SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year October 31, 1999
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 no.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, 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-K or any
amendment to this Form 10-K. [X]
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,
2000 as reported on the NASDAQ National Market ("NASDAQ"), was approximately
$21,583,000.
As of January 13, 2000, Registrant had issued and outstanding 4,674,684 shares
of Common Stock.
<PAGE>
PART I
Item 1. Business
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.
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).
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 $700 for a new or used
car, $650 for a new recreational vehicle and $850 for a 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 $300 (prior to
the payment to the agent of any commission which generally ranges from $10 to
$150) per contract, which fee varies based on the type of service contract sold
by a seller.
In April 1995, the Company formed an affiliated insurance company, National
Service Contract Insurance Company Risk Retention Group, Inc. ("NSC"). Insurance
policies arranged by the Company are underwritten by a subsidiary of The
Travelers Indemnity Company ("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.
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
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.
Initially, the Company's business focused on extended warranties for new
automobiles and, to a lesser extent, used cars. In the past five 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.
<PAGE>
In February 1999, the Company formed a subsidiary, Uautobid.com, which has
developed an internet web site where a car buyer can purchase a new or used
vehicle online directly from a participating dealer. Uautobid.com permits a
prospective buyer to review a broad selection of in-stock vehicles, search by
price, make, model and location and other search criteria and choose the price
he wants to bid for the vehicle. If the bid meets or exceeds the dealer minimum
the consumer is assured of owning that vehicle at his own price. Each vehicle
will come with a comprehensive warranty supplied by the Company. As at October
31, 1999, Uautobid.com had not generated significant revenues.
To date, the operations of Uautobid.com have been financed by the Company.
The Company is currently seeking outside funding for the subsidiary through a
private placement or negotiated transaction.
Marketing
The Company markets its services and products, using its network of
independent representatives, 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 independent representatives
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 independent representatives and dealers through recommendations
and referrals from existing independent representatives 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 independent representatives 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 agreement with each of its independent
representatives which generally is terminable at any time by the Company or the
representative upon giving of 30 days written notice or by the Company
immediately for cause. The agreement provides that, among other things, the
independent representative solicit sellers, on a non-exclusive basis, for the
Company within designated territories which may include one or more states or
portions thereof. Most independent representatives are compensated on a flat
rate commission basis. Independent representatives 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 third party call center facilities and through its own
and third party 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, 1999, the Company's receivables from its financing program totaled
approximately $5,626,000. 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 maintains a toll-free line
to facilitate customer service.
<PAGE>
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.
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, 1999, the Company had 134 full-time employees and 24
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.
<PAGE>
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.)
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company other
than ordinary routine litigation incidental to the ordinary course of 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock, par value $.01 per share (the "Common Stock") is
listed for trading on the NASDAQ National Market System under the symbol "ISTN".
The following table sets forth for the periods indicated the high and low
closing sales prices of the shares of Common Stock as reported by NASDAQ. The
quotations represent prices between dealers and do not include retail mark-up,
mark-down or commission.
Common
Stock
High Low
Fiscal 1998
First Quarter Ended 01/31/98 10-1/8 7-3/4
Second Quarter Ended 04/30/98 9-7/16 7-1/2
Third Quarter Ended 07/31/98 8-3/8 7
Fourth Quarter Ended 10/31/98 8-1/8 5-3/8
Fiscal 1999
First Quarter Ended 01/31/99 13-5/16 7-1/8
Second Quarter Ended 04/30/99 12-1/4 7
Third Quarter Ended 07/31/99 8 6-7/16
Fourth Quarter Ended 10/31/99 6-15/16 5-1/2
Fiscal 2000
First Quarter Through 01/13/00 6-1/4 5-1/16
<PAGE>
As of January 13, 2000, there were 63 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.
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. Selected Financial Data
The following table summarizes certain selected financial data, which
should be read in conjunction with the Company's consolidated financial
statements and notes thereto and with Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this report.
The selected financial data below as of and for each of the fiscal years in the
five year period ended October 31, 1999 are derived from the audited
consolidated financial statements of the Company.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $56,151,613 $49,283,426 $37,928,719 $21,354,148 $13,749,249
Net income 2,814,807 3,303,802 2,136,673 963,475 339,512
Diluted net income .57 .67 .54 .27 .10
per share
Total assets 68,661,087 53,406,741 41,282,561 22,159,169 14,894,389
Long term 37,262,045 28,216,427 20,111,223 12,653,771 6,883,792
obligations
Stockholders'
equity 20,924,415 18,115,563 14,458,838 5,905,315 4,917,773
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
For the Year ended October 31, 1999 compared to the Year ended October
31, 1998
Revenues increased approximately $6,869,000, or 14%, to approximately
$56,152,000 for the year ended October 31, 1999 as compared to approximately
$49,283,000 for the year ended October 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 $4,155,000, or 17%, to
approximately $28,130,000 for the year ended October 31, 1999, as compared to
approximately $23,975,000 for the year ended October 31, 1998. As a percentage
of revenues, cost of services provided increased to 50% for the year ended
October 31, 1999 as compared to 49% 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 $2,714,000, or 11%, to approximately
$28,022,000 for the year ended October 31, 1999, as compared to approximately
$25,308,000 for the year ended October 31, 1998. This increase is primarily
attributable to the increase in revenues as described above. Gross margin for
the year ended October 31, 1999 was 50% as compared to 51% for the year ended
October 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
$3,467,000, or 16%, to approximately $25,302,000 for the year ended October 31,
1999, up from approximately $21,835,000 for the year ended October 31, 1998.
This increase was in large part due to (i) Uautobid.com expenses; (ii) increases
in selling expenses primarily due to increased commissions paid as a result of
increased sales revenue; and (iii) increases in general and administrative
expenses due to increased personnel and printing costs resulting from increased
sales volume and the development of new service contract products. Uautobid.com
expenses of approximately $504,000 were incurred in the fourth quarter of fiscal
1999 as the Company improved its web site and expanded its nationwide network of
dealers who will provide inventory of new and used cars to be auctioned to the
public on the Company's Uautobid.com internet web site. Selling, general and
administrative expenses were 45% of revenues for the year ended October 31, 1999
as compared to 44% for the year ended October 31, 1998.
<PAGE>
Interest income increased by approximately $387,000, or 26%, to
approximately $1,870,000 for the year ended October 31, 1999, as compared to
approximately $1,483,000 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 $113,000, or 6%, to
approximately $1,855,000 for the year ended October 31, 1999, as compared to
approximately $1,968,000 for the year ended October 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
$137,000, or 3%, to approximately $5,078,000 for the year ended October 31,
1999, as compared to approximately $4,941,000 for the same period in 1998,
exclusive of the Uautobid.com expenses and the $500,000 non recurring gain on
settlement. For the year ended October 31, 1999, the Company had income before
provision for income taxes of approximately $4,574,000 and recorded a provision
for income taxes of approximately $1,759,000, as compared to income before
provision for income taxes of approximately $5,442,000 and a provision for
income taxes of approximately $2,138,000 in the same period in 1998. Net income
decreased approximately $489,000, or 15%, to approximately $2,815,000 for the
year ended October 31, 1999 as compared to approximately $3,304,000 for the year
ended October 31, 1998. The decrease in net income is the result of the
Uautobid.com expenses incurred in fiscal 1999 and the $500,000 non-recurring
gain on settlement received in fiscal 1998.
Diluted net income per share for the year ended October 31, 1999 was $.57
per share as compared to diluted net income per share of $.67 for the same
period in 1998. Excluding the Uautobid.com expenses and the $500,000
non-recurring gain on settlement, diluted net income per share for the year
ended October 31, 1999 was $.63 per share, or $.02 per share greater than
diluted net income per share for the year ended October 31, 1998.
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.
<PAGE>
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, United States Treasury Bills, at cost, and
marketable securities were approximately $50,627,000 at October 31, 1999, as
compared to approximately $37,331,000 at October 31, 1998. The increase of
approximately $13,296,000 was primarily the result of cash provided by the
Company's operating activities less cash used for the purchase of furniture,
fixtures and equipment.
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, 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.
Capital Expenditures
The Company intends to spend approximately $700,000 in fiscal 2000 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 and to expand its internet presence.
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. To date, the Company has not experienced any year 2000 related
problems.
Item 8. Financial Statements and Supplementary Data
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, 1999 and 1998 F-3
Consolidated Statements of Operations for the three years ended
October 31, 1999 F-4
Consolidated Statements of Stockholders' Equity for the three years
ended October 31, 1999 F-5
Consolidated Statements of Cash Flows for the three years ended
October 31, 1999 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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended October 31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1999 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Melville, New York
January 5, 2000
F-2
<PAGE>
INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1999 AND 1998
ASSETS 1999 1998
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 30,145,855 $ 20,885,903
United States Treasury Bills, at cost 15,296,768 16,445,339
Accounts receivable, net 6,957,454 8,163,882
Prepaid expenses 712,651 653,281
---------- ----------
Total current assets 53,112,728 46,148,405
MARKETABLE SECURITIES 5,184,074 -
RESTRICTED CASH 2,516,188 1,951,856
FURNITURE, FIXTURES AND EQUIPMENT, at cost,
less accumulated depreciation and amortization
of $1,371,083 and $897,478, respectively 1,779,234 1,551,572
INTANGIBLE ASSETS, less accumulated
amortization of $161,667 and $151,667
respectively 63,333 73,333
DEFERRED INCOME TAXES 2,819,297 2,127,843
NOTE FROM RELATED PARTY 70,000 90,000
OTHER ASSETS
3,116,233 1,463,732
--------- ---------
$ 68,661,087 $ 53,406,741
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $5,535,592 $3,502,872
Accrued expenses 1,001,465 637,205
Accrued commissions 1,207,740 1,001,178
Reserve for claims 2,241,963 1,622,361
Other liabilities 487,867 311,135
------------ -----------
Total current liabilities 10,474,627 7,074,751
DEFERRED CONTRACT REVENUE 34,745,857 26,264,571
CONTINGENCY PAYABLE 2,516,188 1,951,856
---------- ----------
Total liabilities 47,736,672 35,291,178
---------- ----------
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 4,671,284 and
4,650,916 shares, respectively 46,713 46,509
Additional paid-in-capital 11,156,423 11,104,699
Retained earnings 9,779,162 6,964,355
Accumulated other comprehensive loss (57,883) -
----------- ----------
Total stockholders' equity 20,924,415 18,115,563
------------ -----------
$ 68,661,087 $ 53,406,741
============ ============
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 THREE YEARS ENDED OCTOBER 31, 1999
1999 1998 1997
---- ---- ----
REVENUES $56,151,613 $49,283,426 $37,928,719
OPERATING COSTS AND EXPENSES:
Costs of services provided 28,129,523 23,974,988 16,846,370
Selling, general and administrative
expenses 25,302,494 21,835,259 18,290,862
---------- ---------- ----------
Operating income 2,719,596 3,473,179 2,791,487
OTHER INCOME (EXPENSE):
Interest income 1,869,802 1,483,296 771,702
Interest expense (15,000) (15,000) (27,968)
Other income - 500,000 -
-------- ------- -------
Income before provision for
income taxes 4,574,398 5,441,475 3,535,221
PROVISION FOR INCOME TAXES 1,759,591 2,137,673 1,398,548
--------- --------- ---------
Net income $ 2,814,807 $ 3,303,802 $ 2,136,673
=========== =========== ===========
NET INCOME PER SHARE:
Basic $ .60 $ .71 $ .62
======= ======= =======
Weighted average shares outstanding 4,664,632 4,635,301 3,434,008
========= ========= =========
Diluted $ .57 $ .67 $ .54
======= ======= =======
Weighted average shares outstanding 4,980,000 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 THREE YEARS ENDED OCTOBER 31, 1999
Accum-
ulated
Other
Common Stock Additional Compre-
Number Paid-in Retained hensive
of Amount Capital Earnings Loss Total
Shares
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
Shares issued
pursuant to
exercise of
stock options 20,368 204 51,724 - - 51,928
COMPREHENSIVE INCOME:
Net income for the
year ended
October 31, 1999 - - - 2,814,807 - 2,814,807
Other comprehensive
loss:
Unrealized loss on
available
for sale securities - - - - (57,883) (57,883)
---- ----- ------ --------- ------- -------
Total comprehensive
income for the year
ended October 31, 1999 - - - 2,814,807 (57,883) 2,756,924
---- ----- ------ --------- ------- -------
BALANCE AT OCTOBER
31, 1999 4,671,284 $46,713 $11,156,423 $9,779,162 $(57,883) $20,924,415
========= ====== ========== ========= ======= =========
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 THREE YEARS ENDED OCTOBER 31, 1999
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,814,807 $ 3,303,802 $ 2,136,673
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 519,315 427,173 339,891
Deferred income taxes (691,454) (636,072) (638,791)
Increase (decrease) in cash resulting
from changes in
operating assets and liabilities:
Accounts receivable 1,206,428 728,081 (4,753,912)
Prepaid expenses (59,370) (285,349) (117,763)
Restricted cash (564,332) (318,788) 342,437
Other assets (1,688,211) (845,368) (2,839)
Accounts payable 2,032,720 573,396 1,359,579
Accrued expenses 364,260 (403,516) 528,606
Accrued commissions 206,562 (79,000) 531,706
Reserve for claims 619,602 501,834 466,680
Other liabilities 176,732 69,537 85,846
Deferred contract revenue 8,481,286 7,786,416 7,799,889
Contingency payable 564,332 318,788 (342,437)
---------- ---------- -----------
Net cash provided by operating
activities 13,982,677 11,140,934 7,735,565
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of United States
Treasury Bills 1,148,571 (10,435,002) (6,010,337)
Net purchases of marketable securities (5,241,957) - -
Purchase of furniture, fixtures, and
equipment (701,267) (739,476) (555,757)
Note from related party 20,000 20,000 (110,000)
------ ------ ---------
Net cash used in investing
activities (4,774,653)(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 51,928 52,923 12,444
------- ------ ---------
Net cash provided by financing
activities 51,928 52,923 6,556,850
------- ------ ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,259,952 39,379 7,616,321
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 20,885,903 20,846,524 13,230,203
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF
YEAR $30,145,855 $20,885,903 $20,846,524
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 2,384,824 $ 2,915,254 $2,083,791
=========== =========== ==========
Interest $ 15,000 $ 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
FOR THE THREE YEARS ENDED OCTOBER 31, 1999
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.
In February 1999, the Company formed a subsidiary, Uautobid.com, which has
developed an internet web site where a car buyer can purchase a new or used
vehicle online directly from a participating dealer. The Company will issue a
warranty for each vehicle sold by Uautobid.com. As of October 31, 1999,
Uautobid.com had not generated significant revenues.
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.
Marketable Securities
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No.
F-7
<PAGE>
115, "Accounting for Certain Investments in Debt and Equity Securities".
Securities classified as available for sale are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity (on an after tax basis as part of
comprehensive income). Gains and losses on the disposition of securities are
recognized on the specific identification method in the period in which they
occur.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation for all
assets acquired prior to fiscal 1995 is calculated using accelerated methods
over the estimated useful lives of the assets. Depreciation for all assets
acquired thereafter is calculated using the straight line method over the
estimated useful lives of the assets. The asset lives are as follows:
Furniture and fixtures 7 years
Office equipment 5 to 10 years
Leasehold improvements the lesser of the lease term or useful
life
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, 1999, 1998 and 1997, the
Company received approximately $227,000, $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 $768,000 and $802,000 at October 31, 1999 and 1998, 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 The Chase Manhattan Bank. 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 did not receive a distribution of
such unconsumed reserves in the year ended October 31, 1999. 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 $1,748,000 and
$1,150,000 at October 31, 1999 and 1998, respectively. The same amounts have
been reflected as contingency payable in the accompanying consolidated balance
sheets.
F-8
<PAGE>
Reserve for Claims
Reserve for claims represents claims that were approved for payment as of
October 31, 1999 and 1998, but not paid as of those respective dates.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report all changes in equity during a
period. Comprehensive income is the total of net income and other comprehensive
income/loss which includes unrealized gains/losses on securities classified as
available-for-sale, foreign currency translation adjustments and minimum pension
liability adjustments. Included in other comprehensive loss for the period
ending October 31, 1999 is $57,883 of unrealized losses on available for sale
securities.
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.
Income Taxes
The Company accounts for income taxes in accordance with 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.
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.
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.
F-9
<PAGE>
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.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
2. FURNITURE, FIXTURES AND EQUIPMENT:
Furniture, fixtures and equipment consists of the following:
October 31,
1999 1998
---- ----
Furniture and fixtures $771,126 $624,366
Office equipment 2,113,458 1,616,828
Leasehold improvements 265,733 207,856
----------- ---------
3,150,317 2,449,050
Less: Accumulated depreciation
and amortization 1,371,083 897,478
--------- ---------
$1,779,234 $1,551,572
========= ==========
3. INCOME TAXES:
The provision for income taxes consists of the following:
October 31,
1999 1998 1997
---- ---- ----
Federal:
Current $1,967,697 $2,182,830 $1,564,233
Deferred (517,656) (480,872) (463,523)
State:
Current 483,348 590,915 473,106
Deferred (173,798) (155,200) (175,268)
--------- ---------- ----------
$1,759,591 $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,
1999 1998 1997
---- ----- -----
U.S. Federal
statutory rate 34% 34% 34%
State income taxes,
net of Federal benefit 4 5 6
--- --- ---
Effective tax rate 38% 39% 40%
=== === ===
The deferred income taxes of approximately $2,819,000 which have been paid as of
October 31, 1999, result from temporary differences between the financial
accounting and income tax treatment of deferred contract revenue.
F-10
<PAGE>
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, 1999 and
1998, 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 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, 1999:
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
Exercised (10,868) .74
Expired (900) 1.31
--------
October 31, 1999 225,566 $2.43
=======
As of October 31, 1999, options to purchase 198,565 shares were exercisable and
12,400 shares were available for future grant.
F-11
<PAGE>
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, 1999:
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
Granted 15,000 7.13
Exercised (9,500) 4.62
Expired (30,400) 4.63
--------
October 31, 1999 200,800 $5.43
=======
As of October 31, 1999, options to purchase 114,400 shares were exercisable and
79,900 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.
In September 1999, the Company's Uautobid.com subsidiary granted a total of
1,565,000 options to its directors and officers and various employees and
directors of the Company and outside consultants. The options expire ten years
after the date of grant and have an exercise price of $.10 per share which, in
management's view, equaled or exceeded the fair market value of the subsidiary's
common stock at the date of grant. The Company currently owns 7,500,000 shares
of common stock of Uautobid.com, Inc., and the options, if exercised in full,
would represent approximately 17% of the issued and outstanding shares of the
subsidiary.
F-12
<PAGE>
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 1999, 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:
1999 1998 1997
---- ---- ----
Net income - as reported $2,814,807 $3,303,802 $2,136,673
Net income - pro forma 2,718,625 3,230,760 2,098,580
Diluted net income per share - as .57 .67 .54
reported
Diluted net income per share - .55 .65 .53
pro forma
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 1999: dividend yield of 0%; expected volatility of 50%;
risk-free interest rate of 5.13%; expected life of 5 years and a fair value of
$3.54. 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 $5,203, $6,595 and $3,375 was
recognized for the years ended October 31, 1999, 1998 and 1997, respectively.
The balance outstanding at October 31, 1999 was $70,000.
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 1999 and 1998, Target received approximately $15,000 and $2,100,
respectively, in premiums under its agreement with Orion. In addition, in
January 1998, NSC entered into a reinsurance agreement with a subsidiary of
Orion which
F-13
<PAGE>
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 1999 or 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 Company
makes contributions to the profit sharing portion of the plan which is
discretionary and non-contributory. Approximately $101,000, $82,000 and $64,000
was contributed by the Company for the years ended October 31, 1999, 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. Under the terms of the Orion agreements, the Company
has committed to pay Orion a minimum of $399,900 in premiums for the period July
1999 through March 2000. Pursuant to the terms of the Orion agreements, the
Company deposits certain funds collected on the sale of certain contracts
insured by Orion into an escrow account. The balance of this escrow account,
which totaled approximately $1,912,000 and $397,000 at October 31, 1999 and
1998, respectively, is included in other assets.
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
----------- ------
2000 $ 650,000
2001 666,000
2002 465,000
2003 462,000
2004 479,000
Thereafter 137,000
--------
$2,859,000
==========
F-14
<PAGE>
Rent expense totaled approximately $636,000, $578,000 and $479,000 for the years
ended October 31, 1999, 1998 and 1997, respectively.
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 $312,000 and $249,000 as of October 31, 1999 and
1998, 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.
On February 1, 1999, the Company entered into an Amended and Restated Employment
Agreement with Lawrence J. Altman providing for his employment as Senior Vice
President, Marketing, of the Company. This agreement terminates on January 31,
2004. Mr. Altman is to be paid an annual salary of $70,710, which may be
increased annually in the discretion of the Company. Mr. Altman is also entitled
to receive monthly commissions equal to 2% of (i) all administrative fees for
vehicle service contracts and vehicle warranties paid to the Company during each
calendar month minus (ii) the aggregate selling expenses incurred by the Company
for such month minus (iii ) $150,000. In addition to his annual salary and
monthly commissions, Mr. Altman may also be paid an annual performance bonus in
an amount, if any, determined at the discretion of the Board of Directors.
The future aggregate minimum annual compensation required under these agreements
is approximately $746,000.
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.
F-15
<PAGE>
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.
10. EARNINGS PER SHARE:
A reconciliation between the numerators and denominators of Basic and Diluted
EPS is as follows:
Net Income Shares Per
Share
For the year ended October 31, 1999
Basic EPS
Net income attributable to common shares $2,814,807 4,664,632 $.60
Effect of dilutive securities: stock
options and warrants - 315,368 (.03)
---------- --------- -----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $2,814,807 4,980,000 $.57
========== ========= ====
For the year ended October 31, 1998
Basic EPS
Net income attributable to common shares $3,303,802 4,635,301 $.71
Effect of dilutive securities: stock
options and warrants - 325,638 (.04)
---------- --------- ----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $3,303,802 4,960,939 $.67
========== ========= ====
For the year ended October 31, 1997
Basic EPS
Net income attributable to common shares $2,136,673 3,434,008 $.62
Effect of dilutive securities: stock
options and warrants - 515,736 (.08)
---------- -------- ----
Diluted EPS
Net income attributable to common shares
and assumed option and warrant exercises $2,136,673 3,949,744 $.54
========== ========= ====
F-16
<PAGE>
11. QUARTERLY CONSOLIDATED INFORMATION (unaudited):
The following is a summary of unaudited quarterly financial information for the
years ended October 31, 1999 and 1998:
Year Ended October 31, 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
Revenues $11,534,491 $13,749,522 $15,343,542 $15,524,058
Operating income 381,983 814,463 1,139,635 383,515
Net income 491,441 749,267 991,064 583,035
Basic earnings per share .11 .16 .21 .12
Diluted earnings per share .10 .15 .20 .12
Year Ended October 31, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
Revenues $10,308,175 $11,792,534 $13,775,114 $13,407,603
Operating income 504,340 877,493 1,120,190 971,156
Net income 806,253 746,602 915,187 835,760
Basic earnings per share .17 .16 .20 .18
Diluted earnings per share .16 .15 .19 .17
F-17
<PAGE>
Item 9. Changes In and Disagreements with Accountant on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The table below sets forth certain information as of January 13, 2000 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. . . . . . . . 68 Chairman, Chief Executive Officer and
Director*
Cindy H. Luby. . . . . . . . . 45 President, Chief Operating Officer
and Director**
Lawrence J. Altman . . . . . . 52 Senior Vice President, Marketing
Zvi D. Sprung . . . . . . . .. 50 Chief Financial Officer, Treasurer
and Secretary
William H. Brown . . . . . . . 69 Director**
Donald Kirsch. . . . . . . . . . 68 Director*
Harvey Granat . . . . . . . . . 62 Director***
* Term expires 2000
** Term expires 2001
*** Term expires 2002
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 in 1991. 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. ("Sterling"), 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 has been a director of the Company since January 1999.
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, 1999, 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 11. 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, 1999 (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 Compensation Securities
Name and Ended Underlying All Other
Principal October Salary Bonus Options Compensation
Position 31, (4)
Chester J. Luby (1) 1999 $250,000 $208,313 $ - $62,865
Chairman and Chief 1998 200,000 181,500 25,000 62,865
Executive Officer 1997 154,167 137,829 - 62,919
Cindy H. Luby (2) 1999 175,000 162,125 - -
President and Chief 1998 125,000 141,100 31,000 -
Operating Officer 1997 100,961 98,450 - -
Lawrence J.Altman(3)1999 244,134 - - -
Senior Vice 1998 217,464 - 6,000 -
President, 1997 164,890 - - -
Marketing
(1) Annual compensation paid to Mr. Luby was pursuant to an Amended and Restated
Employment Agreement dated November 1, 1998 between the
Company and Mr. Luby.
<PAGE>
(2) Annual compensation paid to Ms. Luby was pursuant to an Amended and Restated
Employment Agreement dated November 1, 1998 between the Company and Ms.
Luby. The Company has a loan outstanding to Ms. Luby in the amount of
$45,000. 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. To date, Ms. Luby has prepaid $65,000 of the loan.
(3) Annual compensation paid to Mr. Altman was pursuant to an Amended and
Restated Employment Agreement dated February 1, 1999 between the Company
and Mr. Altman.
(4) Amount represents split dollar life insurance premiums paid by the Company
for the benefit of Mr. Luby. 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. 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 1999 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 each Board or Committee meeting, 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
April 1999 upon his election to the Board of Directors. These options, 3,000 of
which are currently exercisable, become exercisable at the rate of 3,000 options
per year.
The Company did not grant any stock options or stock appreciation rights
during the fiscal year ended October 31, 1999 to the Named Executives. The
Company's Uautobid.com subsidiary, however, in order to provide equity based
compensation to persons associated with the Company who have contributed to the
development of the subsidiary, granted options to the Named Executives in
September 1999. Mr. Luby was granted options to purchase 1,000,000 shares; Ms.
Luby was granted options to purchase 200,000 shares and Mr. Altman was granted
options to purchase 10,000 shares. All of such options have an exercise price of
$.10 per share and expire ten years after the date of grant. The options were
granted as a portion of a total of 1,565,000 options granted by Uautobid.com,
Inc. to its directors and officers and various employees and directors of the
Company and outside consultants. The Company currently owns 7,500,000 shares of
common stock of Uautobid.com, Inc., and the options, if exercised in full, would
represent approximately 17% of the issued and outstanding shares of the
subsidiary.
The following table sets forth information concerning the exercise of stock
options by the Named Executives during the fiscal year ended October 31, 1999
and the value of unexercised options as of October 31, 1999 held by the Named
Executives.
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, 1999(1)
31,1999
Exercis- Unexercis- Exercis- Unexercis-
able able able able
Chester Luby - 214,000 11,000 $336,643 $ 43,051
Cindy Luby 4,000 $24,650 186,834 9,000 273,224 35,450
Lawrence
Altman - - 27,900 16,400 73,269 19,421
(1) Based on the closing price of the Common Stock on NASDAQ on October 31,
1999.
<PAGE>
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, 1999, options to purchase 225,566 shares of
Common Stock were outstanding under the Option Plan, 215,065 of which are
exercisable at January 13, 2000. Under the Option Plan, a total of 12,400
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, 1999, options to purchase 200,800 shares of Common
Stock were outstanding under the Incentive Plan, 122,400 of which are
exercisable at January 13, 2000. Under the Incentive Plan, a total of 79,900
additional options may be granted
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 employment 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 $312,000 as of October 31,
1999. 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.
<PAGE>
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 employment agreement) or if the Company terminates his
employment other than for "good cause" (as defined in the employment 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 employment
agreement. If Mr. Luby retires during the term of his employment 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" (as
defined in the employment agreement) of the Company 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 employment 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 employment 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.
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 employment 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.
<PAGE>
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.
On February 1, 1999, the Company entered into an Amended and Restated
Employment Agreement with Lawrence J. Altman providing for his employment as
Senior Vice President, Marketing, of the Company. This employment agreement
terminates on January 31, 2004.
Mr. Altman is to be paid an annual salary of $70,710, which may be increased
annually in the discretion of the Company. Mr. Altman is also entitled to
receive monthly commissions equal to 2% of (i) all administrative fees for
vehicle service contracts and vehicle warranties paid to the Company during each
calendar month minus (ii) the aggregate selling expenses incurred by the Company
for such month minus (iii ) $150,000. In addition to his annual salary and
monthly commissions, Mr. Altman may also be paid an annual performance bonus in
an amount, if any, determined at the sole discretion of the members of the
Board. Mr. Altman's "Total Compensation" (as defined in the employment
agreement) for any fiscal year is defined as the sum of his annual salary,
monthly commissions and annual performance bonus (if any) for that fiscal year.
If Mr. Altman dies during the term of his employment agreement, the Company
will pay to his estate a death benefit in an amount equal to the Total
Compensation paid to Mr. Altman for the Company's most recent fiscal year prior
to his death. If Mr. Altman's employment is terminated because he becomes
disabled, the Company will pay him disability benefits equal to fifty percent
(50%) of his Total Compensation for the Company's most recent fiscal year
immediately prior to Mr. Altman's disability termination. Such disability
benefits are to be paid for the longer of two years or the balance of the term
of the employment agreement. If Mr. Altman terminates his employment by the
Company for "good reason" or if the Company terminates his employment other than
for "proper cause" or disability, then he is entitled to be paid the amount of
his Total Compensation for the Company's most recent fiscal year multiplied by a
factor of two.
If Mr. Altman is an employee of the Company immediately prior to a "Change
in Control" of the Company, all stock options he owns immediately vest and
become exercisable. In addition, the Company is required to pay Mr. Altman an
amount equal to the number of Shares underlying his options multiplied by the
amount, if any, by which the lesser of (i) the exercise price of Mr. Altman'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. Altman
may then retain or exercise his options. Alternately, Mr. Altman 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. Altman's employment agreement contains a two year "non-compete" clause.
This clause does not apply in the event that Mr. Altman terminates his
employment with the Company for good reason or if the Company terminates Mr.
Altman's employment for reasons other than disability or proper cause.
Item 12. 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, 2000, by each person who
beneficially owns more than five (5%) 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) 14.4%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Joan S. Luby . . . . . . . . . . . 492,500 (3) 10.5%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Cindy H. Luby . . . . . . . . . . . 210,394 (4) 4.3%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Lawrence J. Altman . . . . . . . . . 62,300 (5) 1.3%
333 Earle Ovington Blvd.
Mitchel Field, New York 11553
Zvi D. Sprung. . . . . . . . . . . . 21,400 (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) . . 1,047,894 20.2%
(1) Amount and Percent of Shares Beneficially Owned was computed based on
4,674,684 shares of Common Stock outstanding on January 13, 2000 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, 221,000
of which are currently exercisable and the balance of which become
exercisable at the rate of 4,000 options per year.
(3) Includes 15,000 shares issuable upon the exercise of stock options, all of
which are currently exercisable.
(4) Includes 195,834 shares issuable upon the exercise of stock options, 191,834
of which are currently exercisable and the balance of which become
exercisable at the rate of 4,000 options per year. Also includes 960 shares
owned by Ms. Luby's husband, as to which Ms. Luby disclaims beneficial
ownership.
(5) Includes 40,900 shares issuable upon the exercise of stock options, 29,400
of which are currently exercisable and the balance of which become
exercisable at the rate of 1,700 options per year.
(6) All of these shares are issuable upon the exercise of stock options, 9,100
of which are currently exercisable and the balance of which become
exercisable at the rate of 4,900 options per year.
<PAGE>
(7) Includes (a) 10,000 shares issuable upon the exercise of stock options, all
of which are currently exercisable and (b) 1,200 shares issuable upon
exercise of warrants to purchase Common Stock (the "Independent Director
Warrants"), all of which are currently exercisable.
(8) All of these shares are issuable upon the exercise of stock options, all of
which are currently exercisable.
(9) All of these shares are issuable upon the exercise of stock options, 3,000
of which are currently exercisable and the balance of which become
exercisable at the rate of 3,000 options per year.
(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 13. 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 1999, Target
received approximately $15,000 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 1999.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules 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 PurchaseOption
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.(5)
10.2 Amended and Restated Employment Agreement between the Company and
Cindy H. Luby, dated as of November 1, 1998.(5)
10.3 Amended and Restated Employment Agreement between the Company and
Lawrence J. Altman, dated as of February 1, 1999.
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 1996 Incentive Plan. (4)
21 List of Subsidiaries.
23 Consent of Experts and Counsel.
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 Registration Statement on Form S-8, File
No. 333-09571.
(5) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended October 31, 1998.
(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, 2000
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 February, 1999, by and between INTERSTATE NATIONAL DEALER
SERVICES, INC., a Delaware corporation (the "Company"), and LAWRENCE J.
ALTMAN (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 May 1, 1996 and by the Amendment to the
Employment Agreement, dated as of February 13, 1998 (collectively, the "Prior
Employment Agreement").
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 Senior Vice President, Marketing of the
Company, subject to the supervision of, and reporting only to, The Board, the
Chairman of the Board and/or the President. Executive shall have such duties,
responsibilities, titles and authority normally associated with the position of
senior vice president of marketing of a company the size and structure of the
Company. The Executive agrees to devote his best talents, efforts and abilities
on a full-time basis to the performance of such duties.
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:
(1) Annual Salary. The Company shall pay Executive a salary at the rate of
$70,710 per year during the Term, subject to future increases in the discretion
of the Company (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.
(2) Commissions. The Executive shall receive commissions in an amount equal to
2% of (i) all administrative fees for vehicle service contracts and vehicle
warranties paid to the Company during each calendar month minus (ii) the
aggregate selling expenses incurred by the Company for such month minus (iii)
$150,000. Such commissions shall be paid to the Executive no later than 30 days
following the end of each calendar month; however, nothing herein shall be
deemed to make the Company obligated to sell any products or services.
(3) 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 or the Compensation Committee of 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. Nothing
contained herein shall be deemed to make the Company obligated to pay any such
Performance Bonus.
(a) 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. The Executive shall be entitled to such medical and other benefits
as are customarily given to employees of the Company generally.
4. Term. The term of this Agreement shall be for five (5) years, commencing on
the date hereof and terminating February 1, 2004 (the "Term"), unless sooner
terminated as herein provided. In the event that the Executive continues his
employment after the Term, 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.
1. Early Termination. The employment of the Executive by the
Company may be terminated prior to the end of the Term as set forth below:
(a) Death. If the Executive shall die during the Term, the
employment of the Executive by the Company shall thereupon terminate, except
that the Company shall pay to the legal representative of the Executive's estate
an amount equal to: (i) 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; and (ii) the Total Compensation paid or
payable to the Executive hereunder for the most recent fiscal year of the
Company immediately prior the date of death. Such amount shall be paid in six
equal monthly installments with the first payment due and payable on the first
day of the second calendar month following the date of death.
(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 shall become, by
reason of physical or mental disability, unable to render, for 135 consecutive
days or for shorter periods aggregating 180 days or more in any twelve month
period, services of the character contemplated by this Agreement. As a result of
any such disability termination, 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
Total Compensation paid or payable to the Executive hereunder for the Company's
most recent fiscal year immediately prior to the Executive's disability
termination less the amount, if any, of payments received by the Executive from
a Company funded 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 with the same level of health/medical insurance or
coverage provided to him immediately prior to such disability termination, with
the cost of such continued insurance or coverage being borne by the Company.
Alternatively, the Executive may elect to receive from the Company instead of
such insurance or coverage, a monthly payment equal to the cost to the Executive
to obtain comparable health/medical insurance or coverage through another
provider.
Any payments due to the Executive hereunder may be paid to his
then current spouse or legal representative for Executive's benefit, to the
extent warranted by Executive's incapacity.
(1) Proper Cause. The Company, by written notice to the Executive, may terminate
the Company's employment of the Executive for proper cause. As used herein,
"proper cause" shall mean that the Executive has: (1) willfully refused or
failed to carry out specific directions of the Board, the Chairman of the Board
and/or the President of the Company which directions are not inconsistent with
the duties and responsibilities set forth in Section 1 hereof, or willfully
refused or failed to perform a material part of such duties and responsibilities
hereunder; (2) committed a breach of any of the provisions of Section 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 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. For purposes of this clause (c), 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.
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.
(c) 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 its obligations, promises or
covenants under this Agreement without cure;
(3) the Company terminated the Executive's employment
hereunder, and such termination does not constitute Proper Cause (as defined
herein);
(4) the Company intentionally required the Executive to
commit or participate in any felony or other serious crime;
(5) there has been a Change in Control of the Company (as
defined below); and/or
(6) 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 of two (2) (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
(iii) for the longer of two (2) years or the
balance of the Term, provide Executive with the same level of health/medical
insurance or coverage provided to him immediately prior to such termination,
with the cost of such continued insurance or coverage being borne by the
Company; alternatively, the Executive may elect to receive from the Company,
instead of such insurance or coverage, a monthly payment equal to the monthly
cost to the Executive 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.
5. Other Activities. The Executive shall devote his full business time,
attention and energies to the performance of his duties hereunder, and will not,
during the term of this Agreement, be engaged in any other business activity
without the prior written consent of the Company.
2. 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 7.
(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.
(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.
(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.
6. 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 two (2) 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 by the Executive other than for
Good Reason, 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.
7. 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.
8. 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.
9. Unenforceability. If any provision of Sections 8, 9 or 10 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.
10. Return of Property. Upon termination of his employment with the Company, or
at any time the Company may so request, the Executive will promptly deliver to
the Company all memoranda, notes, records, reports, manuals, drawings,
blueprints and other documents (and all copies thereof), in whatever form
(including files and data in electronic form) relating to the business of the
Company, and all property associated therewith, which he may then possess or
have under his control.
11. Injunctive Relief. The Executive agrees that the restrictions and covenants
contained in Sections 8, 9, 10 and 12 hereof 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.
12. Miscellaneous.
(1) 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.
(2) 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. Lawrence J. Altman
57 Orbach Avenue
Malverne, NY 11565
(3) 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.
(4) 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.
(5) 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.
(6) Binding Effect. This Agreement shall be binding upon, and shall inure to the
benefit of, the parties hereto and their respective personal representatives,
successors and assigns.
(7) Counterparts. This Agreement may be executed in counterparts, each of which
shall be an original, but together shall constitute one and the same instrument.
[Signatures appear on next page; balance of this page left intentionally
blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
- --------------------------------------------------------------------
INTERSTATE NATIONAL DEALER
SERVICES, INC.
BBy:
NName: Chester J. Luby
TTitle: Chairman and Chief
Executive
Officer
Lawrence J. Altman
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.
4. Uautobid.com, Inc.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 5, 2000 included in the
Registration Statements on Form S-8 No. 333-09567 and No. 333-09571. It should
be noted that we have not audited any financial statements of Interstate
National Dealer Services, Inc. and subsidiaries subsequent to October 31, 1999
or performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Melville, New York
January 19, 2000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1999
<PERIOD-START> Nov-01-1998
<PERIOD-END> Oct-31-1999
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<CASH> 30,145,855
<SECURITIES> 20,480,842
<RECEIVABLES> 6,957,454
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0
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