Warrantech Reports On Fiscal 1999 and Prior Results
5 January 2000
Warrantech Reports On Fiscal 1999 and Prior Results
STAMFORD, Conn.--Jan. 5, 2000--Warrantech Corporation (OTC: WTEC), in a Form 10-K/A filed with the Securities and Exchange Commission on Dec. 23, 1999, submitted its financial statements for the fiscal year ended March 31, 1999 and revised financial statements for prior years.
The delay in filing a Form 10K for fiscal 1999, caused by a disagreement concerning the appropriate revenue recognition policy to apply to Warrantech's business, resulted in the delisting of the common stock from the NASDAQ National Market System in September.
The newly applied accounting policy does not affect the Company's cash flow over the years or its liquidity today. It merely affects the amount and timing of reported revenues and expenses and has the net effect of deferring income to later periods. Thus, with the restatement of prior years results, Warrantech started fiscal 1999 having earned for accounting purposes $10.9 million less in the past than previously reported, but poised to recognize this $10.9 million of net deferred revenue in future periods to the benefit of future operating results.
"We have come through a very trying period," Joel San Antonio, Warrantech Chairman and CEO, said. "We have managed to successfully put the accounting issue behind us, maintain a solid foundation for the business and position Warrantech to grow and prosper in the years ahead and to seek re-listing on NASDAQ."
Background on Warrantech and Its Accounting Policy
Warrantech, through its wholly owned domestic and international subsidiaries, markets and administers service contracts and extended warranties on automotive and consumer products. The Company is a third party administrator for a variety of dealer/clients and offers call center and technical computer services. Warrantech assists dealer/clients in obtaining insurance policies from highly rated independent insurance companies for all contracts and programs offered. The insurance company is then responsible for the cost of repairs or replacements for the contracts administered by Warrantech.
In the United States, the contracts administered by Warrantech are of two types depending primarily on state law: dealer obligor service contracts and administrative obligor service contracts. In dealer obligor service contracts, which comprise 63% of Warrantech's business, the retailer/dealer is named as the obligor. In administrative obligor service contracts, which comprise 37% of Warrantech's business, Warrantech is named as the obligor. In both instances, a highly rated independent insurance company is responsible for the costs of repairs or replacement. All of the cash for such insurance coverage changes hands on day one and Warrantech's future obligations are merely administrative.
Accordingly, for many years, Warrantech accounted for both types of contracts the same way, using the proportional performance method. Under the proportional performance method, all revenues except those sufficient to meet future administrative costs and a reasonable profit thereon and all insurance premium expenses are recognized immediately. Therefore, Warrantech deferred a comparatively small amount of the revenue on all contracts and, in accordance with the actual cash transaction, recorded most of the profits immediately.
During the spring and summer of 1999, Warrantech's independent auditors, Ernst & Young, questioned the Company's use of the proportional performance method, thereby delaying the filing of Warrantech's Form 10K for the fiscal year ended March 31, 1999. This delay forced Warrantech to exceed the NASDAQ deadline for such filings, which resulted in the Company's stock being de-listed from the NASDAQ National Market System.
Warrantech then asked the SEC's Division of Corporate Finance (DCF) to confirm its long-standing revenue recognition policy. Ultimately, the DCF stated that it had no objection to Warrantech's use of the proportional performance method for dealer-obligor service contracts, but that Financial Accounting Standards Board Technical Bulletin 90-1 (TB 90-1) must be applied to Warrantech's administrative-obligor service contracts.
Accounting Policy Changes and Impact on Prior Years
Applying TB 90-1, the Company is recognizing revenue for administrative obligor contracts based on the specific historical claims experience over the life of these contracts, even though the responsibility for such claims rests with a highly rated third-party insurer.
In accordance with Statement of Financial Accounting Standards No. 113, Warrantech is amortizing the insurance premium expense for administrative-obligor service contracts evenly over the life of these contracts, rather than writing off the entire expense in Year One as it used to do.
These two changes are the only substantive ones in Warrantech's accounting policy. And, since the amount of deferred revenue on administrative-obligor service contracts is greater than the amount of deferred insurance premium expense on such contracts, the net effect of these accounting changes is to reduce Warrantech's earnings from administrative-obligor service contracts in Year One and hence its net assets or shareholder equity at the end of Year One.
There is, however, one cosmetic accounting change of note having to do with the presentation of revenue for dealer-obligor service contracts sold. Sales of such contracts are now reflected in gross revenues net of premiums paid to insurance companies. Previously, such premiums were included in both gross revenues and direct costs.
For fiscal 1997 and fiscal 1998, the impact of the restatement is as follows:
For the Years Ended March 31,
-----------------------------
1998 1997
1998 as Previously 1997 as Previously
as Restated Issued as Restated Issued
-------------- ------------ ----------- -----------
-------------- ------------ ----------- -----------
Gross revenues $132,797,006 $201,724,332 $106,775,745 $161,044,135
Net (increase)
in deferred
revenue (21,447,327) (1,985,798) (20,501,768) (1,381,271)
------------ ----------- ------------ -----------
Net revenues 111,349,679 199,738,534 86,273,977 159,662,864
----------- ----------- ---------- -----------
Net income $5,619,823 $5,261,037 $2,284,867 $4,794,715
========== ========== ========== ==========
Basic earnings per
common share $0.42 $0.40 $0.18 $0.37
===== ===== ===== =====
Diluted earnings
per common share $0.36 $0.34 $0.15 $0.31
===== ===== ===== =====
Cash dividend
declared NONE NONE NONE NONE
==== ==== ==== ====
Total assets $152,811,266 $81,917,288 $177,120,031 $66,124,255
============ =========== ============ ===========
Long-term debt and
Capital lease
obligations $2,153,286 $2,153,286 $2,491,786 $2,491,786
========== ========== ========== ==========
Common
stockholder's
equity $21,533,883 $31,764,955 $14,692,083 $25,281,941
=========== =========== =========== ===========
Working capital $16,329,259 $16,551,543 $13,342,706 $13,602,168
=========== =========== =========== ===========
Fiscal 1999 Results
For the fiscal year ended March 31, 1999, gross revenues were $148.9 million, an increase of 12.1 percent or $16 million compared to $132.8 million in the prior year. This increase is directly attributable to continued market penetration in the Consumer Products and International business segments, as opposed to the Automotive business segment.
Gross revenues in the Consumer Products business segment increased 17 percent or $13.1 million to $90.6 million, thanks to significant gains in the home warranty business. Gross revenues in the International business segment increased 40.9 percent or $5.2 million to $17.7 million as a result of increased market penetration in the United Kingdom and new markets opened in South America.
The net increase in deferred revenues for fiscal 1999 was $30.6 million, an increase of 42.9 percent or $9.2 million compared to the prior year. This increase was due chiefly to the increased number of service contracts sold with a service period greater than one year during fiscal 1999, offset in part by the amounts earned on expiring contracts from prior years. This increase also reflects the greater deferrals on dealer obligor service contracts to meet higher anticipated administrative costs on such contracts in the future.
Direct costs, which consist primarily of insurance premiums and commissions on administrative-obligor service contracts, were $67.5 in fiscal 1999, compared with $48.7 million in the prior fiscal year. As a percentage of gross revenue, direct costs increased to 45.3 percent from 36.6 percent the prior year. This increase was primarily the result of volume increases in administrative-obligor service contracts sold and the amortization of previously deferred insurance costs for such contracts being recognized in the current year. To a lesser extent, the increase reflects higher insurance premium costs in fiscal 1999.
Service, selling and general and administrative expenses (SG&A) as a percentage of gross revenues remained constant at 37.3 percent, despite increased costs related to the CompUSA account in the Consumer Products business segment.
Provision for bad debt expense increased to $2.3 million in fiscal 1999 from $911,000 in fiscal 1998. This increase was due primarily to the write-off of CompUSA accounts receivables and the termination of Warrantech's relationship with Proteva, Inc.
Depreciation and amortization amounted to $5.1 million in fiscal 1999, compared to $3.8 million in fiscal 1998. This increase is attributable to the continued development of Warrantech's information systems and the purchase of additional computer equipment to accommodate personnel growth and to promote operational efficiency.
Other income, which primarily reflects net interest, increased to $1 million in fiscal 1999, up from $820,000 in fiscal 1998.
After taxes, Warrantech had a net loss of $7.6 million, or $0.51 per diluted share in fiscal 1999, versus net income of $5.6 million, or $0.36 per diluted share in fiscal 1998.
Looking ahead
Now that the revenue recognition issue is resolved, the Company expects to file its Form 10-Q for the periods June 30, 1999 and September 30, 1999 in accordance with the new accounting policy by mid-January 2000. Once the Company's periodic reports are brought up-to-date, the Company will resume its efforts to have its common stock re-listed on the NASDAQ National Market while simultaneously exploring the possibility of obtaining listing on other markets or exchanges.
Warrantech Corporation, through its subsidiaries, administers and markets services 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 that are subject to risks and uncertainties. The Company's ability to have its common stock traded on the Nasdaq National Market depends on its ability to have the Nasdaq Qualifications Panel reconsider its decision to delist the Company's stock, which was based on the delay in the filing of the Company's financial statements. The Company also has the right to appeal the Panel's decision to the Nasdaq Listing and Hearing Review Council. There is no assurance that the Panel's decision will be reversed upon reconsideration or through the appeal. Other risks and uncertainties include but are not limited to: analysis of the service contracts for the purpose of computing the amount of any revenue that must be deferred; the number of prior period financial results that may have to be restated; the continuation of current levels of business activity; the impact of competitive products, product demand or 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.
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31,
1999 1998 1997
------------- -------------- -------------
------------- -------------- -------------
Gross revenues $148,868,791 $132,797,006 $106,775,745
Net increase in
deferred revenues (30,640,470) (21,447,327) (20,501,768)
------------- -------------- -------------
------------- -------------- -------------
Net revenues 118,228,321 111,349,679 86,273,977
Costs and expenses:
Direct costs 67,501,008 48,663,577 42,704,103
Service, selling
and general
administrative 55,522,487 49,504,178 36,320,524
Provision for bad
debt expense 2,288,580 910,675 733,119
Depreciation and
amortization 5,148,370 3,758,213 2,619,981
------------- -------------- -------------
------------- -------------- -------------
Total costs and expenses 130,460,445 102,836,643 82,377,727
------------- -------------- -------------
------------- -------------- -------------
Income (loss) from operations (12,232,124) 8,513,036 3,896,250
------------- -------------- -------------
------------- -------------- -------------
Legal settlements -- -- (2,274,170)
Gain on sale of
equity joint venture -- -- 1,876,480
Other income 1,043,201 819,732 324,585
------------- -------------- -------------
------------- -------------- -------------
Income (loss) before
provision for income taxes (11,188,923) 9,332,768 3,823,145
Provision (benefit)
for income taxes (3,549,198) 3,712,945 1,538,278
------------- -------------- -------------
------------- -------------- -------------
Net income (loss) ($7,639,725) $5,619,823 $2,284,867
============= ============== =============
============= ============== =============
Earnings per share:
Basic ($0.51) $0.42 $0.18
======= ===== =====
Diluted ($0.51) $0.36 $0.15
======= ===== =====
Weighted number of
shares outstanding:
Basic 15,098,242 13,259,964 13,054,611
========== ========== ==========
Diluted 15,098,242 15,617,350 15,394,869
========== ========== ==========
-0-
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(iii)
WARRANTECH CORPORATION AND SUBSIDIARIES -- CONSOLIDATED BALANCE SHEETS
ASSETS --
March 31,
----------------------------
1999 1998
------------- -------------
Current assets:
Cash and cash equivalents $15,032,473 $24,062,052
Investments in marketable securities 2,961,602 537,924
Accounts receivable, (net of allowances of
$1,115,285 and $1,223,173, respectively) 39,275,404 27,878,335
Other receivables, net 5,924,332 2,197,405
Income tax receivable 1,147,324 -
Deferred income taxes 1,419,854 503,282
Prepaid expenses and other current assets 1,537,633 1,775,316
------------- -------------
------------- -------------
Total current assets 67,298,622 56,954,314
------------- -------------
Property and equipment, net 16,277,473 13,639,921
Other assets:
Excess of cost over fair value of assets
acquired (net of accumulated amortization
of $4,882,009 and $4,212,956, respectively) 3,276,524 3,945,577
Deferred income taxes 9,603,277 8,121,666
Deferred direct costs 86,107,696 65,354,341
Investments in marketable securities 1,321,019 1,967,817
Restricted cash 800,000 800,000
Split dollar life insurance policies 1,370,010 1,054,045
Notes receivable 477,767 654,068
Collateral security fund 199,389 199,389
Other assets 178,493 120,128
------------- -------------
Total other assets 103,334,175 82,217,031
============= =============
Total Assets $186,910,270 $152,811,266
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY --
March 31,
----------------------------
1999 1998
------------- -------------
Current liabilities:
Current maturities of long-term
debt and capital lease obligations $1,558,447 $2,371,662
Insurance premiums payable 36,585,920 22,269,589
Income taxes payable - 2,073,284
Accounts and commissions payable 8,524,040 7,698,948
Legal settlements payable 100,000 200,000
Accrued expenses and other
current liabilities 8,346,440 6,011,572
------------- -------------
------------- -------------
Total current liabilities 55,114,847 40,625,055
------------- -------------
Deferred revenues 118,497,564 87,890,306
Long-term debt and capital
lease obligations 2,420,967 2,153,286
Deferred rent payable 476,890 608,736
------------- -------------
Total liabilities 176,510,268 131,277,383
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value
authorized - 15,000,000 Shares
Issued - none at March 31, 1999
and March 31, 1998 - -
Common stock - $.007 par value
authorized - 30,000,000 Shares
Issued - 16,501,786 shares at
March 31, 1999 and 13,449,382 shares
at March 31, 1998 115,513 94,146
Additional paid-in capital 23,728,881 14,124,700
Loans to directors and officers (9,006,699) -
Accumulated other comprehensive
income, net of taxes (93,534) 85,608
Retained earnings 105,154 7,744,879
------------- -------------
14,849,315 22,049,333
Less: Deferred compensation - (21,631)
Treasury stock - at cost,
1,280,300 shares at
March 31, 1999 and 100,000
shares at March 31, 1998 (4,449,313) (493,819)
------------- -------------
Total Stockholders' Equity 10,400,002 21,533,883
============= =============
Total Liabilities and
Stockholders' Equity $186,910,270 $152,811,266
============= =============
-0-
For the Years Ended March 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash flows from
operating activities:
Net income (loss) ($7,639,725) $5,619,823 $2,284,867
------------ ----------- -----------
Adjustments to reconcile net
income (loss) to net
cash provided by
operating activities:
Depreciation and amortization 5,148,370 3,758,213 2,619,981
Provision for bad debt 2,288,580 910,675 733,119
Deferred revenues 30,640,470 21,447,327 20,501,768
Deferred income taxes (2,398,183) (657,828) (1,441,811)
Gain on sale of investment
in joint venture - - (1,876,480)
Other 14,074 81,900 (79,049)
Increase (decrease) in cash
flows as a result of
changes in asset and
liability balances:
Deferred direct costs (20,753,355) (20,198,990)(15,188,907)
Accounts receivable (11,767,393) (5,511,145) (7,862,945)
Other receivables (5,645,183) 1,677,046 4,736,468
Income taxes (3,220,608) 1,928,886 (1,868,208)
Prepaid expenses and
other current assets 237,683 (141,617) (644,763)
Split dollar life
insurance policies (315,965) (188,503) (181,649)
Other assets (58,365) 52,312 24,431
Insurance premiums
payable 14,316,331 2,667,299 3,355,043
Accounts and
commissions payable 825,092 2,437,081 452,340
Legal settlements payable (100,000) (1,435,000) 1,635,000
Accrued expenses and
other current liabilities 2,334,868 1,879,459 2,409,568
Deferred rent payable (131,846) (93,497) 167,613
----------- ------------ -----------
----------- ------------ -----------
Total adjustments 11,414,570 8,613,618 7,491,519
----------- ------------ -----------
Net cash provided by
operating activities 3,774,845 14,233,441 9,776,386
Cash flows from
investing activities:
Property and
equipment purchased (4,870,260) (4,609,623) (3,379,104)
Net cash paid for
acquired business - (888,541) -
Purchase of
marketable securities (3,307,886) (360,324) (1,313,356)
Proceeds from sales of
marketable securities 1,542,586 184,225 1,055,934
----------- ------------ -----------
----------- ------------ -----------
Net cash (used in)
investing activities (6,635,560) (5,674,263) (3,636,526)
----------- ------------ -----------
Cash flows from
financing activities:
(Increase) decrease
in notes receivable 176,301 (611,992) 45,684
Exercise of unrestricted
common stock
options and grants 289,960 1,094,750 822,080
Purchase treasury stock (3,955,494) - (101,069)
Repayments, notes
and capital leases (2,679,631) (2,011,809) (1,734,117)
----------- ------------ -----------
Net cash (used in)
financing activities (6,168,864) (1,529,051) (967,422)
----------- ------------ -----------
Net increase (decrease) in
cash and cash equivalents (9,029,579) 7,030,127 5,172,438
Cash and cash equivalents
at beginning of year 24,062,052 17,031,925 11,859,487
----------- ------------ -----------
Cash and cash equivalents
at end of year $15,032,473 $24,062,052 $17,031,925
----------- ------------ -----------
Supplemental Cash
Flow Information:
Cash payments for: Interest $458,598 $378,812 $410,109
----------- ------------ -----------
: Income taxes $1,109,616 $2,428,590 $4,879,377
----------- ------------ -----------
Non-Cash Investing and
financing activities:
Purchase of preferred stock - - $6,420,363
Note issued in connection
with purchase of
preferred stock - - 2,395,960
Property and equipment
financed through
capital leases $2,134,097 $2,047,136 1,989,136
Exercise of restricted
common stock options 9,335,588 - -
Increase in loans to
officers and directors (9,006,699) - -