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, 1998
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
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.)
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 /_/
2
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 $14,558,474
The aggregate market value of the issuer's voting stock held by
non-affiliates of the issuer as of April 13, 1999, based upon the closing price
on the date thereof is $9,332,348.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of April 13, 1999, the issuer had outstanding a total of 8,331,800
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/
THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
3
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 and
administers the automotive collision repair referral services for insurance
companies through its Direct Appraisal and Repair Program, Affinity Division and
Recovery Services Division.
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. All the activity surrounding the repair process
is tightly managed by the Company's staff. 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
4
fleet. It is primarily these unique systems that won the Company it's
prestigious award in 1995 from Inc. Magazine and MCI, as one of the nations best
run service companies.
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. Also offered, are 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.
Direct Appraisal and Repair Program (DARP). In 1992 the Company began
developing the business of providing automotive appraisal and collision repair
services for insurance companies. The automobile insurance industry is
experiencing massive changes as it moves in the direction of a "PPO" or "HMO"
type environment, similar to that of the health industry. The Company believes
that it's presence in this market and provision of such services to insurance
companies will 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 believes it is uniquely positioned to take advantage of the need for
such services by insurance companies. The Company has entered into agreements
with insurance companies whereby such insurance companies have agreed to utilize
the Company for appraisal and repair services. The Company proposes to try to
expand its insurance company referral business, and has increased its' sales
force in order to rapidly expand its market share in Direct Appraisal and Repair
Programs. [See Forward-Looking Statements and Cautionary Factors]
5
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 1997 or 1998.
Recent Developments.
The Company has made a decision to grow its business by entering into a
number of strategic partnerships. Recently the Company announced that NFS has
begun to provide collision claims management services to self insured clients of
Sedgwick Claims Management Services, Inc., a unit of Marsh & McLennan Companies,
Inc. Previously, the Company announced that it had entered into an agreement
with American Bankers Insurance Group, Inc.("American Bankers") whereby American
will market the Company's Driver's Shield(R) program. [See Forward-Looking
Statements and Cautionary Factors]
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 insurance
company referral 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 1998, one customer accounted for approximately 10% of the Company's
revenue. In 1997, a different customer accounted for approximately 10% of the
Company's revenue.
6
Employees
At year end, the Company employed thirty-seven 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.
Insurance Company Referral Business. The Company is aware of two other
companies that offer automotive collision repair services to insurance
companies. One of such companies is, 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.
In July 1998, the Company entered into a one year sublease for
approximately 6,500 of office space in Margate, Florida to house the Company's
second call center. Although this call center was closed in January 1999, the
lease runs through June 30, 1999.
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
7
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 recently 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 false representations
concerning his educational background, employment history, experience and
skills. The Company is seeking monetary damages of no less than $1 million. The
Company believes that Mr. Panzera's claim is without merit and intends to
vigorously defend this suit.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are traded on The Nasdaq SmallCap market.
The following table shows the high and low closing prices for the periods
indicated.
Sale Price($)
High Low
---- ---
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
1997
First Quarter $2.25 $1.50
Second Quarter $2.167 $1.375
Third Quarter $3.375 $1.44
Fourth Quarter $6.875 $3.00
8
The number of record holders of the Company's common shares as of March
31, 1999 was 379.
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, prior to September 1996, conducted business in only one
segment, automotive fleet management and related operations, such as the DARP
and Affinity programs ("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
Revenues from services of the automotive management operations were
$14,558,474 in 1998, as compared to $13,558,640 in 1997, representing an
increase of $999,834, or 7.4%. The direct costs of services related to such
revenue (principally charges from automotive repair facilities) were $12,129,819
in 1998, as compared to $11,262,698 in 1997, representing an increase of
$867,121, or 7.7%. Gross profit percentage decreased .2% to 16.7% in 1998 from
16.9% in 1997. Although the number of vehicles increased, this was partially
offset by a reduction in the national vehicle accident rate. The reduced vehicle
accident rate, recognized by various insurance industry sources, is due to: (i)
increased safety conditions on both roads and in vehicles, (ii) drivers' safety
awareness and defensive driving and (iii) moderate weather conditions.
Total operating expenses were $4,573,009 for 1998, as compared to
$2,946,232 for 1997, representing an increase of $1,626,777 or 55.2%. Increased
operating expenses were primarily attributable to the Company's efforts in
exploring new business opportunities in order to grow its business, incurring
charges for consultants to review alternative business strategies and associated
legal fees. Additionally, in 1998, the Company incurred costs associated with
the opening and the subsequent closing of a second call center facility in
Margate, Florida. This call center was closed in January 1999, resulting in an
accrual for the remaining lease payments of $48,520. The Company also developed
an Information Technology Department in order to upgrade all its systems for
Y2K. These expenditures have positioned the Company for rapid growth in new
business and technology areas. In addition, the Company incurred severance
expenses related to the resignation of the former President and Chief Operating
Officer of the Company.
9
Interest and other income were $245,246 in 1998, as compared to $41,781
in 1997, representing an increase of $203,465. The increase is primarily
attributable to larger average cash balances available during 1998 which were
invested in short-term cash equivalents.
Interest expense was $2,800 in 1998, as compared to $9,532 in 1997,
representing an increase of $6,732.
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.
For the ended December 31, 1998, FPG Direct had no sales as compared to
sales of $2,500,097 in 1997. The cost of goods sold for the year ended December
31, 1997 was $1,301,077, resulting in a gross profit of $1,199,020 (48%). In
1997, FPG Direct incurred selling, general, and administrative expenses of
$2,277,156, and interest expense of $32,934 resulting in a net loss of
$1,111,070. FPG Direct experienced a loss on disposition of assets of $93,922 in
1998.
Liquidity and Capital Resources
As of December 31, 1998, the Company had cash and cash equivalents of
$2,782,180 as compared to $3,453,864 as of December 31, 1997. Working capital of
the Company as of December 31, 1998, was $2,680,475 as compared to $3,717,452 as
of December 31, 1997. The Company's operating activities used $1,554,262 of cash
in 1998 as compared to 1997, when the Company's operating activities used
$861,894 of cash. As discussed above, the Company experienced large increases in
its operating costs in order to accommodate the growth of the Company as it
explores and enters into new business.
The Company arranged for a short-term line of credit agreement with its
bank, providing for financing up to $750,000 through June 30, 1998. Effective
October 16, 1997, the Company terminated this 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.
In April 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 redeemable common stock
purchase warrant at
10
$2.00 per share. A private investment group and one executive participated in
this placement. In December 1997, the Company raised an additional $2,330,813
through the private placement issuance of 581,250 units at $4.01 per unit,
consisting of one share of common stock and a redeemable common stock purchase
warrant at $5.75 per share. Additionally, in December, the Company issued a
Notice of Redemption to the holders of the warrants issued as part of the August
1997 private placement. Thereafter, one holder, an executive in the Company,
exercised his right to purchase 250,000 additional shares of common stock at
$2.00, permitting the Company to raise an additional $400,000 in cash and a note
from the executive for a $100,000. This note was paid, in full, on March 6,
1998. Subsequently, in January 1998 the other warrant holder also exercised its
right to purchase 500,000 additional shares of common stock at $2.00, permitting
the Company to raise an additional $1,000,000. In December, 1998 a holder of a
stock option exercised its right to purchase 100,000 shares of common stock at
$.70 per share, permitting the Company to raise an additional $70,000 in cash.
The Company believes that its present cash position will enable the
Company to continue to support its operations for the short and longer term.
Year 2000 Compliance
The Company has two computer systems and software products coded to
accept only two digit entries to represent years. For example, the year "1998"
would be represented by "98." These systems and products will need to be able to
accept four digit entries to distinguish years beginning with 2000 from prior
years. As a result, systems and products that do not accept four digit year
entries will be replaced to comply with such "Year 2000" requirements. The
Company believes that its internal systems are Year 2000 compliant or will be
replaced in connection with previously planned changes to information systems
prior to the need to comply with Year 2000 requirements. Expenses related to
Year 2000 compliance amounted to approximately $100,000 in 1998 and are expected
to amount to approximately $100,000 in 1999. The anticipated costs of any Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to the availability or cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties. In addition, there can be no assurance
that Year 2000 compliance problems will not be revealed in the future which
could have a material adverse affect on the Company's business, financial
condition and results of operations. Many of the Company's customers and
suppliers may be affected by Year 2000 issues that may require them to expend
significant resources to modify or replace their existing systems. This may
result in those customers having reduced funds to purchase the Company's
products or in those suppliers experiencing difficulties in producing or
shipping key components to the Company on a timely basis or at all.
11
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.
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. The DARP concept is to enter into contractual commitments with auto
insurers that will permit the Company to manage the insurer's claim
management process. During this contractual period, the insurer may
terminate the agreement during the trial period, and/or not offer for
processing, a substantial number of claims of its entire claims experience.
This situation could result in individual insurer's relationship not
contributing to FPG's growth and profitability as originally expected.
Item 7. FINANCIAL STATEMENTS
The Company's financial statements and schedules appear at the end of
this Report after Item 13.
12
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998 AND 1997
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
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, 1998 and 1997, 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, 1998 and 1997, 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.
February 18, 1999
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
--------------- ---------------
Current assets:
Cash and cash equivalents $2,782,180 $3,453,864
Accounts receivable, less allowance for doubtful
accounts of $28,223 in 1998 and $22,500 in 1997 1,711,644 1,604,266
Note receivable, shareholder - 100,000
Inventories - 61,642
Prepaid expenses and other current assets 66,207 139,276
---------- ----------
Total current assets 4,560,031 5,359,048
Property and equipment, net 601,424 457,310
Security deposits and other assets 107,972 41,328
---------- ----------
Total assets $5,269,427 $5,857,686
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,238,089 $1,254,628
Accrued expenses and other current liabilities 596,795 386,968
Current portion of long-term debt 44,672 -
---------- ----------
Total current liabilities 1,879,556 1,641,596
----------- -----------
Long-term debt 51,926 -
---------- ----------
Shareholders' equity:
Common stock, $.015 par value, authorized 20,000,000 shares; issued
8,598,467 shares in 1998 and 7,998,467
shares in 1997 128,977 119,977
Preferred stock, $.01 par value, authorized 1,000,000
shares; none issued or outstanding - -
Additional paid-in capital 7,762,350 6,645,737
Deficit (4,463,382) (2,459,624)
---------- ----------
3,427,945 4,306,090
Less common stock held in treasury, at cost, 266,667 shares 90,000 90,000
---------- ----------
Total shareholders' equity 3,337,945 4,216,090
---------- ----------
Total liabilities and shareholders' equity $5,269,427 $5,857,686
========== ==========
See notes to consolidated financial statements.
F-2
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
Revenue $ 14,558,474 $ 13,558,640
Cost of revenue (principally charges incurred at repair
facilities for services) 12,129,819 11,262,698
------------ ------------
Gross profit 2,428,655 2,295,942
------------ ------------
Operating expenses:
Selling 1,351,360 972,407
General and administrative 3,221,649 1,973,825
------------ ------------
Total operating expenses 4,573,009 2,946,232
------------ ------------
(2,144,354) (650,290)
------------ ------------
Other income (expense):
Interest and other income 245,246 41,781
Interest expense (2,800) (9,532)
------------ ------------
Total other income 242,446 32,249
------------ ------------
Loss from continuing operations before
income taxes (1,901,908) (618,041)
Income taxes, all current 7,928 2,381
------------ ------------
Loss from continuing operations (1,909,836) (620,422)
------------ ------------
Discontinued operations:
Loss from operations of discontinued direct
response marketing division, no income
tax benefit -- (670,198)
Loss on disposal of direct response marketing
division, no income tax benefit (93,922) (440,872)
------------ ------------
(93,922) (1,111,070)
------------ ------------
Net loss ($ 2,003,758) ($ 1,731,492)
============ ============
Basic and diluted loss per share:
Continuing operations ($ .23) ($ .10)
Discontinued operations (.01) (.17)
------------ ------------
Net loss ($ .24) ($ .27)
============ ============
Weighted average number of common shares outstanding 8,197,827 6,364,768
============ ============
See notes to consolidated financial statements.
F-3
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
Common Stock
Additional
-------------------------- Paid-in
Shares Amount Capital Deficit
--------- -------- ------------- ---------------
Balance, January 1, 1997 6,150,550 $ 92,258 $1,942,643 ($ 728,132)
Issuance of common stock in private
placements 1,597,917 23,969 4,206,844 -
Exercise of warrants 250,000 3,750 496,250 -
Net loss - - - (1,731,492)
--------- ------ --------- ---------
Balance, January 1, 1998 7,998,467 119,977 6,645,737 (2,459,624)
Exercise of options 100,000 1,500 68,500 -
Exercise of warrants 500,000 7,500 992,500 -
Options granted for services - - 55,613 -
Net loss - - - (2,003,758)
--------- ------ --------- ---------
Balance, December 31, 1998 8,598,467 $128,977 $7,762,350 ($4,463,382)
--------- ------ --------- ---------
Total
Treasury Stock Share-
--------------------------- holders'
Shares Amount Equity
---------- -------- ---------
Balance, January 1, 1997 266,667 ($90,000) $1,216,769
Issuance of common stock in private
placements - - 4,230,813
Exercise of warrants - - 500,000
Net loss - - (1,731,492)
------------ ------------- -----------
Balance, January 1, 1998 266,667 (90,000) 4,216,090
Exercise of options - - 70,000
Exercise of warrants - - 1,000,000
Options granted for services - - 55,613
Net loss - - (2,003,758)
------------ ------------- -----------
Balance, December 31, 1998 266,667 ($90,000) $3,337,945
------------ ------------- -----------
------------ ------------- -----------
See notes to consolidated financial statements.
F-4
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
--------------- -------------
Cash flows used in operating activities:
Net loss ($2,003,758) ($1,731,492)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 143,308 83,072
Provision for bad debts 16,723 39,000
Options granted for services 55,613 -
Changes in assets and liabilities:
Accounts receivable (124,101) 373,369
Inventories 61,642 256,756
Prepaid expenses and other current assets 73,069 182,622
Security deposit and other assets (66,644) 5,985
Accounts payable (16,539) (148,515)
Accrued expenses and other current liabilities 306,425 77,309
------------ -------------
Total adjustments 449,496 869,598
------------ ------------
Net cash used in operating activities (1,554,262) (861,894)
------------ -------------
Purchase of property and equipment and net cash
used in investing activities (287,422) (398,558)
------------ ------------
Cash flows provided by financing activities:
Net repayments of borrowings under line of credit - (600,000)
Borrowing on equipment note- 150,000
Principal payments on equipment note - (150,000)
Collection of shareholder note 100,000 -
Proceeds from issuance of common stock 1,070,000 4,630,813
------------ -------------
Net cash provided by financing activities 1,170,000 4,030,813
------------ -------------
Net increase (decrease) in cash and cash equivalents (671,684) 2,770,361
Cash and cash equivalents at beginning of year 3,453,864 683,503
------------ -------------
Cash and cash equivalents at end of year $2,782,180 $3,453,864
============ =============
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 2,876 $ 3,762
============ =============
Cash paid during the year for interest $ - $ 48,152
============ =============
Supplemental disclosure of non-cash financing activities:
During 1997, the Company received $400,000 and a note of $100,000 from a
shareholder in connection with the exercise of 250,000 warrants for
$500,000. The note was paid during 1998.
See notes to consolidated financial statements.
F-5
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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.
Inventories
Inventories, consisting of finished goods purchased for resale of the
discontinued operation, are stated at the lower of cost (first-in,
first-out) or market.
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
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Direct-Response Advertising (Discontinued Operation)
The Company expenses the costs of advertising the first time the
advertising takes place, except for direct-response advertising (see Note
15), which in 1996 was capitalized and amortized over its expected period
of future benefits. Direct-response advertising consists primarily of
advertising inserts mailed to customers that include order coupons for
the Company's products. The capitalized costs of the advertising were
generally amortized over a three or four-month period following the mail
distribution date. Advertising expense was $1,629,680 in 1997.
F-6
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
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.
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 Note Receivable, Shareholder
The carrying amount of the Company's note receivable, shareholder
approximates fair value.
o Long-Term Debt
The carrying amount of the Company's long-term debt approximates fair
value.
2. Description of Business, Revenue Recognition and Concentration of
Credit Risk
Automotive Management
The Company is engaged in automotive management services, including fleet
management, 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.
F-7
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
2. Description of Business, Revenue Recognition and Concentration of
Credit Risk (Continued)
Automotive Management (Continued)
The Company also has a service called the Direct Appraisal Repair
Program. The program provides automotive collision repair and appraisal
services to insurance companies throughout the United States. The Company
receives commissions from participating body shop vendors for referring
clients of the insurance companies to them.
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.
Sales to one customer accounted for 10% of revenue in 1998, and sales to
a different customer accounted for 10% of revenue in 1997.
The Company has no instruments with significant off-balance-sheet risk or
concentration of credit risk.
Direct-Response Marketing (Discontinued Operation)
Effective September 1, 1996, the Company commenced marketing consumer
goods through oil companies and retail department stores ("client")
through direct mailing efforts throughout the United States, to customers
who regularly use a credit card issued by the client companies. In the
second quarter of 1997, the Company decided to discontinue this segment
(see Note 15).
3. Due From Shareholder
In December 1997, the Company received $400,000 and a note of $100,000
from a shareholder in connection with the exercise of warrants (see Note
9). The note, which was paid in full during 1998, bore interest at 6% per
annum and was secured by 250,000 shares of Company stock.
F-8
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
4. Property and Equipment
1998 1997
-------------- -------------
Machinery and equipment $ 717,912 $468,266
Furniture and fixtures 264,823 246,933
Leasehold improvements 19,886 -
------------- -------------
1,002,621 715,199
Less accumulated depreciation 401,197 257,889
------------- -------------
$ 601,424 $457,310
============= =============
5. Bank Debt
Line of Credit Financing
The Company had a line of credit with its bank in the amount of
$1,000,000, which was collateralized by substantially all assets of the
Company, and the Company was required to maintain a compensating balance
of $250,000 in a certificate of deposit. The line bore interest at prime
plus 1/2% and was cancelled in October, 1997.
Equipment Notes
In 1997, the Company borrowed $150,000 from a bank to purchase equipment,
furniture, fixtures and for relocation costs. The note was collateralized
by substantially all assets of the Company. The note was interest bearing
at a rate of 1/2% above prime and was repaid in October, 1997.
F-9
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
6. 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. This amount has been accrued and charged to operations in the
year ended December 31, 1998.
7. 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
----------- ------------- ----------
1998:
-----
Basic and Diluted Loss Per Share
Loss from continuing operations ($1,909,836) 8,197,827 ($.23)
========== ========= ====
1997:
-----
Basic and Diluted Loss Per Share
Loss from continuing operations ($ 620,422) 6,364,768 ($.10)
=========== ========= ====
In 1998 and 1997, options and warrants were anti-dilutive.
F-10
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
8. 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 1998 and 1997, respectively: annual dividends of $-0-
for both years, expected volatility of 80% and 93%, risk-free interest
rate of 5.02% and 6.08%, and expected life of five years for all grants.
The weighted-average fair value of stock options granted in 1998 and 1997
was $.83 and $2.43, respectively.
F-11
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
8. Stock Options (Continued)
Stock Compensation Plan (Continued)
Under the above model, the total value of stock options granted in 1998
and 1997 was $1,044,745 and $766,784, respectively, which would be
amortized ratably on a pro forma basis over the related vesting periods,
which range from thirty-six months to five years (not including
performance-based stock options granted in 1998 and 1997, 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:
1998 1997
---------------- -------------
Loss from continuing operations:
As reported ($1,909,836) ($620,422)
Pro forma ($2,994,711) ($761,261)
Basic and diluted loss per share from continuing operations:
As reported ($ .23) ($ .10)
Pro forma ($ .37) ($ .12)
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).
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-12
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
8. Stock Options (Continued)
Performance-Based Stock Options
Under its 1995 Stock Incentive Plan, the Company had granted 2,125,000
options to certain key executives hired in 1997 and 1996 whose vesting is
entirely contingent upon the future profits (as defined) for the division
or subsidiary or commissions earned under the management of the related
key executive. During 1998, the Company terminated an executive hired in
1996 who had been granted 500,000 of the above options, and cancelled
450,000 options granted to another executive. During 1997, the Company
terminated three executives hired in 1996 who had been granted 1,000,000
of these options. Generally, for each $10,000 of future profits of the
related division or subsidiary, the key executive becomes vested and may
exercise options equal to defined amounts of shares, ranging from 500
shares to 1,500 shares based upon the aggregate amount of future profit
attained.
The Company believes that it is not possible to estimate any profits for
the related divisions and subsidiaries and, therefore, cannot estimate as
of December 31, 1998 the outcome of the performance condition.
Accordingly, the pro forma amounts of net loss and loss per share
described above do not include any pro forma compensation expense related
to the performance-based stock options.
For disclosure purposes, the fair value of each performance-based stock
option grant is estimated on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions for
1997 (none in 1998): annual dividends of $-0-, expected volatility of
93%, risk-free interest rate of 6.08% and expected life of five years for
all grants. The weighted-average fair value of the performance-based
stock options granted in 1997 was $1.50 (none in 1998)
On October 22, 1998, the Company repriced certain performance-based
options granted in 1997, representing the right to purchase 150,000
shares of common stock. The original 1997 grants gave the holder the
right to purchase common stock at $2.00 per share. The options were
repriced at $1.75 per share. At the date of the repricing, the new
exercise price was equal to the fair market value of the shares.
Non-Incentive Stock Option Agreements
The Company has non-incentive stock option agreements with five of its
directors and/or officers.
F-13
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
8. Stock Options (Continued)
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, 1997 3,915,000 $.06-2.00 .81
Options granted 850,000 2.00-6.84 3.07
Options expired/canceled (1,000,000) .75-2.00 1.38
---------
Options outstanding, December 31, 1997 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 exercisable, December 31, 1997 1,566,667 .06-2.75 .55
=========
Options exercisable, December 31, 1998 1,552,500 .12-5.00 1.36
=========
The following table summarizes information about the options outstanding
at December 31, 1998 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 Outstanding Price
------ ----------- ------------ --------- ----------- ---------
$.12 - .22 450,000 1.46 $ .19 362,500 $ .19
.75 - 1.56 765,000 1.93 1.17 743,334 1.18
1.75 - 2.25 1,837,500 3.65 1.80 288,333 1.80
2.75 - 5.00 225,000 4.14 3.77 158,333 4.08
F-14
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
9. Common Stock and Stock Warrants
In April 1997, the Company raised $400,000 through the private placement
issuance of 266,667 shares of common stock at $1.50 per share. Several of
the Company's executives and employees accounted for a majority of the
shares issued. In June 1997, the agreement was amended to provide for
additional shares to the subscribers to bring the value of their
investment to $2.00 per share if the closing price on the anniversary
date, April 1998, was less than $2.00 per share. No additional shares
became issuable on such date.
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 (see Note 3).
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. The Company
has provided the investors with certain price protection, subject to
certain conditions being met, which may require the Company to issue
additional shares and warrants to these investors without receiving
additional consideration. Subsequent to December 31, 1997, the price
protection element of the above expired.
F-15
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
9. Common Stock and Stock Warrants (Continued)
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 year ended December 31, 1998 and 1997, 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.
10. Preferred Stock Purchase Rights
The Company is authorized to issue 1,000,000 shares of preferred stock,
$.01 par, with rights and preferences as determined by the Board of
Directors.
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 and (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 stock
holders.
F-16
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
10. Preferred Stock Purchase Rights (Continued)
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 only if a person or group
acquires (1) 20% or more of the Company's common stock (10% in the case
of an Adverse Person as defined) (2) 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). (3) the tenth 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 one- one thousandth of a share of the
JPPS at an exercise price of $27.50 per one- one thousandth of a share,
subject to adjustment.
11. 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 $9,632 and $7,727 in 1998 and 1997.
12. Commitments and Contingency
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. Rent expense including real estate taxes for the years ended
December 31, 1998 and 1997 aggregated $253,531 and $152,268,
respectively.
F-17
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
12. Commitments and Contingency (Continued)
Leases (Continued)
As of December 31, 1998, the Company's future minimum rental commitments
are as follows:
1999 $177,100
2000 184,300
2001 191,600
2002 48,400
----------
$601,400
==========
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 consideration for several senior executives voluntarily temporarily
reducing 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. 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.
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.
F-18
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
13. 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.
At December 31, 1998, the Company has an operating loss carryforward of
approximately $4,000,000 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 $1,520,000 and
$770,000 at December 31, 1998 and 1997 due to the uncertainty of
realizing the benefit of the loss carryforwards.
At December 31, 1998, 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
2013 1,973,000
----------
$4,000,000
==========
The Company's effective income tax rate differs from the Federal
statutory rate as follows:
1998 1997
-------------- ------------
Federal statutory rate 34.0% 34.0%
Expected tax benefit (34.0) (34.0)
State income taxes .4 .1
------- ------
.4% .1%
======= ======
F-19
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
14. Advertising Expense
Advertising expense (other than from discontinued operations) amounted to
$125,873 and $116,759 in 1998 and 1997.
15. Discontinued Operations
At June 30, 1997, the Company decided to discontinue its direct-response
marketing division. Accordingly, the operating results of the division
have been segregated from continuing operations and reported separately
on the statement of operations. Net sales for discontinued operations
were $2,500,097 for 1997.
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 losses of
$93,922 and $440,872 during the years ended December 31, 1998 and 1997
which are reflected as a disposal losses in the accompanying financial
statements. As of December 31, 1998, there are no remaining assets or
liabilities of this division.
16. Fourth Quarter Adjustments
During the fourth quarter of the year ended December 31, 1998, the
Company recorded a severance agreement (see Note 6) and an accrual for
consulting services of $50,000, applicable to earlier periods in 1998.
F-20
FIRST PRIORITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
17. Contingency
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 for at least $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. The action is in the early discovery stages
and 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.
F-21
Part III
Items 9 through 12 have been incorporated by reference from the
Company's definitive proxy statement or definitive information 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 Form of subscription agreement executed by subscribers to the Company's
private placement dated August 26, 1997 incorporated by reference to
Exhibit 10.1 of the Company's Form 10-QSB for the period ended
September 30, 1997.
10.5 Form of warrant granted to subscribers to the Company's private
placement dated August 26, 1997 incorporated by reference to Exhibit
10.2 of the Company's Form 10-QSB for the period ended September 30,
1997.
10.6 Form of subscription agreement executed by subscribers to the Company's
private placement dated December 19, 1997 incorporated by reference to
Exhibit 10.2 of the Company's Form 10-QSB for the period ended
September 30, 1997.
10.7 Form of warrant executed by the Company's pursuant to the subscription
agreement dated December 19, 1997 incorporated by reference to Exhibit
10.18 of the Company's Form 10-KSB for the period ended December 31,
1997.
10.8 Employment agreement between the Company and Philip M. Panzera dated
November 14, 1997 incorporated by reference to Exhibit 10.19 of the
Company's Form 10-KSB for the period ended December 31, 1997.
10.9 Amendment to employment agreement dated November 26, 1997 between the
Company and Michael Karpoff incorporated by reference to Exhibit 10.20
of the Company's Form 10-KSB for the period ended December 31, 1997.
10.10 Amendment to employment agreement dated November 26, 1997 between the
Company and Barry Siegel incorporated by reference to Exhibit 10.21 of
the Company's Form 10-KSB for the period ended December 31, 1997.
10.11 Termination Agreement dated July 16, 1997 between the Company and
Douglas Konetzni incorporated by reference to Exhibit 10.22 of the
Company's Form 10-KSB for the period ended December 31, 1997.
10.12 Termination Agreement dated May 20, 1997 between the Company and Paul
Zucker incorporated by reference to Exhibit 10.23 of the
14
Company's Form 10-KSB for the period ended December 31, 1997.
10.13 Amendment to Termination Agreement dated August 22, 1997 between the
Company and Paul Zucker incorporated by reference to Exhibit 10.24 of
the Company's Form 10-KSB for the period ended December 31, 1997.
10.14 Termination Agreement dated May 20, 1997 between the Company and Steven
Zucker incorporated by reference to Exhibit 10.25 of the Company's Form
10-KSB for the period ended December 31, 1997.
10.15 Amendment to Termination Agreement dated August 22, 1997 between the
Company and Steven Zucker incorporated by reference to Exhibit 10.26 of
the Company's Form 10-KSB for the period ended December 31, 1997.
10.16 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.
10.17 Employment Agreement dated October 8, 1998 between the Company and
Barry Siegel filed herein.
10.18 Employment Agreement dated October 2, 1998 between the Company and
Barry J. Spiegel filed herein.
10.19 Employment Agreement dated December 14, 1998 between the Company and
Lisa Siegel filed herein.
10.20 Employment Agreement dated October 8, 1998 between the Company and
Gerald M. Zutler filed herein.
10.21 Severance Agreement dated August 17, 1998 between the Company and
Michael Karpoff filed herein.
13.1 Form 10-QSB for the quarter ending March 31,1998 incorporated by
reference dated and previously filed.
15
13.2 Form 10-QSB for the quarter ending June 30, 1998 incorporated by
reference and previously filed with the Commission..
13.3 Form 10-QSB for the quarter ending September 30, 1998 incorporated by
reference and previously filed with the Commission..
21 List of subsidiaries filed herein.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 28, 1998
stating:
A. On December 28, 1998, the Board of Directors of First
Priority Group, Inc. (the "Company") authorized the issuance of one preferred
share purchase right (a "Right") for each outstanding share of common stock, par
value $0.015 per share (the "Common Stock"), of the Company. The description and
terms of the Rights, and certain defined terms used herein, are set forth in a
Rights Agreement (the "Rights Agreement") between the Company and North American
Transfer Co. as Rights Agent (the "Rights Agent"), dated as of December 28, 1998
and filed as an exhibit to the Form 8-K.
B. On December 28, 1998, the Board of Directors of the Company
also adopted the following amendments to the Company's By-laws:
(i) Article I Section 2 was amended to provide that
shareholders shall have no right to call special meetings of shareholders.
(ii) Article I Section 3 was amended to require that
a shareholder desiring to bring up business at an annual meeting so notify the
Company not less than 60 days nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting (the "Anniversary Date"), or if
the annual meeting is scheduled to be held on a date more than 30 days before
the Anniversary Date or more than 60 days after the Anniversary Date, not later
than the close of business on the later of (A) the 75th day prior to the
scheduled date of the annual meeting or (B) the 15th day following the day on
which public announcement of the date of such annual meeting is made by the
Company.
(iii) Article II Section 1 was amended to implement a
classified board of directors. The directors will be classified, with respect to
the term for which they hold office, into three classes, as nearly equal as
possible. One class of directors (consisting of one director) shall be elected
for a term expiring at the annual meeting to be held in 1999, another class
(consisting of two directors) shall be elected for a term expiring at the annual
meeting to be held in 2000, and another
16
class (consisting of two directors) shall be elected for a term expiring at the
annual meeting to be held in 2001.
(iv) Article II Section 2 was amended to require that
shareholders desiring to nominate one or more candidates for election to the
board of directors so notify the Company not less than 60 days nor more than 90
days prior to the Anniversary Date, or if the annual meeting is scheduled to be
held on a date more than 30 days before the Anniversary Date or more than 60
days after the Anniversary Date, not later than the close of business on the
later of (A) the 75th day prior to the scheduled date of the annual meeting or
(B) the 15th day following the day on which public announcement of the date of
such annual meeting is made by the Company.
(v) Article IX Section 1 was amended to require that
the by-laws may only be amended or repealed by the shareholders by an
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
total votes eligible to be cast on such amendment or repeal by holders of voting
stock, voting together as a class.
The amendments relating to the classified board (clause (iii) above)
and the shareholder super-majority provision (clause (v) above) are subject to
shareholder approval, which the Company currently intends to seek at the next
annual meeting of shareholders. The amended and restated By-laws are attached as
an exhibit to the Form 8-K.
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: April 14, 1999
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.
17
By: /s/ Barry Siegel
---------------------------
Barry Siegel
Chairman of the Board of Directors,
Treasurer, Secretary,
Chief Executive Officer,
Principal Accounting Officer
Date: April 14, 1999
18
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 Form of subscription agreement executed by subscribers to the
Company's private placement dated August 26, 1997 incorporated
by reference to Exhibit 10.1 of the Company's Form 10-QSB for
the period ended September 30, 1997.
10.5 Form of warrant granted to subscribers to the Company's
private placement dated August 26, 1997 incorporated by
reference to Exhibit 10.2 of the Company's Form 10-QSB for
the period ended September 30, 1997.
10.6 Form of subscription agreement executed by subscribers to the
Company's private placement dated December 19, 1997
incorporated by reference to Exhibit 10.2 of the Company's
Form 10-QSB for the period ended September 30, 1997.
19
10.7 Form of warrant executed by the Company's pursuant to the
subscription agreement dated December 19, 1997 incorporated by
reference to Exhibit 10.18 of the Company's Form 10-KSB for
the period ended December 31, 1997.
10.8 Employment agreement between the Company and Philip M. Panzera
dated November 14, 1997 incorporated by reference to Exhibit
10.19 of the Company's Form 10-KSB for the period ended
December 31, 1997.
10.9 Amendment to employment agreement dated November 26, 1997
between the Company and Michael Karpoff incorporated by
reference to Exhibit 10.20 of the Company's Form 10-KSB for
the period ended December 31, 1997.
10.10 Amendment to employment agreement dated November 26, 1997
between the Company and Barry Siegel incorporated by reference
to Exhibit 10.21 of the Company's Form 10-KSB for the period
ended December 31, 1997.
10.11 Termination Agreement dated July 16, 1997 between the Company
and Douglas Konetzni incorporated by reference to Exhibit
10.22 of the Company's Form 10-KSB for the period ended
December 31, 1997.
10.12 Termination Agreement dated May 20, 1997 between the Company
and Paul Zucker incorporated by reference to Exhibit 10.23 of
the Company's Form 10-KSB for the period ended December 31,
1997.
10.13 Amendment to Termination Agreement dated August 22, 1997
between the Company and Paul Zucker incorporated by reference
to Exhibit 10.24 of the Company's Form 10- KSB for the period
ended December 31, 1997.
10.14 Termination Agreement dated May 20, 1997 between the Company
and Steven Zucker incorporated by reference to Exhibit 10.25
of the Company's Form 10-KSB for the period ended December 31,
1997.
10.15 Amendment to Termination Agreement dated August 22, 1997
between the Company and Steven Zucker incorporated by
reference to Exhibit 10.26 of the Company's Form 10-KSB for
the period ended December 31, 1997.
10.16 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.
10.17 Employment Agreement dated October 8, 1998 between the Company
and Barry Siegel filed herein.
20
10.18 Employment Agreement dated October 2, 1998 between the Company
and Barry J. Spiegel filed herein.
10.19 Employment Agreement dated December 14, 1998 between the
Company and Lisa Siegel filed herein.
10.20 Employment Agreement dated October 8, 1998 between the Company
and Gerald M. Zutler filed herein.
10.21 Severance Agreement dated August 17, 1998 between the Company
and Michael Karpoff filed herein.
13.1 Form 10-QSB for the quarter ending March 31,1998 incorporated
by reference dated and previously filed.
13.2 Form 10-QSB for the quarter ending June 30, 1998 incorporated
by reference and previously filed with the Commission..
13.3 Form 10-QSB for the quarter ending September 30, 1998
incorporated by reference and previously filed with the
Commission.
21 List of subsidiaries filed herein.
27 Financial Data Schedule
21