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, 2000 are derived from the audited consolidated financial statements of the Company.
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, cost 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.
Gross margin decreased by approximately $55,000, or less than 1%, to approximately $27,968,000 for the year ended October 31, 2000, as compared to approximately $28,023,000 for the year ended October 31, 1999. This decrease is primarily attributable to the increase in costs of services provided as described above. Gross margin for the year ended October 31, 2000 was 45% as compared to 50% for the year ended October 31, 1999. This decrease is primarily attributable to an increase in claims expense.
For the Year ended October 31, 1999 compared to the Year ended October 31,
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; (ii) an increase in the administrative fees charged per contract; and (iii) an increase in the number of service contracts accepted for administration by the Company in fiscal 1999.
Investment 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 primarily the result of 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.
Loss from discontinued operations net of taxes was approximately $274,000 for the year ended October 31, 1999. There were no losses from discontinued operations during the same period in 1998. The loss from discontinued operations resulted from costs incurred by the Company's subsidiary, Uautobid.com, which commenced operations in August 1999, 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.
Net income for the year ended October 31, 1999 was approximately $2,815,000, as compared to approximately $3,304,000 for the same period in 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. Diluted net income per share from continuing operations for the year ended October 31, 1999 was $.62 per share, or $.01 per share greater than diluted net income per share from continuing operations for the year ended October 31, 1998, excluding the $500,000 non-recurring gain on settlement.
Cash and cash equivalents, United States Treasury Bills, at cost, and marketable securities, which have maturities ranging between two to six years, were approximately $56,355,000 at October 31, 2000, as compared to approximately $50,627,000 at October 31, 1999. The increase of approximately $5,728,000 was primarily the result of cash provided by the Company's operating activities partially offset by cash used for the purchase of furniture, fixtures and equipment and cash used to purchase treasury stock. As of January 19, 2001 the Company had purchased 514,700 shares of treasury stock at an average price of $5.26 per share. The Board of Directors has approved the purchase of up to 1,000,000 shares of treasury stock.
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, no amounts had been borrowed under the credit facility.
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the three years ended October 31, 2000
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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2000 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, 2000 AND 1999
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED OCTOBER 31, 2000
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE THREE YEARS ENDED OCTOBER 31, 2000
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED OCTOBER 31, 2000
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, 2000 and 1999. 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, 2000 and 1999 consist of $ 14,444,690 and -0- respectively, and are stated at cost, which approximates fair market value. 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.
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 years ended October 31, 2000 and October 31, 1999. The Company received approximately $122,000 of such unconsumed reserves for the year ended October 31, 1998, which is reflected in revenues in the accompanying consolidated statements of operations. The balance in these interest-bearing accounts totaled approximately $1,695,000 and$1,748,000 at October 31, 2000 and 1999, respectively. The same amounts have been reflected as contingency payable in the accompanying consolidated balance sheets.
The Company 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 periods ending October 31, 2000 and October 31, 1999 are an unrealized gain of $23,490 and an unrealized loss of $57,883, respectively, on available for sale securities.
The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". This pronouncement establishes financial accounting and reporting standards for the effects of income taxes that result from the Company's activities during the current and preceding years and requires an asset and liability approach for financial accounting and reporting for income taxes. The provision for income taxes is based upon income after adjustment for those permanent items which are not considered in the determination of taxable income. Deferred taxes result when the Company records deductions or recognizes revenue for income tax purposes in a different year than for financial reporting purposes.
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.
October 31, 2000 1999 Furniture and fixtures $803,104 $ 771,126 Office equipment 2,243,833 2,113,458 Leasehold improvements 299,325 265,733 ------- ------- 3,346,262 3,150,317
State: Current 364,616 483,348 590,915 Deferred (223,453) (173,798) (155,200) ----------- --------- --------- 1,197,616 1,759,591 2,137,673 Plus: tax benefits from discontinued operations 557,035 189,842 - ------- --------- ----------
Provision for income taxes from continuing operations $1,754,651 $1,949,433 $2,137,673 ========== ========== ==========
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
As of October 31, 2000, options to purchase 205,901 shares were exercisable and 12,400 shares were available for future grant.
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, 2000: Weighted Average Number Exercise of Shares Price
October 31, 1997 142,500 $4.98 Granted 93,000 5.38 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
Granted 43,000 5.22 Exercised (15,000) 4.00 Expired (2,000) 5.38 --------- October 31, 2000 226,800 $5.38 =======
As of October 31, 2000, options to purchase 145,800 shares were exercisable and 38,900 shares were available for future grant.
c) Other Options 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, 2000:
October 31, 1997 180,000 $4.63 Granted 6,000 9.31 ---------- 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 =======
Income from continuing operations As reported $2,870,658 $3,088,560 $3,303,802 Pro forma 2,609,350 2,992,378 3,230,760 Net income As reported 2,067,412 2,814,807 3,303,802 Pro forma 1,806,104 2,718,625 3,230,760 Diluted income per share from continuing operations As reported .61 .62 .67 Pro forma .55 .60 .65 Diluted net income per share As reported .44 .57 .67 Pro forma .38 .55 .65
The summary of options outstanding at October 31, 2000 is as follows:
Exercise Total Weighted Weighted Total Weighted Price Options Average Average Options Average Range Outstanding Contractual Exercise Exercisable Exercise Life Price Price
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 $3,514, $5,203 and $6,595 was recognized for the years ended October 31, 2000, 1999 and 1998, respectively. The balance outstanding at October 31, 2000 was $45,000.
Rent expense totaled approximately $650,000, $636,000 and $578,000 for the years ended October 31, 2000, 1999 and 1998, respectively.
Included in Other Income is a $500,000 payment received in December 1997, in connection with the settlement of a dispute with an unaffiliated party.
Effect of dilutive securities: stock options and warrants - 325,638 (.04) ---------- -------- ----
The following is a summary of unaudited quarterly financial information for the years ended October 31, 2000 and 1999:
Revenues $11,534,491 $13,749,522 $15,343,542 $15,524,058 Operating income 381,983 814,463 1,139,635 847,111 Income from continuing operations 491,441 749,267 991,064 856,788 Loss from discontinued operations - - - (273,753) Net income 491,441 749,267 991,064 583,035 Basic earnings per share Continuing operations .11 .16 .21 .18 Discontinued operations - - - (.06) Net income .11 .16 .21 .12 Diluted earnings per share Continuing operations .10 .15 .20 .18 Discontinued operations - - - (.06) Net income .10 .15 .20 .12