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 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
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 33-00412-NY
FIRST PRIORITY GROUP, INC.
(Name of small business issuer in its charter)
NEW YORK 11-2750412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
270 Duffy Avenue
Hicksville, New York 11801
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (516) 938-1010
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act : None
Page 1 of 61 pages.
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 ___
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. [X]
State the issuer's revenues for its most recent fiscal year $10,150,086
The aggregate market value of the issuer's voting stock held by non-affiliates
of the issuer as of March 28, 1996, based upon the average bid and asked prices
was $2,336,672 and $2,670,483, respectively.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 27, 1995, the issuer had outstanding a total of 5,883,883
common shares.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Transitional Small Business Disclosure Format (check one):
Yes ____ No X
THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
2
Part I
Item 1. DESCRIPTION OF BUSINESS
First Priority Group, Inc. (the "Company"), a New York corporation
formed in October 1983, is engaged directly and through its wholly-owned
subsidiaries in automotive fleet management and administration of automotive
repairs for businesses, insurance companies and members of affinity groups. The
services provided by the Company include the computerized compilation and
analysis of vehicle usage and maintenance data and the repair and maintenance of
vehicles through thousands of contracted repair facilities nationwide. The
Company's office is located at 270 Duffy Avenue, Hicksville, New York 11801 and
its telephone number is (516) 938-1010.
Nature of Services
The services offered by the Company consist of vehicle maintenance and
repair management, including collision and general repair programs, subrogation
services, vehicle salvage and vehicle rentals; and the administration of
automotive collision repair referral services for insurance companies.
The Company's wholly-owned subsidiary, National Fleet Service, Inc.,
conducts the Company's fleet management business. The Company itself provides
the ServiceGram program and the automotive collision repair referral services
provided to insurance companies.
Fleet Management. The Company has entered into contractual arrangements
with thousands of 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. Upon receipt of the call, the driver is directed to a local
repair shop to which the driver may take the vehicle for repair. The repair is
billed 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
salvage and subrogation services, and offers vehicle rentals to permit clients
to avoid driver down-time while a client's vehicle is being repaired.
Affinity Group Programs. These programs are a series of comprehensive
vehicle-related services for consumers that are provided 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.
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 twenty 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,
3
mufflers, shocks, and tires. 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 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.
ServiceGram. This program is a computerized tracking and
notification program that generates maintenance reminders in accordance with
manufacturer's specifications. ServiceGram archives a vehicle's history
including mileage and repairs that provides an accurate record for tax purposes,
warranty validation or to increase resale value.
Direct Appraisal and Repair Service (DARP). In 1992 the Company entered
into the business of providing automotive collision repair services for insured
persons referred to the Company by insurance companies. The Company believes
that provision of such services to persons referred to the Company by insurance
companies can be an important source of revenue for the Company because of the
high volume of collision repair referrals that insurance companies can provide.
The Company has entered into agreements with several insurance companies whereby
such insurance companies have agreed to refer their insured persons to the
Company for repair services. The Company proposes to try to expand its insurance
company referral business, and to that end has retained several marketing
agencies to market the Company's repair services to insurance companies.
Recent Developments.
The Company has been attempting to increase the number of insurance
companies participating in the insurance company referral program and to expand
the volume of referrals provided by existing participants in the program.
Additionally, the Company has begun marketing consumer oriented auto club
programs through a network of outside marketing agents. The Company has recently
entered into agreements with several marketing agencies and affinity groups and
is providing fee based services. Several of these agreements provide for clients
to meet minimum participation guarantees.
Sales and Marketing. The Company's fleet maintenance clients generally
consist of companies having a large number of vehicles on the road over a broad
geographical area. The Company's clients for ServiceGram are organizations and
affinity groups. The Company's clients for the insurance company referral
program are auto insurance companies.
Sales activities are performed by the Company's own personnel, except
that the Company has retained several marketing agencies to market the Company's
service of furnishing collision repairs to persons referred to the Company by
insurance companies. 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 and maintenance.
The Company believes that this flexibility is important in its marketing
activities and in increasing its client base.
4
During the years 1995 and 1994, none of the Company's customers
accounted for more than 10 percent of the Company's revenues.
Employees
At year end, the Company employed 29 employees, 27 being full-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. The Company believes that there are no other
companies that offer a program providing all of the services offered pursuant to
the Company's Affinity Group Programs.
Insurance Company Referral Business. The Company is aware of two other
companies that offer automotive collision repair services to persons referred by
insurance companies. One of such companies is, like the Company, in the fleet
management business, while the other is in the vehicle valuation business. The
Company believes that its services for persons referred to it by insurance
companies are superior to those offered by such other companies.
Item 2. DESCRIPTION OF PROPERTY
In September 1990, the Company entered into a lease for new office
space at 270 Duffy Avenue, Hicksville, New York 11801. The space consists of
approximately 5,400 square feet of office space. The Company exercised an option
to renew the lease for an additional three year term at an annual rent of
$74,220. The Company holds several options of cancellation during the lease
term. The office space leased by the Company is in good condition.
Item 3. LEGAL PROCEEDINGS
There is no pending legal proceeding which could have a material effect upon the
Company's financial position and/or operating results.
THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
5
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are traded in the over-the- counter market.
The following table shows the high and low bid quotations for the periods
indicated, based upon information received from National Quotation Bureau
Incorporated of Cedar Grove, New Jersey. Such quotations represent prices
between dealers without retail markup, markdown or commission and may not
necessarily represent actual transactions.
Bid Price($)
High Low
---- ---
1995
First Quarter $.05 $.05
Second Quarter .09 .05
Third Quarter .69 .09
Fourth Quarter 1.03 .06
1994
First Quarter $.06 $.03
Second Quarter .06 .05
Third Quarter .05 .05
Fourth Quarter .05 .05
The number of record holders of the Company's common shares as of March
27, 1996 was 463.
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 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
The Company's revenues increased $2,272,991 (28.9 %) to $10,150,086 in
1995 from $7,877,095 in 1994. Increased revenues reflect the Company's continued
success in acquiring several large additional accounts and increasing the
revenues generated by existing customers in 1995. Additionally, the Company has
improved its customer retention rate reflecting the high service level that it
provides its customers.
Gross profit in 1995 increased $368,214 (25.4%) as compared to 1994.
Gross profit was $1,817,599 in 1995, a 17.9 gross profit percentage, while gross
profit in 1994 was $1,449,385, a 18.4 gross profit percentage. The slight
reduction in gross profit percentage reflects the Company's added emphasis in
attracting larger corporate
6
customers that offer substantial increases in revenue and market share, but
require very competitive fee based pricing that results in a increased gross
profit dollars, but reduced gross profit as a percentage of revenue.
Selling, general and administrative expenses ("SG&A") increased
$255,476 (19.1%) to $1,593,280 in 1995 from $1,337,804 in 1994. However, SG&A as
a percentage of sales decreased to 15.7 percent in 1995, as compared to 17.0 in
1994. This was primarily attributable to fixed overhead being absorbed by the
increase in revenue, more efficient use of personnel and the installation of a
technologically advanced telephone system that provided the Company greater cost
savings in long distance telephone rates.
Net income increased $122,852 (114.3%) over 1994 to $230,334, or $.04
per share, as compared to $107,482, or $.02 per share.
Liquidity and Capital Resources
The Company's cash flow improved in 1995 reflecting its profitable
operations and the Company believes that it can continue to meet its cash
requirements for both the short and long term from internally generated sources.
On December 18, 1995, the Company sold, through a private placement, 1 million
shares of common stock generating net proceeds of $435,000. These funds will be
applied to the working capital needs of the Company.
The Company does not presently have any material commitments for
capital expenditures.
THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
7
Item 7. FINANCIAL STATEMENTS
THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
8
[Letterhead of Nussbaum Yates & Wolpow, P.C.]
Report of Independent Certified Public Accountants
Board of Directors
First Priority Group, Inc.
Hicksville, New York
We have audited the accompanying consolidated balance sheets of First Priority
Group, Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ Nussbaum Yates & Wolpow, P.C.
Melville, New York
March 15, 1996
F-1
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
1995 1994
------------- ------------
Current assets:
Cash and cash equivalents $ 779,074 $ 126,918
Accounts receivable, less allowance for doubtful
accounts of $11,500 in 1995 and 1994 1,069,786 744,708
Other current assets 10,940 14,155
------------- -----------
Total current assets 1,859,800 885,781
Property and equipment, net (Notes 3 and 4) 116,039 63,850
Security deposits 10,575 10,575
------------- -----------
$ 1,986,414 $ 960,206
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable (Note 4) $ 37,264 -
Accounts payable 720,375 $ 434,616
Accrued expenses, taxes and other current liabilities 338,913 301,062
------------- -----------
Total current liabilities 1,096,552 735,678
------------- -----------
Commitments and contingency (Notes 7 and 8)
Shareholders' equity (Notes 5, 6 and 10):
Common stock, $.015 par value, authorized
8,000,000 shares; issued 6,150,550 shares
in 1995 and 5,150,550 in 1994 92,258 77,258
Additional paid-in capital 1,929,310 1,509,310
Deficit ( 1,041,706) (1,272,040)
------------- -----------
979,862 314,528
Less common stock held in treasury, at cost,
266,667 shares 90,000 90,000
------------- -----------
889,862 224,528
------------- -----------
$ 1,986,414 $ 960,206
============= ===========
See notes to consolidated financial statements.
F-2
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- ----------
Revenue $10,150,086 $7,877,095
Cost of revenue (principally charges incurred
at repair facilities for services) 8,332,487 6,427,710
----------- ----------
Gross profit 1,817,599 1,449,385
----------- ----------
Operating expenses:
Selling 509,206 434,052
General and administrative 1,084,074 903,752
----------- ----------
1,593,280 1,337,804
----------- ----------
Income from operations 224,319 111,581
Interest and other income 7,554 2,753
----------- ----------
Income before income taxes 231,873 114,334
Income taxes, all current (Note 9) 1,539 6,852
----------- ----------
Net income $ 230,334 $ 107,482
=========== ==========
Income per common share $ .04 $ .02
=========== ==========
Weighted average number of common shares
outstanding 4,922,239 4,883,883
=========== ==========
See notes to consolidated financial statements.
F-3
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
Common Stock Additional Treasury Stock Total
------------------ Paid-in ---------------- Shareholders'
Shares Amount Capital Deficit Shares Amount Equity
------ ------ --------- ------- ------ ------ -------------
Balance, January 1, 1994 5,150,550 $77,258 $1,509,310 ($1,379,522) 266,667 $90,000 $117,046
Net income 107,482 107,482
--------- ------- ---------- ----------- ------- ------- --------
Balance, December 31, 1994 5,150,550 $77,258 $1,509,310 ($1,272,040) 266,667 $90,000 $224,528
Issuance of common stock (Note 10) 1,000,000 15,000 420,000 - - - 435,000
Net income - - - 230,334 - - 230,334
--------- ------- ---------- ----------- ------- ------- --------
Balance, December 31, 1995 6,150,550 $92,258 $1,929,310 ($1,041,706) 266,667 $90,000 $889,862
========= ======= ========== =========== ======= ======= ========
See notes to consolidated financial statements.
F-4
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
-------- --------
Cash flows from operating activities:
Net income $230,334 $107,482
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 32,940 26,311
Changes in assets and liabilities:
Accounts receivable (325,078) (144,120)
Other current assets 3,215 (4,159)
Security deposit - 952
Accounts payable 285,759 25,136
Accrued expenses, taxes and other current liabilities 37,851 173,999
-------- --------
Total adjustments 34,687 78,119
-------- --------
Net cash provided by operating activities 265,021 185,601
-------- --------
Cash flows used in investing activities,
additions to property and equipment (85,129) (35,344)
-------- --------
Cash flows provided by (used in) financing activities:
Repayment of notes payable - (67,500)
Proceeds from bank loan 41,600 -
Principal payments on bank loan (4,336) -
Proceeds from issuance of common stock 435,000 -
-------- --------
Net cash provided by (used in) financing activities 472,264 (67,500)
-------- --------
Net increase in cash 652,156 82,757
Cash and cash equivalents at beginning of year 126,918 44,161
-------- --------
Cash and cash equivalents at end of year $779,074 $126,918
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 5,346 $ 1,789
======== ========
Cash paid during the year for interest $ 1,407 $ -
======== ========
See notes to consolidated financial statements.
F-5
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
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., 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.
Revenue Recognition
The Company recognizes revenue 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.
Property and Equipment
Property and equipment are stated at cost. The Company provides
depreciation primarily by the straight-line method over the estimated
useful lives of the assets, ranging from three to five years.
Cash
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Per Share Data
Income per share data is based upon the weighted average number of common
shares plus, in 1995, 820,500 common equivalent shares. Common equivalent
shares were anti-dilutive in 1994.
F-6
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. Summary of Significant Accounting Policies (Continued)
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. Significant estimates are used in accounting for income taxes.
Future Effect of Recently Issued Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 123, Accounting for Stock Based
Compensation (SFAS 123). SFAS 123 requires entities to disclose the fair
value of their employee stock options. Disclosure requirements are
effective for 1996.
2. Description of Business and Concentration of Credit Risk
The Company is engaged in automotive management, including fleet
management, for major corporate clients. The Company provides computerized
compilation and analysis of vehicle usage and maintenance data and the
repair and maintenance of vehicles through over 3,000 independently
contracted repair facilities nationwide.
The Company also has a service called the Direct Appraisal Repair Program.
The program provides automotive collision repair and appraisal services to
insurance companies. The Company receives commissions from participating
body shop vendors for referring clients of the insurance companies to
them.
F-7
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
3. Property and Equipment
1995 1994
-------- --------
Machinery and equipment $197,047 $167,960
Furniture and fixtures 56,904 39,336
-------- --------
253,951 207,296
Less accumulated depreciation 137,912 143,446
-------- --------
$116,039 $ 63,850
======== ========
4. Note Payable
In July 1995, the Company borrowed $41,600 under a term note from a bank
used to purchase equipment which was pledged as collateral. The note was
interest bearing at a rate of 1 1/2% above prime. On March 15, 1996, the
balance of this note was paid off.
5. Stock Options
1987 Incentive Stock Option Plan
The Company has an incentive stock option plan effective since October 2,
1987 ("The 1987 Plan"). The 1987 Plan authorizes up to 1,000,000 options
to be granted to employees at an exercise price equal to 100% (or 110% if
the optionee owns directly or indirectly more than 10% of the outstanding
voting stock) of the fair market value of the shares on the date of the
grant. No charge to income is made in connection with the grant of options
granted under The 1987 Plan. Options are to be exercisable over a period
not to exceed five years. During 1994, no options were granted, 200,000
options expired and 75,000 options were canceled. During 1995, the Company
granted 200,000 options to the Company's two principal officers, 150,000
options to employees and 33,333 options expired. No options have been
exercised to date. As of December 31, 1995, options for 175,000 shares
were exercisable and 300,000 options are available for future grant.
F-8
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
5. Stock Options (Continued)
1995 Incentive Stock Plan
On October 1, 1995, the Board of Director adopted and authorized a new
stock option plan ("The 1995 Plan"). The plan is subject to shareholder
approval. In the event that shareholder approval is not obtained, any
options granted under The 1995 Plan will be voided. The 1995 Plan, if
approved by the shareholders, authorizes up to 3,000,000 stock options
(both incentive and non-statutory stock options) to be granted to
employees, officers, directors and others. Those options granted under The
1995 Plan which are incentive stock options, are to be granted at an
exercise price equal to 100% (or 110% if the optionee owns directly or
indirectly more than 10% of the outstanding voting stock) of the fair
market value of the shares on the date of the grant. No charge to income
is made in connection with the grant of incentive stock options granted
under The 1995 Plan. Options granted are to be exercisable over a period
not to exceed ten years (five years if the optionee owns directly or
indirectly more than 10% of the outstanding voting stock). On October 1,
1995, 600,000 incentive stock options were granted to the Company's two
principal officers. None of the options granted in 1995 were exercisable
at December 31, 1995.
Under the terms of The 1995 Plan, annually, each non-employee Director
shall be granted options to purchase 15,000 shares of common stock
commencing in 1996.
Non-Incentive Stock Option Agreements
The Company has non-incentive stock option agreements with four of its
directors and/or officers. Under these agreements, the Company, as of
December 31, 1993 had granted 700,000 options. The options were granted at
the fair market value as of the date of the grant. During 1994, 300,000
options expired. During 1995, the Company granted an additional 100,000
options to a director of the Company.
The options under the non-incentive stock option agreements are
exercisable in whole or in part at any time prior to their expiration
dates, which range from 1996 to 2000.
F-9
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
5. Stock Options (Continued)
Summary
All option activity is summarized as follows:
Exercise Price Range
--------------------
Outstanding at January 1, 1994 1,358,333 $0.06-$0.25
Canceled and expired during 1994 (575,000) $0.06-$0.1375
---------
Outstanding at December 31, 1994 783,333 $0.06-$0.25
Granted during 1995 1,050,000 $0.12-$0.41
Expired during 1995 (33,333) $0.25
---------
Outstanding at December 31, 1995 1,800,000 $0.06-$0.41
=========
6. Stock Warrants
In connection with the 1995 issuance of 1,000,000 shares of its common
stock (Note 10), the Company issued 850,000 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.
During the fiscal year ended December 31, 1995, none of these warrants
were exercised. All warrants expire in 2000.
In lieu of the payment of the exercise price in cash, the holders 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-10
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
7. Employee Benefit Plan
During 1995, the Company instituted a new 401(k) profit sharing plan. This
plan is 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 $4,513 in 1995.
The 401(k) profit sharing plan which was in effect in the previous year,
was frozen during 1995. Employer contributions to the frozen plan amounted
to none in 1995 and $3,420 in 1994.
8. Commitments and Contingency
Leases
The Company is obligated through January 1999 under a noncancelable
operating lease for its premises, which requires minimum annual rentals
and certain other expenses including real estate taxes. Rent expense
including real estate taxes for the years ended December 31, 1995 and 1994
aggregated approximately $80,000 and $71,000.
As of December 31, 1995, the Company's approximate future minimum rental
commitments are as follows:
1996 $ 68,000
1997 74,000
1998 74,000
1999 6,000
--------
$222,000
========
F-11
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
8. Commitments and Contingency (Continued)
Employment Contracts
The Company has employment contracts with its two principal officers
expiring on December 31, 1998. The agreements provide for minimum annual
salaries each of $175,000 effective January 1, 1996; $192,500 effective
January 1, 1997; and $211,750 effective January 1, 1998. The agreements
also provide for additional incentive compensation based on a stated
percentage of earnings, as defined in the agreements. Incentive
compensation for the year ended December 31, 1995 totaled $23,542.
Each 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. In no event would the maximum amount payable exceed the amount
deductible by the Company under the provisions of the Internal Revenue
Code.
9. Income Taxes
The Company accounts for income taxes on the liability method, as provided
by Statement of Financial Accounting Standards 109, Accounting for Income
Taxes (SFAS 109).
At December 31, 1995, the Company has an operating loss carryforward of
approximately $660,000 which is available to offset future taxable income.
At December 31, 1994 the Company had an operating loss carryforward of
approximately $910,000. A valuation allowance has been recognized to
offset the full amount of the related deferred tax asset of approximately
$250,000 at December 31, 1995 and $363,000 at December 31, 1994 due to the
uncertainty of realizing the benefit of the loss carryforwards.
At December 31, 1995, the Company's net operating loss carryforwards are
scheduled to expire as follows:
Year ended December 31,
-----------------------
2002 $552,000
2003 24,000
2005 50,000
2008 34,000
--------
$660,000
========
F-12
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
9. Income Taxes (Continued)
The Company's effective income tax rate differs from the Federal statutory
rate as follows:
1995 1994
---- ----
Federal statutory rate 34.0% 34.0%
Utilization of net operating loss carryforwards (34.0) (34.0)
State income taxes .7 6.0
----- -----
.7% 6.0%
===== =====
10. Common Shares
On December 18, 1995, the Company issued 1,000,000 shares of its common
stock to Kirlin Securities, Inc. and several of its executive officers for
$.50 per share and received net proceeds of $435,000 after underwriting
commissions of $65,000 (see Note 6 for warrants issued).
The total number of shares obtainable upon potential exercise of all
outstanding options and warrants would, when added to the presently
outstanding shares, require the Company to issue more shares than it is
previously authorized to issue. Accordingly, it is the intention of the
Company to seek shareholder approval at the 1996 shareholder meeting to
obtain authorization to issue the required shares. If such approval is not
granted, options to purchase 600,000 shares will be voided, thereby curing
the requirement to issue more shares than the Company is presently
authorized to issue (Note 5).
11. Transactions With Related Parties
In December 1994, the Company repaid outstanding notes totaling $67,500 to
officers and directors of the Company. The notes were payable on demand
within thirty days and were non-interest bearing. Proceeds of the notes
were used to establish a Payment Fund as defined. Withdrawals from the
payment Fund were made solely for the purpose of allowing the Company to
take advantage of discounts (additional commission income) offered by
vendors for early payment of accounts payable. The notes provided that the
additional commission income earned by the use of funds from other than
the Payment Fund would be fully retained by the Company. Additional
commissions earned from the Payment Fund were allocated 20% to the Company
and 80% (Loan Fees) to the holders of the notes. Loan fees totaled $16,482
in 1994.
F-13
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following schedule sets forth the name and age of each director and
executive officer of the Company and the title of all positions and offices with
the Company presently held by him or her.
Name Age Position
- ---- --- --------
Michael Karpoff 52 Co-Chairman of the Board of Directors,
Co-Chief Executive Officer, and President
Barry Siegel 44 Co-Chairman of the Board of Directors, Co-Chief
Executive Officer, Secretary, and Treasurer
Lisa Siegel 35 Vice President of Operations
Leonard Giarraputo 51 Director
The directors of the Company are elected by the Company's shareholders
or by the other members of the Board of Directors, and the Company's officers
are elected annually by the Board of Directors. Each officer devotes his full
business time to the Company.
Michael Karpoff has been President of the Company since June, 1986.
Mr. Karpoff became a director of the Company at its inception and became
Co-Chairman of the Company's Board of Directors and Co-Chief Executive Officer
in October, 1987. Mr. Karpoff was President of National Fleet Service, Inc. from
August, 1984 until January, 1991. On October 22, 1992, Mr. Karpoff was again
elected President of National Fleet Service, Inc. and has continued to hold this
position through the present date.
Barry Siegel became a director of the Corporation at its inception and
became Co-Chairman of the Board of Directors and Co-Chief Executive Officer in
October, 1987. Mr. Siegel was the Executive Vice-President of the Company from
June, 1986 until October, 1987. He became the Company's Treasurer in June, 1986,
and its Secretary in November, 1987. He was the Executive Vice-President of
National Fleet Service, Inc. from February 1984 until October, 1987, and he has
been the Treasurer of National Fleet Service, Inc., since February, 1984 and the
Secretary of National Fleet Service, Inc., since January, 1991. He is married to
Lisa Siegel.
Lisa Siegel was elected Vice President of Operations of the Company and
its wholly owned subsidiary, National Fleet Service, Inc. in February, 1994.
Previously, she held the position of Manager of Subrogation Services. She has
held various management positions in the Company since its inception. She is
married to Barry Siegel.
Leonard Giarraputo was elected a director of the Company in September,
1988. He has also been a director of National Fleet Service, Inc. since
February, 1984. Since March, 1972, he has been Vice President of Block Trading
with Paine Webber Incorporated, a member of the New York Stock Exchange.
There are no arrangements or understandings between any of the
Company's directors or officers, or anyone else, pursuant to which directors or
officers were, or are, to be selected for a particular office or position.
22
The issuer does not have a class of securities registered under Section
12 of the Exchange Act.
Item 10. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------
(a) (b) (c) (d)
Name and
Principal Position Year Salary($) Bonus($)
- ------------------ ---- --------- --------
Michael Karpoff 1995 $125,000 $11,771 (1)
Co-Chairman of the 1994 $122,319 $ 6,229 (2)
Board of Directors, 1993 $120,000 $ 0
Co-Chief Executive
Officer and President
Barry Siegel 1995 $125,000 $11,771 (1)
Co-Chairman of the 1994 $122,319 $ 6,229 (2)
Board of Directors, 1993 $120,000 $ 0
Co-Chief Executive
Officer, Treasurer
and Secretary
(1) Incentive compensation for the year ended December 31, 1995 was paid in
1996.
(2) Incentive compensation for the year ended December 31, 1994 was paid in
1995.
THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
23
(Cc) Option/SAR Grants Table
Individual Grants
- -----------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- -----------------------------------------------------------------------------
Michael Karpoff 100,000 10.5 $.22 7/19/00
300,000 (1) 31.6 $.41 9/30/00
Barry Siegel 100,000 10.5 $.22 7/19/00
300,000 (1) 31.6 $.41 9/30/00
Lisa Siegel 75,000 7.9 $.14 6/11/00
- ------------
(1) Options granted under 1995 Incentive Stock Plan (the "Plan") which is
subject to shareholder approval within twelve months of adoption by the
Company. Should the shareholders not approve this Plan within the
requisite period, this option grant will be voided.
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired on Value
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------
Michael Karpoff None None 150,000/450,000 $134,500/283,500
Barry Siegel None None 150,000/450,000 $134,500/283,500
Lisa Siegel None None 37,500/112,500 $33,750/95,250
(f) Compensation of Directors
No compensation is paid to the directors in consideration of the
director's service on the board.
24
(g) Employment contracts and termination of employment and change in control
arrangements.
The Company has employment agreements with its two principal officers,
Barry Siegel and Michael Karpoff. The Company entered into employment agreements
that expire on December 31, 1998. The agreements provide for minimum annual
salaries each of $175,000 effective January 1, 1996; $192,500 effective January
1, 1997; and $211,750 effective January 1, 1998. Each contract provides for
options to purchase 300,000 shares of the Company's common stock under the 1995
Incentive Stock Option Plan. Additionally, the agreements also provide for
additional incentive compensation based on a stated percentage of earnings as
defined in the agreements. Incentive compensation for the year ended December
31, 1995 totaled $23,542.
These employment agreements also contain a change in control provision
whereby the executive, following a change of control as defined in the
agreement, would receive: (a) a severance payment of 300 percent of the average
annual salary for the past five years, less $100; (b) the cash value of the
outstanding, but unexercised stock options, and (c) other perquisites, should
the executive be terminated for various reasons as defined in the agreement. The
agreements provide that in no event, shall the severance payment exceed the
amount deductible by the Company under the provisions of the Internal Revenue
Code.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is as of March 28, 1996.
(a) Security ownership of certain beneficial owners.
(1) (2) (3) (4)
Name and Amount and
Title Address of Nature of Percent of
of Class Beneficial Owner Beneficial Owner Common Stock(1)
- -------------------------------------------------------------------------
Common Kirlin Holding Corp. 1,140,000 (2) 15.60
6901 Jericho Turnpike
Syosset, NY. 11791
Common Kirlin Securities, Inc. 1,140,000 (2) 15.60
6901 Jericho Turnpike
Syosset, NY. 11791
Common Frances Giarraputo 1,005,999 (3) 13.76%
6 Fox Hunt Court
Huntington, NY 11743
- ------------
(1) The percentages set forth in this Annual Report on Form 10-KSB have been
calculated in accordance with Instruction 3 to Item 403 of Regulation S-B.
(2) Includes 800,000 shares owned directly by Kirlin Holding Corp. and warrants
to purchase 40,000 and 300,000 shares of the Company's common stock that are
exercisable in full, held by Kirlin Securities, Inc.
(3) Includes 749,000 owned directly by Frances Giarraputo, 56,999 shares owned
directly or as custodian for others by Leonard Giarraputo, and 200,000
shares representing options that are exercisable within sixty
25
days by Leonard Giarraputo to purchase the common stock of the Company.
Leonard and Frances Giarraputo are husband and wife. Each disclaims
beneficial ownership of shares held by the other.
(b) Security ownership of management.
(1) (2) (3) (4)
Name and Amount and
Title Address of Nature of Percent of
Class Beneficial Owner Beneficial Owner Common Stock(1)
- --------------------------------------------------------------------------
Common Michael Karpoff 952,333 (3) 13.03%
32 Gramercy Park South
New York, NY 10010
Common Barry Siegel 992,568 (4) 13.58%
8 Indian Well Court
Huntington, NY 11743
Common Leonard Giarraputo 1,005,999 (2) 13.76%
6 Fox Hunt Court
Huntington, NY 11743
Common Lisa Siegel 992,568 (4) 13.58%
8 Indian Well Court
Huntington, NY 11743
Common Directors and officers 2,950,900 40.37%
as a group
(1) The percentages set forth in this Annual Report on Form 10-KSB have
been calculated in accordance with Instruction 3 to Item 403 of Regulation S-B.
(2) Includes 749,000 owned directly by Frances Giarraputo, 56,999
shares owned directly or as custodian for others by Leonard Giarraputo, and
200,000 shares representing options that are exercisable within sixty days by
Leonard Giarraputo to purchase the common stock of the Company. Leonard and
Frances Giarraputo are husband and wife. Each disclaims beneficial ownership of
shares held by the other.
(3) Owned jointly with another. Includes 150,000 shares representing
options that are exercisable within sixty days by Michael Karpoff to purchase
the common stock of the Company.
(4) Includes options exercisable by Barry Siegel within sixty days to
purchase 150,000 shares, 3,334 shares held by Barry Siegel as custodian for two
nephews, 67 shares held directly by Barry Siegel's wife, Lisa Siegel, and 37,500
shares representing options held by her that are exercisable within sixty days.
Both Barry and Lisa Siegel disclaim beneficial ownership of shares held by the
other.
(c) Changes in control. None.
26
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1992, certain directors, officers and employees of the Company
loaned National Fleet Service, Inc. $60,000 in the aggregate in order to permit
National Fleet Service, Inc. to create a fund that National Fleet Service, Inc.
could use to pay certain of its accounts payable prior to their due dates where,
and only where, such early payment would result in National Fleet Service,
Inc.'s receiving a discount on the amount payable. To compensate the persons
making such loans for doing so, National Fleet Service, Inc. agreed to pay to
each such lender, on a pro rata basis, a fee equal to 80 percent of the amount
of any discounts obtained as the result of any such early payments made with the
proceeds of such loans (the "Loan Fees"). National Fleet Service, Inc. is not
required to use money from the fund created by such loans to pay its accounts
payable early, and may use any other funds available to it to do so in any
instance, in which case such lenders will not receive any fee with respect to
such early payment. (In this regard, since the date that the loans referred to
above were made, National Fleet Service, Inc.'s practice has been to apply
$75,000 from its operating funds each month to the prepayment of its accounts
payable before applying the proceeds of such loans for such purpose.) Except for
the fee referred to above, no other amount (including interest) is payable to
the makers of such loans in respect of such loans. The principal amount of each
such loan is subject to repayment in full upon 30 days' notice from the maker
thereof.
The Company determined to obtain the loans referred to above for
National Fleet Service, Inc. from the directors, executive officers and
employees of the Company who made such loans only after the Company determined
that National Fleet Service, Inc. would not have sufficient cash flow to enable
it to take full advantage of the opportunities available to it to pay its
accounts payable early and after it determined that it would not be able to
obtain financing from commercial sources to permit it to take full advantage of
such opportunities.
In July, 1992, the persons making such loans to National Fleet Service,
Inc. loaned, in the aggregate, an additional $30,000 to National Fleet Service,
Inc., such additional loans being upon the same terms and conditions, and for
the same purpose, as the earlier loans.
The names of the persons making the loans referred to above, their
offices in the Company and the total amount loaned by each, are as follows:
Michael Karpoff, Co-Chairman of the Company, $22,500; Barry Siegel, Co-Chairman,
Treasurer and Secretary of the Company, and his wife, Lisa Siegel, Vice
President of Operations of the Company, $22,500 in the aggregate; Leonard
Giarraputo, a director of the Company, $22,500. The entire $22,500 principal
amount owed to one participant was repaid when his employment with the Company
terminated in October, 1992. In December, 1994 the Company repaid the
outstanding notes totaling $67,500 to officers and directors of the Company.
Loan Fees totaled $16,482 in 1994 and $12,960 in 1993
The Company entered into an Investment Banking Agreement with Kirlin
Securities, Inc. ("Kirlin") (the "Investment Banking Agreement") on August 1,
1995. For a term of eighteen months, Kirlin will provide financial consulting
and investment banking services to the Company. It is anticipated that Kirlin
will assist the Company in exploring the possibility of raising additional
capital through the issuance of additional shares of its common stock. In
consideration, Kirlin has been granted a warrant to purchase 750,000 shares of
the Company's Common Stock which is exercisable at various prices.
On December 18, 1995, the Company sold through a private placement,
1 million shares of common stock generating net proceeds of $435,000. Kirlin
Holding Corp. parent of its wholly owned subsidiary Kirlin Securities, and the
principal shareholders of Kirlin Holding Corp., were the sole purchasers of the
1 million shares of this private placement. Kirlin earned a placement agent fee
from this private placement, under the Investment Banking Agreement, of $50,000,
non-accountable expenses of $15,000, and a warrant to purchase 100,000 shares of
the Company's common stock.
27
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
Exhibit No. Description
- ----------- -----------
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 By-laws of the Company, incorporated by reference to Exhibit 19.2
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1991.
10.1 Sample employment agreement executed between the Barry Siegel and
Michael Karpoff dated January 18, 1996 filed with this Report.
10.2 Sample subscription agreement executed by subscribers to the
Company's private placement dated December 18, 1995.
10.3 Sample warrant granted to transferees of Kirlin Securities, Inc.,
placement agent to the private placement, dated December 18, 1995.
13.1 Form 10-QSB for the quarter ending March 31, 1995 incorporated by
reference dated and previously filed.
13.2 Form 10-QSB for the quarter ending June 30, 1995 incorporated by
reference and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 1995 incorporated
by reference and previously filed with the Commission.
21 Subsidiaries of the Company, incorporated by reference to Exhibit
22 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990.
(b) Reports on Form 8-K
None
28
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/ Michael Karpoff
Michael Karpoff, Co-Chairman of the Board of Directors and President
Date: 3/29/96
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/ Michael Karpoff
Michael Karpoff, Co-Chairman of the Board of Directors, Co-Chief Executive
Officer, President and Director
Date: 3/29/96
By: /s/ Barry Siegel
Barry Siegel, Co-Chairman of the Board of Directors, Co-Chief Executive
Officer, Treasurer, Secretary and Director (Principal Financial and
Accounting Officer)
Date: 3/29/96
By: /s/ Leonard Giarraputo
Director
Date: March 29, 1996
29