SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required).
For the fiscal year October 31, 1996 Commission file no.1-12938
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required).
For the transition period from to
Commission file number
INTERSTATE NATIONAL DEALER SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3078398
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
(Address of principal executive offices) (Zip Code)
(516) 228-8600
(Registrant's telephone number, including area code)
Securities registered under Section 12 (b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, par value $.01 per share NASDAQ & Boston Stock Exchange
Common Stock Purchase Warrants NASDAQ & Boston Stock Exchange
Common Stock Purchase Rights NASDAQ & Boston Stock Exchange
Securities registered under Section 12 (g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended October 31, 1996 were
$21,354,148. The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based upon the closing sale price of the
Common Stock on January 7, 1997 as reported on the NASDAQ SmallCap Market
("NASDAQ"), was approximately $12,737,000.
As of January 7, 1997, Registrant had issued and outstanding 3,384,233 shares of
Common Stock.
Transitional Small Business Issuer Disclosure Format (check one): Yes No x
<PAGE>
PART I
Item 1. Business
General
Interstate National Dealer Services, Inc. (the "Company") was incorporated
in Delaware in 1991 and commenced operations in November 1991 with the purchase
of certain assets and the assumption of certain liabilities of INDS Group, Inc.,
a California corporation (the "Predecessor") which commenced operations in 1981
under the name Interstate National Dealer Services Group, Inc. The Company's
principal executive offices are located at 333 Earle Ovington Blvd., Mitchel
Field, New York 11553, and its telephone number is (516) 228-8600.
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 vehicle service
contract is an agreement between either the dealer or the administrator and the
vehicle purchaser under which the dealer 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 dealers to vehicle purchasers in a
manner similar to other options. In some instances, service contracts are sold
directly to the vehicle owners by the Company or others.
The Company offers a variety of vehicle service contract and warranty
programs through its nationwide sales force of approximately 100 independent
sales agents consisting of both companies and individuals (the "Agents"). The
Company enters into a non-exclusive agreement with each dealer, under which the
Company obtains insurance coverage to cover such dealer's liability for claims
under its vehicle service contracts and assists such dealer, and purchasers,
with the making, processing and adjustment of claims. The Company also
administers service contracts and claims for other service contract marketers
("Private Labels"). One such Private Label accounted for approximately 11% of
all service contract revenue received by the Company in fiscal 1996.
In April 1995, the Company formed an affiliated insurance company, National
Service Contract Insurance Company Risk Retention Group, Inc. ("NSC"). Prior to
March 1996, substantially all of the insurance policies arranged by the Company
as administrator to its dealers had been underwritten by The Travelers Indemnity
Company ("Travelers") and National Warranty Insurance, Risk Retention Group
("National Warranty"). Commencing March 1996, the insurance policies arranged by
the Company were underwritten by Travelers and NSC.
Each dealer pays a net rate for each service contract or warranty sold by
such dealer. This payment includes (i) an administrative fee for the Company
from which the Company pays any commission due the Agent, (ii) insurance
premiums and fees for the insurance underwriter, and (iii) a claim reserve to be
placed in an interest-bearing loss reserve account maintained for the benefit of
the contract purchaser. The net rate for service contracts ranges from $75 to
over $3,000 per contract with a typical average net rate per contract of $360
for a new car, $400 for a used car and $500 for a new or used recreational
vehicle. Each dealer is free to determine the price at which it will sell the
service contract to the purchaser. The amount a dealer charges for the service
contract in excess of the net rate is additional income to such dealer. The
administrative fee for the Company ranges from $30 to $212 (prior to the payment
to the Agent of any commission which generally ranges from $10 to $100) per
contract, which fee varies based on the type of service contract sold by a
dealer.
The various vehicle service contract programs offered by the Company are
designed to provide dealers with an additional source of revenue and to increase
dealers' ability to sell vehicles. For example, certain of the Company's
programs provide that dealers and other participants (such as Agents) who reach
certain sales volumes receive additional revenues if, and to the extent, claims
paid on their service contracts are less than the claims reserves maintained for
such contracts. Under certain circumstances, the Company may also be entitled to
unconsumed claim reserves, including reserves attributable to dealers who have
not achieved specified sales volumes of service contracts.
The Company's business has historically focused on extended warranties for
new automobiles and, to a lesser extent, used cars. In the past two fiscal
years, however, the mix of the Company's business has changed such that a higher
percentage of sales are from warranties for used cars. In addition, the Company
has sought to expand into other markets, such as recreational vehicles and
watercraft, and has realized an increasing portion of revenues from its
recreational vehicle programs.
<PAGE>
Marketing
The Company markets its services and products, using its network of
independent Agents, primarily to dealers and, to a lesser extent, leasing
companies, finance companies and other service contract marketers. The Company
promotes its services and products to the Agents and, to some extent, to dealers
primarily through the participation of the Company at trade shows and
advertising in trade publications. The Company has also obtained Agents and
dealers through recommendations and referrals from existing Agents and dealers
and others, some of which receive a commission from the Company upon the sale of
its services and products. To assure a high level of competence and awareness of
its current administrative services and products, the Company provides initial
and on-going training for its Agents and dealers.
The dealers participating in the Company's programs sell motor vehicles and
recreational vehicles manufactured by all of the major manufacturers whose
products are sold in North America. Most of the Company's dealers sell products
from more than one manufacturer. Accordingly, the Company does not focus its
sales and marketing efforts on any one vehicle manufacturer or on any small
group of manufacturers.
To date the Company's penetration in certain markets, such as the watercraft
and motorcycle industries, has been low partially as a result of the Company's
inability to obtain insurance coverage. To improve its market penetration in
these markets, as well as in the new and used motor vehicle and recreational
vehicle industries, the Company (a) formed NSC to underwrite insurance policies
arranged for by the Company and (b) has increased its promotional and
advertising efforts through additional participation in trade shows, increased
advertising in trade publications and the recruitment of new Agents.
The Company enters into an independent agent agreement with each of its
Agents which is terminable at any time by the Company or the Agent upon giving
of 30 days' written notice or by the Company immediately for cause. The
agreement provides that, among other things, the Agents solicit dealers, on a
non-exclusive basis, for the Company within designated territories which may
include one or more states or portions thereof. Most Agents are compensated on a
flat rate commission basis. Agents may sell products and services of other
companies, including competitors of the Company, and have no obligation to sell
the products and services offered by the Company. As of October 31, 1996, the
Company had approximately 100 "active" Agents (that is, Agents who within the
prior 12 months have sold the Company's products and services).
In order to sell service contracts to vehicle owners who had not purchased a
service contract through their dealers at the time of the vehicle purchase, the
Company also makes sales through its own and a third party's direct marketing
facility. To facilitate such sales, the Company offers a service contract
financing program. Under the Company's financing program, a purchaser of a
service contract is given the option to pay for such contract on a monthly basis
over a period of time, without interest. As of October 31, 1996, the Company's
receivable from its financing program totaled approximately $3,627,000. The
Company believes its exposure from these financed contracts is minimal because
the service contract is terminated if the purchaser fails to make his monthly
payments to the Company.
In September 1994, the Company entered into an agreement with Chase
Financial Management Corporation ("Chase"), an affiliate of The Chase Manhattan
Bank. Pursuant to the agreement, Chase, one of the country's leading providers
of retail financing to purchasers of recreational vehicles and marine products,
markets the Company's service contract program to its dealer base of
approximately 1,000 recreational vehicle and marine dealers in the country.
Competition
The business of marketing administrative services and related products to
dealers, and specifically services related to motor vehicle service contracts,
is highly competitive and dominated by the major automotive manufacturers and
other independent third-party administrators. The Company is unable to predict
the extent to which automobile manufacturers (by, for example, extending the
period or parts covered under vehicle warranties) may reduce a dealer's ability
to market extended vehicle service contracts such as those administered by the
Company.
Although management of the Company believes that it is competitive with most
third-party administrators, the Company's position in the overall market is not
significant. In addition, many of the Company's competitors have significantly
better financial resources and operating resources than those of the Company. In
order to be competitive in the marketplace, the Company provides insurance
coverage at competitive prices, offers a range of products and services believed
not to be available from most of its competitors and supports sales with service
to its dealers and the vehicle purchaser. The Company requires its salespersons
<PAGE>
and support staff to communicate regularly with its dealers and it maintains a
toll-free line to facilitate consumer service.
Seasonality
A sale of a service contract by the Company is dependent upon the sale of
the primary product (such as motor vehicles and recreational vehicles) covered
by the service contract. As a result, the Company's revenues are reduced in the
winter months when sales of new and used motor vehicles and recreational
vehicles are lower in some regions than during the other months of the year.
Government Regulation
The service contract programs developed and marketed by the Company and its
related operations are regulated by the statutes and regulations of a number of
states. Generally, some states require registration of administrators and some
state statutes concern the scope of service contract coverage and the content of
the service contract or warranty document. In the latter instances, these state
statutes typically require that specific provisions be included in the contract
expressly stating the purchaser's rights in the event of a claim, how the
service contract or warranty may be canceled and identification of the insurance
underwriter indemnifying the dealers or administrators against loss for
performance under the terms of the contracts. The Company believes that it is in
compliance in all material respects with the applicable regulations governing
vehicle service contracts and warranties in the states in which it does
business, and in some cases relies on its insurance underwriters and their
managing agents to monitor such regulations and respond to any inquiries from
state authorities.
The issuance of insurance policies in respect of service contracts is
regulated under the insurance laws and regulations of the various states.
Although the Company believes that its activities as a service contract
administrator are not directly proscribed by such regulations, the Company's
ability to perform its activities as a service contract administrator is
effected by such regulations. The Company does not believe that as a result of
performing such activities it can be characterized as an insurance company or
insurance agent under any state insurance statute in the states in which it
currently operates. In the event that any state insurance regulators require the
Company to comply with insurance statutes or regulations or become an insurance
agent, the Company will evaluate the cost of such compliance to determine
whether the Company will conduct business in the state. NSC, the Company's
insurance affiliate, is regulated by federal statutes and must comply with
certain state registration requirements. The Company believes that NSC is in
compliance in all material respects with the insurance laws and regulations in
the states in which NSC does business.
It is possible that some states in which the Company now conducts business
may effect changes in the current laws which may regulate the activities of the
Company, including the imposition of new financial or other requirements on the
Company. In such event, the Company would have to meet the regulatory
requirements or cease to conduct business in such state or states.
The Company does business in 47 states and believes it has complied in all
material respects with applicable regulations in all such states. Of such 47
states, the Company is able to sell only certain products and services in
Connecticut, Wisconsin and Washington because of certain insurance regulations
in these states. The Company does not currently transact business in Florida but
intends to do so in the future through a recently formed subsidiary which is
licensed to do business in that state.
Employees
As of December 31, 1996, the Company had 77 full-time employees and 41
part-time employees. None of the Company employees is represented by a labor
union, and the Company considers its relations with its employees to be good.
Forward Looking Statements
The statements contained in this annual report that are not historical facts
are "forward-looking statements." The Company cautions readers of this annual
report that a number of important factors could cause the Company's actual
future results to differ materially from those expressed in any such
forward-looking statements. These important factors, and other factors that
could affect the Company, are described in the Company's Current Report on Form
<PAGE>
8-K filed with the Securities and Exchange Commission on December 23, 1996.
Readers of this annual report are referred to such filing.
Item 2. Properties
The Company currently occupies approximately 20,500 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 7,500 square feet are occupied pursuant to a six-year sublease which
commenced October 1996, at an annual rent of approximately $121,000. (See Note 8
to the Notes to Consolidated Financial Statements for future lease payments
under this lease and sublease).
Item 3. Litigation
In November 1995, INDS Agency, Inc. an agent for the Company in northern
California controlled by Alan Pallie, a shareholder of the Company and a
controlling person of the Predecessor, filed a lawsuit against the Company in
state court in Northern California alleging various breaches by the Company of
its agency agreement and claiming unspecified damages estimated by the plaintiff
to exceed $50,000 and requesting declaratory relief as to certain provisions of
the Agreement. The Company answered the complaint, successfully obtained the
dismissal of certain of the claims and filed counterclaims against INDS Agency.
In November 1996, the parties reached an agreement in principle to settle the
litigation. Under the terms of the settlement, the Company will pay to INDS
Agency $55,000 on account of its monetary claims and the parties reached
agreement as to various other matters in dispute, including the scope of
exclusivity of INDS Agency's territory, the computation of commissions and the
exclusion of certain types of programs from the agency agreement. The Company
reserved for this litigation in its financial statements for the 1996 fiscal
year.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since July 22, 1994, the Company's common stock, par value $.01 per share
(the "Common Stock") and the Company's redeemable common stock purchase
warrants, exercisable to purchase one share of Common Stock (the "Warrants"),
have been traded on the NASDAQ SmallCap Market under the symbols "ISTN," and
"ISTNW," respectively, and on the Boston Stock Exchange under the symbols "IST"
and "ISTW," respectively. The following table sets forth for the periods
indicated the high and low closing sales prices of the shares of Common Stock
and Warrants as reported by NASDAQ. The quotations represent prices between
dealers and do not include retail mark-up, mark-down or commission.
Common
Stock Warrants
------- ---------
High Low High Low
11/01/94 to 01/31/95 4-5/8 1-1/4 7/8 3/16
02/01/95 to 04/30/95 1-15/16 1-1/8 3/16 1/8
05/01/95 to 07/31/95 1-15/32 3/4 7/32 1/8
08/01/95 to 10/31/95 1-21/32 1-5/16 7/32 5/32
11/01/95 to 01/31/96 2-1/4 1-7/32 11/32 1/8
02/01/96 to 04/30/96 4-5/8 2-3/8 1-13/16 5/16
05/01/96 to 07/31/96 5-3/8 3-15/16 1-13/16 1-1/16
08/01/96 to 10/31/96 6 4-1/2 1-15/16 1-3/8
11/01/96 to 01/07/97 6 5-1/8 2-1/2 1-10/16
As of January 7, 1997, there were 39 holders of record of Common Stock and
15 holders of record of Warrants.
The Company has not paid cash dividends on the Common Stock and does not
contemplate paying cash dividends in the foreseeable future. Instead, the
Company intends to retain earnings for use in the Company's operations.
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
(the "Record Date"). 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 description and terms of the Rights are set forth in a Rights Agreement
dated as of October 24, 1995 between the Company and Continental Stock Transfer
& Trust Company, as Rights Agent.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the outstanding
shares of Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
becomes an Acquiring Person) following the commencement of, or an announcement
of an intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of 15% or
more of such outstanding shares (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced with respect to any of the
Common Stock certificates outstanding as of the Record Date, by such Common
Stock certificate with a copy of the Summary of Rights to Purchase Common Shares
attached thereto. The Rights are not exercisable until the Distribution Date.
The Rights will expire on November 10, 2005 (the "Final Expiration Date"),
<PAGE>
unless the Final Expiration Date is extended or unless the Rights are earlier
redeemed by the Company, in each case, as described below.
In the event that, after the Distribution Date, the Company is acquired in a
merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold, proper provision will be made so
that each holder of a Right will thereafter have the right to receive, upon
exercise thereof at the then current exercise price of the Right, that number of
shares of common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise price of the
Right. In the event that any person becomes an Acquiring Person, proper
provision shall be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise that number of shares of
Common Stock having a market value of two times the exercise price of the Right.
At any time after the acquisition by an Acquiring Person of beneficial
ownership of 15% or more of the outstanding Common Stock and prior to the
acquisition by such Acquiring Person of 50% or more of the outstanding Common
Stock, the Board of Directors of the Company may exchange the Rights (other than
Rights owned by such Acquiring Person which have become void), in whole or in
part , at an exchange ratio of one share of Common Stock per Right (subject to
adjustment).
At any time prior to the acquisition by an Acquiring Person of beneficial
ownership of 15% or more of the outstanding Common Stock, the Board of Directors
of the Company may redeem the Rights in whole, but not in part, at a price of
$.01 per Right (the "Redemption Price"). The redemption of the Rights may be
made effective at such time, on such basis and with such conditions as the Board
of Directors in its sole discretion may establish. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person becomes an Acquiring Person no such amendment may
adversely affect the interests of the holders of the Rights (other than the
Acquiring Person).
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends.
There is no separate public trading market for the Rights. Until the
Distribution Date, the Rights may be transferred with and only with the shares
of Common Stock.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the Year ended October 31, 1996 compared to the Year ended
October 31, 1995
Revenues increased approximately $7,605,000, or 55%, to approximately
$21,354,000 for the year ended October 31, 1996 as compared to approximately
$13,749,000 for the year ended October 31, 1995. This increase was due to a
number of factors: (i) a significant increase in administrative and insurance
fees resulting from an increase in the number of service contracts accepted for
administration by the Company in fiscal 1996; (ii) a significant 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 (iii) an
increase in the average price per contract sold. The increase in the number of
service contracts accepted for administration during fiscal 1996 was primarily
due to the aggressive efforts by the Company in enrolling additional producers
to sell the Company's products as well as to a more diversified array of
products offered by the Company.
Cost of services provided, which consist primarily of claims costs,
increased by approximately $3,079,000, or 91%, to approximately $6,449,000 in
the year ended October 31, 1996, as compared to approximately $3,370,000 in the
year ended October 31, 1995. As a percentage of revenues, cost of services
provided increased to 30% in the year ended October 31, 1996 as compared to 25%
in the same period in 1995. The increase was due to a number of factors
anticipated by the Company: (i) claims costs are directly affected by the total
number of unexpired contracts under administration, which has increased on a
yearly basis; (ii) there has been a shift in the mix of contracts sold, as
described under Item 1; and (iii) the average claim cost has increased as more
<PAGE>
contracts are written on used cars as opposed to new cars and as more contracts
are written for recreational vehicles.
Selling, general and administrative expenses increased by approximately
$3,790,000, or 38%, to approximately $13,745,000 in the year ended October 31,
1996, up from approximately $9,955,000 in the year ended October 31, 1995. 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 volume; and
(ii) increases in general and administrative expenses due to increased
personnel, telephone and postage costs as a result of additional staffing to
handle increased sales volume. The increase in general and administrative
expenses was partially offset by a reduction in licensing fees paid by the
Company to the Predecessor resulting from the Company's buy-out of the license
in March 1996 for $100,000. As a percentage of revenues, selling, general and
administrative expenses decreased to 64% in the year ended October 31, 1996 as
compared to 72% in the same period in 1995.
Other income, net increased by approximately $119,000 or 37%, to
approximately $445,000 in the year ended October 31, 1996, as compared to
approximately $326,000 in the year ended October 31, 1995. This increase is the
result of an increase in investment income generated by funds provided by
operating activities.
In the year ended October 31, 1996, the Company had income before income
taxes of approximately $1,604,000 and recorded a provision for income taxes of
approximately $641,000, as compared to income before income taxes of
approximately $568,000 and a provision for income taxes of approximately
$228,000 in the same period in 1995. Net income increased approximately
$623,000, or 183%, to approximately $963,000 for the year ended October 31, 1996
as compared to approximately $340,000 for the year ended October 31, 1995.
Income before income taxes for the year ended October 31, 1995 included
non-recurring relocation costs of approximately $183,000.
Liquidity and Capital Resources
Cash and cash equivalents were approximately $13,230,000 at October 31,
1996, as compared to approximately $9,314,000 of cash and cash equivalents and
United States Treasury Notes, at cost, at October 31, 1995. The increase of
approximately $3,916,000 is the result of cash provided by the Company's
operating activities less cash used for the purchase of furniture, fixtures and
equipment, the payment of long-term debt and the buy-out of the license from the
Predecessor.
The Company believes that its current available cash and anticipated levels
of internally generated funds will be sufficient to fund its financial
requirements at least for the next fiscal year at the Company's present level of
revenues and business activity.
Capital Expenditures
The Company intends to spend approximately $300,000 in fiscal 1997 for the
purchase of new computer hardware and software to enable the Company to increase
its sales volume.
Impact of Inflation
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.
Item 7. Financial Statements
Annexed hereto starting on page F-1.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of October 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
October 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interstate National Dealer Services, Inc.:
We have audited the accompanying consolidated balance sheets of Interstate
National Dealer Services, Inc. (a Delaware corporation) and subsidiaries as of
October 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
January 8, 1997
F-2
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1996 AND 1995
ASSETS 1996 1995
------ -------- -----
CURRENT ASSETS:
Cash and cash equivalents $ 13,230,203 $ 8,341,337
United States Treasury Notes, at cost - 972,600
Accounts receivable 4,138,051 2,528,366
Prepaid expenses 250,169 216,201
----------- -----------
Total current assets 17,618,423 12,058,504
RESTRICTED CASH 1,975,505 1,505,511
FURNITURE, FIXTURES AND EQUIPMENT, at cost,
less accumulated depreciation and amortization
of $283,850 and $150,453, respectively 881,548 586,860
INTANGIBLE ASSETS, less accumulated amortization
of $81,232 and $59,649, respectively 143,768 65,351
DEFERRED INCOME TAXES 852,980 -
OTHER ASSETS 686,945 678,163
------------- -----------
$22,159,169 $14,894,389
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,569,897 $ 1,566,799
Accrued expenses 512,115 315,258
Accrued commissions 548,472 553,362
Reserve for claims 653,847 353,497
Current portion of long-term debt to related party 160,000 200,000
Other liabilities 155,752 103,908
----------- -----------
Total current liabilities 3,600,083 3,092,824
DEFERRED CONTRACT REVENUE 10,678,266 5,218,281
CONTINGENCY PAYABLE 1,975,505 1,505,511
LONG-TERM DEBT TO RELATED PARTY - 160,000
----------- ------------
Total liabilities 16,253,854 9,976,616
----------- ------------
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 3,384,233 and 3,325,167 shares,
respectively 33,843 33,252
Additional paid-in capital 4,347,592 4,324,116
Retained earnings 1,523,880 560,405
------------ ------------
Total stockholders' equity 5,905,315 4,917,773
------------ ------------
$ 22,159,169 $ 14,894,389
The accompanying notes to financial statements are an integral
part of these consolidated balance sheets.
F-3
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
1996 1995
REVENUES $ 21,354,148 $ 13,749,249
OPERATING COSTS AND EXPENSES:
Costs of services provided 6,449,347 3,369,572
Selling, general and administrative expenses 13,745,177 9,954,647
Relocation costs (Note 1) - 182,725
---------- ---------
Operating income 1,159,624 242,305
OTHER INCOME (EXPENSE):
Interest income 499,118 364,502
Interest expense (54,556) (38,955)
------------- -----------
Income before income taxes 1,604,186 567,852
PROVISION FOR INCOME TAXES 640,711 228,340
------------- -----------
Net income $ 963,475 $ 339,512
============= ============
Net income per share $ .27 $ .10
========= ========
Weighted average shares outstanding 3,501,983 3,458,592
========== ==========
The accompanying notes to financial statements are an integral
part of these consolidated statements.
F-4
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
Common Stock Additional
Number of Paid-in Retained
Shares Amount Capital Earnings Total
BALANCE AT OCTOBER 31, 1994 3,325,167 $33,252 $4,324,116 $ 220,893 $4,578,261
Net income for the year ended
October 31, 1995 - - - 339,512 339,512
--------- ------- ---------- ------- ----------
BALANCE AT OCTOBER 31, 1995 3,325,167 33,252 4,324,116 560,405 4,917,773
Shares issued pursuant to
exercise of stock options 59,066 591 23,476 - 24,067
Net income for the year ended
October 31, 1996 - - - 963,475 963,475
--------- ------- ---------- ------- ----------
BALANCE AT OCTOBER 31, 1996 3,384,233 $33,843 $4,347,592 $1,523,880 $5,905,315
========= ======= ========== ========== ==========
The accompanying notes to financial statements are an integral
part of these consolidated statements.
F-5
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 963,475 $ 339,512
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 203,262 100,600
Deferred income taxes (852,980) -
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (1,609,685) (1,220,831)
Prepaid expenses (33,968) (127,368)
Restricted cash (469,994) 520,983
Other assets (45,198) (618,614)
Accounts payable 3,098 842,353
Accrued expenses 196,857 257,232
Accrued commissions (4,890) 211,077
Reserve for claims 300,350 174,457
Other liabilities 51,844 79,300
Deferred contract revenue 5,459,985 3,232,055
Contingency payable 469,994 (520,983)
---------- ----------
Net cash provided by operating activities 4,632,150 3,269,773
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net redemptions of United States Treasury Notes 972,600 2,530
Purchase of furniture, fixtures and equipment, net (439,951) (462,555)
Purchase of license (100,000) -
--------- ---------
Net cash provided by (used in) investing
activities 432,649 (460,025)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt to related party (200,000) -
Proceeds from exercise of stock options 24,067 -
--------- ----------
Net cash used in financing activities (175,933) -
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,888,866 2,809,748
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,341,337 5,531,589
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,230,203 $ 8,341,337
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 1,457,621 $ 206,028
============ ===========
Interest $ 64,311 $ 22,200
============ ===========
The accompanying notes to financial statements are an integral
part of these consolidated statements.
F-6
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
Interstate National Dealer Services, Inc. and subsidiaries (the "Company")
designs, markets and administers service contracts and warranties in the
continental United States for new and used motor vehicles and recreational
vehicles and to a lesser extent, watercraft, motorcycles and other vehicles. A
vehicle service contract is an agreement between either the dealer or the
administrator and the vehicle purchaser under which the dealer 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 dealers to
vehicle purchasers in a manner similar to other options. In some instances,
service contracts are sold directly to the vehicle owners. The Company enters
into a non-exclusive agreement with each dealer, under which the Company obtains
insurance coverage to cover such dealer's liability for claims under its vehicle
service contracts and assists such dealer, and purchasers, with the making,
processing and adjustment of claims. The Company also administers service
contracts and claims for other service contract marketers. In April 1995, the
Company formed an affiliated insurance company, National Service Contract
Insurance Company Risk Retention Group, Inc. ("NSC"). Prior to March 1996,
substantially all of the insurance policies arranged by the Company as
administrator to its dealers had been underwritten by two non-affiliated
insurance companies. Commencing March 1996, the insurance policies arranged by
the Company are underwritten by NSC and a single non-affiliated insurance
company.
On November 1, 1991, the Company purchased for $200,000 certain assets of INDS
Group, Inc. (hereinafter referred to as "Seller") and commenced operations. The
purchase price was allocated to the assets acquired as follows:
Covenant not-to-compete agreement $ 100,000
Other assets 30,000
Leasehold interest 25,000
Furniture, fixtures and equipment 20,000
Excess of cost over fair value of
net assets acquired 25,000
---------
$ 200,000
=========
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
transactions and balances have been eliminated in consolidation. As required for
insurance companies, NSC has a December 31 year end.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
F-7
<PAGE>
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation for all
assets acquired prior to fiscal 1995 is calculated using accelerated methods
over the estimated useful lives of the assets. Depreciation for all assets
acquired thereafter is calculated using the straight line method over the
estimated useful lives of the assets. The asset lives are as follows:
Furniture and fixtures 7 years
Office equipment 5 to 10 years
Leasehold improvements The remaining lease term or useful life of
asset, whichever is shorter.
Restricted Cash
Pursuant to an agreement among the Company, the non-affiliated underwriter 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, 1996 and 1995, the Company received
approximately $98,000 and $155,000, respectively, of such funds, which are
reflected in revenues in the accompanying consolidated statements of operations.
The balance in this escrow account totaled approximately $732,000 and $758,000
at October 31, 1996 and 1995, respectively. The same amounts have been reflected
as contingency payable in the accompanying consolidated balance sheets.
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 PNC Bank, New England. 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 received approximately $244,000 and $37,000 of such
unconsumed reserves for the years ended October 31, 1996 and 1995, respectively,
which are reflected in revenues in the accompanying consolidated statements of
operations. The balance in these interest-bearing accounts totaled approximately
$1,243,000 and $748,000 at October 31, 1996 and 1995, respectively. The same
amounts have been reflected as contingency payable in the accompanying
consolidated balance sheets.
Intangible Assets
Intangible assets, which consist of a license agreement with the Seller (Note
8), a covenant not-to-compete agreement with the Seller and the excess of cost
over the fair value of net assets acquired relating to the acquisition of the
Company, are being amortized on a straight-line basis as follows:
License agreement 10 years
Covenant not-to-compete agreement 7 years
Excess of cost over fair value of net
assets acquired 5 years
F-8
<PAGE>
Reserve for Claims
Reserve for claims represents claims that were approved for payment as of
October 31, 1996 and 1995, but not paid as of those respective dates.
Revenues
Revenues relating to administrative and insurance fees from the sale of vehicle
service contracts are recognized when the service contract sold by the dealer 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.
Relocation Costs
In March 1995, the Company consolidated and relocated its Great Neck, New York
and Novato, California offices to its new corporate headquarters located in
Mitchel Field, New York. In connection with this relocation, the Company
incurred related training and relocation expenses of approximately $183,000 for
the fiscal year ended October 31, 1995.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("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.
Net Income Per Share
Net income per share is computed based upon the weighted average number of
common and common equivalent shares outstanding during the period. Common stock
equivalents are considered in the weighted average share computation for periods
in which they are dilutive.
Use of Estimates
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.
Recently Issued Accounting Standard
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" which establishes a fair value based
method of accounting and reporting
F-9
<PAGE>
for stock-based compensation. Under SFAS 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 is required to adopt SFAS 123 in its fiscal year 1997 and anticipates
continuing to follow the accounting guidance of APB 25 with pro forma disclosure
of the fair value method specified in SFAS 123.
2. FURNITURE, FIXTURES AND EQUIPMENT:
Furniture, fixtures and equipment consists of the following :
October 31,
1996 1995
------ -----
Furniture and fixtures $ 325,429 $ 224,889
Office equipment 791,465 484,836
Leasehold improvements 48,504 27,588
---------- ---------
1,165,398 737,313
Less:Accumulated
depreciation and
amortization 283,850 150,453
--------- ---------
$ 881,548 $ 586,860
3. INTANGIBLE ASSETS:
Intangible assets consists of a license agreement with the Seller and amounts
allocated from the purchase price in connection with the acquisition of the
Company's assets and operations on November 1, 1991, and are summarized as
follows:
October 31,
1996 1995
---- ----
License agreement $100,000 $ -
Covenant not-to-compete agreement 100,000 100,000
Excess of cost over fair value of
net assets acquired 25,000 25,000
------- -------
225,000 125,000
Less: Accumulated amortization 81,232 59,649
------- -------
$143,768 $ 65,351
======== ========
4. INCOME TAXES:
The provision for income taxes consists of the following :
October 31,
1996 1995
---- ----
Federal :
Current $1,157,105 $175,693
Deferred (660,771) -
State :
Current 336,586 52,647
Deferred (192,209) -
--------- -------
$640,711 $228,340
======== ========
The deferred income taxes of approximately $853,000, the majority of which has
F-10
<PAGE>
been paid as of October 31, 1996, result from temporary differences between the
financial accounting and income tax treatment of deferred contract revenue.
The differences between the provision for income taxes and income taxes computed
using the U.S. Federal income tax rate were as follows :
October 31,
1996 1995
---- ----
U.S. Federal statutory rate 34% 34%
State income taxes, net of
Federal benefit 6 6
--- ---
Effective tax rate 40% 40%
=== ===
5. LONG-TERM DEBT TO RELATED PARTY:
Long-term debt to related party consists of unsecured notes payable to Target
Insurance Ltd. ("Target"), which is owned by certain shareholders of the
Company, as follows:
October 31,
1996 1995
---- ----
Note payable, with interest at the greater of (a) 10%
or (b) 1% above the prime rate of interest, paid
October 24, 1996 $ - $200,000
Note payable, with interest at 8.5%, due October 21,
1997 100,000 100,000
Note payable, with interest at 8%, due October 21,
1997 60,000 60,000
------- -------
160,000 360,000
Less: Current portion (160,000) (200,000)
--------- --------
$ - $160,000
========= ========
6. STOCKHOLDERS' EQUITY:
a) Warrants
In connection with a July 1994 public offering of Common Stock, the Company
issued warrants for the purchase of 1,225,100 shares of its Common Stock at a
price per share of $5.50. Each warrant is exercisable on or before July 1999.
b) 1993 Stock Option Plan
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.
F-11
<PAGE>
The following options to purchase the Company's common shares were outstanding
under the Plan at October 31, 1996:
Number Option
of Shares Price
-------- -----
October 31, 1994 172,667 $ .40
Granted 48,000 1.50
Exercised - -
Canceled - -
-------
October 31, 1995 220,667 .40 - 1.50
Granted 154,934 1.3125 - 4.25
Exercised (59,066) .40 - 1.50
Canceled (39,701) .40 - 1.50
-------
October 31, 1996 276,834 $.40 - 4.25
=======
As of October 31, 1996, options to purchase 140,434 shares were exercisable and
8,100 shares were available for future grant.
c) 1996 Incentive Plan
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. In 1996, the
Company granted certain directors, officers and employees stock options for the
purchase of up to 105,000 shares of common stock at exercise prices ranging from
$4.00 per share to $4.75 per share. 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. As of October 31, 1996, 105,000 options were outstanding
under the Incentive Plan, none of which were exercisable, and 195,000 shares
were available for future grant.
d) Other Options
On June 12, 1996, the Company granted certain officers non-qualified stock
options for the purchase of 180,000 shares of common stock, half at an exercise
price of $4.50 per share and half at an exercise price of $4.75 per share. These
exercise prices exceeded the market value per share on the date of grant. The
options were immediately exercisable and expire ten years from the date of
grant.
e) Shareholders Rights Plan
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.
F-12
<PAGE>
7. RELATED PARTY TRANSACTIONS:
I.N.D.S. Agency, Inc., a company controlled by a shareholder of the Company
executed an agent agreement with the Seller which was assumed by the Company
upon the acquisition of the business in 1991. Under the terms of the agreement,
such company receives a commission for each service contract it places. The
Company recorded commission expense relating to this agreement of approximately
$698,000 and $618,000 for the years ended October 31, 1996 and 1995,
respectively.
8. COMMITMENTS AND CONTINGENCIES:
Leases
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. 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:
Fiscal year Amount
----------- ------
1997 $ 479,000
1998 501,000
1999 520,000
2000 535,000
2001 550,000
Thereafter 1,532,000
---------
$4,117,000
==========
Rent expense totaled approximately $368,000 and $278,000 for the years ended
October 31, 1996 and 1995, respectively.
Royalties
In connection with the acquisition of the Company, the Seller and the Company
entered into a License Agreement dated September 25, 1991, pursuant to which the
Seller granted the Company a ten-year exclusive license to use certain programs,
administrative systems, computer systems, reports, software, trade names and
other proprietary rights developed by the Seller in connection with the
business. Under the terms of the License Agreement, with respect to each vehicle
service contract entered into between a dealer and its customer, the Company
paid to the Seller a royalty in an amount equal to the lesser of (a) $5.00 per
vehicle service contract or (b) 15% of the administrative fee paid to the
Company thereunder. Upon the payment of an aggregate of $1,100,000 in royalties
to the Seller, the Company had the right to purchase such licensed products for
$100,000 payable in three monthly installments of $33,333. In March 1996, after
having paid an aggregate of $1,100,000 in royalties to the Seller under the
License Agreement, the Company exercised its right and purchased the license.
Royalty expense incurred in connection with this agreement totaled approximately
$121,000 and $340,000 for the years ended October 31, 1996 and 1995,
respectively.
F-13
<PAGE>
Employment Agreements
a) On December 1, 1993, the Company entered into a five-year employment
agreement with its chairman and chief executive officer at an annual salary
of $150,000 plus a non-accountable reimbursement of expenses of $1,000 per
month. In fiscal 1996, the employment agreement was amended to extend its
term for an additional five years from the original date of termination.
During the term of such agreement, the chairman is entitled to receive an
annual bonus at the discretion of the Company's Board of Directors. The
chairman is also provided with the use of a leased car and reimbursed for
all operating expenses thereof. Under the terms of such agreement, if the
chairman's employment with the Company is terminated other than for cause,
he is entitled to receive an amount equal to the greater of (a) the
aggregate salary and discretionary bonus paid or payable by the Company for
the most recent two fiscal years prior to his termination of employment or
(b) the aggregate salary payable from the date of termination of employment
through the expiration of such agreement. In fiscal 1995, the Company
amended the employment contract to provide for assistance to the chairman
with respect to the purchase by his trustee of split-dollar life insurance
policies which benefit the chairman and his family. The funds disbursed by
the Company are included in other assets in the accompanying consolidated
balance sheets in the amount of approximately $123,000 and $60,000 at
October 31, 1996 and 1995, respectively. This amount will be fully
reimbursed to the Company in the event of death of the insured or
termination of the agreement.
b) On December 1, 1993, the Company entered into a five-year employment
agreement with its former chief financial officer at an annual salary of
$72,000 plus a non-accountable reimbursement of expenses of $250 per month.
On December 18, 1995, the Company amended the employment agreement naming
the former chief financial officer to the position of chief operating
officer and president at an annual salary of $100,000 effective November 1,
1995. In fiscal 1996, the employment agreement was further amended to
extend its term for an additional five years from the original date of
termination. During the term of such agreement, the president is entitled
to receive an annual bonus at the discretion of the Company's Board of
Directors. The president is also provided with the use of a leased car and
is reimbursed for all operating expenses thereof. Under the terms of such
agreement, if the president's employment with the Company is terminated
other than for cause, she is entitled to receive an amount equal to the
aggregate salary paid or payable by the Company for the most recent two
fiscal years prior to her termination of employment.
c) As of December 1, 1993, the Company entered into a five-year employment
agreement with its vice president, marketing, at an annual salary of
approximately $69,000 including reimbursement of expenses incurred in
connection with the use of his car. He also receives monthly commissions in
an amount equal to 2% of (a) all administrative fees paid to the Company
during such month
minus (b) the aggregate selling expenses incurred for such month minus (c)
$150,000. In fiscal 1996, the employment agreement was amended to extend
its term for an additional three years from the original date of
termination. During the term of such agreement, the vice president,
marketing, is entitled to receive an annual bonus at the discretion of the
Company's Board of Directors. Under the terms of such agreement, if his
employment with the Company is terminated other than for cause, he is
entitled to receive compensation in an amount equal to the aggregate salary
paid or payable by the Company to him for the most recent two fiscal years
prior to his termination of employment.
The future aggregate minimum annual compensation required under these
agreements is approximately $319,000.
F-14
<PAGE>
Litigation
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 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.
9. MERGER:
INDS Holdings, Inc. ("Holdings") was formed in connection with the acquisition
of the business from the Seller. Certain directors/officers/shareholders of the
Company owned 100% of the outstanding shares of common stock of Holdings.
Target, which is also owned by the directors/officers/shareholders, owned 100%
of all the outstanding shares of preferred stock of Holdings.
On November 12, 1993, Holdings, the owner of 935,000 shares of common stock of
the Company, merged with and into the Company. Pursuant to such merger, (a) each
of the officers referred to above received 467,500 shares of common stock of the
Company and (b) Target, in exchange for the preferred stock of Holdings,
received a promissory note issued by the Company in the principal amount of
$60,000 maturing on October 21, 1997, and bearing interest at a rate of 8% per
annum. In addition, pursuant to such merger, the Company became obligated under
the terms of a loan made by Target to Holdings, which loan is evidenced by a
promissory note dated October 22, 1991 in the principal amount of $100,000. Such
promissory note matures on October 21, 1997, and bears interest at a rate of
8.5% per annum. These notes are further described in Note 5.
F-15
<PAGE>
Item 8. Changes In and Disagreements with Accountant on Accounting
and Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons: Compliance with Section 16 (a) of the Exchange Act
The table below sets forth certain information as of January 7, 1997 with
respect to the executive officers, directors and certain significant employees
of the Company. Other than Chester J. Luby and Cindy H. Luby, who are father and
daughter, none of the executive officers or directors of the Company is related.
Name Age Position
Chester J. Luby. . . . . . . . 65 Chairman, Chief Executive Officer and
Director*
Cindy H. Luby. . . . . . . . . 42 President, Chief Operating Officer
and Director**
Lawrence J. Altman . . . . . . 49 Vice President, Marketing
Zvi D. Sprung . . . . . . . .. 47 Chief Financial Officer, Treasurer
and Secretary
Albert V. Meneses . . . . . . 45 Vice President, Claims
Louis F. Dente . . . . . . . . 66 Director+
Robert E. Schulman . . . . . . 71 Director***
William H. Brown . . . . . . . 66 Director**
Donald Kirsch. . . . . . . . . . 65 Director*
* Term expires 1997
** Term expires 1998
*** Term expires 1999
+ Mr. Dente resigned from the Board on January 6, 1997.
The Board of Directors of the Company is divided into three classes serving
staggered three year terms. The Certificate of Incorporation provides that
directors may be removed with or without cause only upon the affirmative vote of
holders of at least 66-2/3% of the voting power of the then outstanding shares
of any class or series of capital stock of the Company entitled to vote
generally in the election of directors, voting as a class.
Chester J. Luby has been the Chairman, Chief Executive Officer, a director
and a principal stockholder of the Company since its inception in 1991. For more
than five years, Mr. Luby has been the president and a principal stockholder of
Target Agency, Inc. ("Agency"), Target Insurance Ltd., a Bermuda joint stock
company ("Target"), and Dealers Extended Services, Inc. ("DESI"), private
companies involved in various aspects of insurance and service contract
businesses. Mr. Luby is a graduate of the University of Chicago and Yale Law
School and a member of the New York and Florida bars.
<PAGE>
Cindy H. Luby was elected President and Chief Operating Officer of the
Company in December 1995 and has been a director of the Company since its
inception. Ms. Luby was Vice President, Chief Financial Officer, Treasurer and
Secretary of the Company from its inception in 1991 until December 1995. For
more than five years, Ms. Luby has been a vice president of Agency, Target and
DESI. Ms. Luby is a licensed life and property and casualty insurance agent and
is a graduate of Wellesley College and General Motors School of Merchandising
and Management.
Lawrence J. Altman has been the Vice President, Marketing, of the Company
since its inception in 1991. For more than five years Mr. Altman has been a vice
president of Agency and DESI. From 1973 to the present, Mr. Altman has been in
the vehicle service contract industry as an employee of companies selling or
designing, marketing and administering such contracts as well as an independent
agent marketing such contracts.
Zvi D. Sprung joined the Company in August 1995 and was elected Chief
Financial Officer, Treasurer and Secretary in December 1995. Prior to joining
the Company, Mr. Sprung was Controller of Advanced Media, Inc. (1994-95), CFO of
Pharmhouse Corp. (1992-94) and Controller of Long Lake Energy Corporation
(1987-92). Mr. Sprung is a Certified Public Accountant in the state of New York.
Albert V. Meneses was elected Vice President, Claims of the Company in April
1995. From inception in 1991 until 1994, Mr. Meneses was Claims Supervisor of
the Company and from 1994 until April 1995 Mr. Meneses was Claims Manager. From
1989 to inception Mr. Meneses was a Claims Adjuster for the Predecessor. From
1972 to 1989, Mr. Meneses was in the automotive industry as a service manager
for various dealers and distributors.
Louis F. Dente has been a director and a principal stockholder of the
Company from its inception in 1991 until his resignation on January 6, 1997.
From 1991 until November 1995 Mr. Dente was the President of the Company and
from 1981 until the Company commenced operations in 1991, Mr. Dente was the
Executive Vice President of the Predecessor.
Robert E. Schulman is President of MRN Capital Company, a private venture
capital company, and Vice President and Director of Carbo Industries, Inc., a
private gasoline and oil distribution company. Until December 31, 1993, he was
President and Chairman of the Board of Sound One Corp., a public motion picture
post production company. He is currently a financial tax consultant to various
other companies and a certified public accountant and has been a director of the
Company since September 1994.
William H. Brown has been President of Leroy Holdings, Inc., a privately
held vehicle leasing company, for more than the last five years. He has been a
director of the Company since September 1994.
Donald Kirsch is Chairman and President of The Wall Street Group, Inc. and
President and Chief Executive Officer of Wall Street Consultants, Inc.,
financial consulting and public relations firms. He was elected a director by
the Board of Directors in December 1996.
<PAGE>
Item 10. Executive Compensation
The following table summarizes the compensation paid or accrued by the
Company for services rendered during the years indicated to the Company's Chief
Executive Officer and to its executive officers whose salaries and bonuses
exceeded $100,000 during the fiscal year ended October 31, 1996 (the "Named
Executives"). The Company did not grant any restricted stock awards or stock
appreciation rights or make any long-term incentive plan payouts during the
years indicated.
Summary Compensation Table
Long-Term
Compensation
Fiscal Year Annual Securities
Name and Ended Compensation Underlying All Other
Principal Position October 31, Salary Bonus Options Compensation (4)
Chester J.Luby (1) 1996 $153,975 $72,815 170,000 $62,920
Chairman and Chief 1995 150,000 37,484 15,000 60,000
Executive Officer 1994 143,500
-
Cindy H. Luby (2) 1996 106,184 48,543 146,434 -
Presient and Chief 1995 73,980 24,990 5,000 -
Operating Officer 1994 73,266 - -
Lawrence J. Altman(3) 1996 134,702 5,000 26,500 -
Vice President, 1995 104,300 - 5,000 -
Marketing 1994 76,426 - -
(1) Annual compensation paid to Mr. Luby was pursuant to an Employment Agreement
effective as of December 1, 1993 between the Company and Mr. Luby, as
amended.
(2) Annual compensation paid to Ms. Luby was pursuant to an Employment Agreement
effective as of December 1, 1993 between the Company and Ms. Luby, as
amended.
(3) Annual compensation paid to Mr. Altman was pursuant to an Employment
Agreement effective as of December 1, 1993 between the Company and Mr.
Altman, as amended.
(4) Amount includes $62,920 and $60,000 of split dollar life insurance premiums
paid by the Company for the benefit of Mr. Luby. Amount does not include
certain other personal benefits, the total value of which was less than the
lesser of $50,000 or ten percent of the total salary and bonus paid or
accrued by the Company for services rendered by such officer during the
fiscal year indicated.
In fiscal 1996 the Directors of the Company who were not otherwise
affiliated with the Company, received a fee of $1,000 plus travel expenses for
attendance at Board or Committee meetings, while Directors that were employees
of the Company did not receive any compensation for their attendance at Board or
Committee meetings. In addition, Directors of the Company who were not otherwise
affiliated with the Company were awarded 15,000 options to purchase Common Stock
under the Company's 1996 Incentive Plan. Messrs. Schulman and Brown were granted
these options in April 1996 upon approval by the Company's stockholders of the
Incentive Plan. Mr. Kirsch was granted these options in December 1996 upon his
election to the Board of Directors. These options, none of which are currently
exercisable, become exercisable at the rate of 5,000 options per year.
<PAGE>
The following table sets forth certain information concerning options
granted during the fiscal year ended October 31, 1996 to the Named Executives.
The Company did not grant any stock appreciation rights during the fiscal year
ended October 31, 1996.
Option Grants in Last Fiscal Year
Number of Percentage of Total
Securities Option Shares
Underlying Granted Employees Exercise Price Expiration
Name Options Granted in Fiscal 1996 Per Share Date
Chester J.Luby (1) 10,000 2.27% $1.4438 12/18/2005
(1) 10,000 2.27% 1.9688 12/18/2005
(2) 50,000 11.37% 4.2500 06/12/2006
(2) 50,000 11.37% 4.5000 06/12/2006
(2) 50,000 11.37% 4.7500 06/12/2006
Cindy H. Luby (1) 10,000 2.27% $1.3125 12/18/2005
(1) 10,000 2.27% 1.9688 12/18/2005
(2) 46,434 10.55% 4.2500 06/12/2006
(2) 40,000 9.09% 4.5000 06/12/2006
(2) 40,000 9.09% 4.7500 06/12/2006
Lawrence J. (1) 2,500 0.57% $1.3125 12/18/2005
Altman (3) 8,000 1.82% 4.2500 06/12/2006
(3) 8,000 1.82% 4.5000 06/12/2006
(3) 8,000 1.82% 4.7500 06/12/2006
(1) Grants became exercisable in December 1996, at an annual rate of 20% of the
underlying shares of Common Stock.
(2) Grants became exercisable in June 1996.
(3) Grants become exercisable in June 1997, at an annual rate of 20% of the
underlying shares of Common Stock.
The following table sets forth information concerning the exercise of stock
options by the Named Executives during the fiscal year ended October 31, 1996
and the value of unexercised options as of October 31, 1996 held by the Named
Executives.
Aggregated Option Exercises in Last Fiscal Year
and
Fiscal Year End Option Values
Shares Value of Unexercised
Acquired Value Number of Unexercised In-the-Money Options
on Exercise Realized Options at October at October 31, 1996(1)
31,1996
Exercis- Unexercis- Exercis- Unexercis-
able able able able
Chester Luby 10,000 $ 9,750 158,000 42,000 $118,375 $156,519
Cindy Luby 13,600 13,260 134,234 37,600 107,995 146,117
Lawrence
Altman 10,000 26,625 11,400 44,100 52,053 100,535
(1) Based on the closing price of the Common Stock on NASDAQ on October 31,
1996.
<PAGE>
Stock Option Plan
The Company's Amended and Restated 1993 Stock Option Plan, as amended (the
"Option Plan"), is designed to attract, retain and motivate key employees by
granting them options to purchase Common Stock. The Option Plan provides for the
grant of a maximum of 344,000 shares of Common Stock and permits the granting of
stock options to employees which are either "incentive stock options" ("ISOs")
meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or "nonqualified stock options" ("NSOs"). The Option Plan
is administered by a Stock Option and Compensation Committee of the Board of
Directors established for such purpose and consisting of Robert Schulman and
William Brown, independent directors of the Board of Directors of the Company.
Subject to the terms of the Option Plan, such Committee determines the
recipients of options and the number of options to be granted under the Option
Plan. The Option Plan also provides for the Stock Option and Compensation
Committee to establish an exercise price for ISOs and NSOs that is not less than
the fair market value per share at the date of grant. As of October 31, 1996,
options to purchase 276,834 shares of Common Stock were outstanding under the
Option Plan, 158,234 of which are exercisable at January 7, 1997. Under the
Option Plan, a total of 8,100 additional options may be granted.
Incentive Plan
The Company's 1996 Incentive Plan (the "Incentive Plan"), is designed to
assist the Company in attracting and retaining selected individuals to serve as
directors, officers, consultants, advisors and employees of the Company who will
contribute to the Company's long-term success. The Incentive Plan authorizes the
granting of incentive awards through grants of options to purchase Common Stock,
grants of Common Stock appreciation rights, grants of Common Stock purchase
awards and grants of restricted Common Stock. The Incentive Plan provides for
the grant of a maximum of 300,000 shares of Common Stock and permits the
granting of stock options which are either ISOs meeting the requirements of
Section 422 of the Code, or NSOs. The Incentive Plan is administered by a
Committee of the Board of Directors established for such purpose and consisting
of Robert Schulman and William Brown, independent directors of the Company.
Subject to the terms of the Incentive Plan, such Committee determines the
recipients of awards and the number of awards to be granted under the Incentive
Plan. The Incentive Plan also provides for the Committee to establish an
exercise price for ISOs and NSOs that is not less than the fair market value per
share at the date of grant.
In addition to grants of discretionary awards by the Stock Option and
Compensation Committee, the Incentive Plan provides for automatic grants of
options to purchase 15,000 shares to all independent directors (as defined in
the Incentive Plan) at an exercise price equal to the fair market value of the
Common Stock, upon adoption of the Incentive Plan by the stockholders of the
Company and, if later, upon the appointment of an independent director to the
Board of Directors. As a result of this provision of the Incentive Plan, options
to purchase 15,000 shares were automatically granted to each of Messrs. Schulman
and Brown in April 1996 and options to purchase 15,000 shares were automatically
granted to Mr. Kirsch upon his election in December 1996. As of October 31,
1996, options to purchase 105,000 shares of Common Stock were outstanding under
the Incentive Plan, none of which are exercisable at January 7, 1997.
Employment Agreements
On December 1, 1993, the Company entered into a five-year employment
agreement with Chester J. Luby providing for his employment as Chairman and
Chief Executive Officer of the Company at an annual salary of $150,000 plus a
non-accountable reimbursement of expenses of $1,000 per month. In fiscal 1996,
the Company amended the employment agreement to extend its term for an
additional five years from the original date of termination. Mr. Luby is
entitled to receive during the term of such agreement, an annual bonus at the
discretion of the Company's Board of Directors and reimbursement for membership
in certain organizations. Mr. Luby is also provided with the use of a leased car
and reimbursed for all operating expenses thereof. Under the terms of such
agreement, if Mr. Luby's employment with the Company is terminated other than
for cause, he is entitled to receive compensation in an amount equal to the
greater of (a) the aggregate salary and discretionary bonus paid or payable by
the Company for the most recent two fiscal years prior to his termination of
employment and (b) the aggregate salary payable to Mr. Luby from the date of
termination of employment through the expiration of such agreement. In fiscal
1995 the Company amended the employment agreement to provide for assistance to
Mr. Luby with respect to the purchase by his trustee of split-dollar life
insurance policies which benefit Mr. Luby and his family. The amounts disbursed
by the Company are recorded as non-interest bearing loans and total $122,920 as
of October 31, 1996. This amount will be reimbursed to the Company in the event
of death of the insured or termination of the agreement.
<PAGE>
On December 1, 1993, the Company entered into a five-year employment
agreement with Cindy H. Luby providing for her employment as Chief Financial
Officer at an annual salary of $72,000 plus a non-accountable reimbursement of
expenses of $250 per month. On December 18, 1995, the Company amended the
employment agreement naming Ms. Luby to the positions of Chief Operating Officer
and President at an annual salary of $100,000 effective November 1, 1995. In
fiscal 1996, the Company further amended the agreement to extend its term for an
additional five years from the original date of termination. Ms. Luby is
entitled to receive during the term of such agreement, an annual bonus at the
discretion of the Company's Board of Directors. Ms. Luby is also provided with
the use of a leased car and is reimbursed for all operating expenses thereof.
Under the terms of such agreement, if Ms. Luby's employment with the Company is
terminated other than for cause, she is entitled to receive an amount equal to
the aggregate salary paid or payable by the Company for the most recent two
fiscal years prior to her termination of employment.
As of December 1, 1993, the Company entered into a five-year employment
agreement with Lawrence J. Altman providing for his employment as Vice
President, Marketing of the Company at an annual salary of $69,150 including
reimbursement of expenses incurred in connection with the use of his car. Mr.
Altman also receives monthly commissions in an amount equal to 2% of (a) all
administrative fees paid to the Company during such month minus (b) the
aggregate selling expenses incurred for such month minus (c) $150,000. In fiscal
1996, the Company amended the employment agreement to extend its term for an
additional three years from the original date of termination. Mr. Altman is
entitled to receive during the term of such agreement, an annual bonus at the
discretion of the Company's Board of Directors. Under the terms of such
agreement, if Mr. Altman's employment with the Company is terminated other than
for cause, he is entitled to receive compensation in an amount equal to the
aggregate salary paid or payable by the Company to him for the most recent two
fiscal years prior to his termination of employment.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of shares of Common Stock, as of January 7, 1997, by each person who
beneficially owns more than five percent of such shares, by each director of the
Company, by each executive officer of the Company and by all directors and
executive officers of the Company as a group. Each person named in the table has
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by him or it, except as otherwise set forth in the
notes to the table.
Shares Percent of Shares
Name and Address of Beneficially Beneficially
Beneficial Owner Owned Owned (1)
Chester J. Luby 680,800(2) 19.0%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Louis F. Dente 409,116(3) 12.1%
384 Ocean Avenue North.
Long Branch, New Jersey 07740
Joan S. Luby 492,500(4) 14.5%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Cindy H. Luby 186,394(5) 5.2%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Lawrence J. Altman 67,500(6) 2.0%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Zvi D. Sprung 14,500(7) -
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Robert E. Schulman 101,534(8) 3.0%
William H. Brown 18,000(9) -
Donald Kirsch 15,000(10) -
First Wilshire Securities Management, Inc. 408,000(11) 12.1%
All directors and executive officers
as a group (seven persons) 1,083,728 28.0%
(1) Excludes (i) 1,225,100 shares of Common Stock issuable upon the exercise of
the Warrants issued to the public as part of the Company's public offering;
(ii) 110,000 shares of Common Stock issuable upon the exercise of the Unit
Purchase Options issued to the underwriters in the Company's IPO and (iii)
110,000 shares of Common Stock issuable upon exercise of the Warrants issued
as part of the Units comprising the Unit Purchase Options. Amount and
Percent of Shares Beneficially Owned was computed based on 3,384,233 shares
of Common Stock outstanding on January 7, 1997 and, in each person's case,
the number of shares of Common Stock issuable upon the exercise of options
and/or Independent Director Warrants (defined below) held by such person, or
in the case of all directors and executive officers as a group, the number
of shares of Common Stock issuable upon the exercise of options and/or
Independent Director Warrants held by all such members of such group, but
does not include the number of shares of Common Stock issuable upon the
exercise of any other outstanding options and/or Independent Director
Warrants.
<PAGE>
(2) Includes 200,000 shares issuable upon the exercise of stock options, 165,000
of which are currently exercisable and the balance of which become
exercisable at the rate of 12,000 options per year.
(3) Includes 2,266 shares owned by Mr. Dente's wife.
(4) Includes 15,000 shares issuable upon the exercise of stock options, 5,000 of
which are currently exercisable and the balance of which become exercisable
at the rate of 5,000 options per year.
(5) Includes 171,834 shares issuable upon the exercise of stock options, 139,234
of which are currently exercisable and the balance of which become
exercisable at the rate of 11,800 options per year. Also includes 960 shares
owned by Ms. Luby's husband, to which shares Ms. Luby disclaims beneficial
ownership.
(6) Includes 55,500 shares issuable upon the exercise of stock options, 12,900
of which are currently exercisable and the balance of which become
exercisable at the rate of 13,100 options per year.
(7) All of these shares are issuable upon the exercise of stock options, 500 of
which are currently exercisable and the balance of which become exercisable
at the rate of 2,900 options per year.
(8) Includes (a) 15,000 shares issuable upon the exercise of stock options, none
of which are currently exercisable and which become exercisable at the rate
of 5,000 options per year, (b) 3,000 shares issuable upon exercise of
warrants to purchase Common Stock (the "Independent Director Warrants"),
1,200 of which are currently exercisable and the balance of which become
exercisable at the rate of 600 Independent Director Warrants per year and
(c) 83,534 shares owned by MRN Capital Company of which Mr. Schulman is a
controlling person.
(9) Includes (a) 15,000 shares issuable upon the exercise of stock options, none
of which are currently exercisable and which become exercisable at the rate
of 5,000 options per year and (b) 3,000 shares issuable upon exercise of
Independent Director Warrants, 1,200 of which are currently exercisable and
the balance of which become exercisable at the rate of 600 Independent
Director Warrants per year.
(10)All of these shares are issuable upon the exercise of stock options, none
of which are currently exercisable and which become exercisable at the rate
of 5,000 options per year.
(11)Pursuant to Schedule 13G supplied to the Company in July 1996. First
Wilshire Securities Management, Inc., a broker and investment advisor, has
sole voting power over 86,800 of the 408,000 shares.
Based solely on its review of copies received by the Company of reports of
ownership of and changes in ownership of securities filed with the Securities
and Exchange Commission by the Company's officers, directors and greater than
10% shareholders, or written representations from certain reporting persons that
no Forms 5 were required for those persons, the Company believes that, during
the year ended October 31, 1996, all filing requirements applicable to its
officers, trustees and greater than 10% shareholders were complied with as
required by Section 16 (a) of the Securities and Exchange Act of 1934, as
amended.
Item 12. Certain Relationships and Related Transactions
On October 25, 1991, in connection with the acquisition by the Company of
the assets of the Predecessor (the "Acquisition"), Target made a $200,000 loan
to the Company, which loan matured and was paid in October 1996. The loan bore
interest at a rate per annum equal to the greater of (i) 10% and (ii) 1% plus
the prime rate.
In connection with the Acquisition, INDS Holdings, Inc. ("Holdings"), a
company controlled by Chester and Joan Luby, purchased 935,000 shares of the
Company's Common Stock. Upon consummation of the Acquisition, all of the common
stock of Holdings was owned by Mr. and Mrs. Luby, and Target owned all of the
preferred stock of Holdings. Target is also owned and controlled by Mr. and Mrs.
Luby. On November 23, 1993, Holdings was merged into the Company, as a result of
which the Company issued to each of Mr. and Mrs. Luby 467,500 shares of Common
Stock and issued to Target a promissory Note in the amount of $60,000. This
note, which bears interest at the rate of 8% per annum, matures on October 21,
1997. The Company has the right to prepay the note at any time. In addition, as
a result of the merger, the Company assumed the obligations of Holdings under a
promissory note to Target in the amount of $100,000 arising out of a loan made
by Target to Holdings. This note bears interest at 8.5% per annum, matures on
October 21, 1997, and is prepayable at any time by the Company.
<PAGE>
In 1984, Agency executed a standard Agent Agreement with the Predecessor,
which agreement was assumed by the Company upon the Acquisition. In the
Company's fiscal years ended October 31, 1995 and October 31, 1996 Agency was
paid commissions aggregating, approximately $11,000 and $650 respectively.
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
A) Exhibits
Exhibit
No. Description
2.1 Certificate of Merger of INDS Holdings, Inc. ("Holdings") into
the Company.(1)
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 Bylaws of the Company, as amended.(1)
3.3 Amended and Restated Certificate of Incorporation of the Company.(1)
3.4 Amended and Restated Bylaws of the Company.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 Form of Warrant Agreement and Form of Warrant Certificates.(1)
4.3 Form of Unit Purchase Option Agreement and Form of Unit
Purchase Option Certificate.(1)
4.4 Rights Agreement dated as of October 24, 1995 between the Company and
Continental Stock Transfer & Trust Company, which includes as exhibits
the Form of Right Certificate as Exhibit A and the Summary of Rights
to Purchase Common Shares as Exhibit B.(2)
10.1 Employment Agreement between the Company and Louis F.
Dente ("Dente"), dated September 5, 1991.(1)
10.2 Employment Agreement between the Company and Chester J. Luby, dated
as of December 1, 1993.(1)
10.3 Employment Agreement between the Company and Cindy H.Luby, dated
as of December 1, 1993.(1)
10.4 Employment Agreement between the Company and Lawrence J.Altman, dated
as of December 1, 1993.(1)
10.5 Amended and Restated 1993 Stock Option Plan.(1)
10.8 License Agreement, dated September 25, 1991, between INDS Group, Inc.
("Seller")as licensor, and the Company, as licensee.(1)
10.10 Restated Contingent Claim Reserve and Administration Escrow Contract,
dated August 7, 1991, among Seller (as predecessor-in-interest to
the Company), The Travelers Indemnity Company ("Travelers"), Brokerage
Professionals, Inc. ("BPI")and The Massachusetts Company, Inc. (the
"Escrow Agent").(1)
10.11 Replacement Administrator Agreement, dated October 1,1991, among Seller
(as predecessor-in-interest to the Company), Travelers, BPI
and Automotive Professionals, Inc. ("API").(1)
10.12 INDS/BPI-Program Agreement, dated October 1, 1991, among Seller
(as predecessor-in-interest to the Company), Travelers and BPI.(1)
10.13 Escrow Account Agreement for Automobile Vehicle Service Contract Primary
Loss Primary Loss Reserve Funds, dated August 22, 1991, among
Seller (as predecessor-in-interest to the Company), BPI and the Escrow
Agent.(1)
10.14 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
among the Company, Seller and Travelers.(1)
10.15 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
among the Company, Seller and BPI.(1)
10.16 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
among the Company, Seller and the Escrow Agent.(1)
10.17 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
among the Company, Seller and the API.(1)
10.18 Letter Agreement, dated August 8, 1991, with National Warranty Risk
Retention Group.(1)
10.19 Form of Independent Agent Agreement.(1)
10.20 Form of Administrator Agreement.(1)
10.21 Form of Dealer Administrator Agreement.(1)
10.22 Promissory Note, dated October 22, 1991, executed by Holdings
(as predecessor-in-interest to the Company) in favor of Target Insurance
Ltd.,in the principal amount of $100,000.(1)
10.23 Consulting Agreement dated December 1, 1992, between the Company and
MRN Capital Company.(1)
<PAGE>
Exhibit
No. Description
10.24 Promissory Note, dated November 12, 1993, executed by the Company in
favor of Target, in the principal amount of $60,000.(1)
10.25 Services Agreement, dated as of January 1, 1993, between the Company
and Target Agency, Inc.(1)
10.26 Pre-Incorporation Agreement dated September 25, 1991,among Chester J.
Luby, Louis F. Dente and Alan Pallie.(1)
10.27 Agreement of Purchase and Sale, dated September 25, 1991, between Seller
and the Company.(1)
10.28 Form of Service Contract Financing Program Agreement.(1)
10.29 Amendment to Amended and Restated 1993 Stock Option Plan.(1)
10.31 Lease, dated December 2, 1994, between The Omni Partners, a Limited
Partnership, as lessor, and the Company, as lessee.(3)
10.32 Amendment to Employment Agreement between the Company and Chester J.
Luby, dated as of May 1, 1996.
10.33 Amendment to Employment Agreement between the Company and Cindy H.
Luby, dated as of November 1, 1995.
10.34 Amendment to Employment Agreement between the Company and Cindy H.
Luby, dated as of May 1, 1996.
10.35 Amendment to Employment Agreement between the Company and Lawrence J.
Altman, dated as of May 1, 1996.
10.36 1996 Incentive Plan. (4)
21.1 List of Subsidiaries.
27 Financial Data Schedule. (5)
(1) Incorporated by reference to Registration Statement on Form SB-2,
File No. 33-74222-NY.
(2) Incorporated by reference to Registration Statement on Form 8-A dated
October 26, 1995.
(3) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended October 31, 1994.
(4) Incorporated by reference to Registration Statement on Form S-8,
File No. 333-09571.
(5) This Exhibit is filed for EDGAR filing purposes only.
B) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTERSTATE NATIONAL DEALER SERVICES, INC.
January 21, 1997
By /s/Cindy H. Luby
Cindy H. Luby
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the date set forth above.
Signature Title
/s/Chester J. Luby Chairman of the Board
Chester J. Luby (Chief Executive Officer)
/s/Cindy H. Luby President and Director
Cindy H. Luby (Chief Operating Officer)
/s/Zvi D. Sprung Chief Financial Officer
Zvi D. Sprung (Chief Accounting Officer)
/s/Robert E. Schulman Director
Robert E. Schulman
/s/William H. Brown Director
William H. Brown
/s/Donald Kirsch Director
Donald Kirsch
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
This Amendment, dated as of May 1, 1996, to the Employment Agreement,
dated as of December 1, 1993, as amended by the Amendment to the Employment
Agreement, dated as of March 16, 1995 (the "Agreement"), between Interstate
National Dealer Services, Inc. (the "Company" and Chester J. Luby (the
"Executive").
WHEREAS, the Company and the Executive are parties to the Agreement,
providing for the employment by the Company of the Executive and for
compensation and benefits to be provided to the Executive; and
WHEREAS, the parties hereto desire to extend the term of the
Agreement for an additional five years from the original date of termination of
the Agreement.
NOW, THEREFORE, the parties hereto agree that the Agreement is
amended as follows:
1. Section 4(a) of the Agreement is hereby
amended in its entirety to read as follows:
Term. This Agreement shall terminate on December 1, 2003 (the
"Termination Date"), unless sooner terminated as herein provided. In
the event that the Executive continues his employment after the
Termination date, his employment will be deemed "at will" under the
same terms as provided herein unless otherwise expressly agreed to by
further written agreement between the Company and the Executive.
2. Except as specifically amended hereby, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed in all
respects.
3. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original and all of which, taken
together, shall constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
INTERSTATE NATIONAL
DEALER SERVICES, INC.
By: __________________
----------------------
Chester J. Luby
Confirmed:
- - -------------------
A Director of
Interstate National
Dealer Services, Inc.
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment, dated as of November 1, 1995, to the Employment
Agreement, dated as of December 1, 1993 (the "Agreement"), between Interstate
National Dealer Services, Inc. (the "Company" and Cindy H. Luby (the
"Executive").
WHEREAS, the Company and the Executive are parties to the Agreement,
providing for the employment by the Company of the Executive and for
compensation and benefits to be provided to the Executive; and
WHEREAS, the parties hereto desire to amend the Agreement to employ
the Executive in a new capacity and to increase the compensation paid to the
Executive.
NOW, THEREFORE, the parties hereto agree that the Agreement is
amended as follows:
4. Section 1 of the Agreement is hereby amended
in its entirety to read as follows:
Employment, Services. The Company agrees to employ the Executive
as President and Chief Operating Officer of the Company subject to
the supervision of and reporting only to the Board of Directors of
the Company and the Chairman and Chief Executive Officer of the
Company, with such executive duties and responsibilities assigned to
her consistent with her position. The Executive hereby accepts such
employment and agrees to devote her best talents, efforts and
abilities on a full-time basis to the performance of such services.
5. Section 2(a) is hereby amended to increase
the Executive's annual salary from $72,000 to $100,000.
6. Except as specifically amended hereby, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed in all
respects.
7. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original and all of which, taken
together, shall constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
INTERSTATE NATIONAL
DEALER SERVICES, INC.
By: __________________
----------------------
Cindy H. Luby
Confirmed:
- - ---------------------
A Director of
Interstate National
Dealer Services, Inc.
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
This Amendment, dated as of May 1, 1996, to the Employment Agreement,
dated as of December 1, 1993, as amended by the Amendment to the Employment
Agreement, dated as of November 1, 1995 (the "Agreement"), between Interstate
National Dealer Services, Inc. (the "Company" and Cindy H. Luby (the
"Executive").
WHEREAS, the Company and the Executive are parties to the Agreement,
providing for the employment by the Company of the Executive and for
compensation and benefits to be provided to the Executive; and
WHEREAS, the parties hereto desire to extend the term of the
Agreement for an additional five years from the original date of termination of
the Agreement.
NOW, THEREFORE, the parties hereto agree that the Agreement is
amended as follows:
8. Section 4(a) of the Agreement is hereby
amended in its entirety to read as follows:
Term. This Agreement shall terminate on December 1, 2003 (the
"Termination Date"), unless sooner terminated as herein provided. In
the event that the Executive continues her employment after the
Termination date, her employment will be deemed "at will" under the
same terms as provided herein unless otherwise expressly agreed to by
further written agreement between the Company and the Executive.
9. Except as specifically amended hereby, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed in all
respects.
10. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original and all of which, taken
together, shall constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
INTERSTATE NATIONAL
DEALER SERVICES, INC.
By: __________________
----------------------
Cindy H. Luby
Confirmed:
- - -------------------
A Director of
Interstate National
Dealer Services, Inc.
AMENDMENT
TO
EMPLOYMENT AGREEMENT
This Amendment, dated as of May 1, 1996, to the Employment Agreement,
dated as of December 1, 1993 (the "Agreement"), between Interstate National
Dealer Services, Inc. (the "Company" and Lawrence J. Altman (the "Executive").
WHEREAS, the Company and the Executive are parties to the Agreement,
providing for the employment by the Company of the Executive and for
compensation and benefits to be provided to the Executive; and
WHEREAS, the parties hereto desire to extend the term of the
Agreement for an additional three years from the original date of termination of
the Agreement.
NOW, THEREFORE, the parties hereto agree that the Agreement is
amended as follows:
11. Section 4(a) of the Agreement is hereby
amended in its entirety to read as follows:
Term. This Agreement shall terminate on December 1, 2001 (the
"Termination Date"), unless sooner terminated as herein provided. In
the event that the Executive continues his employment after the
Termination date, his employment will be deemed "at will" under the
same terms as provided herein unless otherwise expressly agreed to by
further written agreement between the Company and the Executive.
12. Except as specifically amended hereby, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed in all
respects.
13. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original and all of which, taken
together, shall constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
INTERSTATE NATIONAL
DEALER SERVICES, INC.
By: __________________
----------------------
Lawrence J. Altman
LIST OF SUBSIDIARIES
Interstate National Dealer Services, Inc. has the following
subsidiaries:
1. Warranty Direct, Inc., a Delaware corporation.
2. National Service Contract Insurance Company Risk Retention
Group, Inc., a Hawaii corporation.
3. Interstate National Dealer Services of Florida, Inc., a
Florida corporation.
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<ARTICLE> 5
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<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-START> Nov-01-1995
<PERIOD-END> Oct-31-1996
<EXCHANGE-RATE> 1
<CASH> 13,230,203
<SECURITIES> 0
<RECEIVABLES> 4,138,051
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,618,423
<PP&E> 1,165,398
<DEPRECIATION> 283,850
<TOTAL-ASSETS> 22,159,169
<CURRENT-LIABILITIES> 3,600,083
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0
0
<COMMON> 33,843
<OTHER-SE> 5,871,472
<TOTAL-LIABILITY-AND-EQUITY> 22,159,169
<SALES> 21,354,148
<TOTAL-REVENUES> 21,354,148
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<TOTAL-COSTS> 6,449,347
<OTHER-EXPENSES> 13,745,177
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<INTEREST-EXPENSE> 54,556
<INCOME-PRETAX> 1,604,186
<INCOME-TAX> 640,711
<INCOME-CONTINUING> 963,475
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