SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1998
OR
( ) 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Dunwoody Park Drive, Suite 100
Atlanta, Georgia 30338
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 394-7070
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Par Value $.001 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes (X) No ( )
Based on the average of the bid and asked prices ($10.63) at the close
of business on March 12, 1999, the aggregate market value of the Registrant's
common stock held by non-affiliates of the Registrant was $104,553,000.
The number of shares outstanding of the Registrant's common stock,
$.001 par value, was 11,887,334 on March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Items 10 - 12
are incorporated by reference from the Registrant's Proxy Statement for the 1999
Annual Meeting of Stockholders.
1
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PART 1
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ITEM 1. BUSINESS.
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General
Automobile Protection Corporation - APCO and its subsidiaries (the
"Company") are engaged principally in the marketing and administration of
extended vehicle service contracts and extended vehicle warranty programs sold
by automobile and recreational vehicle dealers located throughout the United
States. A subsidiary of the Company also provides insurance brokerage services
to the automotive industry.
Extended Vehicle Service Contracts and Extended Vehicle Warranties
The Company derives the majority of its revenues from the marketing and
administration of extended vehicle service contracts and extended vehicle
warranties (hereinafter referred to as "VSCs"). A consumer purchases a VSC from
a dealer to provide for the repair or replacement of designated parts of a
vehicle for the term of the agreement, which can extend to 7 years/100,000 miles
depending on vehicle eligibility. VSCs are available for new, used and leased
automobiles, light trucks and recreational vehicles.
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 Company's management is of the opinion
that the syndicates which provide payments pursuant to the VSC's carry
acceptable independent ratings from Standard and Poor's. The Company has never
experienced any difficulty in having claims paid by Lloyd's. All syndicates are
members of a central fund which guarantees claims payments by the syndicates.
The availability of insurance coverage at competitive rates and of insurance
funds to make claims payments, including the financial condition of the
insurance carriers, is critical to the Company and any disruption could have a
material adverse effect on the Company.
While the insurance carriers are obligated to pay for the costs of the
repairs under the VSC's, the Company incurs business risks (other than
underwriting risk) in the transaction with the dealer. Under the Company's
agreements with certain insurers, the Company bears the credit risk because it
is responsible for payment of the premiums to the insurance carriers, regardless
of whether the Company is able to collect from the dealers. As a matter of
course, the Company remits premiums to the insurance carriers each month,
whether or not the Company has been paid by the dealer. The Company incurs
collection losses from dealers from time to time, although they have not been
significant to date. Billings to dealers are based on competitive conditions in
the market place, and therefore the ability to bill dealers for any cost
increases is not assured. Consequently, the Company bears a financial risk if it
cannot control costs or increase its billings to cover cost increases.
The Company markets its products under the trade name, EasyCare(R).
There are EasyCare(R) products for new, used and leased vehicles, which provide
an array of benefits, ranging from total mechanical breakdown (commonly referred
to as "bumper-to-bumper") coverage to named peril (stated component) coverage.
EasyCare(R) products include various benefits such as trip interruption, rental
reimbursement and emergency roadside assistance. The Company also administers
programs under private labels for large customers.
The Company's price of the VSC or limited warranty to the dealer
includes: (a) the Company's fee for its administrative services, and (b) the
cost of insurance, brokerage fees and taxes. The underlying insurance cost is
determined by the VSC term and coverage, in addition to the repair profile of
the specific vehicle. The Company also receives a fee for each claim processed,
which is paid by the insurer.
Insurance Brokerage Services Division
The Insurance Brokerage Services Division of the Company's wholly-owned
subsidiary, The Aegis Group, Inc., markets and administers automotive related
insurance products to automobile dealers, manufacturers, financial institutions
and leasing companies. This division provided less than 1% of the Company's
total revenues for the most recent year.
2
<PAGE>
Marketing
The Company's products are sold by automobile dealers to consumers. The
Company markets its VSCs to dealers through a national network of independent
sales representatives and a few employee sales representatives. The independent
sales representatives often market other automotive related insurance products
to dealers, in addition to the Company's VSCs. The Company's agreement with each
independent sales organization and representative is terminable by the Company
if production quotas are not met, or by the representative upon the giving of
written notice. Independent sales representatives are compensated on a
commission basis which is linked to sales volumes. At March 12, 1999, 140
individual sales representatives actively represented the Company. The Company
supports the sales representatives with a marketing department which is
available to provide proposal assistance, competitive analysis, training of
dealership personnel and program installation.
In February 1994, the Company entered into a five year agreement with
American Honda Finance Corporation to administer a VSC program for non-Honda and
non-Acura vehicles sold through participating Honda and Acura dealerships. The
relationship was extended in January 1999 for an additional period of three
years. This agreement provided approximately 14% of the Company's revenues for
1998 and 1997 and 11% for 1996.
To promote EasyCare(R) products, the Company extensively utilizes
motorsports promotions, including sponsorship of the Joe Gibbs Racing, Inc.
NASCAR car driven by Bobby Labonte, sponsorship of individual races and
sponsorship of race cars through arrangements with automobile dealers. Joe Gibbs
is a national spokesperson for the Company and appears in trade publications,
videos and in person at Company sponsored events.
Commencing in 1998, the Company entered into several national
marketing/administrative agreements which are described below:
During March 1998, the Company's subsidiary, The Aegis Group, Inc.,
entered into a three year agreement with Allstate Insurance Company to
administer a mechanical breakdown insurance policy to be marketed and
underwritten by Allstate Insurance Company under the name Allstate Parts & Labor
Plus. This agreement provided less than 1% of the Company's revenues for 1998.
During March 1998, the Company's subsidiary, The Aegis Group, Inc.,
entered into a five year agreement with Banc One Insurance Services Corporation
to administer a vehicle service contract program to be marketed by Banc One
Insurance Services Corporation under the name The One(R) Care. This agreement
provided less than 1% of the Company's revenues for 1998.
During June 1998, the Company entered into an agreement to market
maintenance reminder software developed by Interval, Inc. The Company plans to
market this software, called Service Advisor Plus, to automobile dealers
commencing in 1999. This product will be marketed through the Company's
independent sales representatives to both existing and prospective dealers.
During August 1998, the Company entered into a marketing agreement with
Simoniz USA, Inc. to market Simoniz car care products under the name Simoniz
EasyCare. This agreement had no financial impact in 1998.
During October 1998, the Company entered into a three year agreement
with Manheim Dealer Support Services, Inc. to administer a vehicle service
contract program to be offered by Manheim to independent automobile dealers
under the name Manheim EasyCare. This agreement provided less than 1% of the
Company's revenues for 1998.
During December 1998, the Company entered into a two year agreement
with Dollar Thrifty Automotive Group to install the Company's limited warranty,
extended service contract and certification products in all Thrifty Car Sales
locations. This agreement had no financial impact in 1998.
Competition
The VSC industry is highly competitive and is dominated by the major
automobile manufacturers and several large third party administrators.
Management believes the Company is competitive against both the factory products
and other third party administrators. In order to be competitive, the Company
designs products which enhance a dealer's Customer Satisfaction Index, provides
training to dealership personnel, and obtains insurance for the dealer to
provide comprehensive coverage at reasonable prices.
3
<PAGE>
Employees
At March 12, 1999, the Company had 180 employees. The Company is not
subject to any collective bargaining agreements and considers its relationships
with employees to be good.
Seasonality
The VSC industry is subject to the seasonality of the automobile
industry. The Company's revenues tend to be lower in the first and fourth
quarters due to lower sales of motor vehicles during the winter months as
compared to other times of the year.
Government Regulation
Although the Company does not operate as an insurance company, the sale
of VSCs by dealers and the issuance of insurance policies is regulated by the
insurance laws of most states and the Company's ability to market and perform
its services is affected by such insurance laws. It is possible that some states
in which the Company now conducts business free of insurance regulation may
change their insurance laws to regulate the activities of the Company. In such
event, the Company would have to comply with the regulatory requirements of
those states or cease its business activities in those states. The Company is
not aware of any proposed legislative change which will materially affect its
business as it is currently conducted.
Proprietary Rights
The Company regards its VSC administration and software as proprietary.
In order to protect its software from illegal reproduction, the Company relies
on copyright protection, trade secret laws and restrictions in its license
agreements with respect to the use and reproduction of such software. The names
"APCO -- Automobile Protection Corp.(R)", "Easy Care(R)" and "Perfect Profit
Program(R)" have been registered with the United States Patent and Trademark
Office. The Company uses these service marks in its sales and marketing
programs.
ITEM 2. PROPERTIES.
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The Company conducts its primary operations from approximately 20,000
sq. ft. of leased office space at 15 Dunwoody Park Drive, Suite 100, Atlanta,
Georgia 30338 under leases which expire in 1999. Additionally, the Company
leases approximately 1,600 sq. ft. of office space in Charlotte, North Carolina
to conduct its motorsports sponsorship programs under a lease which expires in
2000.
The Company acquired 9.6 acres of land during 1998 and is currently
constructing a 52,000 square foot office building to accommodate its corporate
and administrative offices. The Company's new address will be 6010 Atlantic
Boulevard, Norcross, Georgia 30071.
The Company expects to move prior to the expiration of its leases;
however, in the event the new facility is not ready for occupancy before the
expiration of the leases, the Company believes it will be able to negotiate an
extension of the leases.
ITEM 3. LEGAL PROCEEDINGS.
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In July 1998, the Company settled the lawsuit 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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No matter was submitted during the fourth quarter of the year, covered
by this report, to a vote of shareholders of the Company through the
solicitation of proxies or otherwise.
4
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
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MATTERS.
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The Company's common stock is quoted on the National Market System of
the NASDAQ Stock Market under the symbol "APCO." The following figures represent
quarterly high and low bid information related to trading in the Company's
common stock. The figures reflect inter-dealer prices without retail markup,
markdown or commissions and may not be representative of actual transactions
which occurred in the market. Such information has been obtained from NASDAQ.
Low Bid High Bid
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1997:
First Quarter $3.38 $5.00
Second Quarter $3.19 $4.00
Third Quarter $3.50 $5.38
Fourth Quarter $4.75 $7.63
1998:
First Quarter $6.00 $13.44
Second Quarter $9.00 $14.81
Third Quarter $5.00 $11.38
Fourth Quarter $5.00 $11.75
1999:
First Quarter* $9.75 $13.63
* through March 12, 1999
The closing bid price for the common stock on March 12, 1999 was
$10.25.
There are approximately 180 holders of record of the Company's common
stock. Additionally, the Company believes there are approximately 4,500
beneficial owners of its common stock, held in street name by brokerage firms.
No dividends have been declared or paid to date on the Company's common
stock, nor are any anticipated in the foreseeable future.
During the fourth quarter of 1998, the Company issued the following
unregistered securities:
<TABLE>
<CAPTION>
Exemption
Consideration from
Date of sale Title of security Number sold received registration Option terms
------------ ----------------- ----------- -------- ------------ ------------
<S> <C> <C> <C>
10/98 -11/98 Common stock 454,750 - 4 (2) Vest over 4 years
options granted
to employees under
1998 Performance
Equity Plan
10/98 -12/98 Common stock 56,500 $144,860 4 (2)
issued upon
exercise of
options granted
to consultants
and customer
</TABLE>
5
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
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Set forth below is a summary of the selected financial data of the Company:
<TABLE>
<CAPTION>
Four months
Year ended Year ended Year ended Year ended ended Year ended
December 31, December 31, December 31, December 31, December 31, August 31,
1998 1997 1996 1995 1994 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Total revenues $ 119,953,682 $ 93,935,167 $ 67,208,406 $ 49,210,774 $ 11,197,168 $ 26,553,554
Income before
provision for income
taxes and cumulative
effect of accounting
change 10,487,485 6,530,716 2,526,919 2,447,582 413,747 1,290,453
Provision for
income taxes (3,881,000) (2,480,000) (963,000) (922,000) (144,000) (445,705)
Cumulative effect of
accounting change 67,780
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Net income $ 6,606,485 $ 4,050,716 $ 1,563,919 $ 1,525,582 $ 269,747 $ 912,528
==============================================================================================================================
Per share data:
Basic
Earnings before
cumulative effect of
accounting change $ 0.57 $ 0.38 $ 0.16 $ 0.23 $ 0.05 $ 0.17
Cumulative effect of
accounting change 0.01
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Earnings $ 0.57 $ 0.38 $ 0.16 $ 0.23 $ 0.05 $ 0.18
==============================================================================================================================
Diluted
Earnings before
cumulative effect of
accounting change $ 0.53 $ 0.35 $ 0.14 $ 0.21 $ 0.04 $ 0.15
Cumulative effect of
accounting change 0.01
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Earnings $ 0.53 $ 0.35 $ 0.14 $ 0.21 $ 0.04 $ 0.16
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31, August 31,
1998 1997 1996 1995 1994 1994
---- ---- ---- ---- ---- ----
Balance Sheet Data:
- ------------------
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 31,366,510 $ 21,034,430 $ 15,223,512 $ 11,270,716 $ 3,317,098 $ 3,134,005
Total assets $ 55,517,974 $ 39,315,050 $ 31,260,823 $ 19,592,461 $ 9,352,256 $ 8,398,317
Total liabilities $ 20,109,613 $ 15,039,683 $ 12,050,775 $ 4,898,455 $ 3,931,752 $ 4,150,491
Shareholders' equity $ 35,408,361 $ 24,275,367 $ 19,210,048 $ 14,694,006 $ 5,420,504 $ 4,247,826
</TABLE>
6
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS.
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The following discussion and analysis of financial condition and
results of operations presents the more significant factors affecting the
Company during the periods indicated. The discussion and analysis should be read
in conjunction with the Consolidated Financial Statements and related notes, and
with the other financial information appearing herein.
Forward-Looking Statements
When used in Form 10-K and in future filings by the Company with the
Securities 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 elsewhere in
this report, in addition to the following risk factors. 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, an
automobile manufacturer and financial institutions 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. Additionally,
automobile dealer consolidation could reduce the number of dealers and
consequently the Company's addressable market.
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 December
31, 1998, the Company had working capital of $31,366,510 (compared to
$21,034,430 at December 31, 1997) and investment securities with maturities
greater than twelve months of $602,950 (compared to $1,474,493 at December 31,
1997). The net increase in working capital and investment securities of
$9,460,537 is attributable to operations of the Company and to proceeds from the
exercise of stock options ($1,764,036) less the cost of the land purchased to
construct the Company's corporate and administrative offices and other equipment
purchases ($1,987,731). The Company expects to receive a tax benefit from stock
option exercises of $2,500,000 through lower current tax payments. The Company
primarily invests its funds in treasury securities, U.S. agencies, municipal
bonds and financial instruments with maturities of less than five years and
money market accounts. The Company hired a professional investment management
firm in 1998 to invest $1,000,000 in a portfolio of equities. The Company
expects to initially fund the construction of its corporate and administrative
offices from working capital. During 1999, the Company expects to spend
approximately $5,000,000.
7
<PAGE>
Results of Operations
Year ended December 31, 1998 ("1998") compared to year ended December
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31, 1997 ("1997").
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Revenues for 1998 increased by 28% or $26,018,515 to $119,953,682 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 for 1998. EasyCare(R) revenues
increased due to the introduction of additional automobile dealers to
EasyCare(R), increased average production by dealers and from growth under the
contract with American Honda Finance Corporation, which provided 14% of the
Company's 1998 and 1997 revenues. The Company also experienced growth from its
national agreements with a major dealership group and from its third party
administrative agreement with a major insurance company. Management expects
future opportunities for growth to arise from these national agreements and from
other national agreements entered into in late 1998. The national agreements,
excluding the major dealership group agreement, impacted net revenues by less
than 1% during 1998. The Company experienced reduced production from its
certification program in 1998 and management expects it to decline further in
1999.
The Company's gross margin was 21.8% of revenues in 1998 compared to
21.3% of revenues in 1997. Gross margin is impacted by the mix of new and used,
and of makes and models of vehicles and the types of coverage sold. The gross
margin for 1998 was also impacted by an insurance change introduced in late
1997. Management anticipates that if the new product introductions and private
label marketing agreements increase relative to its current mix of business,
average gross margins will decline; however, the Company anticipates that the
effects of this reduction would be offset by increased volumes from these new
arrangements.
Compensation, selling and administrative expenses for 1998 increased by
22% or $3,183,980 to $17,427,912 over 1997. The increase for 1998 is primarily
attributable to compensation cost, which increased by approximately $2,432,000
to support the growth of the business. The Company also experienced a net
increase in marketing expenses of $272,000. Marketing expenses include
motorsports sponsorships and events, which totaled $1,386,000 in 1998 compared
to $1,593,000 in 1997. Additionally, the Company recorded a pretax loss of
$347,000 in 1998, in connection with its decision to relocate the administrative
and corporate offices. The loss provision represents unamortized leasehold
improvements and non-cancelable lease payments at its current facility.
The Company settled its lawsuit with Everest Reinsurance Company during
1998 and recognized a pretax credit of $400,000 to adjust the reserve for claims
which was recorded in 1996 in connection with this lawsuit.
Interest, dividend and other income for 1998 increased by 49% or
$572,599 to $1,744,218 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 $3,881,000
compared to $2,480,000 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 ended December 31, 1997 ("1997") compared to year ended December 31, 1996
- ------------------------------------------------------------------------------
("1996").
- ---------
Revenues for 1997 increased by 40% or $26,726,761 to $93,935,167 over
1996. The Company's largest revenue source is from the marketing and
administration of extended vehicle service contracts ("VSCs") under the
EasyCare(R) name, which provided 99% of revenues for 1997. 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 76% growth under the contract with American Honda Finance
Corporation, which provided 14% of the Company's 1997 revenues and 11% of 1996
revenues.
The Company's gross margin was 21.3% of revenues in 1997 compared to
21.9% of revenues in 1996. Gross margin is impacted by the mix of new and used,
makes and models of vehicles and the types of coverage sold. The overall gross
margin for 1997 reflects production from the EasyCare(R) Certified Pre-Owned
Vehicle program, which has a different margin structure to the EasyCare(R)
service contract and offers additional benefits to the dealer and consumer.
Additionally, the volume of business under the contract with American Honda
Finance Corporation, which has a lower margin than the core business, increased
at a faster rate than the core business.
Compensation, selling and administrative expenses for 1997 increased by
22% or $2,585,148 to $14,243,932 over 1996. The increase for 1997 is primarily
attributable to compensation, printing/fulfillment and marketing costs
(including motorsports promotional activities), offset by reduced legal fees.
Compensation cost increased by $1,717,000 in 1997 to support the growth of the
business. The Company's printing/fulfillment costs increased by $435,000 due to
costs incurred in connection with higher sales volumes and new programs.
Marketing costs increased by $433,000 due to additional promotional events
(including motorsports) and the EasyCare(R) Certified Pre-Owned Vehicle program
in the current year. The Company's motorsports related marketing costs for 1997
were $1,593,000, compared to $1,274,000 for 1996. The Company extensively
utilizes motorsports to advertise its products to automobile dealers and
consumers.
8
<PAGE>
Interest, dividend and other income for 1997 increased by 48% or
$379,676 to $1,171,619 over 1996. The increase is due to the larger cash and
investment securities balances on hand.
The Company recorded a provision for income taxes in 1997 of $2,480,000
compared to $963,000 for 1996. The increase is primarily due to higher pretax
income.
Impact of Inflation
Although the Company's costs may increase from time to time as a result
of increases in some or all of the Company's costs, the precise effect of
inflation on the operations of the Company cannot be determined. The Company
believes that continuation of the general levels of inflation experienced in
recent years should not have a significant impact on the Company's current and
contemplated operations.
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.
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
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
provides guidance on the accounting for the costs of computer software developed
or obtained for internal use and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does not believe SOP
98-1 will have a material impact on the Company's results of operations.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). SFAS No. 133 establishes guidance on the accounting for
derivative instruments, including certain derivative instruments imbedded in
other contracts, and for hedging activities and is effective for financial
statements for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company does not believe SFAS No. 133 will have a material impact on
the Company's results of operations.
9
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ---------------------------------------------------
Index to Financial Statements and Financial Statement Schedules. Page
----
Financial Statements:
- ---------------------
Report of Independent Accountants 11
Consolidated Balance Sheet 12
Consolidated Statement of Income 13
Consolidated Statement of Changes in Shareholders' Equity 14
Consolidated Statement of Cash Flows 15
Notes to Consolidated Financial Statements 16
Financial Statement Schedules:
- ------------------------------
II. Valuation and Qualifying Accounts 23
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
10
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of Automobile Protection Corporation - APCO
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Automobile Protection Corporation - APCO and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 12, 1999
11
<PAGE>
<TABLE>
<CAPTION>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED BALANCE SHEET
December 31, December 31,
------------ ------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $19,095,752 $11,297,049
Trading securities, at fair value 11,175,598 8,067,180
Held-to-maturity securities, current 1,157,249 1,851,019
Available-for-sale securities, at fair value 775,185
Accounts receivable, net of provision for doubtful
accounts of $150,000 and $60,000 3,223,299 2,400,701
Notes receivable, net of provision for doubtful
accounts of $60,000 and $0 2,476,062 2,554,978
Officer and employee receivables 503,273 250,190
Income tax receivable 164,238
Prepaid expenses, inventory and other assets 1,243,079 287,766
Deferred tax asset 1,124,240 785,882
Restricted cash 10,104,633 8,324,628
----------------- -----------------
Total current assets 51,042,608 35,819,393
Property and equipment, net of accumulated
depreciation of $2,449,133 and $2,015,368 2,761,092 1,220,876
Held-to-maturity securities, non current 602,950 1,474,493
Deposits to secure licenses 1,066,115 743,762
Deferred tax asset 18,793
Other assets 45,209 37,733
----------------- -----------------
$55,517,974 $39,315,050
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Premiums, fees and taxes payable $10,104,633 $8,324,628
Accounts payable 2,131,045 1,255,831
Accrued liabilities 7,440,420 4,805,471
Income taxes payable 399,033
----------------- -----------------
Total current liabilities 19,676,098 14,784,963
Deferred income taxes 433,515 254,420
Redeemable preferred stock 300
----------------- -----------------
20,109,613 15,039,683
----------------- -----------------
Shareholders' equity:
Common stock; $.001 par value, 40,000,000
authorized, 11,810,725 and 10,976,964
issued and outstanding 11,810 10,976
Additional paid-in capital 21,514,637 16,731,535
Retained earnings 14,803,340 8,196,855
Unearned compensation related to stock options (998,899) (663,999)
Accumulated other comprehensive income 77,473
----------------- -----------------
Total shareholders' equity 35,408,361 24,275,367
----------------- -----------------
Commitments
----------------- -----------------
$55,517,974 $39,315,050
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
<TABLE>
<CAPTION>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF INCOME
Year Ended Year Ended Year Ended
---------- ---------- ----------
December 31, December 31, December 31,
------------ ------------ ------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $119,953,682 $93,935,167 $67,208,406
---------------- ----------------- -------------------
Cost of sales:
Premium and taxes 76,856,837 60,233,162 43,138,395
Commissions and other costs 16,887,589 13,650,324 9,360,491
---------------- ----------------- -------------------
Total cost of sales 93,744,426 73,883,486 52,498,886
---------------- ----------------- -------------------
26,209,256 20,051,681 14,709,520
---------------- ----------------- -------------------
Expenses:
Compensation, selling and administrative 17,427,912 14,243,932 11,658,784
Depreciation and amortization 438,077 448,652 440,760
Interest, dividend and other income (1,744,218) (1,171,619) (791,943)
Litigation (settlement) charge (Note 14) (400,000) 875,000
---------------- ----------------- -------------------
15,721,771 13,520,965 12,182,601
---------------- ----------------- -------------------
Income before provision for income taxes 10,487,485 6,530,716 2,526,919
Provision for income taxes 3,881,000 2,480,000 963,000
---------------- ----------------- -------------------
Net income $6,606,485 $4,050,716 $1,563,919
================ ================= ===================
Earnings per share:
Basic $0.57 $0.38 $0.16
Diluted $0.53 $0.35 $0.14
Number of shares used in computing Earnings per share:
Basic 11,584,000 10,760,000 10,078,000
Diluted 12,508,000 11,584,000 10,980,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Unearned Accumulated
Additional Compensation Other
Common Stock Paid-in Retained Related to Comprehensive
Shares Amount Capital Earnings Stock Options Income Total
------ ------ ------- -------- ------------- ------ -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 9,614,616 $9,614 $12,102,172 $2,582,220 $14,694,006
Net income 1,563,919 1,563,919
Issuance of common stock upon
exercise of stock options 949,707 950 2,205,927 2,206,877
Stock compensation expense 100,800 100,800
Tax effect of option exercise 644,446 644,446
---------------------------------------------------------------------------------------------
Balances at December 31, 1996 10,564,323 10,564 15,053,345 4,146,139 19,210,048
Net income 4,050,716 4,050,716
Issuance of common stock upon
exercise of stock options 412,641 412 722,690 723,102
Unearned compensation related to
stock options 676,500 $(676,500) -
Stock compensation expense 12,501 12,501
Tax effect of option exercise 279,000 279,000
---------------------------------------------------------------------------------------------
Balances at December 31, 1997 10,976,964 10,976 16,731,535 8,196,855 (663,999) 24,275,367
Comprehensive income:
Net income 6,606,485 6,606,485
Unrealized gain on available-for-sale
securities, net of tax effect of $77,473 77,473
$45,500
Total comprehensive income 6,683,958
Issuance of common stock upon
exercise of stock options 833,761 834 1,763,202 1,764,036
Unearned compensation related to
stock options 519,900 (519,900) -
Stock compensation expense 185,000 185,000
Tax effect of option exercise 2,500,000 2,500,000
---------------------------------------------------------------------------------------------
Balances at December 31, 1998 11,810,725 $11,810 $21,514,637 $14,803,340 ($998,899) $77,473 $35,408,361
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
AUTOMOBILE PROTECTION CORPORATION - APCO
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended
---------- ---------- ----------
December 31, December 31, December 31,
------------ ------------ ------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $6,606,485 $4,050,716 $1,563,919
-------------- ------------- ------------
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 438,077 448,652 440,760
Deferred income taxes (185,970) (140,813) (135,268)
Provision for doubtful accounts 150,000 30,000 35,031
Gain on disposal of property and equipment (1,062) (41,479) (9,019)
Tax benefit from stock option exercise 2,500,000 279,000 644,446
Stock compensation expense 185,000 12,501 100,800
Changes in operating assets and liabilities:
Restricted cash (1,780,005) 5,478 (4,862,159)
Accounts receivable (912,598) (270,465) (978,267)
Officer and employee receivables (253,083) (44,419) (72,699)
Notes receivable 18,916 (2,007,532) (130,564)
Prepaid expenses and other assets (962,789) 364,938 (467,761)
Premiums, fees and taxes payable 1,780,005 (5,478) 4,862,159
Accounts payable 875,214 99,713 269,963
Accrued liabilities 2,634,949 2,344,380 1,990,368
Income taxes (563,271) 851,579 (503,546)
Purchases of trading securities (13,698,461) (7,899,117) (8,660,198)
Sales of trading securities 10,590,043 5,553,667 6,516,826
-------------- ------------- ------------
Total adjustments 814,965 (419,395) (959,128)
-------------- ------------- ------------
Net cash provided by operating activities 7,421,450 3,631,321 604,791
-------------- ------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (1,987,731) (543,578) (736,025)
Proceeds from sales of property and equipment 10,500 105,000 136,766
Purchases of available-for-sale securities (652,212)
Purchases of held-to-maturity securities (373,605) (1,413,672) (3,570,332)
Redemptions and maturities of held-to-maturity securities 1,938,918 1,840,458 1,582,898
Increase in deposits to secure licenses (322,353) (13,486) (3,957)
-------------- ------------- ------------
Net cash used in investing activities (1,386,483) (25,278) (2,590,650)
-------------- ------------- ------------
Cash flows from financing activities:
Issuance of common stock 1,764,036 723,102 2,206,877
Redemption of preferred stock (300)
-------------- ------------- ------------
Net cash provided by financing activities 1,763,736 723,102 2,206,877
-------------- ------------- ------------
Net increase in cash and cash equivalents 7,798,703 4,329,145 221,018
Cash and cash equivalents at beginning of period 11,297,049 6,967,904 6,746,886
-------------- ------------- ------------
Cash and cash equivalents at end of period $19,095,752 $11,297,049 $6,967,904
============== ============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $2,131,865 $1,465,370 $957,368
============== ============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
15
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Automobile Protection Corporation - APCO was incorporated in the State of
Georgia on September 10, 1984. APCO and its wholly-owned subsidiaries (the
"Company") are engaged primarily in the marketing and administration of extended
vehicle service contracts and extended vehicle warranty programs sold by new and
used automobile retailers located throughout the United States. Extended vehicle
service contracts augment and enhance upon the basic warranty offered by the
automobile manufacturer. The Company markets its contracts nationally under the
EasyCare(R) trade name and also administers vehicle service contracts under
private label programs for a major automobile manufacturer and others.
During 1998, the Company arranged for insurance coverage for its automobile
programs to be provided by Greenwich Insurance Company, Indian Harbor Insurance
Company and CIGNA Property & Casualty companies. Insurance coverage for its
non-automobile programs was provided by certain Underwriters at Lloyd's of
London ("Lloyd's"). In prior years, Lloyd's also directly insured automobile
programs. These insurers underwrite and insure the obligations to pay for
covered mechanical repairs and benefits under all vehicle service contract and
warranty programs marketed and administered by the Company.
The Company's subsidiary, The Aegis Group, Inc., provides a wide range of third
party administrative and insurance brokerage services to companies serving the
automotive industry.
The following is a summary of the significant accounting policies followed by
the Company:
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.
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, and the related
liability is included in Premiums, fees and taxes payable.
Debt and Marketable Equity Securities
Investments in debt and marketable equity securities are categorized as either
trading, available-for-sale or held-to-maturity. 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. Available-for-sale
securities are stated at their fair value, which is based on quoted market
prices, and all unrealized gains and losses are recorded as other comprehensive
income within shareholders' equity. Held-to-maturity securities are stated at
their amortized cost.
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. During 1998, the Company purchased land and commenced the
design and construction of an office building, which is classified as
construction-in-progress in Note 6.
16
<PAGE>
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.
Accrued Liabilities
The Company self-insures its obligations to provide emergency roadside
assistance to contract holders and accordingly accrues an estimate of the amount
it expects to pay to provide these services through unaffiliated third parties.
Additionally, the Company reserves for all costs and expenses it expects to
incur under programs with its dealers, such as co-operative advertising.
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
agreement are expensed over the period of the annual contract, while costs
associated with race events are expensed in the month the event takes place.
Income Taxes
The Company provides income taxes on income reported for financial statement
purposes. Deferred income taxes are recorded for differences in the recognition
of various items for financial reporting and income tax purposes. The Company
files a consolidated income tax return with its subsidiaries.
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 associated disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS No. 123) in Note 10. SFAS No. 123 requires that companies
which elect to not account for stock-based compensation as prescribed by that
statement shall disclose, 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 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 Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) as of January 1, 1998. The adoption
of this Statement had no impact on net income or shareholders' equity. SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS 130 requires unrealized gains or losses on
available-for-sale securities to be included in other comprehensive income.
NOTE 2 USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses reported in the financial statements. Actual results could differ
from those estimates.
NOTE 3 ACCOUNTING PRONOUNCEMENTS:
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information," (SFAS 131) was issued
prescribing new guidelines for the reporting of segment data. SFAS 131 is
effective for 1998. The Company does not have any separately reportable business
segments.
NOTE 4 RISKS AND UNCERTAINTIES:
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, an
automobile manufacturer and financial institutions to market its products. The
automobile manufacturer provided 14% of the Company's 1998 and 1997 revenues. A
single independent sales agency provided 11% of the Company's 1998 revenues and
less than 10% of the Company's 1997 revenues.
The distribution of automobiles has been subject to cyclical economic conditions
in the past and could be subject to such conditions in the future. Additionally,
automobile dealer consolidation could reduce the number of dealers and
consequently the Company's addressable market.
17
<PAGE>
The insurance companies described in Note 1 insure the obligations under the
vehicle service contracts. Most of the VSC's accepted by the Company for
administration between 1991 and 1996 are insured by Lloyd's. The availability of
insurance coverage at competitive rates and of insurance funds to make claims
payments, including the financial condition of the insurance carriers, are
critical to the Company.
NOTE 5 DEBT AND MARKETABLE EQUITY SECURITIES:
Debt and marketable equity securities as of December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ----------------
<S> <C> <C>
Trading securities (at fair value):
Municipal bonds $ 972,597 $ 4,904,862
U.S. agencies 9,697,999 1,996,328
Preferred stocks 505,002 466,253
Corporate bonds - 699,737
-------------- ----------------
$ 11,175,598 $ 8,067,180
============== ================
Held-to-maturity securities (at amortized cost):
Certificates of deposit $ 1,399,724 $ 1,122,789
U.S. treasuries and agencies (market value: $0; $1,071,040) - 1,068,918
Municipal bonds (market value: $260,797; $1,035,332) 260,475 1,033,805
Corporate bonds (market value: $100,696; $100,006) 100,000 100,000
-------------- ----------------
1,760,199 3,325,512
Less: Current portion 1,157,249 1,851,019
-------------- ----------------
Non-current portion $ 602,950 $ 1,474,493
============== ================
Maturities of non-current held-to-maturity securities are:
Due within 2 years $ 404,316 $ 997,712
Due within 3 years - 407,863
Due within 4 years - -
Due within 5 years 198,634 -
Due thereafter - 68,918
-------------- ----------------
$ 602,950 $ 1,474,493
============== ================
Available-for-sale securities (at fair value):
Managed equity portfolio $ 775,185 $ -
============== ================
NOTE 6 PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, 1998 and 1997 are summarized as
follows:
1998 1997
-------------- ----------------
Office and computer equipment $ 2,602,004 $ 2,192,735
Furniture and fixtures 448,764 418,439
Vehicles 347,885 135,655
Leasehold improvements 489,415 489,415
Construction-in-progess 1,322,157
-------------- ----------------
5,210,225 3,236,244
Less: Accumulated depreciation
and amortization (2,449,133) (2,015,368)
-------------- ----------------
$ 2,761,092 $ 1,220,876
============== ================
</TABLE>
In September 1998, the Company acquired a 9.6 acre parcel of land in the City of
Norcross, Georgia and has commenced the design and construction of a building to
accommodate the Company's corporate and administrative offices. The building is
expected to be available for occupancy in 1999.
18
<PAGE>
NOTE 7 DEPOSITS TO SECURE LICENSES:
Certain states require the Company to provide security in the form of pledged
securities or bank certificates of deposit. Additionally, one state requires the
Company's subsidiary to maintain capitalization of $750,000.
NOTE 8 INCOME TAXES:
The components of the provision for income taxes for the years ended December
31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- --------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ 1,434,318 $ 2,134,884 $ 1,009,268
State 132,652 206,929 89,000
------------- --------------- ----------------
1,566,970 2,341,813 1,098,268
------------- --------------- ----------------
Deferred:
Federal 2,127,572 125,187 (124,268)
State 186,458 13,000 (11,000)
------------- --------------- ----------------
2,314,030 138,187 (135,268)
------------- --------------- ----------------
Provision for
income taxes $ 3,881,000 $ 2,480,000 $ 963,000
============= =============== ================
</TABLE>
An analysis of the differences between the statutory federal income tax rate of
34% and the effective tax rate for the years ended December 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- --------------- ----------------
<S> <C> <C> <C>
Statutory federal taxes $ 3,565,745 $ 2,220,443 $ 859,152
State income taxes,
net of federal tax benefit 210,613 136,573 51,480
Non-taxable income (45,769) (92,460) (79,126)
Non-deductible expenses 150,411 215,444 131,494
------------- --------------- ----------------
$ 3,881,000 $ 2,480,000 $ 963,000
============= =============== ================
</TABLE>
The components of deferred tax assets and liabilities as of December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Current deferred tax asset:
Accounts receivable allowances $ 83,420 $ 30,400
Charge for litigation reserve 36,354 109,234
Non-deductible accruals 1,004,466 646,248
---------------- --------------
$ 1,124,240 $ 785,882
================ ==============
Non-current deferred tax asset:
Depreciation and amortization $ - $ 18,793
================ ==============
Non-current deferred tax liability:
Deductible expenses and other $ (433,515) $ (254,420)
================ ==============
</TABLE>
19
<PAGE>
NOTE 9 ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Emergency roadside assistance reserve $ 4,718,251 $ 3,235,958
Accrued dealer program costs 1,424,507 795,344
Accrued abandonment costs 347,000 -
Accrued litigation (Note 14) 98,254 287,458
Other accruals 852,408 486,711
---------------- --------------
$ 7,440,420 $ 4,805,471
================ ==============
</TABLE>
The Company recorded a reserve of $347,000 related to costs to be incurred to
abandon its leased office location, primarily representing unamortized leasehold
improvements and non-cancelable lease payments at the current facility. This
accrual is subject to adjustment as the actual timing of the relocation and
extent of costs incurred are completed during 1999.
NOTE 10 SHAREHOLDERS' EQUITY AND OPTIONS:
The Company has three qualified stock option plans which provide for the
granting of stock options to officers, employees and non-employee directors.
Additionally, the Board of Directors has approved the granting of non-qualified
stock options to consultants, company spokespersons, independent sales agents
and certain senior executive officers.
Under the Company's 1988 Stock Option Plan, the exercise price of any option
granted may not be less than the fair market value of the Company's common stock
at the date of grant. The term of each option and the manner in which it may be
exercised are determined by the Board of Directors. The non vested options are
subject to vesting periods of up to five years. This plan was registered in
1994. The ability to grant options under this plan terminated on April 1, 1998.
Under the Company's 1997 Performance Equity Plan, the exercise price of any
option granted may not be less than the fair market value of the Company's
common stock at the date of grant. The term of each option and the manner in
which it may be exercised are determined by the Board of Directors. The non
vested options are subject to vesting schedules which range from three to five
years. The 1997 Performance Equity Plan was registered in 1997.
Under the Company's 1998 Performance Equity Plan, the exercise price of any
option granted may not be less than the fair market value of the Company's
common stock at the date of grant. The term of each option and the manner in
which it may be exercised are determined by the Board of Directors. The non
vested options are subject to vesting schedules which range from three to five
years.
Under the Company's Outside Directors' Stock Option Plan, each eligible director
is granted an option to purchase the maximum number of full shares having an
aggregate fair market value on the date of grant equal to $25,000 on an annual
basis at an exercise price per share equal to the fair market value of a share
of common stock on the date of grant. These options can be exercised at any time
for a ten year period from the date of grant. This plan was registered in 1994.
The ability to grant options under this plan terminated on April 1, 1998.
The Company accounts for stock-based compensation plans under APB No. 25. As a
result, the Company has not recognized compensation expense for stock options
granted with an exercise price equal to the quoted market price of the Company's
common stock on the date of grant and which vest based solely on continuation of
employment by the recipient of the option award. The Company has adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123). Had compensation cost for the Company's stock-based incentive
compensation plans been determined based on the fair value at the grant dates
for awards under these plans consistent with the methodology prescribed by SFAS
No. 123 and if these values had been recorded in the statement of income, the
Company's net income and income per share would have been reduced to the pro
forma amounts indicated below for the years ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income As reported $6,606,485 $4,050,716 $1,563,919
Pro forma $6,467,491 $3,973,104 $1,485,352
Basic EPS As reported $0.57 $0.38 $0.16
Pro forma $0.56 $0.37 $0.15
Diluted EPS As reported $0.53 $0.35 $0.14
Pro forma $0.52 $0.34 $0.14
</TABLE>
20
<PAGE>
These pro forma amounts represent the estimated fair value of stock options
issued during the above periods and are being amortized to expense over the
applicable vesting period. Additional options may be granted in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1998, 1997 and 1996, respectively; dividend yields of 0%; expected
volatility of 50%, 58% and 55%; risk-free interest rates of 5.5%, 6.5% and 5.9%;
and specific vesting periods for each option.
Activity related to all stock options is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted- Weighted- Weighted-
--------- --------- ---------
Average Average Average
------- ------- -------
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
As of January 1 2,059,281 $2.17 1,745,499 $2.05 2,450,156 $1.98
Granted
668,072 $7.57 806,784 $3.87 341,500 $3.43
Exercised
(833,761) $2.12 (412,641) $1.75 (945,707) $2.33
Canceled
(63,000) $2.61 (80,361) $2.86 (100,450) $2.35
------------- ----------- -------------
Options outstanding
As of December 31 1,830,592 $4.85 2,059,281 $2.17 1,745,499 $2.05
============= =========== =============
Options exercisable
As of December 31
552,720 $2.68 1,114,615 $2.07 1,311,857 $1.93
============= =========== =============
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
Weighted-
---------
Number Average Weighted- Number Weighted-
------ ------- --------- ------ ---------
Outstanding Remaining Average Exercisable Average
----------- --------- ------- ----------- -------
December 31, Contractual Exercise December 31, Exercise
------------ ----------- -------- ------------ --------
Range of Exercise Prices 1998 Life Price 1998 Price
- ------------------------ ---- ---- ----- ---- -----
<S> <C> <C> <C> <C>
$1.51 - $3.00 390,936 2.4 years $2.10 375,936 $ 2.06
$3.01 - $7.00 1,212,534 5.3 years $4.71 176,784 $ 3.98
$7.01 - $13.00 227,122 3.8 years $10.33
--------------- ----------- ------------------ ----------------
1,830,592 4.5 years $4.85 552,720 $ 2.68
=============== =========== ================== ================
</TABLE>
In connection with the issuance of certain non-plan options granted to
consultants for various financial consulting and marketing services, the Company
recorded non-cash stock compensation expense of $185,000, $12,501 and $100,800
for 1998, 1997 and 1996, respectively.
21
<PAGE>
NOTE 11 EMPLOYEE BENEFIT PLAN:
The Company established the Automobile Protection Corporation Profit Sharing and
401(k) Plan (the "Plan") at the beginning of 1996. Since inception, the Company
has voluntarily matched employee contributions (subject to limitations), by
purchasing the Company's common stock on the open market. Employer matching
purchases of the Company's common stock are as follows: 1998 - 7,535 shares at a
cost of $68,525; 1997 - 15,225 shares at a cost of $65,371; 1996 - 15,018 shares
at a cost of $64,692. During 1996, the Company also purchased 29,334 shares of
its common stock at a cost of $119,683 as a profit sharing contribution.
Employer matching and profit sharing contributions vest over five years based on
years of service. At December 31, 1998, the Plan held 64,247 shares of the
Company's common stock.
NOTE 12 PREFERRED STOCK:
Class C Redeemable Preferred Stock:
During 1998, the Company redeemed and canceled all the outstanding Class C
Redeemable Preferred Stock for an aggregate payment of $300.
Class D Preferred Stock:
In 1987, the Board of Directors was authorized the issue 5,000,000 shares of
Class D Preferred Stock, with a $.01 par value. The rights and preferences of
the Class D Preferred Stock are determined at the discretion of the Board of
Directors. No Class D Preferred Stock is issued or outstanding.
NOTE 13 COMMITMENTS AND CONTINGENCIES:
The Company leases office space and furniture under non-cancelable operating
lease agreements. Future minimum annual rental payments under these leases
approximate $281,000 for 1999 and $28,000 for year 2000. Rent expense for all
operating leases for 1998, 1997 and 1996 was approximately $338,000, $292,000
and $287,000, respectively.
The Company renewed its associate sponsorship agreement with Joe Gibbs Racing,
Inc. for two years and also committed itself to other multi-year motorsports
events. Minimum future commitments aggregate $1,993,000, of which $914,000
relates to 1999. The Company expensed $1,386,000, $1,593,000 and $1,274,000 in
1998, 1997 and 1996, respectively, related to motorsports activities.
During 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 commencing in 1999. Under the agreement, the Company is required to
purchase software with a minimum aggregate value of $1,750,000 over a period of
two years, of which $485,000 has been paid as of December 31, 1998 and is
recorded as an other asset.
As noted in Note 6, the Company has commenced the construction of a building to
accommodate the Company's administrative and corporate offices. Management
expects future construction costs to approximate $5,000,000.
NOTE 14 LITIGATION MATTER:
In July 1998, the Company settled its lawsuit against Everest Reinsurance
Company (formerly Prudential Reinsurance Company). 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 of 1998 to adjust the accrued liability to its expected ultimate amount.
NOTE 15 UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:
The unaudited quarterly results of the Company for the years ended December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31 Year
-------- ------- ------------ ----------- ----
<S> <C> <C> <C> <C> <C>
1998:
Revenues $ 25,813,515 $ 30,060,872 $ 33,684,804 $ 30,394,491 $ 119,953,682
Gross margin 5,844,454 6,585,469 7,270,081 6,509,252 26,209,256
Net income 1,367,618 1,771,182 1,952,111 1,515,574 6,606,485
Basic EPS 0.12 0.15 0.17 0.13 0.57
Diluted EPS 0.11 0.14 0.16 0.12 0.53
1997:
Revenues $ 20,095,314 $ 23,797,029 $ 27,087,863 $ 22,954,961 $ 93,935,167
Gross margin 4,271,357 4,849,649 5,526,512 5,404,163 20,051,681
Net income 629,303 885,089 1,341,912 1,194,412 4,050,716
Basic EPS 0.06 0.08 0.13 0.11 0.38
Diluted EPS 0.05 0.08 0.12 0.10 0.35
</TABLE>
22
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
----------------------------------------
SCHEDULE II: Valuation and Qualifying Accounts
----------------------------------------------
FORM 10-K
---------
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning of costs and at end of
Description period expenses Deductions period
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful
accounts $ 60,000 $ 150,000 $ 0 $ 210,000
Year ended December 31, 1997:
Allowance for doubtful
accounts 30,000 30,000 0 60,000
Year ended December 31, 1996:
Allowance for doubtful
accounts 45,000 35,031 50,031 30,000
</TABLE>
23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
Since inception, the Company has not changed accountants and has had no
disagreement on any matter of accounting principles or practices or financial
statement disclosure.
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -----------------------------------------------------------
Pursuant to General Instruction G (3), reference is made to the information
contained in the Company's definitive proxy statement for its 1999 Annual
Meeting of Stockholders which will be filed with the Securities and Exchange
Commission on or before April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
- -------------------------------
Pursuant to General Instruction G (3), reference is made to the information
contained in the Company's definitive proxy statement for its 1999 Annual
Meeting of Stockholders which will be filed with the Securities and Exchange
Commission on or before April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -----------------------------------------------------------------------
Pursuant to General Instruction G (3), reference is made to the information
contained in the Company's definitive proxy statement for its 1999 Annual
Meeting of Stockholders which will be filed with the Securities and Exchange
Commission on or before April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------------------------------------------------------
Not applicable.
24
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
The following documents are filed as part of this report under Part II Item 8:
Financial Statements and Financial Statement Schedules.
Reference is made to the Index to Financial Statements and Financial Statement
Schedules included in Item 8 of Part II hereof, where such documents are listed.
Exhibits as required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3(a) Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1(a) to the Registrant's Registration Statement on Form S-1
(file number 33-22279) filed with the Commission on June 3, 1988).*
3(b) Certificate of Amendment to Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (file number 33-22279)
filed with the Commission on June 3, 1988).*
3(c) Certificate of Amendment to Restated Articles of Incorporation
(incorporated by reference to the Registrant's Proxy Statement dated
May 9, 1997 - Annex I).*
3(d) By-Laws (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 (file number 33-22279)
filed with the Commission on June 3, 1988).*
4(a) Certificate of Designation, Preferences and Rights of Series 1
Class D Preferred Stock (incorporated by reference to Registrant's
Current Report on Form 8-K filed with the Commission on
December 15, 1988).*
4(b) Certificate of Designation, Preferences and Rights of Series 2
Class D Preferred Stock (incorporated by reference to Registrant's
Current Report on Form 8-K filed with the Commission on
March 15, 1989).*
10(a) 1988 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement on Form S-1 (file number
33-22279)filed with the Commission on June 3, 1988).*
10(b) Outside Directors' Stock Option Plan (incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1
(file number 33-22279) filed with the Commission on June 3, 1988).*
25
<PAGE>
10(c) Cover Note Between Byas, Mosley & Co., Ltd. and The Aegis Group, Inc.
dated June 6, 1991 (incorporated by reference to Exhibit 10(h) to the
Registrant's Annual Report on Form 10-K for the year ended August 31,
1991 as filed with the Commission on December 13, 1991).*
10(d) 1997 Performance Equity Plan (incorporated by reference to the
Registrant's Proxy Statement dated May 9, 1997 - Annex II).*
10(e) 1998 Performance Equity Plan (incorporated by reference to the
Registrant's Form 10-Q for the quarter ended September 30, 1998 filed
with the Commission on November 12, 1998).*
11 Statement Re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consents of Independent Accountants (PricewaterhouseCoopers LLP)
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the referenced document previously filed by the
registrant with the Commission.
Reports on Form 8-K: None
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Automobile Protection Corporation - APCO has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
AUTOMOBILE PROTECTION CORPORATION - APCO
<TABLE>
<CAPTION>
<S> <C>
/s/ Larry Dorfman
- ----------------------------------------------------------------------------------------------------
By: Larry I. Dorfman Date: March 12, 1999
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Larry Dorfman
- ----------------------------------------------------------------------------------------------------
Larry I. Dorfman Date: March 12, 1999
President (Principal Executive Officer)
and Director
/s/ Martin Blank
- ----------------------------------------------------------------------------------------------------
Martin J. Blank Date: March 12, 1999
Chairman of the Board, Secretary
(Principal Operating Officer) and Director
/s/ Anthony Levinson
- ----------------------------------------------------------------------------------------------------
Anthony R. Levinson Date: March 12, 1999
Chief Financial Officer (Principal
Accounting and Financial Officer)
/s/ Howard Miller
- ----------------------------------------------------------------------------------------------------
Howard C. Miller Date: March 12, 1999
Director
/s/ Mechlin Moore
- ----------------------------------------------------------------------------------------------------
Mechlin D. Moore Date: March 12, 1999
Director
</TABLE>
27
<PAGE>
EXHIBITS
--------
TO ANNUAL REPORT ON FORM 10-K
-----------------------------
DECEMBER 31, 1998
-----------------
EXHIBIT No.
- ----------
11 Statement Re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consents of Independent Accountants (PricewaterhouseCoopers LLP)
27 Financial Data Schedule
AUTOMOBILE PROTECTION CORPORATION - APCO
----------------------------------------
EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
----------------------------------------------------------
FORM 10-K
---------
DECEMBER 31, 1998, 1997 AND 1996
--------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C>
Weighted average number of
issued shares each period 11,584,000 10,760,000 10,078,000
Common stock equivalents,
computed using treasury method 924,000 824,000 902,000
------------- -------------- --------------
12,508,000 11,584,000 10,980,000
============= ============== ==============
Shares used in:
Basic EPS 11,584,000 10,760,000 10,078,000
Diluted EPS 12,508,000 11,584,000 10,980,000
</TABLE>
Subsidiaries of the Registrant
Name of State of
Subsidiary Incorporation
---------- -------------
APCO Finance and Insurance Systems, Inc. Georgia
Aftermarket Profit Plus, Inc. Georgia
W.I.N. Systems, Inc. Georgia
The Aegis Group, Inc. Georgia
Automobile Protection Corporation - APCO Florida
APCO-Wyoming, Inc. Georgia
AUTOMOBILE PROTECTION CORPORATION - APCO
----------------------------------------
EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS
---------------------------------------------
FORM 10-K
---------
DECEMBER 31, 1998
-----------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-86594) and on Form S-8 (No. 333-35763) of
Automobile Protection Corporation - APCO of our report dated March 12, 1999
appearing on page 11 of this Form 10-K.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 12, 1999
<PAGE>
AUTOMOBILE PROTECTION CORPORATION - APCO
----------------------------------------
EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS
---------------------------------------------
FORM 10-K
---------
DECEMBER 31, 1998
-----------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-3473) of
Automobile Protection Corporation - APCO of our report dated March 12, 1999
appearing on page 11 of this Form 10-K.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,095,752
<SECURITIES> 13,710,982
<RECEIVABLES> 6,202,634
<ALLOWANCES> 210,000
<INVENTORY> 0
<CURRENT-ASSETS> 51,042,608
<PP&E> 2,761,092
<DEPRECIATION> 2,449,133
<TOTAL-ASSETS> 55,517,974
<CURRENT-LIABILITIES> 19,676,098
<BONDS> 0
<COMMON> 11,810
0
0
<OTHER-SE> 35,396,551
<TOTAL-LIABILITY-AND-EQUITY> 55,517,974
<SALES> 119,953,682
<TOTAL-REVENUES> 119,953,682
<CGS> 93,744,426
<TOTAL-COSTS> 93,744,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,487,485
<INCOME-TAX> 3,881,000
<INCOME-CONTINUING> 6,606,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,606,485
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.53
</TABLE>
