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 June 30, 1996
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 June 30, 1996
Common stock, par value $.007 per share 13,082,181 shares
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
JUNE 30, 1996
(Unaudited)
I N D E X
Page No.
PART I - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet at June 30, 1996 (Unaudited)
and March 31, 1996............................................. 3
Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 1996
and 1995 (Unaudited) .......................................... 4
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended June 30, 1996
and 1995 (Unaudited) .......................................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited). 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
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
A S S E T S
<TABLE>
1996 1996
------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,687,509 $ 11,859,487
Investments in marketable securities 744,576 824,648
Accounts receivable,(net of allowances of $347,793
and $450,092, respectively) 17,127,882 16,160,209
Other receivables, net 5,835,137 8,610,919
Prepaid expenses, prepaid income taxes
and other current assets 1,435,277 988,936
------------- --------------
Total Current Assets 38,830,381 38,444,199
------------- --------------
Property and Equipment - Net 7,232,617 6,802,798
------------- --------------
Other Assets:
Excess of cost over fair value of assets acquired
( net of accumulated amortization of
$3,289,482 and $3,170,089, respectively) 3,999,150 4,118,544
Investment in and advances to joint venture - 1,885,674
Deferred income taxes 1,326,475 2,031,535
Investments in marketable securities 1,478,189 1,363,047
Certificates of deposit and cash trust fund -
restricted 700,000 700,000
Split dollar life insurance policies 730,025 683,893
Notes receivable - long-term 85,024 87,760
Collateral security fund 199,389 199,389
Other assets 267,809 296,871
------------- --------------
Total Other Assets 8,766,061 11,366,713
------------- --------------
Total Assets $54,849,059 $56,613,710
============= ==============
Page 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES, PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY
June 30, March 31,
1996 1996
--------------- --------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt and capital lease $ 1,524,600 $ 648,650
obligations
Insurance premiums payable 15,332,718 16,247,247
Income taxes payable 672,187 1,795,018
Accounts and commissions payable 6,315,196 4,809,527
Accrued expenses and other current liabilities 1,849,837 1,722,545
--------------- --------------
Total Current Liabilities 25,694,538 25,222,987
--------------- --------------
Deferred Revenues 4,022,867 3,654,794
--------------- --------------
Long-Term Debt and Capital Lease Obligations 2,678,430 1,124,015
--------------- --------------
Deferred Rent Payable 594,422 534,620
--------------- --------------
Commitments and Contingencies
Convertible Exchangeable Preferred Stock-
$.0007 par value
Authorized, 15,000,000 shares
Issued and outstanding - None at June 30, 1996 and 3,234,697
shares at March 31, 1996
(Redemption value - $6,430,000) - 6,420,363
--------------- --------------
Common Stockholders' Equity:
Common stock - $.007 par value
Authorized - 30,000,000 shares
Issued and outstanding - 13,082,181 shares
at June 30, 1996 and at March 31, 1996 89,375 89,375
Additional paid-in-capital 12,212,641 12,212,641
Net unrealized loss on investments, net of income
taxes of $4,389 (6,832) (15,031)
Accumulated translation adjustments (12,832) (10,520)
Retained earnings 10,039,316 7,843,332
--------------- --------------
22,321,668 20,119,797
Less: Deferred compensation (70,116) (70,116)
Treasury stock - at cost, 93,000 shares
at June 30, 1996 and March 31, 1996 (392,750) (392,750)
--------------- --------------
Total Common Stockholders' Equity 21,858,802 19,656,931
--------------- --------------
Total Liabilities, Preferred Stock and
Common Stockholders' Equity $54,849,059 $56,613,710
=============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months Ended
June 30,
-----------------------------------------
1996 1995
------------------ ------------------
<S> <C> <C>
Gross revenues $36,000,025 $20,154,335
Net increase in deferred revenues ( 367,701) (160,114)
------------------ ------------------
Net revenues 35,632,324 19,994,221
------------------ ------------------
Costs and expenses:
Direct costs 26,173,699 12,538,938
Service, selling, and general and administrative 7,410,636 5,572,729
Provision for bad debt expense 41,156 109,536
Depreciation and amortization 519,889 285,824
------------------ ------------------
Total costs and expenses 34,145,380 18,507,027
------------------ ------------------
Income from operations 1,486,944 1,487,194
------------------ ------------------
Gain on sale of equity joint venture 1,876,480 -
Equity loss from joint venture - (416,905)
Other income 103,021 320,213
------------------ ------------------
Income before provision for income taxes 3,466,445 1,390,502
Provision for income taxes 1,347,210 740,042
------------------
==================
Net Income $ 2,119,235 $ 650,460
================== ==================
Earnings per share:
Primary $.16 $.04
Fully Diluted $.15 $.04
Weighted average number of shares outstanding:
Primary 13,644,452 15,702,401
Fully Diluted 13,709,869 16,943,218
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months
Ended June 30,
----------------------------------------------
1996 1995
--------------------- ---------------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 2,613,571 ($ 35,009)
--------------------- ---------------------
Cash flows from investing activities:
Purchase of property and equipment ( 361,363) ( 549,664)
Investment in marketable securities ( 126,678) ( 323,912)
Proceeds from sale of marketable securities 100,000 200,000
--------------------- ---------------------
Net cash provided by (used in) investing activities ( 388,041) ( 673,576)
--------------------- ---------------------
Cash flows from financing activities:
(Increase) decrease in notes receivable 2,736 ( 43,180)
Repayments of borrowings ( 400,244) ( 87,954)
Purchase of treasury stock - ( 29,585)
Proceeds from borrowings of debt - 790,000
--------------------- ---------------------
Net cash provided by (used in) financing activities ( 397,508) 629,281
--------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 1,828,022 ( 79,304)
Cash and cash equivalents at beginning of period 11,859,487 3,039,361
--------------------- ---------------------
Cash and cash equivalents at end of period $ 13,687,509 $ 2,960,057
===================== =====================
Supplemental Cash Flows Information:
Cash Payments for the Periods:
Interest $ 78,601 $ 13,139
===================== =====================
Income taxes $ 1,769,725 $ 304,500
===================== =====================
Noncash Investing and Financing Activities:
Gain on sale of investment in joint venture $ 1,876,480 -
Purchase of preferred stock 6,420,363 -
Note issued in connection with purchase of preferred stock 2,395,960 -
Capital lease obligations incurred 434,649 -
See accompanying notes to condensed consolidated financial statements.
Page 5
</TABLE>
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
1. THE COMPANY
Warrantech Corporation, ("Warrantech" or the "Company"), through its wholly
owned subsidiaries Warrantech Automotive, Inc., Warrantech Consumer Product
Services, Inc., Warrantech Direct, Inc., Warrantech Home Service Company and
Warrantech International, Inc. markets and administers service contract
programs for retailers, distributors and manufacturers of automobiles,
recreational vehicles, automotive components, homes, home appliances,
home entertainment products, computers and peripherals, and office and
communication equipment in the United States, Puerto Rico, Mexico, Canada and
the United Kingdom. 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 one (1) to eighty-four (84)
months.
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 June 30, 1996 are not
necessarily indicative of the results that may be expected for the
year ending March 31, 1997. 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, 1996.
<PAGE>
3. JOINT VENTURE
In July, 1993, the Company and American International Group Inc. ("AIG") formed
a corporate joint venture, Techmark Services Ltd. ("Techmark" or the "Joint
Venture") owned fifty-one percent (51%) by AIG and forty-nine percent (49%) by
the Company.
In conjunction with the foregoing alliance, in October, 1993, AIG purchased,
for a price of $6,430,000, options and a special issue of preferred stock which
was convertible into an issue of new shares of common stock which, subsequent
to its issuance, would be equivalent to twenty percent (20%) of the Company's
issued and outstanding common stock. Under the terms of the purchase agreement,
AIG had the right to purchase an increased interest in the Company, to a
maximum of thirty percent (30%) of the Company's issued and outstanding common
stock, if certain operating goals were achieved by the Company.
On April 18, 1996, the Company and AIG consummated an agreement for the
termination of the Techmark Joint Venture (the "Agreement"). Under the terms
of the Agreement, AIG agreed to purchase the Company's forty-nine (49%)
interest in the Joint Venture for approximately $3.8 million and the Company
agreed to repurchase the 3,234,697 shares of convertible preferred stock held
by AIG for its original redemption value of $6,430,000 and further relinquish
their rights to other options under the original agreement. As a result of this
transaction, the Company no longer has any investment in or liability to the
Joint Venture and will no longer record any equity in the operations of the
Joint Venture. The redemption value will be offset by the amount due the
Company from the sale of its investment, with the net amount due AIG of
$2,395,960 resulting in a three year, non-interest bearing note payable in 11
equal quarterly installments of $205,000 commencing June 30, 1996 with a final
installment of $140,960 due March 1999. In the event of default by the Company
under the note payable, the Company would be required to reissue to AIG
preferred stock for the remaining amount due at the default date.
At March 31, 1996, the Company's carrying value of its investment amounted to
$1,885,674 which resulted in a gain on the sale of the investment of
$1,876,480, recognized in the first quarter of fiscal 1997.
Also, as part of the agreement, AIG paid the Company $1,480,000 related to
amounts due the Company as of March 31, 1996, under its profit sharing
arrangement. In connection with this payment, the Company issued an irrevocable
letter of credit to the benefit of AIG through December 2002 which can be drawn
upon by AIG in the event the ultimate profit sharing amount due the Company is
less than the amount previously paid. It is anticipated that no amounts will
be due AIG under the letter of credit.
Page 7
<PAGE>
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 three month periods ended June 30, 1996 and 1995 were
$36,000,025 and $20,154,335, respectively, representing an increase of 79%.
The gross revenues attributable to consumer product and automotive programs
reflect increases of approximately $11 million related to new business and
approximately $5 million related to volume increases with existing customers
and renewals. Revenues of Warrantech Europe (formerly Home Guarantee
Corporation Plc acquired July 1995) were insignificant to consolidated gross
revenues for the three month period ended June 30, 1996.
The net increase in deferred revenues for the three month period ended
June 30, 1996 as compared with the same period a year ago is directly
attributable to the increased number of service contracts sold with a service
period greater than one year during the current period offset in part by the
amounts earned on expiring contracts during the same period. The Company
recognizes revenues in direct proportion to the costs incurred in providing the
service contract programs and defers an amount sufficient to meet future
administrative costs and a reasonable gross profit thereon.
Direct costs are those costs directly related to the production and acquisition
of service contracts. Direct costs were $26,173,699 for the three month period
ended June 30, 1996 as compared to $12,538,938 for the three month period ended
June 30, 1995. The increase is directly attributable to the volume increases
in contracts sold and a higher level of premium reflecting improved coverage
on selected programs. The direct costs also reflect a shift in the mix of
business from core service contract programs to more private label third party
administration programs which generally result in higher premium and commission
levels and directly impacted the Company's income from operations.
Service, selling, general and administrative expenses for the three month
period ended June 30, 1996 amounted to $7,410,636 as compared with $5,572,729
for the three month period ended June 30, 1995. The relative dollar increase
in the current fiscal year is directly attributable to increases in sales and
marketing acquisition costs and relocation expense. These increases are
related to payroll, payroll related and training costs arising from an increase
in head count to meet the service requirements associated with the increased
number of service contracts being sold as compared with the same levels a year
ago and office facilities expenses associated with additional office space.
In addition, service selling, general and administrative expenses include
approximately $340,000 of expenses related to Warrantech Europe which was
acquired in July of 1995. As a percentage of gross revenues service, selling,
general and administrative expenses represent 21% and 28%, respectively, which
is indicative of management's efforts to contain its overhead costs while
maintaining the highest quality of service levels to its customers.
The increase in depreciation and amortization reflect a higher level of
depreciation as a result of the approximately $5.1 million increase in assets
placed in service during fiscal 1996. This increase in assets is directly
attributable to an ongoing upgrade of the Company's information systems.
In April 1996, the Company and its joint venture partner, AIG, agreed to
terminate the joint venture, Techmark Services Ltd.,. Under the terms of the
agreement, AIG agreed to purchase the Company's forty-nine percent (49%)
investment in the joint venture for $3,762,154. As of March 31, 1996, the
Company's carrying value of the joint venture investment amounted to $1,885,674
which resulted in a gain recognized in the three month period ended
June 30, 1996 amounting to $1,876,480. The equity loss from the joint venture
recognized in the three month period ended June 30, 1995 represents the
Company's share of the joint venture losses for that period.
The provision for income taxes is based on the Company's projection of its
estimated effective tax rate for the fiscal year. The higher effective tax
rate for the three month period ended June 30, 1995 reflects the
non-deductibility of the foreign losses for US purposes at that time.
Net income for the three month period ended June 30, 1996 was $2,119,235 or
$.16 based on the weighted average primary shares as compared with $650,460 or
$.04 per share calculated on the same basis a year ago. The earnings per share
for the three month period ended June 30, 1996 includes the effect of the gain
on the sale of the joint venture ($.08), and the favorable effect of the
decrease in weighted average shares resulting from the retirement of the
preferred stock ($.02).
Liquidity and Financial Resources
The Company believes that internally generated funds will be sufficient to
finance its current operations for at least the next twelve months.
Cash provided by operations during the three month period ended June 30, 1996
amounted to $2,613,571 which is principally attributable to new accounts as
compared with comparable levels of accounts receivable at June 30, 1995.
The Company has a line of credit with a bank which provides for a maximum
aggregate borrowing up to $10 million. The line of credit is secured by
certain accounts receivable and has been renewed and now expires on
August 31, 1997. At June 30, 1996, the Company did not have any borrowing
under the line of credit.
In connection with the Company's ongoing upgrade of its information systems,
the Company has financed additional equipment during the three month period
ended June 30, 1996 through capital lease transactions amounting to $434,649.
In connection with the sale of the Company's joint venture interest to AIG, the
Company agreed to repurchase 3,234,697 shares of convertible exchangeable
preferred stock held by AIG at their redemption value of $6,430,000. this
amount was offset by the amount due the Company for the sale of its investment,
with the net amount due AIG of $2,395,960 resulting in a three year,
non-interest bearing note payable. The note is payable in 11 equal quarterly
installments of $205,000 commencing June 30, 1996, with a final installment of
$140,960 due march 1999. Also, as part of the agreement, AIG agreed to pay the
Company $1,480,000 related to amounts due the Company under its profit
sharing arrangement. In connection with this payment, the Company issued an
irrevocable letter of credit to the benefit of AIG through December 31, 2002
which can be drawn against by AIG in the event that the ultimate profit sharing
amount due the Company is less than the amount paid. It is anticipated that no
amounts will be due AIG under this letter of credit.
The effects of inflation have not been significant to the Company since its
formation.
Page 9
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
A. No material developments regarding litigation have occurred
since 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, 1996.
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.
(27) Financial Data Schedule
Item 6 (b) Reports on 8-K
None.
Page 10
<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: August 9, 1996
S/N/S Bernard J. White
Bernard J. White
(Chief Financial Officer)
Date: August 9, 1996
<TABLE>
<CAPTION>
WARRANTECH CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<S> <C> <C>
Earnings:
For the Three Months Ended June 30,
-----------------------------------------------
1996 1995
--------------------- --------------------
Net income $ 2,119,235 $ 650,460
===================== ====================
Weighted average shares outstanding:
Primary (A):
Common shares 12,989,181 12,999,181
Assumed exercise of stock options 655,271 753,833
Assumed conversion of preferred stock - 1,949,387
===================== ====================
13,644,452 15,702,401
===================== ====================
Fully diluted (B):
Common shares 12,989,181 12,999,181
Assumed exercise of stock options 720,688 1,994,500
Assumed conversion of preferred stock - 1,949,537
===================== ====================
13,709,869 16,943,218
===================== ====================
Earnings Per Common Share:
Primary (A):
Net income $.16 $0.04
===================== ====================
Fully diluted (B):
Net income $.15 $0.04
===================== ====================
(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 all periods presented.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 13,687,509
<SECURITIES> 744,576
<RECEIVABLES> 22,963,019
<ALLOWANCES> 347,793
<INVENTORY> 0
<CURRENT-ASSETS> 38,830,381
<PP&E> 12,674,439
<DEPRECIATION> 5,441,822
<TOTAL-ASSETS> 54,849,059
<CURRENT-LIABILITIES> 25,694,538
<BONDS> 0
<COMMON> 89,375
0
0
<OTHER-SE> 21,776,927
<TOTAL-LIABILITY-AND-EQUITY> 54,849,059
<SALES> 0
<TOTAL-REVENUES> 36,000,025
<CGS> 0
<TOTAL-COSTS> 34,145,380
<OTHER-EXPENSES> (181,622)
<LOSS-PROVISION> 41,156
<INTEREST-EXPENSE> 78,601
<INCOME-PRETAX> 3,466,445
<INCOME-TAX> 1,347,210
<INCOME-CONTINUING> 2,119,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,119,235
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
