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 December 31, 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 February 1, 1999
Common stock, par value $.007 per share 15,473,033 shares
1
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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 December 31, 1998
(Unaudited) and March 31, 1998................... 3
Condensed Consolidated Statement of Operations
For the Three and Nine Months Ended December 31, 1998
and 1997 (Unaudited) ............................ 4
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended December 31, 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
<PAGE>
<TABLE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
A S S E T S
(Unaudited)
December 31, March 31,
-------------------------------
1998 1998
------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,832,973 $ 24,062,052
Investments in marketable securities 2,012,841 537,924
Accounts receivable, (net of allowances of $894,041
and $1,223,173, respectively) 51,626,784 27,878,335
Other receivables, net 4,849,038 2,197,405
Prepaid expenses and other current assets 2,051,588 1,775,316
--------------- --------------
Total Current Assets 64,373,224 56,451,032
------------- --------------
Property and Equipment, net 15,620,829 13,639,921
------------- --------------
Other Assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of
$4,714,796 and $4,212,956, respectively) 3,443,737 3,945,577
Deferred income taxes 3,612,845 3,085,311
Investments in marketable securities 2,166,384 1,967,817
Restricted cash 800,000 800,000
Split dollar life insurance policies 1,352,109 1,054,045
Notes receivable 543,849 654,068
Collateral security fund 199,389 199,389
Other assets 138,116 120,128
------------- --------------
Total Other Assets 12,256,429 11,826,335
------------- --------------
Total Assets $ 92,250,482 $81,917,288
============= ==============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
(Unaudited)
December 31, March 31,
-------------------------------
1998 1998
------------- --------------
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations $ 1,983,832 $ 2,371,662
Insurance premiums payable 31,819,483 22,269,589
Income taxes payable 1,096,235 1,850,999
Accounts and commissions payable 8,526,580 7,698,948
Accrued expenses and other current liabilities 6,555,114 6,211,572
--------------- --------------
Total current liabilities 49,981,244 40,402,770
--------------- --------------
Deferred revenues 8,851,241 6,987,541
Long-term debt and capital lease obligations 2,050,036 2,153,286
Deferred rent payable 515,257 608,736
--------------- --------------
Total liabilities 61,397,778 50,152,333
--------------- --------------
Commitments and contingencies
Stockholders' Equity:
Common stock - $.007 par value:
authorized - 30,000,000
Shares
issued - 16,498,333 shares at Dec 31, 1998
and 13,449,382 shares at March 31, 1998 115,488 94,146
Additional paid-in capital 15,226,557 14,124,700
Accumulated other comprehensive income,
net of taxes (24,164) 85,608
Retained earnings 19,159,318 17,975,951
--------------- --------------
34,477,199 32,280,405
Less: Deferred compensation (3,933) (21,631)
Treasury stock - at cost, 1,025,300 shares
at December 31, 1998 and 100,000 at
March 31, 1998 (3,620,562) (493,819)
--------------- --------------
Total Stockholders' Equity 30,852,704 31,764,955
--------------- --------------
Total Liabilities and
Stockholders' Equity $ 92,250,482 $81,917,288
=============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
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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 Nine Months Ended
December 31, December 31,
------------------- ------------------- ------------------- -------------------
1998 1997 1998 1997
------------------- ------------------- ------------------- -------------------
Gross revenues $59,578,186 $53,224,914 $170,983,832 $156,743,579
Revenues deferred to future periods (1,196,007) (887,704) (2,948,764) (2,052,753)
Deferred revenues earned 409,533 259,020 1,020,712 613,474
------------------- ------------------- ------------------- -------------------
Net revenues 58,791,712 52,596,230 169,055,780 155,304,300
Costs and expenses:
Direct costs 40,921,039 36,595,198 122,925,796 111,362,547
Service, selling, and general and
administrative 13,756,606 13,673,500 41,169,354 35,806,136
Depreciation and amortization 1,336,174 935,164 3,747,815 2,436,115
------------------- ------------------- ------------------- -------------------
Total costs and expenses 56,013,819 51,203,862 167,842,965 149,604,798
------------------- ------------------- ------------------- -------------------
Income from operations 2,777,893 1,392,368 1,212,815 5,699,502
Other income 311,217 253,855 828,438 649,766
------------------- ------------------- ------------------- -------------------
Income before provision for income taxes 3,089,110 1,646,223 2,041,253 6,349,268
Provision for income taxes 1,272,048 633,899 857,886 2,440,060
------------------- ------------------- ------------------- -------------------
Net income $1,817,062 $1,012,324 $1,183,367 $3,909,208
=================== =================== =================== ===================
Earnings per share:
Basic $0.12 $0.08 $0.08 $0.30
=================== =================== =================== ===================
Diluted $0.12 $0.06 $0.08 $0.25
=================== =================== =================== ===================
Weighted average number of shares outstanding:
Basic 15,520,411 13,284,760 14,981,328 13,228,056
=================== =================== =================== ===================
Diluted 15,531,938 15,786,572 15,401,092 15,785,414
=================== =================== =================== ===================
</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>
<S> <C> <C>
For the Nine Months Ended December 31,
---------------------------------------------
1998 1997
-------------------- --------------------
Net cash provided by (used in) operating activities ($11,019,811) $7,339,879
Cash flows from investing activities:
Property and equipment purchased (3,813,415) (3,062,217)
Business acquisition - (1,301,999)
Purchase of marketable securities (2,205,420) (447,253)
Proceeds from sales of Marketable securities 542,586 383,368
-------------------- --------------------
Net cash used in investing activities (5,476,249) (4,428,101)
-------------------- --------------------
Cash flows from financing activities:
Decrease (increase) in notes receivable 110,219 (666,705)
Proceeds from exercise of common stock options 39,449 840,214
Tax benefit from exercise of common stock options 1,083,750 -
Purchase treasury stock (3,126,743) -
Repayments, notes and capital leases (1,839,694) (1,651,085)
-------------------- --------------------
Net cash (used in) financing activities (3,733,019) (1,477,576)
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents (20,229,079) 1,434,202
Cash and cash equivalents at beginning of period 24,062,052 17,031,925
-------------------- --------------------
Cash and cash equivalents at end of period $3,832,973 $18,466,127
==================== ====================
Supplemental Cash Flow Information
Cash payments for:
Interest $346,967 $262,878
==================== ====================
Income taxes $1,033,436 $2,132,175
==================== ====================
Non-Cash Investing and financing activities
Property and equipment financed through capital leases $1,348,614 $1,373,450
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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. The Company operates call
centers which provide technical and computer services and is currently doing
business 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 December 31, 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.
6
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COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three and
nine month periods ended December 31, 1998 and 1997 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
----------------- ----------------- ------------------ ---------------
December 31, December 31,
----------------- ----------------- ------------------ ---------------
1998 1997 1998 1997
------------------------------------- ------------------------------------
Net income $1,817,062 $1,012,324 $1,183,367 $3,909,208
Other Comprehensive Income, net of tax
Foreign currency translation adjustments (100,464) 41,577 (107,860) 20,641
Unrealized gain(loss) on investments 643 3,265 (1,912) 8,311
----------------- ----------------- ------------------ ---------------
Comprehensive Income $1,717,241 $1,057,166 $1,073,595 $3,938,160
================= ================= ================== ===============
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
December 31, 1998 and March 31, 1998 are as follows:
December 31, March 31,
1998 1998
----------------- -----------------
Unrealized gain(loss) on investments $5,143 $7,055
Foreign currency translation adjustments (29,307) 78,553
----------------- -----------------
Accumulated other comprehensive income ($24,164) $85,608
================= =================
4. EARNINGS PER SHARE
The computation of earnings per share at December 31, 1998 and December 31, 1997
was as follows:
<TABLE>
<S> <C> <C> <C> <C>
For The Three Months Ended For The Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
-------------- -------------- ------------- ---------------
Numerator:
- ------------------------------------------
Net income applicable to common stock $1,817,062 $1,012,324 $1,183,367 $3,909,208
============== ============== ============= ===============
Denominator
- ------------------------------------------
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,520,411 13,284,760 14,981,328 13,228,056
Stock Options (treasury method) 11,527 2,501,812 419,764 2,557,358
-------------- -------------- ------------- ---------------
Diluted shares 15,531,938 15,786,572 15,401,092 15,785,414
============== ============== ============= ===============
Earnings Per Common Share:
- ------------------------------------------
Basic $0.12 $0.08 $0.08 $0.30
Diluted $0.12 $0.06 $0.08 $0.25
</TABLE>
7
<PAGE>
5. 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
<PAGE>
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 may contain 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, (d) regulatory or
legal changes affecting the Company's business, or (e) loss of business from, or
significant change in relationship with, any major customer of the Company.
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 December 31, 1998 Compared to the Three Months ended December
31, 1997
Gross revenues for the three month period ended December 31, 1998 increased $6.4
million or 11.9% to $59,578,186 as compared with $53,224,914 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, Help Desk, Home Services and International markets. The
Company realized through its Help Desk subsidiary during the quarter increased
revenue relating to CompUSA's acquisition of Computer City.
Direct costs are those costs directly related to the production and acquisition
of service contracts. Direct costs were $40,921,039 for the three month period
ended December 31, 1998 as compared with $36,595,198 for the comparable period
last year. This increase is primarily attributable to the increase in gross
revenues. Gross margin as a percent of gross revenues increased slightly to
31.3% compared to 31.2% last year.
Service, selling and general and administrative expenses for the three months
ended December 31, 1998 were $13,756,606 as compared to $13,673,500 for the
three months ended December 31, 1997. This increase is primarily due to the
increase in sales. SG&A as a percentage of sales improved to 23.1% for the third
quarter, versus 25.7% for the third quarter of fiscal 1998 and 28.2% for the
first quarter of fiscal 1999. This decrease is the result of the re-engineering
of the Company's call center processes and other cost cutting initiatives which
began in the second quarter of the current fiscal year.
9
<PAGE>
Depreciation and amortization increased $401,010 to $1,336,174 for the three
months ended December 31, 1998 compared to $935,164 for the same period last
year primarily as the result of capital additions related to the Company's
ongoing upgrade of its computer systems.
Net income for the three months ended December 31, 1998 amounted to $1,817,062
or $.12 per diluted share as compared to $1,012,324 or $.06 per diluted share
for the comparable period last year.
Nine Months Ended December 31, 1998 Compared to the Nine Months Ended December
31, 1997
Gross revenues for the nine months ended December 31, 1998 increased $14.2
million or 9.1% to $170,983,832 as compared with $156,743,579 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 Automotive, Home Services and International
markets.
Direct costs are those costs directly related to the production and acquisition
of service contracts. Direct costs were $122,925,796 for the nine months ended
December 31, 1998, as compared with $111,362,547 for the nine months ended
December 31, 1997. The increase is primarily attributable to the increase in
gross revenues. Gross margins as a percent of gross revenue decreased to 28.1%
for the nine months ended December 31, 1998 compared to 29.0% for the comparable
period. This decrease is primarily attributable to increased sales in the Home
Services division, a lower margin incremental business.
Service, selling and general and administrative expenses for the nine months
ended December 31, 1998 were $41,169,354, an increase of $5.4 million or 15.0%
compared to $35,806,136 for the nine months ended December 31, 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 24.1% for the
nine months ended December 31, 1998 as compared to 22.8% for the nine months
ended December 31, 1997.
Depreciation and amortization increased $1,311,700 to $3,747,815 for the nine
months ended December 31, 1998 compared to $2,436,115 for the same period last
year primarily as the result of capital additions related to the Company's
ongoing upgrade of its computer systems.
Net income for the nine months ended December 31, 1998 amounted to $1,183,367 or
$.08 per diluted share, compared to net income of $3,909,208 or $.25 per diluted
share for the comparable period last year.
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
nine month period ended December 31, 1998 amounted to $1,348,614. 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 August 16,
1999, is secured by certain accounts receivable. The Company is in the process
of renewing this credit facility. During the nine months ended and as of
10
<PAGE>
December 31, 1998, the Company did not have any borrowings under the line of
credit.
Cash used by operations during the nine months ended December 31, 1998 amounted
to $11,019,811 which is directly attributable to the temporary increase in
accounts receivable offset in part by increases in insurance premiums payable.
During the nine months ended December 31, 1998, the Company's cash position
decreased from $24,620,000 to $3,833,000, while its accounts receivable
increased from $27,878,000 to $51,627,000, resulting from the temporary delay in
receipt of payments for contracts closed prior to December 31, 1998. During the
nine months ended December 31, 1998, the Company's investments in marketable
securities increased by $1,673,484 to $4,179,225. As of February 5, 1999, the
Company's cash and cash equivalents returned to a normal level of approximately
$15,000,000. The reduction in cash and cash equivalents also reflects
expenditures to purchase an aggregate of 925,300 shares of the Company's common
stock for treasury purposes during the nine months ended December 31, 1998. The
Company believes that internally generated funds will be sufficient to finance
its current operations for at least the next twelve months.
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:
- - Energy management systems
- - Security systems
- - Fire protection systems
- - UPS systems
- - Automated HVAC systems
- - Elevators
- - Vaults
11
<PAGE>
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 June
30, 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 June 30, 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
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 June 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.
12
<PAGE>
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 $100,000 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 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)
13
<PAGE>
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 systems development, the Company is redeveloping its
data feeds and should be fully Year 2000 compliant at the end of the Company's
first quarter fiscal period ending June 30, 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
At the Company's Annual Meeting of Shareholders held on October
27, 1998, the shareholders elected the following to serve as
directors until the next Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
For Withheld
Joel San Antonio 12,404,274 200,273
William Tweed 12,404,274 200,273
Jeffrey J. White 12,404,124 200,423
Lawrence Richenstein 12,404,274 200,273
Gordon A. Paris 12,404,274 200,273
In addition, the shareholders approved the 1998 Stock Option Plan
by a vote of 12,208,562 for, 345, 281 against, and 50,704
withheld.
Item 5. Other Information
Not applicable.
Item 6 (a) Exhibits
(27) Financial Data Schedule
Item 6 Reports on Form 8-K
Not applicable
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: February 11, 1999
S/N/S Richard F. Gavino
Richard F. Gavino - Executive Vice President
and Chief Financial Officer
Date: February 11, 1999
17
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