UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12938
Interstate National Dealer Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-3078398
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
333 Earle Ovington Blvd., Mitchel Field, NY 11553
(Address of principal executive offices)
(516) 228-8600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of September 13, 1999, Registrant had issued and outstanding 4,669,284 shares
of Common Stock.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of
July 31, 1999 and October 31, 1998 3
Consolidated Statements of Operations
for the nine and three month periods ended
July 31, 1999 and 1998 4
Consolidated Statement of Stockholders'
Equity for the nine month period ended
July 31, 1999 5
Consolidated Statements of Cash Flows for
the nine month periods ended July 31, 1999
and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
ASSETS 1999 1998
------ ------ -----
Unaudited
CURRENT ASSETS:
Cash and cash equivalents $ 28,111,824 $20,885,903
United States Treasury Bills, at cost 14,092,142 16,445,339
Accounts receivable 6,600,808 8,163,882
Prepaid expenses 793,531 653,281
----------- ----------
Total current assets 49,598,305 46,148,405
MARKETABLE SECURITIES 5,179,716 -
RESTRICTED CASH 2,390,752 1,951,856
FURNITURE, FIXTURES AND EQUIPMENT, at cost,
less accumulated depreciation and
amortization of $1,234,017 and $897,478,
respectively 1,591,884 1,551,572
INTANGIBLE ASSETS, less accumulated amortization
of $159,167 and $151,667, respectively 65,833 73,333
DEFERRED INCOME TAXES 2,601,346 2,127,843
NOTE FROM RELATED PARTY 70,000 90,000
OTHER ASSETS 2,353,778 1,463,732
----------- ----------
$63,851,614 $53,406,741
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,424,982 $ 3,402,417
Accrued expenses 1,982,686 737,660
Accrued commissions 1,182,329 1,001,178
Reserve for claims 2,027,500 1,622,361
Other liabilities 376,915 311,135
---------- ----------
Total current liabilities 8,994,412 7,074,751
DEFERRED CONTRACT REVENUE 32,067,987 26,264,571
CONTINGENCY PAYABLE 2,390,752 1,951,856
----------- -----------
Total liabilities 43,453,151 35,291,178
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares; no issued
shares - -
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued
and outstanding 4,669,284 and 4,650,916
shares, respectively 46,693 46,509
Additional paid-in capital 11,155,643 11,104,699
Retained earnings 9,196,127 6,964,355
----------- -----------
Total stockholders' equity 20,398,463 18,115,563
----------- -----------
$63,851,614 $53,406,741
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
For the Nine Months For the Three Months
Ended July 31, Ended July 31,
1999 1998 1999 1998
REVENUES $40,627,555 $35,875,823 $15,343,542 $13,775,114
OPERATING COSTS AND EXPENSES:
Costs of services provided 20,240,296 17,333,339 7,565,703 6,712,644
Selling, general and
administrative expenses 18,051,178 16,040,461 6,638,204 5,942,280
----------- ---------- ---------- ----------
Operating income 2,336,081 2,502,023 1,139,635 1,120,190
OTHER INCOME:
Interest income 1,299,502 1,068,433 486,780 388,467
Other income - 500,000 - -
---------- ---------- --------- ----------
Income before provision for
income taxes 3,635,583 4,070,456 1,626,415 1,508,657
PROVISION FOR INCOME TAXES 1,403,811 1,602,414 635,351 593,470
--------- --------- --------- ---------
Net income $2,231,772 $2,468,042 $ 991,064 $915,187
========== ========== ========= ========
NET INCOME PER SHARE:
Basic $ .48 $ .53 $ .21 $ .20
====== ====== ====== ======
Weighted average shares
outstanding 4,662,500 4,631,932 4,669,284 4,640,933
========= ========= ========= =========
Diluted $ .45 $ .50 $ .20 $ .19
====== ====== ====== ======
Weighted average shares
outstanding 5,010,795 4,967,451 4,948,318 4,942,004
========= ========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JULY 31, 1999
UNAUDITED
Common Stock Additional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
BALANCE AT OCTOBER 31,1998 4,650,916 $46,509 $11,104,699 $6,964,355 $18,115,563
Shares issued pursuant
to exercise of employee
stock options 18,368 184 50,944 - 51,128
Net income for the nine
months ended July 31,
1999 - - - 2,231,772 2,231,772
------- ------- --------- --------- ---------
BALANCE AT JULY 31, 1999 4,669,284 $46,693 $11,155,643 $9,196,127 $20,398,463
========= ======= ========== ========= ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1999 AND 1998
UNAUDITED
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,231,772 $2,468,042
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 370,748 308,782
Deferred income taxes (473,503) (441,510)
Changes in operating assets
and liabilities:
Accounts receivable 1,563,074 465,713
Prepaid expenses (140,250) (134,752)
Restricted cash (438,896) (66,847)
Other assets (916,755) (448,757)
Accounts payable 22,565 302,667
Accrued expenses 1,245,026 (373,507)
Accrued commissions 181,151 223,968
Reserve for claims 405,139 380,055
Other liabilities 65,780 184,448
Deferred contract revenue 5,803,416 5,390,432
Contingency payable 438,896 66,847
---------- ----------
Net cash provided by operating activities 10,358,163 8,325,581
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of United States
Treasury Bills 2,353,197 (7,481,954)
Purchases of marketable securities (5,179,716) -
Purchases of furniture, fixtures and equipment,
net (376,851) (655,137)
Note from related party 20,000 20,000
----------- ---------
Net cash used in investing activities (3,183,370) (8,117,091)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options 51,128 30,223
--------- ----------
Net cash provided by financing activities 51,128 30,223
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,225,921 238,713
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,885,903 20,846,524
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $28,111,824 $21,085,237
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $1,784,856 $2,006,865
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended October 31, 1998.
2. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
July 31, 1999, and the consolidated results of operations and cash flows for
the periods ended July 31, 1999 and 1998. The accounting policies followed by
the Company are set forth in the Company's consolidated financial statements
included in the Annual Report mentioned above.
3. The consolidated results of operations for the nine and three month periods
ended July 31, 1999 and 1998 are not necessarily indicative of the results to
be expected for the full year.
4. The Company reports earnings per share in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic net income per share ("Basic EPS") is computed by dividing net
income by the weighted average number of common shares outstanding. Diluted net
income per share ("Diluted EPS") is computed by dividing net income by the
weighted average number of common shares and dilutive common share equivalents
then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the statements of operations.
A reconciliation between the numerators and denominators of Basic and Diluted
EPS is as follows:
Net Income Shares Per Share
For the nine months ended July 31, 1999
Basic EPS
Net income attributable to common shares $2,231,772 4,662,500 $.48
Effect of dilutive securities: stock options
and warrants - 348,295 (.03)
-------- --------- ---
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $2,231,772 5,010,795 $.45
======== ========= =====
For the nine months ended July 31, 1998
Basic EPS
Net income attributable to common shares $2,468,042 4,631,932 $.53
Effect of dilutive securities: stock options
and warrants - 335,519 (.03)
-------- --------- -----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $2,468,042 4,967,451 $.50
======== ========= =====
<PAGE>
Net Income Shares Per Share
For the three months ended July 31, 1999
Basic EPS
Net income attributable to common shares $991,064 4,669,284 $.21
Effect of dilutive securities: stock options
and warrants - 279,034 (.01)
-------- --------- ---
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $991,064 4,948,318 $.20
======== ========= ====
For the three months ended July 31, 1998
Basic EPS
Net income attributable to common shares $915,187 4,640,933 $.20
Effect of dilutive securities: stock options
and warrants - 301,071 (.01)
-------- --------- -----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $915,187 4,942,004 $.19
======== ========= =====
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
For the Nine Months ended July 31, 1999 compared to the Nine Months ended
July 31, 1998
Revenues increased approximately $4,752,000, or 13%, to approximately
$40,628,000 for the nine months ended July 31, 1999 as compared to approximately
$35,876,000 for the nine months ended July 31, 1998. This increase was primarily
due to: (i) an 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) an increase in administrative and insurance fees
resulting from an increase in the administrative fees charged per contract and
an increase in the number of service contracts accepted for administration by
the Company in fiscal 1999.
Costs of services provided, which consist primarily of claims and
cancellation costs, increased by approximately $2,907,000, or 17%, to
approximately $20,240,000 for the nine months ended July 31, 1999, as compared
to approximately $17,333,000 for the nine months ended July 31, 1998. As a
percentage of revenues, cost of services provided increased to 50% for the nine
months ended July 31, 1999 as compared to 48% in the same period in 1998. Claims
and cancellation costs are directly affected by the total number of unexpired
contracts under administration, which has increased on a yearly basis.
Gross margin increased by approximately $1,845,000, or 10%, to approximately
$20,388,000 for the nine months ended July 31, 1999, as compared to
approximately $18,543,000 for the nine months ended July 31, 1998. This increase
is primarily attributable to the increase in revenues as described above. Gross
margin for the nine months ended July 31, 1999 was 50% as compared to 52% for
the nine months ended July 31, 1998. This decrease is primarily attributable to
an increase in the relative percentage of revenue represented by deferred
contract revenue, which has a low gross margin, as compared to administrative
fees which have a higher gross margin.
Selling, general and administrative expenses increased by approximately
$2,011,000, or 13%, to approximately $18,051,000 for the nine months ended July
31, 1999, up from approximately $16,040,000 for the nine months ended July 31,
1998. 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
<PAGE>
increased personnel and printing costs resulting from the development of new
service contract products and the development of the Company's new web site. As
a percentage of revenues, selling, general and administrative expenses decreased
to 44% for the nine months ended July 31, 1999 as compared to 45% in the same
period in 1998.
Interest income increased by approximately $232,000, or 22%, to
approximately $1,300,000 for the nine months ended July 31, 1999, as compared to
approximately $1,068,000 for the same period in 1998. The increase is a result
of an increase in investment income generated by funds provided by operating
activities. Other income, net decreased by approximately $268,000, or 17%, to
approximately $1,300,000 for the nine months ended July 31, 1999, as compared to
approximately $1,568,000 for the nine months ended July 31, 1998. This decrease
is attributable to non recurring other income of $500,000 received by the
Company in settlement of a dispute with an unaffiliated party in the first
quarter of 1998.
Income before provision for income taxes increased by approximately $66,000,
or 2%, to approximately $3,636,000 for the nine months ended July 31, 1999, as
compared to approximately $3,570,000 for the same period in 1998, exclusive of
the $500,000 non recurring gain on settlement. For the nine months ended July
31, 1999, the Company had income before provision for income taxes of
approximately $3,636,000 and recorded a provision for income taxes of
approximately $1,404,000, as compared to income before provision for income
taxes of approximately $4,070,000 and a provision for income taxes of
approximately $1,602,000 in the same period in 1998. Net income decreased
approximately $236,000, or 10%, to approximately $2,232,000 for the nine months
ended July 31, 1999 as compared to approximately $2,468,000 for the nine months
ended July 31, 1998. The decrease in net income is the result of the $500,000
non recurring gain on settlement received in fiscal 1998.
Diluted net income per share for the nine months ended July 31, 1999 was
$.45 per share, or $.01 per share greater than diluted net income per share for
the nine months ended July 31, 1998, exclusive of the $500,000 non recurring
gain on settlement. Diluted net income per share for the nine months ended July
31, 1999 was $.45 per share as compared to diluted net income per share of $.50
for the same period in 1998, inclusive of the non recurring item.
For the Three Months ended July 31, 1999 compared to the Three Months ended
July 31, 1998
Revenues increased approximately $1,569,000, or 11%, to approximately
$15,344,000 for the three months ended July 31, 1999 as compared to
approximately $13,775,000 for the three months ended July 31, 1998. This
increase was primarily due to: (i) an 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) an increase in administrative
and insurance fees resulting from an increase in the administrative fees charged
per contract and an increase in the number of service contracts accepted for
administration by the Company in fiscal 1999.
Costs of services provided, which consist primarily of claims and
cancellation costs, increased by approximately $853,000, or 13%, to
approximately $7,566,000 for the three months ended July 31, 1999, as compared
to approximately $6,713,000 for the three months ended July 31, 1998. Cost of
services provided was 49% of revenues for both the three months ended July 31,
1999 and the same period in 1998. Gross margin increased by approximately
$716,000, or 10%, to approximately $7,778,000 for the three months ended July
31, 1999, as compared to approximately $7,062,000 for the three months ended
July 31, 1998. This increase is primarily attributable to the increase in
revenues as described above.
Gross margin for both three month periods was 51%.
Selling, general and administrative expenses increased by approximately
$696,000, or 12%, to approximately $6,638,000 for the three months ended July
31, 1999, up from approximately $5,942,000 for the three months ended July 31,
1998. 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 printing costs resulting from the development of new
service contract products and the development of the Company's new web site.
Selling, general and administrative expenses were 43% of revenues for both the
three months ended July 31, 1999 and the three months ended July 31, 1998.
Other income increased by approximately $99,000 or 25%, to approximately
$487,000 for the three months ended July 31, 1999, as compared to approximately
$388,000 for the three months ended July 31, 1998. This increase represents an
increase in investment income generated by funds provided by operating
activities.
<PAGE>
For the three months ended July 31, 1999, the Company had income before
provision for income taxes of approximately $1,626,000 and recorded a provision
for income taxes of approximately $635,000, as compared to income before
provision for income taxes of approximately $1,509,000 and a provision for
income taxes of approximately $594,000 in the same period in 1998. Net income
increased approximately $76,000, or 8%, to approximately $991,000 for the three
months ended July 31, 1999 as compared to approximately $915,000 for the three
months ended July 31, 1998.
Diluted net income per share for the three months ended July 31, 1999 was
$.20 per share, as compared to $.19 per share for the three months ended July
31, 1998.
Liquidity and Capital Resources
Cash and cash equivalents, United States Treasury Bills, at cost, and
marketable securities were approximately $47,384,000 at July 31, 1999, as
compared to approximately $37,331,000 at October 31, 1998. The increase of
approximately $10,053,000 was primarily the result of cash provided by the
Company's operating activities.
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 July 31, 1999, 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.
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.
Forward-Looking Statements
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based on assumptions and expectations which may not be realized and are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. Future events and
actual results, financial or otherwise, may differ from the results discussed in
the forward-looking statements. A number of these risks and other factors that
might cause differences, some of which could be material, along with additional
discussion of forward-looking statements, are set forth in the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on December 23,
1996.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended July 31,
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
INTERSTATE NATIONAL DEALER SERVICES, INC.
September 13, 1999 By: /s/ Zvi D. Sprung
- ------------------ -----------------------------------------
Date Zvi D. Sprung
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Oct-31-1999
<PERIOD-START> Nov-01-1998
<PERIOD-END> Jul-31-1999
<EXCHANGE-RATE> 1
<CASH> 28,111,824
<SECURITIES> 14,092,142
<RECEIVABLES> 6,600,808
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,598,305
<PP&E> 2,825,901
<DEPRECIATION> 1,234,017
<TOTAL-ASSETS> 63,851,614
<CURRENT-LIABILITIES> 8,994,412
<BONDS> 0
0
0
<COMMON> 46,693
<OTHER-SE> 20,351,770
<TOTAL-LIABILITY-AND-EQUITY> 63,851,614
<SALES> 40,627,555
<TOTAL-REVENUES> 40,627,555
<CGS> 0
<TOTAL-COSTS> 20,240,296
<OTHER-EXPENSES> 18,051,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,635,583
<INCOME-TAX> 1,403,811
<INCOME-CONTINUING> 2,231,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,231,772
<EPS-BASIC> .48
<EPS-DILUTED> .45
</TABLE>
