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 7 to the Notes to Consolidated Financial Statements for future lease payments under this lease and sublease.)
For the Year ended October 31, 2001 compared to the Year ended October ------------------------------------------------------------------------- 31, 2000 -------
Revenues decreased by approximately $1,802,000, or 3%, to approximately $59,853,000 for the year ended October 31, 2001 as compared to approximately $61,655,000 for the year ended October 31, 2000. This decrease was primarily due to a decrease in administrative and insurance fees resulting from a decrease in the number of service contracts accepted for administration by the Company in fiscal 2001, partially offset by 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.
Costs of services provided, which consist primarily of claims and cancellation costs, increased by approximately $66,000, or 0.2%, to approximately $33,753,000 for the year ended October 31, 2001, as compared to approximately $33,687,000 for the year ended October 31, 2000. As a percentage of revenues, costs of services provided increased to 56% for the year ended October 31, 2001 as compared to 55% for the same period in 2000. Claims and cancellation costs are directly affected by the total number of unexpired contracts under administration, which has increased on a yearly basis.
Gross margin decreased by approximately $1,868,000, or 7%, to approximately $26,100,000 for the year ended October 31, 2001, as compared to approximately $27,968,000 for the year ended October 31, 2000. This decrease is attributable to the decrease in revenues and the increase in costs of services provided as described above. Gross margin for the year ended October 31, 2001 was 44% as compared to 45% for the year ended October 31, 2000.
Net loss for the year ended October 31, 2001 was approximately $253,000, as compared to net income of approximately $2,067,000 for the same period in 2000. Diluted net loss per share for the year ended October 31, 2001 was $.06 as compared to diluted net income per share of $.44 for the same period in 2000. Income from continuing operations for the year ended October 31, 2001, excluding the nonrecurring item explained above, was approximately $2,343,000, as compared to income from continuing operations of approximately $2,871,000 for the same period in 2000. Diluted income per share from continuing operations for the year ended October 31, 2001, excluding the nonrecurring item, decreased by $.06 to $.55 per share, as compared to $.61 per share for income from continuing operations for the same period in 2000.
For the Year ended October 31, 2000 compared to the Year ended October ------------------------------------------------------------------------- 31, 1999 --------
Costs of services provided, which consist primarily of claims and cancellation costs, increased by approximately $5,558,000, or 20%, to approximately $33,687,000 for the year ended October 31, 2000, as compared to approximately $28,129,000 for the year ended October 31, 1999. As a percentage of revenues, costs of services provided increased to 55% for the year ended October 31, 2000 as compared to 50% for the same period in 1999. Claims and cancellation costs are directly affected by the total number of unexpired contracts under administration, which has increased on a yearly basis.
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.
Income from continuing operations before provision for income taxes decreased by approximately $413,000, or 8%, to approximately $4,625,000 for the year ended October 31, 2000, as compared to approximately $5,038,000 for the same period in 1999. For the year ended October 31, 2000, the Company recorded a provision for income taxes on continuing operations of approximately $1,755,000, as compared to a provision for income taxes on continuing operations of approximately $1,949,000 in the same period in 1999. Income from continuing operations was approximately $2,871,000 for the year ended October 31, 2000, as compared to approximately $3,089,000 for the year ended October 31, 1999.
Loss from discontinued operations net of taxes was approximately $803,000 for the year ended October 31, 2000, as compared to approximately $274,000 during the same period in 1999. 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.
Cash and cash equivalents, United States Treasury Bills, at cost, and marketable securities, which have maturities ranging between 2 to 5 years, were approximately $57,843,000 at October 31, 2001, as compared to approximately $56,355,000 at October 31, 2000. The increase of approximately $1,971,000 was primarily the result of cash provided by the Company's operating activities, partially offset by cash used to purchase furniture, fixtures and equipment and cash used to purchase treasury stock. As of January 18, 2002, the Company had purchased 731,000 shares of treasury stock at an average price of $5.26 per share. The Board of Directors has approved the purchase of up to 2,000,000 shares of the Company's stock.
The Company intends to spend approximately $200,000 in fiscal 2002 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.
The Company does not believe that inflation has had, or will have in the foreseeable future, a material impact upon the Company's operating results.
Consolidated Statements of Operations for the three years ended October 31, 2001
We have audited the accompanying consolidated balance sheets of Interstate National Dealer Services, Inc. (a Delaware corporation) and subsidiaries as of October 31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States.
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2001 AND 2000
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED OCTOBER 31, 2001
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Income taxes $ 1,623,505 $ 2,059,618 $2,384,824 =========== =========== ========== Interest $ - $ 15,000 $ 15,000 =========== ========== ===========
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 2001
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 ========== ======= ======== ==========
Furniture and fixtures 7 years Office equipment 5 to 10 years Leasehold improvements the lesser of the lease term or useful life
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
Reserve for claims represents claims that were approved for payment as of October 31, 2001 and 2000, but not paid as of those respective dates.
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 income for the years ended October 31, 2001, October 31, 2000 and October 31, 1999 are unrealized gains of $359,495 and $23,490 and an unrealized loss of $57,883, respectively, on available for sale securities.
Revenues relating to administrative and insurance fees from the sale of vehicle service contracts are recognized when the service contract sold is approved and accepted by the Company. Revenues are deferred on vehicle service contracts in those instances where the Company directly receives cash for that portion of the total service contract that is allocated to estimated claims reserves. Deferred contract revenue is recorded as earned over the life of the service contract in proportion to expected claims.
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 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.
October 31, 2001 2000 Furniture and fixtures $815,665 $ 803,104 Office equipment 2,413,997 2,243,833 Leasehold improvements 299,325 299,325 ------- ------- 3,528,987 3,346,262
Less: Accumulated depreciation and Amortization 2,436,017 1,906,110 --------- --------- $1,092,970 $1,440,152 ========= ==========
October 31, 2001 2000 1999 ---- ---- ---- Federal: Current $ 88,335 $1,745,704 $1,967,697 Deferred (532,153) (689,251) (517,656)
The differences between the provision for income taxes and income taxes computed using the U.S. Federal statutory income tax rate were as follows:
October 31, 2001 2000 1999 ---- ----- ----- U.S. Federal statutory rate (34%) 34% 34% Tax on municipal bond interest (35) State income taxes, net of Federal benefit (4) 4 5 --- --- --- Effective tax rate (73%) 38% 39% === === ===
On November 1, 1992, the Company granted certain officers and employees non-qualified stock options for the purchase of up to 184,000 shares of common stock and on May 5, 1993, such non- qualified stock options were formally
included in the Company's 1993 Stock Option Plan (the "Plan") adopted as of such date. Under the Plan, as amended, 344,000 shares of common stock have been reserved for issuance upon exercise of incentive stock options or non-qualified stock options to be granted to officers and employees who are instrumental to the success of the Company. The majority of options 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.
October 31, 1998 237,334 $2.35 Exercised (10,868) .74 Expired (900) 1.31 ---------- October 31, 1999 225,566 $2.43
Exercised (9,165) .67 --------- October 31, 2000 216,401 $2.50 Exercised (0) -------- October 31, 2001 216,401 $2.50 =======
As of October 31, 2001, all of the outstanding options were exercisable and 12,400 shares were available for future grant.
The following options to purchase the Company's common shares were outstanding under the Incentive Plan at October 31, 2001: Weighted Average Number Exercise of Shares Price
As of October 31, 2001, options to purchase 176,400 shares were exercisable and 42,900 shares were available for future grant.
From time to time, the Company will grant certain officers non-qualified stock options to purchase shares of common stock. The following options to purchase the Company's common shares were outstanding at October 31, 2001:
October 31, 1998 186,000 $4.78 Granted 0 - ------------ October 31, 1999 186,000 $4.78 Granted 100,000 5.01 ---------- October 31, 2000 286,000 $4.86 Granted 0 -------- October 31, 2001 286,000 $4.86
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 and 1999 as described by the provisions of SFAS No. 123, the Company's net income (loss) and diluted net income (loss) per share would have been as follows:
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 upon the occurence of a triggering event, as defined.
In connection with the Orion agreements explained in Note 5, the Company has issued two letters of credit through its principal lending institution in the amounts of $2,000,000 and $250,000. 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 $630,000 in premiums for the period April 2001 through April 2002.
Fiscal year Amount ----------- ------ 2002 682,000 2003 481,000 2004 479,000 2005 137,000 ------------ $1,779,000
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.
Effect of dilutive securities: stock options - 175,267 ( - ) ---------- --------- -----
Diluted EPS Net income attributable to common shares and assumed option exercises $ (252,985) 4,272,144 $(.06) ======== ========= ====
Basic EPS Net income attributable to common shares $2,067,412 4,528,001 $.46
Effect of dilutive securities: stock options and warrants - 181,793 (.02) ---------- --------- -----
Effect of dilutive securities: stock options and warrants - 315,368 (.03) ---------- --------- ----