10-Q 1 t10q102.txt FORM 10-Q JANUARY 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-12938 Interstate National Dealer Services, Inc. (Exact name of registrant as specified in its charter) Delaware 11-3078398 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 333 Earle Ovington Blvd., Mitchel Field, NY 11553 (Address of principal executive offices) (516) 228-8600 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of March 14, 2002, Registrant had issued and outstanding 3,971,216 shares of Common Stock. INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of January 31, 2002 and October 31, 2001 3 Consolidated Statements of Operations for the three months ended January 31, 2002 and 2001 4 Consolidated Statement of Stockholders' Equity and Comprehensive Income for the three months ended January 31, 2002 5 Consolidated Statements of Cash Flows for the three months ended January 31, 2002 and 2001 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 9 INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

~~For~~January ~~the~~31, ~~Nine~~October ~~Months~~31, ~~For~~ASSETS ~~the~~2002 ~~Three~~2001 ~~Months~~------ ~~Ended~~--------- ~~July~~--------- ~~31,~~Unaudited ~~Ended~~CURRENT ~~July~~ASSETS: ~~31,~~Cash ~~2001~~and ~~2000~~cash ~~2001~~equivalents ~~2000 REVENUES~~ $~~44,439,460~~ ~~$45~~21,~~405~~534,~~405~~367 $~~16,821,849~~ ~~$16~~18,~~825~~511,~~617~~679 ~~OPERATING~~United ~~COSTS~~States ~~AND~~Treasury ~~EXPENSES:~~Bills, ~~Costs~~at ofcost ~~services provided 24~~2,~~588~~818,~~207~~011 242,~~145~~122,~~683~~635 ~~9,362,015~~Accounts 9receivable,~~320,492~~ ~~Selling,~~net ~~general~~of ~~and~~allowance ~~administrative~~for ~~expenses~~doubtful 19accounts of $300,~~925~~000 6,~~728~~458,260 196,~~865~~410,~~625~~709 7Prepaid expenses 1,~~285~~930,~~699~~317 72,~~024~~117,~~564~~984 ----------- -~~---------~~ ---------- -~~---------~~ ~~Operating~~Total ~~(loss)~~current ~~income~~assets ~~(74~~32,~~475) 1~~740,~~394,097~~955 ~~174~~29,~~135 480~~163,~~561~~007 ~~OTHER~~MARKETABLE ~~INCOME:~~SECURITIES ~~Investment income 3~~33,~~020~~702,~~632~~309 237,208,~~576~~929 ~~862~~RESTRICTED CASH 13,~~068~~944,016 ~~863~~13,~~189~~212,072 ~~----------~~FURNITURE, ~~---------~~FIXTURES ~~---------~~AND ~~----------~~EQUIPMENT, ~~Income~~at ~~from~~cost, ~~continuing~~less ~~operations~~accumulated ~~before~~depreciation ~~provision~~and ~~for~~amortization ~~income~~of ~~taxes~~ $2,~~946~~558,~~157~~189 3and $2,~~602~~436,~~673~~017, 1respectively 988,~~036,203~~934 1,~~343~~092,~~750~~970 ~~PROVISION~~DEFERRED ~~FOR~~ INCOME TAXES 14,~~116~~495,~~422~~682 14,~~370~~238,~~655~~077 ~~396~~NOTE FROM RELATED PARTY - 20,~~342~~000 ~~506~~OTHER ASSETS 1,~~202~~724,420 1,678,487 --------- --~~-------~~ --------- --~~-------~~ ~~Income from continuing operations 1~~$87,~~829~~596,~~735~~316 2$86,~~232~~613,~~018~~542 ~~639,861~~=========== ~~837,548~~=========== ~~DISCONTINUED~~LIABILITIES ~~OPERATIONS~~AND ~~(Net~~STOCKHOLDERS' ofEQUITY ~~taxes)~~CURRENT LIABILITIES: ~~Loss~~Accounts ~~from~~payable ~~discontinued~~$ ~~operations~~4,371,839 ~~net~~$ of4,756,179 ~~income~~Accrued ~~taxes~~expenses ~~of 445~~687,~~884~~150 ~~and 100~~863,403, ~~respectively~~Accrued -commissions ~~(642~~1,~~966) - (144~~165,~~782)~~309 ~~Loss from abandonment~~1,345,441 ~~net~~Reserve offor ~~income~~claims ~~taxes~~2,183,810 ~~of $111~~2,~~151~~403,153 -Other ~~(160~~liabilities 1,~~280)~~146,498 ~~- (160~~1,~~280)~~102,968 --------- -~~-------~~ ------ ---~~----~~ Total ~~loss~~current ~~from~~liabilities ~~discontinued~~9,554,606 ~~operations~~10,471,144 -DEFERRED ~~(803~~CONTRACT REVENUE 56,~~246)~~487,186 -54,661,093 ~~(305~~CONTINGENCY PAYABLE 2,~~062)~~047,966 2,138,231 --------- --~~-------~~ ------ ----~~---~~ ~~Net~~Total ~~income~~liabilities $168,~~829~~089,~~735~~758 $167,~~428~~270,~~772~~468 ~~$ 639,861 $532,486 ========== ========== ======== ======== NET INCOME PER SHARE~~ - ~~BASIC: Continuing operations $ .44 $ .48 $ .16 $ .19 Discontinued operations $(~~ - ~~) $(.17) $(~~ - ~~) $(.07)~~ ------ --~~---~~ ------ ----- ~~Total~~STOCKHOLDERS' $EQUITY: ~~.44~~Preferred $stock, ~~.31~~ $ .1601 $par ~~.12~~value; ~~======~~1,000,000 ~~=====~~shares ~~=====~~authorized; ~~======~~no ~~Weighted~~issued ~~average~~ shares ~~outstanding~~- ~~4,140,494~~- 4Common stock,~~604,280~~ 4$.01 par value; 10,~~055~~000,~~877~~000 shares authorized; 4,~~458~~698,~~829~~449 ~~=========~~shares ~~=========~~issued ~~=========~~and ~~=========~~3,967,449 ~~NET~~shares ~~INCOME~~outstanding ~~PER~~46,985 ~~SHARE~~46,985 Additional paid-in ~~DILUTED:~~capital ~~Continuing~~11,226,786 ~~operations~~11,226,786 $Retained ~~.42~~earnings $11,938,972 ~~.47~~11,593,589 $Accumulated ~~.15~~other $comprehensive ~~.18~~income ~~Discontinued~~143,203 ~~operations~~325,102 $(Less: -Treasury )stock, ~~$(.17)~~at $cost (731,000 -shares) (3,849,388) $(~~.07~~3,849,388) ------ ----- ------ ----- Total $stockholders' ~~.42~~equity ~~$ .30 $ .15 $ .11 ====== ===== ===== ====== Weighted average shares outstanding 4~~19,~~316~~506,~~548~~558 419,~~785~~343,~~301~~074 4---------- ------------ $87,~~225~~596,~~785~~316 4$86,~~610~~613,~~770~~542 ========= ==~~=======~~ ========= ==~~=======~~

The accompanying notes to financial statements are an integral part of these consolidated balance sheets. INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 UNAUDITED 2002 2001 ---- ---- REVENUES $ 13,960,699 $ 12,878,138 OPERATING COSTS AND EXPENSES: Costs of services provided 8,061,828 7,450,225 Selling, general and administrative expenses 6,109,911 5,883,924 --------- --------- Operating loss (211,040) (456,011) OTHER INCOME: Investment income 629,919 947,135 ---------- -------- Income before provision for income taxes 418,879 491,124 PROVISION FOR INCOME TAXES 73,496 171,609 -------- --------- Net income $ 345,383 $ 319,515 ========= ========= NET INCOME PER SHARE: Basic $ .09 $ .08 ======= ======= Weighted average shares outstanding 3,967,449 4,195,325 ========= ========= Diluted $ .08 $ .07 ======= ======= Weighted average shares outstanding 4,087,131 4,407,417 ========= ========== The accompanying notes to financial statements are an integral part of these consolidated statements. INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED JANUARY 31, 2002 UNAUDITED

Accum- ulated Other Compre- Common Stock Additional hensive Number Paid-in Retained Income Treasury of Shares Amount Capital Earnings (Loss) Stock Total BALANCE AT OCTOBER 31, ~~2000~~2001 4,698,449 $46,985 $11,226,786 $11,~~846~~593,~~574~~589 $~~(34~~325,~~393)~~102 $(23,~~285~~849,~~385~~388) $2019,~~800~~343,~~567~~074 ~~Purchase of treasury stock - - - - - (1,564,003) (1,564,003)~~ COMPREHENSIVE INCOME: Net income for the ~~nine~~three months ended ~~July~~January 31, ~~2001~~2002 - - - 1345,~~829,735~~383 - - 1345,~~829,735~~383 Other comprehensive income: Unrealized ~~gain~~loss on available for sale securities - - - - ~~328~~(181,~~963~~899) - ~~328~~(181,~~963~~899) -------- ----- --------- --------- -------- ------- --------- Total comprehensive income for the ~~nine~~three months ended ~~July~~January 31, ~~2001~~2002 - - - 1345,~~829,735~~383 ~~328~~(181,~~963~~899) - 2163,~~158,698~~484 -------- ----- --------- --------- -------- ------- --------- BALANCE AT ~~JULY~~JANUARY 31, ~~2001~~2002 4,698,449 $46,985 $11,226,786 $1311,~~676~~938,~~309~~972 $~~294~~143,~~570~~203 $(3,849,388) $2119,~~395~~506,~~262~~558 ======== ====== ========= ========== ======= ========= ==========

The accompanying notes to financial statements are an integral part of these consolidated statements. INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 UNAUDITED 2002 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 345,383 $ 319,515 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 122,172 139,694 Deferred income taxes (257,605) (191,107) Increase in cash resulting from changes in operating assets and liabilities: Accounts receivable (47,551) (67,106) Prepaid expenses 187,667 204,196 Restricted cash (731,944) (899,337) Other assets (45,933) (27,317) Accounts payable (384,340) (499,833) Accrued expenses (176,253) 102,302 Accrued commissions (180,132) (275,500) Reserve for claims (219,343) (972,608) Other liabilities 43,530 49,823 Deferred contract revenue 1,826,093 2,308,416 Contingency payable (90,265) (147,555) ---------- ---------- Net cash provided by operating activities 391,479 43,583 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (purchases) sales of United States Treasury Bills (695,376) 678,784 Net sales (purchases) of marketable securities 3,324,721 (1,369,016) Purchase of furniture, fixtures, and equipment (18,136) (26,154) Note from related party 20,000 25,000 Net cash provided by (used in) ---------- --------- investing activities 2,631,209 (691,386) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock - (421,801) ---------- -------- Net cash used in financing activities - (421,801) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,022,688 (1,069,604) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,511,679 17,432,848 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $21,534,367 $16,363,244 =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 10,000 $ 100,659 ========== ========= The accompanying notes to financial statements are an integral part of these consolidated statements. INTERSTATE NATIONAL DEALER SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2001. 2. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of January 31, 2002, and the consolidated results of operations and cash flows for the periods ended January 31, 2002 and 2001. The accounting policies followed by the Company are set forth in the Company's consolidated financial statements included in the Annual Report mentioned above. 3. The consolidated results of operations for the three months ended January 31, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. 4. The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic net income per share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share ("Diluted EPS") is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the statements of operations. A reconciliation between the numerators and denominators of Basic and Diluted EPS is as follows: Net Income Shares Per Share For the three months ended January 31, 2002 Basic EPS Net income attributable to common shares $345,383 3,967,449 $.09 Effect of dilutive securities: stock options - 119,682 (.01) -------- --------- --- Diluted EPS Net income attributable to common shares and assumed option exercises $345,383 4,087,131 $.08 ======== ========= ==== For the three months ended January 31, 2001 Basic EPS Net income attributable to common shares $319,515 4,195,325 $.08 Effect of dilutive securities: stock options - 212,092 (.01) -------- --------- ----- Diluted EPS Net income attributable to common shares and assumed option exercises $319,515 4,407,417 $.07 ======== ========= ===== Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues increased approximately $1,083,000, or 8%, to approximately $13,961,000 for the three months ended January 31, 2002 as compared to approximately $12,878,000 for the three months ended January 31, 2001. This increase was primarily due to 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 an increase in the administrative and insurance fees charged per contract. Costs of services provided, which consist primarily of claims and cancellation costs, increased by approximately $612,000, or 8%, to approximately $8,062,000 for the three months ended January 31, 2002, as compared to approximately $7,450,000 for the three months ended January 31, 2001. As a percentage of revenues, cost of services provided remained at 58% for both three month periods. 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 $471,000, or 8%, to approximately $5,899,000 for the three months ended January 31, 2002, as compared to approximately $5,428,000 for the three months ended January 31, 2001. This increase is attributable to the increase in revenues as described above. Gross margin was 42% for both three month periods. Selling, general and administrative expenses increased by approximately $226,000, or 4%, to approximately $6,110,000 for the three months ended January 31, 2002, from approximately $5,884,000 for the three months ended January 31, 2001. This increase was primarily due to increased commissions paid as a result of increased sales revenue. Selling, general and administrative expenses decreased to 44% of revenues for the three months ended January 31, 2002 as compared to 46% for the three months ended January 31, 2001. Investment income decreased by approximately $317,000, or 33%, to approximately $630,000 for the three months ended January 31, 2002, as compared to approximately $947,000 for the same period in 2001. This decrease is primarily a result of an overall decrease in the interest rates paid on investment cash balances, United States Treasury Bills and government securities during the period. Income before provision for income taxes decreased by approximately $72,000, or 15%, to approximately $419,000 for the three months ended January 31, 2002, as compared to approximately $491,000 for the same period in 2001. For the three months ended January 31, 2002, the Company recorded a provision for income taxes of approximately $74,000, as compared to a provision for income taxes of approximately $172,000 in the same period in 2001. The effective tax rate in fiscal 2002 was reduced as a result of nontaxable interest earned on municipal bonds. Net income for the three months ended January 31, 2002 was approximately $345,000, as compared to approximately $319,000 for the same period in 2001. Diluted income per share for the three months ended January 31, 2002 increased by $.01 to $.08 per share, as compared to $.07 per share for the same period in 2001. Liquidity and Capital Resources Cash and cash equivalents, United States Treasury Bills, at cost, and marketable securities, which have maturities ranging between two to five years, were approximately $58,055,000 at January 31, 2002, as compared to approximately $57,843,000 at October 31, 2001. The increase of approximately $212,000 was primarily the result of cash provided by the Company's operating activities. 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. Quantitative and Qualitative Disclosure About Market Risk Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. Forward-Looking Statements This Form 10-Q, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial or otherwise, may differ from the results discussed in the forward-looking statements. A number of these risks and other factors that might cause differences, some of which could be material, along with additional discussion of forward-looking statements, are set forth in the Company's Report on Form 8-K filed with the Securities and Exchange Commission on December 23, 1996. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- There were no reports on Form 8-K filed during the three months ended January 31, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. INTERSTATE NATIONAL DEALER SERVICES, INC. March 14, 2002 By: /s/ Zvi D. Sprung Date Zvi D. Sprung Chief Financial Officer

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