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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Amendment No. 2
Date of Report (Date of earliest event reported): August 25, 1999
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WARRANTECH CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 0-13084 13-3178732
(State or other juris- (Commission File Number) (IRS Employer
diction of incorporation) 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
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Item 7. Financial Statements and Exhibits.
Exhibit 16. Letter from Ernst & Young LLP dated September 13, 1999.
Exhibit 99-1. Letter from Weinick Sanders Leventhal & Co., LLP, dated
August 11, 1999, concerning the Registrant's revenue recognition policy.
Exhibit 99-2. Warrantech 's summary of the Audit Adjustments for Fiscal
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WARRANTECH CORPORATION
Date: September 14, 1999 By: s/Joel A. San Antonio
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Name: Joel A. San Antonio
Title: President
2
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Exhibit Index
Exhibit No. Page
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Exhibit 16 Letter from Ernst & Young dated September 13, 1999. 16
Exhibit 99-1 Letter from Weinick Sanders Leventhal & Co., LLP,
dated August 11, 1999, concerning the Registrant's 18
revenue recognition policy.
Exhibit 99-2 Warrantech's summary of the Audit Adjustments for
Fiscal 1999. 20
Exhibit 16
[ERNST & YOUNG LLP'S LETTERHEAD]
September 13, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Gentlemen:
We have read Item 4 of Form 8-K of Warrantech Corporation filed on August 27,
1999. We have no basis to agree or disagree with the statements in paragraphs
(a) (1) (i) and (iii). We agree with the statement in paragraph (a) (1) (ii).
With respect to paragraph (a) (1) (iv), we agree with the statement in the first
paragraph and with respect to (a) (1) (iv) (A) (B) and (C), (v) and (a) (2), we
have the following comments:
1. With respect to the first paragraph of (A) on page 2, we informed
Warrantech that Ernst & Young LLP (E&Y) believes that the revenue
recognition method provided for in Technical Bulletin No. 90-1 (TB 90-1) is
required for that portion of Warrantech's business where Warrantech is the
obligor and is performing the administrative services.
The revenue recognition issue referred to above was discussed at a meeting
with senior executives of Warrantech on June 18, 1999. Subsequent to this
meeting and up to the extended due date of the Form 10-K (July 14, 1999),
we were not able to obtain adequate information to resolve our concerns
relative to this issue. Warrantech elected not to file its Form 10-K within
the extended due date.
2. With respect to the first and second paragraphs under the heading
"Background" on page 3, we have no basis to comment as to the basis of
conclusions of the various written correspondence and oral discussions
cited in this section. However, we believe that the memos, correspondence
and other documentation made available to us, including but not limited to
a SAS 50 letter from another accounting firm that was submitted to the SEC,
are not inconsistent with our conclusion since Warrantech was described as
not being the primary obligor in such documentation. The SAS 50 letter
stated that "the Company is not a party to the insurance contract between
the retailer and the insurance carrier". We are not aware of either the SEC
or FASB staff addressing at that time the issue of the applicability of TB
90-1 in situations where Warrantech was the primary obligor as well as the
administrator.
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3. With respect to the seventh paragraph under the heading "Anticipated Impact
of Changing the Registrant's Revenue Recognition Policy" on page 9, we take
exception to the statement that E&Y was unwilling to discuss further the
issue with the Registrant. As recently as August 12, 1999, we provided
comments on Warrantech-prepared documents that they informed us they would
submit to the FASB.
4. With respect to the ninth paragraph under the heading "Anticipated Impact
of Changing the Registrant's Revenue Recognition Policy" on page 9, the
statement that E&Y would not accept the position of the FASB is incomplete.
At a July 26, 1999 Audit Committee meeting, we informed the Audit Committee
that, even if the FASB Staff determined that Warrantech's revenue
recognition policy was supportable, we would expect that Warrantech would
review such accounting with the Staff of the SEC prior to filing its Form
10-K.
5. With respect to the first paragraph of paragraph (a) (1) (v) on page 10,
the date of the Audit Committee meeting was July 26, 1999.
6. With respect to other information included under (a) (1) (iv) (A) (B) and
(C), (v) and (a) (2) on pages 2 through 11, we either have no basis or no
reason to comment.
s/ Ernst & Young LLP
Exhibit 99-1
[Weinick Sanders Leventhal & Co., LLP letterhead]
August 11, 1999
The Audit Committee of
Board of Directors
Warrantech Corporation
300 Atlantic Street
Stamford, CT 06905
INTRODUCTION
We have been engaged by Warrantech Corporation ("Warrantech" or the "Company")
to report on the continued appropriateness of the accounting policy which the
Company utilizes for the recognition of revenue from the sale of extended
service contracts ("ESC") which the Company designs, markets and administers.
This report is being issued to Warrantech for assistance in evaluating
accounting principles for the specific transactions described below. Our
engagement has been conducted in accordance with standards established by the
American Institute of Certified Public Accountants.
BACKGROUND
We were engaged in 1991 to determine the appropriateness of the
non-applicability of Financial Accounting Standards Board ("FASB") Technical
Bulletin No. 90-1("TB 90-1") and to determine whether the Company should change
its accounting treatment to conform with guidelines contained in the Exposure
Draft of the American Institute of Certified Public Accountants ("AICPA")
entitled Proposed Industry Guidelines For Insurance Agents and Brokers.
According to members of FASB and the AICPA, and based upon the correspondence
with the staff of the Division of Corporation Finance of the Securities and
Exchange Commission, the transfer of risk was the crucial consideration in
determining whether an entity should use TB 90-1 or the Exposure Draft in
accounting for the ESC programs. In our letter to the Company's Board of
Directors dated October 25, 1991, we concluded that, based on management's
belief that all risk of loss for repair, replacement or other product loss is
covered by insurance and that the Company is not liable for any loss under any
insurance arrangement, management's adoption of the proportional performance
method of revenue recognition will more accurately conform to the Company's
business operations and properly match the incurrance of costs with revenues.
The Company has asked us whether, based upon the manner in which its business is
currently operated, it is still our opinion today that TB 90-1 does not apply
and that the Company should continue to follow the revenue recognition policy it
has followed over the past eight years.
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DESCRIPTION OF TRANSACTION
We have relied upon the Synopsis of Business Operations, dated August 4, 1999,
for a description of the present facts, circumstances and assumptions relevant
to the specific transaction.
In sum, the Company is in the business of designing, marketing, and installing
ESC programs and thereafter performing claims administration for such ESC
programs. The Company also offers its program design and administrative
expertise to manufacturers of such products and as administrator of these
manufacturers' product warranty programs. Additionally, the Company sometimes
contracts with dealers to sell the ESC programs on their behalf directly through
mail or telephone. In some instances the dealer/retailer is the obligor under
the ESC and in other instances Warrantech is the obligor. In all instances,
Warrantech arranges for insurance coverage with a non-affiliated excellent-rated
insurance carrier, which is responsible for any and all costs, related to the
repair, replacement or other product loss. Except for a small deductible, which
in some programs the consumer may be required to pay, the carrier is responsible
or the costs.
APPROPRIATE ACCOUNTING PRINCIPLES
Based on the foregoing, the Company would be entitled to record revenues from
sales of its ESC programs at the time of sale by the retailer, dealer, utility,
financial institution, and the Company to the consumer since the Company's
earnings process has been substantially completed at the time and the insurance
carrier has assumed all risk of obligor loss under the contract. Since the
Company is responsible for the administration of claims during the ESC period, a
portion of revenues should be deferred in amount sufficient to meet the
Company's future costs and a reasonable profit thereon.
CONCLUDING COMMENTS
The ultimate responsibility for the appropriate application of generally
accepted accounting principles for an actual transaction rests with the
preparers of the financial statements. Our judgment on the appropriate
application of generally accepted accounting principles for the foregoing
transaction is based on the facts provided to us by management and the
communications with representatives of the FASB and AICPA that were involved in
the process of the formulation of TB 90-1 and the Exposure Draft. Should the
facts and circumstances as described above differ, our conclusion may change.
Very truly yours,
Weinick Sanders Leventhal & Co., LLP
Exhibit 99-2 Schedule A
Warrantech Corporation
Summary of Audit Adjustments
Fiscal year Ended 3-31-99
Note # Audit Adjustments resulting from Events subsequent to year end: Amount
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Amount
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1 Proteva ("PRO"), a manufacturer/seller of computers, had an agreement with $533,000
Warrantech ("WTEC") wherein WTEC would administer on behalf of PRO the
warranty provided on each product. The agreement stipulated WTEC would
receive an administrative fee for each product shipped. In January/February
1999, WTEC discovered that PRO had underreported to WTEC the number of
products shipped. Based on admissions by Pro of the number of units sold,
WTEC accrued for the units underreported and recognized revenue of
$1,033,000. Litigation commenced in May 1999, resulting in a settlement
agreement and mutual release whereby WTEC would receive $500,000
necessitating an adjustment to increase allowance for doubtful accounts for
$533,000.
2 CompUSA, a retailer of computer products and customer of WTEC acquired the $2,447,679
Computer City stores. In September/October 1998, WTEC, at the request of
CompUSA, converted the 50 acquired stores to begin selling WTEC warranties.
This required sales personnel training, system review for data reporting,
production of supplies and store/salesperson performance monitoring. In
November/December WTEC and CompUSA reached an agreement to administer the
contracts sold by Computer City prior to their acquisition. A draft
agreement was prepared effective December 1, 1998, subject to approval of
CompUSA's in house counsel. WTEC recognized revenue of $2,448,000 in
December 1998,based on the services rendered. While the agreement was under
legal review, Cigna Property and Casualty Insurance notified WTEC of a
premium increase which WTEC notified CompUSA on March 30,1999, in
accordance with its agreement. On June 22, 1999, CompUSA rejected the
premium increase imposed by Cigna Property and Casualty Insurance Company
with respect to the insurance underlying the warranties administered by
WTEC. On June 30, 1999, CompUSA gave notice to WTEC that it was terminating
the Administration Agreement dated August 18, 1995. As the $2,448,000 was
not paid, an adjustment to increase allowance for doubtful accounts was
required
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In addition, based on the termination, an allowance for doubtful accounts $559,000
for other unpaid receivables from CompUSA totaling $560,000 was required.
Audit Adjustments resulting from judgmental differences:
3 Historically and for the fiscal year ended March 31, 1999,WTEC established $1,018,969
its allowance for doubtful accounts at year end by reserving 100% for any
receivables over 15 months. Ernst & Young recommended that we provide for
an additional reserve of $193,000 for receivables between 9 through 15
months and that we provide an additional further reserve of $826,256 for
other specific potential uncollectable receivables. (To date $489,333 of
these receivables has been Collected.)
Write down of capitalized building costs $155,000
Other Miscellaneous Audit Adjustments:
4 Comprised of a payroll accrual reversal posted twice for $158,894; a write $313,366
off of an obsolete prepaid of $135,000 and other sundry adjustments of
$19,472.
Total Summary of Audit
Adjustments $5,027,014
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