Revenues increased approximately $6,869,000, or 14%, to approximately $56,152,000 for the year ended October 31, 1999 as compared to approximately $49,283,000 for the year ended October 31, 1998. This increase was primarily due to: (i) an increase in the recognition of deferred contract revenue as a result of an increase in the total number of unexpired service contracts under administration; and (ii) an increase in administrative and insurance fees resulting from an increase in the administrative fees charged per contract and an increase in the number of service contracts accepted for administration by the Company in fiscal 1999.
Gross margin increased by approximately $2,714,000, or 11%, to approximately $28,022,000 for the year ended October 31, 1999, as compared to approximately $25,308,000 for the year ended October 31, 1998. This increase is primarily attributable to the increase in revenues as described above. Gross margin for the year ended October 31, 1999 was 50% as compared to 51% for the year ended October 31, 1998. This decrease is primarily attributable to an increase in the relative percentage of revenue represented by deferred contract revenue, which has a low gross margin, as compared to administrative fees which have a higher gross margin.
Interest income increased by approximately $387,000, or 26%, to approximately $1,870,000 for the year ended October 31, 1999, as compared to approximately $1,483,000 for the same period in 1998. The increase is a result of an increase in investment income generated by funds provided by operating activities. Other income, net decreased by approximately $113,000, or 6%, to approximately $1,855,000 for the year ended October 31, 1999, as compared to approximately $1,968,000 for the year ended October 31, 1998. This decrease is attributable to non-recurring other income of $500,000 received by the Company in settlement of a dispute with an unaffiliated party in the first quarter of 1998.
Income before provision for income taxes increased by approximately $137,000, or 3%, to approximately $5,078,000 for the year ended October 31, 1999, as compared to approximately $4,941,000 for the same period in 1998, exclusive of the Uautobid.com expenses and the $500,000 non recurring gain on settlement. For the year ended October 31, 1999, the Company had income before provision for income taxes of approximately $4,574,000 and recorded a provision for income taxes of approximately $1,759,000, as compared to income before provision for income taxes of approximately $5,442,000 and a provision for income taxes of approximately $2,138,000 in the same period in 1998. Net income decreased approximately $489,000, or 15%, to approximately $2,815,000 for the year ended October 31, 1999 as compared to approximately $3,304,000 for the year ended October 31, 1998. The decrease in net income is the result of the Uautobid.com expenses incurred in fiscal 1999 and the $500,000 non-recurring gain on settlement received in fiscal 1998.
Revenues increased approximately $11,354,000, or 30%, to approximately $49,283,000 for the year ended October 31, 1998 as compared to approximately $37,929,000 for the year ended October 31, 1997. This increase was primarily due to: (i) a significant increase in the recognition of deferred contract revenue as a result of an increase in the total number of unexpired service contracts under administration; and (ii) a significant increase in administrative and insurance fees resulting from an increase in the number of service contracts accepted for administration by the Company in fiscal 1998. The increase in the number of service contracts accepted for administration during fiscal 1998 was primarily due to the aggressive efforts by the Company in enrolling additional producers to sell the Company's products and to a more diversified array of products offered by the Company.
Selling, general and administrative expenses increased by approximately $3,544,000, or 19%, to approximately $21,835,000 for the year ended October 31, 1998, up from approximately $18,291,000 for the year ended October 31, 1997. This increase was in large part due to (i) increases in selling expenses primarily due to increased commissions paid as a result of increased sales volume; and (ii) increases in general and administrative expenses due to increased personnel and postage costs resulting from increased sales volume and to the development of new service contract products. As a percentage of revenues, selling, general and administrative expenses decreased to 44% for the year ended October 31, 1998 as compared to 48% in the same period in 1997.
Other income, net increased by approximately $1,224,000 or 165%, to approximately $1,968,000 for the year ended October 31, 1998, as compared to approximately $744,000 for the year ended October 31, 1997. This increase is partially attributable to other income of $500,000 received by the Company in settlement of a dispute with an unaffiliated party in the first quarter of 1998. The balance of the increase was the result of an increase in investment income generated by funds provided by the exercise of the Company's outstanding warrants in October 1997 and by funds provided by operating activities.
During the fiscal year ended October 31, 1997, the Company entered into a $3,000,000 revolving credit facility with the Chase Manhattan Bank. Under the terms of the facility, advances bear interest at 1/2% above the prime rate and the Company is obligated to pay an annual facility fee of 1/2% of the total available amount. Outstanding amounts under the credit facility are secured by a pledge of all accounts receivable of the Company. As at October 31, 1999, no amounts had been borrowed under the credit facility.
The Company believes that its current available cash and anticipated levels of internally generated funds will be sufficient to fund its financial requirements at least for the next fiscal year at the Company's present level of revenues and business activity.
The Company intends to spend approximately $700,000 in fiscal 2000 for the purchase of computer hardware and software, telephone equipment and leasehold improvements to enable the Company to administer the contracts generated by increased sales volume and to expand its internet presence.
The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process critical financial and operational information incorrectly. The Company's computer systems use four-digit date fields to designate a year and, as a result, the Company believes that its systems will properly recognize the Year 2000. The Company has contacted its critical suppliers of services to determine that the services that they provide are Year 2000 compliant. The Company believes, based upon its internal reviews, the configuration of the Company's systems, inquiries made of its critical customers and suppliers, and other factors, that the future external and internal costs to be incurred relating to the modification of internal-use software for the Year 2000 will not be material to the Company's results of operations or financial position. To date, the Company has not experienced any year 2000 related problems.
Consolidated Statements of Operations for the three years ended October 31, 1999
Consolidated Statements of Cash Flows for the three years ended October 31, 1999
CURRENT ASSETS: Cash and cash equivalents $ 30,145,855 $ 20,885,903 United States Treasury Bills, at cost 15,296,768 16,445,339 Accounts receivable, net 6,957,454 8,163,882 Prepaid expenses 712,651 653,281 ---------- ---------- Total current assets 53,112,728 46,148,405
CURRENT LIABILITIES: Accounts payable $5,535,592 $3,502,872 Accrued expenses 1,001,465 637,205 Accrued commissions 1,207,740 1,001,178 Reserve for claims 2,241,963 1,622,361 Other liabilities 487,867 311,135 ------------ -----------
OTHER INCOME (EXPENSE): Interest income 1,869,802 1,483,296 771,702 Interest expense (15,000) (15,000) (27,968) Other income - 500,000 - -------- ------- ------- Income before provision for income taxes 4,574,398 5,441,475 3,535,221
PROVISION FOR INCOME TAXES 1,759,591 2,137,673 1,398,548 --------- --------- --------- Net income $ 2,814,807 $ 3,303,802 $ 2,136,673 =========== =========== ===========
Basic $ .60 $ .71 $ .62 ======= ======= ======= Weighted average shares outstanding 4,664,632 4,635,301 3,434,008 ========= ========= =========
Accum- ulated Other Common Stock Additional Compre- Number Paid-in Retained hensive of Amount Capital Earnings Loss Total Shares
BALANCE AT OCTOBER 31,1996 3,384,233 $33,843 $ 4,347,592 $1,523,880 $ - $ 5,905,315
Shares issued pursuant to exercise of warrants 1,218,983 12,190 6,692,216 - - 6,704,406
Net income for the year ended October 31,1998 - - - 3,303,802 - 3,303,802
BALANCE AT OCTOBER -------- ------ ---------- --------- ----- --------- 31, 1998 4,650,916 46,509 11,104,699 6,964,355 - 18,115,563
COMPREHENSIVE INCOME: Net income for the year ended October 31, 1999 - - - 2,814,807 - 2,814,807
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED OCTOBER 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,814,807 $ 3,303,802 $ 2,136,673 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 519,315 427,173 339,891 Deferred income taxes (691,454) (636,072) (638,791) Increase (decrease) in cash resulting from changes in operating assets and liabilities: Accounts receivable 1,206,428 728,081 (4,753,912) Prepaid expenses (59,370) (285,349) (117,763) Restricted cash (564,332) (318,788) 342,437 Other assets (1,688,211) (845,368) (2,839) Accounts payable 2,032,720 573,396 1,359,579 Accrued expenses 364,260 (403,516) 528,606 Accrued commissions 206,562 (79,000) 531,706 Reserve for claims 619,602 501,834 466,680 Other liabilities 176,732 69,537 85,846 Deferred contract revenue 8,481,286 7,786,416 7,799,889 Contingency payable 564,332 318,788 (342,437) ---------- ---------- -----------
Net cash provided by operating activities 13,982,677 11,140,934 7,735,565 ---------- ---------- ---------
In February 1999, the Company formed a subsidiary, Uautobid.com, which has developed an internet web site where a car buyer can purchase a new or used vehicle online directly from a participating dealer. The Company will issue a warranty for each vehicle sold by Uautobid.com. As of October 31, 1999, Uautobid.com had not generated significant revenues.
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions and balances have been eliminated in consolidation. As required for insurance companies, NSC has a December 31 year end.
115, "Accounting for Certain Investments in Debt and Equity Securities". Securities classified as available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity (on an after tax basis as part of comprehensive income). Gains and losses on the disposition of securities are recognized on the specific identification method in the period in which they occur.
Furniture, fixtures and equipment are stated at cost. Depreciation for all assets acquired prior to fiscal 1995 is calculated using accelerated methods over the estimated useful lives of the assets. Depreciation for all assets acquired thereafter is calculated using the straight line method over the estimated useful lives of the assets. The asset lives are as follows:
Certain of the service contract programs offered by the Company provide that the claim reserves generated by each dealer be placed in interest-bearing accounts maintained by The Chase Manhattan Bank. To the extent such reserves are unconsumed on expired contracts, then (a) with respect to dealers who reach specified sales volumes of service contracts, such unconsumed reserves and any interest earned thereon are distributed (subject to the underwriter's consent based on its satisfaction that a dealer's reserves are in an amount in excess of an actuarially acceptable level) to the dealer and (b) with respect to each other dealer, such unconsumed reserves and any interest earned thereon are distributed to the Company (subject to the underwriter's consent based on its satisfaction that a dealer's reserves are in an amount in excess of an actuarially acceptable level). The Company did not receive a distribution of such unconsumed reserves in the year ended October 31, 1999. The Company received approximately $122,000 and $254,000 of such unconsumed reserves for the years ended October 31, 1998 and 1997, respectively, which are reflected in revenues in the accompanying consolidated statements of operations. The balance in these interest-bearing accounts totaled approximately $1,748,000 and $1,150,000 at October 31, 1999 and 1998, respectively. The same amounts have been reflected as contingency payable in the accompanying consolidated balance sheets.
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive Income," which requires companies to report all changes in equity during a period. Comprehensive income is the total of net income and other comprehensive income/loss which includes unrealized gains/losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. Included in other comprehensive loss for the period ending October 31, 1999 is $57,883 of unrealized losses on available for sale securities.
Less: Accumulated depreciation and amortization 1,371,083 897,478 --------- --------- $1,779,234 $1,551,572 ========= ========== 3. INCOME TAXES:
State: Current 483,348 590,915 473,106 Deferred (173,798) (155,200) (175,268) --------- ---------- ---------- $1,759,591 $2,137,673 $1,398,548 ========== ========== ==========
In connection with a July 1994 public offering of Common Stock, the Company issued warrants for the purchase of 1,225,100 shares of its Common Stock at a price per share of $5.50. On September 29, 1997 the Company exercised its right to redeem all of its outstanding warrants. The warrants remained exercisable until October 29, 1997, thirty days after the date of the redemption notice. As of October 29, 1997, 1,218,983 of the 1,225,100 then outstanding warrants had been exercised by the holders thereof for a price of $5.50 per share and the Company received proceeds of $6,704,406 in connection therewith. All remaining warrants are no longer excercisable.
As of October 31, 1999, options to purchase 198,565 shares were exercisable and 12,400 shares were available for future grant.
On June 12, 1996, the Company granted certain officers non-qualified stock options for the purchase of 180,000 shares of common stock at a weighted average exercise price of $4.63 per share. Similarly, on January 7, 1998, the Company granted a certain officer non-qualified stock options for the purchase of 6,000 shares of common stock at an exercise price of $9.313 per share. The exercise prices exceeded the market value per share on the dates of grant. The options were immediately exercisable and expire ten years from the dates of grant.
In September 1999, the Company's Uautobid.com subsidiary granted a total of 1,565,000 options to its directors and officers and various employees and directors of the Company and outside consultants. The options expire ten years after the date of grant and have an exercise price of $.10 per share which, in management's view, equaled or exceeded the fair market value of the subsidiary's common stock at the date of grant. The Company currently owns 7,500,000 shares of common stock of Uautobid.com, Inc., and the options, if exercised in full, would represent approximately 17% of the issued and outstanding shares of the subsidiary.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for options granted in fiscal 1999, 1998 and 1997 as described by the provisions of SFAS No. 123, the Company's net income and diluted net income per share would have been decreased as indicated below:
In April 1997, the Company made a loan to one of its officers in the amount of $110,000. The loan bears interest at 7 percent per annum, payable quarterly, and is due in full in April 2002. Interest income of $5,203, $6,595 and $3,375 was recognized for the years ended October 31, 1999, 1998 and 1997, respectively. The balance outstanding at October 31, 1999 was $70,000.
In January 1998, the Company entered into an agreement with a subsidiary of Orion Capital ("Orion") to underwrite a portion of the insurance coverage arranged by the Company for its service contract customers. Concurrently, Orion entered into a reinsurance agreement with Target Insurance Ltd. ("Target"), which is owned by certain shareholders of the Company, which provided reinsurance for losses to Orion under its agreement with the Company. During fiscal 1999 and 1998, Target received approximately $15,000 and $2,100, respectively, in premiums under its agreement with Orion. In addition, in January 1998, NSC entered into a reinsurance agreement with a subsidiary of Orion which
provides reinsurance for losses to NSC under certain circumstances. Concurrently, the Company entered into agreements to indemnify Orion and Target for any losses incurred under the aforementioned agreements. There were no such losses, and there were no payments made by the Company under the indemnification agreements in fiscal 1999 or 1998. In fiscal 1997 the Company and NSC had similar reinsurance agreements with Reliance National Indemnity Company, which agreements were terminated in December 1997.
On February 1, 1999, the Company entered into an Amended and Restated Employment Agreement with Lawrence J. Altman providing for his employment as Senior Vice President, Marketing, of the Company. This agreement terminates on January 31, 2004. Mr. Altman is to be paid an annual salary of $70,710, which may be increased annually in the discretion of the Company. Mr. Altman is also entitled to receive monthly commissions equal to 2% of (i) all administrative fees for vehicle service contracts and vehicle warranties paid to the Company during each calendar month minus (ii) the aggregate selling expenses incurred by the Company for such month minus (iii ) $150,000. In addition to his annual salary and monthly commissions, Mr. Altman may also be paid an annual performance bonus in an amount, if any, determined at the discretion of the Board of Directors.
In the normal course of business, the Company is a party to various claims and/or litigation. Management believes that the settlement of all such claims and/or litigation, considered in the aggregate, will not have a material adverse effect on the Company's financial position and results of operations.
Basic EPS Net income attributable to common shares $2,814,807 4,664,632 $.60
Effect of dilutive securities: stock options and warrants - 315,368 (.03) ---------- --------- -----
Diluted EPS Net income attributable to common shares and assumed option and warrant exercises $2,814,807 4,980,000 $.57 ========== ========= ====
Basic EPS Net income attributable to common shares $3,303,802 4,635,301 $.71
Diluted EPS Net income attributable to common shares and assumed option and warrant exercises $3,303,802 4,960,939 $.67 ========== ========= ====
Basic EPS Net income attributable to common shares $2,136,673 3,434,008 $.62
Effect of dilutive securities: stock options and warrants - 515,736 (.08) ---------- -------- ----
The following is a summary of unaudited quarterly financial information for the years ended October 31, 1999 and 1998:
Revenues $11,534,491 $13,749,522 $15,343,542 $15,524,058 Operating income 381,983 814,463 1,139,635 383,515 Net income 491,441 749,267 991,064 583,035 Basic earnings per share .11 .16 .21 .12 Diluted earnings per share .10 .15 .20 .12