_________________________________________________________________
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 June 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 August 2, 1995:
8,560,904 shares of Common Stock, par value $.01 per share.
_________________________________________________________________
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED
June 30, 1995
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 1995 and December 31, 1994 .... 2 - 3
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1995
and 1994 ............................... 4
Consolidated Statements of Cash Flows
Six Months Ended June 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 - 14
SIGNATURES ........................................... 15
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1995 1994
-------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ..... $ 4,089,318 $ 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 and
$465,028 .................... 18,993,143 17,675,311
Income taxes receivable ....... -- 2,136,028
Deferred income taxes ......... 2,750,000 3,250,000
Prepaid expenses .............. 482,581 232,216
------------ ------------
Total current assets ....... 26,315,042 33,573,856
------------ ------------
Deferred contract receivables ... 2,853,714 3,218,126
------------ ------------
Property and equipment, at cost:
Furniture, fixtures and
equipment ................... 14,743,636 15,606,722
Leasehold improvements ........ 1,696,475 1,696,475
------------ ------------
16,440,111 17,303,197
Less accumulated depreciation
and amortization ............ (13,298,727) (13,046,118)
------------ -------------
Property and equipment-net . 3,141,384 4,257,079
------------ -------------
Capitalized software, less
amortization of $757,818
and $2,629,112................. 1,528,946 1,340,639
------------ ------------
Other assets .................... 525,908 503,753
------------ ------------
$ 34,364,994 $ 42,893,453
============ ============
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31,
1995 1994
---------- ------------
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Notes payable ................ $ -- $ 2,000,000
Accounts payable ............. 659,747 1,097,668
Accrued liabilities .......... 12,765,718 12,087,706
Unearned contract revenue .... 6,881,091 8,975,598
----------- -----------
Total current liabilities . 20,306,556 24,160,972
----------- -----------
Unearned contract revenue ...... 15,070,872 12,886,460
----------- -----------
Deferred income taxes .......... 470,000 470,000
----------- -----------
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 ...................... 10,414,252 10,401,994
Retained earnings (deficit) .. (9,421,428) (2,550,639)
Treasury stock at cost -
633,986 and 633,986
shares ..................... (2,567,207) (2,567,207)
----------- -----------
Total stockholders' (deficit) (1,482,434) 5,376,021
equity ----------- -----------
$34,364,994 $42,893,453
=========== ===========
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
June 30,
----------- -----------
1995 1994
Revenues:
Insurance services revenue ... $ 3,878,434 $ 7,886,564
Software licensing revenues .. 925,386 629,828
Insurance earned premiums .... -- 2,219,814
Data processing and MTF
revenue .................... 551,789 1,672,214
Net investment income ........ 28,790 114,616
Subcontracted claims
servicing revenue .......... ( 150,794) 1,269,435
----------- -----------
5,233,605 13,792,471
----------- -----------
Costs and expenses:
Selling, general, and
administrative expenses ... 8,764,119 12,190,836
Special charges ............. -- --
Insurance expenses including
losses .................... -- 2,029,529
Subcontracted claims services ( 150,794) 1,269,435
Interest expense ............ 3,477 78,978
----------- -----------
8,616,802 15,568,778
----------- -----------
Loss from continuing operations
before income taxes ......... (3,383,197) (1,776,307)
Income taxes/(benefit) ........ -- ( 626,404)
----------- -----------
Loss from continuing operations (3,383,197) (1,149,903)
Decrease (increase) in reserve
for loss on spin-off of
$1,320,355 and $(2,679,645),
net of tax (provision)/benefit
of $(448,921) and $911,079,
respectively, in 1994 ....... -- 871,434
----------- -----------
Net loss ...................... $(3,383,197) $( 278,469)
=========== ===========
Loss per share from continuing
operations .................. $( 0.40) $( 0.13)
=========== ==========
Net loss per share ............ $( 0.40) $( 0.03)
=========== ==========
Cash dividend per share ....... $ -- $ 0.01
=========== ==========
Weighted average number of
common shares outstanding .... 8,560,904 8,869,699
=========== ==========
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Six Months Ended
June 30
----------------------
1995 1994
-------- --------
Revenues:
Insurance services revenue.... $ 9,779,993 $15,117,952
Software licensing revenues... 1,979,085 1,113,361
Insurance earned premiums..... -- 3,748,352
Data processing and MTF
revenue...................... 1,300,644 4,550,181
Net investment income......... 40,156 274,002
Subcontracted claims
servicing revenue............ 55,895 2,689,880
----------- -----------
13,155,773 27,493,728
----------- -----------
Costs and expenses:
Selling, general, and
administrative expenses...... 18,796,942 23,223,177
Special charges............... 1,165,000 --
Insurance expenses including
losses....................... -- 3,466,353
Subcontracted claims services. 55,895 2,689,880
Interest expense.............. 8,725 113,116
----------- -----------
20,026,562 29,492,526
----------- -----------
Loss from continuing operations
before income taxes........... ( 6,870,789) ( 1,998,798)
Income taxes/(benefit).......... -- ( 632,439)
----------- -----------
Loss from continuing operations ( 6,870,789) ( 1,366,359)
Decrease (increase) in reserve
for loss on spin-off of
$1,320,355 and $(2,679,645),
net of tax (provision)/benefit
of $(448,921) and $911,079,
respectively, in 1994......... -- ( 1,768,566)
----------- -----------
Net loss........................ $(6,870,789) $(3,134,925)
=========== ===========
Loss per share from continuing
operations.................... $( 0.80) $( 0.15)
=========== ===========
Net loss per share.............. $( 0.80) $( 0.35)
=========== ===========
Cash dividend per share......... $ -- $ 0.02
=========== ===========
Weighted average number of
common shares outstanding..... 8,557,709 8,915,014
=========== ===========
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
----------------------------
1995 1994
------------- -------------
Cash flows from operating
activities:
Net loss .................... $(6,870,789) $( 3,134,925)
Adjustments to reconcile net
loss to net cash provided
from (used for) operating
activities:
Depreciation and
amortization ............. 795,902 1,003,665
Amortization of capitalized
software ................. 336,574 1,158,989
Accounts receivable ....... ( 953,420) ( 6,881,622)
Income taxes receivable ... 2,136,028 --
Premiums receivable ....... -- ( 5,308,206)
Deferred acquisition costs. -- ( 1,188,727)
Prepaid expenses .......... ( 250,365) 183,687
Deferred income taxes, net. 500,000 ( 2,152,000)
Other assets............... ( 22,155) ( 144,655)
Accounts payable........... ( 437,921) 31,912
Accrued liabilities ....... 1,018,695 6,129,913
Unearned contract revenue . 89,905 3,263,010
Unpaid losses and loss
expenses ................. -- 3,063,591
Ceding commissions payable. -- 609,293
Unearned premiums ......... -- 5,528,962
Income taxes .............. -- ( 477,963)
------------ ------------
Net cash (used for) provided
from operating activities ... (3,657,546) 1,684,924
----------- ------------
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 ................... -- (11,777,011)
Capital expenditures ......... ( 20,890) ( 671,333)
Capital software expenditures. ( 524,881) ( 1,848,371)
Proceeds from disposition of
assets ..................... -- 217,924
Net cash provided from (used for)
investing activities ......... 3,326,729 ( 3,179,131)
----------- ------------
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 ............... 12,334 133,295
Payment for purchase of
treasury shares ............ -- ( 338,657)
----------- ------------
Net cash (used for) provided
from financing activities..... (1,987,666) 1,617,781
----------- ------------
Net decrease in cash and cash
equivalents .................. (2,318,483) 123,574
Cash and cash equivalents at
beginning of period .......... 6,407,801 5,731,498
----------- ------------
Cash and cash equivalents at
end of period ................ $ 4,089,318 $ 5,855,072
=========== ============
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") 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 June 30,
1995 and December 31, 1994 and the results of operations for the
three- and six-month periods ended June 30, 1995 and 1994, and
the cash flows for the six-month periods ended June 30, 1995 and
1994. Such adjustments are of a normal and recurring nature.
The results of operations for the six-month period ended June 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
closed in the third quarter of 1995.
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 six-month
periods ended June 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.
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 quarter 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 $500,000 of product development costs incurred in
the second quarter were capitalized in accordance with prevailing
accounting guidelines.
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. A companion
interpleader action by the MTF was dismissed by the trial court
and stay applications have been denied by the trial court and the
Appellate Division.
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 court originally set a July 1995
trial date but this was reversed on appeal and the trial date has
been put off to November 27, 1995. The Company is currently in
negotiations with respect to the settlement of 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
allegations of antitrust and insurance law violations were
dismissed.
The completion of discovery has been expedited by court order and
the court has set an October 1995 trial date in this case. The
Company is currently in negotiations with respect to the
settlement of this lawsuit as part of a global settlement to
resolve the MDA litigation as well.
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 as a result of the recent developments described
above, the cases are in a better posture for settlement now 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 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 settlement 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 provision/(benefit) has been reflected in
the Statement of Operations. A valuation allowance was provided
equal to the tax benefit that the loss generated. The 1994
income tax/(benefit) represents the federal tax benefit of losses
net of a provision for state income taxes of approximately
$47,000.
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 June 30, 1995
(including subcontracted claims services) were $5,233,605 as
compared to $13,792,471 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 a negative $150,794
in the 1995 quarter as compared to $1,269,435 in the 1994
quarter. For the six months ended June 30, 1995, total revenues
were $13,155,773 as compared to $27,493,728 in the same period of
the prior year. Subcontracted claims services contributed
$55,895 in the first six months of 1995 as compared to $2,689,880
in the first six 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 half 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.
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 quarter ended June 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 period 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 the first quarter of
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 half
of 1995, these "pass-through" subcontract claims servicing
revenues were approximately $.1 million, compared with
approximately $2.7 million in the first half 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
$1.3 million in the first half of 1995, down from $4.6 million in
the first half 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 $2.0 million in the first half of 1995 as compared
with $1.1 million in the first half of 1994, reflecting
increasing progress on initial installations and increased fees
from professional support services to customers.
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 $3.4 million in the second quarter of 1995 and by
approximately $4.4 million for the first six 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 2 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, the product development costs of approximately $500,000
incurred in the second quarter were capitalized as required by
prevailing accounting guidelines. For the second quarter of
1995, COVER-ALL had a pretax loss of $280,000 as compared with a
loss in excess of $2 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 six months of 1995.
Liquidity and Capital Resources
-------------------------------
Cash flows from operations were negative in the first six months
of 1995 by $3.7 million as compared with positive cash flows of
$1.7 million in the same period in 1994. This is primarily due
to the loss from operations caused by reduced revenues as
described above.
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
June 30, 1995, pending Alerion's sale 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.
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 during 1995 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 third
quarter. Also, as discussed in Note 4 to the Consolidated
Financial Statements for the six months ended June 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 4 - Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on June 15,
1995. At the Meeting, the stockholders of the Company elected a
class of two directors, consisting of Pamela J. Newman and
Leonard Gubar, to serve for a three-year term and until their
WARNER INSURANCE SERVICES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION (continued)
Item 4 - Submission of Matters to a Vote of Security Holders
(continued)
successors have been elected and qualified. The following table
sets forth the results of the votes cast for directors at the
Meeting:
Director Votes For Votes Withheld
-------- --------- --------------
Pamela J. Newman 7,377,522 743,910
Leonard Gubar 7,377,522 743,910
The stockholders of the Company also approved the adoption of the
1995 Employee Stock Option Plan of the Company by the requisite
vote of a majority of the shares of Common Stock voting on such
proposal. There were 3,746,648 shares cast in favor of the
proposal and 1,220,052 shares cast against such proposal.
The stockholders of the Company also approved the adoption of the
1994 Stock Option Plan for Independent Directors of the Company
by the requisite vote of a majority of the shares of Common Stock
voting on such proposal. There were 3,631,023 shares cast in
favor of the proposal and 1,316,155 shares cast in opposition
thereto.
A proposal to amend the Company's Certificate of Incorporation to
authorize the issuance of up to 2,000,000 shares of a new class
of "blank check" Preferred Stock did not receive the requisite
vote of a majority of the outstanding shares of Common Stock of
the Company. There were 3,481,663 shares cast in favor of the
proposal and 1,452,489 shares cast against such proposal.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
None.
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.
August 17, 1995 By: /s/ Alfred J. Moccia
--------------------
Alfred J. Moccia
President and Chief
Executive Officer
August 17, 1995 By: /s/ Bradley J. Hughes
---------------------
Bradley J. Hughes
Vice President - Finance
and Administration and
Chief Financial Officer
<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 JUNE 30, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 4,089,318
<SECURITIES> 0
<RECEIVABLES> 19,458,171
<ALLOWANCES> 465,028
<INVENTORY> 0
<CURRENT-ASSETS> 26,315,042
<PP&E> 16,440,111
<DEPRECIATION> 13,298,727
<TOTAL-ASSETS> 34,364,994
<CURRENT-LIABILITIES> 20,306,556
<BONDS> 0
<COMMON> 91,949
0
0
<OTHER-SE> (1,574,383)
<TOTAL-LIABILITY-AND-EQUITY> 34,364,994
<SALES> 0
<TOTAL-REVENUES> 5,233,605
<CGS> 0
<TOTAL-COSTS> (150,794)
<OTHER-EXPENSES> 8,764,119
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,477
<INCOME-PRETAX> (3,383,197)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,383,197)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (3,383,197)
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