Warrantech Announces SEC Opinion on its Revenue Recognition Policy
8 October 1999
Warrantech Announces SEC Opinion on its Revenue Recognition Policy
STAMFORD, Conn,--Oct. 7, 1999--Warrantech Corporation (OTC-BB:WTECE) announced today that it received the opinion from the Chief Accountant's Office of the Securities and Exchange Commission's Division of Corporation Finance (DCF) concerning the Company's revenue recognition policy. The DCF stated in its opinion that it believes the Company should recognize revenue from service contracts in which it is the obligor in accordance with Financial Accounting Standards Board Technical Bulleting 90-1 ("TB 90-1"). The Company is currently preparing its financial information 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 which it administers. The Company 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 which are incurred in connection with the acquisition of the service contract business. The Company currently defers only that portion of the administrative fee income which pertains to administrating claims over the life of the contracts. The Company has requested the DCF to reconsider its position with respect to this revenue recognition issue and, at the suggestion of the DCF, the Company will be submitting further information substantiating its position.
Lastly, the DCF stated in its opinion that the Company 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 Company has had with the DCF, the Company 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 Company's revenue recognition policy which are recommended in the DCF opinion 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 Company completes its revenue recognition models to comply with the DCF's opinion the actual impact of the changes cannot be assessed for the most recent fiscal year or prior years. An illustration of the nature of the changes is annexed to this release. The numbers in the illustration are for illustrative purposes only and bear no relation to the actual numbers that will be reflected in the changes. The Company also is considering a restructuring of its business model in order to permit revenue recognition more reflective of the Company's actual business operations.
Once the Company receives clarification of DCF's position on the remaining open accounting issue, Warrantech's independent auditors will complete its audit of the Company's financial statements and the Company'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 Company 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.
Warrantech Corporation's common stock continues to trade on the over-the-counter market. The Company, through its subsidiaries, administers and markets service contracts and after-market warranties on automobiles, automotive components, recreational vehicles, appliances, consumer electronics, homes, computer and computer peripherals for retailers, distributors and manufacturers. The Company 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 release 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 Company's filings with the Securities and Exchange Commission. These risks could cause the Company'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 Company.
This release and prior releases are available on the KCSA Public Relations Worldwide website at www.kcsa.com.
Illustrative Balance Sheet
NOTE: The Company believes that the changes reflected in the
illustration below are in accordance with the revenue
recognition policy recommended by the SEC. The illustration
bears no relation to Warrantech's actual balance sheet or any
actual changes that will be made to its balance sheet. The
numbers in the illustration are for illustrative purposes
only.
--0--
Prior to Effect of After
Revenue Revenue Revenue
Recognition Recognition Recognition
Change Change Change
Cash and Investments $ 1,500 $ 1,500
Accounts Receivable 500 500
Other Current Assets 500 500
------- -------
Total Current Assets 2,500 2,500
Other Assets 500 250 750
-------- -------
Total Assets $ 3,000 $ 3,250
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Liabilities & Shareholders
Equity
Current Liabilities $ 1,000 $ 1,000
Long-Term Liabilities 500 500
--------- --------
Total Liabilities 1,500 1,500
Deferred Revenue 500 1,250 1,750
Stockholders Equity 1,000 (1,000)
-------- ------
Total Liabilities &
Stockholder's Equity $ 2,500 $ 3,250
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