UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
(X) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
( ) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-13084
WARRANTECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3178732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Atlantic Street, Stamford, CT 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 975-1100
(Former name,former address and former fiscal year, if changed since last year)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 2, 1998
Common stock, par value $.007 per share 15,524,596 shares
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WARRANTECH CORPORATION AND SUBSIDIARIES
I N D E X
Page No.
PART I - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet at September 30, 1998
(Unaudited) and March 31, 1998................... 3
Condensed Consolidated Statement of Operations
For the Three and Six Months Ended September 30, 1998
and 1997 (Unaudited) ............................ 4
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended September 30, 1998
and 1997 (Unaudited) ............................ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) ............................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - Other Information 16
Signatures .............................................. 17
2
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<TABLE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
A S S E T S
(Unaudited)
September 30, March 31,
-------------------------------
1998 1998
------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,113,458 $ 24,062,052
Investments in marketable securities -- 537,924
Accounts receivable, (net of allowances of $899,531
and $1,223,173, respectively) 31,624,159 27,878,335
Prepaid income taxes 460,322 --
Other receivables, net 5,168,919 2,197,405
Prepaid expenses and other current assets 2,190,478 1,775,316
--------------- --------------
Total Current Assets 60,557,336 56,451,032
------------- --------------
Property and Equipment - Net 14,562,908 13,639,921
------------- --------------
Other Assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of
$4,547,583 and $4,212,956, respectively) 3,610,950 3,945,577
Deferred income taxes 3,208,115 3,085,311
Investments in marketable securities 2,168,732 1,967,817
Restricted cash 800,000 800,000
Split dollar life insurance policies 1,149,570 1,054,045
Notes receivable 567,815 654,068
Collateral security fund 199,389 199,389
Other assets 137,139 120,128
------------- --------------
Total Other Assets 11,841,710 11,826,335
------------- --------------
Total Assets $ 86,961,954 $81,917,288
============= ==============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
(Unaudited)
September 30, March 31,
-------------------------------
1998 1998
------------- --------------
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations $ 1,696,134 $ 2,371,662
Insurance premiums payable 29,964,431 22,269,589
Income taxes payable -- 1,850,999
Accounts and commissions payable 8,778,299 7,698,948
Accrued expenses and other current liabilities 5,549,893 6,211,572
--------------- --------------
Total current liabilities 45,988,757 40,402,770
--------------- --------------
Deferred revenues 8,016,135 6,987,541
Long-term debt and capital lease obligations 1,802,720 2,153,286
Deferred rent payable 551,117 608,736
--------------- --------------
Total liabilities 56,358,729 50,152,333
--------------- --------------
Commitments and contingencies
Stockholders' Equity:
Common stock - $.007 par value:
authorized - 30,000,000 shares
Issued; outstanding - 16,495,396 shares
at Sept. 30, 1998 and 13,449,382 shares
at March 31, 1998 115,468 94,146
Additional paid-in capital 15,305,712 14,124,700
Accumulated other comprehensive income,
net of taxes 75,657 85,608
Retained earnings 17,342,256 17,975,951
--------------- --------------
32,839,093 32,280,405
Less: Deferred compensation (9,832) (21,631)
Treasury stock - at cost, 612,700 shares
at September 30, 1998 and 100,000 at
March 31, 1998 (2,226,036) (493,819)
--------------- --------------
Total Stockholders' Equity 30,603,225 31,764,955
--------------- --------------
Total Liabilities and
Stockholders' Equity $ 86,961,954 $81,917,288
=============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months Ended, For the Six Months Ended,
September 30, September 30,
------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
Gross revenues $ 61,141,164 $ 50,191,635 $111,405,646 $103,518,665
Revenues deferred to future periods (971,806) (606,841) (1,752,757) (1,165,049)
Deferred revenues earned 320,278 205,405 611,179 354,454
------------ ------------ ------------- -------------
Net revenues 60,489,636 49,790,199 110,264,068 102,708,070
Costs and expenses:
Direct costs 45,469,541 35,822,264 82,004,757 74,767,349
Service, selling, and general and administrative 13,235,901 10,817,861 27,412,748 22,132,636
Depreciation and amortization 1,137,027 774,995 2,411,641 1,500,951
------------ ------------ ------------- -------------
Total costs and expenses 59,842,469 47,415,120 111,829,146 98,400,936
------------ ------------ ------------- -------------
Income (loss) from operations 647,167 2,375,079 (1,565,078) 4,307,134
Other income 347,261 198,532 517,221 395,911
------------ ------------ ------------- -------------
Income (loss) before provision (benefit)
for income taxes 994,428 2,573,611 (1,047,857) 4,703,045
Provision (benefit) for income taxes 401,495 1,003,931 (414,162) 1,806,161
------------ ------------ ------------- -------------
Net income (loss) $592,933 $1,569,680 ($633,695) $2,896,884
------------ ------------ ------------- -------------
Earnings per share:
Basic $0.04 $0.12 ($0.04) $0.22
------------ ------------ ------------- -------------
Diluted $0.04 $0.10 ($0.04) $0.18
------------ ------------ ------------- -------------
Weighted average number of shares outstanding:
Basic 16,043,736 13,204,446 14,710,342 13,190,402
------------ ------------ ------------- -------------
Diluted 16,070,990 15,717,314 15,417,404 15,705,676
------------ ------------ ------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
For the Six Months Ended September 30,
<S> <C> <C>
1998 1997
--------------- -------------
Net cash provided by operating activities $1,143,452 $4,976,983
Cash flows from investing activities:
Property and equipment purchased (2,568,331) (2,129,103)
Purchase of marketable securities (205,420) (241,562)
Proceeds from sales of marketable securities 542,586 184,225
--------------- -------------
Net cash used in investing activities (2,231,165) (2,186,440)
--------------- -------------
Cash flows from financing activities:
Decrease (increase) in notes receivable 86,253 (745,931)
Proceeds from exercise of common stock options 118,584 298,350
Tax benefit from exercise of common stock options 1,083,750
Purchase of treasury stock (1,732,217)
Repayments, notes and capital leases (1,417,251) (1,118,340)
--------------- -------------
Net cash used in financing activities (1,860,881) (1,565,921)
--------------- -------------
Net increase (decrease) in cash and cash equivalents (2,948,594) 1,224,622
Cash and cash equivalents at beginning of period 24,062,052 17,031,925
--------------- -------------
Cash and cash equivalents at end of period $21,113,458 $18,256,547
--------------- -------------
Supplemental Cash Flow Information
Cash payments for:
Interest $237,720 $157,962
--------------- -------------
Income taxes $980,536 $902,375
--------------- -------------
Non-Cash Investing and financing activities:
Property and equipment financed through capital leases $391,157 $869,595
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. THE COMPANY
Warrantech Corporation ("Warrantech" or the "Company"), through its wholly-owned
subsidiaries, Warrantech Automotive, Inc., Warrantech Consumer Product Services,
Inc., Warrantech Help Desk, Inc., Warrantech Direct, Inc., Warrantech Home
Service Company and Warrantech International, Inc., markets and administers
service contract programs for retailers, distributors and manufacturers of
automobiles, homes, home appliances, home entertainment products, computers and
peripherals, and office and communication equipment and operates call center
services and technical computer services in the United States, Puerto Rico,
Mexico, Canada, Caribbean, South America and the United Kingdom. Additionally,
third-party administrative services are provided to manufacturers of consumer
and automotive products and other business entities requiring such services. The
actual repair service under such extended service contracts and limited
warranties is provided by third party repair facilities and the cost of such
repair services is borne by the insurance companies. The predominant terms of
the contracts and manufacturers' warranties range from twelve (12) to
eighty-four (84) months.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K and Form
10K/A for the year ended March 31, 1998.
Certain prior year amounts may have been reclassified to conform to current year
presentation.
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3. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three and
six month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
For the Three Months Ended, For the Six Months Ended,
September 30, September 30,
------------------------- --------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------ ------------ ------------- -------------
Net income (loss) $592,933 $1,569,680 ($633,695) $2,896,884
Other Comprehensive Income, net of tax
Foreign currency translation adjustments 12,965 (36,255) (7,396) (20,936)
Unrealized gain(loss) on investments (1,422) 7,747 (2,555) 5,046
------------ ------------ ------------- -------------
Comprehensive income (loss) $604,476 $1,541,172 ($643,646) $2,880,994
The components of accumulated other comprehensive income, net of related
tax, at September 30, 1998 and March 31, 1998 are as follows:
September 30, March 31,
1998 1998
------------ ------------
Unrealized gain on investments $4,500 $7,055
Foreign currency translation adjustments 71,157 78,553
------------ ------------
Accumulated other comprehensive income $75,657 $85,608
------------ ------------
4. EARNINGS PER SHARE
The computation of earnings per share at September 30, 1998 and
September 30, 1997 was as follows:
For the Three Months Ended, For the Six Months Ended,
September 30, September 30,
------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
Numerator:
- -----------------------------------
Net income (loss) applicable to common stock $592,933 $1,569,680 ($633,695) $2,896,884
------------ ------------ ------------- -------------
Denominator
- -----------------------------------
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 16,043,736 13,204,446 14,710,342 13,190,402
Stock Options (treasury method) 27,254 2,512,868 707,062 2,515,274
------------ ------------ ------------- -------------
Diluted shares 16,070,990 15,717,314 15,417,404 15,705,676
------------ ------------ ------------- -------------
Earnings Per Common Share:
- -----------------------------------
Basic $0.04 $0.12 ($0.04) $0.22
Diluted $0.04 $0.10 ($0.04) $0.18
</TABLE>
5. OTHER MATTERS
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of Warrantech's
Board of Directors, exercised all of their vested options to purchase Warrantech
common stock. A total of 3,000,000 shares were purchased, with payment by
delivery of promissory notes payable over three years at an annual interest rate
of 6%. The exercise of these options and the anticipated tax benefit from this
transaction represents a combined
7
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investment of approximately $10 million.
6. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information ("FAS 131"). FAS 131 is effective for financial
statements for periods beginning after December 15, 1997. This Statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
Generally, financial information is required to be reported on the basis
that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. FAS 131 will have no impact on the
Company's results of operations, financial condition or liquidity.
8
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WARRANTECH CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the matters discussed
below or elsewhere in this quarterly report are forward looking statements that
involve risks and uncertainties. The Company makes such forward looking
statements under the provisions of the "safe harbor" section of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are based
on management's beliefs and assumptions, as well as information currently
available to management. Such beliefs and assumptions are based on, among other
things, the Company's operating and financial performance over recent years and
its expectations about its business for the current fiscal year and beyond.
Although the Company believes that the expectations reflected in such forward
looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such statements are subject to certain
risks, uncertainties and assumptions, including (a) prevailing economic
conditions may significantly deteriorate, thereby reducing the demand for the
Company's products and services, (b) unavailability of technical support
personnel or increases in the rate of turnover of such personnel, reflecting
increased demand for such qualified personnel, (c) changes in the terms or
availability of insurance coverage for the Company's programs or (d) regulatory
or legal changes affecting the Company's business, although none of these risks
are anticipated at the present time. Should one or more of these or any other
risks or uncertainties materialize, or should the underline assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or expected.
Three Months Ended September 30, 1998 Compared to the Three Months ended
September 30, 1997
Gross revenues for three month period ended September 30, 1998 increased $10.9
million or 21.8% to $61,141,164 as compared with $50,191,635 for the same period
last year. This increase is directly attributable to increased revenue with new
and existing customers resulting from continued market penetration in the
Consumer Products, Automotive, Home Services and international markets.
Direct costs are those costs directly related to the production and acquisition
of service contracts. Direct costs were $45,469,541 for the three month period
ended September 30, 1998 as compared with $35,822,264 for the comparable period
in Fiscal 1998. This increase is primarily attributable to the increase in gross
revenues. The increase in direct costs as a percent of revenue sales is in part
a result of increased sales in Home Services, an incremental business and new
market.
Service, selling and general and administrative expenses for the three months
ended September 30, 1998 were $13,235,901 as compared to $10,817,861 for the
three months ended September 30, 1997, an increase of $2.4 million or 22.4%. The
increase is primarily related to the increased revenue and higher payroll and
payroll related costs. As a percentage of sales SG&A remained constant at 21.6%
for the comparable periods. During the quarter, the Company benefited from
several cost cutting and operational efficiency initiatives which included the
reengineering of its call center processes. The Company reduced SG&A expenses
$940,946 for the three months ended September 30, 1998 compared to the three
months ended June 30, 1998. As a percentage of sales SG&A was reduced to 21.6%
from 28.2% for the comparable periods.
9
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The increase in depreciation and amortization of $362,032 for the three months
ended September 30, 1998 compared to the same period last year is the result of
capital additions related to the Company's ongoing upgrade of its computer
systems and the additional equipment requirements resulting from the increase in
service contracts in force.
The increase in other income for the three months ended September 30, 1998
compared to the three months September 30, 1997 is due primarily to increased
interest income.
Net income for the three months ended September 30, 1998 amounted to $592,933 or
$.04 per basic share as compared to $1,569,680 or $.12 per basic share for the
comparable period in fiscal 1997.
Six Months Ended September 30, 1998 Compared to the Six Months Ended September
30, 1998
Gross revenues for the six months ended September 30, 1998 increased $7.9
million or 7.6% to $111,405,646 as compared with $103,518,665 for the same
period last year. This increase is the result of the Company's efforts in
expanding its market penetration in the personal computer industry as well as
continued market penetration in the Consumer Products, Automotive, Home Services
and international markets.
Direct costs are those costs directly related to the production and acquisition
of service contracts. Direct costs were $82,004,757 for the six months ended
September 30, 1998, as compared with $74,767,349 for the six months ended
September 30, 1997. The increase is primarily attributable to the increases in
gross revenues.
Service, selling and general and administrative expenses for the six months
ended September 30, 1998 were $27,412,748, an increase of $5.3 million or 23.9%
compared to $22,132,636 for the six months ended September 30, 1997. The
increase is primarily related to the increased revenue and higher payroll and
payroll related costs. As a percentage of sales SG&A increased to 24.6% for the
six months ended September 30, 1998 as compared to 21.4% for the six months
ended September 30, 1997. During the second quarter of Fiscal 1999, the Company
benefited from several cost cutting and operational efficiency initiatives which
included the reengineering of its call center processes. The Company reduced
SG&A expenses $940,946 for the three months ended September 30, 1998 compared to
the three months ended June 30, 1998. As a percentage of sales SG&A was reduced
to 21.6% from 28.2% for the comparable periods.
The increase in depreciation and amortization of $911,050 for the six months
ended September 30, 1998 compared to the same period last year is the result of
capital additions related to the Company's ongoing upgrade of its computer
systems and the additional equipment requirements resulting from the increase in
service contracts in force.
The increase in other income for the six months ended September 30, 1998
compared to the six months September 30, 1997 is due primarily to increased
interest income.
The net loss for the six months ended September 30, 1998 amounted to $633,695 or
$.04 per basic share, compared to net income of $2,896,884 or $.22 per basic
share for the comparable period in fiscal 1997.
10
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Liquidity and Financial Resources
The Company has an ongoing relationship with equipment financing companies and
intends to continue financing certain future equipment needs through leasing
transactions. The total amount financed through leasing transactions during the
six month period ended September 30, 1998 amounted to $391,157. The
Company has a line of credit with a bank, which provides for a maximum aggregate
borrowing up to $10 million. The line of credit, which expires on November 30,
1998, is secured by certain accounts receivable. The Company is in the process
of renewing this credit facility. At September 30, 1998, the Company did not
have any borrowings under the line of credit.
The Company believes that internally generated funds will be sufficient to
finance its current operations for at least the next twelve months. Cash used by
operations during the six months ended September 30, 1998 amounted to $1,143,452
which is principally attributable to the net loss from operations.
The effect of inflation has not been significant to the Company since its
formation.
Readiness For Year 2000
The Company is currently in the process of addressing the business, financial,
technical, legal, and other implications that arise due to the Year 2000 date
issues. A comprehensive Year 2000 program was put into place during the last
quarter of 1997. The primary goal of the Year 2000 program is to implement the
changes needed to answer functionality in the Year 2000, as cost effectively and
expeditiously as possible. Towards that goal, the Company has established the
following objectives:
- - Implementation of overall Year 2000 program
- - Develop and implement a methodology for assessment, project planning,
development, testing and implementation
- - Implement a business partner management framework
- - Develop a risk management approach
Scope
The scope of the Year 2000 program includes both InformationTechnology and
non-Information Technology assets:
IT Assets:
- - Micro-computer software and hardware
- - In-house application software
- - Acquired third-party vendor application software
- - Operating system components
- - Proprietary mid-range computers
- - Network and communication hardware and software
Non-IT assets:
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- - Energy management systems
- - Security systems
- - Fire protection systems
- - UPS systems
- - Automated HVAC systems
- - Elevators
- - Vaults
Overall Project Plan
The Year 2000 program is structured into five major phases, with our overall
objective to have Warrantech Corporation Year 2000 compliant by the end of
Fiscal 1999 (March 31, 1999).
<TABLE>
<S> <C> <C> <C>
Phase Tasks Target Completion Objectives
- --------------- ------------------ --------------------- ------------------
Formalize Project Define: November 1997 Communicate issues to
- Process management
- Roles
- Responsibilities % Complete-100%
- Deliverables
- --------------- ------------------ --------------------- ------------------
Assessment Inventory of January 1998 - Define Scope
systems affected - Identify resource needs
% Complete-100% for 1998-99
- Set expectations for future
impact
- --------------- ------------------ --------------------- ------------------
Strategy Formulation Develop projects and March 1998 Ensure necessary funding is
estimates % Complete-100% included in the Annual
Operating Plan
- --------------- ------------------ --------------------- ------------------
Execute - Upgrade/develop new March 31, 1999 Compliant systems
- Test % Complete-50%
- Employment
- --------------- ------------------ --------------------- ------------------
</TABLE>
YEAR 2000 PROGRAM STATUS
Overall, the Company is at varying stages of readiness in each of the following
functional areas:
- - Business Applications
- - Hardware
- - Major business partners
12
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Business Applications
In conjunction with the Company's 1995 reengineering and restructuring
initiatives, the Company began a complete process redesign and new system's
architecture including desktops, networking, and development infrastructure,
which is expected to be completed in March 1999. It is anticipated that these
new systems, which are Year 2000 compliant, will replace substantially all of
the Company's critical business application software.
As a result of this new architecture, the Company replaced significant portions
of its software and hardware. In connection with such installation, the
Company's vendors have represented to the Company that the new hardware and
applications software are Year 2000 compliant. Therefore, the Company's existing
information technology systems are 100% compliant.
The total cost of the Year 2000 project is estimated at $250,000 and is being
funded through operating cash flows. To date the Company has incurred
approximately $50,000 related to the Year 2000 project. All Year 2000 costs are
expensed as incurred.
A full application survey, by subsidiary, has been completed and remediation
strategies created. Critical third-party packaged software vendors have been
identified and assessed for compliance. Contingency plans will be developed and
put into place after testing is performed on compliant versions of the software
package. Alternate vendors will be identified, if necessary.
Compliance statements identifying software product release levels have been
received. Software upgrade implementation and testing plans are in the process
of being scheduled. Outside vendors and internal resources will be used to
implement third-party software upgrades.
Hardware
A complete computer, telecommunications, and office equipment hardware inventory
has been taken by each functional area. Manufacturer compliance plans and timing
have been requested. Plans to install new/upgraded products and to test products
for compliance in local environments are being developed.
The Company has standardized desktop and server platforms, Gateway and Compaq,
respectfully. Risk assessment on current hardware inventory is low.
Manufacturers of 95% of the Company's desktop and server hardware have published
compliance assertions. Their published compliance assertions are not a
substitute for a formal statement of vendor intent targeted to a specific
product. The Company has sent vendor certification letters to all vendors to
document their Year 2000 strategies. An assessment of critical vendors'
commitment to compliance has been performed. A risk factor rating system has
been applied to all vendors. A vendor letter has been sent to obtain formal
vendor commitments.
Major Business Partners
Customers:
Critical to performing service contract administration is the ability to acquire
contract sales data from our customers. Due to the nature of the service
contract business (five-year contract expiration dates, etc.) electronic data
import modules have been programmed to interpret the criteria based upon data
windowing techniques. In the event sales data is not available, the ability to
verify and administer should
13
<PAGE>
not be impeded due to the current processes already in place at many of the
subsidiaries.
The Company has identified critical customers and suppliers and is assessing
their plans and progress in addressing the Year 2000 problem.
Customer letters requesting certification, compliance plans and timing have been
sent to all of the Company's major customers. As part of system's development,
data acquisition (electronic data feeds) from major customers is being
redeveloped. This process will allow the Company to identify, review, and
compensate for inadequacies in the customer's internal data reporting processes.
The Company will supply customers with modern EDI software interfaces and help
them achieve Year 2000 compliant reporting methods. The Company will also
identify alternative reporting methods should the need arise.
Insurance Companies:
Insurance companies require the Company to report sales and claims information
periodically. As part of system's development, the Company is redeveloping its
data feeds and should be fully Year 2000 compliant at the end of the Company's
fourth quarter fiscal period (March 1999).
RESULTS ON OPERATIONS
The Company has ascertained that failure to alleviate the Year 2000 problem
within its application systems could result in possible failure or
miscalculations causing disruptions of operations. These problems could be
substantially alleviated with manual processing. However, this would cause
delays and additional costs to the administration process. The Company has
identified the following key areas at risk:
- - Call Center operations
- - Contract sales acquisition
- - Service fulfillment
- - Payment of invoices
- - Insurance company reporting
- - Financial reporting
Contingency plans are being developed to address each area of risk depending
upon levels and magnitude of risk.
Worst Case Scenarios
<TABLE>
<C> <S>
Scenario I Contingency Plan
- --------------------------------------------------------- --------------------------------------
- - External vendors telecommunications systems do not work - Developing vendor redundancy plans to
minimize impact on operations
- --------------------------------------------------------- --------------------------------------
Scenario II Contingency Plan
- --------------------------------------------------------- --------------------------------------
- - Customers' Point of Sales systems cannot record sales - Manual entry of contract sales
- --------------------------------------------------------- --------------------------------------
Scenario III Contingency Plan
- --------------------------------------------------------- --------------------------------------
- - Internal systems breakdown - Manual operations
- --------------------------------------------------------- --------------------------------------
Scenario IV Contingency Plan
- --------------------------------------------------------- --------------------------------------
- - Banking system failure - Temporary increase in short-term cash holdings
- --------------------------------------------------------- --------------------------------------
</TABLE>
14
<PAGE>
Based upon current information, the Company does not anticipate costs associated
with the Year 2000 issue to have a material financial impact. However, there can
be no assurances that there will not be interruptions or other limitations of
financial and operating systems functionality, or other problems which cannot be
anticipated at this time, or that the Company will not incur significant
financial costs to avoid such interruptions, limitations or other problems. The
Company's expectations about future costs associated with the Year 2000 issue
are subject to uncertainties that could cause actual results to have a greater
financial impact than currently anticipated. Factors that could influence the
amount and timing of future costs include the success of the Company in
identifying systems and programs that contain two-digit year codes, the nature
and amount of programming required to upgrade or replace each of the affected
programs, the rate and magnitude of related labor and consulting costs, and the
success of the Company's partnerships in addressing the Year 2000 issue.
15
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6 (a) Exhibits
(27) Financial Data Schedule
Item 6 Reports on Form 8-K
Report on Form 8-K reporting item 4, dated August 28, 1998 filed
September 4, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARRANTECH CORPORATION
S/N/S Joel San Antonio
Joel San Antonio - Chairman of the Board
(Chief Executive Officer)
Date: November 13, 1998
S/N/S Richard F. Gavino
Richard F. Gavino - Executive Vice President
and Chief Financial Officer
Date: November 13, 1998
17
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