The Company currently occupies approximately 26,500 square feet of office space at 333 Earle Ovington Blvd., Mitchel Field, New York 11553. Of such space, 13,000 square feet are occupied pursuant to a ten-year lease which commenced March 1, 1995, at an initial annual rent of approximately $300,000, and the remaining 13,500 square feet are occupied pursuant to a six-year sublease which commenced October 1996 and was amended in November 1997, at an amended annual rent of approximately $237,000. (See Note 8 to the Notes to Consolidated Financial Statements for future lease payments under this lease and sublease.)
Revenues increased approximately $5,503,000, or 10%, to approximately $61,655,000 for the year ended October 31, 2000 as compared to approximately $56,152,000 for the year ended October 31, 1999. 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 fees resulting from an increase in the fees charged per contract.
Selling, general and administrative expenses increased by approximately $1,700,000, or 7%, to approximately $26,539,000 for the year ended October 31, 2000, up from approximately $24,839,000 for the year ended October 31, 1999. This increase was in large part due to: (i) increased commissions paid as a result of increased sales revenue; and (ii) increased personnel costs. Selling, general and administrative expenses were 43% of revenues for the year ended October 31, 2000 as compared to 44% for the year ended October 31, 1999.
Investment income increased by approximately $1,342,000, or 72%, to approximately $3,212,000 for the year ended October 31, 2000, as compared to approximately $1,870,000 for the same period in 1999. The increase is primarily a result of investment income generated by funds provided by operating activities in the twelve months ended October 31, 2000 and a shift of investments from short term United States Treasury Bills to longer term government securities which provide a greater yield.
Net income for the year ended October 31, 2000 was approximately $2,067,000, as compared to approximately $2,815,000 for the same period in 1999. Diluted income per share from continuing operations for the year ended October 31, 2000 decreased by $.01 to $.61 per share, as compared to $.62 per share for the same period in 1999. Diluted net income per share for the year ended October 31, 2000 was $.44 as compared to diluted net income per share of $.57 for the same period in 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 claims expense.
Selling, general and administrative expenses increased by approximately $3,004,000, or 14%, to approximately $24,839,000 for the year ended October 31, 1999, up from approximately $21,835,000 for the year ended October 31, 1998. 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 revenue; and (ii) increases in general and administrative expenses due to increased personnel and printing costs resulting from increased sales volume and the development of new service contract products. Selling, general and administrative expenses were 44% of revenues for both years ended October 31, 1999 and October 31, 1998.
The Company intends to spend approximately $350,000 in fiscal 2001 for the purchase of computer hardware and software and telephone equipment to enable the Company to increase its efficiency in administering contracts and to expand its internet presence.
Consolidated Statements of Operations for the three years ended October 31, 2000
Consolidated Statements of Cash Flows for the three years ended October 31, 2000
We have audited the accompanying consolidated balance sheets of Interstate National Dealer Services, Inc. (a Delaware corporation) and subsidiaries as of October 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended October 31, 2000. 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.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Income taxes $ 2,059,618 $ 2,384,824 $2,915,254 =========== =========== ========== Interest $ 15,000 $ 15,000 $ 15,000 =========== ========== ===========
Government Securities 19,568,665 13,436 (45,122) 19,536,979 Corporate Bonds 948,736 - (2,707) 946,029 ---------- -------- ----------- ---------- $20,517,401 $ 13,436 $(47,829) $20,483,008 =========== ======== ========= ==========
Government Securities $4,293,220 $ - $(49,958) $4,243,262 Corporate Bonds 948,737 - (7,925) 940,812 --------- ------- ---------- --------- $5,241,957 $ - $(57,883) $5,184,074 ========== ======= ======== ==========
Investment income for the years ending October 31, 2000, 1999, and 1998 was $3,212,400, $1,869,802 and $1,483,296, respectively.
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 $6,471,000 and $1,912,000 at October 31, 2000 and 1999, 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, 2000, 1999 and 1998, the Company received approximately $219,000, $227,000 and $195,000, respectively, of such funds, which are reflected in revenues in the accompanying consolidated statements of operations. The balance in this escrow account totaled approximately $785,000 and $768,000 at October 31, 2000 and 1999, respectively. The same amounts have been reflected as contingency payable in the accompanying consolidated balance sheets.
The Company accounts for stock-based compensation in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation". This pronouncement establishes a fair value based method of accounting and reporting for stock-based compensation. Under SFAS No. 123, companies may elect to follow the new fair value based method or to continue to report under Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". The Company has elected to follow the accounting guidance of APB 25 with pro forma disclosure of the fair value method specified in SFAS No. 123.
In June 1998, The Financial Accounting Standards Board Issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 (as amended by SFAS No. 137) and will not require retroactive restatement of prior period financial statements. This statement requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet measured at fair value. Derivative instruments will be recognized as gains or losses in the period of change. If certain conditions are met where the derivative instrument has been designated as a fair value hedge, the hedged item may also be marked to market through earnings thus creating an offset. If the derivative is designed and qualifies as a cash flow hedge, the changes in fair value of the derivative instrument may be recorded in comprehensive income. The Company presently does not make use of derivative instruments.
Less: Accumulated depreciation and Amortization 1,906,110 1,371,083 --------- --------- $1,440,152 $1,779,234 ========= ==========
October 31, 2000 1999 1998 ---- ----- ----- U.S. Federal statutory rate 34% 34% 34% State income taxes, net of Federal benefit 4 5 5 --- --- --- Effective tax rate 38% 39% 39% === === ===
The deferred income taxes of approximately $3,732,000 which have been paid as of October 31, 2000, result from temporary differences between the financial accounting and income tax treatment of deferred contract revenue.
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, 2000 and 1999, no amounts had been borrowed under the credit facility.
The following options to purchase the Company's common shares were outstanding under the Plan at October 31, 2000:
The exercise prices were equal to, or 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.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, the Company has chosen to continue to account for stock based employee compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. In accordance with APB Opinion No. 25, no compensation cost has been recognized by the Company, as all option grants have been made at the fair market value of the Company's stock on the date of grant. . 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 2000, 1999 and 1998 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:
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 following weighted-average assumptions were used for grants in 1998: dividend yield of 0%; expected volatility of 50%; risk-free interest rate of 4.6%; expected life of 5 years and a fair value of $2.74.
$.40 47,967 2.51 $0.40 47,967 $0.40 1.3125- 1.9688 72,000 4.80 1.58 61,500 1.58 4.00-6.00 568,434 6.84 4.77 507,434 4.74 6.75-9.313 40,800 7.28 7.52 20,800 7.85
The Board of Directors of the Company has approved the purchase of up to 1,000,000 shares of treasury stock. As of October 31, 2000, the Company has purchased 443,700 shares of treasury stock at an average price of $5.15 per share.
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 shareholders of the Company, which provided reinsurance for losses to Orion under its agreement with the Company. During fiscal 2000, 1999 and 1998, Target received approximately $52,600, $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 2000, 1999 or 1998.
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 and 1998. In fiscal 2000, the Company amended the plan and matched 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 contribution for fiscal 2000 was approximately $28,000. 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 year ended October 31, 2000. Approximately $101,000 and $82,000 was contributed by the Company for the years ended October 31, 1999 and 1998, respectively.
Concurrent with the Orion agreements explained in Note 6, the Company issued two letters of credit through its principal lending institution in the amount of $1,750,000 and $250,0000. These letters of credit are irrevocable and have one-year renewable terms. Under the terms of the Orion agreements, the Company has committed to pay Orion a minimum of $928,800 in premiums for the period July 1999 through March 2001.
Fiscal year Amount ----------- ------ 2001 $666,000 2002 465,000 2003 462,000 2004 479,000 2005 137,000 ------------ $2,209,000
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, 2010, but is automatically extended for additional one-year periods unless
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, 2010, 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, 2004. Mr. Altman is to be paid an annual salary of $70,710, which may be increased annually at 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.