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
For the fiscal year October 31, 1997 Commission file no.1-12938
OR
[ ]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
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
Common Stock Purchase rights NASDAQ
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, 1997 were
$37,928,719. 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 13, 1998 as reported on the NASDAQ National Market
("NASDAQ"), was approximately $30,600,000.
As of January 13,1998, Registrant had issued and outstanding 4,623,016 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.
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.
Initially, the Company's business focused on extended warranties for new
automobiles and, to a lesser extent, used cars. In the past three 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 expanded into other markets 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.
The Company enters into an independent agent agreement with each of its
Agents which generally 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, 1997, 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, 1997, the Company's
receivables from its financing program totaled approximately $7,141,000. The
Company believes its exposure from these financed contracts is limited because
the service contract is terminated if the purchaser fails to make his monthly
payments to the Company.
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 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
to provide support services to its dealers and it maintains a toll-free line to
facilitate customer 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.
<PAGE>
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.
Employees
As of December 31, 1997, the Company had 90 full-time employees and 71
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
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 26,500 square feet of office
space at 333 Earle Ovington Blvd., Mitchel Field, New York 11553. Of such space,
13,000 square feet are occupied pursuant to a ten-year lease which commenced
March 1, 1995, at an initial annual rent of approximately $300,000, and the
remaining 13,500 square feet are occupied pursuant to a six-year sublease which
commenced October 1996 and was amended in November 1997, at an amended annual
rent of approximately $237,000. (See Note 9 to the Notes to Consolidated
Financial Statements for future lease payments under this lease and sublease.)
<PAGE>
Item 3. Litigation
There are no material legal proceedings pending against the Company other
than ordinary routine litigation incidental to the business, and the Company is
not aware of any threatened material legal proceedings to which the Company may
be a party.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
From July 22, 1994 until January 23,1997, 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"), 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. On January 23,1997, the Company's common stock and
Warrants were listed for trading on the NASDAQ National Market System and, as a
result, were no longer traded on the SmallCap Market or the Boston Stock
Exchange. On September 29, 1997 the Company exercised its right to redeem all of
its outstanding Warrants. The Warrants remained exercisable until October 29,
1997, thirty days after the date of the redemption notice. As of October 29,
1997, 1,218,983 of the 1,225,100 then outstanding warrants had been exercised by
the holders thereof for a price of $5.50 per share and the Company received
proceeds of approximately $6,704,000 from such exercises. All remaining Warrants
are no longer exercisable.
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
11/01/95 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 3-5/16 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 01/31/97 5-3/4 5 2-1/2 1-11/16
02/01/97 to 04/30/97 7-9/32 5-5/8 2-5/8 1-15/16
05/01/97 to 07/31/97 7-11/16 6-1/2 3 2
08/01/97 to 10/31/97 10-3/4 7-1/16 5 2-5/16
11/01/97 to 01/13/98 10-1/8 7-3/4 N/A N/A
As of January 13, 1998, there were 41 holders of record of Common Stock.
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.
<PAGE>
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"),
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.
Use of Proceeds from Registered Securities
On July 22, 1994, the Company's Registration Statement on Form SB-2, as
amended (File No. 33-74222-NY), was declared effective. Thereafter, on July 29,
<PAGE>
1994, the Company completed its public offering (the "Offering") of Units (each
Unit consisting of one share of Common Stock and one Redeemable Common Stock
Purchase Warrant of the Company (a "Warrant")), Common Stock and Warrants. The
managing underwriter of the Offering was Westfield Financial Corporation.
With respect to the Units, Common Stock and Warrants, (i) the amount of
each security registered in connection with the Offering (including the
underwriters' overallotment option), (ii) the aggregate price of the Offering
amount of each security, (iii) the amount of each security sold (including the
exercise of the underwriters' overallotment option), and (iv) the aggregate
Offering price of the amount of each security sold (for the account of the
Company and the account of MRN Capital Company, the selling shareholder) are as
follows:
- --------------------------------------------------------------------
Aggregate
Price of Aggregate
Offering Offering
Title of Amount Amount Price of
Security Registered Registered Amount sold Amount Sold
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Units 1,265,000 $6,325,000 1,225,100 $6,125,500
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Included in Included in
price of price of
Common stock 2,530,000 Units offered 1,225,100 Units sold
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Included in Included in
price of price of
Warrants 1,265,000 Units offered 1,225,100 Units sold
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Common Stock
(with
respect to
Selling
Stockholder) 133,000 $665,000 133,000 $135,000
- --------------------------------------------------------------------
The actual amount of expenses incurred by the Company in connection with
the issuance and distribution of the Units, Common Stock and Warrants (none of
which was paid to directors, officers or to persons owning ten percent or more
of any class of equity securities of the Company) was $1,913,445, of which
$612,550, $245,921 and $1,054,974 covered the cost of underwriting discounts and
commissions, expenses paid to or for the underwriters and other miscellaneous
expenses, respectively. The amount of net Offering proceeds to the Company after
deducting the foregoing expenses was $4,212,055.
As of January 13, 1998, the actual amount of net Offering proceeds to the
Company used for purchase and installation of machinery and equipment; working
capital; investment in an affiliated insurance company; and investment in a new
subsidiary (none of which were paid to directors, officers or to persons owning
ten percent or more of any class of equity securities of the Company) was:
$1,535,131, $1,002,298, $1,124,626 and $550,000, respectively. The Company did
not use any of the net Offering proceeds for purchases of real estate;
acquisition of other businesses; or repayment of indebtedness.
The foregoing description of the Company's use of Offering proceeds does not
represent a material change from that described in the Company's prospectus
relating to the Offering.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the Year ended October 31, 1997 compared to the Year ended
October 31, 1996
Revenues increased approximately $16,575,000, or 78%, to approximately
$37,929,000 for the year ended October 31, 1997 as compared to approximately
$21,354,000 for the year ended October 31, 1996. 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 1997; (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) a
significant increase in revenue from sales through telemarketing. The increase
in the number of service contracts accepted for administration during fiscal
1997 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.
<PAGE>
Gross margin increased by approximately $6,177,000, or 41%, to approximately
$21,082,000 for the year ended October 31, 1997, as compared to approximately
$14,905,000 for the year ended October 31, 1996. This increase is primarily
attributable to the increase in revenues as described above.
Costs of services provided, which consist primarily of claims and
cancellation costs, increased by approximately $10,397,000, or 161%, to
approximately $16,846,000 for the year ended October 31, 1997, as compared to
approximately $6,449,000 for the year ended October 31, 1996. As a percentage of
revenues, cost of services provided increased to 44% for the year ended October
31, 1997 as compared to 30% in the same period in 1996. Claims costs are
directly affected by the total number of unexpired contracts under
administration, which has increased on a yearly basis. Cancellation costs are
primarily affected by the total number of contracts accepted for administration
during the period, which has also increased.
Selling, general and administrative expenses increased by approximately
$4,546,000, or 33%, to approximately $18,291,000 for the year ended October 31,
1997, up from approximately $13,745,000 for the year ended October 31, 1996.
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, printing and postage costs resulting from
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 such license in March 1996
for $100,000. As a percentage of revenues, selling, general and administrative
expenses decreased to 48% for the year ended October 31, 1997 as compared to 64%
in the same period in 1996.
Other income, net increased by approximately $299,000 or 67%, to
approximately $744,000 for the year ended October 31, 1997, as compared to
approximately $445,000 for the year ended October 31, 1996. This increase was
the result of an increase in investment income generated by funds provided by
operating activities.
For the year ended October 31, 1997, the Company had income before income
taxes of approximately $3,535,000 and recorded a provision for income taxes of
approximately $1,398,000, as compared to income before income taxes of
approximately $1,604,000 and a provision for income taxes of approximately
$641,000 in the same period in 1996. Net income increased approximately
$1,174,000, or 122%, to approximately $2,137,000 for the year ended October 31,
1997 as compared to approximately $963,000 for the year ended October 31, 1996.
Liquidity and Capital Resources
Cash and cash equivalents and United States Treasury Notes, at cost, were
approximately $26,857,000 at October 31, 1997, as compared to approximately
$13,230,000 at October 31, 1996. The increase of approximately $13,627,000 was
primarily the result of proceeds from the exercise of the Company's outstanding
warrants (approximately $6,704,000) and cash provided by the Company's operating
activities less cash used for the purchase of furniture, fixtures and equipment
and the payment of long-term debt.
During the fiscal year ended October 31, 1997, the Company entered into a
$3,000,000 revolving credit facility with the Chase Manhattan Bank. Under the
terms of the facility, advances bear interest at 1/2% above the prime rate and
the Company is obligated to pay an annual facility fee of 1/2% of the total
available amount. Outstanding amounts under the credit facility are secured by a
pledge of all accounts receivable of the Company. As at October 31, 1997, no
amounts had been borrowed under the credit facility.
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 $320,000 in fiscal 1998 for the
purchase of computer hardware and software, telephone equipment and leasehold
improvements to enable the Company to administer the contracts generated by
increased sales volume.
<PAGE>
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 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.
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, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
October 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1997 and 1996 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, 1997 and 1996, 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, 1997 and 1996, 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 6, 1998
F-2
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1997 AND 1996
ASSETS 1997 1996
------ -------- -----
CURRENT ASSETS:
Cash and cash equivalents $ 20,846,524 $13,230,203
United States Treasury Notes, at cost 6,010,337 -
Accounts receivable 8,891,963 4,138,051
Prepaid expenses 367,932 250,169
----------- -----------
Total current assets 36,116,756 17,618,423
RESTRICTED CASH 1,633,068 1,975,505
FURNITURE, FIXTURES AND EQUIPMENT, at cost,
less accumulated depreciation and amortization
of $530,281 and $283,850, respectively 1,179,293 881,548
INTANGIBLE ASSETS, less accumulated amortization
of $127,401 and $81,232, respectively 97,599 143,768
DEFERRED INCOME TAXES 1,491,771 852,980
NOTE FROM RELATED PARTY 110,000 -
OTHER ASSETS 654,074 686,945
------------- -----------
$41,282,561 $22,159,169
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,929,476 $ 1,569,897
Accrued expenses 1,040,721 512,115
Accrued commissions 1,080,178 548,472
Reserve for claims 1,120,527 653,847
Current portion of long-term debt to related party - 160,000
Other liabilities 241,598 155,752
----------- -----------
Total current liabilities 6,412,500 3,600,083
DEFERRED CONTRACT REVENUE 18,478,155 10,678,266
CONTINGENCY PAYABLE 1,633,068 1,975,505
----------- ------------
Total liabilities 26,523,723 16,253,854
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
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 4,623,016 and 3,384,233 shares,
respectively 46,231 33,843
Additional paid-in capital 11,052,054 4,347,592
Retained earnings 3,660,553 1,523,880
------------ ------------
Total stockholders' equity 14,758,838 5,905,315
------------ ------------
$ 41,282,561 $ 22,159,169
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, 1997 AND 1996
1997 1996
REVENUES $ 37,928,719 $ 21,354,148
OPERATING COSTS AND EXPENSES:
Costs of services provided 16,846,370 6,449,347
Selling, general and administrative expenses 18,290,862 13,745,177
---------- ---------
Operating income 2,791,487 1,159,624
OTHER INCOME (EXPENSE):
Interest income 771,702 499,118
Interest expense (27,968) (54,556)
------------- -----------
Income before income taxes 3,535,221 1,604,186
PROVISION FOR INCOME TAXES 1,398,548 640,711
------------- -----------
Net income $ 2,136,673 $ 963,475
============= ============
NET INCOME PER SHARE:
Primary $ .52 $ .27
============ ==========
Weighted average shares outstanding 4,290,078 3,501,983
============ ==========
Fully Diluted $ .48 $ .27
============ ==========
Weighted average shares outstanding 4,512,611 3,501,983
============ ==========
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, 1997 AND 1996
Common Stock Additional
Number of Paid-in Retained
Shares Amount Capital Earnings Total
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
Shares issued pursuant to
exercise of warrants 1,218,983 12,190 6,692,216 - 6,704,406
Shares issued pursuant to
exercise of stock options 19,800 198 12,246 - 12,444
Net income for the year ended
October 31, 1997 - - - 2,136,673 2,136,673
--------- ------- ---------- --------- ----------
BALANCE AT OCTOBER 31, 1997 4,623,016 $46,231 $11,052,054 $3,660,553 $14,758,838
========= ======= =========== ========== ===========
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, 1997 AND 1996
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,136,673 $ 963,475
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 339,891 203,262
Deferred income taxes (638,791) (852,980)
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (4,753,912) (1,609,685)
Prepaid expenses (117,763) (33,968)
Restricted cash 342,437 (469,994)
Other assets (2,839) (45,198)
Accounts payable 1,359,579 3,098
Accrued expenses 528,606 196,857
Accrued commissions 531,706 (4,890)
Reserve for claims 466,680 300,350
Other liabilities 85,846 51,844
Deferred contract revenue 7,799,889 5,459,985
Contingency payable (342,437) 469,994
---------- ----------
Net cash provided by operating activities 7,735,565 4,632,150
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (purchases)redemptions of United States
Treasury Notes (6,010,337) 972,600
Purchase of furniture, fixtures and equipment,
net (555,757) (439,951)
Note from related party (110,000) -
Purchase of license - (100,000)
--------- ---------
Net cash (used in) provided by investing
activities (6,676,094) 432,649
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants 6,704,406 -
Payment of long-term debt to related party (160,000) (200,000)
Proceeds from exercise of stock options 12,444 24,067
--------- ----------
Net cash provided by (used in) financing
activities 6,556,850 (175,933)
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,616,321 4,888,866
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,230,203 8,341,337
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 20,846,524 $13,230,203
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 2,083,791 $ 1,457,621
============ ===========
Interest $ 27,967 $ 64,311
============ ===========
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, 1997 AND 1996
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, 1997 and 1996, the Company received
approximately $136,000 and $98,000, respectively, of such funds, which are
reflected in revenues in the accompanying consolidated statements of operations.
The balance in this escrow account totaled approximately $753,000 and $732,000
at October 31, 1997 and 1996, 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 $254,000 and $244,000 of such
unconsumed reserves for the years ended October 31, 1997 and 1996, respectively,
which are reflected in revenues in the accompanying consolidated statements of
operations. The balance in these interest-bearing accounts totaled approximately
$880,000 and $1,243,000 at October 31, 1997 and 1996, 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
9), 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, 1997 and 1996, 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.
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
Primary net income per share is computed based upon the weighted average number
of common and common equivalent shares outstanding during the period. Fully
diluted net income per share is computed as above, except that the outstanding
warrants are assumed to have been exercised at the beginning of the period.
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.
Stock Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation". This pronouncement establishes a
fair value based method of accounting and reporting for stock-based
compensation. Under SFAS No. 123, companies may elect to follow the 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 has elected to follow the accounting guidance of APB 25 with pro forma
disclosure of the fair value method specified in SFAS No. 123.
F-9
<PAGE>
Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. This statement establishes standards for computing and
presenting earnings per share ("EPS"), replacing the presentation of currently
required primary EPS with a presentation of Basic EPS. For entities with complex
capital structures, the statement requires the dual presentation of both Basic
EPS and Diluted EPS on the face of the statement of operations. Under this new
standard, Basic EPS is computed based on weighted average shares outstanding and
excludes any potential dilution; Diluted EPS reflects potential dilution from
the exercise or conversion of securities into common stock or from other
contracts to issue common stock and is similar to the currently required fully
diluted EPS. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods, and earlier
application is not permitted. When adopted, the Company will be required to
restate its EPS data for all prior periods presented. Pro forma EPS under SFAS
No. 128 is as follows:
1997 1996
Basic EPS $ .62 $ .28
Weighted average shares outstanding 3,434,008 3,369,684
Diluted EPS $ .54 $ .27
Weighted average shares outstanding 3,949,744 3,501,983
2. FURNITURE, FIXTURES AND EQUIPMENT:
Furniture, fixtures and equipment consists of the following :
October 31,
1997 1996
Furniture and fixtures $ 424,096 $ 325,429
Office equipment 1,225,667 791,465
Leasehold improvements 59,811 48,504
---------- ---------
1,709,574 1,165,398
Less: Accumulated
depreciation and
amortization 530,281 283,850
-------------------
$1,179,293 $ 881,548
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,
1997 1996
License agreement $100,000 $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
-------- --------
225,000 225,000
Less: Accumulated amortization 127,401 81,232
------- ------
$ 97,599 $143,768
======== ========
F-10
<PAGE>
4. INCOME TAXES:
The provision for income taxes consists of the following :
October 31,
1997 1996
Federal :
Current $1,564,233 $1,157,105
Deferred (463,523) (660,771)
State :
Current 473,106 336,586
Deferred (175,268) (192,209)
---------- ----------
$1,398,548 $640,711
The deferred income taxes of approximately $1,492,000, which have been paid as
of October 31, 1997, 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. statutory Federal income tax rate were as follows :
October 31,
1997 1996
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 of October 31, 1997, all of the notes had been paid in full.
October 31,
1996
Note payable, with interest at 8.5%,
paid October 21, 1997 $100,000
Note payable, with interest at 8%,
paid October 21, 1997 60,000
---------
160,000
Less: Current portion (160,000)
---------
$ -
6. LINE OF CREDIT:
During the fiscal year ended October 31, 1997, the Company entered into a
$3,000,000 revolving credit facility with the Chase Manhattan Bank. Under the
terms of the facility, advances bear interest at 1/2% above the prime rate and
the Company is obligated to pay an annual facility fee of 1/2% of the total
available amount. Outstanding amounts under the credit facility are secured by a
pledge of all accounts receivable of the Company. As at October 31, 1997, no
amounts had been borrowed under the credit facility.
F-11
<PAGE>
7. 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. On September 29, 1997 the Company exercised its right
to redeem all of its outstanding warrants. The warrants remained exercisable
until October 29, 1997, thirty days after the date of the redemption notice. As
of October 29, 1997, 1,218,983 of the 1,225,100 then outstanding warrants had
been exercised by the holders thereof for a price of $5.50 per share and the
Company received proceeds of $6,704,406 in connection therewith.
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.
The following options to purchase the Company's common shares were outstanding
under the Plan at October 31, 1997:
Weighted
Average
Number Exercise
of Shares Price
October 31, 1995 220,667 $ .64
Granted 154,934 3.23
Exercised (59,066) .41
Canceled (39,701) 1.16
--------
October 31, 1996 276,834 $2.10
Exercised (19,800) .63
Canceled (3,400) 1.41
----------
October 31, 1997 253,634 $2.23
As of October 31, 1997, options to purchase 165,434 shares were exercisable and
11,500 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. 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
F-12
<PAGE>
anniversary of the issuance date. However, no option shall be exercisable after
the expiration of ten years from the date the option was granted.
The following options to purchase the Company's common shares were outstanding
under the Incentive Plan at October 31, 1997:
Weighted
Average
Number Exercise
of Shares Price
October 31, 1995 - $ -
Granted 105,000 4.36
-------
October 31, 1996 105,000 $4.36
Granted 37,500 6.73
---------
October 31, 1997 142,500 $4.98
As of October 31, 1997, options to purchase 55,000 shares were exercisable and
157,500 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 at a weighted average
exercise price of $4.63 per share. The 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) SFAS No. 123
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for options granted in fiscal 1997 and 1996 as described by the
provisions of SFAS No. 123, the Company's net income and net income per share
would have been decreased as indicated below:
1997 1996
Net income - as reported $2,136,673 $963,475
Net income - pro forma 2,098,580 575,087
Net income per share - as reported .52 .27
Net income per share - pro forma .49 .16
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used for grants in 1997: dividend yield of 0%; expected volatility of 50%;
risk-free interest rate of 6.5%; expected life of 5 years and a fair value of
$3.48. The following weighted-average assumptions were used for grants in 1996:
dividend yield of 0%; expected volatility of 50%; risk-free interest rate of
6.7%; expected life of 5 years and a fair value of $2.10.
F-13
<PAGE>
f) 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.
8. RELATED PARTY TRANSACTIONS:
In April 1997 the Company made a loan to one of its officers in the amount of
$110,000. The loan bears interest at 7 percent per annum, payable quarterly, and
is due in full in April 2002. Interest income of $3,375 was recorded for the
year ended October 31, 1997.
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
$869,000 and $698,000 for the years ended October 31, 1997 and 1996,
respectively.
In November 1996, NSC entered into a reinsurance agreement with Reliance
National Indemnity Company ("Reliance") which provided reinsurance for losses to
NSC under certain circumstances. Also in November 1996, Reliance entered into a
reinsurance agreement with Target which provided reinsurance for losses to
Reliance under its agreement with NSC. In November 1996, the Company entered
into agreements to indemnify Reliance and Target for any losses incurred under
the aforementioned reinsurance agreements. There were no such losses, and there
were no payments made by the Company under the indemnification agreements. All
of the aforementioned agreements were terminated in December 1997.
9. 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. In November 1997, the sublease was amended to expand
the additional office space available to the Company at its Mitchel Field
location. The term of the sublease commenced on October 1, 1996 and shall
terminate on November 30, 2002. Future minimum lease payments under the lease
and sublease are as follows:
Fiscal year Amount
----------- ------
1998 $ 578,000
1999 636,000
2000 650,000
2001 666,000
2002 465,000
Thereafter 1,078,000
---------
$4,073,000
F-14
<PAGE>
Rent expense totaled approximately $479,000 and $368,000 for the years ended
October 31, 1997 and 1996, 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 for the year ended October 31, 1996.
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 and
in fiscal 1997, the employment agreement was further amended to increase
the annual salary to $200,000. 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
$186,000 and $123,000 at October 31, 1997 and 1996, 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 and was amended in fiscal 1997 to increase the annual salary to
F-15
<PAGE>
$125,000. 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 $394,000.
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.
10. 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 matured on October 21, 1997, and bore interest at a rate of 8.5%
per annum. These notes were paid in full in October 1997 as further described in
Note 5.
F-16
<PAGE>
11. SUBSEQUENT EVENT:
In December 1997, the Company received a payment of $500,000 in settlement of a
dispute with an unaffiliated party. This amount will be included in other income
in the first quarter of fiscal 1998.
F-17
<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 13, 1998 with
respect to the executive officers and directors 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. . . . . . . . 66 Chairman, Chief Executive Officer and
Director*
Cindy H. Luby. . . . . . . . . 43 President, Chief Operating Officer
and Director**
Lawrence J. Altman . . . . . . 50 Senior Vice President, Marketing
Zvi D. Sprung . . . . . . . .. 48 Chief Financial Officer, Treasurer
and Secretary
Robert E. Schulman . . . . . . 72 Director***
William H. Brown . . . . . . . 67 Director**
Donald Kirsch. . . . . . . . . . 66 Director*
* Term expires 2000
** Term expires 1998
*** Term expires 1999
The Board of Directors of the Company is divided into three classes serving
staggered three year terms. The Company's 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.
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
<PAGE>
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 was elected Senior Vice President, Marketing of the
Company in April 1997. Mr. Altman was Vice President, Marketing, of the Company
since its inception in 1991 until April 1997. 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), Chief
Financial officer 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.
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 has been a director of the
Company since December 1996.
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, 1997, all filing requirements applicable to its
officers, directors and greater than 10% shareholders were complied with as
required by Section 16 (a) of the Securities and Exchange Act of 1934, as
amended.
<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, 1997 (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) 1997 $154,167 $137,829 - $62,919
Chairman and Chief 1996 153,975 72,815 170,000 62,920
Executive Officer 1995 150,000 37,484 15,000 60,000
Cindy H. Luby (2) 1997 100,961 98,450 - -
Presient and Chief 1996 106,184 48,543 146,434 -
Operating Officer 1995 73,980 24,990 5,000 -
Lawrence J. Altman(3) 1997 164,890 - - -
Senior Vice 1996 134,702 5,000 26,500 -
President, 1995 104,300 - 5,000 -
Marketing
(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. In April 1997, the Company provided a loan to Ms. Luby in the
amount of $110,000 to assist her in the purchase of a new residence in close
proximity to the Company's offices. The loan bears interest, payable
quarterly in arrears, at 7% per annum, is unsecured, and is due and payable
in full April 2002. The loan may be prepaid by Ms. Luby in whole or in part
at any time. In January 1998, Ms. Luby prepaid $20,000 of the loan.
(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 represents 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 1997 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, Mr. Kirsch was awarded 15,000 options to
purchase Common Stock under the Company's 1996 Incentive Plan in December 1996
upon his election to the Board of Directors. These options, 5,000 of which are
currently exercisable, become exercisable at the rate of 5,000 options per year.
The Company did not grant any options or stock appreciation rights to the
Named Executives during the fiscal year ended October 31, 1997.
<PAGE>
The following table sets forth information concerning the exercise of stock
options by the Named Executives during the fiscal year ended October 31, 1997
and the value of unexercised options as of October 31, 1997 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, 1997(1)
31,1997
Exercis- Unexercis- Exercis- Unexercis-
able able able able
Chester Luby - $ - 170,000 30,000 $952,054 $247,840
Cindy Luby - - 146,034 25,800 832,361 216,483
Lawrence
Altman 10,000 48,500 14,500 31,000 112,333 204,068
(1) Based on the closing price of the Common Stock on NASDAQ on October 31,
1997.
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, 1997,
options to purchase 253,634 shares of Common Stock were outstanding under the
Option Plan, 182,234 of which are exercisable at January 13, 1998. Under the
Option Plan, a total of 11,500 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
<PAGE>
granted to Mr. Kirsch upon his election in December 1996. As of October 31,
1997, options to purchase 142,500 shares of Common Stock were outstanding under
the Incentive Plan, 70,000 of which are exercisable at January 13, 1998.
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 and in September
1997, the Company further amended the agreement to increase the annual salary to
$200,000. 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 approximately $186,000 as of October 31, 1997. This amount will be
reimbursed to the Company in the event of death of the insured or termination of
the agreement.
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 to reflect the appointment of 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 and in September 1997, the Company amended the agreement to increase
the annual salary to $125,000. 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.
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 13, 1998, 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.
<PAGE>
Shares Percent of Shares
Name and Address of Beneficially Beneficially
Beneficial Owner Owned Owned (1)
Chester J. Luby 680,800(2) 14.1%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Joan S. Luby 492,500(3) 10.6%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Cindy H. Luby 184,894(4) 3.9%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Lawrence J. Altman 67,500(5) 1.4%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Zvi D. Sprung 19,500(6) -
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Robert E. Schulman 18,000(7) -
William H. Brown 18,000(8) -
Donald Kirsch 15,000(9) -
First Wilshire Securities Management, Inc. 408,000(10) 8.8%
All directors and executive officers
as a group (seven persons) 1,005,194 19.7%
(1) Excludes (i) 110,000 shares of Common Stock issuable upon the exercise of
the Unit Purchase Options issued to the underwriters in the Company's
initial public offering and (ii) 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 4,623,016 shares of Common Stock outstanding on January
13 ,1998 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.
(2) Includes 200,000 shares issuable upon the exercise of stock options, 177,000
of which are currently exercisable and the balance of which become
exercisable at the rate of 12,000 options per year.
(3) Includes 15,000 shares issuable upon the exercise of stock options, 10,000
of which are currently exercisable and the balance of which become
exercisable at the rate of 5,000 options per year.
(4) Includes 171,834 shares issuable upon the exercise of stock options, 151,034
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, as to which Ms. Luby disclaims beneficial
ownership.
(5) Includes 45,500 shares issuable upon the exercise of stock options, 16,000
of which are currently exercisable and the balance of which become
exercisable at the rate of 13,100 options per year.
<PAGE>
(6) All of these shares are issuable upon the exercise of stock options, 3,400
of which are currently exercisable and the balance of which become
exercisable at the rate of 3,900 options per year.
(7) Includes (a) 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 and (b) 3,000 shares
issuable upon exercise of warrants to purchase Common Stock (the
"Independent Director Warrants"), 1,800 of which are currently exercisable
and the balance of which become exercisable at the rate of 600 Independent
Director Warrants per year.
(8) Includes (a) 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 and (b) 3,000 shares
issuable upon exercise of Independent Director Warrants, 1,800 of which are
currently exercisable and the balance of which become exercisable at the
rate of 600 Independent Director Warrants per year.
(9) All of these shares are 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.
(10)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.
Item 12. Certain Relationships and Related Transactions
In connection with the acquisition by the Company of the assets of the
Predecessor, 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 bore interest at the
rate of 8% per annum, matured and was paid on October 21, 1997. 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, which bore interest at 8.5% per annum, matured
and was paid on October 21, 1997.
In November 1996, NSC entered into a reinsurance agreement with Reliance
National Indemnity Company ("Reliance") which provided reinsurance for losses to
NSC under certain circumstances. Also in November 1996, Reliance entered into a
reinsurance agreement with Target which provided reinsurance for losses to
Reliance under its agreement with NSC. During fiscal 1997, Target received
approximately $67,300 in premiums under its agreement with Reliance. In November
1996, the Company entered into agreements to indemnify Reliance and Target for
any losses incurred under the aforementioned reinsurance agreements. There were
no such losses, and there were no payments made by the Company under the
indemnification agreements. All of the aforementioned agreements were
terminated in December 1997.
<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.(4)
10.33 Amendment to Employment Agreement between the Company and Cindy H.
Luby, dated as of November 1, 1995.(4)
10.34 Amendment to Employment Agreement between the Company and Cindy H.
Luby, dated as of May 1, 1996. (4)
10.35 Amendment to Employment Agreement between the Company and Lawrence J.
Altman, dated as of May 1, 1996.(4)
10.36 1996 Incentive Plan. (5)
11 Computation of per share earnings.
21.1 List of Subsidiaries.
27 Financial Data Schedule. (6)
(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 Annual Report on Form 10-KSB for the fiscal
year ended October 31, 1996.
(5) Incorporated by reference to Registration Statement on Form S-8,
File No. 333-09571.
(6) 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, 1998
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
EXHIBIT 11
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
FOR THE YEAR ENDED OCTOBER 31, 1997
Fully
Primary Diluted
SHARES
Weighted average number of common shares
outstanding 3,434,008 3,434,008
Exercise of options and warrants, using
the treasury stock method 856,070 1,078,603
------- ---------
Common and common equivalent shares used
to compute net income per share 4,290,078 4,512,611
========= =========
NET INCOME
Net income $2,136,673 $2,136,673
Interest income, net of taxes, on proceeds of
exercise of options and warrants, using the
treasury stock method 91,543 10,009
--------- --------
Net income used for computing net income
per share $2,228,216 $2,146,682
========== ==========
Net income per share $ .52 $ .48
====== ======
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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<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-START> Nov-01-1996
<PERIOD-END> Oct-31-1997
<EXCHANGE-RATE> 1
<CASH> 20,846,524
<SECURITIES> 6,010,337
<RECEIVABLES> 8,891,963
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,116,756
<PP&E> 1,709,574
<DEPRECIATION> 530,281
<TOTAL-ASSETS> 41,282,561
<CURRENT-LIABILITIES> 6,412,500
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0
0
<COMMON> 46,231
<OTHER-SE> 14,712,607
<TOTAL-LIABILITY-AND-EQUITY> 41,282,561
<SALES> 37,928,719
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<INTEREST-EXPENSE> 27,968
<INCOME-PRETAX> 3,535,221
<INCOME-TAX> 1,398,548
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<EPS-PRIMARY> .52
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