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, 1998 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, 1998 were
$49,283,426. 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, 1999 as reported on the NASDAQ National Market
("NASDAQ"), was approximately $44,767,000.
As of January 13,1999, Registrant had issued and outstanding 4,655,616 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 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 service contract
may be sold by any of the following entities: (1) either the seller originating
the sale of the vehicle, (2) the financial institution financing the sale of the
vehicle, or (3) other entities, including the Company, which sell the contract
to the owner of the vehicle after the vehicle has been purchased. A vehicle
service contract is an agreement between either the seller or the administrator
of the service contract and the vehicle purchaser under which the seller 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 sellers to
vehicle purchasers in a manner similar to other options.
The Company offers a variety of vehicle service contract and warranty
programs through its nationwide sales force of independent sales agents
consisting of both companies and individuals. The Company enters into a
non-exclusive agreement with each seller, under which the Company obtains
insurance coverage to cover such seller's liability for claims under its vehicle
service contracts and assists such seller, and purchasers, with the making,
processing and adjustment of claims.
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 sellers 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. In January 1998, the Company
entered into an agreement with a subsidiary of Orion Capital to underwrite a
portion of the insurance policies arranged by the Company.
Each seller pays a net rate for each service contract or warranty it sells.
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 $600 for a new car,
$650 for a used car and $725 for a new or used recreational vehicle. In most
cases, each seller is free to determine the price at which it will sell the
service contract to the purchaser. The amount a seller charges for the service
contract in excess of the net rate is additional income to such seller. The
administrative fee for the Company ranges from $30 to $250 (prior to the payment
to the agent of any commission which generally ranges from $10 to $125) per
contract, which fee varies based on the type of service contract sold by a
seller.
The various vehicle service contract programs offered by the Company are
designed to provide sellers with an additional source of revenue. For example,
certain of the Company's programs provide that sellers 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 sellers who have not achieved specified sales volumes of service
contracts.
<PAGE>
Initially, the Company's business focused on extended warranties for new
automobiles and, to a lesser extent, used cars. In the past four years, however,
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.
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 sellers, 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.
In order to sell service contracts to vehicle owners who had not purchased a
service contract at the time of their vehicle purchase, the Company also makes
sales through its own and a third party's call center facilities and through its
own and another entity's internet sites. To facilitate such direct 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, 1998, the Company's receivables from its financing program
totaled approximately $6,849,000. 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, 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 provides 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, recreational vehicles and
watercraft) 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,
recreational vehicles and watercraft 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 sellers 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, 1998, the Company had 103 full-time employees and 40
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 8 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
11/01/96 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 01/31/98 10-1/8 7-3/4 N/A N/A
02/01/98 to 04/30/98 9-7/16 7-1/2 N/A N/A
05/01/98 to 07/31/98 8-3/8 7 N/A N/A
08/01/98 to 10/31/98 8-1/8 5-3/8 N/A N/A
11/01/98 to 01/13/99 12-1/4 7-1/8 N/A N/A
As of January 13, 1999, there were 56 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.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the Year ended October 31, 1998 compared to the Year ended
October 31, 1997
Revenues increased approximately $11,354,000, or 30%, to approximately
$49,283,000 for the year ended October 31, 1998 as compared to approximately
$37,929,000 for the year ended October 31, 1997. This increase was primarily due
to: (i) a significant increase in the recognition of deferred contract revenue
as a result of an increase in the total number of unexpired service contracts
under administration; and (ii) a significant increase in administrative and
insurance fees resulting from an increase in the number of service contracts
accepted for administration by the Company in fiscal 1998. The increase in the
number of service contracts accepted for administration during fiscal 1998 was
primarily due to the aggressive efforts by the Company in enrolling additional
producers to sell the Company's products and to a more diversified array of
products offered by the Company.
Costs of services provided, which consist primarily of claims and
cancellation costs, increased by approximately $7,129,000, or 42%, to
approximately $23,975,000 for the year ended October 31, 1998, as compared to
approximately $16,846,000 for the year ended October 31, 1997. As a percentage
of revenues, cost of services provided increased to 49% for the year ended
October 31, 1998 as compared to 44% in the same period in 1997. Claims and
cancellation costs are directly affected by the total number of unexpired
contracts under administration, which has increased on a yearly basis.
Gross margin increased by approximately $4,226,000, or 20%, to approximately
$25,308,000 for the year ended October 31, 1998, as compared to approximately
$21,082,000 for the year ended October 31, 1997. This increase is primarily
attributable to the increase in revenues as described above. Gross margin for
the year ended October 31, 1998 was 51% as compared to 56% for the year ended
October 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
$3,544,000, or 19%, to approximately $21,835,000 for the year ended October 31,
1998, up from approximately $18,291,000 for the year ended October 31, 1997.
This increase was in large part due to (i) increases in selling expenses
primarily due to increased commissions paid as a result of increased sales
volume; and (ii) increases in general and administrative expenses due to
increased personnel and postage costs resulting from increased sales volume and
to the development of new service contract products. As a percentage of
revenues, selling, general and administrative expenses decreased to 44% for the
year ended October 31, 1998 as compared to 48% in the same period in 1997.
Other income, net increased by approximately $1,224,000 or 165%, to
approximately $1,968,000 for the year ended October 31, 1998, as compared to
approximately $744,000 for the year ended October 31, 1997. This increase is
partially attributable to other income of $500,000 received by the Company in
settlement of a dispute with an unaffiliated party in the first quarter of 1998.
The balance of the increase 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 year ended October 31, 1998, the Company had income before income
taxes of approximately $5,442,000 and recorded a provision for income taxes of
approximately $2,138,000, as compared to income before income taxes of
approximately $3,535,000 and a provision for income taxes of approximately
$1,398,000 in the same period in 1997. Net income increased approximately
$1,167,000, or 55%, to approximately $3,304,000 for the year ended October 31,
1998 as compared to approximately $2,137,000 for the year ended October 31,
1997.
Liquidity and Capital Resources
Cash and cash equivalents and United States Treasury Bills, at cost, were
approximately $37,331,000 at October 31, 1998, as compared to approximately
$26,857,000 at October 31, 1997. The increase of approximately $10,474,000 was
primarily the result of cash provided by the Company's operating activities less
cash used for the purchase of furniture, fixtures and equipment.
<PAGE>
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, 1998, 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 $350,000 in fiscal 1999 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.
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's computer systems use four-digit date fields to
designate a year and, as a result, the Company believes that its systems will
properly recognize the Year 2000. The Company has contacted its critical
suppliers of services to determine that the services that they provide are Year
2000 compliant. The Company believes, based upon its internal reviews, the
configuration of the Company's systems, inquiries made of its critical customers
and suppliers, and other factors, that the future external and internal costs to
be incurred relating to the modification of internal-use software for the Year
2000 will not be material to 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, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
October 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1998 and 1997 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, 1998 and 1997, 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, 1998 and 1997, 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, 1999
F-2
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1998 AND 1997
ASSETS 1998 1997
------ -------- -----
CURRENT ASSETS:
Cash and cash equivalents $ 20,885,903 $20,846,524
United States Treasury Bills, at cost 16,445,339 6,010,337
Accounts receivable, net 8,163,882 8,891,963
Prepaid expenses 653,281 367,932
----------- -----------
Total current assets 46,148,405 36,116,756
RESTRICTED CASH 1,951,856 1,633,068
FURNITURE, FIXTURES AND EQUIPMENT, at cost,
less accumulated depreciation and amortization
of $897,478 and $530,281, respectively 1,551,572 1,179,293
INTANGIBLE ASSETS, less accumulated amortization
of $151,667 and $127,401, respectively 73,333 97,599
DEFERRED INCOME TAXES 2,127,843 1,491,771
NOTE FROM RELATED PARTY 90,000 110,000
OTHER ASSETS 1,463,732 654,074
------------- -----------
$53,406,741 $41,282,561
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,402,417 $ 2,929,476
Accrued expenses 737,660 1,040,721
Accrued commissions 1,001,178 1,080,178
Reserve for claims 1,622,361 1,120,527
Other liabilities 311,135 241,598
----------- -----------
Total current liabilities 7,074,751 6,412,500
DEFERRED CONTRACT REVENUE 26,264,571 18,478,155
CONTINGENCY PAYABLE 1,951,856 1,633,068
----------- ------------
Total liabilities 35,291,178 26,523,723
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares; no issued shares - -
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued and
outstanding 4,650,916 and 4,623,016 shares,
respectively 46,509 46,231
Additional paid-in capital 11,104,699 11,052,054
Retained earnings 6,964,355 3,660,553
------------ ------------
Total stockholders' equity 18,115,563 14,758,838
------------ ------------
$ 53,406,741 $ 41,282,561
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, 1998 AND 1997
1998 1997
REVENUES $ 49,283,426 $ 37,928,719
OPERATING COSTS AND EXPENSES:
Costs of services provided 23,974,988 16,846,370
Selling, general and administrative expenses 21,835,259 18,290,862
---------- ---------
Operating income 3,473,179 2,791,487
OTHER INCOME (EXPENSE):
Interest income 1,483,296 771,702
Interest expense (15,000) (27,968)
Other income 500,000 -
------------- -----------
Income before provision for income taxes 5,441,475 3,535,221
PROVISION FOR INCOME TAXES 2,137,673 1,398,548
------------- -----------
Net income $ 3,303,802 $ 2,136,673
============= ============
NET INCOME PER SHARE:
Basic $ .71 $ .62
============ ==========
Weighted average shares outstanding 4,635,301 3,434,008
============ ==========
Diluted $ .67 $ .54
============ ==========
Weighted average shares outstanding 4,960,939 3,949,744
============ ==========
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, 1998 AND 1997
Common Stock Additional
Number of Paid-in Retained
Shares Amount Capital Earnings Total
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
Shares issued pursuant to
exercise of stock options 27,900 278 52,645 - 52,923
Net income for the year ended
October 31, 1998 - - - 3,303,802 3,303,802
--------- ------- ---------- --------- ----------
BALANCE AT OCTOBER 31, 1998 4,650,916 $46,509 $11,104,699 $6,964,355 $18,115,563
========= ======= =========== ========== ===========
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, 1998 AND 1997
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,303,802 $2,136,673
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 427,173 339,891
Deferred income taxes (636,072) (638,791)
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable 728,081 (4,753,912)
Prepaid expenses (285,349) (117,763)
Restricted cash (318,788) 342,437
Other assets (845,368) (2,839)
Accounts payable 472,941 1,359,579
Accrued expenses (303,061) 528,606
Accrued commissions (79,000) 531,706
Reserve for claims 501,834 466,680
Other liabilities 69,537 85,846
Deferred contract revenue 7,786,416 7,799,889
Contingency payable 318,788 (342,437)
---------- ----------
Net cash provided by operating activities 11,140,934 7,735,565
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of United States
Treasury Bills (10,435,002) (6,010,337)
Purchase of furniture, fixtures and equipment (739,476) (555,757)
Note from related party 20,000 (110,000)
--------- ---------
Net cash used in investing
activities (11,154,478) (6,676,094)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants - 6,704,406
Payment of long-term debt to related party - (160,000)
Proceeds from exercise of stock options 52,923 12,444
--------- ----------
Net cash provided by financing
activities 52,923 6,556,850
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 39,379 7,616,321
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,846,524 13,230,203
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 20,885,903 $20,846,524
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 2,915,254 $ 2,083,791
============ ===========
Interest $ 15,000 $ 27,968
============ ===========
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, 1998 AND 1997
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 for new and
used motor vehicles and recreational vehicles and, to a lesser extent,
watercraft, motorcycles and other vehicles. A service contract may be sold by
any of the following entities: (1) either the seller originating the sale of the
vehicle, (2) the financial institution financing the sale of the vehicle, or (3)
other entities, including the Company, which sell the contract to the owner of
the vehicle after the vehicle has been purchased. A vehicle service contract is
an agreement between either the seller or the administrator of the service
contract and the vehicle purchaser under which the seller 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 sellers to vehicle purchasers in
a manner similar to other options. The Company enters into a non-exclusive
agreement with each seller, under which the Company obtains insurance coverage
to cover such seller's liability for claims under its vehicle service contracts
and assists such seller, and purchasers, with the making, processing and
adjustment of claims. In April 1995, the Company formed an affiliated insurance
company, National Service Contract Insurance Company Risk Retention Group, Inc.
("NSC"). Commencing March 1996, the insurance policies arranged by the Company
as administrator to its dealers were underwritten by NSC and a single
non-affiliated insurance company. In January 1998, the Company entered into an
agreement with a second non-affiliated insurance company to underwrite a portion
of its service contracts.
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.
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:
F-7
<PAGE>
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, one of the non-affiliated
underwriters 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, 1998 and 1997, the Company
received approximately $195,000 and $136,000, respectively, of such funds, which
are reflected in revenues in the accompanying consolidated statements of
operations. The balance in this escrow account totaled approximately $802,000
and $753,000 at October 31, 1998 and 1997, 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 $122,000 and $254,000 of such
unconsumed reserves for the years ended October 31, 1998 and 1997, respectively,
which are reflected in revenues in the accompanying consolidated statements of
operations. The balance in these interest-bearing accounts totaled approximately
$1,150,000 and $880,000 at October 31, 1998 and 1997, respectively. The same
amounts have been reflected as contingency payable in the accompanying
consolidated balance sheets.
Reserve for Claims
Reserve for claims represents claims that were approved for payment as of
October 31, 1998 and 1997, 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 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.
F-8
<PAGE>
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
The Company reports earnings per share in accordance with the provisions of SFAS
No. 128, "Earnings Per Share". Basic net income per share ("Basic EPS") is
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common shares and dilutive
common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the statements of
operations.
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.
2. FURNITURE, FIXTURES AND EQUIPMENT:
Furniture, fixtures and equipment consists of the following :
October 31,
1998 1997
Furniture and fixtures $ 624,366 $ 424,096
Office equipment 1,616,828 1,225,667
Leasehold improvements 207,856 59,811
---------- ----------
2,449,050 1,709,574
Less: Accumulated depreciation
and amortization 897,478 530,281
----------- ----------
$1,551,572 $1,179,293
F-9
<PAGE>
3. INCOME TAXES:
The provision for income taxes consists of the following :
October 31,
1998 1997
--------- --------
Federal :
Current $2,182,830 $1,564,233
Deferred (480,872) (463,523)
State :
Current 590,915 473,106
Deferred (155,200) (175,268)
----------- -----------
$2,137,673 $1,398,548
The differences between the provision for income taxes and income taxes computed
using the U.S. Federal statutory income tax rate were as follows :
October 31,
1998 1997
U.S. Federal statutory rate 34% 34%
State income taxes, net of
Federal benefit 5 6
---- ---
Effective tax rate 39% 40%
=== ===
The deferred income taxes of approximately $2,128,000, which have been paid as
of October 31, 1998, result from temporary differences between the financial
accounting and income tax treatment of deferred contract revenue.
4. 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, 1998 and
1997, no amounts had been borrowed under the credit facility.
5. 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. All remaining
warrants are no longer excercisable.
b) 1993 Stock Option Plan
On November 1, 1992, the Company granted certain officers and employees
non-qualified stock
F-10
<PAGE>
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, 1998:
Weighted
Average
Number Exercise
of Shares Price
October 31, 1996 276,834 $2.10
Exercised (19,800) .63
Canceled (3,400) 1.41
----------
October 31, 1997 253,634 $2.23
Exercised (16,300) .53
----------
October 31, 1998 237,334 $2.35
As of October 31, 1998, options to purchase 192,934 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 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, 1998:
Weighted
Average
Number Exercise
of Shares Price
October 31, 1996 105,000 $4.36
Granted 37,500 6.73
---------
October 31, 1997 142,500 $4.98
Granted 93,000 5.375
Exercised (9,800) 4.24
----------
October 31, 1998 225,700 $5.18
F-11
<PAGE>
As of October 31, 1998, options to purchase 99,700 shares were exercisable and
64,500 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. Similarly, on January 7, 1998, the Company
granted a certain officer non-qualified stock options for the purchase of 6,000
shares of common stock at an exercise price of $9.313 per share. The exercise
prices exceeded the market value per share on the dates of grant. The options
were immediately exercisable and expire ten years from the dates 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 1998 and 1997 as described by the
provisions of SFAS No. 123, the Company's net income and diluted net income per
share would have been decreased as indicated below:
1998 1997
Net income - as reported $3,303,802 $2,136,673
Net income - pro forma 3,230,760 2,098,580
Diluted net income per share -
as reported .67 .54
Diluted net income per share -
pro forma .65 .53
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 1998: dividend yield of 0%; expected volatility of 50%;
risk-free interest rate of 4.6%; expected life of 5 years and a fair value of
$2.74. 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.
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.
6. 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 $6,595 and $3,375 was recorded
for the years ended October 31, 1998 and 1997, respectively. The balance
outstanding at October 31, 1998 was $90,000.
F-12
<PAGE>
In January 1998, the Company entered into an agreement with a subsidiary of
Orion Capital ("Orion") to underwrite a portion of the insurance coverage
arranged by the Company for its service contract customers. Concurrently, Orion
entered into a reinsurance agreement with Target Insurance Ltd. ("Target"),
which is owned by certain shareholders of the Company, which provided
reinsurance for losses to Orion under its agreement with the Company. During
fiscal 1998, Target received approximately $2,100 in premiums under its
agreement with Orion. In addition, in January 1998, NSC entered into a
reinsurance agreement with a subsidiary of Orion which provides reinsurance for
losses to NSC under certain circumstances. Concurrently, the Company entered
into agreements to indemnify Orion and Target for any losses incurred under the
aforementioned agreements. There were no such losses, and there were no payments
made by the Company under the indemnification agreements in fiscal 1998. In
fiscal 1997 the Company and NSC had similar reinsurance agreements with Reliance
National Indemnity Company, which agreements were terminated in December 1997.
7. EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) Profit Sharing Plan covering substantially all
full-time employees, and provides for employee contributions of up to 15% of
their salary. The Company does not match employee contributions. The profit
sharing portion of the plan is discretionary and non-contributory. Approximately
$82,000 and $64,000 was contributed by the Company for the years ended October
31, 1998 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES:
Letters of Credit
Concurrent with the Orion agreements explained in Note 6, the Company issued two
letters of credit through its principal lending institution in the amount of
$1,750,000 and $250,0000. These letters of credit are irrevocable and have
one-year renewable terms.
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
----------- ------
1999 $ 636,000
2000 650,000
2001 666,000
2002 465,000
2003 462,000
Thereafter 616,000
---------
$3,495,000
Rent expense totaled approximately $578,000 and $479,000 for the years ended
October 31, 1998 and 1997, respectively.
F-13
<PAGE>
Employment Agreements
On November 1, 1998, the Company entered into an Amended and Restated Employment
Agreement with Chester J. Luby providing for his employment as Chairman of the
Board of Directors and Chief Executive Officer of the Company. The agreement
terminates on December 31, 2008, but is automatically extended for additional
one-year periods unless either party provides written notice that no further
extensions shall be granted. The employment agreement provides for total
compensation as the sum of his annual salary, annual bonus and annual
performance bonus (if any) for that fiscal year. The annual salary of $250,000
may be increased annually at the discretion of the Board of Directors. The
annual bonus is calculated based on the earnings of the Company and is equal to
the greater of $150,000 or 4 1/2% of the Company's earnings before interest and
taxes for the fiscal year. The annual performance bonus may be granted each year
at the discretion of the Board of Directors. In the event of Mr. Luby's death or
the termination of his employment agreement the amount the Company paid for his
split-dollar life insurance policies which are recorded as non-interest bearing
loans and totaled approximately $249,000 and $186,000 as of October 31, 1998 and
1997, respectively, will be reimbursed to the Company.
On November 1, 1998, the Company entered into an Amended and Restated Employment
Agreement with Cindy H. Luby providing for her employment as President and Chief
Operating Officer of the Company. The agreement terminates on December 31, 2008,
but is automatically extended for additional one-year periods unless either
party provides written notice that no further extensions shall be granted. The
employment agreement provides for total compensation as the sum of her annual
salary, annual bonus and annual performance bonus (if any) for that fiscal year.
The annual salary of $175,000 may be increased annually at the discretion of the
Board of Directors. The annual bonus is calculated based on the earnings of the
Company and is equal to the greater of $100,000 or 3 1/2% of the Company's
earnings before interest and taxes for the fiscal year. The annual performance
bonus may be granted each year at the discretion of the Board of Directors.
As of December 1, 1993, the Company entered into a five-year employment
agreement with its vice president, marketing, which provides for an annual
salary of approximately $69,000. 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. Such employment agreement, as amended, terminates on
December 31, 2002. During the term of such agreement, the vice president,
marketing, is entitled to receive an annual bonus at the discretion of the Board
of Directors.
The future aggregate minimum annual compensation required under these agreements
is approximately $744,000.
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.
9. DISPUTE SETTLEMENT:
Included in Other Income is a $500,000 payment received in December 1997, in
connection with the settlement of a dispute with an unaffiliated party.
F-14
<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, 1999 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. . . . . . . . 67 Chairman, Chief Executive Officer and
Director*
Cindy H. Luby. . . . . . . . . 44 President, Chief Operating Officer
and Director**
Lawrence J. Altman . . . . . . 51 Senior Vice President, Marketing
Zvi D. Sprung . . . . . . . .. 49 Chief Financial Officer, Treasurer
and Secretary
William H. Brown . . . . . . . 68 Director**
Donald Kirsch. . . . . . . . . . 67 Director*
Harvey Granat . . . . . . . . . 61 Director***
* Term expires 2000
** Term expires 2001
*** 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 the insurance business. 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
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.
<PAGE>
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.
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 financial public relations firms, positions he has held
for more than five years. He has been a director of the Company since December
1996.
Harvey Granat has been the President and Chief Executive Officer of
Sterling/Carl Marks Capital, Inc., a Small Business Investment Company, since
1988. Prior to joining Sterling, Mr. Granat was the President and Chief
Executive Officer of Sussex Leasing Corp., an equipment leasing company. He was
elected a director by the Board of Directors in January 1999.
During the fiscal year ended October 31, 1998, Robert E. Schulman was a
member of the Board of Directors. On November 30, 1998 Mr.
Schulman resigned from the Board.
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 fiscal year ended October 31, 1998, 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.
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, 1998 (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) 1998 $200,000 $181,500 25,000 $62,865
Chairman and Chief 1997 154,167 137,829 - 62,919
Executive Officer 1996 153,975 72,815 170,000 62,920
Cindy H. Luby (2) 1998 125,000 141,100 31,000 -
President and Chief 1997 100,961 98,450 - -
Operating Officer 1996 106,184 48,543 146,434 -
Lawrence J. Altman(3) 1998 217,464 - 6,000 -
Senior Vice 1997 164,890 - - -
President, 1996 134,702 5,000 26,500 -
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.
<PAGE>
(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.
Similarly, in January 1999, Ms. Luby prepaid an additional $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 1998 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. Granat was awarded 15,000 options to
purchase Common Stock under the Company's 1996 Incentive Plan in January 1999
upon his election to the Board of Directors. These options, none of which are
currently exercisable, become exercisable at the rate of 3,000 options per year.
The following table sets forth certain information concerning options
granted during the fiscal year ended October 31, 1998 to the Named Executives.
The Company did not grant any stock appreciation rights during the fiscal year
ended October 31, 1998.
Option Grants in Last Fiscal Year
Number of Percentage of Total
Securities Option Shares
Underlying Granted Employees Exercise Price Expiration
Name Options Granted in Fiscal 1998 Per Share Date
Chester J.Luby (1) 25,000 25.25% $5.375 10/08/2008
Cindy H. Luby (1) 25,000 25.25% $5.375 10/08/2008
(2) 6,000 6.06% 9.313 01/07/2008
Lawrence J. (3) 6,000 6.06% $5.375 10/08/2008
Altman
(1) Grants became exercisable in October 1998.
(2) Grants became exercisable in January 1998.
(3) Grant becomes exercisable in October 1999, at an annual rate of 20% of the
underlying shares of Common Stock.
The following table sets forth information concerning the exercise of stock
options by the Named Executives during the fiscal year ended October 31, 1998
and the value of unexercised options as of October 31, 1998 held by the Named
Executives.
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and
Fiscal Year End Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money Options
on Exercise Realized Options at October at October 31, 1998(1)
31,1998
Exercis- Unexercis- Exercis- Unexercis-
able able able able
Chester Luby - $ - 207,000 18,000 $593,649 $ 95,420
Cindy Luby 3,000 21,300 185,834 14,000 521,392 74,456
Lawrence
Altman 7,200 57,420 20,400 23,900 89,803 63,799
(1) Based on the closing price of the Common Stock on NASDAQ on October 31,
1998.
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 Donald Kirsch and
William Brown, independent 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, 1998, options to purchase 237,334 shares of
Common Stock were outstanding under the Option Plan, 209,734 of which are
exercisable at January 13, 1999. 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 Donald Kirsch 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, in the case of ISOs, 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 the appointment of an independent director to the Board of
Directors. As of October 31, 1998, options to purchase 225,700 shares of Common
Stock were outstanding under the Incentive Plan, 104,700 of which are
exercisable at January 13, 1999.
<PAGE>
Employment Agreements
On November 1, 1998, the Company entered into an Amended and Restated
Employment Agreement with Chester J. Luby providing for his employment as
Chairman of the Board of Directors and Chief Executive Officer of the Company.
This agreement terminates on December 31, 2008. However, it is automatically
extended for additional one-year periods unless either the Company or Mr. Luby
provides written notice that no further extensions shall be granted.
Mr. Luby is to be paid an annual salary of $250,000, which may be increased
annually in the discretion of the Board of Directors. Mr. Luby is also entitled
to an annual bonus on account of each fiscal year equal to the greater of
$150,000 or 4-1/2% of the Company's earnings before interest and taxes for the
fiscal year. In addition to his annual salary and bonus, Mr. Luby may also be
paid an annual performance bonus in the discretion of the Board of Directors.
However, the amount, if any, of this bonus is determined at the sole discretion
of the members of the Board. Mr. Luby's "Total Compensation" (as defined in the
employment agreement) for any fiscal year is defined as the sum of his annual
salary, annual bonus and annual performance bonus (if any) for that fiscal year.
Under the terms of his employment agreement, Mr. Luby is entitled to the use
of a leased car and reimbursement for all operating expenses for the car,
reimbursement for travel expenses incurred in attending conferences and meetings
of certain trade associations and certain other business and employment related
expenses, and premium payments for split dollar life insurance policies for the
benefit of Mr. Luby and his family. With respect to the split-dollar life
insurance policies, the premium payments made by the Company are recorded as
non-interest bearing loans and total approximately $249,000 as of October 31,
1998. This amount will be reimbursed to the Company in the event of Mr. Luby's
death or the termination of his employment agreement under certain
circumstances.
If Mr. Luby dies during the term of his employment agreement, the Company
will pay to his estate a death benefit in an amount equal to five times Mr.
Luby's annual salary for the most recent fiscal year immediately prior to his
death. If Mr. Luby's employment is terminated because he becomes disabled, the
Company will pay him disability benefits equal to fifty percent (50%) of his
average Total Compensation during the three most recent fiscal years prior to
his disability. This annual disability benefit is payable until Mr. Luby's
death. If Mr. Luby terminates his employment by the Company for "good reason,"
as defined in the agreement, or if the Company terminates his employment other
than for "good cause" (as defined in the agreement) or disability, then he is
entitled to be paid the amount of his Total Compensation for the Company's most
recent fiscal year immediately prior to his termination multiplied by a factor
equal to the greater of two (2) or the number of years (including fractions)
remaining in the term of his agreement. If Mr. Luby retires during the term of
his agreement, he is to be paid retirement benefits equal to fifty percent (50%)
of his Total Compensation for the Company's most recent fiscal year prior to his
retirement. This annual retirement benefit is payable until Mr. Luby's death. If
Mr. Luby is an employee of the Company immediately prior to a "Change in
Control" of the Company, as defined in the agreement, all stock options he owns
immediately vest and become exercisable. In addition, the Company is required to
pay Mr. Luby an amount equal to the number of shares of Common Stock underlying
his options multiplied by the amount, if any, that the lesser of (i) the
exercise price of Mr. Luby's options or (ii) the closing price of the Company's
shares on the date of the Change in Control, exceeds the average closing price
of the Company's shares during the period beginning 180 days and ending 150 days
prior to the date of the Change in Control. Upon receipt of this payment from
the Company, Mr. Luby may then retain or exercise his options. Alternatively,
Mr. Luby may forfeit his options to the Company in exchange for payment equal to
the difference between the closing price of the Company's shares on the date of
the Change in Control and the exercise price of his options.
Mr. Luby's employment agreement also contains a three year "non-compete"
clause. This clause does not apply in the event that Mr. Luby terminates his
employment with the Company for good reason or if the Company terminates Mr.
Luby's employment for reasons other than disability or "proper cause," as
defined in the agreement.
On November 1, 1998, the Company entered into an Amended and Restated
Employment Agreement with Cindy H. Luby providing for her employment as
President and Chief Operating Officer of the Company. This agreement terminates
on December 31, 2008. However, it is automatically extended for additional
one-year periods unless either the Company or Ms. Luby provides written notice
that no further extensions shall be granted.
Ms. Luby is to be paid an annual salary of $175,000, which may be increased
annually in the discretion of the Board of Directors. Ms. Luby is also entitled
to an annual bonus on account of each fiscal year equal to the greater of
$100,000 or 3-1/2% of the Company's earnings before interest and taxes for the
fiscal year. In addition to her annual salary and bonus, Ms. Luby may also be
paid an annual performance bonus in the discretion of the Board of Directors.
<PAGE>
However, the amount, if any, of this bonus is determined at the sole discretion
of the members of the Board. Ms. Luby's Total Compensation for any fiscal year
is defined as the sum of her annual salary, annual bonus and annual performance
bonus (if any) for that fiscal year.
Under the terms of her employment agreement, Ms. Luby is entitled to the use
of a leased car and reimbursement for all operating expenses for the car and
reimbursement for business expenses and employment related expenses, including
travel expenses incurred in attending conferences and meetings of certain trade
associations and dues of certain associations.
If Ms. Luby dies during the term of her employment agreement, the Company
will pay to her estate a death benefit in an amount equal to five times Ms.
Luby's annual salary for the most recent fiscal year immediately prior to her
death. If Ms. Luby's employment is terminated because she becomes disabled, the
Company will pay her disability benefits equal to fifty percent (50%) of her
average Total Compensation during the three most recent fiscal years prior to
her disability. This annual disability benefit is payable for the longer of two
(2) years or the balance of the term of her employment agreement. If Ms. Luby
terminates her employment by the Company for good reason, or if her employment
is terminated by the Company for reasons other than "good cause" or disability,
then she is entitled to be paid the amount of her Total Compensation for the
Company's most recent fiscal year immediately prior to the termination
multiplied by a factor equal to the greater of two (2) or the number of years
(including fractions) remaining in the term of her agreement. If Ms. Luby is an
employee of the Company immediately prior to a Change in Control of the Company,
all stock options she owns immediately vest and become exercisable. In addition,
the Company is required to pay Ms. Luby an amount equal to the number of shares
of Common Stock underlying her options multiplied by the amount, if any, that
the lesser of (i) the exercise price of Ms. Luby's options or (ii) the closing
price of the Company's shares on the date of the Change in Control, exceeds the
average closing price of the Company's shares during the period beginning 180
days and ending 150 days prior to the date of the Change in Control. Upon
receipt of this payment from the Company, Ms. Luby may then retain or exercise
her options. Alternatively, Ms. Luby may forfeit her options to the Company in
exchange for payment equal to the difference between the closing price of the
Company's shares on the date of the Change in Control and the exercise price of
her options.
Ms. Luby's employment agreement also contains a three year "non-compete"
clause. This clause does not apply in the event that Ms. Luby terminates her
employment with the Company for good reason or if the Company terminates Ms.
Luby's employment for reasons other than disability or proper cause.
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. Such
employment agreement, as amended, terminates on December 31,2002. Pursuant to
his employment agreement, 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, 1999, 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 705,800(2) 14.5%
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 215,894(4) 4.5%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Lawrence J. Altman 64,300(5) 1.4%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Zvi D. Sprung 24,500(6) -
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
William H. Brown 18,000(7) -
Donald Kirsch 15,000(8) -
Harvey Granat 15,000(9) -
First Wilshire Securities Management, Inc. 476,300(10) 10.2%
All directors and executive officers
as a group (seven persons) 1,058,494 20.4%
(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 4,655,616 shares of Common Stock outstanding on January
13, 1999 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 225,000 shares issuable upon the exercise of stock options, 214,000
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, all of
which are currently exercisable.
(4) Includes 199,834 shares issuable upon the exercise of stock options, 190,834
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 44,300 shares issuable upon the exercise of stock options, 21,900
of which are currently exercisable and the balance of which become
exercisable at the rate of 14,300 options per year.
<PAGE>
(6) All of these shares are issuable upon the exercise of stock options, 7,300
of which are currently exercisable and the balance of which become
exercisable at the rate of 4,900 options per year.
(7) Includes (a) 10,000 shares issuable upon the exercise of stock options,
5,000 of which are currently exercisable and the balance of which become
exercisable in April 1999 and (b) 1,200 shares issuable upon exercise of
warrants to purchase Common Stock (the "Independent Director Warrants"), 600
of which are currently exercisable and the balance of which become
exercisable at the rate of 600 Independent Director Warrants per year.
(8) All of these shares are issuable upon the exercise of stock options, 10,000
of which are currently exercisable and the balance of which become
exercisable in December 1999.
(9) All of these shares are issuable upon the exercise of stock options, none of
which are currently exercisable and which become exercisable at the rate of
3,000 options per year beginning in January 2000.
(10)Based on information provided in Schedule 13G supplied to the Company in
February 1998. First Wilshire Securities Management, Inc., a broker and
investment advisor, has sole voting power over 96,000 of the 476,300 shares.
Item 12. Certain Relationships and Related Transactions
In January 1998, the Company entered into an agreement with a subsidiary of
Orion Capital ("Orion") to underwrite a portion of the insurance coverage
arranged by the Company for its service contract customers. Concurrently, Orion
entered into a reinsurance agreement with Target which provided reinsurance for
losses to Orion under its agreement with the Company. During fiscal 1998, Target
received approximately $2,100 in premiums under its agreement with Orion. In
addition, in January 1998, NSC entered into a reinsurance agreement with a
subsidiary of Orion which provides reinsurance for losses to NSC under certain
circumstances. Concurrently, the Company entered into agreements to indemnify
Orion and Target for any losses incurred under the aforementioned agreements.
There were no such losses, and there were no payments made by the Company under
the indemnification agreements in fiscal 1998.
<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 Amended and Restated Employment Agreement between the Company and
Chester J. Luby, dated as of November 1, 1998.
10.2 Amended and Restated Employment Agreement between the Company and
Cindy H. Luby, dated as of November 1, 1998.
10.3 Employment Agreement between the Company and Lawrence J.Altman, dated
as of December 1, 1993.(1)
10.4 Amended and Restated 1993 Stock Option Plan.(1)
10.5 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)
10.6 Replacement Administrator Agreement, dated October 1, 1991, among
INDS Group Inc. (The "Seller")(as predecessor-in-interest to the
Company), Travelers, BPI and Automotive Professionals, Inc. ("API").(1)
10.7 INDS/BPI-Program Agreement, dated October 1, 1991, among Seller (as
predecessor-in-interest to the Company), Travelers and BPI.(1)
10.8 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)
10.9 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
among the Company, Seller and Travelers.(1)
10.10 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
among the Company, Seller and BPI.(1)
10.11 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
among the Company, Seller and the Escrow Agent.(1)
10.12 Assumption of Contracts, Rights and Actions, dated November 1, 1991,
among the Company, Seller and the API.(1)
10.13 Form of Independent Agent Agreement.(1)
10.14 Form of Administrator Agreement.(1)
10.15 Form of Dealer Administrator Agreement.(1)
10.16 Form of Service Contract Financing Program Agreement.(1)
10.17 Amendment to Amended and Restated 1993 Stock Option Plan.(1)
10.18 Lease, dated December 2, 1994, between The Omni Partners,a Limited
Partnership, as lessor, and the Company, as lessee.(3)
<PAGE>
Exhibit
No. Description
10.19 Amendment to Employment Agreement between the Company and Lawrence J.
Altman, dated as of May 1, 1996.(4)
10.20 1996 Incentive Plan. (5)
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 19, 1999
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/William H. Brown Director
William H. Brown
/s/Donald Kirsch Director
Donald Kirsch
/s/Harvey Granat Director
Harvey Granat
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement is entered into as of
the 1st day of November, 1998, by and between INTERSTATE NATIONAL DEALER
SERVICES, INC., a Delaware corporation (the "Company"), and CHESTER J. LUBY (the
"Executive").
RECITALS:
WHEREAS, the Company and the Executive are parties to an Employment
Agreement entered into as of December 1, 1993, as amended by the Amendment to
the Employment Agreement, dated as of March 16, 1995, by the Amendment to the
Employment Agreement, dated as of May 1, 1996, by the Amendment to the
Employment Agreement, dated as of October 1, 1997 and by the Amendment to the
Employment Agreement, dated as of February 13, 1998 (collectively, the "Prior
Employment Agreement") and the Company and the Executive are parties to certain
split dollar insurance agreements dated as of January 23, 1995 and February 9,
1995 (the "Split Dollar Insurance Agreements"); and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its shareholders
to assure that the Company will have the continued dedication of the Executive
by providing him with compensation and benefit arrangements that are competitive
with those of other similar corporations;
WHEREAS, in furtherance of the foregoing, the Board has deemed it
advisable to amend and restate in full the Prior Employment Agreement as
provided herein; and
WHEREAS, the Board approved the execution and delivery of this
Agreement by the Company at a meeting of the Board held on September 29, 1998;
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereby agree as follows:
1. Position and Duties. The Company agrees to employ the Executive,
and the Executive agrees to be employed, as Chairman of the Board and Chief
Executive Officer of the Company, subject to the supervision of, and reporting
only to, the Board. Executive shall have such duties, responsibilities, titles
and authority normally associated with the position of chairman of the board and
chief executive officer of a company the size and structure of the Company,
limited, however, to those duties and responsibilities as historically performed
by the Executive.
<PAGE>
During the Term (as defined in Section 4 below) and excluding
any periods of Personal Time-Off (as defined in Section 3(g) below), the
Executive agrees to devote reasonable attention and time during normal business
hours to the business and affairs of the Company, and, to the extent necessary
to discharge the duties and responsibilities assigned to the Executive
hereunder, to use the Executive's reasonable best efforts to perform faithfully
and efficiently such duties and responsibilities.
It shall not be a violation of this Agreement for the Executive
to engage in the following activities, so long as such activities do not
significantly interfere with the performance of Executive's duties and
responsibilities: (a) serve on corporate, civic or charitable boards or
committees; (b) deliver lectures, fulfill speaking engagements or teach at
educational institutions; (c) manage personal investments; or (d) attend
conferences conducted by business organizations including but not limited to the
World Presidents Organization and the Chief Executives Organization. It is
expressly understood and agreed that to the extent that any activities described
in (a), (b), (c) or (d) above have been conducted by the Executive prior to the
date of this Agreement, the continued conduct of such activities (or the conduct
of activities similar in nature and scope thereto) during the Term shall not be
deemed to interfere with the performance of the Executive's duties and
responsibilities to the Company. The Company agrees that Executive's current
activities with respect to, and without any material changes in the financial
structure or operations of, Target Agency, Inc., Target Insurance Ltd. and
Dealers Extended Services, Inc. do not significantly interfere with the
performance of the Executive's duties and responsibilities to the Company and
shall not constitute a violation of this Agreement.
2. Compensation. For all services rendered by the Executive pursuant
to this Agreement, the Company shall annually pay to the Executive the
compensation set forth in clauses 2(a), (b) and (c) below (each an "Element"),
the sum of which Elements shall be Executive's "Total Compensation" for any such
year.
(a) Annual Salary. The Company shall pay Executive a salary at
the rate of $250,000 per year during the Term, subject to future increases (the
"Annual Salary") and subject to applicable tax, Social Security and other
legally required withholding ("Withholding"). The Annual Salary shall be paid in
accordance with the customary payroll practices of the Company at regular
intervals, but in no event less frequently than every month, as the Company may
establish from time to time for employees of the Company generally. The Company
shall conduct an annual performance appraisal and salary review on behalf of the
Executive and adjust the Annual Salary accordingly but never below $250,000.
(b) Annual Bonus. In addition to the Annual Salary, the Company
shall pay each fiscal year to the Executive an amount equal to four and one half
per cent (4-1/2%) of the Company's Earnings Before Interest and Taxes ("EBIT")
for such fiscal year (the "Annual Bonus"). EBIT shall be as reflected on the
Company's audited consolidated financial statements and computed in accordance
with United States generally accepted accounting principles. However, in no
event shall any Annual Bonus be less than $150,000.
<PAGE>
The Company shall pay each Annual Bonus to the Executive no later than
thirty (30) days after the completion of the Company's audited consolidated
financial statements by the Company's auditors for the subject fiscal year (the
"Bonus Payment Deadline"). Each Annual Bonus payment shall be subject to
Withholding.
Along with the payment of each Annual Bonus, the Company shall also deliver
to the Executive a written statement setting forth the basis of its calculation
of such Annual Bonus. The Executive and the Executive's representatives shall
have the right, at the Executive's cost, to inspect the records of the Company
with respect to the calculation of any such Annual Bonus, to make copies of said
records utilizing the Company's facilities without charge, and to have free and
full access thereto upon reasonable notice during the normal business hours of
the Company.
In the event that such inspection reveals an
underpayment by the Company of any Annual Bonus due the Executive, then the
Company shall immediately pay to the Executive the balance of all such amounts
found to be due ("Bonus Balance") plus interest, at the Prime Rate in effect
during such period as set forth in The Wall Street Journal, Eastern Edition, on
such Bonus Balance from (and including) the date the Annual Bonus for the
subject fiscal year was paid to (but excluding) the date such Bonus Balance is
received by Executive. If such inspection discloses that the Company has
underpaid the Annual Bonus due for the period by ten percent (10%) or more, then
the Company shall also pay the reasonable professional fees of the Executive's
representatives engaged to conduct or review such inspection or audit.
(c) Performance Bonus. In addition to any other compensation
provided for in this Section 2, the Company may award to the Executive a
performance bonus at any time in such amount as the Board may determine (the
"Performance Bonus"), in its sole discretion, after taking into consideration
other compensation paid or payable to the Executive under this Agreement, as
well as the financial and non-financial progress of the business of the Company
and the contributions of the Executive toward that progress. Any Performance
Bonus shall be subject to Withholding.
(d) Elements Earned Pro Rata. Each Element of the Executive's
Total Compensation shall be deemed to be earned by Executive on a pro rata basis
throughout each fiscal year, based on the number of days elapsed in such fiscal
year, for purposes of determining amounts accrued or owing but not yet paid
under this Agreement. The pro rata portion of any Annual Bonus accrued or owing
as a result of an Early Termination (as defined in Section 5 below) shall be
paid to the Executive on or before the Bonus Payment Deadline.
3. Benefits.
(a) Medical, etc. The Executive shall be entitled to such
medical and other benefits as are customarily made available to executive
officers of the Company and upon the same terms. The Executive shall also be
entitled to receive those benefits and privileges that the Corporation
currently, and may at any time in the future, provide for its executive officers
upon the same terms.
<PAGE>
(b) Company Car. For the Executive's sole use in fulfilling his
obligations under this Agreement and for personal use, the Company shall provide
the Executive with an automobile in a style comparable to the BMW 740 IL model
(the "Company Car"). The Company Car shall be leased by the Company in the
Executive's name and on terms acceptable to the Company. The Company shall pay
for or reimburse the Executive for the annual garage expenses at one location as
the Executive shall select and for all automobile insurance premiums for the
Company Car. With respect to other expenses incurred in connection with the use
and maintenance of the Company Car, the Company shall pay for or reimburse the
Executive for all reasonable expenses incurred by the Executive solely in
connection with the performance of his duties and responsibilities under this
Agreement upon submission of appropriate receipts. The Executive shall not be
reimbursed for expenses, such as tolls and any other expenses, incurred by the
Executive in connection with his personal use of the Company Car, other than
those expenses as historically reimbursed by the Company.
(c) Expenses. The Executive shall: (i) receive a non-accountable expense
allowance of $1,000 per month; and (ii) be reimbursed by the Company, in
accordance with customary procedures, for all expenses actually and necessarily
incurred by Executive in the performance of his services.
(d) Annual Conferences. The Executive shall be reimbursed for
any and all expenses he incurs, including travel, in connection with attending
the annual meetings or conferences of both the World Presidents Organization and
the Chief Executive Organization.
(e) Insurance Benefits. The Company shall maintain split dollar
life insurance policies for the Executive and his family in accordance with the
terms of the Split Dollar Insurance Agreements (the "Split Dollar Policies").
(f) Office and Support Staff. During the Term, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, including exclusive personal secretarial and other
assistance, at least equal to the most favorable of the foregoing provided to
the Executive by the Company at any time during the 90-day period immediately
preceding the date of this Agreement, or, if more favorable to the Executive, as
provided at any time after such date to Executive or other executive officers of
the Company.
(g) Personal Time-Off. The Executive shall be entitled each
fiscal year during the Term to such number of personal days off, for purposes of
vacations or other personal affairs ("Personal Time-Off"), as are approved by
the Board, but not less than the greater of: (i) thirty (30) business days; or
(ii) the Personal Time-Off generally given by the Company to its executive
officers. Personal Time-Off shall be in addition to regular paid holidays
provided to all employees of the Company and shall be taken as determined by the
Executive in his reasonable and good faith discretion. The Executive shall be
fully compensated with respect to Personal Time-Off but shall not be permitted
to carry forward into a subsequent fiscal year any accrued but unused Personal
Time-Off.
(h) Tax and Financial Services. The Company shall provide
Executive with tax and financial advisory and tax return preparation services at
an annual cost to the Company not to exceed five thousand dollars ($5,000),
adjusted annually to reflect inflation as measured by changes in the Consumer
Price Index or other comparable index.
<PAGE>
4. Term. The term of this Agreement (the "Term") shall terminate on
December 31, 2008 (the "Termination Date"); provided, however, that on December
31 of each year commencing December 31, 1999, the Term and Termination Date
shall automatically extend for an additional one-year period unless either party
hereto provides written notice not less than 60 days prior to December 31 of any
year that no further automatic extensions shall be granted. In the event that
the Executive continues his employment after the Termination Date, his
employment will be deemed "at will" under the same terms as provided herein
unless otherwise expressly agreed to by further written agreement between the
Company and the Executive.
5. Early Termination. The employment by the Company of the Executive
shall be terminated prior to the Termination Date as a result of the death or
disability of the Executive and may be terminated prior to the Termination Date
for proper cause by the Company, for good reason by the Executive or upon the
Executive's retirement (each an "Early Termination") as set forth below:
(a) Death. If the Executive shall die during the Term, this
Agreement shall thereupon terminate, except that notwithstanding such
termination the Company shall:
(i) pay to the legal representative of the
Executive's estate, within thirty (30) days of Executive's date of death, all
amounts accrued or owing but not yet paid under this Agreement and any other
benefits in accordance with the terms of any applicable plans and programs of
the Company;
(ii) pay to the legal representative of the
Executive's estate an amount equal to a factor of five (5) multiplied by the
dollar amount of the Annual Salary paid or payable to the Executive hereunder
for the Company's most recent fiscal year immediately prior to the Executive's
date of death (the "Death Benefit"). Such Death Benefit shall be paid in one
lump sum within sixty (60) days of the Executive's date of death;
(iii) provide the Executive's spouse until
her death with the same level of health/medical insurance or coverage that was
provided to her immediately prior to the Executive's death, with the cost of
such continued insurance or coverage being borne by the Company. Alternatively,
the Executive's spouse may elect to receive from the Company until her death a
monthly payment equal to her monthly cost to obtain comparable health/medical
insurance or coverage through another provider; and
(iv) pay the premiums on the Split Dollar
Policies in accordance with the terms of the Split Dollar Insurance Agreements.
<PAGE>
(b) Disability. The Company or the Executive, upon not less than
thirty (30) days written notice to the other party, may terminate the employment
by the Company of the Executive if the Executive has been unable, by reason of
physical or mental disability, to render, for 90 successive days or for shorter
periods aggregating 180 days or more in any twelve month period, services of the
character contemplated by this Agreement and will be unable to resume providing
such services within a reasonable period of time by reason of such disability.
The determination of whether the Executive has become disabled within the
meaning of this Section 5(b) shall be made (i) in the case of a termination of
employment by the Company, by a medical doctor selected by the Company, or (ii)
in the case of a termination of employment by the Executive, by Executive's
medical doctor. In the event the Company gives a notice of termination of
employment under this Section 5(b), the Executive or his representative may at
any time prior to the effective date of termination contest the termination and
cause a determination of disability to be made by Executive's medical doctor. In
the event the Executive gives a notice of termination of employment under this
Section 5(b), the Company may at any time prior to the effective date of
termination contest the termination and cause a determination of disability to
be made by a medical doctor selected by the Company. In either case, if such
medical doctors do not agree with regard to the determination of disability,
they shall mutually choose a third medical doctor to examine the Executive, and
the disability determination of such third medical doctor shall be binding upon
both the Company and the Executive.
If the employment by the Company of the
Executive is terminated by reason of Executive's disability, the Company shall:
(i) pay to the Executive, within thirty (30)
days of such disability termination date, all amounts accrued or owing but not
yet paid under this Agreement and any other benefits in accordance with the
terms of any applicable plans and programs of the Company;
(ii) pay to the Executive annually, in
installments at least as frequent as monthly, an amount equal to fifty percent
(50%) of the average Total Compensation paid or payable to the Executive
hereunder for the Company's three most recent fiscal years immediately prior to
the Executive's disability termination less the amount, if any, of any payments
received by the Executive from the Company's disability insurance plan (the
"Disability Benefit"). Such Disability Benefit shall be subject to Withholding
and shall be payable until the Executive's death;
(iii) for the longer of two (2) years or the
balance of the Term, provide Executive and/or his spouse with the same level of
health/medical insurance or coverage provided to them immediately prior to such
disability termination, with the cost of such continued insurance or coverage
being borne by the Company. Alternatively, the Executive, or his spouse after
Executive's death, may elect to receive from the Company instead of such
insurance or coverage, a monthly payment equal to the cost to the Executive
and/or his spouse to obtain comparable health/medical insurance or coverage
through another provider; and
(iv) pay the premiums on the Split Dollar
Policies in accordance with the terms of the Split Dollar Insurance Agreements.
Any payments due to the Executive hereunder
may be paid to his spouse or legal representative for Executive's benefit, to
the extent warranted by Executive's incapacity.
<PAGE>
(c) Proper Cause. The Company, upon not less than ten (10) days
written notice to the Executive, may terminate the employment by the Company of
the Executive if the Board has established and unanimously concluded (excluding
the vote of the Executive and/or any member of his immediate family who is then
on the Board), during a properly called meeting or meetings, that the Executive
has engaged in any of the following conduct (each a "Proper Cause"): (1)
willfully refused or failed to carry out specific directions of the Board which
are not inconsistent with the duties and responsibilities set forth in Section 1
hereof and which are material to the performance of his duties and
responsibilities under said Section 1, or willfully refused or failed to perform
a material part of such duties and responsibilities hereunder; (2) committed a
material breach of any of the provisions of Sections 8, 9 or 10 of this
Agreement; (3) acted fraudulently or dishonestly in his relations with the
Company; (4) been convicted of a felony involving an act of moral turpitude,
fraud or misrepresentation; (5) engaged in the use of illegal substances or
alcohol, which use has impaired the Executive's ability, on an ongoing basis, to
perform his duties and responsibilities; or (6) willfully engaged in misconduct
which materially injured the reputation, business or business relationships of
the Company, monetarily or otherwise.
No act, or failure to act, on the part of the
Executive shall be deemed "willful" unless done, or omitted to be done, by the
Executive otherwise than in good faith and in a manner that the Executive
reasonably believed was in or not opposed to the best interests of the Company
and its shareholders. In no event shall the employment by the Company of the
Executive be terminated for Proper Cause unless and until the Board has provided
the Executive with the following: (x) written notice specifying the details of
the Proper Cause (the "Notice"); (y) an opportunity or opportunities to appear
before the Board to respond to such Notice; and (z) thirty (30) days after
receiving such Notice during which to remedy, terminate, cure or correct the
conduct referred to therein.
As a result of any such termination for
Proper Cause, the Company shall pay, within thirty (30) days of such
termination, all amounts accrued or owing but not yet paid under this Agreement
through the date of termination and any other benefits in accordance with the
terms of any applicable plans and programs of the Company.
(d) By Executive For Good Reason; Other Termination. The
Executive may terminate the employment by the Company of the Executive upon not
less than ten (10) days' written notice to the Company based upon his reasonable
determination that one or more of the following events has occurred (each a
"Good Reason"):
(1) any of the Company's representations or warranties in this Agreement is
not materially true, accurate and/or complete;
(2) the Company intentionally and continually
breached or wrongfully failed to fulfill or perform (A) its obligations,
promises or covenants under this Agreement; or (B) any warranties, obligations,
promises or covenants of the Company in any agreement (other than this
Agreement) entered into between the Company and the Executive, without cure, if
any, as provided in such agreement;
<PAGE>
(3) the Company terminated the Executive's employment hereunder, and such
termination does not constitute Proper Cause (as defined herein);
(4) without the consent of the Executive, the
Company: (A) substantially altered or materially diminished the position,
nature, status, prestige or responsibilities of the Executive from those in
effect by mutual agreement of the parties from time-to-time; (B) assigned
additional duties or responsibilities to the Executive which were wholly and
clearly inconsistent with the position, nature, status, prestige or
responsibilities of the Executive then in effect; or (C) removed or failed to
reappoint or re-elect the Executive to the Executive's offices under this
Agreement (as they may be changed or augmented from time-to-time with the
consent of the Executive), or as Chairman of the Board, except in connection
with the death or disability of the Executive;
(5) without the consent of the Executive, the
Company relocated the Company's principal operating offices from their present
location and as a result increased the Executive's ordinary commute from the
Executive's residence by more than thirty (30) miles;
(6) the Company intentionally required the
Executive to commit or participate in any felony or other serious
crime;
(7) there has been a Change in Control of the
Company (as defined in Section 6(a) below); and/or
(8) the Company engaged in other conduct
constituting legal cause for termination.
If any event of Good Reason occurs, and such
event is reasonably susceptible of being cured, the Company shall be entitled to
one period of thirty (30) days during which to cure such event, following the
receipt of written notice of such event from Executive. As a result of any such
termination for Good Reason, or if the Company terminates the employment of the
Executive for any reason other than as set forth in Sections 5(a), 5(b) or 5(c),
the Company shall:
(i) within thirty (30) days of such
termination, pay to the Executive all amounts accrued or owing but not yet paid
under this Agreement and any other benefits in accordance with the terms of any
applicable plans and programs of the Company;
(ii) pay Executive an amount equal to
the dollar amount of the Total Compensation paid or payable to the Executive
hereunder for the Company's most recent fiscal year immediately prior to the
Executive's termination multiplied by a factor which shall be the greater of two
(2) or the number of years (including fractions thereof) remaining in the Term
(the "Severance Benefit"). Such Severance Benefit shall be paid in one lump sum
within forty-five (45) days of the Executive's termination date and shall be
subject to Withholding;
<PAGE>
(iii) for the longer of two (2) years
or the balance of the Term: (x) provide Executive and/or his spouse with the
same level of health/medical insurance or coverage provided to them immediately
prior to such termination, with the cost of such continued insurance or coverage
being borne by the Company; alternatively, the Executive, or his spouse after
Executive's death, may elect to receive from the Company, instead of such
insurance or coverage, a monthly payment equal to the monthly cost to the
Executive and/or his spouse to obtain comparable health/medical insurance or
coverage through another provider; and (y) continue the benefits associated with
both the Company Car and the Tax and Financial Services as set forth above in
Section 3(b) and 3(h) respectively; and
(iv) pay the premiums on the Split
Dollar Policies in accordance with the terms of the Split Dollar Insurance
Agreements.
(e) Retirement. The Executive may retire at any time during the
Term upon ten (10) days written notice to the Company. As a result of any such
retirement, the Company shall:
(i) within thirty (30) days of such
retirement, pay to the Executive all amounts accrued or owing but not yet paid
under this Agreement and any other benefits in accordance with the terms of any
applicable plans and programs of the Company;
(ii) pay Executive annually, in
installments at least as frequently as monthly, an amount equal to fifty percent
(50%) of the dollar amount of the Total Compensation paid or payable to the
Executive hereunder for the Company's most recent fiscal year immediately prior
to the Executive's retirement (the "Retirement Benefit"). Such Retirement
Benefit shall be subject to Withholding and shall be payable until the
Executive's death;
(iii) for the longer of two (2) years or the
balance of the Term: (x) provide Executive and/or his spouse with the same level
of health/medical insurance or coverage provided to them immediately prior to
such retirement, with the cost of such continued insurance or coverage being
borne by the Company; alternatively, the Executive, or his spouse after
Executive's death, may elect to receive from the Company, instead of such
insurance or coverage, a monthly payment equal to the monthly cost to the
Executive and/or his spouse to obtain comparable health/medical insurance or
coverage through another provider; and (y) continue the benefits associated with
both the Company Car and the Tax and Financial Services as set forth above in
Section 3(b) and 3(h) respectively; and
(iv) pay the premiums on the Split Dollar
Policies in accordance with the terms of the Split Dollar Insurance Agreements.
6. Change Of Control. In the event that the
Executive is an employee of the Company at the moment immediately
prior to a Change in Control of the Company (as defined below),
the Executive shall be entitled to receive all benefits described
in this Section 6.
<PAGE>
(a) For purposes of this Agreement, a "Change in Control of the
Company" shall be deemed to occur if:
(i) there shall have occurred a change in
control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended, as in effect on the date hereof, whether or not the
Company is then subject to such reporting requirement, provided, however, that
there shall not be deemed to be a Change in Control of the Company if: (A)
immediately prior to the occurrence of what would otherwise be a Change in
Control of the Company, the Executive is the other party to the transaction (a
"Control of the Company Event"); or (B) immediately prior to the occurrence of
what would otherwise be a Change in Control of the Company, the Executive is an
executive officer, trustee, director or more than 25% equity holder of the other
party to the Control of the Company Event or of any entity, directly or
indirectly, controlling such other party;
(ii) the Company merges or consolidates
with, or sells all or substantially all of its assets to, another company (each,
a "Transaction"), provided, however, that a Transaction shall not be deemed to
result in a Change in Control of the Company if (A) immediately prior thereto
the circumstances in (a)(i)(A) or (a)(i)(B) above exist, or (B)(1) the
shareholders of the Company, immediately before such Transaction own, directly
or indirectly, immediately following such Transaction in excess of fifty percent
(50%) of the combined voting power of the outstanding voting securities of the
corporation or other entity resulting from such Transaction (the "Surviving
Corporation") in substantially the same proportion as their ownership of the
voting securities of the Company immediately before such Transaction ("Shares")
and (2) the individuals who were members of the Company's Board of Directors
immediately prior to the execution of the agreement providing for such
Transaction constitute at least a majority of the members of the board of
directors of the Surviving Corporation, or of a corporation or other entity
beneficially directly or indirectly owning a majority of the outstanding voting
securities of the Surviving Corporation; or
(iii) the Company acquires assets of another
company or a subsidiary of the Company merges or consolidates with another
company (each, an "Other Transaction") and (A) the shareholders of the Company,
immediately before such Other Transaction own, directly or indirectly,
immediately following such Other Transaction, 50% or less of the combined voting
power of the outstanding voting securities of the corporation or other entity
resulting from such Other Transaction (the "Other Surviving Corporation") or (B)
the individuals who were members of the Company's Board of Directors immediately
prior to the execution of the agreement providing for such Other Transaction
constitute less than a majority of the members of the board of directors of the
Other Surviving Corporation, or of a corporation or other entity beneficially
directly or indirectly owning a majority of the outstanding voting securities of
the Other Surviving Corporation, provided, however, that an Other Transaction
shall not be deemed to result in a Change in Control of the Company if
immediately prior thereto the circumstances in (a)(i)(A) or (a)(i)(B) above
exist.
<PAGE>
(b) In the event that the Executive is an employee of the
Company at the moment immediately prior to a Change of Control of the Company:
(i) the Company shall pay to the Executive
additional compensation in the form of cash equal to, on the date of a Change in
Control of the Company and with respect to each option to purchase Shares held
by the Executive whether or not such option has vested or is exercisable on such
date (an "Option"), the number of Shares underlying the Option, multiplied by
the amount, if any, that the exercise price of the Option or the Closing Share
Value (as defined below), whichever is less, exceeds the Initial Share Value (as
defined below);
(ii) with respect to each Option, in the
event that the Closing Share Value is greater than the exercise price of such
Option, then the Executive can (A) retain the Option or (B) exercise the Option,
or (C) forfeit the Option and receive, in exchange therefor, a cash payment
equal to the number of Shares underlying the Option multiplied by the amount
that the Closing Share Value exceeds the exercise price of the Option;
(iii) upon the occurrence of a Change of
Control, all Options then held by the Executive shall immediately
vest and become exercisable; and
(iv) for purposes of this subsection, the
"Initial Share Value" of an Option shall mean the average of the Closing Prices
of the Shares for the period commencing on the 180th day prior to the date of
the Change in Control of the Company and ending on the 150th day prior to the
date of the Change in Control of the Company, and the "Closing Share Value"
shall mean the Closing Price of the Shares on the date of the Change in Control
of the Company. For purposes of this subsection, the "Closing Price" of a Share
on any date shall mean the last sale price, regular way, or, in case no such
sale takes place on such date, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the Shares are listed or admitted to
trading or, if the Shares are not listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the highest bid and lowest ask prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer used, the principal other
automated quotation system that may then be in use or, if the Shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making the market in the Shares as
such person is selected from time to time by the Board of Directors of the
Company or, if there are no professional market makers making a market in the
Shares, then the value as determined in good faith judgement of the Board of
Directors of the Company.
<PAGE>
7. Advances. The Company may, upon written consent of the Board, make
an advance to the Executive against any compensation or other amounts to be paid
by the Company to the Executive (an "Advance"). Any amounts due under this
Agreement to the Executive shall, at the election of the Company, be offset by
any then outstanding Advances. In the event of Executive's termination of
employment, Executive agrees that the Company shall have the right to offset the
amount of any and all outstanding Advance(s) against any compensation or any
other amounts due to the Executive from the Company, and that any remaining
balance of the Advance(s) shall be repaid by the Executive within ninety (90)
days after the termination of Executive's employment by the Company.
8. Non-Competition. In order to induce the Company to enter into and
perform this Agreement and, as additional consideration for the payment of the
Total Compensation provided herein, so long as the Executive is employed by the
Company and for the three (3) year period following the termination of the
Executive's employment pursuant to Section 5(b) (pertaining to disability),
Section 5(c) (pertaining to proper cause) or Section 5(e) (pertaining to
retirement), the Executive will not, either separately or in association with
others, directly or indirectly, in the continental United States, (i) establish,
engage in or become interested in, as an employee, consultant, advisor, agent,
owner, partner, co-venturer, principal, stockholder, director or otherwise, any
company the primary business of which is the administration of vehicle service
contracts and warranties, or (ii) solicit, interfere with, or endeavor to entice
away from the Company any dealers, independent agents or insurance underwriters
party to an agreement with the Company as of the date of Executive's termination
of employment. Mere passive ownership of stock representing five percent (5%) or
less of the capital stock of a publicly held company shall not be deemed a
breach of this Section 8. However, Company agrees that Executive's current and
future activities with respect to Target Agency, Inc., Target Insurance Ltd. and
Dealers Extended Services, Inc. shall not constitute a violation of this Section
8.
9. Confidential Information. During the Term and at any time
thereafter, the Executive shall not divulge, furnish or make accessible to any
person or business entity any of the Company's trade secrets or other
information of a confidential nature including, but not limited to, the
Company's business methods, operational procedures and cost and price
information, without the prior written consent of the Company.
10. Non-Interference. The Executive, during the time period referred
to in Section 8 hereof, will not cause or influence any employee, consultant or
advisor now employed or in the future to be employed by the Company, to work in
any way for the Executive or in any enterprise in which the Executive owns a
participation, directly or indirectly.
11. Unenforceability. If any provision of Sections 8, 9 or 10 herein
is held to be unenforceable because of the scope, duration or area of its
applicability, such scope, duration or area, or all of them, shall be modified
to the minimum extent possible to make such provision(s) enforceable, and such
provision(s) shall then be applicable in such modified form.
12. Return of Property. Upon Executive's termination of employment
with the Company, the Executive shall promptly deliver to the Company all
memoranda, notes, records, reports, manuals, drawings, blueprints and other
documents (and all copies thereof) relating to the business of the Company, and
all property associated therewith, which he may then possess or have under his
control.
<PAGE>
13. Injunctive Relief. The Executive agrees that the restrictions and
covenants contained in Sections 8, 9, 10 and 12 herein are necessary for the
protection of the Company and any breach thereof will cause the Company
irreparable damages for which there is no adequate remedy at law. The Executive
further agrees that, in the event of a breach of his obligations thereunder, the
Company shall have the absolute right, in addition to any other remedy that
might be available to it, to obtain from any court having jurisdiction, such
equitable relief as might be appropriate, including temporary, interlocutory,
preliminary and permanent decrees or injunctions enjoining any further breach of
such provisions.
14. Miscellaneous.
(a) Severability. If any provision of this Agreement is
determined to be invalid or unenforceable, it shall not affect the validity or
enforceability of any of the other remaining provisions hereof.
(b) Notices. Any and all notices or other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand or if mailed, first class, postage prepaid,
registered or certified mail, return receipt requested to the addresses of the
parties set forth below or, as to each party, at such other address as shall be
designated in a written notice to the other party.
To the Company:
Interstate National Dealer Services, Inc.
The Omni, Suite 700
333 Earle Ovington Boulevard
Mitchel Field, NY, 11553
To the Executive:
Mr. Chester J. Luby
76 Cove Neck Road
Oyster Bay, NY 11771
(c) Waiver. No waiver by either party hereto of any breach of
any provision of this Agreement shall be deemed a waiver of any preceding or
succeeding breach of such provision or any other provision herein contained.
(d) Governing Law. This Agreement shall be
governed by, and construed in accordance with, the laws of the
State of New York, without giving effect to the conflict of law
principles thereof.
<PAGE>
(e) Entire Agreement. This Agreement, together with the Split
Dollar Insurance Agreements, sets forth the entire agreement of the parties
hereto with respect to the subject matter hereof, and is intended to supersede
all prior employment negotiations, understandings and agreements. No provision
of this Agreement may be waived or changed, except by a writing signed by the
party to be charged with such waiver or change. The Split Dollar Insurance
Agreements shall continue in accordance with their terms notwithstanding any
termination or amendment of this Agreement; provided, however, that Article VII,
Section 1(b) of each of such agreements shall be and hereby is amended to refer
to Section 5(c) of this Amended and Restated Employment Agreement instead of
Section 4(b)(ii) as is currently written in each of such agreements.
(f) Successors: Binding Agreement.
(i) The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(ii) This Agreement and all rights of the
Executive hereunder, shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(g) Counterparts. This Agreement may be executed
in counterparts, each of which shall be an original, but together
shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
INTERSTATE NATIONAL DEALER
SERVICES, INC.
By:
Name:Cindy H. Luby
Title: President
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement is entered into as of
the 1st day of November, 1998, by and between INTERSTATE NATIONAL DEALER
SERVICES, INC., a Delaware corporation (the "Company"), and CINDY H. LUBY (the
"Executive").
RECITALS:
WHEREAS, the Company and the Executive are parties to an Employment
Agreement entered into as of December 1, 1993, as amended by the Amendment to
the Employment Agreement, dated as of November 1, 1995, by the Amendment to the
Employment Agreement, dated as of May 1, 1996, by the Amendment to the
Employment Agreement, dated as of October 1, 1997 and by the Amendment to the
Employment Agreement, dated as of February 13, 1998 (collectively, the "Prior
Employment Agreement"); and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its shareholders
to assure that the Company will have the continued dedication of the Executive
by providing her with compensation and benefit arrangements that are competitive
with those of other similar corporations;
WHEREAS, in furtherance of the foregoing, the Board has deemed it
advisable to amend and restate in full the Prior Employment Agreement as
provided herein; and
WHEREAS, the Board approved the execution and delivery of this
Agreement by the Company at a meeting of the Board held on September 29, 1998;
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereby agree as follows:
1. Position and Duties. The Company agrees to employ the Executive,
and the Executive agrees to be employed, as President and Chief Operating
Officer of the Company, subject to the supervision of, and reporting only to,
the Chairman of the Board and/or the Board. Executive shall have such duties,
responsibilities, titles and authority normally associated with the position of
president and chief operating officer of a company the size and structure of the
Company, limited, however, to those duties and responsibilities as historically
performed by the Executive.
<PAGE>
During the Term (as defined in Section 4 below) and excluding
any periods of Personal Time-Off (as defined in Section 3(g) below), the
Executive agrees to devote reasonable attention and time during normal business
hours to the business and affairs of the Company, and, to the extent necessary
to discharge the duties and responsibilities assigned to the Executive
hereunder, to use the Executive's reasonable best efforts to perform faithfully
and efficiently such duties and responsibilities.
It shall not be a violation of this Agreement for the Executive
to engage in the following activities, so long as such activities do not
significantly interfere with the performance of Executive's duties and
responsibilities: (a) serve on corporate, civic or charitable boards or
committees; (b) deliver lectures, fulfill speaking engagements or teach at
educational institutions; (c) manage personal investments; or (d) attend
conferences conducted by business organizations including but not limited to the
Young Presidents Organization, and, should Executive become a member, the World
Presidents Organization and the Chief Executives Organization. It is expressly
understood and agreed that to the extent that any activities described in (a),
(b), (c) or (d) above have been conducted by the Executive prior to the date of
this Agreement, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) during the Term shall not be
deemed to interfere with the performance of the Executive's duties and
responsibilities to the Company. The Company agrees that Executive's current
activities with respect to, and without any material changes in the financial
structure or operations of, Target Agency, Inc., Target Insurance Ltd. and
Dealers Extended Services, Inc. do not significantly interfere with the
performance of the Executive's duties and responsibilities to the Company and
shall not constitute a violation of this Agreement.
2. Compensation. For all services rendered by the Executive pursuant
to this Agreement, the Company shall annually pay to the Executive the
compensation set forth in clauses 2(a), (b) and (c) below (each an "Element"),
the sum of which Elements shall be Executive's "Total Compensation" for any such
year.
(a) Annual Salary. The Company shall pay Executive a salary at
the rate of $175,000 per year during the Term, subject to future increases (the
"Annual Salary") and subject to applicable tax, Social Security and other
legally required withholding ("Withholding"). The Annual Salary shall be paid in
accordance with the customary payroll practices of the Company at regular
intervals, but in no event less frequently than every month, as the Company may
establish from time to time for employees of the Company generally. The Company
shall conduct an annual performance appraisal and salary review on behalf of the
Executive and adjust the Annual Salary accordingly but never below $175,000.
(b) Annual Bonus. In addition to the Annual Salary, the Company
shall pay each fiscal year to the Executive an amount equal to three and one
half per cent (3-1/2%) of the Company's Earnings Before Interest and Taxes
("EBIT") for such fiscal year (the "Annual Bonus"). EBIT shall be as reflected
on the Company's audited consolidated financial statements and computed in
accordance with United States generally accepted accounting principles. However,
in no event shall any Annual Bonus be less than $100,000.
<PAGE>
The Company shall pay each Annual Bonus to
the Executive no later than thirty (30) days after the completion of the
Company's audited consolidated financial statements by the Company's auditors
for the subject fiscal year (the "Bonus Payment Deadline"). Each Annual Bonus
payment shall be subject to Withholding.
Along with the payment of each Annual Bonus,
the Company shall also deliver to the Executive a written statement setting
forth the basis of its calculation of such Annual Bonus. The Executive and the
Executive's representatives shall have the right, at the Executive's cost, to
inspect the records of the Company with respect to the calculation of any such
Annual Bonus, to make copies of said records utilizing the Company's facilities
without charge, and to have free and full access thereto upon reasonable notice
during the normal business hours of the Company.
In the event that such inspection reveals an
underpayment by the Company of any Annual Bonus due the Executive, then the
Company shall immediately pay to the Executive the balance of all such amounts
found to be due ("Bonus Balance") plus interest, at the Prime Rate in effect
during such period as set forth in The Wall Street Journal, Eastern Edition, on
such Bonus Balance from (and including) the date the Annual Bonus for the
subject fiscal year was paid to (but excluding) the date such Bonus Balance is
received by Executive. If such inspection discloses that the Company has
underpaid the Annual Bonus due for the period by ten percent (10%) or more, then
the Company shall also pay the reasonable professional fees of the Executive's
representatives engaged to conduct or review such inspection or audit.
(c) Performance Bonus. In addition to any other compensation
provided for in this Section 2, the Company may award to the Executive a
performance bonus at any time in such amount as the Board may determine (the
"Performance Bonus"), in its sole discretion, after taking into consideration
other compensation paid or payable to the Executive under this Agreement, as
well as the financial and non-financial progress of the business of the Company
and the contributions of the Executive toward that progress. Any Performance
Bonus shall be subject to Withholding.
(d) Elements Earned Pro Rata. Each Element of the Executive's
Total Compensation shall be deemed to be earned by Executive on a pro rata basis
throughout each fiscal year, based on the number of days elapsed in such fiscal
year, for purposes of determining amounts accrued or owing but not yet paid
under this Agreement. The pro rata portion of any Annual Bonus accrued or owing
as a result of an Early Termination (as defined in Section 5 below) shall be
paid to the Executive on or before the Bonus Payment Deadline.
3. Benefits.
(a) Medical, etc. The Executive shall be entitled to such
medical and other benefits as are customarily made available to executive
officers of the Company and upon the same terms. The Executive shall also be
entitled to receive those benefits and privileges that the Corporation
currently, and may at any time in the future, provide for its executive officers
upon the same terms.
<PAGE>
(b) Company Car. For the Executive's sole use in fulfilling her
obligations under this Agreement and for personal use, the Company shall provide
the Executive with an automobile in a style comparable to the Lexus ES 300 or
BMW 500 series model (the "Company Car"). The Company Car shall be leased by the
Company in the Executive's name and on terms acceptable to the Company. The
Company shall pay for or reimburse the Executive for the annual garage expenses
at one location as the Executive shall select and for all automobile insurance
premiums for the Company Car. With respect to other expenses incurred in
connection with the use and maintenance of the Company Car, the Company shall
pay for or reimburse the Executive for all reasonable expenses incurred by the
Executive solely in connection with the performance of her duties and
responsibilities under this Agreement upon submission of appropriate receipts.
The Executive shall not be reimbursed for expenses, such as tolls and any other
expenses, incurred by the Executive in connection with her personal use of the
Company Car, other than those expenses as historically reimbursed by the
Company.
(c) Expenses. The Executive shall: (i) receive a
non-accountable expense allowance of $500.00 per month; and (ii)
be reimbursed by the Company, in accordance with customary
procedures, for all expenses actually and necessarily incurred by
Executive in the performance of her services.
(d) Annual Conferences. The Executive shall be reimbursed for
any and all expenses she incurs, including travel, in connection with attending
the annual meetings or conferences of the Young Presidents Organization, and,
should Executive become a member, the World Presidents Organization and the
Chief Executives Organization.
(e) Membership Dues. The Company shall pay
Executive's lifetime membership dues of the World Presidents
Organization and the Chief Executives Organization upon her
joining those organizations.
(f) Office and Support Staff. During the Term, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, including exclusive personal secretarial and other
assistance, at least equal to the most favorable of the foregoing provided to
the Executive by the Company at any time during the 90-day period immediately
preceding the date of this Agreement, or, if more favorable to the Executive, as
provided at any time after such date to Executive or other executive officers of
the Company.
(g) Personal Time-Off. The Executive shall be entitled each
fiscal year during the Term to such number of personal days off, for purposes of
vacations or other personal affairs ("Personal Time-Off"), as are approved by
the Board, but not less than the greater of: (i) thirty (30) business days; or
(ii) the Personal Time-Off generally given by the Company to its executive
officers. Personal Time-Off shall be in addition to regular paid holidays
provided to all employees of the Company and shall be taken as determined by the
Executive in her reasonable and good faith discretion. The Executive shall be
fully compensated with respect to Personal Time-Off but shall not be permitted
to carry forward into a subsequent fiscal year any accrued but unused Personal
Time-Off.
<PAGE>
(h) Tax and Financial Services. The Company shall provide
Executive with tax and financial advisory and tax return preparation services at
an annual cost to the Company not to exceed three thousand five hundred dollars
($3,500), adjusted annually to reflect inflation as measured by changes in the
Consumer Price Index or other comparable index.
4. Term. The term of this Agreement (the "Term") shall terminate on
December 31, 2008 (the "Termination Date"); provided, however, that on December
31 of each year commencing December 31, 1999, the Term and Termination Date
shall automatically extend for an additional one-year period unless either party
hereto provides written notice not less than 60 days prior to December 31 of any
year that no further automatic extensions shall be granted. In the event that
the Executive continues her employment after the Termination Date, her
employment will be deemed "at will" under the same terms as provided herein
unless otherwise expressly agreed to by further written agreement between the
Company and the Executive.
5. Early Termination. The employment by the Company of the Executive
shall be terminated prior to the Termination Date as a result of the death or
disability of the Executive and may be terminated prior to the Termination Date
for proper cause by the Company, for good reason by the Executive or upon the
Executive's retirement (each an "Early Termination") as set forth below:
(a) Death. If the Executive shall die during the Term, this
Agreement shall thereupon terminate, except that notwithstanding such
termination the Company shall:
(i) pay to the legal representative of the
Executive's estate, within thirty (30) days of Executive's date of death, all
amounts accrued or owing but not yet paid under this Agreement and any other
benefits in accordance with the terms of any applicable plans and programs of
the Company;
(ii) pay to the legal representative of the
Executive's estate an amount equal to a factor of five (5) multiplied by the
dollar amount of the Annual Salary paid or payable to the Executive hereunder
for the Company's most recent fiscal year immediately prior to the Executive's
date of death (the "Death Benefit"). Such Death Benefit shall be paid in one
lump sum within sixty (60) days of the Executive's date of death; and
(iii) provide the Executive's then current
spouse, for a one year period, with the same level of health/medical insurance
or coverage that was provided to him immediately prior to the Executive's death,
with the cost of such continued insurance or coverage being borne by the
Company. Alternatively, the Executive's then current spouse may elect to receive
from the Company, for a one year period, a monthly payment equal to his monthly
cost to obtain comparable health/medical insurance or coverage through another
provider.
<PAGE>
(b) Disability. The Company or the Executive, upon not less than
thirty (30) days written notice to the other party, may terminate the employment
by the Company of the Executive if the Executive has been unable, by reason of
physical or mental disability, to render, for 90 successive days or for shorter
periods aggregating 180 days or more in any twelve month period, services of the
character contemplated by this Agreement and will be unable to resume providing
such services within a reasonable period of time by reason of such disability.
The determination of whether the Executive has become disabled within the
meaning of this Section 5(b) shall be made (i) in the case of a termination of
employment by the Company, by a medical doctor selected by the Company, or (ii)
in the case of a termination of employment by the Executive, by Executive's
medical doctor. In the event the Company gives a notice of termination of
employment under this Section 5(b), the Executive or her representative may at
any time prior to the effective date of termination contest the termination and
cause a determination of disability to be made by Executive's medical doctor. In
the event the Executive gives a notice of termination of employment under this
Section 5(b), the Company may at any time prior to the effective date of
termination contest the termination and cause a determination of disability to
be made by a medical doctor selected by the Company. In either case, if such
medical doctors do not agree with regard to the determination of disability,
they shall mutually choose a third medical doctor to examine the Executive, and
the disability determination of such third medical doctor shall be binding upon
both the Company and the Executive.
If the employment by the Company of the
Executive is terminated by reason of Executive's disability, the Company shall:
(i) pay to the Executive, within thirty (30)
days of such disability termination date, all amounts accrued or owing but not
yet paid under this Agreement and any other benefits in accordance with the
terms of any applicable plans and programs of the Company;
(ii) pay to the Executive annually, in
installments at least as frequent as monthly, an amount equal to fifty percent
(50%) of the average Total Compensation paid or payable to the Executive
hereunder for the Company's three most recent fiscal years immediately prior to
the Executive's disability termination less the amount, if any, of any payments
received by the Executive from the Company's disability insurance plan (the
"Disability Benefit"). Such Disability Benefit shall be subject to Withholding
and shall be payable for the longer of two (2) years or the balance of the Term;
and
(iii) for the longer of two (2) years or the
balance of the Term, provide Executive and/or her then current spouse with the
same level of health/medical insurance or coverage provided immediately prior to
such disability termination, with the cost of such continued insurance or
coverage being borne by the Company. Alternatively, the Executive, or her then
current spouse after Executive's death, may elect to receive from the Company
instead of such insurance or coverage, a monthly payment equal to the cost to
the Executive and/or her then current spouse to obtain comparable health/medical
insurance or coverage through another provider.
Any payments due to the Executive hereunder may be paid to her
then current spouse or legal representative for Executive's benefit, to the
extent warranted by Executive's incapacity.
<PAGE>
(c) Proper Cause. The Company, upon not less than ten (10) days
written notice to the Executive, may terminate the employment by the Company of
the Executive if the Board has established and unanimously concluded (excluding
the vote of the Executive and/or any member of her immediate family who is then
on the Board), during a properly called meeting or meetings, that the Executive
has engaged in any of the following conduct (each a "Proper Cause"): (1)
willfully refused or failed to carry out specific directions of the Board which
are not inconsistent with the duties and responsibilities set forth in Section 1
hereof and which are material to the performance of her duties and
responsibilities under said Section 1, or willfully refused or failed to perform
a material part of such duties and responsibilities hereunder; (2) committed a
material breach of any of the provisions of Sections 8, 9 or 10 of this
Agreement; (3) acted fraudulently or dishonestly in her relations with the
Company; (4) been convicted of a felony involving an act of moral turpitude,
fraud or misrepresentation; (5) engaged in the use of illegal substances or
alcohol, which use has impaired the Executive's ability, on an ongoing basis, to
perform her duties and responsibilities; or (6) willfully engaged in misconduct
which materially injured the reputation, business or business relationships of
the Company, monetarily or otherwise.
No act, or failure to act, on the part of the Executive shall be
deemed "willful" unless done, or omitted to be done, by the Executive otherwise
than in good faith and in a manner that the Executive reasonably believed was in
or not opposed to the best interests of the Company and its shareholders. In no
event shall the employment by the Company of the Executive be terminated for
Proper Cause unless and until the Board has provided the Executive with the
following: (x) written notice specifying the details of the Proper Cause (the
"Notice"); (y) an opportunity or opportunities to appear before the Board to
respond to such Notice; and (z) thirty (30) days after receiving such Notice
during which to remedy, terminate, cure or correct the conduct referred to
therein.
As a result of any such termination for Proper Cause, the
Company shall pay, within thirty (30) days of such termination, all amounts
accrued or owing but not yet paid under this Agreement through the date of
termination and any other benefits in accordance with the terms of any
applicable plans and programs of the Company.
(d) By Executive For Good Reason; Other Termination. The
Executive may terminate the employment by the Company of the Executive upon not
less than ten (10) days' written notice to the Company based upon her reasonable
determination that one or more of the following events has occurred (each a
"Good Reason"):
(1) any of the Company's representations or
warranties in this Agreement is not materially true, accurate
and/or complete;
(2) the Company intentionally and continually
breached or wrongfully failed to fulfill or perform (A) its obligations,
promises or covenants under this Agreement; or (B) any warranties, obligations,
promises or covenants of the Company in any agreement (other than this
Agreement) entered into between the Company and the Executive, without cure, if
any, as provided in such agreement;
<PAGE>
(3) the Company terminated the Executive's
employment hereunder, and such termination does not constitute
Proper Cause (as defined herein);
(4) without the consent of the Executive, the
Company: (A) substantially altered or materially diminished the position,
nature, status, prestige or responsibilities of the Executive from those in
effect by mutual agreement of the parties from time-to-time; (B) assigned
additional duties or responsibilities to the Executive which were wholly and
clearly inconsistent with the position, nature, status, prestige or
responsibilities of the Executive then in effect; or (C) removed or failed to
reappoint or re-elect the Executive to the Executive's offices under this
Agreement (as they may be changed or augmented from time-to-time with the
consent of the Executive), except in connection with the death or disability of
the Executive;
(5) without the consent of the Executive, the
Company relocated the Company's principal operating offices from their present
location and as a result increased the Executive's ordinary commute from the
Executive's residence by more than thirty (30) miles;
(6) the Company intentionally required the
Executive to commit or participate in any felony or other serious
crime;
(7) there has been a Change in Control of the
Company (as defined in Section 6(a) below); and/or
(8) the Company engaged in other conduct
constituting legal cause for termination.
If any event of Good Reason occurs, and such
event is reasonably susceptible of being cured, the Company shall be entitled to
one period of thirty (30) days during which to cure such event, following the
receipt of written notice of such event from Executive. As a result of any such
termination for Good Reason, or if the Company terminates the employment of the
Executive for any reason other than as set forth in Sections 5(a), 5(b) or 5(c),
the Company shall:
(i) within thirty (30) days of such
termination, pay to the Executive all amounts accrued or owing but not yet paid
under this Agreement and any other benefits in accordance with the terms of any
applicable plans and programs of the Company;
(ii) pay Executive an amount equal to
the dollar amount of the Total Compensation paid or payable to the Executive
hereunder for the Company's most recent fiscal year immediately prior to the
Executive's termination multiplied by a factor which shall be the greater of two
(2) or the number of years (including fractions thereof) remaining in the Term
(the "Severance Benefit"). Such Severance Benefit shall be paid in one lump sum
within forty-five (45) days of the Executive's termination date and shall be
subject to Withholding; and
<PAGE>
(iii) for the longer of two (2) years
or the balance of the Term: (x) provide Executive and/or her then current spouse
with the same level of health/medical insurance or coverage provided immediately
prior to such termination, with the cost of such continued insurance or coverage
being borne by the Company; alternatively, the Executive, or her then current
spouse after Executive's death, may elect to receive from the Company, instead
of such insurance or coverage, a monthly payment equal to the monthly cost to
the Executive and/or her then current spouse to obtain comparable health/medical
insurance or coverage through another provider; however, the Company shall in no
event be required to provide any such coverage or monthly payment after such
time as Executive becomes entitled to receive (without regard to any individual
waivers of coverage or other similar arrangements) comparable health/medical
benefits of the same type from another employer or recipient of Executive's
services; and (y) continue the benefits associated with both the Company Car and
the Tax and Financial Services as set forth above in Section 3(b) and 3(h)
respectively.
(e) Retirement. At any time after reaching age 65, the Executive
may retire at any time during the Term upon ten (10) days written notice to the
Company. As a result of any such retirement, the Company shall:
(i) within thirty (30) days of such
retirement, pay to the Executive all amounts accrued or owing but not yet paid
under this Agreement and any other benefits in accordance with the terms of any
applicable plans and programs of the Company;
(ii) pay Executive annually, in
installments at least as frequently as monthly, an amount equal to fifty percent
(50%) of the dollar amount of the Total Compensation paid or payable to the
Executive hereunder for the Company's most recent fiscal year immediately prior
to the Executive's retirement (the "Retirement Benefit"). Such Retirement
Benefit shall be subject to Withholding and shall be payable until the
Executive's death; and
(iii) for the longer of two (2) years or the
balance of the Term: (x) provide Executive and/or her then current spouse with
the same level of health/medical insurance or coverage provided immediately
prior to such retirement, with the cost of such continued insurance or coverage
being borne by the Company; alternatively, the Executive, or her then current
spouse after Executive's death, may elect to receive from the Company, instead
of such insurance or coverage, a monthly payment equal to the monthly cost to
the Executive and/or her then current spouse to obtain comparable health/medical
insurance or coverage through another provider; and (y) continue the benefits
associated with both the Company Car and the Tax and Financial Services as set
forth above in Section 3(b) and 3(h) respectively.
(f) Termination By Executive for Other Reason. If the Executive
terminates the employment by the Company of the Executive other than for Good
Reason under Section 5(d) or retirement under Section 5(e) above, the Company
shall pay, within thirty (30) days of such termination, all amounts accrued or
owing but not yet paid under this Agreement through the date of termination and
any other benefits in accordance with the terms of any applicable plans and
programs of the Company.
<PAGE>
6. Change Of Control. In the event that the
Executive is an employee of the Company at the moment immediately
prior to a Change in Control of the Company (as defined below),
the Executive shall be entitled to receive all benefits described
in this Section 6.
(a) For purposes of this Agreement, a "Change in Control of the
Company" shall be deemed to occur if:
(i) there shall have occurred a change in
control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended, as in effect on the date hereof, whether or not the
Company is then subject to such reporting requirement, provided, however, that
there shall not be deemed to be a Change in Control of the Company if: (A)
immediately prior to the occurrence of what would otherwise be a Change in
Control of the Company, the Executive is the other party to the transaction (a
"Control of the Company Event"); or (B) immediately prior to the occurrence of
what would otherwise be a Change in Control of the Company, the Executive is an
executive officer, trustee, director or more than 25% equity holder of the other
party to the Control of the Company Event or of any entity, directly or
indirectly, controlling such other party;
(ii) the Company merges or consolidates
with, or sells all or substantially all of its assets to, another company (each,
a "Transaction"), provided, however, that a Transaction shall not be deemed to
result in a Change in Control of the Company if (A) immediately prior thereto
the circumstances in (a)(i)(A) or (a)(i)(B) above exist, or (B) (1) the
shareholders of the Company, immediately before such Transaction own, directly
or indirectly, immediately following such Transaction in excess of fifty percent
(50%) of the combined voting power of the outstanding voting securities of the
corporation or other entity resulting from such Transaction (the "Surviving
Corporation") in substantially the same proportion as their ownership of the
voting securities of the Company immediately before such Transaction ("Shares")
and (2) the individuals who were members of the Company's Board of Directors
immediately prior to the execution of the agreement providing for such
Transaction constitute at least a majority of the members of the board of
directors of the Surviving Corporation, or of a corporation or other entity
beneficially directly or indirectly owning a majority of the outstanding voting
securities of the Surviving Corporation; or
<PAGE>
(iii) the Company acquires assets of another
company or a subsidiary of the Company merges or consolidates with another
company (each, an "Other Transaction") and (A) the shareholders of the Company,
immediately before such Other Transaction own, directly or indirectly,
immediately following such Other Transaction, 50% or less of the combined voting
power of the outstanding voting securities of the corporation or other entity
resulting from such Other Transaction (the "Other Surviving Corporation") or (B)
the individuals who were members of the Company's Board of Directors immediately
prior to the execution of the agreement providing for such Other Transaction
constitute less than a majority of the members of the board of directors of the
Other Surviving Corporation, or of a corporation or other entity beneficially
directly or indirectly owning a majority of the outstanding voting securities of
the Other Surviving Corporation, provided, however, that an Other Transaction
shall not be deemed to result in a Change in Control of the Company if
immediately prior thereto the circumstances in (a)(i)(A) or (a)(i)(B) above
exist.
(b) In the event that the Executive is an employee of the
Company at the moment immediately prior to a Change of Control of the Company:
(i) the Company shall pay to the Executive
additional compensation in the form of cash equal to, on the date of a Change in
Control of the Company and with respect to each option to purchase Shares held
by the Executive whether or not such option has vested or is exercisable on such
date (an "Option"), the number of Shares underlying the Option, multiplied by
the amount, if any, that the exercise price of the Option or the Closing Share
Value (as defined below), whichever is less, exceeds the Initial Share Value (as
defined below);
(ii) with respect to each Option, in the
event that the Closing Share Value is greater than the exercise price of such
Option, then the Executive can (A) retain the Option or (B) exercise the Option,
or (C) forfeit the Option and receive, in exchange therefor, a cash payment
equal to the number of Shares underlying the Option multiplied by the amount
that the Closing Share Value exceeds the exercise price of the Option;
(iii) upon the occurrence of a Change of
Control, all Options then held by the Executive shall immediately
vest and become exercisable; and
(iv) for purposes of this subsection, the
"Initial Share Value" of an Option shall mean the average of the Closing Prices
of the Shares for the period commencing on the 180th day prior to the date of
the Change in Control of the Company and ending on the 150th day prior to the
date of the Change in Control of the Company, and the "Closing Share Value"
shall mean the Closing Price of the Shares on the date of the Change in Control
of the Company. For purposes of this subsection, the "Closing Price" of a Share
on any date shall mean the last sale price, regular way, or, in case no such
sale takes place on such date, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the Shares are listed or admitted to
trading or, if the Shares are not listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the highest bid and lowest ask prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer used, the principal other
automated quotation system that may then be in use or, if the Shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making the market in the Shares as
such person is selected from time to time by the Board of Directors of the
Company or, if there are no professional market makers making a market in the
Shares, then the value as determined in good faith judgement of the Board of
Directors of the Company.
<PAGE>
7. Advances. The Company may, upon written consent of the Board, make
an advance to the Executive against any compensation or other amounts to be paid
by the Company to the Executive (an "Advance"). Any amounts due under this
Agreement to the Executive shall, at the election of the Company, be offset by
any then outstanding Advances. In the event of Executive's termination of
employment, Executive agrees that the Company shall have the right to offset the
amount of any and all outstanding Advance(s) against any compensation or any
other amounts due to the Executive from the Company, and that any remaining
balance of the Advance(s) shall be repaid by the Executive within ninety (90)
days after the termination of Executive's employment by the Company.
8. Non-Competition. In order to induce the Company to enter into and
perform this Agreement and, as additional consideration for the payment of the
Total Compensation provided herein, so long as the Executive is employed by the
Company and for the three (3) year period following the termination of the
Executive's employment pursuant to Section 5(b) (pertaining to disability),
Section 5(c) (pertaining to proper cause), Section 5(e) (pertaining to
retirement) or Section 5(f) (pertaining to termination by the Executive for
other reasons), the Executive will not, either separately or in association with
others, directly or indirectly, in the continental United States, (i) establish,
engage in or become interested in, as an employee, consultant, advisor, agent,
owner, partner, co-venturer, principal, stockholder, director or otherwise, any
company the primary business of which is the administration of vehicle service
contracts and warranties, or (ii) solicit, interfere with, or endeavor to entice
away from the Company any dealers, independent agents or insurance underwriters
party to an agreement with the Company as of the date of Executive's termination
of employment. Mere passive ownership of stock representing five percent (5%) or
less of the capital stock of a publicly held company shall not be deemed a
breach of this Section 8. However, Company agrees that Executive's current and
future activities with respect to Target Agency, Inc., Target Insurance Ltd. and
Dealers Extended Services, Inc. shall not constitute a violation of this Section
8.
9. Confidential Information. During the Term and at any time
thereafter, the Executive shall not divulge, furnish or make accessible to any
person or business entity any of the Company's trade secrets or other
information of a confidential nature including, but not limited to, the
Company's business methods, operational procedures and cost and price
information, without the prior written consent of the Company.
10. Non-Interference. The Executive, during the time period referred
to in Section 8 hereof, will not cause or influence any employee, consultant or
advisor now employed or in the future to be employed by the Company, to work in
any way for the Executive or in any enterprise in which the Executive owns a
participation, directly or indirectly.
11. Unenforceability. If any provision of Sections 8, 9 or 10 herein
is held to be unenforceable because of the scope, duration or area of its
applicability, such scope, duration or area, or all of them, shall be modified
to the minimum extent possible to make such provision(s) enforceable, and such
provision(s) shall then be applicable in such modified form.
<PAGE>
12. Return of Property. Upon Executive's termination of employment
with the Company, the Executive shall promptly deliver to the Company all
memoranda, notes, records, reports, manuals, drawings, blueprints and other
documents (and all copies thereof) relating to the business of the Company, and
all property associated therewith, which she may then possess or have under her
control.
13. Injunctive Relief. The Executive agrees that the restrictions and
covenants contained in Sections 8, 9, 10 and 12 herein are necessary for the
protection of the Company and any breach thereof will cause the Company
irreparable damages for which there is no adequate remedy at law. The Executive
further agrees that, in the event of a breach of her obligations thereunder, the
Company shall have the absolute right, in addition to any other remedy that
might be available to it, to obtain from any court having jurisdiction, such
equitable relief as might be appropriate, including temporary, interlocutory,
preliminary and permanent decrees or injunctions enjoining any further breach of
such provisions.
14. Miscellaneous.
(a) Severability. If any provision of this Agreement is
determined to be invalid or unenforceable, it shall not affect the validity or
enforceability of any of the other remaining provisions hereof.
(b) Notices. Any and all notices or other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand or if mailed, first class, postage prepaid,
registered or certified mail, return receipt requested to the addresses of the
parties set forth below or, as to each party, at such other address as shall be
designated in a written notice to the other party.
To the Company:
Interstate National Dealer Services, Inc.
The Omni, Suite 700
333 Earle Ovington Boulevard
Mitchel Field, NY, 11553
To the Executive:
Ms. Cindy H. Luby
201 East 69th Street
New York, NY 10021
(c) Waiver. No waiver by either party hereto of any breach of
any provision of this Agreement shall be deemed a waiver of any preceding or
succeeding breach of such provision or any other provision herein contained.
(d) Governing Law. This Agreement shall be
governed by, and construed in accordance with, the laws of the
State of New York, without giving effect to the conflict of law
principles thereof.
<PAGE>
(e) Entire Agreement. This Agreement sets forth the entire
agreement of the parties hereto with respect to the subject matter hereof, and
is intended to supersede all prior employment negotiations, understandings and
agreements. No provision of this Agreement may be waived or changed, except by a
writing signed by the party to be charged with such waiver or change.
(f) Successors: Binding Agreement.
(i) The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(ii) This Agreement and all rights of the
Executive hereunder, shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
(g) Counterparts. This Agreement may be executed
in counterparts, each of which shall be an original, but together
shall constitute one and the same instrument.
The rest of this page intentionally left blank.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
INTERSTATE NATIONAL DEALER
SERVICES, INC.
By:
Name:Chester J. Luby
Title: Chairman of the Board
Cindy H. Luby
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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