UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
(X) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period End December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
( ) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-13084
WARRANTECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3178732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Atlantic Street, Stamford, CT 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 975-1100
(Former name, former address and former fiscal year, if changed since last year)
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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at December 31, 1994
Common stock, par value $.007 per share 12,977,302 shares
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1994
(Unaudited)
I N D E X
Page No.
PART I - Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheet as at December 31, 1994 and
March 31, 1994 3
Consolidated Statement of Operations
For the Nine and Three Months Ended December 31, 1994
and 1993 4
Consolidated Statement of Cash Flows
For the Nine Months Ended December 31, 1994
and 1993 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-10
PART II - Other Information 11-13
Signatures 14
Exhibit 11 - Statement re: Computation of Per Share Earnings 15
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
A S S E T S
<TABLE>
<CAPTION>
December 31, 1994 March 31, 1994
_________________ ______________
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,920,326 $ 5,024,282
Cash - certificates of deposit - 27,000
Investment in marketable securities 471,296 500,000
Accounts and sundry receivable, less
allowance for doubtful accounts of
$0 and $0, respectively 11,397,811 7,960,690
Other receivables 6,778,391 4,521,300
Prepaid expenses, prepaid income taxes
and other current assets 1,592,270 1,622,105
__________ __________
Total Current Assets 26,160,094 19,655,377
__________ __________
Property and Equipment - Net 2,427,069 2,179,525
__________ __________
Other Assets:
Deferred income taxes 710,017 732,482
Excess of cost over fair value of assets acquired
- net of accumulated amortization of
$2,715,850 and $2,321,614, respectively 5,168,878 5,563,114
Insurance escrow fund - administrative costs 199,389 199,389
Certificates of deposit and cash trust fund -
restricted 500,000 657,602
Investments in marketable securities 1,795,685 2,133,000
Notes receivable - long-term 290,324 290,725
Split dollar life insurance policies 663,345 595,788
Investment in and advance to joint venture 3,438,879 1,000,215
Other assets 151,599 134,545
___________ __________
Total Other Assets 12,918,116 11,306,860
__________ __________
Total Assets $41,505,279 $33,141,762
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1994 March 31, 1994
_________________ ______________
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt and
capital lease obligations $ 248,031 $ 355,585
Insurance premiums payable 11,461,915 6,426,464
Accounts and commissions payable 2,549,654 2,298,770
Accrued expenses and other current liabilities 1,193,362 805,978
__________ _________
Total Current Liabilities 15,452,962 9,886,797
__________ _________
Deferred Revenues 2,295,096 1,770,705
__________ _________
Long-Term Debt and Capital Lease Obligations 332,978 476,875
__________ _________
Deferred Rent Payable 411,369 363,449
__________ _________
Convertible Exchangeable
Preferred Stock - $.0007 par value
Authorized - 15,000,000 shares
Issued and outstanding - 3,234,697 shares
at December 31, 1994 and March 31, 1994, respectively
(Redemption value - $6,430,000) 6,385,823 6,343,614
Preferred Stock - $.0007 par value _________ _________
Authorized - 11,765,303 shares
Issued and outstanding - none - -
Common Stockholders' Equity: _________ _________
Common stock - $.007 par value
Authorized - 30,000,000
Issued - 13,018,302 shares
at December 31, 1994 and 12,965,302
shares at March 31, 1994, respectively 88,928 88,557
Additional paid-in capital 11,952,404 11,752,754
Net unrealized loss on investments, net of
income taxes of $22,447 ( 43,572) -
Retained earnings 4,778,383 2,629,431
__________ __________
16,776,143 14,470,742
Less: Deferred compensation - ( 21,328)
Treasury stock - at cost 41,000 shares
at December 31, 1994 and March 31,
1994, respectively ( 149,092) ( 149,092)
__________ __________
Total Common Stockholders' Equity 16,627,051 14,300,322
__________ __________
Total Liabilities and Common Stockholders' Equity $41,505,279 $33,141,762
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
December 31, December 31,
_________________________ __________________________
1994 1993 1994 1993
__________ __________ __________ __________
<S> <C> <C> <C> <C>
Gross revenues $51,684,943 $35,552,950 $20,384,794 $12,613,294
Less: Deferred revenues to be recognized in
future periods 746,333 589,080 259,892 194,005
__________ __________ __________ __________
50,938,610 34,963,870 20,124,902 12,419,289
Add: Deferred revenues earned in current period 221,941 456,483 78,033 74,227
__________ __________ __________ __________
Net revenues 51,160,551 35,420,353 20,202,935 12,493,516
__________ __________ __________ __________
Costs and expenses:
Direct costs 33,214,823 22,470,394 13,824,556 7,869,544
Service, selling, and general and
administrative 14,099,538 10,544,768 4,725,400 3,589,835
Bad debt expense 275,543 4,662 270,830 2,428
Depreciation and amortization 1,082,188 1,070,553 362,270 353,319
__________ __________ __________ __________
Total costs and expenses 48,672,092 34,090,377 19,183,056 11,815,126
__________ __________ __________ __________
Income from operations 2,488,459 1,329,976 1,019,879 678,390
__________ __________ __________ __________
Other income (expenses):
Interest and dividend income 418,996 163,806 247,379 68,778
Interest expense ( 61,183) ( 107,785) ( 19,829) ( 27,735)
Other ( 8,022) ( 23,825) 23,612 ( 2,217)
Equity income (loss) from joint venture 235,223 ( 550,000) - ( 225,000)
__________ __________ __________ __________
Total other income (expenses) 585,014 ( 517,804) 251,162 ( 186,174)
__________ __________ __________ __________
Income before provision for income taxes 3,073,473 812,172 1,271,041 492,216
Provision for income taxes 882,312 717,475 238,345 412,545
_________ _________ __________ _________
Net Income $2,191,161 $ 94,697 $ 1,032,696 $ 79,671
========= ========= ========== =========
Earnings per share:
Primary:
Net income $.14 $.01 $.07 $.01
==== ==== ==== ====
Fully Diluted:
Net income $.13 $.01 $.06 N.M.
==== ==== ==== ====
Weighted average number of shares outstanding:
Primary 15,541,772 14,131,814 15,869,763 15,729,947
Fully Diluted 16,884,343 17,060,054 16,903,528 17,075,447
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
1994 1993
<S> <C> <C>
Net cash provided by (used in) operating activities $ 3,521,812 ($ 1,760,391)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment ( 932,245) ( 813,352)
Sale of marketable securities 457,602 -
Certificates of deposit 27,000 ( 176,455)
Proceeds from sale of equipment 23,446 24,000
Investment in joint venture (1,143,318) (1,715,000)
___________ ____________
Net cash used in investing activities (1,567,515) (2,680,807)
___________ ____________
Cash flows from financing activities:
Issuance of preferred stock - 6,430,000
Proceeds from borrowings - 1,500,000
Advance to joint venture ( 980,123) -
Decrease in notes receivable 401 36,058
Increase in deferred rent payable 47,920 49,099
Repayments of borrowings ( 251,451) (1,852,400)
Issuance of common stock 125,000 96,288
___________ ___________
Net cash (used in) provided by financing activities (1,058,253) 6,259,045
___________ ___________
Net increase in cash and cash equivalents 896,044 1,817,847
Cash and cash equivalents at beginning of period 5,024,282 4,312,869
__________ ___________
Cash and cash equivalents at end of period $ 5,920,326 $ 6,130,716
========== ===========
Supplemental Cash Flows Information:
Cash Payments for the Periods:
Interest $ 61,183 $ 102,672
========= ==========
Income taxes $ 464,363 $ 1,441,706
========= ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
(Unaudited)
1. THE COMPANY
The Company, through its subsidiaries Warrantech Consumer Product Services,
Inc.("WCPS"), Warrantech Automotive, Inc. ("Automotive") and Warrantech
Direct, Inc.("Direct") and its joint venture Techmark Services, Ltd.
("Techmark") markets and administers service contract programs for retail
business establishments. Such establishments sell service contract programs
to purchasers of certain electronic and office equipment, major household
appliances, automobiles and recreation vehicles. Additionally, third-party
administrative services are provided to manufacturers of consumer and
automotive products and other business entities requiring such services.
The predominant terms of the contracts and manufacturer's warranties range
from three (3) to eighty-four (84) months.
The Company assists the dealer-clients of both WCPS and Automotive in obtaining
insurance coverage that indemnifies the clients against losses resulting from
service contract claims and protects the consumer by ensuring that their claims
will be paid. Additionally, the Company and the insurer have agreements that
provide eligibility for the Company to participate in the profits generated by
the programs and for the Company to provide administrative services to the
insurer with regard to the programs.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended December 31, 1994 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 1995. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Form 10-K for the year ended March 31, 1994.
Certain balance sheet reclassifications of amounts have been made to correspond
with the current presentation.
<PAGE>
3. JOINT VENTURE
Following is the summarized financial information of Techmark:
<TABLE>
<CAPTION>
December 31,1994 March 31, 1994
<S> <C> <C>
Current Assets $ 6,855,000 $2,059,000
Total Assets $10,373,000 $3,755,000
Current Liabilities $ 3,011,000 $1,586,000
Noncurrent Liabilities and Equity $ 7,362,000 $2,169,000
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months For the Three Months For the Twelve
Ended Ended Months Ended
December 31, 1994 December 31, 1994 March 31, 1994
<S> <C> <C> <C>
Net Revenues $47,427,465 $19,062,093 $ 7,073,000
Net Income (Loss) $ 597,127 $ -0- $(1,099,000)
</TABLE>
4. INVESTMENT IN MARKETABLE SECURITIES
In May 1993 the Financial Accounting Standards Board issued Statement No. 115
"Accounting for Certain Investments in Debt and Equity Securities",
("SFAS 115"). Under SFAS 115, marketable debt securities, equity securities,
and mortgages are designated as either (1) "held to maturity" and carried at
amortized cost, (2) "trading securities" carried at fair market value with
differences between cost and fair value reflected in results of operations, or
(3) "available for sale" and carried at fair value with differences between
cost and fair value being reflected as a separate component of shareholders'
equity, net of income tax effect.
<PAGE>
At December 31, 1994, investments in marketable securities are comprised of the
following:
<TABLE>
<CAPTION>
Gross Aggregate
Amortized Unrealized Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
<S> <C> <C> <C> <C> <C>
Corporate Bonds $ 333,000 $ 1,760 $ 334,760 $271,296 $ 63,464
Municipal Bonds 1,800,000 ( 67,779) 1,732,221 - 1,732,221
Callable Preferred Stock 200,000 - 200,000 200,000 -
_________ _______ _________ _______ _________
Total Investments in
Marketable Securities $2,333,000 ($ 66,019) $2,266,981 $471,296 $1,795,685
========= ======= ========= ======= =========
</TABLE>
All of the above investments are considered "available for sale". The
resultant difference between cost and fair value, net of taxes, has been
reflected as a component of Shareholders' Equity.
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
_____________________
Net revenues for the nine and three month periods ended December 31, 1994 were
$51,160,551 and $20,202,935, which represents an increase of 44% and 62% over
the comparative nine and three month periods in fiscal 1994, respectively. The
increases for both the nine and three month periods are directly attributable
to continued increases in market share, market penetration, favorable product
mix and pricing in the electronic, household and other market segments.
"Direct Costs" are those costs directly related to the production and
acquisition of service contracts. Those costs are net insurance and commission
expenses. Net insurance expense is the insurance premiums accrued and/or paid
to the insurer, less any profit sharing accrued and/or received from the
insurers.
Direct costs were $33,214,823 and $13,824,556 for the nine and three month
periods ended December 31, 1994, respectively, as compared to $22,470,394 and
$7,869,544 for the nine and three month periods ended December 31, 1993. The
increase in direct costs for the nine and three month periods are the result
of increased premiums and commissions attributable to the increase in revenues.
Direct costs are reduced by profit sharing accrued in the amount of $1,467,818
and $571,965 for the nine month periods ended December 31, 1994 and 1993,
respectively and $341,487 and $287,932 for the three month periods ended
December 31, 1994, and 1993, respectively.
Service, Selling, General and Administrative expenses for the nine and three
month periods ended December 31, 1994 were $14,099,538 and $4,725,400,
respectively, as compared with $10,544,768 and $3,589,835 for the nine and
three month periods ended December 31, 1993. The increases for the nine and
three month periods ended December 31, 1994 are primarily attributable to
increases in sales related costs, payroll and payroll related costs resulting
from an increase in headcount, and general inflationary increases.
The increase in bad debt expense for the nine and three month periods ended
December 31, 1994 is principally the result of a write down of a receivable
related to the Gulf Settlement.
The increase in interest income is attributable to interest associated with
refunds expected from overpayment of taxes in prior years and higher rates
earned on investments.
<PAGE>
The provision for income taxes has been adjusted to reflect the effective tax
rate that the Company anticipates will be its effective tax rate for the year.
Net income for the nine and three month periods ended December 31, 1994 were
$2,191,161 and $1,032,696, respectively, as compared to $94,697 and $79,671
for the nine and three month periods ended December 31, 1993. The results for
the nine and three month periods ended December 31, 1993 include the Company's
share of losses realized from its investment in the joint venture, Techmark
Services, Ltd. ("Techmark"). For the nine and three month periods ended
December 31, 1993, the joint venture's initial nine months of operations, the
Company's share of such losses were $550,000 and $225,000, respectively, as
compared with income from the joint venture for the nine and three month
periods ended December 31, 1994 of $235,223 and $-0-, respectively.
Excluding the effect of the joint venture, the increases in net income for the
nine and three month period ended December 31, 1994 are directly attributable
to the increase in revenues.
Techmark has eliminated a non-profitable portion of its business with a major
customer. The customer has agreed to reimburse Techmark for certain costs
incurred relating to such business. The operations relating to this business
are not considered a part of Techmark's core business. It is anticipated that
eliminating this business has the potential of improving Techmark's future
profitability. This reimbursement is expected to take place prior to the end of
the fourth quarter. As a result of this agreement, Techmark has reported
break-even operating results for the three month period ended December 31, 1994.
Liquidity and Financial Resources
_________________________________
Net cash provided by operations was $3,521,812 for the nine months ended
December 31, 1994 as compared to ($1,760,391) used in operations for the nine
month period ended December 31, 1993. The favorable increase in cash flow is
primarily the result of the increase in business for the period, favorable
product mix, and pricing.
In October 1994, the Company, through its wholly-owned subsidiary
Warrantech UK, Ltd. advanced Techmark $980,123 to fund the start up of
its Japanese branch operations.
The Company has available an unused line of credit with a bank amounting to
$1,000,000 at December 31, 1994.
The Company believes that internally generated funds will be sufficient to
finance its current operations for at least the next twelve months.
The effects of inflation have not been significant to the Company since its
formation.
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
_________________
A. Gulf Insurance Co. v. Warrantech Dealer Based Services, Inc., et
al. The Company, Warrantech Dealer Based Services, Inc. and
Plaintiff have settled their dispute and have signed
confidential settlement papers.
B. David Robertson v. Warrentech Corporation and Warrentech
Automotive [spelling as in original], District Court of Tarrant
County, Texas, 141st Judicial District (Case No. 141-151240-93).
On December 7, 1994, the Trial Referee awarded judgment in favor
of Warrantech Corporation and Warrantech Automotive, Inc.
against David Robertson in the amount of $195,050.48 plus
interest at the rate of 14% per annum from July 1, 1991.
Warrantech Corporation and Warrantech Automotive Inc. have
submitted a proposed judgment to the Court in the amount of
$293,300.24 based upon the Trial Referee's award and are waiting
for the Court to sign the judgment. The Trial Referee also
ruled that Robertson was not obligated to return his share of
common stock to Warrantech Corporation because he determined
that Robertson was not bound by the non-competition clause after
his relationship with Warrantech Automotive, Inc. was
terminated. Warrantech Corp. and Warrantech Automotive, Inc.
have decided not to appeal the latter ruling. The arbitration
proceeding with Robertson is still pending.
C. The Oak Agency Inc., et al. v. Warrantech Dealer Based Services,
Inc.; Case No. 91-C-6677, filed in the United States District
Court for the Northern District of Illinois. The Oak Agency
("Oak"), a former agent for Dealer Based Services, Inc. and
Warrantech Dealer Based Services, Inc.("WDBS" or the "Company"),
seeks a declaratory judgment and monetary damages from WDBS
arising from the termination of the agency agreement with Oak.
Oak's complaint does not specify the dollar amount of its alleged damages,
but Oak has retained an expert witness who estimates that Oak's damages
exceed $20,000,000.00. WDBS has vigorously defended the case, and has
retained its own economic expert, who will directly refute the opinions
of Oak's financial expert regarding the magnitude of Oak's alleged damages.
<PAGE>
WDBS's principal defenses in the case concern Oak's conduct as a
sales agent: WDBS contends, in part, that Oak performed poorly
and breached its duty of loyalty as an agent of WDBS. However,
the district court recently granted a partial summary judgment
to Oak that will preclude WDBS from presenting evidence at the
non-jury trial of Oak's breach of its duty of loyalty owed to
WDBS. No trial date has been set as yet, and discovery is
continuing.
D. No material developments regarding litigation have occurred
since March 31, 1994, except as disclosed above and in the
Company's Form 10-Q for the quarter ended June 30, 1994.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's
Form 10-K for the year ended March 31, 1994.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on November 21,
1994, the shareholders' elected the following to serve as directors
until the next Annual Meeting of Shareholders and until their successors
are duly elected and qualified.
<TABLE>
For Withheld
<S> <C> <C>
Joel San Antonio 10,795,631 124,802
William Tweed 10,795,781 124,652
Jeffrey J. White 10,795,206 125,277
William Rueger 10,795,781 124,652
Michael J. Salpeter 10,795,531 124,902
Kurt R. Schwamberger 10,793,356 127,077
Jo Ann Duarte 10,793,356 127,077
Lawrence Richenstein 10,796,481 123,952
</TABLE>
Item 5. Other Information
Not applicable.
<PAGE>
Item. 6 (a) Exhibits
(11) Statement re: Computation of Per Share Earnings.
Item 6. (b) Reports on 8-K
None.
<PAGE>
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.
WARRANTECH CORPORATION
______________________
S/N/S Joel San Antonio
________________________________________
Joel San Antonio - Chairman of the Board
(Chief Executive Officer)
Date: February 14, 1995
S/N/S Bernard J. White
________________________________________
Bernard J. White
Vice President Finance and
Chief Financial Officer
Date: February 14, 1995
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
December 31, December 31,
1994 1993 1994 1993
___________ __________ __________ __________
<S> <C> <C> <C> <C>
Earnings:
Net income $ 2,191,161 $ 94,697 $ 1,032,696 $ 79,671
========== ========== ========== ==========
Weighted average shares outstanding:
Primary (A):
Common shares 12,936,106 12,885,208 12,955,291 12,900,601
Assumed exercise of stock options 712,610 735,013 846,132 999,181
Assumed conversion of preferred stock 1,893,056 511,593 2,068,340 1,830,165
__________ __________ __________ __________
15,541,772 14,131,814 15,869,763 15,729,947
========== ========== ========== ==========
Fully diluted (B):
Common shares 12,936,106 12,885,208 12,955,291 12,900,601
Assumed exercise of stock options 2,013,601 1,895,332 2,013,601 1,895,332
Assumed conversion of preferred stock 1,934,636 2,279,514 1,934,636 2,279,514
__________ __________ __________ __________
16,884,343 17,060,054 16,903,528 17,075,447
========== ========== ========== ==========
Earnings Per Common Share:
Primary (A):
Net income $.14 $.01 $.07 $.01
========== ========== ========= =========
Fully diluted (B):
Net income $.13 $.01 $.06 N.M.
========== ========== ========= ==========
<FN>
(A) The treasury stock method was used in the calculation of primary earnings
per share for all periods presented.
(B) The modified treasury stock method was used in the calculation of fully
diluted earnings per share for the nine and three months ended December 31,
1994.
</TABLE>
<PAGE>
