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 Ended September 30, 1995
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 September 30, 1995
Common stock, par value $.007 per share 13,045,552 shares
WARRANTECH CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1995
(Unaudited)
I N D E X
PART I - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet at September 30, 1995
(Unaudited) and March 31, 1995........................... 3
Condensed Consolidated Statement of Operations
For the Six and Three Months Ended September 30, 1995
and 1994 (Unaudited) ............................. 4
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended September 30, 1995
and 1994 (Unaudited) ............................. 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ... 8
PART II - Other Information 10
Signatures .................................................. 11
Page 2
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
A S S E T S
September 30, March 31,
1995 1995
-------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,341,472 $ 3,039,361
Investment in marketable securities 801,553 472,344
Accounts receivable, net 15,729,970 12,705,664
Other receivables 8,949,624 8,599,198
Prepaid expenses
and other current assets 1,027,324 1,065,062
-------------- -------------
Total Current Assets 32,849,943 25,881,629
-------------- -------------
Property and Equipment - Net 4,465,609 2,865,910
-------------- -------------
Other Assets:
Deferred income taxes 1,085,177 1,029,083
Excess of cost over fair value of assets acquired
- net of accumulated amortization of
$2,924,336 and $2,723,429, respectively 4,242,206 3,850,724
Insurance escrow fund - administrative costs 199,389 199,389
Certificates of deposit and cash trust fund -
restricted 700,000 500,000
Receivable from insurance company - long-term 505,606 505,606
Investments in marketable securities 1,256,436 2,671,507
Notes receivable - long-term 325,805 290,125
Split dollar life insurance policies 763,070 698,338
Investment in and advances to joint venture 1,888,328 2,880,921
Other assets 371,584 485,314
-------------- -------------
Total Other Assets 11,337,601 13,111,007
-------------- -------------
Total Assets $48,653,153 $41,858,546
============== =============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<TABLE>
Page 3
<CAPTION>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
September 30, March 31,
1995 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt and
capital lease obligations $ 663,311 $ 205,200
Income taxes payable 1,545,254 1,010,878
Insurance premiums payable 12,488,864 9,230,377
Accounts and commissions payable 3,866,297 2,641,843
Accrued expenses and other current liabilities 1,328,480 1,725,348
--------------- ---------------
Total Current Liabilities 19,892,206 14,813,646
--------------- ---------------
Deferred Revenues 2,993,213 2,470,449
--------------- ---------------
Long-Term Debt and Capital Lease Obligations 225,849 293,648
--------------- ---------------
Deferred Rent Payable 439,892 440,245
--------------- ---------------
Convertible Exchangeable
Preferred Stock - $.0007 par value
Authorized, issued
and outstanding - 3,234,697 shares
(Redemption value - $6,430,000) 6,414,069 6,396,795
--------------- ---------------
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 shares
Issued and outstanding - 13,045,552 shares
and 13,045,302 shares, respectively 89,119 89,117
Additional paid-in-capital 12,098,755 12,097,507
Net unrealized loss on investments, net of income
taxes of $3,323 and $27,089, respectively ( 6,171) ( 42,370)
Retained earnings 6,709,586 5,472,039
--------------- ---------------
18,891,289 17,616,293
Less: Deferred compensation ( 24,688) ( 23,438)
Treasury stock - at cost 47,000 shares
and 41,000 shares, respectively ( 178,677) ( 149,092)
--------------- ---------------
Total Common Stockholders' Equity 18,687,924 17,443,763
--------------- ---------------
Total Liabilities and Common Stockholders'
Equity $ 48,653,153 $ 41,858,546
=============== ===============
</TABLE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
September 30, September 30,
-------------------------------------- -----------------------------------
1995 1994 1995 1994
------------------ ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Gross revenues $43,934,597 $31,300,149 $23,780,262 $17,254,511
Net (increase) decrease in deferred revenues ( 522,764) ( 342,533) ( 362,650) ( 236,079)
------------------ ---------------- ----------------- --------------
Net revenues 43,411,833 30,957,616 23,417,612 17,018,432
------------------ ---------------- ----------------- --------------
Costs and expenses:
Direct costs 27,819,675 19,390,267 15,540,737 11,004,111
Service, selling, and general and administrative 11,469,859 9,374,138 5,897,130 5,039,130
Provision for bad debt expense 137,456 4,713 27,920 1,737
Depreciation and amortization 651,742 719,918 365,918 361,964
----------------- ---------------- ---------------- --------------
Total costs and expenses 40,078,732 29,489,036 21,831,705 16,406,942
------------------ ---------------- ----------------- --------------
Income from operations 3,333,101 1,468,580 1,585,907 611,490
------------------ ---------------- ----------------- ---------------
Other income, net 100,479 98,629 40,266 46,365
Equity in operations of joint venture ( 947,593) 235,223 ( 530,688) 176,420
------------------ ---------------- ----------------- ---------------
Total other income (expenses) ( 847,114) 333,852 ( 490,422) 222,785
------------------ ---------------- ----------------- ---------------
Income before provision for income taxes 2,485,987 1,802,432 1,095,485 834,275
Provision for income taxes 1,228,024 643,967 487,982 294,623
------------------ ---------------- ----------------- ---------------
Net Income $ 1,257,963 $ 1,158,465 $ 607,503 $ 539,652
================== ================ ================= ===============
Earnings per share:
Primary $.08 $.08 $.04 $.04
Fully Diluted $.07 $.07 $.04 $.03
Weighted average number of shares outstanding:
Primary 15,715,006 15,350,871 15,727,172 15,376,548
Fully Diluted 16,942,852 16,909,972 16,942,539 16,910,539
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 4
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
--------------------------------------------
1995 1994
--------------------- -------------------
<S> <C> <C>
Net cash (used in) provided by operating activities $ 4,760,632 $ 3,529,511
--------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment ( 1,988,507) ( 419,635)
Investment in marketable securities ( 330,880) ( 15,398)
Proceeds from sale of marketable securities 1,216,742 -
Purchase of Home Guarantee Corporation PLC, net of cash
acquired ( 680,923) -
Investment in Joint Venture - ( 1,143,318)
--------------------- ---------------------
Net cash used in investing activities ( 1,783,568) ( 1,578,351)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings 805,821 -
Repayments of borrowings ( 415,509) ( 169,229)
Decrease (increase) in notes receivable ( 35,680) ( 800)
Purchase of treasury stock ( 29,585) -
------------------- ---------------------
Net cash (used in) provided by financing activities 325,047 ( 170,029)
-------------------- ---------------------
Net increase in cash and cash equivalents 3,302,111 1,781,131
Cash and cash equivalents at beginning of period 3,039,361 5,024,282
--------------------- ---------------------
Cash and cash equivalents at end of period $6,341,472 $ 6,805,413
===================== =====================
Supplemental Cash Flows Information:
Cash Payments for the Periods:
Interest $ 27,255 $ 41,354
===================== =====================
Income taxes $ 775,350 $ 186,850
===================== =====================
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 5
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(Unaudited)
1. THE COMPANY
Warrantech Corporation, (the "Company"), through its subsidiaries Warrantech
Consumer Product Services, Inc. ("WCPS"), Warrantech Automotive, Inc. ("WAUTO"),
Warrantech Direct, Inc. ("Direct") and Warrantech International, Inc. markets
and administers service contract programs for retailers, distributors and
manufacturers of automobiles, recreational vehicles, automotive components,
home appliances, home entertainment products, computers and peripherals, and
office and communication equipment worldwide. 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 WAUTO 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 condensed 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 September 30, 1995 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1996. 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, 1995.
Page 6
3. JOINT VENTURE
Following is the summarized unaudited financial information of Techmark
Services Limited ("Techmark"), a 49% owned joint venture of the Company
which is accounted for under the equity method:
September 30, March 31,
1995 1995
------------------ ------------------
Current Assets $ 9,029,169 $ 6,033,375
Total Assets 10,096,284 7,291,722
Current Liabilities 4,398,335 3,045,517
Noncurrent Liabilities and Equity 5,697,949 4,246,205
For the Six Months ended
September 30,
---------------------------------------
1995 1994
------------------ -----------------
Net Revenues $ 8,297,764 $28,365,372
Net (Loss) Income $(1,933,863) $ 537,127
The loss from the joint venture for the six months ended September 30, 1995 is
principally the result of continued start-up expenses related to Techmark's
operations in Japan.
Page 7
WARRANTECH CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Gross revenues for the six months ended September 30, 1995 and 1994 were
$43,934,597 and $31,300,149, respectively representing a 40% increase. The
gross revenues attributable to consumer product programs reflect increases of
approximately $6.2 million related to new business, approximately a $1.7 million
increase related to volume increases with existing customers and
increased renewals, and approximately a $.5 million one time gain from
the accession of a portfolio of business from a new customer. Automotive
related program revenues reflect increases of approximately $2.8 million
related to new business and approximately $1.4 million related to increased
volumes and new programs with existing customers. The increase in gross
revenues for the three month period ended September 30, 1995 as compared
with the same period ended September 30, 1994 is directly attributable to new
customers, the gain from the accession of a new customer portfolio, new
automotive programs and increases with existing customers.
It is anticipated that revenues will continue to increase the balance of the
fiscal year, reflecting, in part, the inclusion of revenues generated from the
Company's contract with CompUSA, which commenced in late August 1995.
The net increase in deferred revenues for the six and three month periods
ended September 30, 1995 is the direct result of the increased volume of
contracts processed in the respective periods.
Direct costs are those costs directly related to the production and acquisition
of service contracts. Direct costs were $27,819,675 and $15,540,737 for the
six and three month periods ended September 30, 1995, respectively, as compared
with $19,390,267 and $11,004,111 for the comparable period ending September 30,
1994. The increases in direct costs for the six and three month periods is the
result of a higher level of premium on certain programs, and increased premiums
and commissions attributable to the volume increase of contracts processed.
Service, selling and general and administrative expenses for the six and three
month periods ended September 30, 1995 were $11,469,859 and $5,897,130,
respectively, as compared with $9,374,138 and $5,039,130 for the six and three
month periods ended September 30, 1994. The increase is directly attributable
to increases in sales related costs, payroll and payroll related costs arising
from increased headcount to meet volume increases, and approximately
$.3 million of expenses of Home Guarantee Corporation PLC acquired July 14,
1995.
The increase in the provision for bad debts results from the write-off of
accounts considered uncollectible at September 30, 1995.
The reduction in depreciation and amortization for the six month period ended
September 30, 1995 and slight increase for the three month period ended
September 30, 1995 is the result of the reduction in fiscal 1995 of the
remaining goodwill related to the acquisition of Dealer Based Services, Inc.
offset in part by increased depreciation resulting from capital additions
related to the Company's ongoing upgrade of its computer systems.
Page 8
The increase in equity losses in operations of the joint venture is the result
of continuing start-up expenses in Japan which resulted in losses of
approximately $.7 million and $.4 million for the six and three month periods
ended September 30, 1995, respectively with the remaining losses attributable
to the Techmark UK operations. Based upon the Company's current projections it
is anticipated that losses will continue into the fourth quarter of the fiscal
year.
Liquidity and Financial Resources
The primary source of liquidity during the six month period ended September 30,
1995 was cash generated by operations. Funds were utilized for (i) working
capital requirements, (ii) capital expenditures related to the Company's
ongoing information systems upgrade project, and, (iii) the purchase of Home
Guarantee PLC.
On November 1, 1995, the Company signed a letter of intent to increase its line
of credit with a bank from $1 million to $6.5 million and a standby commitment
was created for an additional $3.5 million subject to bank approval prior to
drawdown. At September 30, 1995, the Company's borrowing under its line of
credit amounted to $.5 million.
The Company believes that internally generated funds will be sufficient to
finance its current operations for at least the next twelve months.
The effect of inflation has not been significant to the Company since its
formation.
Page 9
PART II. Other Information
Item 1. Legal Proceedings
A. No material developments regarding litigation have occurred
since March 31, 1995 except as described below.
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.
On October 31, 1995, the Oak Agency, Inc. ("Oak") filed a
motion seeking permission to file an Amended Complaint to
add as defendants in the case the Registrant and its
subsidiary, Warrantech Automotive, Inc., and Joel San
Antonio, Chairman and Chief Executive Officer
of Registrant, and William Tweed, President of Registrant.
Oak's proposed Amended Complaint also seeks to add new
claims for alleged tortious interference with Oak's
business relationships. Oak is attempting to add these
new claims and parties more than four years after it
originally filed suit. Warrantech Dealer Based Services,
Inc. ("WDBS"), the subsidiary of Registrant that is
currently a named defendant in the action, will oppose the
requested amendments in the most forceful terms on the
grounds that it believes the amended pleadings to be
legally and equitably improper.
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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6 (a) Exhibits
(11) Statement re: computation of per share earnings.
(22) Financial Data Schedule
Item 6 (b) Reports on 8-K
None.
Page 10
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: November 8, 1995
S/N/S Bernard J. White
Bernard J. White
(Chief Financial Officer)
Date: November 8, 1995
Page 11
WARRANTECH CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
September 30, September 30,
----------------- -- ------------------- ----------------- -- ----------------
1995 1994 1995 1994
----------------- ------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Earnings:
Net income $ 1,257,963 $ 1,158,465 $ 607,503 $ 539,652
================= =================== ================= ================
Weighted average shares outstanding:
Primary (A):
Common shares 12,998,865 12,926,735 12,998,552 12,927,302
Assumed exercise of stock options 759,475 639,976 764,924 650,065
Assumed conversion of preferred stock 1,956,666 1,784,160 1,963,696 1,799,181
----------------- -------------- ----------------- ----------------
15,715,006 15,350,871 15,727,172 15,376,548
================= =============== ================= ================
Fully diluted (B):
Common shares 12,998,865 12,926,735 12,998,552 12,927,302
Assumed exercise of stock options 1,994,385 2,021,727 1,994,385 2,021,727
Assumed conversion of preferred stock 1,949,602 1,961,510 1,949,602 1,961,510
----------------- --------------- ----------------- ----------------
16,942,852 16,909,972 16,942,539 16,910,539
================= =============== ================= ================
Earnings Per Common Share:
Primary (A):
Net income $.08 $.08 $.04 $.04
================= =================== ================= ================
Fully diluted (B):
Net income $.07 $.07 $.04 $.03
================= =================== ================= ================
<FN>
(A) The treasury method was used in the calculation of primary earnings per share for all periods
presented.
(B) The modified treasury method was used in the calculation of fully diluted earnings per share
for the six and three months ended September 30, 1995 and 1994, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 6,341,472
<SECURITIES> 801,553
<RECEIVABLES> 24,679,594
<ALLOWANCES> 124,207
<INVENTORY> 0
<CURRENT-ASSETS> 32,849,943
<PP&E> 8,748,055
<DEPRECIATION> 4,282,446
<TOTAL-ASSETS> 48,653,153
<CURRENT-LIABILITIES> 19,892,206
<BONDS> 0
<COMMON> 89,119
0
6,414,069
<OTHER-SE> 18,598,805
<TOTAL-LIABILITY-AND-EQUITY> 48,653,153
<SALES> 0
<TOTAL-REVENUES> 43,934,597
<CGS> 0
<TOTAL-COSTS> 40,078,732
<OTHER-EXPENSES> 12,568
<LOSS-PROVISION> 137,456
<INTEREST-EXPENSE> 41,093
<INCOME-PRETAX> 2,485,987
<INCOME-TAX> 1,228,024
<INCOME-CONTINUING> 1,257,963
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,257,963
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
