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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
COMMISSION FILE NUMBER 0-13124
WARNER INSURANCE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2698053
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17-01 POLLITT DRIVE, FAIR LAWN, NEW JERSEY 07410
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(201)794-4800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
--- ---
Number of shares outstanding at November 1, 1995:
8,560,904 shares of Common Stock, par value $.01 per share.
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<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
September 30, 1995
Page No.
-------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 1995 and December 31, 1994 . . . . . 2 - 3
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994. . . 5
Notes to Consolidated Financial Statements . . . . 6 - 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 10 - 13
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . $ 4,090,254 $ 6,407,801
Fixed maturity investments available-for-sale,
at fair value (cost: $4,110,278). . . . -- 3,872,500
Accounts receivable, less allowance for
doubtful accounts of $465,028 . . . . . 18,490,036 17,675,311
Income taxes receivable . . . . . . . . . 2,000,000 2,136,028
Deferred income taxes . . . . . . . . . . 880,000 3,250,000
Prepaid expenses. . . . . . . . . . . . . 326,474 232,216
------------ ------------
Total current assets . . . . . . . . . 25,786,764 33,573,856
------------ ------------
Deferred contract receivables . . . . . . . 2,504,924 3,218,126
------------ ------------
Property and equipment, at cost:
Furniture, fixtures and equipment . . . . 14,590,968 15,606,722
Leasehold improvements. . . . . . . . . . 1,696,475 1,696,475
------------ ------------
16,287,443 17,303,197
Less accumulated depreciation and
amortization. . . . . . . . . . . . . . (13,529,504) (13,046,118)
------------ ------------
Property and equipment-net . . . . . . 2,757,939 4,257,079
------------ ------------
Capitalized software, less accumulated amortization
of $902,214 and $2,629,112. . . . . . . . 1,765,495 1,340,639
------------ ------------
Other assets. . . . . . . . . . . . . . . . 520,796 503,753
------------ ------------
$ 33,335,918 $ 42,893,453
============ ============
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Notes payable . . . . . . . . . . . . . . $ -- $ 2,000,000
Accounts payable. . . . . . . . . . . . . 837,133 1,097,668
Accrued liabilities . . . . . . . . . . . 11,858,918 12,087,706
Unearned contract revenue . . . . . . . . 7,880,214 8,975,598
------------ -----------
Total current liabilities. . . . . . . 20,576,265 24,160,972
------------ -----------
Unearned contract revenue . . . . . . . . . 15,157,906 12,886,460
------------ -----------
Deferred income taxes . . . . . . . . . . . 600,000 470,000
------------ -----------
Contingencies (Note 4)
Stockholders' (deficit) equity:
Common stock, $.01 par value; authorized
20,000,000 shares, issued 9,194,890 and
9,187,323 shares. . . . . . . . . . . . . 91,949 91,873
Capital in excess of par value. . . . . . 10,414,253 10,401,994
Retained earnings (deficit) . . . . . . . (10,937,248) ( 2,550,639)
Treasury stock at cost - 633,986 shares . ( 2,567,207) ( 2,567,207)
------------ -----------
Total stockholders' (deficit) equity . ( 2,998,253) 5,376,021
------------ -----------
$ 33,335,918 $42,893,453
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<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ------
Revenues:
Insurance services
revenue . . . . . $ 4,415,241 $ 7,777,225 $14,195,234 $22,895,177
Software licensing
revenues . . . . 1,135,513 155,036 3,114,598 1,268,397
Insurance earned
premiums . . . . -- 2,378,875 -- 6,127,227
Data processing
and MTF revenue . 529,768 1,014,107 1,830,412 5,564,288
Net investment
income . . . . . 40,963 202,556 81,119 476,558
Subcontracted claims
servicing revenue 19,917 (774,472) 75,812 1,915,408
----------- ----------- ----------- -----------
6,141,402 10,753,327 19,297,175 38,247,055
----------- ---------- ----------- -----------
Costs and expenses:
Selling, general, and
administrative
expenses . . . . 7,634,057 11,688,145 26,430,999 34,911,322
Special charges . . -- -- 1,165,000 --
Insurance expenses including
losses . . . . . -- 2,192,480 -- 5,658,832
Subcontracted claims
services . . . . 19,917 (774,472) 75,812 1,915,408
Interest expense . 3,248 41,577 11,973 154,693
----------- ----------- ----------- -----------
7,657,222 13,147,730 27,683,784 42,640,255
--------- ----------- ----------- -----------
Loss from continuing
operations before
income taxes . . (1,515,820) (2,394,403) (8,386,609) (4,393,200)
Income taxes
/(benefit) . . . . -- ( 865,608) -- (1,498,046)
----------- ----------- ----------- ------------
Loss from continuing
operations . . . . . (1,515,820) (1,528,795) (8,386,609) (2,895,154)
Decrease in reserve for loss
on spin-off of $2,679,645,
net of tax (provision) of
$(911,079) in 1994 -- 1,768,566 -- --
----------- ----------- ----------- -----------
Net (loss) income . . $(1,515,820) $ 239,771 $(8,386,609) $(2,895,154)
=========== =========== =========== ===========
Loss per share from continuing
operations . . . . $( 0.18) $( 0.17) $( 0.98) $( 0.33)
=========== =========== =========== ===========
Net (loss) income
per share . . . . . $( 0.18) $ 0.03 $( 0.98) $( 0.33)
=========== =========== =========== ===========
Cash dividend
per share . . . . . $ -- $ -- $ -- $ 0.02
=========== =========== =========== ===========
Weighted average
number of
common shares
outstanding . . . 8,560,904 8,829,406 8,558,774 8,886,478
=========== =========== =========== ===========
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1995 1994
------------ -----------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . $(8,386,609) $( 2,895,154)
Adjustments to reconcile net loss to net
cash provided from (used for) operating
activities:
Depreciation and amortization . . . . 1,169,964 1,588,264
Amortization of capitalized software. 531,970 1,777,115
Accounts receivable . . . . . . . . . ( 101,523) ( 5,227,639)
Income taxes receivable . . . . . . . 136,028 --
Premiums receivable . . . . . . . . . -- ( 4,214,748)
Deferred acquisition costs. . . . . . -- ( 1,006,232)
Prepaid expenses. . . . . . . . . . . ( 94,258) 350,423
Deferred income taxes, net. . . . . . 2,500,000 ( 1,968,750)
Other assets. . . . . . . . . . . . . ( 17,043) ( 271,944)
Accounts payable. . . . . . . . . . . ( 260,535) ( 30,665)
Accrued liabilities . . . . . . . . . 111,895 3,243,205
Unearned contract revenue . . . . . . 1,176,062 3,505,402
Unpaid losses and loss expenses . . . -- 4,630,960
Ceding commissions payable. . . . . . -- 95,723
Unearned premiums . . . . . . .. . . . -- 4,680,147
Income taxes. . . . . . . . . .. . . . -- ( 776,423)
----------- ------------
Net cash (used for) provided from operating
activities. . . . . . . . . . . . . . . (3,234,049) 3,479,684
----------- ------------
Cash flows from investing activities:
Proceeds from sale of fixed maturity
investments available-for-sale. . . . 3,872,500 10,899,660
Purchase of fixed maturity investments
available-for-sale. . . . . . . . . . -- (12,899,261)
Capital expenditures. . . . . . . . . . ( 11,507) ( 723,630)
Capitalized software expenditures . . . ( 956,826) ( 3,007,530)
Proceeds from disposition of assets . . -- 306,832
----------- ------------
Net cash provided from (used for) investing
activities. . . . . . . . . . . . . . . 2,904,167 ( 5,423,929)
----------- ------------
Cash flows from financing activities:
Proceeds from credit line borrowings. . -- 4,500,000
Payment on credit line. . . . . . . . . (2,000,000) ( 2,500,000)
Dividends to stockholders . . . . . . . -- ( 176,857)
Net proceeds from issuance of
common stock. . . . . . . . . . . . . 12,335 160,207
Payment for purchase of treasury
shares. . . . . . . . . . . . . . . . -- ( 338,657)
----------- ------------
Net cash (used for) provided from financing
activities. . . . . . . . . . . . . . . (1,987,665) 1,644,693
----------- ------------
Net decrease in cash and cash
equivalents . . . . . . . . . . . . . . (2,317,547) ( 299,552)
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . 6,407,801 5,731,698
---------- ------------
Cash and cash equivalents at end
of period. . . . . . . . . . . . . . . $ 4,090,254 $ 5,432,146
=========== ============
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
For a summary of significant accounting policies, refer to Note 1 of Notes
to Consolidated Financial Statements included in Warner Insurance Services,
Inc.'s (the "Company" or "Warner") Annual Report on Form 10-K for the year
ended December 31, 1994. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest annual report. Certain amounts for the prior year have
been reclassified to conform with the current period's financial statement
presentation. The financial statements include on a consolidated basis the
results of all subsidiaries. All material intercompany transactions have
been eliminated.
In the opinion of management, the accompanying consolidated financial
statements include all adjustments which are necessary to present fairly
the Company's financial position as of September 30, 1995 and December 31,
1994 and the results of operations for the three- and nine-month periods
ended September 30, 1995 and 1994, and the cash flows for the nine-month
periods ended September 30, 1995 and 1994. Such adjustments are of a
normal and recurring nature. The results of operations for the nine-month
period ended September 30, 1995 are not necessarily indicative of the
results to be expected for a full year.
NOTE 2 - INSURANCE COMPANY
In late 1993, the Company formed Alerion Insurance Company of New Jersey
("Alerion"). Alerion entered into a reinsurance agreement with Clarendon
National Insurance Company ("Clarendon") to assume a portion of Clarendon's
risk in the New Jersey Assigned Risk Program. The subsidiary was initially
capitalized with $10 million. During the fourth quarter of 1994, the
Company decided to discontinue assuming any underlying insurance risk.
This was accomplished by Alerion commuting all its rights and obligations
under the reinsurance contract back to Clarendon and paying to Clarendon
all amounts received in excess of payments made since the inception of the
reinsurance contract in January 1994.
In June 1995, the Company entered into an agreement with an insurance
company for the sale of Alerion for a cash purchase price of approximately
$2.5 million (book value). The sale of Alerion, subject to regulatory
approvals, is expected to be completed in the fourth quarter of 1995.
If not, the Company intends to dissolve Alerion, subject to regulatory
approvals, in the fourth quarter of 1995.
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - COVER-ALL
In March 1994, the Company adopted a plan to implement a tax-free spin-off
of 100% of the stock of COVER-ALL Systems, Inc. (a wholly-owned subsidiary
that provides software products to the property/casualty insurance
industry) on a pro rata basis to the Company's stockholders. On November
11, 1994, the Company announced that its Board of Directors had voted to
retain COVER-ALL, thereby cancelling the spin-off plan. The
Board determined not to proceed with the proposed spin-off because of
questions as to whether a tax-free ruling on the spin-off could be
obtained, and the impact on existing and prospective customer relationships
of continuing uncertainty. Additionally, the Board determined that both
companies would be stronger financially remaining in the same corporate
structure.
Accordingly, COVER-ALL operations for the three- and nine-month periods
ended September 30, 1994 have been reclassified and are included in the
Consolidated Statements of Operations as a part of the continuing
operations. In the Company's previously issued quarterly financial reports
for the first two quarters of 1994, COVER-ALL's losses from operations and
provisions for loss on spin-off, were reflected as operations "pending
spin-off." Such treatment was reclassified in the 1994 third quarter
report and resulted in a $2,679,645 reduction of the previously established
reserve for loss on spin-off.
In December 1994, management instituted a plan to downsize the COVER-ALL
organization and reduce the rate of product development to a level
consistent with the reduced level of customer installations planned for
1995. The total head count, including employees and technical consultants,
was reduced by approximately half in the first quarter of 1995.
As a result of this reorganization plan for COVER-ALL, special charges were
reported in the fourth quarter of 1994 to write down a substantial portion
of the unamortized capitalized software development costs and accrue for
excess facilities and other costs. Additional costs were incurred in the
first quarter of 1995 for executive and other severance costs as well as
additional write-off of software development costs. These 1995 provisions
and write-offs, aggregating $1,165,000, were reflected as special charges
in the Statement of Operations for the first quarter of 1995.
During the second and third quarters of 1995, certain modules of the COVER-
ALL system were successfully installed and tested at a customer site.
Furthermore, increased customer interest in these modules indicated that
the development costs would likely be recoverable through multiple future
installations. As a result, approximately $1,000,000 of product
development costs incurred in the second and third quarters were
capitalized in accordance with generally accepted accounting principles.
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LITIGATION
In March 1994, Material Damage Adjustment Corporation ("MDA"), a subsidiary
of The Robert Plan Corporation and a subcontractor for the Company
performing claims processing work, instituted an action in the Superior
Court of New Jersey seeking injunctive relief requiring that the Company
turn over to MDA in excess of $1 million that the Company had withheld from
certain claims fees allegedly owed to MDA. This action arose out of the
Company's servicing contract with the Market Transition Facility of New
Jersey ("MTF"). The Company withheld the funds as a set off to cover
unpaid invoices for data processing services rendered by the Company for
MDA. MDA also added a claim for approximately $2.5 million of surcharge
fees paid to the Company by the MTF. Thereafter, the trial court denied
several applications by MDA to impound the funds pending the litigation.
The Company is vigorously contesting MDA's claims. The Company is pursuing
counter-claims against MDA to establish the Company's entitlement to the
disputed sums. Discovery is not yet completed in this matter. The trial
date has been set for January 8, 1996. MDA is adding a substantial
additional claim that excessive sums were refunded by MDA through Warner
to the MTF for claims closed without payment ("CWPs"). MDA seeks to hold
Warner and the MFT liable for negligence in the application of the CWP
formula. The resolution of this new issue has delayed the ultimate
disposition in the case, but in the Company's opinion is unlikely to have
any financial impact on the Company because any alleged overpayments to
the MTF, if they occurred and are ordered by the court to be repaid, are
likely to come from the MTF and not from Warner. The Company continues
to pursue settlement opportunities with respect to this lawsuit.
In May 1994, the Company filed an action in the Superior Court of New
Jersey against Lion Insurance Company, National Consumer Insurance
Corporation, and The Robert Plan Corporation seeking payment of unsatisfied
invoices under an April 1991 agreement totalling approximately $2.7
million. Under the agreement, the Company agreed to provide data
processing services for a three-year term in support of Lion Insurance
Company's "depopulation pool" automobile insurance business in New Jersey.
Lion Insurance Company is a subsidiary of The Robert Plan Corporation whose
affiliate, National Consumer Insurance Corporation, has taken over the
"depopulation pool" business. The Robert Plan Corporation guaranteed
Lion's performance and payment. Defendants have counterclaimed asserting
antitrust violations and other claims which the Company is vigorously
disputing. In connection with the Company's motion for summary judgment,
the claims of antitrust and insurance law violations were dismissed.
The completion of discovery has been expedited by court order and the court
is in the process of setting a trial date in this case. The Company
continues to pursue settlement opportunities with respect to this lawsuit
as part of a global settlement to resolve the MDA litigation as well.
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LITIGATION (CONTINUED)
Because of the uncertainties associated with the litigation described
above, an estimate of the ultimate liability of the Company cannot be made
with certainty at this time. The Company believes that recent developments
described above may make a settlement more likely than before, although no
firm predictions can be made about the ultimate outcomes.
The financial statements have been prepared assuming that the Company will
continue as a going concern and do not include any adjustments that might
result from the outcome of these uncertainties.
In addition to the matters described above, the Company is named as
defendant in a small number of legal actions arising from its operations.
Those actions have been considered in establishing liabilities. Management
and its legal counsel are of the opinion that the disposition of those
actions will not have a material adverse effect on financial position or
results of operations.
NOTE 5 - INCOME TAXES
For 1995, no income tax benefit relative to the Company's operating loss
has been reflected in the Statement of Operations. A valuation allowance
was provided equal to the tax benefit that the loss generated, since the
realization of such benefit would be dependent upon achieving future
operating profits which cannot be reasonably assured. The 1994 income
tax/(benefit) represents the federal tax benefit of losses net of a
provision for state income taxes of approximately $88,000.
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Total revenues for the three months ended September 30, 1995 (including
subcontracted claims services) were $6,141,402 as compared to $10,753,327
for the same period in 1994. Subcontracted claims servicing revenue
(representing flow-through activity associated with the Market Transition
Facility of New Jersey ("MTF") with no impact on profit) was $19,917 in the
1995 quarter as compared to negative $774,472 in the 1994 quarter. For the
nine months ended September 30, 1995, total revenues were $19,297,175 as
compared to $38,247,055 in the same period of the prior year.
Subcontracted claims services contributed $75,812 in the first nine months
of 1995 as compared to $1,915,408 in the first nine months of 1994.
Insurance services revenues are primarily made up of policy administration
and claims servicing fees from customers such as Atlantic/Pacific Employers
Insurance Company for servicing policies in the New Jersey voluntary and
assigned risk markets. The contract with Atlantic/Pacific Employers
Insurance Company reached its peak level of activity in 1994 and policy
volumes are declining in 1995. During 1995 and 1996, Atlantic/Pacific
Employers Insurance Company will non-renew all of their auto insurance
policies in New Jersey in accordance with the accelerated withdrawal order
entered into with the New Jersey Department of Insurance in August 1994.
As a result, Warner's insurance services revenue declined in the first nine
months of 1995 as compared with the same period in 1994 reflecting the
reduced number of policies and claims being handled.
Revenues earned under a contract with Clarendon National Insurance Company
("Clarendon") involved full service policy administration and claims
services for approximately 18% of the assigned risk drivers in New Jersey.
This activity started in 1993 with the commencement of the New Jersey
Personal Automobile Insurance Plan ("PAIP") following the end of New
Jersey's direct insurance program provided by its MTF. Warner's service
for Clarendon was performed under New Jersey's Limited Assignment
Distribution Program ("LAD") which required that servicing carriers such as
Warner bear some of the underlying insurance risk of the policies being
handled. For this reason, Warner formed a wholly-owned insurance
subsidiary, Alerion, and effective January 1, 1994, Alerion reinsured a
portion of Clarendon's insurance risk under the PAIP program.
By the end of 1994, Warner decided that risk taking, even as a reinsurer,
was not an attractive business strategy, particularly because of the
substantial capital required by its insurance subsidiary relative to other
Warner capital commitments. Warner and Clarendon agreed, therefore, to end
the reinsurance arrangement in the fourth quarter of 1994 and "commute" all
reinsurance interests and liabilities back to the inception of the
agreement, thus eliminating all reinsurance activity of Alerion.
Since Warner is no longer willing to share in the underlying insurance risk
of PAIP policies, it cannot, by law, continue to provide policy
administration and claims servicing to Clarendon under the LAD program
after 1994. However, Warner will continue to provide claims adjustment
services for policies issued in 1994 and prior.
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Most of Warner's insurance services contracts include a variable fee
structure based on the loss ratios of the underlying insurance policies
which could increase or decrease fee revenues. The Company obtains
periodic independent actuarial evaluations of the loss ratios for these
programs and adjusts the amount of its revenue when required. In the nine
months ended September 30, 1995, insurance services revenues were reduced
by approximately $1.5 million to adjust for actuarial evaluations through
June 30, 1995 which indicate loss ratio experience on these contracts that
would result in increased net refundable service fees due to certain
customers. Although the ultimate loss ratio estimates vary from one
evaluation to the next, there are approximately $1.8 million of net
refundable service fees currently due to customers. Management is
currently negotiating with these customers to defer payment of the net
refundable service fees.
The loss of service revenues in 1995 and beyond from the accelerated
withdrawal of Atlantic/Pacific Employers Insurance Company from auto
insurance in New Jersey and Warner's decision to cease the PAIP activity
with Clarendon has required Warner to evaluate the available business
strategies with respect to its insurance service business. Thus far, there
have not been sufficient new service business opportunities to enable the
Company to replace its declining contracts and achieve profitable
operations.
The overall decline in total revenues in 1995 is also due to the phasing
out of the MTF program, as described in the next paragraph, and related
data processing contracts with other insurance companies.
Policies serviced under the three-year MTF contract came to an end at
September 30, 1993 with respect to policy processing and administration as
the last of the MTF policies expired. The claims for these MTF policies
have been handled for Warner since the inception of the contract by a
subcontractor. The claims fees are included in Warner's total revenues as
"subcontracted claims servicing revenue" and are passed through to the
subcontractor without any profit for Warner. In the first nine months of
1995, these "pass-through" subcontract claims servicing revenues were
approximately $.1 million, compared with approximately $1.9 million in the
first nine months of 1994. Although some claims remain to be settled in
the MTF, Warner's contracted activity has substantially ended.
Revenues from data processing services amounted to approximately $1.8
million in the first nine months of 1995, down from $5.6 million in the
first nine months of 1994. While Warner's profit margins on these data
processing services were high, the departure of certain customers has
enabled Warner to decommission several of its aging mainframe computers and
downsize the data processing costs considerably.
Revenues from COVER-ALL software licensing and maintenance increased to
$3.1 million in the first nine months of 1995 as compared with $1.3 million
in the first nine months of 1994, reflecting increasing progress on initial
installations and increased fees from professional support services to
customers.
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Selling, general and administrative expenses decreased by approximately
$4.1 million in the third quarter of 1995 and by approximately $8.5 million
for the first nine months of 1995 as compared to the same periods in 1994,
primarily as a result of the lower level of costs associated with declining
insurance services activity and sharply reduced costs in the COVER-ALL
subsidiary which was downsized in early 1995. Data processing and overhead
expenses were also further reduced in 1995 as compared with 1994.
In December 1994, Warner management adopted a plan to reduce the COVER-ALL
marketing and product development costs until revenues increased to
significantly higher levels. The cash outlay had grown to a level of
approximately $1 million per month but the revenues from customers
continued to lag expectations. The total head count, including employees
and technical consultants, was reduced by approximately half in the first
quarter of 1995 and a business plan was adopted for 1995 which would match
slowly growing revenues with reduced costs resulting in the expectation of
profitable operations by late 1995.
As a result of this reorganization plan for COVER-ALL, special charges were
reported in the fourth quarter of 1994 to write down a substantial portion
of the unamortized capitalized software development costs (approximately
$2.7 million) and accrue for excess facilities and other costs ($.6
million). Additional costs were incurred in the first quarter of 1995 for
executive severance, employee severance, and additional write-off of
software development costs as the reorganization was completed. These 1995
provisions and write-offs, aggregating $1,165,000, were reflected as
special charges in the Statement of Operations for the quarter ended March
31, 1995.
As stated in Note 3 to the Consolidated Financial Statements, COVER-ALL has
successfully installed and tested certain modules of its system and
customer interest has grown significantly. As a result, product
development costs of approximately $1,000,000 in the second and third
quarter were capitalized as required by generally accepted accounting
principles. For the third quarter of 1995, COVER-ALL had a pretax loss of
approximately $400,000 as compared with a loss in excess of $2.5 million in
the same quarter in 1994.
As described in Note 5 to the Consolidated Financial Statements, no net
income tax benefit is available with respect to the loss incurred in the
first nine months of 1995.
Liquidity and Capital Resources
-------------------------------
Cash flows from operations were negative in the first nine months of 1995
by $3.2 million as compared with positive cash flows of $3.5 million in the
same period in 1994. This is primarily due to the loss from operations
caused by reduced revenues as described above.
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In the first quarter of 1994, the insurance subsidiary, Alerion, was
capitalized with approximately $10 million of cash generated from insurance
service contracts. By the end of 1994, the decision was reached to remove
all available capital from this inactive insurance subsidiary and $4.5
million was distributed to Warner by December 31, 1994. In early February
1995, an additional $3 million was distributed to Warner leaving Alerion
with a minimum statutory capital of approximately $2.5 million at September
30, 1995, pending Alerion's sale or dissolution as described in Note 2 to
the Consolidated Financial Statements.
At December 31, 1994, Warner had $2 million of short-term borrowings
against its $4 million secured line of credit with a bank. Subsequent to
year-end, the borrowings were repaid and the credit line was withdrawn.
Warner intends to seek new bank credit lines.
In April 1995, the Company received a $2.3 million refund of federal income
taxes paid prior to 1994. The Company has the ability to carry back
current year operating losses to prior years' tax payments and expects to
file for a refund of approximately $2 million in early 1996.
There is a $1 million letter of credit outstanding with a bank which was
issued in favor of the JUA/MTF in connection with the Company's contractual
obligations. The letter of credit expires in February 1996, and it has
been fully cash collateralized by the Company.
The Company believes that current cash balances (including amounts invested
in its insurance subsidiary), and anticipated cash flows from operations
will be sufficient to meet normal operating needs for the near term
provided that satisfactory arrangements can be made with customers to defer
payment of net refundable service fees as discussed above. The amounts
invested in the insurance subsidiary are subject to regulatory approval
prior to withdrawal but such approval is anticipated in the fourth quarter.
Also, as discussed in Note 4 to the Consolidated Financial Statements for
the nine months ended September 30, 1995, the ultimate outcome of the
pending litigation, either at trial or by settlement, cannot be determined
at this time.
Management is exploring alternative means of raising longer-term capital
that will be required to continue the COVER-ALL software development and to
sustain the Company's insurance services business in 1996 and beyond.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None.
<PAGE>
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
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.
WARNER INSURANCE SERVICES, INC.
November 10, 1995 By: /s/ Alfred J. Moccia
---------------------------
Alfred J. Moccia
President and Chief
Executive Officer
November 10, 1995 By: /s/ Bradley J. Hughes
---------------------------
Bradley J. Hughes
Vice President - Finance
and Administration and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
-------
27 - Financial Date Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WARNER
INSURANCE SERVICES INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,090,254
<SECURITIES> 0
<RECEIVABLES> 21,459,988
<ALLOWANCES> 465,028
<INVENTORY> 0
<CURRENT-ASSETS> 25,786,764
<PP&E> 16,287,443
<DEPRECIATION> 13,529,504
<TOTAL-ASSETS> 33,335,918
<CURRENT-LIABILITIES> 20,576,265
<BONDS> 0
<COMMON> 91,949
0
0
<OTHER-SE> (3,090,202)
<TOTAL-LIABILITY-AND-EQUITY> 33,335,918
<SALES> 0
<TOTAL-REVENUES> 6,141,402
<CGS> 0
<TOTAL-COSTS> 19,917
<OTHER-EXPENSES> 7,634,057
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,248
<INCOME-PRETAX> (1,515,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,515,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,515,820)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
