For the Year ended October 31, 1999 compared to the Year ended October 31, 1998
Selling, general and administrative expenses increased by approximately $3,467,000, or 16%, to approximately $25,302,000 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) Uautobid.com expenses; (ii) increases in selling expenses primarily due to increased commissions paid as a result of increased sales revenue; and (iii) 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. Uautobid.com expenses of approximately $504,000 were incurred in the fourth quarter of fiscal 1999 as the Company improved its web site and expanded its nationwide network of dealers who will provide inventory of new and used cars to be auctioned to the public on the Company's Uautobid.com internet web site. Selling, general and administrative expenses were 45% of revenues for the year ended October 31, 1999 as compared to 44% for the year ended October 31, 1998.
Diluted net income per share for the year ended October 31, 1999 was $.57 per share as compared to diluted net income per share of $.67 for the same period in 1998. Excluding the Uautobid.com expenses and the $500,000 non-recurring gain on settlement, diluted net income per share for the year ended October 31, 1999 was $.63 per share, or $.02 per share greater than diluted net income per share for the year ended October 31, 1998.
For the year ended October 31, 1998, the Company had income before income taxes of approximately $5,442,000 and recorded a provision for income taxes of approximately $2,138,000, as compared to income before income taxes of approximately $3,535,000 and a provision for income taxes of approximately $1,398,000 in the same period in 1997. Net income increased approximately $1,167,000, or 55%, to approximately $3,304,000 for the year ended October 31, 1998 as compared to approximately $2,137,000 for the year ended October 31, 1997.
Cash and cash equivalents, United States Treasury Bills, at cost, and marketable securities were approximately $50,627,000 at October 31, 1999, as compared to approximately $37,331,000 at October 31, 1998. The increase of approximately $13,296,000 was primarily the result of cash provided by the Company's operating activities less cash used for the purchase of furniture, fixtures and equipment.
Consolidated Statements of Stockholders' Equity for the three years ended October 31, 1999
We have audited the accompanying consolidated balance sheets of Interstate National Dealer Services, Inc. (a Delaware corporation) and subsidiaries as of October 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1999. 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interstate National Dealer Services, Inc. and subsidiaries as of October 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles.
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1999 AND 1998
FURNITURE, FIXTURES AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $1,371,083 and $897,478, respectively 1,779,234 1,551,572
INTANGIBLE ASSETS, less accumulated amortization of $161,667 and $151,667 respectively 63,333 73,333
COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share; authorized 1,000,000 shares; no issued shares - -
Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding 4,671,284 and 4,650,916 shares, respectively 46,713 46,509 Additional paid-in-capital 11,156,423 11,104,699 Retained earnings 9,779,162 6,964,355 Accumulated other comprehensive loss (57,883) - ----------- ---------- Total stockholders' equity 20,924,415 18,115,563 ------------ ----------- $ 68,661,087 $ 53,406,741 ============ ============
The accompanying notes to financial statements are an integral part of these consolidated balance sheets.
OPERATING COSTS AND EXPENSES: Costs of services provided 28,129,523 23,974,988 16,846,370 Selling, general and administrative expenses 25,302,494 21,835,259 18,290,862 ---------- ---------- ----------
Diluted $ .57 $ .67 $ .54 ======= ======= ======= Weighted average shares outstanding 4,980,000 4,960,939 3,949,744 ========= ========= =========
Shares issued pursuant to exercise of stock options 19,800 198 12,246 - - 12,444
Net income for the year ended October 31, 1997 - - - 2,136,673 - 2,136,673 --------- ------ --------- --------- ------ --------- BALANCE AT OCTOBER 31, 1997 4,623,016 46,231 11,052,054 3,660,553 - 14,758,838
Shares issued pursuant to exercise of stock options 27,900 278 52,645 - - 52,923
Shares issued pursuant to exercise of stock options 20,368 204 51,724 - - 51,928
Other comprehensive loss: Unrealized loss on available for sale securities - - - - (57,883) (57,883) ---- ----- ------ --------- ------- ------- Total comprehensive income for the year ended October 31, 1999 - - - 2,814,807 (57,883) 2,756,924 ---- ----- ------ --------- ------- ------- BALANCE AT OCTOBER 31, 1999 4,671,284 $46,713 $11,156,423 $9,779,162 $(57,883) $20,924,415 ========= ====== ========== ========= ======= =========
CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of United States Treasury Bills 1,148,571 (10,435,002) (6,010,337) Net purchases of marketable securities (5,241,957) - - Purchase of furniture, fixtures, and equipment (701,267) (739,476) (555,757) Note from related party 20,000 20,000 (110,000) ------ ------ --------- Net cash used in investing activities (4,774,653)(11,154,478) (6,676,094) ---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of warrants - - 6,704,406 Payment of long-term debt to related party - - (160,000) Proceeds from exercise of stock options 51,928 52,923 12,444 ------- ------ ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,885,903 20,846,524 13,230,203 ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $30,145,855 $20,885,903 $20,846,524 =========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Income taxes $ 2,384,824 $ 2,915,254 $2,083,791 =========== =========== ========== Interest $ 15,000 $ 15,000 $ 27,968 =========== ========== ===========
Interstate National Dealer Services, Inc. and subsidiaries (the "Company") designs, markets and administers service contracts and warranties for new and used motor vehicles and recreational vehicles and, to a lesser extent, watercraft, motorcycles and other vehicles. A service contract may be sold by any of the following entities: (1) either the seller originating the sale of the vehicle, (2) the financial institution financing the sale of the vehicle, or (3) other entities, including the Company, which sell the contract to the owner of the vehicle after the vehicle has been purchased. A vehicle service contract is an agreement between either the seller or the administrator of the service contract and the vehicle purchaser under which the seller or the administrator agrees to replace or repair for a specific term designated vehicle parts in the event of a mechanical breakdown. Vehicle service contracts supplement, or are in lieu of, manufacturers' warranties and provide a variety of extended coverage options (typically ranging from three months to seven years and/or 3,000 miles to 150,000 miles) generally offered for sale by sellers to vehicle purchasers in a manner similar to other options. The Company enters into a non-exclusive agreement with each seller, under which the Company obtains insurance coverage to cover such seller's liability for claims under its vehicle service contracts and assists such seller, and purchasers, with the making, processing and adjustment of claims. In April 1995, the Company formed an affiliated insurance company, National Service Contract Insurance Company Risk Retention Group, Inc. ("NSC"). Commencing March 1996, the insurance policies arranged by the Company as administrator to its dealers were underwritten by NSC and a single non-affiliated insurance company. In January 1998, the Company entered into an agreement with a second non-affiliated insurance company to underwrite a portion of its service contracts.
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No.
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, 1999, 1998 and 1997, the Company received approximately $227,000, $195,000 and $136,000, respectively, of such funds, which are reflected in revenues in the accompanying consolidated statements of operations. The balance in this escrow account totaled approximately $768,000 and $802,000 at October 31, 1999 and 1998, respectively. The same amounts have been reflected as contingency payable in the accompanying consolidated balance sheets.
Reserve for claims represents claims that were approved for payment as of October 31, 1999 and 1998, but not paid as of those respective dates.
Furniture, fixtures and equipment consists of the following: October 31, 1999 1998 ---- ---- Furniture and fixtures $771,126 $624,366
Office equipment 2,113,458 1,616,828 Leasehold improvements 265,733 207,856 ----------- --------- 3,150,317 2,449,050
1999 1998 1997 ---- ---- ---- Federal: Current $1,967,697 $2,182,830 $1,564,233 Deferred (517,656) (480,872) (463,523)
October 31, 1999 1998 1997 ---- ----- ----- U.S. Federal statutory rate 34% 34% 34% State income taxes, net of Federal benefit 4 5 6 --- --- --- Effective tax rate 38% 39% 40% === === ===
The deferred income taxes of approximately $2,819,000 which have been paid as of October 31, 1999, 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, 1999 and 1998, 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, 1999: Weighted Average Number Exercise of Shares Price
October 31, 1996 276,834 $2.10 Exercised (19,800) .63 Canceled (3,400) 1.41 ---------- October 31, 1997 253,634 $2.23 Exercised (16,300) .53 ---------- October 31, 1998 237,334 $2.35 Exercised (10,868) .74 Expired (900) 1.31 -------- October 31, 1999 225,566 $2.43 =======
On December 18, 1995 the Board of Directors of the Company approved the 1996 Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes the granting of incentive awards through grants of share options, grants of share appreciation rights, grants of share purchase awards and grants of restricted share awards to those individual directors and/or employees who are instrumental to the success of the Company. The aggregate number of shares which may be issued pursuant to the Incentive Plan shall not exceed 300,000. The majority of options issued under the Incentive Plan are exercisable in increments of 20% of the underlying option shares per annum following the first anniversary of the issuance date. However, no option shall be exercisable after the expiration of ten years from the date the option was granted.
The following options to purchase the Company's common shares were outstanding under the Incentive Plan at October 31, 1999: Weighted Average Number Exercise of Shares Price
October 31, 1996 105,000 $4.36 Granted 37,500 6.73 -------- October 31, 1997 142,500 $4.98 Granted 93,000 5.375 Exercised (9,800) 4.24 -------- October 31, 1998 225,700 $5.18 Granted 15,000 7.13 Exercised (9,500) 4.62 Expired (30,400) 4.63 -------- October 31, 1999 200,800 $5.43 =======
As of October 31, 1999, options to purchase 114,400 shares were exercisable and 79,900 shares were available for future grant.
Net income - as reported $2,814,807 $3,303,802 $2,136,673 Net income - pro forma 2,718,625 3,230,760 2,098,580 Diluted net income per share - as .57 .67 .54 reported Diluted net income per share - .55 .65 .53 pro forma
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 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 $3.54. 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. The following weighted-average assumptions were used for grants in 1997: dividend yield of 0%; expected volatility of 50%; risk-free interest rate of 6.5%; expected life of 5 years and a fair value of $3.48.
In September 1995, the Board of Directors of the Company adopted a Shareholders Rights Plan (the "Rights Plan") to help protect the Company's stockholders against certain coercive takeover tactics commonly used by corporate raiders to deprive stockholders of the long-term value of their investment through transactions that do not treat all stockholders equally. Under the terms of the Rights Plan, the Board of Directors declared a dividend of one common stock purchase right (a "Right") for each outstanding share of Common Stock of the Company held by stockholders of record on November 10, 1995. Each Right entitles the holder to purchase from the Company one share of Common Stock at a price of $25 per share, subject to adjustment.
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 does not match employee contributions. The Company makes contributions to the profit sharing portion of the plan which is discretionary and non-contributory. Approximately $101,000, $82,000 and $64,000 was contributed by the Company for the years ended October 31, 1999, 1998 and 1997, 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 $399,900 in premiums for the period July 1999 through March 2000. Pursuant to the terms of the Orion agreements, the Company deposits certain funds collected on the sale of certain contracts insured by Orion into an escrow account. The balance of this escrow account, which totaled approximately $1,912,000 and $397,000 at October 31, 1999 and 1998, respectively, is included in other assets.
In December 1994, the Company entered into a 10 year lease agreement for office space in Mitchel Field, New York which enabled the Company to consolidate its Great Neck, New York and Novato, California operations. The term of the lease commenced on March 1, 1995 and shall terminate on February 28, 2005. In May 1996, the Company entered into a 6 year sublease for additional office space at its Mitchel Field location. In November 1997, the sublease was amended to expand the additional office space available to the Company at its Mitchel Field location. The term of the sublease commenced on October 1, 1996 and shall terminate on November 30, 2002. Future minimum lease payments under the lease and sublease are as follows:
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, 2008, 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 $312,000 and $249,000 as of October 31, 1999 and 1998, 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, 2008, 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.
A reconciliation between the numerators and denominators of Basic and Diluted EPS is as follows:
Effect of dilutive securities: stock options and warrants - 325,638 (.04) ---------- --------- ----
Diluted EPS Net income attributable to common shares and assumed option and warrant exercises $2,136,673 3,949,744 $.54 ========== ========= ====