U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-21467
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FIRST PRIORITY GROUP, INC.
--------------------------
(Name of small business issuer in its charter)
NEW YORK 11-2750412
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
51 East Bethpage Road
Plainview, New York 11803
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (516) 694-1010
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value $.015 per share
Preferred Stock Purchase Rights par value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ___
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Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year $12,135,578
The aggregate market value of the issuer's voting stock held by
non-affiliates of the issuer as of March 30, 2000, based upon the closing price
on the date thereof is $25,908,825.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of April 13, 2000, the issuer had outstanding a total of 8,806,999
common shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-KSB is hereby incorporated by reference to the
Definitive Proxy or Definitive Information Statement issued by the Company for
the Notice of the Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format (check one):
Yes No X
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THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
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Part I
Item 1. DESCRIPTION OF BUSINESS
The Company, a New York corporation formed on June 28, 1985, is engaged
in automotive fleet management and administration of automotive repairs for
businesses, insurance companies and members of affinity groups.
The Company's office is located at 51 East Bethpage Road, Plainview,
New York 11803 and its telephone number is (516) 694-1010.
Nature of Services
The services offered by the Company consist of vehicle maintenance and
repair management, including collision and general repair programs, appraisal
services, subrogation services, vehicle salvage and vehicle rentals; and the
administration of automotive collision repair referral services for self insured
fleets, insurance companies and affinity group members.
The Company's wholly-owned subsidiary, National Fleet Service, Inc.,
("NFS") conducts the Company's fleet management business. The Company itself
provides the various affinity programs for all types of businesses.
Fleet Management. The Company has entered into contractual arrangements
with over 2,000 independently owned and operated repair shops throughout the
United States, as well as with national chains of automobile repair shops, to
provide repair services for the Company's fleet management clients' vehicles.
The automotive repair shops with which the Company has contracted can handle, on
a per incident basis, any repair which the Company's fleet management clients'
drivers may encounter. Because the Company has made arrangements with a large
number of repair shops, whenever a repair to a client's vehicle is needed, the
chances are excellent that a local repair shop will be available to perform the
required repair work. The repairs provided consist primarily of collision and
glass replacement repairs although general repairs can also be provided. In the
event that a repair is needed, the driver need only call the Company's toll free
telephone number. Through the development of a comprehensive proprietary
management system and customized computer software, upon receipt of the call,
the driver is directed to a local repair shop to which the driver may take the
vehicle for the needed repairs. The Company's staff tightly manages all the
activity surrounding the repair process. Upon completion of the repair, the bill
is forwarded to the Company, which in turn, bills the client. There is no need
for independent negotiations between the repair shop and the client or the
driver. As part of its fleet management services, the Company also offers its
clients computerized appraisal services, salvage and subrogation services, and
offers vehicle rentals to permit clients to avoid driver down-time while a
client's vehicle is being repaired. Additionally, the Company has created a
complete line of customized reports with features that allow risk managers to
thoroughly assess all variables concerning the collision activity expense of
their fleet. These unique systems were primarily attributable to the Company
winning in 1995 the prestigious award from Inc. Magazine and MCI, as one of the
nations best-run service companies.
3
Affinity Group Programs. These programs are a series of comprehensive
vehicle-related services for consumers sold through affinity groups, financial
institutions, corporations and organizations. These programs may be used as
re-enrollment incentives and/or membership premiums, or resold at a profit, and
may be sold individually, or a variety of services can be bundled together as a
high-value package.
Driver's Shield(R). - This is the premium program consisting of
components, which may be sold individually. This package consists of the
Collision Damage Repair Program, Driver Discount Program and the Auto Service
Hotline, as well an auto buying service, legal defense reimbursement, and custom
trip routing services.
Collision Damage Repair Program (CDR). - This is the corporate
collision program modified to suit consumer needs. Drivers participating in this
program may utilize the Company's proprietary network of collision body repair
shops. Additionally, the Company's customer service department will supervise
the entire process from expediting estimates and repairs, to troubleshooting any
problems or difficulties that may occur.
Driver Discount Program (DDP). This program offers drivers
discounts of up to forty percent off automotive-related services through
thousands of premium auto chain facilities throughout the nation. It applies
these discounts to virtually all routine maintenance including oil changes,
brakes, transmissions, mufflers, shocks, tires and glass. An option to this
program also provides 24-hour emergency roadside assistance for drivers anywhere
in the U.S.
Auto Service Hotline (ASH). This program provides drivers with
their own repair specialist who will help the driver determine a course of
action to repair the vehicle, and if necessary, provide a referral to one of
thousands of independently owned auto repair facilities. Drivers will receive a
ten percent discount off repairs and an enhanced nationwide warranty when
utilizing the shop to which they were referred. Additionally, drivers will be
offered rental replacement cars at preferred rates that are delivered to and
picked up from the driver's home or office.
Discontinued Operations
In September 1996, the Company's FPG Direct division began to market
consumer goods through direct mailing efforts to credit card customers of major
oil companies and retail department stores. During the second quarter of 1997,
the Company decided to discontinue its FPG Direct division. The division has not
participated in any new promotions since June 1997, it continued to fill orders
(to reduce inventory) through October 1997, pay vendors, collect receivables,
and receive returns. The Company did not expect to incur any additional losses
during the remaining phase out period; however, the Company was unable to
realize certain assets being carried (consisting mostly of inventories) and
wrote these assets off in 1998. Losses from this division did not provide any
income tax benefit during 1998.
Recent Developments.
In April 1999 the Company established a new Internet enterprise,
driversshield.com Corp., as a wholly owned subsidiary. driversshield.com is
designed to serve insurance companies by offering a complete customer
relationship management solution by combining its Affinity Group programs and
collision repair management services into an Internet based strategy. This new
business focuses on capturing a significant
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share of the North American market for managed automotive care. The first thrust
into the marketplace is the introduction of a website for efficient management
of collision repairs. The interactive website facilitates information gathering
and distribution to launch the repair process. The website will enable insurance
carriers to utilize the Company's website to directly enter the initial vehicle
claim information, permit the insured to select an automobile collision repair
shop from the Company's network of over 2,400 shops across the country, and
enable the insurance carrier and the insured to track the repairs of the vehicle
until completion. The website address is: www.driversshield.com is in
development and is presently in the beta testing stage. [See Forward-Looking
Statements and Cautionary Factors]
Related to the website development, in November 1999, driversshield.com
entered into an agreement with Electronic Data Systems Corporation ("EDS")
whereby EDS will develop and host the Company's website through December 31,
2003. Additionally, EDS will assist the Company in offering the Internet based
automobile collision managed care program to EDS' customers that provide auto
insurance to its insureds. driversshield.com will pay no more than $350,000 for
the initial development costs of the website. Once the website is operational,
driversshield shall retain the entire Net Revenue from the operation of website,
total revenue less cost of sales, until it has recovered the fees paid to EDS
for the website development. Thereafter, EDS shall be paid the entire Net
Revenue until it has recovered the development costs in excess of $350,000, if
any. The total recoverable amount allowed for EDS is not to exceed $80,000. For
the remainder of the first year of this Agreement, driversshield.com shall pay
EDS thirty percent (30%) of the Net Revenue. In years two, three and four of the
Agreement, EDS shall receive thirty-five percent (35%), forty-two percent (42%)
and forty-two percent (42%), respectively, of the Net Revenue. Throughout the
term of this Agreement, EDS shall host and maintain the website, process all
transactions, maintain, secure and update all database functions, design,
develop and build a repair management call center, secure all transmissions over
the website, upgrade the site for additional functionality, handle all
accounting functions, fulfill customer material and introduce electronic data
interchange throughout the repair facility network at no additional cost. First
Priority Group, Inc., has guaranteed performance of this Agreement by its wholly
owned subsidiary, driversshield.com
Sales and Marketing. The Company's fleet management clients generally
consist of companies having a large number of vehicles on the road over a broad
geographical area. The Company's clients for its affinity programs are
organizations and affinity groups. The Company's clients for the
driversshield.com program are property and casualty insurance companies.
Sales activities are performed by the Company's own personnel and
contracted agencies outside the Company. Sales are made through referrals, cold
canvassing of appropriate prospects and direct mailings. The Company also
attends trade shows in order to increase its client base.
Since the Company deals with a large number of independently owned
repair facilities, it is often able to offer to its fleet management clients a
custom tailored program to suit their needs for vehicle repairs. The Company
believes that this flexibility is important in its marketing activities and in
increasing its client base.
In 1999 and 1998, one customer accounted for approximately 10% of the
Company's revenue.
5
Employees
At year-end, the Company employed thirty-five full-time employees and
three part time employees. None of the Company's employees are governed by a
union contract and the Company believes that its employee relationships are
satisfactory.
Competition
Fleet Management. Some leasing companies offer fleet
management services, but most offer such services only to fleets leased by them.
The Company is aware of three other companies that, like the Company, offer
fleet management services independent of a fleet leasing arrangement.
Affinity Group Programs. Although there are several companies
providing various types of auto club programs the Company believes that there is
only one other company that offers a program providing similar services offered
by the Company's Affinity Group division.
driversshield.com. The Company is aware of three other
companies that offer automotive collision repair services to insurance
companies. Two of such companies are, like the Company, in the fleet management
business, while the other is in the vehicle software valuation business. The
Company believes that its services for insurance companies are superior to those
offered by such other companies.
Item 2. DESCRIPTION OF PROPERTY
In December 1996, the Company entered into a lease for new office space
at 51 East Bethpage Road, Plainview, New York 11803. The space consists of
approximately 12,000 square feet of office space. The Company relocated to this
new space during April 1997. The lease is for five years and expires on March
31, 2002.
A portion of the premise is subleased under a lease expiring June 2000.
Item 3. LEGAL PROCEEDINGS.
The Company was served with a summons and complaint filed by Philip M. Panzera
in United States District Court (Eastern District, NY) alleging that the Company
wrongfully terminated his employment on January 29, 1998 pursuant to an
employment agreement dated November 14, 1997 (the "Employment Agreement") and
wrongfully converted Mr. Panzera's personal property. Mr. Panzera is seeking
monetary damages in excess of $1 million. Mr. Panzera held the position in the
Company of Senior Vice President, Chief Financial Officer for the period of
November 17, 1997 through January 29, 1998. The Company has answered this
complaint and denied all of Mr. Panzera's allegations stating that the Company
properly terminated Mr. Panzera for cause pursuant to the Employment Agreement.
Additionally, the Company has filed a counterclaim against Mr. Panzera alleging,
among other things, that Mr. Panzera fraudulently induced the Company to enter
into the Employment Agreement by making
6
false representations concerning his educational background, employment history,
experience and skills. The Company is seeking monetary damages of no less than
$1 million. The Company believes that Mr. Panzera's claim is without merit and
intends to vigorously defend this suit. The discovery phase of this case has
been completed, and pending a ruling by the Court on both parties' cross-motions
for partial summary judgment, the case will be scheduled for trial.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are traded on The Nasdaq SmallCap market.
The following table shows the high and low closing prices for the periods
indicated.
Sale Price($)
High Low
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1999
First Quarter $3.50 $1.125
Second Quarter $2.0625 $1.375
Third Quarter $1.825 $.75
Fourth Quarter $3.00 $.75
1998
First Quarter $6.625 $4.94
Second Quarter $6.75 $5.50
Third Quarter $5.125 $2.50
Fourth Quarter $4.25 $1.50
The number of record holders of the Company's common shares as of March
30, 2000 was 350.
The Company has never paid dividends on its common stock and is not
expected to do so in the foreseeable future. Payment of dividends is within the
discretion of the Company's Board of Directors
7
and would depend on, among other factors, the earnings, capital requirements and
operating and financial condition of the Company.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 101 (SAB 101), the Company has determined that the portion of its
business representing commission revenues from its subrogation and salvage
services should be displayed in the financial statements on a net basis. It had
been the Company's prior policy to report such revenues and related costs on a
gross basis. Accordingly, 1998 has been reclassified to reflect the net
presentation. There was no effect on net loss or net cash flows used in
operating activities from the reclassification. Revenues and direct costs for
1998 were reduced by $2,417,503. Accounts receivable and accounts payable for
1998 were reduced by $539,759.
Automotive Management
Revenues were $12,135,578 in 1999, as compared to $12,140,971 in 1998,
representing a decrease of $5,393. The direct costs of services related to such
revenue (principally charges from automotive repair facilities) were $9,338,271
in 1999, as compared to $9,712,316 in 1998, representing a decrease of $374,045,
or 3.9%. Gross profit percentage increased 3.1% to 23.1% in 1999 from 20.0% in
1998. In 1998, the Company ceased operating in the insurance company market with
its DRP (Direct Repair Program). DRP sales for 1998 were approximately
$1,203,000 as compared to approximately $187,000 during 1999. The Company had
increased revenues of approximately $600,000 for its collision repair and fleet
management services, including subrogation and salvage commissions representing
an increase of 5.7% as compared to 1998. Affinity sales increased 113% in 1999
or $410,526 to $773,406 as compared to $362,880 in 1998. The increased gross
profit percentage is a result of the increased Affinity sales, which has a lower
cost of revenue than the other programs.
Total operating expenses were $3,886,899 for 1999, as compared to
$4,573,009 for 1998, representing a decrease of $686,110 or 15%. The decrease in
operating expenses is attributable to the discontinuation of the DRP and
Recovery Service programs as well as pay cuts taken by upper management.
Operating expenses include costs of approximately $169,000 incurred for the
Website development of driversshield.com.
Investment and other income was $152,976 in 1999, as compared to
$245,246 in 1998, representing a decrease of $92,270. The decrease is primarily
attributable to lower average cash balances available during 1999.
Interest expense was $6,784 in 1999, as compared to $2,800 in 1998,
representing an increase of $3,984.
8
FPG Direct (Discontinued operations)
Management discontinued operations of the FPG Direct division in 1997
and has not participated in any new promotions since June 1997. FPG Direct
experienced a loss on disposition of assets of $93,922 in 1998.
Liquidity and Capital Resources
As of December 31, 1999, the Company had cash and cash equivalents of
$542,359 as compared to $2,782,180 as of December 31, 1998. The Company holds
106,721 shares of Salomon Smith Barney Adjustable Rate Government Income Fund
securities valued at $1,036,263 at December 31, 1999. Working capital of the
Company as of December 31, 1999, was $1,676,240 as compared to $2,680,475 as of
December 31, 1998. The Company's operating activities used $899,336 of cash in
1999 as compared to 1998, when the Company's operating activities used
$1,554,262 of cash. This is primarily a result of the decrease in net loss for
1999.
The Company believes that its present cash position will enable the
Company to continue to support its operations for the next twelve months.
Forward Looking Statements - Cautionary Factors
Except for the historical information and statements contained in this
Report, the matters and items set forth in this Report are forward looking
statements that involve uncertainties and risks some of which are discussed at
appropriate points in the Report and are also summarized as follows:
1. The Company has been able to assemble a network of independently owned
and operated repair shops throughout the United States. These collision
repair shops must maintain the high quality repairs standard that has
enabled the Company to continue to retain and attract new clients. The
Company's inability to retain these quality repair shops and maintain
their individually high repair standards could have a material adverse
impact upon all of the Company's vehicle collision repair programs.
2. The Company, under the DARP, or NFS, under its fleet management
business, or the Affinity Division, have clients that either
individually control a large number of insureds, control large fleets,
or a large number of participants in FPG programs such as Driver's
Shield(R). The loss of any one insurance company, large fleet operator,
or affinity group, terminating its relationship with the Company or
NFS, could have an adverse impact on the continued growth of that
business. The Company and NFS have addressed the issue of customer
retention by implementing a policy of entering into long-term contracts
with its customers. In the past several years, this has materially
improved the customer retention rate.
9
3. As the Company's proprietary programs gain more success, it is possible
that the competition will attempt to copy these programs and
incorporate them into their programs. This could lead to increased
competitive pressures on those programs that are the most successful.
The competition could result in decreased profit margins and/or the
loss of certain customers.
4. As the Company has embarked on an Internet strategy whereby it will
offer auto collision managed care services on its website, there will
be new and additional risks that may influence the business of the
Company. These risks are:
o The Company's website will be the first to offer auto
collision managed care services on the Internet, and
therefore, we are not sure our business model will be
successful or that we can generate revenue from this activity
or be profitable.
o As is typical for any new, rapidly evolving market,
demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty and
risk. It is also difficult to predict the market's future
growth rate, if any. If the market fails to develop, develops
more slowly than expected or becomes saturated with
competitors, or our services do not achieve or sustain market
acceptance, our business, results of operations and financial
condition could be materially and adversely affected.
o We also depend on establishing and maintaining a
number of commercial relationships with other companies. Our
business could be adversely affected if we do not maintain our
existing commercial relationships on terms as favorable as
currently in effect, if we do not establish additional
commercial relationships on commercially reasonable terms or
if our commercial relationships do not result in the expected
increased use of our Website.
o We cannot assure you that we will be able to
establish new agreements or maintain existing agreements on
commercially acceptable terms. We also may not be able to
maintain relationships with third parties that supply us with
software or products that are crucial to our success, and the
vendors of these software or products may not be able to
sustain any third- party claims or rights against their use.
Furthermore, we cannot assure you that the software, services
or products of those companies that provide access or links to
our services or products will achieve market acceptance or
commercial success.
o To remain competitive we must continue to enhance and
improve the ease of use, responsiveness, functionality and
features of our website and develop new services in addition
to continuing to improve the customer experience. These
efforts may require the development or licensing of
increasingly complex technologies. We may not be successful in
developing or introducing new features, functions and
services, and these features, functions and services may not
achieve market acceptance.
o Our future success and revenue growth depends
substantially upon continued growth in the use of the
Internet. Businesses will likely widely accept and adopt the
Internet for conducting business and exchanging information
only if the Internet provides these businesses with greater
efficiencies and improvements in commerce and communication.
In addition, e-commerce generally, and the purchase of
automotive related products and services on the Internet in
particular, must become widespread. The Internet may prove not
to be a viable commercial marketplace generally, or, in
particular, for
10
vehicle related products and services. If use of the Internet
does not continue to increase, our business, results of
operations and financial condition would be materially and
adversely affected.
o We are dependent on certain key personnel. Our future
success is substantially dependent on our senior management
and key technical personnel. If one or more of our key
employees decided to leave us, join a competitor or otherwise
compete directly or indirectly with us, this could have a
material adverse effect on our business, results of operations
and financial condition. Competition for such personnel is
intense, and we may not be able to attract, assimilate or
retain such personnel in the future. The inability to attract
and retain the necessary managerial, technical, sales and
marketing personnel could have a material adverse effect on
our business, results of operations and financial condition.
o We are a new business in a new industry and need to
manage our growth and our entry into new business areas in
order to avoid increased expenses without corresponding
revenues. The growth of our operations requires us to increase
expenditures before we generate revenues. Our inability to
generate satisfactory revenues from such expanded services to
offset costs could have a material adverse effect on our
business, financial condition and results of operations. We
believe establishing industry leadership also requires us to:
- test, introduce and develop new services and products,
including enhancing our website, - expand the breadth of and
services offered, - expand our market presence through
relationships with third parties, and - acquire new or
complementary businesses, products or technologies. We cannot
assure you that we can successfully manage these tasks.
o Our success is dependent on keeping pace with
advances in technology. If we are unable to keep pace with
advances in technology, businesses may stop using our services
and our revenues will decrease. The Internet and electronic
commerce markets are characterized by rapid technological
change, changes in user and customer requirements, frequent
new service and product introductions embodying new
technologies and the emergence of new industry standards and
practices that could render our existing Website and
technology obsolete. If we are unable to adapt to changing
technologies, our business, results of operations and
financial condition could be materially and adversely
affected. Our performance will depend, in part, on our ability
to continue to enhance our existing services, develop new
technology that addresses the increasingly sophisticated and
varied needs of our prospective customers, license leading
technologies and respond to technological advances and
emerging industry standards and practices on a timely and
cost-effective basis.
o We are uncertain of our ability to obtain additional
financing for our future capital needs. If we are unable to
obtain additional financing, we may not be able to continue to
operate our business. We currently anticipate that our cash,
cash equivalents and short-term investments will be sufficient
to meet our anticipated needs for working capital and other
cash requirements at least for the next 12 months. We may need
to raise additional funds sooner, however, in order to fund
more rapid expansion, to develop new or enhance existing
services or products, to respond to competitive pressures or
to acquire
11
complementary products, businesses or technologies. There can
be no assurance that additional financing will be available on
terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our
ability to fund our expansion, take advantage of potential
acquisition opportunities, develop or enhance services or
products or respond to competitive pressures would be
significantly limited. Such limitation could have a material
adverse effect on our business, results of operations,
financial condition and prospects.
o The Company's business involves the repair of motor
vehicles through a contracted network of automobile collision
repair shops. These shops are obligated to maintain certain
minimum limits of liability insurance, indemnify the Company
from any and all claims and expenses related to the shop's
negligent acts or from the breach of the agreement between the
Company and the shop, and name the Company as an additional
insured under the shop's liability policy. However, the repair
shop and/or the Company's general liability insurance may not
cover all potential claims to which we are exposed and may not
be adequate to indemnify us for all liability that may be
imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could have a
material adverse effect on our business, results of operations
and financial condition.
Item 7. FINANCIAL STATEMENTS
The Company's financial statements and schedules appear at the end of this
Report after Item 13.
12
Part III
Items 9 through 12 have been incorporated by reference from the
Company's definitive proxy statement .
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3.1 Certificate of Incorporation of the Company, as amended, incorporated
by reference to Exhibit 19.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1991.
3.2 Amendment to the Certificate of Incorporation incorporated by reference
to Exhibit 3.1 of the Company's Form 10-QSB for the period ended
September 30, 1996.
3.3. Amended and restated By-laws of the Company, incorporated by reference
to Exhibit 4 to the Company's Current Report on Form 8-K dated December
28, 1998.
4 Shareholders Rights Agreement, dated as of December 28, 1998, between
First Priority Group, Inc. and North American Transfer Co., as Rights
Agent, together with Exhibits A, B and C attached thereto
incorporated by reference to the Registrant's Registration Statement
on Form 8-A filed on December 31, 1998.
10.1 The Company's 1995 Incentive Stock Plan incorporated by reference to
Exhibit 10.1 of the Company's Form 10-QSB for the period ended
September 30, 1996.
10.2 Lease Agreement dated December 6, 1996 between the Company and 51 East
Bethpage Holding Corporation for lease of the Company's facilities in
Plainview, New York incorporated by reference to Exhibit 10.3 of the
Company's Form 10-QSB for the period ended June 30, 1997.
10.3 First Amendment to Lease Agreement dated July 14, 1997 amending the
lease dated December 6, 1996 between the Company and 51 East Bethpage
Holding Corporation incorporated by reference to Exhibit 10.4 of the
Company's Form 10-QSB for the period ended June 30, 1997.
13
10.4 Employment Agreement dated March 23, 1998 between the Company and
Gerald M. Zutler incorporated by reference to Exhibit 10.1 of the
Company's Form 10-QSB for the period ended March 31, 1998.
10.5 Employment Agreement dated October 8, 1998 between the Company and
Barry Siegel incorporated by reference to Exhibit 10.17 of the
Company's Form 10-KSB for the year ended December 31, 1998.
10.6 Employment Agreement dated October 2, 1998 between the Company and
Barry J. Spiegel incorporated by reference to Exhibit 10.18 of the
Company's Form 10-KSB for the year ended December 31, 1998.
10.7 Employment Agreement dated December 14, 1998 between the Company and
Lisa Siegel incorporated by reference to Exhibit 10.19 of the Company's
Form 10-KSB for the year ended December 31, 1998.
10.8 Employment Agreement dated October 8, 1998 between the Company and
Gerald M. Zutler incorporated by reference to Exhibit 10.20 of the
Company's Form 10-KSB for the year ended December 31, 1998.
10.9 Severance Agreement dated August 17, 1998 between the Company and
Michael Karpoff incorporated by reference to Exhibit 10.21 of the
Company's Form 10-KSB for the year ended December 31, 1998.
10.10 Service Agreement dated November 29, 1999 between the Company,
driversshield.com Corp., Electronic Systems Corporation and EDS
Information Services L.L.C filed herein.
10.11 driversshield.com Corp. 1999 Stock Option Plan file herein
13.1 Form 10-QSB for the quarter ending March 31,1999 incorporated by
reference dated and previously filed with the Commission.
13.2 Form 10-QSB for the quarter ending June 30, 1999 incorporated by
reference and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 1999 incorporated by
reference and previously filed with the Commission.
14
21 List of subsidiaries filed herein.
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST PRIORITY GROUP, INC.
By: /s/ Barry Siegel
Barry Siegel
Chairman of the Board of Directors,
Treasurer, Secretary,
Chief Executive Officer,
Principal Accounting Officer
Date: March 30, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Barry Siegel Date: March 30, 2000
---------------
Barry Siegel
Chairman of the Board of Directors,
Treasurer, Secretary,
Chief Executive Officer,
Principal Accounting Officer
By: /s/Barry J. Spiegel Date: March 30, 2000
------------------
Barry J. Spiegel
President
Driver's Shield, Inc.
Director
15
By: /s/Kenneth J. Friedman Date: March 30, 2000
---------------------
Kenneth J. Friedman
Director
By: /s/R. Frank Mena Date: March 30, 2000
---------------
R. Frank Mena
Director
16
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1999 AND 1998
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Certified Public Accountants
Board of Directors
First Priority Group, Inc.
Plainview, New York
We have audited the accompanying consolidated balance sheets of First Priority
Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Priority Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Melville, New York NUSSBAUM YATES & WOLPOW, P.C.
March 13, 2000
F-1
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
-------------- ------------
Current assets:
Cash and cash equivalents $ 542,359 $ 2,782,180
Accounts receivable, less allowance for doubtful
accounts of $28,223 in 1999 and 1998 1,794,740 1,171,885
Investment securities (Note 3) 1,036,263 -
Prepaid expenses and other current assets 39,376 66,207
------------- -------------
Total current assets 3,412,738 4,020,272
Property and equipment, net 689,094 601,424
Security deposits and other assets 35,288 107,972
------------- ------------
Total assets $ 4,137,120 $ 4,729,668
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 938,418 $ 698,330
Accrued expenses and other current liabilities 747,567 596,795
Current portion of long-term debt 50,513 44,672
------------- -------------
Total current liabilities 1,736,498 1,339,797
------------- -------------
Long-term debt - 51,926
------------- -------------
Shareholders' equity:
Common stock, $.015 par value, authorized 20,000,000
shares; issued 8,598,467 shares in 1999 and 1998 128,977 128,977
Preferred stock, $.01 par value, authorized 1,000,000
shares; none issued or outstanding - -
Additional paid-in capital 7,823,916 7,762,350
Accumulated other comprehensive loss, unrealized holding
loss on investment securities ( 4,095) -
Deficit ( 5,429,014) ( 4,463,382)
------------- -------------
2,519,784 3,427,945
Less common stock held in treasury, at cost, 296,667
shares in 1999 and 266,667 shares in 1998 119,162 90,000
------------- -------------
Total shareholders' equity 2,400,622 3,337,945
------------- -------------
Total liabilities and shareholders' equity $4,137,120 $4,729,668
============= =============
See notes to consolidated financial statements.
F-2
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
------------- -------------
Revenue:
Collision repairs and fleet management services $ 10,954,912 $ 11,366,891
Subrogation and salvage service commissions 407,260 411,200
Automobile affinity services 773,406 362,880
------------- -------------
Total revenues 12,135,578 12,140,971
Cost of revenue (principally charges incurred at repair
facilities for services) 9,338,271 9,712,316
------------- -------------
Gross profit 2,797,307 2,428,655
------------- -------------
Operating expenses:
Selling 1,048,681 1,351,360
General and administrative 2,838,218 3,221,649
------------- -------------
Total operating expenses 3,886,899 4,573,009
------------- -------------
( 1,089,592) ( 2,144,354)
------------- -------------
Other income (expense):
Realized loss on investment ( 3,096) -
Investment and other income 152,976 245,246
Interest expense ( 6,784) ( 2,800)
------------- -------------
Total other income 143,096 242,446
------------- -------------
Loss from continuing operations before
income taxes ( 946,496) ( 1,901,908)
Income taxes, all current 19,136 7,928
------------- -------------
Loss from continuing operations ( 965,632) ( 1,909,836)
Discontinued operations,
loss on disposal of direct response marketing
division, no income tax benefit - ( 93,922)
------------- -------------
Net loss ($ 965,632) ($ 2,003,758)
------------- -------------
Basic and diluted loss per share:
Continuing operations ($ .12) ($ .23)
Discontinued operations - ( .01)
------------- -------------
Net loss ($ .12) ($ .24)
------------- -------------
Weighted average number of common shares outstanding 8,324,649 8,197,827
------------- -------------
See notes to consolidated financial statements.
F-3
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated
Common Stock Additional Other
----------------------- Paid-in Comprehensive
Shares Amount Capital Loss Deficit
--------- ---------- ----------- -------- ----------
Balance, January 1, 1998 7,998,467 $ 119,977 $ 6,645,737 $ -- ($2,459,624)
Net loss -- -- -- -- ( 2,003,758)
Exercise of options 100,000 1,500 68,500 -- --
Exercise of warrants 500,000 7,500 992,500 -- --
Options granted for services -- -- 55,613 -- --
--------- ---------- ----------- -------- ----------
Balance, December 31, 1998 8,598,467 128,977 7,762,350 -- ( 4,463,382)
Net loss -- -- -- -- ( 965,632)
Other comprehensive income (loss),
unrealized holding loss arising
during period -- -- -- ( 4,095) --
Comprehensive loss -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Options granted for services -- -- 61,566 -- --
--------- ---------- ----------- -------- ----------
Balance, December 31, 1999 8,598,467 $ 128,977 $ 7,823,916 ($ 4,095) ($5,429,014)
========= ========== =========== ======== ===========
Total
Treasury Stock Share-
----------------------- holders'
Shares Amount Equity
------- -------- -----------
Balance, January 1, 1998 266,667 ($ 90,000) $ 4,216,090
Net loss -- -- ( 2,003,758)
Exercise of options -- -- 70,000
Exercise of warrants -- -- 1,000,000
Options granted for services -- -- 55,613
------- -------- -----------
Balance, December 31, 1998 266,667 ( 90,000) 3,337,945
-----------
Net loss -- -- ( 965,632)
Other comprehensive income (loss),
unrealized holding loss arising
during period -- -- ( 4,095)
-----------
Comprehensive loss -- -- ( 969,727)
Purchase of treasury stock 30,000 ( 29,162) ( 29,162)
Options granted for services -- -- 61,566
------- -------- -----------
Balance, December 31, 1999 296,667 ($ 119,162) $ 2,400,622
======= ========= ==========
See notes to consolidated financial statements.
F-4
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- ---------
Cash flows used in operating activities:
Net loss ($ 965,632) ($2,003,758)
---------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 201,289 143,308
Gain on sale of property and equipment ( 2,500) --
Realized loss on investment 3,096 --
Provision for bad debts -- 16,723
Options granted for services 61,566 55,613
Changes in assets and liabilities:
Accounts receivable ( 622,855) ( 50,784)
Inventories -- 61,642
Prepaid expenses and other current assets 26,831 73,069
Security deposit and other assets 8,009 ( 66,644)
Accounts payable 240,088 ( 89,856)
Accrued expenses and other current liabilities 150,772 306,425
---------- ----------
Total adjustments 66,296 449,496
---------- ----------
Net cash used in operating activities ( 899,336) ( 1,554,262)
---------- ----------
Cash flows used in investing activities:
Proceeds from sale of property and equipment 2,500 --
Purchase of property and equipment ( 224,284) ( 287,422)
Purchase of investments ( 1,543,454) --
Proceeds from sale of investments 500,000 --
---------- ----------
Net cash used in investing activities ( 1,265,238) ( 287,422)
---------- ----------
Cash flows provided by (used in) financing activities:
Repayment of long-term debt ( 46,085) --
Purchase of treasury stock ( 29,162) --
Collection of shareholder note -- 100,000
Proceeds from issuance of common stock -- 1,070,000
---------- ----------
Net cash provided by (used in) financing activities ( 75,247) 1,170,000
---------- ----------
Net decrease in cash and cash equivalents ( 2,239,821) ( 671,684)
Cash and cash equivalents at beginning of year 2,782,180 3,453,864
---------- ----------
Cash and cash equivalents at end of year $ 542,359 $2,782,180
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 20,204 $ 2,876
========== ==========
Cash paid during the year for interest $ 9,175 $ --
========== ==========
See notes to consolidated financial statements
F-5
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
First Priority Group, Inc. and its subsidiaries, National Fleet Service,
Inc., driversshield.com Corp., American Automotive Trading Corp., and First
Priority Group Leasing, Inc. (collectively referred to as the "Company")
all of which are wholly owned. All material intercompany balances and
transactions have been eliminated.
Property and Equipment
Property and equipment are stated at cost. The Company provides
depreciation for machinery and equipment and for furniture and fixtures by
the straight-line method over the estimated useful lives of the assets,
principally five years. Leasehold improvements are amortized over the
estimated useful lives or the remaining term of the lease, whichever is
less.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Investment Securities
Investments consist of securities available for sale and are carried at
fair value with unrealized gains or losses reported in a separate component
of shareholders' equity. Realized gains or losses are determined based on
the specific identification method.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-6
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. Summary of Significant Accounting Policies (Continued)
Reclassification
In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 101 (SAB 101), the Company has determined that the portion of
its business representing commission revenues from its subrogation and
salvage services should be displayed in the financial statements on a net
basis. It had been the Company's prior policy to report such revenues and
related costs on a gross basis. Accordingly, 1998 has been reclassified to
reflect the net presentation. There was no effect on net loss or net cash
flows used in operating activities from the reclassification. Revenues and
direct costs for 1998 were reduced by $2,417,503. Accounts receivable and
accounts payable for 1998 were reduced by $539,759.
2. Fair Value of Financial Instruments, Description of Business and
Concentration of Credit Risk, and Revenue Recognition
Fair Value of Financial Instruments
o Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short
maturity of the instruments.
o Investments
Investments are stated at fair value as measured by quoted market
prices.
o Long-Term Debt
The carrying amount of the Company's long-term debt approximates fair
value.
Description of Business and Concentration of Credit Risk
The Company is engaged in automotive fleet management and administration of
automotive repairs for major corporate clients throughout the United
States. The Company offers computerized collision estimates and provides
its clients with a cost-effective method for repairing their vehicle. The
Company also arranges for repair of the vehicles through a nationwide
network of independently owned contracted facilities. The Company also
provides automobile affinity services for individuals.
F-7
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
2. Fair Value of Financial Instruments, Description of Business and
Concentration of Credit Risk, and Revenue Recognition (Continued)
Description of Business and Concentration of Credit Risk (Continued)
The Company formed driversshield.com Corp. in April 1999 to provide
collision repair claims management services for the insurance industry
nationwide through a website on the Internet. At December 31, 1999, the
website was not yet operational and to date, there have been no revenues.
Sales to one customer accounted for 10% of revenue in 1999 and 1998.
The Company has no financial instruments with significant off-balance-sheet
risk or concentration of credit risk.
Revenue Recognition
The Company recognizes revenue for its collision repairs and fleet
management at the time of customer approval and completion of repair
services. The Company warrants such services for varying periods ranging up
to twelve months. Such warranty expense is borne by the repair facilities
and has not been material to the Company. The Company recognizes
commissions for its subrogation and salvage services upon completion of the
services. Automobile affinity services are recognized as such services are
rendered.
3. Investment Securities
At December 31, 1999:
Unrealized
Holding
Cost Fair Value Loss
---------- ---------- ------
Available for sale, 106,721
shares of Salomon Smith Barney
Adjustable Rate Government Income
Fund $1,040,358 $1,036,263 ($4,095)
========== ========== ======
F-8
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
4. Property and Equipment
1999 1998
----------- ----------
Machinery and equipment $ 980,894 $ 717,912
Furniture and fixtures 285,800 264,823
Leasehold improvements 19,886 19,886
----------- -----------
1,286,580 1,002,621
Less accumulated depreciation
and amortization 597,486 401,197
----------- -----------
$ 689,094 $ 601,424
=========== ===========
5. Long-Term Debt
In August 1998, the Company agreed to pay severance to its former
Co-Chairman and President in the amount of $100,000 including imputed
interest of 8.5% in quarterly installments of $12,500 commencing March 31,
1999 and ending December 31, 2000. This amount was accrued and charged to
operations in the year ended December 31, 1998.
6. Loss Per Share
Basic loss per share is computed by dividing the loss by the weighted
average number of common shares outstanding during the period. Diluted loss
per share reflects the potential dilution that could occur if common stock
equivalents, such as stock options and warrants, were exercised.
Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- --------- ----
1999:
Basic and Diluted Loss Per Share
Loss from continuing operations ($ 965,632) 8,324,469 ($.12)
=========== ========= ====
1998:
Basic and Diluted Loss Per Share
Loss from continuing operations ($1,909,836) 8,197,827 ($.23)
========== ========= ====
In 1999 and 1998, options and warrants were anti-dilutive.
F-9
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
7. Stock Options
Stock Compensation Plan
The Company accounts for its stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
expense is recognized. In 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
(SFAS No. 123) for disclosure purposes; accordingly, no compensation
expense has been recognized in the results of operations for its stock
option plans as required by APB Opinion No. 25. The Company has two fixed
option plans, the 1995 Stock Incentive Plan, and the 1987 Incentive Stock
Option Plan. Under the plans, in the aggregate, the Company may grant
options to its employees, directors and consultants for up to 7,000,000
shares of common stock. Under both plans, incentive stock options may be
granted at no less than the fair market value of the Company's stock on the
date of grant, and in the case of an optionee who owns directly or
indirectly more than 10% of the outstanding voting stock ("an Affiliate"),
110% of the market price on the date of grant. The maximum term of an
option is ten years, except, in regard to incentive stock options granted
to an Affiliate, in which case the maximum term is five years.
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing model
with the following weighted average assumptions used for stock options
granted in 1999 and 1998, respectively: annual dividends of $-0- for both
years, expected volatility of 174% and 80%, risk-free interest rate of
5.90% and 5.02%, and expected life of five years for all grants. The
weighted-average fair value of stock options granted in 1999 and 1998 was
$1.08 and $.83, respectively.
Under the above model, the total value of stock options granted in 1999 and
1998 was $801,945 and $1,044,745, respectively, which would be amortized
ratably on a pro forma basis over the related vesting periods, which range
from immediate vesting to five years (not including performance-based stock
options granted in 1999 and 1998, see below). Had compensation cost been
determined based upon the fair value of the stock options at grant date
consistent with the method of SFAS No. 123, the Company's loss from
continuing operations and loss per share from continuing operations would
have been reduced to the pro forma amounts indicated below:
F-10
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
7. Stock Options (Continued)
Stock Compensation Plan (Continued)
1999 1998
----------- ---------
Loss from continuing operations:
As reported ($ 965,632) ($1,909,836)
Pro forma ($3,293,360) ($2,994,711)
Basic and diluted loss per share from
continuing operations:
As reported ($ .12) ($ .23)
Pro forma ($ .40) ($ .37)
During 1998, the Company repriced certain options granted in 1997,
representing the right to purchase 465,000 shares of common stock. The
original 1997 grants gave the holders the right to purchase common stock at
prices ranging from $2.75 to $6.84 per share. The options were repriced at
prices ranging from $1.75 to $1.93 per share. In addition, during 1998, the
Company repriced certain options granted at earlier dates in 1998,
representing the right to purchase 1,095,000 shares of common stock. The
original 1998 grants gave the holders the right to purchase common stock at
prices ranging from $5.13 to $5.69 per share. The options were repriced at
prices ranging from $1.75 to $1.93 per share. At the date of repricing, the
new exercise price was equal to the fair market value of the shares (110%
of the fair market value in the case of an affiliate).
In March 1999, the Company repriced certain options granted to employees
and third parties in previous years, representing the right to purchase
1,665,000 shares of common stock. The original grants gave the holders the
right to purchase common stock at prices ranging from $1.25 to $5.00 per
share. The options were repriced at prices ranging from $1.13 to $3.00 per
share. The Company also granted options to employees, representing the
right to purchase 630,000 shares of common stock at prices ranging from
$1.13 to $1.24 per share. In addition, in October 1999, the Company
repriced certain options granted to employees and third parties,
representing the right to purchase 2,330,000 shares of common stock, of
which 2,235,000 were part of the March 1999 grant. The original grants gave
the holders the right to purchase common stock at prices ranging from $1.00
to $1.24 per share. The options were repriced at prices ranging from $.75
to $.83 per share. At the date of the repricing, the new exercise price was
equal to the fair market value of the shares (110% of the fair market value
in the case of an affiliate).
The SFAS No. 123 method of accounting does not apply to options granted
prior to January 1, 1995, and accordingly, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
F-11
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
7. Stock Options (Continued)
Performance-Based Stock Options
Under its 1995 Stock Incentive Plan, the Company had granted options to
certain key executives whose vesting was entirely contingent upon the
future profits (as defined) for the division or subsidiary or commissions
earned under the management of the related key executive. As of January 1,
1998, there were 1,100,000 of such options outstanding. During 1998, the
Company terminated and cancelled 950,000 of such options. During 1999, the
Company terminated the remainder of the options.
Non-Incentive Stock Option Agreements
The Company has non-incentive stock option agreements with five of its
directors and/or officers.
Summary
Stock options transactions (other than performance-based stock options) are
summarized as follows:
Weighted
Number Exercise Average
of Price Exercise
Shares Range Price
---------- ----------- ----------
Options outstanding, January 1, 1998 3,765,000 .06 - 6.84 1.17
Options granted 3,242,500 1.75 - 6.63 3.38
Options expired/canceled (3,630,000) .06 - 6.84 2.79
Options exercised ( 100,000) .70 .70
----------
Options outstanding, December 31, 1998 3,277,500 .12 - 5.00 1.57
Options granted 5,035,000 .75 - 3.00 1.02
Options canceled ( 4,352,500) 1.00 - 5.00 1.54
----------
Options outstanding, December 31, 1999 3,960,000 .12 - 3.75 .91
==========
Options exercisable, December 31, 1998 1,552,500 .12 - 5.00 1.36
==========
Options exercisable, December 31, 1999 2,712,914 .12 - 3.75 .92
==========
F-12
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
7. Stock Options (Continued)
Summary (Continued)
The following table summarizes information about the options outstanding at
December 31, 1999 other than performance-based stock options:
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
--------------- ------------ ------------ ---------- ----------- ---------
$.14 - $.22 450,000 .46 $.19 450,000 $ .19
$.75 - $1.56 3,190,000 3.11 $.87 1,976,248 $ .90
$1.75 - $3.75 320,000 3.33 $2.36 286,666 $ 2.28
driversshield.com Corp.
During 1999, the Company's subsidiary, driversshield.com Corp. established
the "driversshield.com Corp. 1999 Stock Option Plan." Under this plan,
options may be granted to employees of driversshield.com Corp or the Parent
or other subsidiaries of the Company, and outside directors for up to
2,000,000 shares of common stock. Under this plan, incentive stock options
may be granted at no less than fair market value of the driversshield.com
Corp. stock at the date of grant, and in the case of an optionee who owns
directly or indirectly more than 10% of the outstanding voting stock, 110%
of the market price on the date of grant. The maximum term of an option is
ten years, except in regard to incentive stock options granted to an
Affiliate, in which case the maximum term is five years. No options have
been granted as of December 31, 1999.
F-13
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. Common Stock and Stock Warrants
In August 1997, the Company raised $1,500,000 through the private placement
issuance of 750,000 units at $2.00 per unit. Each unit consists of one
share of common stock and a redeemable common stock purchase warrant at
$2.00 per share for a period of two years. The units were issued to an
executive of the Company and a private investment group. In response to the
Notice of Redemption issued by the Company, the executive exercised 250,000
shares of the warrants in December 1997. Thereafter, in January 1998, the
private investment group exercised 500,000 shares of the warrants.
In December 1997, the Company raised $2,330,813 through the private
placement issuance of 581,250 units at $4.01 per unit. Each unit consists
of one share of common stock and a redeemable common stock purchase warrant
at $5.75 per share for a period of five years. Should the price of the
Company's stock exceed $11.50 per share for 20 consecutive trading days,
the Company may request redemption of the warrants at a price of $.01 per
share. The warrant holders would then have 30 days in which to either
exercise the warrant or accept the redemption offer.
In connection with the 1995 issuance of 1,000,000 shares of its common
stock, the Company issued warrants to purchase 850,000 shares of the
Company's common stock. The warrants are all presently exercisable at
prices ranging from $.125 to $.50 per share and these warrants expire in
2000. During the fiscal years ended December 31, 1999 and 1998, none of
these warrants were exercised. In lieu of the payment of the exercise price
in cash, the holders of these warrants have the right (but not the
obligation) to convert the warrants, in whole or in part, into common stock
as follows; upon exercise of the conversion rights of the warrant, the
Company shall deliver to the holder that number of shares of common stock
equal to the quotient obtained by dividing the remainder derived from
subtracting (a) the exercise price multiplied by the number of shares of
common stock being converted from (b) the market price of the common stock
multiplied by the number of shares of common stock being converted, by the
market price of the stock.
F-14
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
9. Preferred Stock Purchase Rights
On December 28, 1998, the Board of Directors authorized the issuance of up
to 200,000 shares of non-redeemable Junior Participating Preferred Stock
("JPPS"). The JPPS shall rank junior to all other series of preferred stock
(but senior to the common stock) with respect to payment of dividends and
any other distributions. Among other rights, the holders of the JPPS shall
be entitled to receive, when and if declared, quarterly dividends per share
equal to the greater of (a) $100 or (b) the sum of 1,000 (subject to
adjustment) times the aggregate per share of all cash and non cash
dividends (other than dividends payable in common stock of the Company and
other defined distributions). Each share of JPPS shall entitle the holders
to voting rights equal to 1,000 votes per share. The holders of JPPS shall
vote together with the common stockholders.
On December 28, 1998, the Board of Directors also adopted a Rights
Agreement ("the Agreement"). Under the agreement, each share of the
Company's common stock carries with it one preferred share purchase right
("Rights"). The Rights themselves will at no time have voting power or pay
dividends. The Rights become exercisable (1) when a person or group
acquires 20% or more of the Company's common stock (10% in the case of an
Adverse Person as defined) and an additional 1% or more in the case of
acquisitions by any shareholder with beneficial ownership of 20% or more on
the record date (10% in the case of an Adverse Person as defined) or (2) on
the tenth business day after a person or group announces a tender offer to
acquire 20% or more of the Company's common stock (10% in the case of an
Adverse Person as defined). When exercisable, each Right entitles the
holder to purchase 1/1000 of a share of the JPPS at an exercise price of
$27.50 per 1/1000 of a share, subject to adjustment.
10. Employee Benefit Plan
The Company has a 401(k) profit sharing plan for the benefit of all
eligible employees as defined in the plan documents. The plan provides for
voluntary employee salary contributions from 1% to 15% not to exceed the
statutory limitation provided by the Internal Revenue Code. The Company
may, at its discretion, match within prescribed limits, the contributions
of the employees. Employer contributions to the plan amounted to $8,671 and
$9,632 in 1999 and 1998.
F-15
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
11. Commitments and Contingencies
Leases
The Company leases its executive office in Plainview, New York, expiring in
March 2002 under a noncancelable operating lease which requires minimum
annual rentals and certain other expenses including real estate taxes. A
portion of the premise is subleased under a lease expiring June 2000.
Sublease income was $39,728 for the year ended December 31, 1999. Rent
expense including real estate taxes for the years ended December 31, 1999
and 1998 aggregated $178,490 and $253,531, respectively.
As of December 31, 1999, the Company's future minimum rental commitments,
net of sublease income of $20,000 to be received in 2000, are approximately
as follows:
2000 $164,000
2001 191,600
2002 48,400
--------
$404,000
========
Employment Contracts
The Company has employment contracts with its two principal officers
expiring during 2001. The agreements provide minimum annual salaries of
$300,000 to the Chief Executive Office ("CEO") and $150,000 to the
President.
In March 1999, in consideration for several senior executives who
volunteered to temporarily reduce their salaries (without changing the
terms of employment contracts), the Company granted stock options
representing the right to purchase 145,000 shares of the Company's common
stock at prices ranging from $1.13 to $1.24. These options were
subsequently repriced in October 1999 (see Note 7). All grants were at no
less than the fair market value at date of grant or repricing. Such
temporary salary reduction amounts to approximately $145,000 on an
annualized basis, of which $100,000 is attributable to the CEO. Such salary
reductions can be terminated by the executives at any time without
forfeiture of the options. During the year ended December 31, 1999, salary
reductions were approximately $123,000.
F-16
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
11. Commitments and Contingencies (Continued)
Employment Contracts (Continued)
The CEO's employment contract provides that, in the event of termination of
the employment of the officer within three years after a change in control
of the Company, then the Company would be liable to pay a lump sum
severance payment of three years' salary (average of last five years), less
$100, in addition to the cash value of any outstanding but unexercised
stock options. The President's employment contract provides that, in the
event of termination of the employment of the officer within one year after
a change in control of the Company, then the Company would be liable to pay
a lump sum severance payment of two years' salary as determined on the date
of termination or the date on which a change in control occurs, whichever
is greater. In no event would the maximum amount payable exceed the amount
deductible by the Company under the provisions of the Internal Revenue
Code.
Purchase Commitment
In September 1999, the Company entered into an agreement with a vendor for
the design, development and operational services for an Internet website.
The Company will pay the vendor the lesser of $350,000 or the actual rate
determined by the number of hours accumulated on the project as defined for
the design and development services. The operational services require the
Company to compensate the vendor with 30% of any net revenue during the
first contract year, provided, however, that the Company shall be entitled
to retain for itself 100% of the net revenue until it has recouped the
amount paid for the design and development services. After the Company has
recouped the amount for the design and development services, the vendor
shall be paid 100% of the revenue until it has recouped its cost, as
defined. During the remainder of the contract which expires December 31,
2003, the vendor shall be paid between 35% to 42% of any net revenue
generated from the website. Through December 31, 1999, the Company has
expensed $168,794 for the development of the website.
F-17
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
11. Commitments and Contingencies (Continued)
Litigation
On January 29, 1998, the Company terminated the employment of its chief
financial and accounting officer, who had been employed by the Company
since November 17, 1997 pursuant to an employment contract. The employment
contract provided for a base salary of $145,000 during the first year of
the contract, $152,250 during the next year of the contract and $160,000
during the third year of the contract. The employment contract also
provided for the employee to receive incentive compensation equal to 2% of
annual pre-tax earnings of the Company, and health and other fringe
benefits. Further, the employee was granted options to purchase 120,000
shares of common stock of the Company. Such options were cancelled upon the
termination of employment. The employee has asserted a claim against the
Company in excess of $1,000,000, including, but not limited to, the
remaining unpaid portion of the employment contract and other losses
sustained. The Company has served an answer denying liability and
interposing a counterclaim to recover amounts previously paid to the former
employer. Both parties have cross-motions for partial summary judgment
pending before the Court and are awaiting a decision. Counsel for the
Company is unable to form an opinion as to the outcome of this matter, and
the Company intends to vigorously defend the action.
The Company has not provided for any loss on this matter in the
accompanying financial statements.
12. Income Taxes
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards (SFAS) 109, "Accounting for
Income Taxes." Under the liability method specified by SFAS 109, deferred
tax assets and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities as measured
by the enacted tax rates which will be in effect when these differences
reverse.
F-18
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
12. Income Taxes (Continued)
At December 31, 1999, the Company has an operating loss carryforward of
approximately $4,950,000 which is available to offset future taxable
income. A valuation allowance has been recognized to offset the full amount
of the related deferred tax asset of approximately $1,880,000 and
$1,520,000 at December 31, 1999 and 1998 due to the uncertainty of
realizing the benefit of the loss carryforwards.
At December 31, 1999, the Company's net operating loss carryforwards are
scheduled to expire as follows:
Year ended December 31,
-----------------------
2002 $ 232,000
2003 24,000
2005 50,000
2008 36,000
2012 1,685,000
2018 1,973,000
2019 950,000
-----------
$ 4,950,000
===========
The Company's effective income tax rate differs from the Federal statutory
rate as follows:
1999 1998
---------- ---------
Federal statutory rate (34.0%) (34.0%)
Valuation allowance 34.0 34.0
State income taxes 2.0 .4
---------- ---------
2.0% .4%
========== =========
F-19
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
13. Advertising Expense
Advertising expense, which is expensed as incurred, amounted to $95,947 and
$125,873 in 1999 and 1998.
14. Discontinued Operations
At June 30, 1997, the Company decided to discontinue its direct-response
marketing division. Accordingly, the loss on disposal of the division has
been segregated from continuing operations and reported separately on the
statement of operations.
At the measurement date, the Company did not provide for any loss on
disposal or anticipate any continuing losses from this division. Subsequent
to the measurement date, the division reflected a loss of $93,922 during
the year ended December 31, 1998 which is reflected as a disposal loss in
the accompanying financial statements. As of December 31, 1998, there were
no remaining assets or liabilities of this division.
15. Fourth Quarter Adjustments
During the fourth quarter of the year ended December 31, 1998, the Company
recorded a severance agreement (see Note 5) and an accrual for consulting
services of $50,000, applicable to earlier periods in 1998.
F-20
INDEX OF EXHIBITS
3.1 Certificate of Incorporation of the Company, as amended, incorporated
by reference to Exhibit 19.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1991.
3.2 Amendment to the Certificate of Incorporation incorporated by reference
to Exhibit 3.1 of the Company's Form 10-QSB for the period ended
September 30, 1996.
3.3. Amended and restated By-laws of the Company, incorporated by reference
to Exhibit 4 to the Company's Current Report on Form 8-K dated December
28, 1998.
4 Shareholders Rights Agreement, dated as of December 28, 1998, between
First Priority Group, Inc. and North American Transfer Co., as Rights
Agent, together with Exhibits A, B and C attached thereto
incorporated by reference to the Registrant's Registration Statement
on Form 8-A filed on December 31, 1998.
10.1 The Company's 1995 Incentive Stock Plan incorporated by reference to
Exhibit 10.1 of the Company's Form 10-QSB for the period ended
September 30, 1996.
10.2 Lease Agreement dated December 6, 1996 between the Company and 51 East
Bethpage Holding Corporation for lease of the Company's facilities in
Plainview, New York incorporated by reference to Exhibit 10.3 of the
Company's Form 10-QSB for the period ended June 30, 1997.
10.3 First Amendment to Lease Agreement dated July 14, 1997 amending the
lease dated December 6, 1996 between the Company and 51 East Bethpage
Holding Corporation incorporated by reference to Exhibit 10.4 of the
Company's Form 10-QSB for the period ended June 30, 1997.
10.4 Employment Agreement dated March 23, 1998 between the Company and
Gerald M. Zutler incorporated by reference to Exhibit 10.1 of the
Company's Form 10-QSB for the period ended March 31, 1998.
10.5 Employment Agreement dated October 8, 1998 between the Company and
Barry Siegel incorporated by reference to Exhibit 10.17 of the
Company's Form 10-KSB for the year ended December 31, 1998.
1
10.6 Employment Agreement dated October 2, 1998 between the Company and
Barry J. Spiegel incorporated by reference to Exhibit 10.18 of the
Company's Form 10-KSB for the year ended December 31, 1998.
10.7 Employment Agreement dated December 14, 1998 between the Company and
Lisa Siegel incorporated by reference to Exhibit 10.19 of the Company's
Form 10-KSB for the year ended December 31, 1998.
10.8 Employment Agreement dated October 8, 1998 between the Company and
Gerald M. Zutler incorporated by reference to Exhibit 10.20 of the
Company's Form 10-KSB for the year ended December 31, 1998.
10.9 Severance Agreement dated August 17, 1998 between the Company and
Michael Karpoff incorporated by reference to Exhibit 10.21 of the
Company's Form 10-KSB for the year ended December 31, 1998.
10.10 Service Agreement dated November 29, 1999 between the Company,
driversshield.com Corp., Electronic Systems Corporation and EDS
Information Services L.L.C filed herein.
10.11 driversshield.com Corp. 1999 Stock Option Plan file herein
13.1 Form 10-QSB for the quarter ending March 31,1999 incorporated by
reference dated and previously filed with the Commission.
13.2 Form 10-QSB for the quarter ending June 30, 1999 incorporated by
reference and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 1999 incorporated by
reference and previously filed with the Commission.
21 List of subsidiaries filed herein.
2