The following table summarizes certain selected financial data, which should be read in conjunction with the Company's consolidated financial statements and notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. The selected financial data below as of and for each of the fiscal years in the five year period ended October 31, 2001 are derived from the audited consolidated financial statements of the Company.
Selling, general and administrative expenses decreased by approximately $13,000, or 0.001%, to approximately $26,526,000 for the year ended October 31, 2001, as compared to approximately $26,539,000 for the year ended October 31, 2000. This decrease was in large part due to decreased commissions and printing costs resulting from a decrease in sales revenue, mostly offset by increases in personnel, promotional, legal and banking costs. Selling, general and administrative expenses were 44% of revenues for the year ended October 31, 2001 as compared to 43% for the year ended October 31, 2000.
Investment income increased by approximately $630,000, or 20%, to approximately $3,842,000 for the year ended October 31, 2001, as compared to approximately $3,212,000 for the same period in 2000. The increase is primarily a result of investment income generated by funds provided by operating activities in the twelve months ended October 31, 2001 and a shift of investments from one and two year United States Treasury Notes to longer term government securities which provide a greater yield.
Nonrecurring loss was approximately $4,359,000 for the year ended October 31, 2001. The Company and NSC, the Company's insurance subsidiary, were involved in certain legal proceedings and related litigation with CECO Management Corp. ("CECO"), a Texas based company operating under the name "Warranty Gold", and its successor. On October 12, 2001, the Company and the other parties involved in or related to the cases resolved and settled these proceedings. As part of the settlement, the Company transferred all administrative responsibilities and insurance coverages with respect to the Warranty Gold service contracts to a third party. The cost to the Company of the settlement, including legal fees, was approximately $4,359,000.
Income (loss) from continuing operations before provision for income taxes decreased by approximately $5,567,000, or 120%, to approximately $(942,000) for the year ended October 31, 2001, as compared to approximately $4,625,000 for the same period in 2000. For the year ended October 31, 2001, the Company recorded a benefit from income taxes on continuing operations of approximately $689,000, as compared to a provision for income taxes on continuing operations of approximately $1,755,000 in the same period in 2000. The effective tax rate in fiscal 2001 was reduced as a result of nontaxable interest income earned on municipal bonds. Income (loss) from continuing operations was approximately $(253,000) for the year ended October 31, 2001, as compared to approximately $2,871,000 for the year ended October 31, 2000. Income from continuing operations before provision for income taxes, excluding the nonrecurring item referred to above, decreased by approximately $1,208,000, or 26%, to approximately $3,417,000 for the year ended October 31, 2001, as compared to approximately $4,625,000 for the same period in 2000.
Loss from discontinued operations net of taxes was approximately $803,000 for the year ended October 31, 2000. The loss from discontinued operations resulted from costs incurred by the Company's subsidiary, Uautobid.com, to develop and finance its car buying web site. In July 2000, after an extensive review and evaluation, the Company decided to abandon the operations of its Uautobid.com subsidiary. The Company determined that further investment in this operation was not prudent due to the higher level of risk associated with the rapidly changing and increasingly competitive internet car buying market.
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the three years ended October 31, 2001
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED OCTOBER 31, 2001
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE THREE YEARS ENDED OCTOBER 31, 2001
The accompanying notes to financial statements are an integral part of these consolidated statements.
The Company accounts for investments in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company's short-term investments consist of Treasury Bills which are stated at cost, and which approximate fair market value at October 31, 2001 and 2000. The Company's Marketable Securities consist of securities held to maturity and securities available for sale. Securities held to maturity include long term Treasury Bills, maturing between one and two years. Long term Treasury Bills at October 31, 2001 and 2000 total $11,217,858 and $14,444,690, respectively, and are stated at amortized cost. Securities available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported separately as a 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.
Government Securities $25,463,943 $527,128 $ - $25,991,071 ----------- ------- ------- -----------
In January 1998, the Company entered into an agreement with a subsidiary of Orion Capital, a member company of Royal and SunAlliance USA ("Orion"), to underwrite a portion of the insurance coverage arranged by the Company for its service contract customers. Pursuant to the terms of the agreement, the Company deposits certain funds collected on the sale of contracts insured by Orion into an escrow account. The balance of this escrow account, which totaled approximately $11,074,000 and $6,471,000 at October 31, 2001 and 2000, respectively, is included in restricted cash.
Pursuant to an agreement among the Company, one of the non-affiliated underwriters of the insurance policies administered by the Company and its managing agent, a specified amount is required to be deposited into an escrow account for each contract sold by the Company and underwritten by such insurer. These funds held in escrow by an independent third party are to be used for paying the costs of administering service contracts should the Company be unable to do so for any reason. Under the agreement, the Company is entitled to receive on a quarterly basis, any funds in excess of a specified amount for each active service contract. For the years ended October 31, 2001, 2000 and 1999, the Company received approximately $242,000, $219,000 and $227,000, respectively, of such funds, which are reflected in revenues in the accompanying consolidated statements of operations. The balance in this escrow account totaled approximately $679,000 and $785,000 at October 31, 2001 and 2000, respectively. The same amounts have been reflected as contingency payable in the accompanying consolidated balance sheets.
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 years ended October 31, 2001, October 31, 2000 and October 31, 1999. The balance in these interest-bearing accounts totaled approximately $1,459,000 and $1,695,000 at October 31, 2001 and 2000, respectively. The same amounts have been reflected as contingency payable in the accompanying consolidated balance sheets.
The Company follows the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" which requires companies to report certain information by operating segment. The Company currently believes it operates in one segment.
The Company reports earnings per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share". Basic net income per share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share ("Diluted EPS") is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the statements of operations (See Note 9).
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and 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.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and other Intangible Assets". SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently, if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The impact of the adoption of SFAS No. 141 and 142 was not significant.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2001. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30 "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The Statement retains the fundamental provisions of SFAS No. 121 for recognition and measurement of impairment, but amends the accounting and reporting standards for segments of a business to be disposed of. The provisions of this statement are required to be adopted no later than fiscal years beginning after December 31, 2001, with early adoption encouraged. The Company does not currently own such tangible long-lived assets.
State: Current (69,488) 364,616 483,348 Deferred (175,949) (223,453) (173,798) ----------- --------- --------- (689,255) 1,197,616 1,759,591 Plus: tax benefits from discontinued operations - 557,035 189,842 ------- --------- ----------
(Benefit) provision for income taxes from continuing operations $ (689,255) $1,754,651 $1,949,433 =========== ========== ==========
Deferred income taxes of approximately $4,238,000 and $3,732,000 at October 31, 2001 and October 31, 2000, respectively, result primarily from temporary differences between the financial accounting and income tax treatment of deferred contract revenue. Prepaid expenses of approximately $2,118,000 at October 31, 2001 include approximately $1,640,000 of prepaid income taxes.
The following options to purchase the Company's common shares were outstanding under the Plan at October 31, 2001:
Granted 43,000 5.22 Exercised (15,000) 4.00 Expired (2,000) 5.38 --------- October 31, 2000 226,800 $5.38 Expired (4,000) 5.54 -------- October 31, 2001 222,800 $5.38
(Loss) income from continuing operations As reported ($252,985) $2,870,658 $3,088,560 Pro forma (335,953) 2,609,350 2,992,378 Net (loss) income As reported (252,985) 2,067,412 2,814,807 Pro forma (335,953) 1,806,104 2,718,625 Diluted (loss) income per share from continuing operations As reported (.06) .61 .62 Pro forma (.08) .55 .60 Diluted net (loss) income per share As reported (.06) .44 .57 Pro forma (.08) .38 .55
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants in 2000: dividend yield of 0%; expected volatility of 50%; risk-free interest rate of 6.65%; expected life of 5 years and a fair value of $2.47. The following weighted-average assumptions were used for grants in 1999: dividend yield of 0%; expected volatility of 50%; risk-free interest rate of 5.13%; expected life of 5 years and a fair value of $5.34.
The summary of options outstanding at October 31, 2001 is as follows:
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 $1,750, $3,514 and $5,203 was recognized for the years ended October 31, 2001, 2000 and 1999, respectively. The balance outstanding at October 31, 2001 was $20,000.
In January 1998, the Company entered into an agreement with a subsidiary of 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 of the officers and shareholders of the Company, which provided reinsurance for losses to Orion under its agreement with the Company. During fiscal 2001, 2000 and 1999, Target received approximately $58,100, $52,600 and $15,000, 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 2001, 2000 or 1999.
6. EMPLOYEE BENEFIT PLAN: ---------------------- The Company maintains a 401(k) Profit Sharing Plan covering substantially all full-time employees, and provides for employee contributions of up to 15% of their salary. The Company did not match employee contributions in fiscal 1999. In fiscal 2000, the Company amended the plan to match employee contributions up to 50% of the first 3% of each employee's contribution, not to exceed 1 1/2% of the employee's gross salary. The Company's matching contributions for fiscal 2001 and fiscal 2000 were approximately $54,000 and $28,000, respectively. The Company makes contributions to the profit sharing portion of the plan which is discretionary and non-contributory. The Company did not make a contribution for the years ended October 31, 2001 and 2000. Approximately $101,000 was contributed by the Company for the year ended October 31, 1999.
On November 1, 1998, the Company entered into an Amended and Restated Employment Agreement with Chester J. Luby providing for his employment as Chairman of the Board of Directors and Chief Executive Officer of the Company. The agreement terminates on December 31, 2011, but is automatically extended for additional one-year periods unless either party provides written notice that no further extensions shall be granted. The employment agreement provides for total compensation as the sum of his annual salary, annual bonus and annual performance bonus (if any) for that fiscal year. The annual salary of $250,000 may be increased annually at the discretion of the Board of Directors. The annual bonus is calculated based on the earnings of the Company and is equal to the greater of $150,000 or 4 1/2% of the Company's earnings before interest and taxes for the fiscal year. The annual performance bonus may be granted each year at the discretion of the Board of Directors. In the event of Mr. Luby's death or the termination of his employment agreement the amount the Company paid for his split-dollar life insurance policies which are recorded as non-interest bearing loans and totaled approximately $437,000 and $374,000 as of October 31, 2001 and 2000, respectively, will be reimbursed to the Company.
On November 1, 1998, the Company entered into an Amended and Restated Employment Agreement with Cindy H. Luby providing for her employment as President and Chief Operating Officer of the Company. The agreement terminates on December 31, 2011, but is automatically extended for additional one-year periods unless either party provides written notice that no further extensions shall be granted. The employment agreement provides for total compensation as the sum of her annual salary, annual bonus and annual performance bonus (if any) for that fiscal year. The annual salary of $175,000 may be increased annually at the discretion of the Board of Directors. The annual bonus is calculated based on the earnings of the Company and is equal to the greater of $100,000 or 3 1/2% of the Company's earnings before interest and taxes for the fiscal year. The annual performance bonus may be granted each year at the discretion of the Board of Directors.
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, 2007. Mr. Altman is to be paid an annual salary of $70,710, which may be
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 current 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.
The Company was involved in certain legal proceedings and related litigation. In October 2001, the Company and the other parties involved in or related to the cases resolved and settled these proceedings. The cost of the settlement to the Company, including legal fees , was approximately $4,359,000.
Diluted EPS Net income attributable to common shares and assumed option and warrant exercises $2,067,412 4,709,794 $.44 ========== ========= ====
The following is a summary of unaudited quarterly financial information for the years ended October 31, 2001 and 2000:
Revenues $12,878,138 $14,739,473 $16,821,849 $15,413,858 Operating (loss) income (456,011) 207,401 174,135 (350,809) Net income (loss) 319,515 870,359 639,861 (2,082,720) Basic earnings (loss) per share .08 .21 .16 (.52) Diluted earnings (loss) per share .07 .20 .15 (.52)