UNITED STATES
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): October 1, 1999
WARRANTECH CORPORATION
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(Exact name of registrant as specified in its charter)
_____Delaware____ ____0-13084____ ___13-3178732____
(State or other juris- (Commission File Number) (IRS Employer
diction of incorporation) Identification No.)
300 Atlantic Street, Stamford, Connecticut ___06901___
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (203) 975-1100
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Item 5. Other Events.
Letter from the Division of Corporation Finance of the Securities and Exchange
Commission
By letter dated October 1, 1999 (the "DCF Letter"), the Division of
Corporation Finance of the Securities and Exchange Commission (the "DCF")
responded to Warrantech Corporation's (the "Registrant" or "Warrantech") request
that the DCF review its accounting policies concerning revenue recognition on
certain extended service contracts. The DCF Letter stated that the DCF believes
that the Registrant should recognize revenue from service contracts in which it
is the obligor in accordance with Financial Accounting Standards Board Technical
Bulletin 90-1 ("TB 90-1"). The Registrant is currently preparing its financial
statements to comply with the revenue recognition under TB 90-1.
With respect to service contracts in which Warrantech is not the obligor,
the DCF further stated its opinion that it believes that Warrantech is required
to recognize administrative fees on a straight-line basis over the life of the
contracts that it administers. The Registrant currently recognizes a substantial
portion of its administrative fee income in the year in which the service
contracts are sold because a substantial amount of that income relates to
expenses that are incurred in connection with the acquisition of the service
contract business. The Registrant currently defers only that portion of the
administrative fee income which pertains to administrating claims over the life
of the contracts. The Registrant has requested the DCF to reconsider its
position with respect to this revenue recognition issue and, at the suggestion
of the DCF, the Registrant will be submitting further information substantiating
its position.
Lastly, the DCF stated in the DCF Letter that the Registrant should exclude
from its gross revenue that portion of the dealer-obligor service contract
payments it receives which pertains to the premium that is paid to the insurance
companies. In accordance with prior communications which the Registrant has had
with the DCF, the Registrant currently includes the premium cost as part of its
gross revenues and simultaneously recognizes premium cost as a direct cost of
sales relating to the service contracts.
Warrantech anticipates that the changes in the Registrant's revenue
recognition policy which are recommended in the DCF Letter will most likely
result in Warrantech's deferring a substantial portion of its revenues to future
periods with a concomitant decrease in current revenues. As a result, the
accounting changes could have a materially adverse effect on shareholder equity
for current and prior periods, although the resultant increase in deferred
revenue will be recognized in future periods. Until the Registrant completes its
revenue recognition models to comply with the DCF's Letter the actual impact of
the changes cannot be assessed for the most recent fiscal year or prior years.
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Once the Registrant receives clarification of the DCF's position on the
remaining open accounting issue, Warrantech's independent auditors will complete
its audit of the Registrant's financial statements and the Registrant's Form
10-K will be completed for the fiscal year ended March 31, 1999. As part of the
financial statements for the Form 10-K, the Registrant intends to include in its
results of operations for the third quarter ended December 31, 1998, a reduction
of $2.5 million in revenue which it had previously taken in the fourth quarter,
the net effect of which will be no change for the fiscal year. The Registrant is
also considering a restructuring of its business model in order to permit
revenue recognition more reflective of the Registrant's actual business
operations.
The Letter from PricewaterhouseCoopers LLP
On October 5, 1999, the Registrant sent notification of the DCF's position
to PricewaterhouseCoopers LLP ("PWC"), which is the successor firm of Coopers &
Lybrand L.L.P. Coopers & Lybrand L.L.P. were the independent auditors retained
by the Registrant to audit the consolidated financial statements of the
Registrant and its subsidiaries as of and for the fiscal years ended March 31,
1998, March 31, 1997, March 31, 1996 and March 31, 1995. In a letter dated
October 8, 1999, PWC notified the Registrant that the reports of Coopers &
Lybrand L.L.P. with respect to the aforesaid consolidated financial statements
should no longer be relied upon.
The Registrant's Business
The Registrant, through its subsidiaries, administers and markets service
contracts and after-market warranties on automobiles, automotive components,
recreational vehicles, appliances, consumer electronics, computer and computer
peripherals for retailers, distributors and manufacturers. The Registrant
continues to expand its domestic and global penetration, and now provides its
services in the United States, Canada, Mexico, the United Kingdom, Puerto Rico
and Latin America.
Safe Harbor Statement Pursuant to the Securities Litigation Reform Act of 1995
This Form 8-K contains forward-looking statements which are subject to
risks and uncertainties, including, but not limited to, analysis of the service
contracts for the purpose of computing the amount of any revenue which must be
deferred, the number of prior period financial results which may have to be
restated, the continuation of current levels of business activity, the impact of
competitive products, product demand and market acceptance risks, reliance on
key strategic alliances, fluctuations in operating results and other risks
detailed from time to time in the Registrant's filings with the Securities and
Exchange Commission. These risks could cause the Registrant's actual results for
the current fiscal year and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Registrant.
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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: October 18, 1999 By: /s/ Richard F. Gavino
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Richard F. Gavino
Chief Financial Officer
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