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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) December 23, 1996
(December 23, 1996)
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INTERSTATE NATIONAL DEALER SERVICES, INC.
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(Exact Name of Registrant as Specified in Charter)
Delaware 1-12938 11-3078398
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
333 Earle Ovington Boulevard, Mitchel Field, New York 11553
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 228-8600
_____________
_______________________________________________________________________________
(Former Name or Former Address, if Changed Since Last Report)
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Item 5. Other Events
In connection with the Private Securities Litigation Reform
Act of 1995 (the "Litigation Reform Act"), Interstate National
Dealer Services, Inc. (the "Company") is hereby disclosing
certain cautionary information to be used in connection with
written materials and oral statements made by or on behalf of its
employees and representatives that may contain "forward-looking
statements" within the meaning of the Litigation Reform Act.
Such statements consist of any statement other than a recitation
of historical fact and can be identified by the use of forward-
looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The reader is
cautioned that all forward looking statements are necessarily
speculative and there are numerous risks and uncertainties that
could cause actual events or results to differ materially from
those referred to in such forward-looking statements. The
discussion below highlights some of the more important risks
identified by management, but should not be assumed to be the
only factors that could affect future performance. The reader is
cautioned that the Company does not have a policy of updating or
revising forward-looking statements and thus he or she should not
assume that silence by management over time means that actual
events are bearing out as estimated in such forward-looking
statements.
Seasonality
A sale of a service contract by the Company is dependent
upon the sale of the primary product (such as motor vehicles)
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 and recreational vehicles 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 statutes
require registration of administrators and some 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 or warranty expressly stating the
purchaser's rights in the event of a claim, how the service
contract may be cancelled and identification of the insurance
underwriter indemnifying the dealers 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 affected 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 statute requires the Company to
comply therewith 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. National Service
Contract Insurance Company Risk Retention Group, Inc. ("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 various laws and regulations in
the states in which NSC does business.
In addition, 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. The Company does not currently do business in the state
of Florida but intends to do so in the future through a newly
formed subsidiary which is licensed to do business in that state.
New Markets
The Company from time to time conducts research as to the
feasibility of entry into new markets for service contracts on
non-vehicle products (such as home warranties, electronics and
appliances) and, depending upon the results, may enter into some
of such markets. While the Company believes that its vehicle
service contract administrative experience and facilities can be
adapted to administration of service contracts for such new
markets, management's experience is solely in the vehicle sales
and service industry and significant aspects of such potential
new markets may differ greatly. For example, the Company has no
experience in risk assessment, setting of appropriate loss
reserves or pricing with respect to service contracts in such
markets. In addition, there may be significant competition in
any one or more markets from manufacturers of products or
established third-party administrators. Further, the Company
would be required to establish appropriate distribution networks
to market, promote and sell such new products and services, which
could vary from market to market. Accordingly, no assurance can
be given that the Company will be successful in entering into
such potential new markets.
Dependence on Agents
The Company primarily sells its products and services to
dealers through its nationwide sales force of approximately 100
independent sales agents consisting of both companies and
individuals ("Agents"), who not only market the Company's program
to potential dealers but, once enrolled, provide the dealers with
on-site training and service. Agents are under no obligation to
market any of the Company's products and services, may offer
products and services of competitors and may terminate their
relationship with the Company at any time. One producer of
service contracts under its own brand name (often referred to as
a "Private Label" program), has accounted for approximately 11%
of all administrative fees received by the Company during the
fiscal year ended October 31, 1996. If such Private Label
producer terminates or significantly curtails its relationship
with the Company, the Company's revenues could be materially
adversely affected. In addition, while the nature of certain of
the Company's programs provides incentives for dealers to utilize
the Company's programs, the Company's on-going relationship with
a dealer, and thus the derivation of additional revenues from
such dealer, is often dependent, to a certain extent, upon the
ability of an Agent to keep such dealer satisfied with the
quality of the products and services offered by the Company.
Accordingly, the Company's growth and revenues will, in part, be
substantially dependent upon its relationships with its Agents,
and upon the ability of its Agents to successfully recruit
dealers and maintain their relationships with such dealers.
Dependence on Dealers
The Company derives revenues primarily if and to the extent
that dealers enter into vehicle service contracts or warranties
with vehicle purchasers. Furthermore, dealers are under no
obligation to market vehicle service contracts. Accordingly, the
Company's revenues, and profitability, are substantially
dependent upon the ability and efforts of dealers to successfully
market such contracts. The successful marketing of service
contracts by dealers depends upon many factors beyond the
Company's control, including, among other things, economic
factors affecting foreign or domestic motor vehicle sales, the
availability of insurance covering claims under these contracts,
the scope and terms of warranties offered by manufacturers and
the existence of competitive programs.
Direct Marketing Programs
The Company has developed and is expanding the marketing of
its service contract programs directly to consumers (rather than
through agents and dealers). The continued expansion of these
direct marketing programs cannot, however, be assured. The
success of the Company's direct marketing programs depends on
factors including the availability of information regarding
purchasers of new and used motor vehicles, recreational vehicles
and other products, regulatory requirements and competition. To
the extent the Company cannot increase or continue at current
levels its direct marketing efforts, it will become more
dependent on existing and new agents and dealers.
Dependence on Sales of Primary Products
Sales of the Company's products and services are dependent
upon the sale of the primary products, that is, motor vehicles
and recreational vehicles. Thus any decrease in the sales of
these products, whether due to economic factors or otherwise, is
likely to have an adverse impact upon the Company's revenues and
thus its profitability. In addition, if the Company enters into
any new markets for service contracts on non-vehicle products,
sales of the Company's service contracts will be dependent upon
the sale of the primary product in such markets, for example,
homes, electronics and appliances. Thus, any decrease in the
sales of any primary products in any such non-vehicle markets the
Company may enter, is also likely to have an adverse impact upon
the Company's ability to sell its products and services in such
potential markets.
Dependence on Insurance Coverage
An integral part of the Company's service to dealers entails
the Company obtaining and maintaining in effect insurance policies
issued by an insurance company to cover producers' liability for
claims under the service contracts administered by the Company.
Although the Company believes there are a number of insurance
companies which provide this type of coverage, to date,
substantially all policies have been obtained by the Company for
the dealers through The Travelers Indemnity Company ("Travelers")
and, until March 1996, National Warranty Insurance, Risk Retention
Group ("National Warranty"). There is no assurance that the
Company will be able to continue to obtain required insurance
coverage. Any underwriter can terminate its relationship with the
Company upon the occurrence of a variety of events, including
certain defaults by the Company or the insurance company's termina-
tion of its relationship with its managing agent. The loss of
continued coverage would have a material adverse effect on the
Company. In addition, there is no assurance the Company would be
able to obtain replacement coverage from any other insurance
carrier or risk retention group. Further, the Company's
profitability depends to a great extent on the availability of
insurance coverage at favorable rates. To the extent the Company
is not able to offset any increased cost resulting from an increase
in insurance rates, its operating results will be adversely
impacted. Moreover, if insurance rates are significantly increased
the Company may be required to arrange for insurance coverage from
different carriers, but there is no assurance that it will be able
to arrange for such alternative insurance coverage or that such
alternative coverage will not also be at higher rates than in the
past.
The Company recently established NSC, an affiliated risk
retention group insurance company, which is providing insurance for
an increasing number of the Company's service contracts. NSC is a
newly formed entity without an established market presence. In
order to market programs that include insurance from NSC, it is
necessary for NSC to obtain reinsurance from an established
carrier. There can be no assurance that this reinsurance will
continue to be available on satisfactory terms, or at all, or that
a replacement reinsurer with suitable ratings could be engaged by
NSC.
Claims for Repairs Substantially in Excess of Amounts Reserved
In many instances the Company is obligated to indemnify NSC or
NSC's reinsurance provider to the extent, if any, that claims under
service contracts administered by the Company exceed reserves set
aside for such purpose. Although the Company bases reserve amounts
on historical actuarial figures and although, historically, claims
under service contracts have not exceeded claims reserves, there
can be no assurance that such reserves will be sufficient to cover
the costs of all claims brought by consumers under service
contracts at all times.
Competition
The business of marketing administrative services and after
market products to producers, and specifically services related to
motor vehicle service contracts and warranties, is highly
competitive and dominated by the major automotive manufacturers and
other independent third-party administrators. The Company is
unable to predict the extent, if any, to which automobile
manufacturers will provide more extensive warranty protection on
new vehicles or whether the revised warranty protection offered by
manufacturers may reduce a dealer's ability to market vehicle
service contracts on new vehicles such as those administered by the
Company. The major automotive companies and some of the other
competitors have significantly greater financial resources and
operating resources than those of the Company. As a result of the
competition, the Company may be unable to increase its fees by an
amount necessary to cover any increases in costs. New companies in
the future may present the Company with additional competition, the
impact of which it is unable to assess at this time.
Dependence on Key Personnel
The success of the Company is expected to be largely dependent
on the efforts of Chester J. Luby, the Chairman and Chief Executive
Officer of the Company, and Cindy H. Luby, its President and Chief
Operating Officer. Mr. Luby and Ms. Luby have extensive experience
in service contracts and administration. Mr. Luby owned and
operated several automotive dealerships, marketed credit life
insurance and service contract programs to dealerships and
financial institutions and owned two credit life reinsurance
companies prior to forming the Company. Ms. Luby was the Vice
President and Chief Financial Officer of the Company since its
inception in 1991 until her promotion to President and Chief
Operating Officer in 1996. The loss of Mr. Luby or Ms. Luby before
a qualified replacement is obtained could be detrimental to the
Company. The Company has an employment agreement with each of Mr.
Luby and Ms. Luby each of which expires in 2003.
Possible Volatility of Stock Price
Factors such as new product developments, general trends in
the vehicle sales, service and finance industries as well as
quarterly variations in the Company's results of operations and
market conditions in general may cause the market price of the
Company's common stock to fluctuate significantly. The stock
markets have experienced extreme price and volume fluctuations
during certain periods. These broad market fluctuations and other
factors may adversely affect the market price of the Company's
securities.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
Date: December 23, 1996
INTERSTATE NATIONAL DEALER
SERVICES, INC.
By: /s/ Chester J. Luby
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Chester J. Luby
Chairman and Chief Executive Officer
