U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-21467
FIRST PRIORITY GROUP, INC.
(Exact name of small business issuer as specified in its charter)
New York 11-2750412
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
51 East Bethpage Road
Plainview, New York 11803
(Address of principal executive offices)
(516) 694-1010
(Issuer's telephone number)
Check whether the issuer (1) has 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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of November 14, 1997: 6,900,550 shares of common stock
Transitional Small Business Format (check one)
Yes[ ] No[ X ]
1
Part I Financial Information
ITEM 1. Financial Statements
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
------------------
ASSETS
Current Assets
Cash and cash equivalents $1,144,116
Accounts receivable, less allowances for
doubtful accounts of $22,500 1,937,387
Inventories 178,118
Prepaid expenses and other current assets 46,062
------------------
Total current assets 3,305,683
Property and equipment, net of accumulated 463,312
depreciation of $236,984
Security deposits and other non-current assets 27,738
------------------
Total assets $3,796,733
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $50,004
Accounts payable and accrued expenses 1,684,334
------------------
Total current liabilities $1,734,338
Long term debt less current portion 79,161
------------------
Total liabilities 1,813,499
------------------
Shareholders' equity:
Common stock, $.015 par value, authorized
20,000,000 shares, issued 7,167,217 shares 107,508
Additional paid-in capital 3,827,393
Accumulated deficit (1,861,667)
------------------
2,073,234
Less common stock held in treasury, at
cost, 266,667 shares (90,000)
------------------
Total shareholders' equity 1,983,234
------------------
Total liabilities and shareholders'
equity $3,796,733
==================
The accompanying notes are an integral part of these financial statements.
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------------- ------------- -------------- -------------
Revenue $ 3,412,788 $ 3,599,722 $ 10,289,922 $ 9,650,709
Cost of revenue 2,801,553 2,992,848 8,508,593 7,930,763
------------ ------------ ------------- ------------
Gross profit 611,235 606,874 1,781,329 1,719,946
Operating expenses:
Selling, general and administrative 730,718 475,024 2,011,747 1,422,635
------------ ------------ ------------- ------------
Income (loss) from operations (119,483) 131,850 (230,418) 297,311
------------ ------------ ------------- ------------
Other income (expense):
Interest and other income 11,047 6,502 31,985 22,287
Interest expense (6,663) -- (8,393) --
------------ ------------ ------------- ------------
Total other income 4,384 6,502 23,592 22,287
------------ ------------ ------------- ------------
Income (loss) from continuing operations
before income taxes (115,099) 138,352 (206,826) 319,598
Provision for income taxes -- 1,500 -- 3,000
------------ ------------ ------------- ------------
Income (loss) from continuing operations (115,099) 136,852 (206,826) 316,598
Discontinued operations (Note 3):
Loss from operations of discontinued division (256,511) -- (926,709) --
(No income tax benefit) ------------ ------------ ------------- ------------
Net income (loss) $ (370,610) $ 136,852 $ (1,133,535) $ 316,598
============ ============ ============= ============
Earnings (loss) per common share
(continuing operations) $ (0.02) $ 0.02 $ (0.03) $ 0.04
Earnings (loss) per common share
(discontinued operations) (0.04) -- (0.15) --
------------ ------------ ------------- ------------
Net earnings (loss) per common share $ (0.06) $ 0.02 $ (0.18) $ 0.04
============ ============ ============= ============
The accompanying notes are an integral part of these financial statements.
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
NINE MONTHS ENDED
------------------------------------
September 30, September 30,
1997 1996
------------- -------------
Cash flows from operating activities:
Net income (loss) ($1,133,535) $316,598
------------- -------------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Depreciation and amortization 58,967 28,305
Provision for bad debt 11,000
Changes in assets and liabilities
Accounts receivable 68,248 (163,433)
Inventories 140,280 (6,521)
Prepaid expenses and other current assets 275,836 (4,374)
Security deposit and other non-current assets 19,575 (175)
Accounts payable and accrued
expenses (28,468) 118,195
------------- -------------
Total adjustments 545,438 (28,003)
------------- -------------
Net cash provided by (used in) operating
activities (588,097) 288,595
------------- -------------
Cash flows from investing activities,
additions to property and equipment (380,455) (78,597)
------------- -------------
Cash flows from financing activities:
Repayment under line of credit financing (600,000)
Proceeds from bank loan 150,000
Principal payments on bank loan (20,835) (37,264)
Proceeds from issuance of common stock 1,900,000
------------- -------------
Net cash provided by (used in) financing activities 1,429,165 (37,264)
Net increase in cash and cash equivalents 460,613 172,734
Cash and cash equivalents at beginning of period 683,503 779,074
------------- -------------
Cash and cash equivalents at end of period $1,144,116 $951,808
============= =============
The accompanying notes are an integral part of these financial statements.
FIRST PRIORITY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. UNAUDITED FINANCIAL STATEMENTS
The information contained in the condensed consolidated financial
statements for the period ended September 30, 1997 is unaudited, but includes
all adjustments, consisting of normal recurring adjustments, which First
Priority Group (the "Company") considers necessary for a fair presentation of
the company's financial position, results of operations, and cash flows.
The financial statements and notes are presented as permitted by Form
10-QSB, and may not contain certain information included in the Company's annual
financial statements and notes. These interim financial statements should be
read in conjunction with the Company's annual financial statements and notes
which are included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996. Interim results for the three months and nine months
may not necessarily be indicative of the Company's annual results for fiscal
year 1997.
2. BUSINESS OF THE COMPANY
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 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 approximately 8,000 repair facilities nationwide.
The Company's office is located at 51 East Bethpage Road, Plainview,
New York 11803 and its telephone number is (516) 694-1010.
3. 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. While the division
has not participated in any new promotions since June 1997, it is continuing to
fill orders (to reduce existing inventory), pay vendors, and collect
receivables. The Company does not expect to incur any additional losses during
the remaining phase out period. Losses from this division are not expected to
provide any income tax benefit during 1997, but such losses may be used to
offset income in subsequent years.
5
4. LINES OF CREDIT
In order to provide for the working capital needs of FPG Direct and
provide liquidity for its ongoing growth, the Company entered into a short-term
line of credit agreement with its bank, providing for financing up to $750,000
through June 30, 1998. As of September 30, 1997 the Company had no borrowings
from the bank under the line of credit. Effective October 16, 1997, the Company
canceled its line of credit.
5. PRIVATE PLACEMENTS
In May 1997, the Company raised $400,000 through the private placement
issuance of 266,667 shares at $1.50 per share. Several of the Company's
executives and employees accounted for a majority of the shares issued in the
private placement. In August 1997, the Company raised an additional $1,500,000
through the private placement issuance of 750,000 units at $2.00 per unit,
consisting of one share of common stock and a warrant to purchase one share of
common stock at $2.00 per share. A private investment group and one executive
participated in this placement.
6. EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE
The computation of earnings (loss) per common and per common equivalent
share is based upon the weighted average number of outstanding common shares
during the period plus, when applicable, the dilutive effect of stock options
and warrants.
The number of common and common equivalent shares utilized in the per
share computations were 6,411,420 and 7,870,350 for the three months ended
September 30, 1997 and 1996, respectively and 6,133,944 and 7,788,453 for the
nine months ended September 30, 1997 and 1996, respectively.
6
Item 2. Management's Discussion and Analysis or Plan of Operation.
Results of Operations
The Company, prior to September 1996, conducted business in only one
segment, automotive fleet management and related operations ("Automotive
Management.") In September 1996, the Company commenced a new line of business,
under the name FPG Direct. FPG Direct marketed consumer goods to the credit card
base of customers of oil companies and retail department stores through direct
mailing efforts throughout the United States. See discussion below regarding the
discontinuance of the operations of FPG Direct.
Automotive Management
For the three months ended September 30, 1997, revenues from services
of the automotive management operations were $3,412,788, as compared to
$3,599,722 for the three months ended September 30, 1996, representing a
decrease of $186,934, or 5.2%. For the nine months ended September 30, 1997
revenues from services were $10,289,922 as compared to $9,650,709 for the nine
months ended September 30, 1996, representing an increase of $639,213, or 6.6%.
Although revenue increased for the nine month period, the Company experienced a
decrease in revenue for the three month period as a result of a reduced number
of claims received by its National Fleet Service subsidiary.
The direct cost of services related to such revenue (principally
charges from automotive repair facilities) was $2,801,553 and $2,992,848 for the
three month periods ended September 30, 1997 and 1996, respectively, resulting
in a decrease of $191,295 or 6.4%. The direct cost of services for the nine
months ended September 30, 1997 and 1996, respectively, were $8,508,593 and
$7,930,763 resulting in an increase of $577,830 or 7.3%. Changes in cost of
revenue for both reporting periods were directly proportional to the changes in
revenue for the corresponding periods.
The gross profit percentage was 17.9% and 17.3% for the three and nine
months ended September 30, 1997, respectively, as compared to 16.9% and 17.8%
for the same periods of 1996. The increased three month gross profit percentage
is mainly due to the restructuring of fees for new and renewing client
contracts. The nine month decrease of gross profit is a result of fee-based
programs offered previously to large companies at a reduced rate as an incentive
to sign long term contracts. This business practice has reduced the Company's
attrition rate.
Total operating expenses were $730,718 for the three months ended
September 30, 1997, as compared to $475,024 for the three months ended September
30, 1996, representing an increase of $255,694, or 53.8%. For the nine months
ended September 30, 1997, total operating expenses were $2,011,747, an increase
of $589,112 or 41.4% from total operating expenses of $1,422,635 for the same
period of 1996. The increases in operating expense are primarily attributable to
increased payroll and related expenses specifically associated with hiring
senior
7
executives to head the Affinity and Direct Appraisal and Repair Programs (DARP)
business groups as well as increases in other general and administrative
expenses required to service the Company's group automotive management
operations. Operating expenses were also adversely affected by non-recurring
costs associated with the relocation of the Company's corporate offices.
As a result of the foregoing, the net loss from continuing operations
for the three months ended September 30, 1997 was $115,099 ($.02 per share) as
compared to net income of $136,852 ($.02 per share) for the comparable three
months in 1996. For the nine months ended September 30, 1997, the net loss from
continuing operations was $206,826 ($.03 per share) as compared to net income of
$316,598 ($.04 per share) for the same period in 1996.
FPG Direct (Discontinued operations)
For the three and nine months ended September 30, 1997, FPG Direct had
net sales of $216,397 and $2,511,186 and cost of goods sold of $117,697 and
$1,187,782, resulting in a three month gross profit of $98,700 (45.6%) and a
nine month gross profit of $1,323,404 (52.7%), respectively. For the three
months ended September 30, 1997, FPG Direct incurred selling, general, and
administrative expenses of $355,211, resulting in a net loss of $256,511 ($.04
per share). For the nine months ended September 30, 1997, FPG direct incurred
selling, general, and administrative expenses of $2,217,114 and interest expense
of $32,999 resulting in a nine month net loss of $926,709 ($.15 per share).
Sales related to the promotions completed and ongoing during this year did not
meet expectations, resulting in losses for the division. As a result of these
losses, management discontinued the operations of this division. FPG Direct has
not participated in any new promotions since June 1997.
The Company had previously anticipated no further losses for this
division, however, certain revenue did not materialize as a result of shipping
delays caused by the Montgomery Ward petition for reorganization under Chapter
11 of the U.S. Bankruptcy Code, therefore, unexpected losses resulted during the
third quarter. The Company does not expect to incur any additional losses during
the remaining phase out period.
Liquidity and Capital Resources
As of September 30, 1997, the Company had cash and cash equivalents of
$1,144,116. Working capital of the Company as of September 30, 1997, was
$1,571,345. The Company's operating activities used $588,097 of cash in the
first three quarters of 1997. The Company believes its existing capital
resources and cash flow from operations will be sufficient to meet the Company's
cash and capital requirements for at least the next twelve months.
In order to provide for the working capital needs of FPG Direct and
provide liquidity for its ongoing growth, the Company entered into a short-term
line of credit agreement with its bank, providing for financing up to $750,000
through June 30, 1998. As of September 30, 1997 the Company had no borrowings
from the bank under the
8
line of credit. Effective October 16, 1997, the Company canceled its line of
credit.
In April 1997 the Company relocated its corporate offices to a 12,000
square foot facility in Plainview, New York. The company incurred significant
expenditures representing moving costs, new furniture and equipment, and
leasehold improvements. In April, 1997, the Company obtained a term loan of
$150,000 from its bank to finance some of these costs. On October 16, 1997, the
Company repaid the balance of the loan. As of November 14, 1997, the Company has
no outstanding debt with the bank.
In May 1997, the Company raised $400,000 through the private placement
issuance of 266,667 shares at $1.50 per share. Several of the Company's
executives and employees accounted for a majority of the shares issued in the
private placement. In August 1997 the Company raised an additional $1,500,000
through the private placement issuance of 750,000 units at $2.00 per unit,
consisting of one share of common stock and a warrant to purchase one share of
common stock at $2.00 per share. A private investment group and one executive
participated in this placement.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Form of subscription agreement executed by subscribers to the Company's
private placement dated August 26, 1997.
10.2 Form of warrant granted to subscribers to the Company's private
placement dated August 26, 1997.
(b) Reports on Form 8-K
None
9
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FIRST PRIORITY GROUP, INC.
Date: November 14, 1997 By: /s/ Michael Karpoff
-------------------
Michael Karpoff
President and
Co-Chief Executive Officer
Date: November 14, 1997 By: /s/ Barry Siegel
----------------
Barry Siegel
Chairman of the Board
of Directors, Secretary and
Co-Chief Executive Officer
10
Index of Exhibits
Exhibit No. Description Page
- ----------- ----------- ----
10.1 Form of subscription agreement executed by subscribers to 12
the Company's private placement dated August 26, 1997.
10.2 Form of warrant granted to subscribers to the Company's 31
private placement dated August 26, 1997.
11