UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12938
Interstate National Dealer Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-3078398
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
333 Earle Ovington Blvd., Mitchel Field, NY 11553
(Address of principal executive offices)
(516) 228-8600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of May 28, 1998, Registrant had issued and outstanding 4,637,816 shares of
Common Stock.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of
April 30, 1998 and October 31, 1997 3
Consolidated Statements of Operations
for the six and three month periods ended
April 30, 1998 and 1997 4
Consolidated Statement of Stockholders'
Equity for the six month period ended
April 30, 1998 5
Consolidated Statements of Cash Flows for
the six month periods ended April 30,1998
and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, October 31,
ASSETS 1998 1997
------ ------ -----
Unaudited
CURRENT ASSETS:
Cash and cash equivalents $ 19,349,208 $20,846,524
United States Treasury Notes, at cost 12,492,395 6,010,337
Accounts receivable 7,443,230 8,891,963
Prepaid expenses 582,492 367,932
----------- ----------
Total current assets 39,867,325 36,116,756
RESTRICTED CASH 1,609,789 1,633,068
FURNITURE, FIXTURES AND EQUIPMENT, at cost,
less accumulated depreciation and
amortization of $698,172 and $530,281,
respectively 1,441,122 1,179,293
INTANGIBLE ASSETS, less accumulated amortization
of $139,547 and $127,401, respectively 85,453 97,599
DEFERRED INCOME TAXES 1,707,714 1,491,771
NOTE FROM RELATED PARTY 90,000 110,000
OTHER ASSETS 918,037 654,074
----------- ----------
$45,719,440 $41,282,561
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,019,925 $ 2,929,476
Accrued expenses 1,241,455 1,040,721
Accrued commissions 1,118,447 1,080,178
Reserve for claims 1,076,556 1,120,527
Other liabilities 233,541 241,598
---------- ----------
Total current liabilities 6,689,924 6,412,500
DEFERRED CONTRACT REVENUE 21,101,829 18,478,155
CONTINGENCY PAYABLE 1,609,789 1,633,068
----------- -----------
Total liabilities 29,401,542 26,523,723
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares; no issued
shares - -
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued
and outstanding 4,637,616 and 4,623,016
shares, respectively 46,377 46,231
Additional paid-in capital 11,058,113 11,052,054
Retained earnings 5,213,408 3,660,553
----------- -----------
Total stockholders' equity 16,317,898 14,758,838
----------- -----------
$45,719,440 $41,282,561
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
For the Six Months For the Three Months
Ended April 30, Ended April 30,
1998 1997 1998 1997
REVENUES $22,100,709 $14,984,314 $11,792,534 $8,650,077
OPERATING COSTS AND EXPENSES:
Costs of services provided 10,620,695 5,786,870 5,518,682 3,651,189
Selling, general and
administrative expenses 10,098,181 8,055,753 5,396,359 4,362,247
----------- ----------- ---------- ----------
Operating income 1,381,833 1,141,691 877,493 636,641
OTHER INCOME (EXPENSE):
Interest income 679,966 332,405 349,969 181,917
Interest expense - (6,650) - (3,325)
Other income 500,000 - - -
---------- ---------- --------- --------
Income before income taxes 2,561,799 1,467,446 1,227,462 815,233
PROVISION FOR INCOME TAXES 1,008,944 586,098 480,860 325,603
--------- --------- --------- --------
Net income $1,552,855 $ 881,348 $ 746,602 $489,630
=========== ========= ========= ========
NET INCOME PER SHARE:
Basic $ .33 $ .26 $ .16 $ .14
====== ====== ====== ======
Weighted average shares
outstanding 4,627,357 3,391,836 4,631,845 3,397,898
========= ========= ========= =========
Diluted $ .31 $ .24 $ .15 $ .13
====== ====== ====== ======
Weighted average shares
outstanding 4,980,100 3,731,773 4,961,539 3,860,396
========= ========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED APRIL 30, 1998
UNAUDITED
Common Stock Additional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
BALANCE AT OCTOBER 31,1997 4,623,016 $46,231 $11,052,054 $3,660,553 $14,758,838
Shares issued pursuant
to exercise of employee
stock options 14,600 146 6,059 - 6,205
Net income for the six
months ended April 30,
1998 - - - 1,552,855 1,552,855
------- ------- ---------- --------- ---------
BALANCE AT APRIL 30, 1998 4,637,616 $46,377 $11,058,113 $5,213,408 $16,317,898
========= ====== ========== ======== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1998 AND 1997
UNAUDITED
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,552,855 $881,348
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 197,843 161,200
Deferred income taxes (215,943) (278,981)
Increase (decrease) in cash resulting
from changes in operating assets
and liabilities:
Accounts receivable 1,448,733 (2,252,926)
Prepaid expenses (214,560) 8,256
Restricted cash 23,279 248,549
Other assets (281,769) (17,839)
Accounts payable 90,449 813,180
Accrued expenses 200,734 186,843
Accrued commissions 38,269 175,962
Reserve for claims (43,971) 131,921
Other liabilities (8,057) (15,881)
Deferred contract revenue 2,623,674 3,492,506
Contingency payable (23,279) (248,549)
---------- ----------
Net cash provided by operating activities 5,388,257 3,285,589
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of United States Treasury Notes (6,482,058) (6,816,795)
Purchases of furniture, fixtures and equipment,
net (429,720) (378,259)
Note from related party 20,000 (110,000)
----------- ---------
Net cash used in investing activities (6,891,778) (7,305,054)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options 6,205 10,581
--------- ----------
Net cash provided by financing activities 6,205 10,581
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,497,316) (4,008,884)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,846,524 13,230,203
------------ ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $19,349,208 $9,221,319
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $1,345,302 $648,362
=========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended October 31, 1997.
2. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
April 30, 1998, and the consolidated results of operations and cash flows for
the periods ended April 30, 1998 and 1997. The accounting policies followed by
the Company are set forth in the Company's consolidated financial statements
included in the Annual Report mentioned above.
3. The consolidated results of operations for the six and three month periods
ended April 30, 1998 and 1997 are not necessarily indicative of the results to
be expected for the full year.
4. The Company reports earnings per share in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic net income per share ("Basic EPS") is computed by dividing net
income by the weighted average number of common shares outstanding. Diluted net
income per share ("Diluted EPS") is computed by dividing net income by the
weighted average number of common shares and dilutive common share equivalents
then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the statements of operations. The impact of the
adoption of this statement was not material to all previously reported EPS
amounts.
A reconciliation between the numerators and denominators of Basic and Diluted
EPS is as follows:
Net Income Shares Per Share
For the six months ended April 30, 1998
Basic EPS
Net income attributable to common shares $1,552,855 4,627,357 $.33
Effect of dilutive securities: stock options
and warrants - 352,743 (.02)
-------- --------- ---
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $1,552,855 4,980,100 $.31
======== ========= =====
For the six months ended April 30, 1997
Basic EPS
Net income attributable to common shares $881,348 3,391,836 $.26
Effect of dilutive securities: stock options
and warrants - 339,937 (.02)
-------- --------- -----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $881,348 3,731,773 $.24
======== ========= =====
<PAGE>
Net Income Shares Per Share
For the three months ended April 30, 1998
Basic EPS
Net income attributable to common shares $746,602 4,631,845 $.16
Effect of dilutive securities: stock options
and warrants - 329,694 (.01)
-------- --------- ---
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $746,602 4,961,539 $.15
======== ========= ====
For the three months ended April 30, 1997
Basic EPS
Net income attributable to common shares $489,630 3,397,898 $.14
Effect of dilutive securities: stock options
and warrants - 462,498 (.01)
-------- --------- -----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $489,630 3,860,396 $.13
======== ========= =====
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
For the Six Months ended April 30, 1998 compared to the Six Months ended
April 30, 1997
Revenues increased approximately $7,117,000, or 47%, to approximately
$22,101,000 for the six months ended April 30, 1998 as compared to approximately
$14,984,000 for the six months ended April 30, 1997. This increase was primarily
due to: (i) a significant increase in the recognition of deferred contract
revenue as a result of an increase in the total number of unexpired service
contracts under administration; and (ii) a significant increase in
administrative and insurance fees resulting from an increase in the number of
service contracts accepted for administration by the Company in fiscal 1998. The
increase in the number of service contracts accepted for administration during
fiscal 1998 was primarily due to the aggressive efforts by the Company in
enrolling additional producers to sell the Company's products and to a more
diversified array of products offered by the Company.
Costs of services provided, which consist primarily of claims and
cancellation costs, increased by approximately $4,834,000, or 84%, to
approximately $10,621,000 for the six months ended April 30, 1998, as compared
to approximately $5,787,000 for the six months ended April 30, 1997. As a
percentage of revenues, cost of services provided increased to 48% for the six
months ended April 30, 1998 as compared to 39% in the same period in 1997.
Claims and cancellation costs are directly affected by the total number of
unexpired contracts under administration, which has increased on a yearly basis.
Gross margin increased by approximately $2,283,000, or 25%, to approximately
$11,480,000 for the six months ended April 30, 1998, as compared to
approximately $9,197,000 for the six months ended April 30, 1997. This increase
is primarily attributable to the increase in revenues as described above. Gross
margin for the six months ended April 30, 1998 was 52% as compared to 61% for
the six months ended April 30, 1997. This decrease is primarily attributable to:
(i) an increase in the relative percentage of revenue represented by deferred
contract revenue, which has a low gross margin, as compared to administrative
fees which have a higher gross margin; and (ii) a higher level of cancellations
of telemarketing sales which occurred in the first quarter of 1998.
<PAGE>
Selling, general and administrative expenses increased by approximately
$2,042,000, or 25%, to approximately $10,098,000 for the six months ended April
30, 1998, up from approximately $8,056,000 for the six months ended April 30,
1997. This increase was in large part due to (i) increases in selling expenses
primarily due to increased commissions paid as a result of increased sales
volume; and (ii) increases in general and administrative expenses due to
increased personnel, printing and postage costs resulting from increased sales
volume and to the development of new service contract products. As a percentage
of revenues, selling, general and administrative expenses decreased to 46% for
the six months ended April 30, 1998 as compared to 54% in the same period in
1997.
Other income, net increased by approximately $854,000 or 262%, to
approximately $1,180,000 for the six months ended April 30, 1998, as compared to
approximately $326,000 for the six months ended April 30, 1997. This increase is
primarily attributable to other income of $500,000 received by the Company in
settlement of a dispute with an unaffiliated party in the first quarter of 1998.
The balance of the increase of $354,000 was the result of an increase in
investment income generated by funds provided by the exercise of the Company's
outstanding warrants in October 1997 and by funds provided by operating
activities.
For the six months ended April 30, 1998, the Company had income before
income taxes of approximately $2,562,000 and recorded a provision for income
taxes of approximately $1,009,000, as compared to income before income taxes of
approximately $1,467,000 and a provision for income taxes of approximately
$586,000 in the same period in 1997. Net income increased approximately
$672,000, or 76%, to approximately $1,553,000 for the six months ended April 30,
1998 as compared to approximately $881,000 for the six months ended April 30,
1997.
For the Three Months ended April 30, 1998 compared to the Three Months ended
April 30, 1997
Revenues increased approximately $3,143,000, or 36%, to approximately
$11,793,000 for the three months ended April 30, 1998 as compared to
approximately $8,650,000 for the three months ended April 30, 1997. This
increase was primarily due to: (i) a significant increase in the recognition of
deferred contract revenue as a result of an increase in the total number of
unexpired service contracts under administration; and (ii) a significant
increase in administrative and insurance fees resulting from an increase in the
number of service contracts accepted for administration by the Company in fiscal
1998. The increase in the number of service contracts accepted for
administration during fiscal 1998 was primarily due to the aggressive efforts by
the Company in enrolling additional producers to sell the Company's products and
to a more diversified array of products offered by the Company.
Costs of services provided, which consist primarily of claims and
cancellation costs, increased by approximately $1,868,000, or 51%, to
approximately $5,519,000 for the three months ended April 30, 1998, as compared
to approximately $3,651,000 for the three months ended April 30, 1997. As a
percentage of revenues, cost of services provided increased to 47% for the six
months ended April 30, 1998 as compared to 42% in the same period in 1997.
Claims and cancellation costs are directly affected by the total number of
unexpired contracts under administration, which has increased on a yearly basis.
Gross margin increased by approximately $1,275,000, or 26%, to approximately
$6,274,000 for the three months ended April 30, 1998, as compared to
approximately $4,999,000 for the three months ended April 30, 1997. This
increase is primarily attributable to the increase in revenues as described
above. Gross margin for the three months ended April 30, 1998 was 53% as
compared to 58% for the three months ended April 30, 1997. This decrease is
primarily attributable to an increase in the relative percentage of revenue
represented by deferred contract revenue, which has a low gross margin, as
compared to administrative fees which have a higher gross margin.
Selling, general and administrative expenses increased by approximately
$1,034,000, or 24%, to approximately $5,396,000 for the three months ended April
30, 1998, up from approximately $4,362,000 for the three months ended April 30,
1997. This increase was in large part due to (i) increases in selling expenses
primarily due to increased commissions paid as a result of increased sales
volume; and (ii) increases in general and administrative expenses due, in part,
to increased personnel and postage costs resulting from increased sales volume
and to the development of new service contract products. As a percentage of
revenues, selling, general and administrative expenses decreased to 46% for the
three months ended April 30, 1998 as compared to 50% in the same period in 1997.
<PAGE>
Other income, net increased by approximately $171,000 or 96%, to
approximately $350,000 for the three months ended April 30, 1998, as compared to
approximately $179,000 for the three months ended April 30, 1997. This increase
is primarily attributable to an increase in investment income generated by funds
provided by the exercise of the Company's outstanding warrants in October 1997
and by funds provided by operating activities.
For the three months ended April 30, 1998, the Company had income before
income taxes of approximately $1,228,000 and recorded a provision for income
taxes of approximately $481,000, as compared to income before income taxes of
approximately $815,000 and a provision for income taxes of approximately
$325,000 in the same period in 1997. Net income increased approximately
$257,000, or 52%, to approximately $747,000 for the three months ended April 30,
1998 as compared to approximately $490,000 for the three months ended April 30,
1997.
Liquidity and Capital Resources
Cash and cash equivalents and United States Treasury Notes, at cost, were
approximately $31,842,000 at April 30, 1998, as compared to approximately
$26,857,000 at October 31, 1997. The increase of approximately $4,985,000 was
primarily the result of cash provided by the Company's operating activities less
cash used for the purchase of furniture, fixtures and equipment.
The Company believes that its current available cash and anticipated levels
of internally generated funds will be sufficient to fund its financial
requirements at least for the next fiscal year at the Company's present level of
revenues and business activity.
Impact of Inflation
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
Forward-Looking Statements
This Form 10-QSB, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based on assumptions and expectations which may not be realized and are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. Future events and
actual results, financial or otherwise, may differ from the results discussed in
the forward-looking statements. A number of these risks and other factors that
might cause differences, some of which could be material, along with additional
discussion of forward-looking statements, are set forth in the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on December 23,
1996.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of stockholders was held on April 16, 1998 to elect two
directors for a term expiring at the annual meeting of stockholders to be held
in 2001, and to vote on certain amendments to the Company's Certificate of
Incorporation and Bylaws, which amendments would have had certain anti-takeover
affects. Proxies for the meeting were solicited by the registrant pursuant to
Regulation 14A under the Securities Exchange Act of 1934; there were no
solicitations in opposition to management's proposals. The nominees for director
were elected, proposals two through six were not approved.
A total of 4,406,200 shares were voted for the election of Cindy H. Luby
as Director; votes were withheld for 90,900 shares. A total of 4,386,400 shares
were voted for the election of William H. Brown as Director; votes were withheld
for 110,700 shares. There were no abstentions and no broker non-votes. In
addition to the nominees elected as director, the other directors whose terms of
office continue after the meeting are Chester J. Luby, Robert E. Schulman and
Donald Kirsch.
<PAGE>
The results with respect to the other proposals are summarized below:
A proposal to amend the Bylaws to fix the number of directors and provide for
filling vacancies on the Board:
For Against Abstain Not Voted
2,081,777 106,885 10,570 2,297,868
A proposal to amend the Certificate of Incorporation to provide that
stockholders may only remove directors for cause:
For Against Abstain Not Voted
1,928,522 242,844 27,866 2,297,868
A proposal to amend the Certificate of Incorporation and Bylaws to provide that
only the Board of Directors or Chairman of the Board may call special
stockholder meetings:
For Against Abstain Not Voted
1,875,757 309,655 13,820 2,297,868
A proposal to amend the Certificate of Incorporation and Bylaws to eliminate
stockholder action by written consent:
For Against Abstain Not Voted
1,872,382 296,705 30,145 2,297,868
A proposal to amend the Certificate of Incorporation and Bylaws to require a
two-thirds majority vote to amend or repeal the proposed amendments which were
presented at the meeting:
For Against Abstain Not Voted
1,837,447 332,984 28,801 2,297,868
Item 6(b). Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
April 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
INTERSTATE NATIONAL DEALER SERVICES, INC.
May 28, 1998 By: /s/ Zvi D. Sprung
Date Zvi D. Sprung
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Oct-31-1998
<PERIOD-START> Nov-01-1997
<PERIOD-END> Apr-30-1998
<EXCHANGE-RATE> 1
<CASH> 19,349,208
<SECURITIES> 12,492,395
<RECEIVABLES> 7,443,230
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,867,325
<PP&E> 2,139,294
<DEPRECIATION> 698,172
<TOTAL-ASSETS> 45,719,440
<CURRENT-LIABILITIES> 6,689,924
<BONDS> 0
0
0
<COMMON> 46,377
<OTHER-SE> 16,271,521
<TOTAL-LIABILITY-AND-EQUITY> 45,719,440
<SALES> 22,100,709
<TOTAL-REVENUES> 22,100,709
<CGS> 0
<TOTAL-COSTS> 10,620,695
<OTHER-EXPENSES> 10,098,181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,561,799
<INCOME-TAX> 1,008,944
<INCOME-CONTINUING> 1,552,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,552,855
<EPS-PRIMARY> .33
<EPS-DILUTED> .31
</TABLE>
