UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12938
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, NY 11553
(Address of principal executive offices)
(516) 228-8600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 past 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
As of September 3, 1998, Registrant had issued and outstanding 4,644,116 shares
of Common Stock.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of
July 31, 1998 and October 31, 1997 3
Consolidated Statements of Operations
for the nine and three month periods ended
July 31, 1998 and 1997 4
Consolidated Statement of Stockholders'
Equity for the nine month period ended
July 31, 1998 5
Consolidated Statements of Cash Flows for
the nine month periods ended July 31, 1998
and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
ASSETS 1998 1997
------ ------ -----
Unaudited
CURRENT ASSETS:
Cash and cash equivalents $ 21,085,237 $20,846,524
United States Treasury Notes, at cost 13,492,291 6,010,337
Accounts receivable 8,426,250 8,891,963
Prepaid expenses 502,684 367,932
----------- ----------
Total current assets 43,506,462 36,116,756
RESTRICTED CASH 1,699,915 1,633,068
FURNITURE, FIXTURES AND EQUIPMENT, at cost,
less accumulated depreciation and
amortization of $794,135 and $530,281,
respectively 1,570,576 1,179,293
INTANGIBLE ASSETS, less accumulated amortization
of $145,620 and $127,401, respectively 79,380 97,599
DEFERRED INCOME TAXES 1,933,281 1,491,771
NOTE FROM RELATED PARTY 90,000 110,000
OTHER ASSETS 1,076,122 654,074
----------- ----------
$49,955,736 $41,282,561
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,232,143 $ 2,929,476
Accrued expenses 667,214 1,040,721
Accrued commissions 1,304,146 1,080,178
Reserve for claims 1,500,582 1,120,527
Other liabilities 426,046 241,598
---------- ----------
Total current liabilities 7,130,131 6,412,500
DEFERRED CONTRACT REVENUE 23,868,587 18,478,155
CONTINGENCY PAYABLE 1,699,915 1,633,068
----------- -----------
Total liabilities 32,698,633 26,523,723
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares; no issued
shares - -
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued
and outstanding 4,644,116 and 4,623,016
shares, respectively 46,442 46,231
Additional paid-in capital 11,082,066 11,052,054
Retained earnings 6,128,595 3,660,553
----------- -----------
Total stockholders' equity 17,257,103 14,758,838
----------- -----------
$49,955,736 $41,282,561
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
For the Nine Months For the Three Months
Ended July 31, Ended July 31,
1998 1997 1998 1997
REVENUES $35,875,823 $25,598,342 $13,775,114 $10,614,028
OPERATING COSTS AND EXPENSES:
Costs of services provided 17,333,339 10,439,794 6,712,644 4,652,924
Selling, general and
administrative expenses 16,040,461 13,100,620 5,942,280 5,044,867
----------- ---------- ---------- ----------
Operating income 2,502,023 2,057,928 1,120,190 916,237
OTHER INCOME (EXPENSE):
Interest income 1,068,433 537,584 388,467 205,179
Interest expense - (24,975) - (18,325)
Other income 500,000 - - -
---------- ---------- --------- ----------
Income before income taxes 4,070,456 2,570,537 1,508,657 1,103,091
PROVISION FOR INCOME TAXES 1,602,414 1,026,673 593,470 440,575
--------- --------- --------- ---------
Net income $2,468,042 $1,543,864 $ 915,187 $662,516
========== ========== ========= ========
NET INCOME PER SHARE:
Basic $ .53 $ .45 $ .20 $ .19
====== ====== ====== ======
Weighted average shares
outstanding 4,631,932 3,395,048 4,640,933 3,401,368
========= ========= ========= =========
Diluted $ .50 $ .40 $ .19 $ .17
====== ====== ====== ======
Weighted average shares
outstanding 4,967,451 3,813,143 4,942,004 3,966,080
========= ========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JULY 31, 1998
UNAUDITED
Common Stock Additional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
BALANCE AT OCTOBER 31,1997 4,623,016 $46,231 $11,052,054 $3,660,553 $14,758,838
Shares issued pursuant
to exercise of employee
stock options 21,100 211 30,012 - 30,223
Net income for the nine
months ended July 31,
1998 - - - 2,468,042 2,468,042
------- ------- --------- --------- ---------
BALANCE AT JULY 31, 1998 4,644,116 $46,442 $11,082,066 $6,128,595 $17,257,103
========= ======= ========== ========= ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
UNAUDITED
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,468,042 $1,543,864
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 308,782 248,471
Deferred income taxes (441,510) (508,779)
Increase (decrease) in cash resulting
from changes in operating assets
and liabilities:
Accounts receivable 465,713 (4,269,406)
Prepaid expenses (134,752) 13,117
Restricted cash (66,847) 374,181
Other assets (448,757) (10,339)
Accounts payable 302,667 997,274
Accrued expenses (373,507) 559,941
Accrued commissions 223,968 478,727
Reserve for claims 380,055 97,557
Other liabilities 184,448 31,325
Deferred contract revenue 5,390,432 6,369,296
Contingency payable 66,847 (374,181)
---------- ----------
Net cash provided by operating activities 8,325,581 5,551,048
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of United States Treasury Notes (7,481,954) (7,787,575)
Purchases of furniture, fixtures and equipment,
net (655,137) (429,127)
Note from related party 20,000 (110,000)
----------- ---------
Net cash used in investing activities (8,117,091) (8,326,702)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options 30,223 12,044
--------- ----------
Net cash provided by financing activities 30,223 12,044
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 238,713 (2,763,610)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,846,524 13,230,203
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $21,085,237 $10,466,593
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $2,006,865 $1,210,059
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended October 31, 1997.
2. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
July 31, 1998, and the consolidated results of operations and cash flows for
the periods ended July 31, 1998 and 1997. The accounting policies followed by
the Company are set forth in the Company's consolidated financial statements
included in the Annual Report mentioned above.
3. The consolidated results of operations for the nine and three month periods
ended July 31, 1998 and 1997 are not necessarily indicative of the results to
be expected for the full year.
4. The Company reports earnings per share in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic net income per share ("Basic EPS") is computed by dividing net
income by the weighted average number of common shares outstanding. Diluted net
income per share ("Diluted EPS") is computed by dividing net income by the
weighted average number of common shares and dilutive common share equivalents
then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the statements of operations.
A reconciliation between the numerators and denominators of Basic and Diluted
EPS is as follows:
Net Income Shares Per Share
For the nine months ended July 31, 1998
Basic EPS
Net income attributable to common shares $2,468,042 4,631,932 $.53
Effect of dilutive securities: stock options
and warrants - 335,519 (.03)
-------- --------- ---
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $2,468,042 4,967,451 $.50
======== ========= =====
For the nine months ended July 31, 1997
Basic EPS
Net income attributable to common shares $1,543,864 3,395,048 $.45
Effect of dilutive securities: stock options
and warrants - 418,095 (.05)
-------- --------- -----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $1,543,864 3,813,143 $.40
======== ========= =====
<PAGE>
Net Income Shares Per Share
For the three months ended July 31, 1998
Basic EPS
Net income attributable to common shares $915,187 4,640,933 $.20
Effect of dilutive securities: stock options
and warrants - 301,071 (.01)
-------- --------- ---
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $915,187 4,942,004 $.19
======== ========= ====
For the three months ended July 31, 1997
Basic EPS
Net income attributable to common shares $662,516 3,401,368 $.19
Effect of dilutive securities: stock options
and warrants - 564,712 (.02)
-------- --------- -----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $662,516 3,966,080 $.17
======== ========= =====
5. In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities ". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No.133 is effective for fiscal years beginning after June 15, 1999. The
Company does not use derivatives or hedging instruments, and therefore this new
pronouncement is not applicable.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
For the Nine Months ended July 31, 1998 compared to the Nine Months ended
July 31, 1997
Revenues increased approximately $10,278,000, or 40%, to approximately
$35,876,000 for the nine months ended July 31, 1998 as compared to approximately
$25,598,000 for the nine months ended July 31, 1997. This increase was primarily
due to: (i) 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 (ii) 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 1998. The
increase in the number of service contracts accepted for administration during
fiscal 1998 was primarily due to the aggressive efforts by the Company in
enrolling additional producers to sell the Company's products and to a more
diversified array of products offered by the Company.
Costs of services provided, which consist primarily of claims and
cancellation costs, increased by approximately $6,893,000, or 66%, to
approximately $17,333,000 for the nine months ended July 31, 1998, as compared
to approximately $10,440,000 for the nine months ended July 31, 1997. As a
<PAGE>
percentage of revenues, cost of services provided increased to 48% for the nine
months ended July 31, 1998 as compared to 41% in the same period in 1997. Claims
and cancellation costs are directly affected by the total number of unexpired
contracts under administration, which has increased on a yearly basis.
Gross margin increased by approximately $3,384,000, or 22%, to approximately
$18,542,000 for the nine months ended July 31, 1998, as compared to
approximately $15,158,000 for the nine months ended July 31, 1997. This increase
is primarily attributable to the increase in revenues as described above. Gross
margin for the nine months ended July 31, 1998 was 52% as compared to 59% for
the nine months ended July 30, 1997. This decrease is primarily attributable to
an increase in the relative percentage of revenue represented by deferred
contract revenue, which has a low gross margin, as compared to administrative
fees which have a higher gross margin.
Selling, general and administrative expenses increased by approximately
$2,939,000, or 22%, to approximately $16,040,000 for the nine months ended July
31, 1998, up from approximately $13,101,000 for the nine months ended July 31,
1997. 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 and postage costs resulting from increased sales volume and
to the development of new service contract products. As a percentage of
revenues, selling, general and administrative expenses decreased to 45% for the
nine months ended July 31, 1998 as compared to 51% in the same period in 1997.
Other income, net increased by approximately $1,055,000 or 206%, to
approximately $1,568,000 for the nine months ended July 31, 1998, as compared to
approximately $513,000 for the nine months ended July 31, 1997. This increase is
partially attributable to other income of $500,000 received by the Company in
settlement of a dispute with an unaffiliated party in the first quarter of 1998.
The balance of the increase of $555,000 was the result of an increase in
investment income generated by funds provided by the exercise of the Company's
outstanding warrants in October 1997 and by funds provided by operating
activities.
For the nine months ended July 31, 1998, the Company had income before
income taxes of approximately $4,070,000 and recorded a provision for income
taxes of approximately $1,602,000, as compared to income before income taxes of
approximately $2,571,000 and a provision for income taxes of approximately
$1,027,000 in the same period in 1997. Net income increased approximately
$924,000, or 60%, to approximately $2,468,000 for the nine months ended July 31,
1998 as compared to approximately $1,544,000 for the nine months ended July 31,
1997.
For the Three Months ended July 31, 1998 compared to the Three Months ended
July 31, 1997
Revenues increased approximately $3,161,000, or 30%, to approximately
$13,775,000 for the three months ended July 31, 1998 as compared to
approximately $10,614,000 for the three months ended July 31, 1997. This
increase was primarily due to: (i) 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 (ii) 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
1998. The increase in the number of service contracts accepted for
administration during fiscal 1998 was primarily due to the aggressive efforts by
the Company in enrolling additional producers to sell the Company's products and
to a more diversified array of products offered by the Company.
Costs of services provided, which consist primarily of claims and
cancellation costs, increased by approximately $2,060,000, or 44%, to
approximately $6,713,000 for the three months ended July 31, 1998, as compared
to approximately $4,653,000 for the three months ended July 31, 1997. As a
percentage of revenues, cost of services provided increased to 49% for the three
months ended July 31, 1998 as compared to 44% in the same period in 1997. Claims
and cancellation costs are directly affected by the total number of unexpired
contracts under administration, which has increased on a yearly basis.
Gross margin increased by approximately $1,101,000, or 18%, to approximately
$7,062,000 for the three months ended July 31, 1998, as compared to
approximately $5,961,000 for the three months ended July 31, 1997. This increase
is primarily attributable to the increase in revenues as described above. Gross
margin for the three months ended July 31, 1998 was 51% as compared to 56% for
the three months ended July 31, 1997. This decrease is primarily attributable to
an increase in the relative percentage of revenue represented by deferred
<PAGE>
contract revenue, which has a low gross margin, as compared to administrative
fees which have a higher gross margin.
Selling, general and administrative expenses increased by approximately
$897,000, or 18%, to approximately $5,942,000 for the three months ended July
31, 1998, up from approximately $5,045,000 for the three months ended July 31,
1997. 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, in part,
to increased personnel costs resulting from increased sales volume and to the
development of new service contract products. As a percentage of revenues,
selling, general and administrative expenses decreased to 43% for the three
months ended July 31, 1998 as compared to 48% in the same period in 1997.
Other income, net increased by approximately $201,000 or 108%, to
approximately $388,000 for the three months ended July 31, 1998, as compared to
approximately $187,000 for the three months ended July 31, 1997. This increase
is primarily attributable to an increase in investment income generated by funds
provided by the exercise of the Company's outstanding warrants in October 1997
and by funds provided by operating activities.
For the three months ended July 31, 1998, the Company had income before
income taxes of approximately $1,509,000 and recorded a provision for income
taxes of approximately $594,000, as compared to income before income taxes of
approximately $1,103,000 and a provision for income taxes of approximately
$441,000 in the same period in 1997. Net income increased approximately
$253,000, or 38%, to approximately $915,000 for the three months ended July 31,
1998 as compared to approximately $662,000 for the three months ended July 31,
1997.
Liquidity and Capital Resources
Cash and cash equivalents and United States Treasury Notes, at cost, were
approximately $34,578,000 at July 31, 1998, as compared to approximately
$26,857,000 at October 31, 1997. The increase of approximately $7,721,000 was
primarily the result of cash provided by the Company's operating activities less
cash used for the purchase of furniture, fixtures and equipment.
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.
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.
Year 2000
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems will recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the Year 2000 may
cause systems to process critical financial and operational information
incorrectly. The Company believes, based upon its internal reviews, inquiries
made of its critical customers and suppliers, and other factors, that the future
external and internal costs to be incurred relating to the modification of
internal-use software for the Year 2000 will not have a material effect on the
Company's results of operations or financial position.
Forward-Looking Statements
This Form 10-QSB, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based on assumptions and expectations which may not be realized and are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. Future events and
actual results, financial or otherwise, may differ from the results discussed in
<PAGE>
the forward-looking statements. A number of these risks and other factors that
might cause differences, some of which could be material, along with additional
discussion of forward-looking statements, are set forth in the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on December 23,
1996.
PART II - OTHER INFORMATION
Item 5. Other Information
Shareholder Proposals
Any shareholder proposal submitted outside the process of rule 14a-8 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for
presentation at the Company's 1999 Annual Meeting will be considered untimely
for purposes of Rules 14a-4 and 14a-5 under the Exchange Act if notice of such
shareholder proposal is received by the Company after February 1, 1999.
Item 6(b). Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended July
31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
INTERSTATE NATIONAL DEALER SERVICES, INC.
September 3, 1998 By: /s/ Zvi D. Sprung
Date Zvi D. Sprung
Chief Financial Officer
<TABLE> <S> <C>
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<S> <C>
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<PERIOD-START> Nov-01-1997
<PERIOD-END> Jul-31-1998
<EXCHANGE-RATE> 1
<CASH> 21,085,237
<SECURITIES> 13,492,291
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0
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