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 December 31, 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 December 31, 1995
- --------------------------------------- ----------------------------------
Common stock, par value $.007 per share 13,070,552 shares
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1995
(Unaudited)
I N D E X
Page No.
PART I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet at December 31, 1995
(Unaudited) and March 31, 1995......................... 3
Condensed Consolidated Statement of Operations
For the Nine and Three Months Ended December 31, 1995
and 1994 (Unaudited) ............................... 4
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended December 31, 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 11
Signatures ............................................................. 13
Page 2
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
A S S E T S
December 31, March 31,
1995 1995
-------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,871,491 $ 3,039,361
Investment in marketable securities 633,917 472,344
Accounts receivable, net 27,982,460 12,705,664
Other receivables 7,417,202 8,599,198
Prepaid expenses
and other current assets 1,072,530 1,065,062
-------------- --------------
Total Current Assets 44,977,600 25,881,629
-------------- --------------
Property and Equipment - Net 6,181,015 2,865,910
-------------- --------------
Other Assets:
Deferred income taxes 1,154,399 1,029,083
Excess of cost over fair value of assets acquired
- net of accumulated amortization of
$3,024,853 and $2,723,429, respectively 4,121,655 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 1,375,316 2,671,507
Notes receivable - long-term 318,305 290,125
Split dollar life insurance policies 805,111 698,338
Investment in and advances to joint venture 1,885,673 2,880,921
Other assets 479,194 485,314
-------------- --------------
Total Other Assets 11,544,648 13,111,007
-------------- --------------
Total Assets $62,703,263 $41,858,546
============== ==============
See accompanying notes to condensed consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
1995 1995
-------------- --------------
(Unaudited)
Current Liabilities:
Current maturities of long-term debt and
capital lease obligations $ 580,359 $ 205,200
Income taxes payable 1,995,399 1,010,878
Insurance premiums payable 22,248,328 9,230,377
Accounts and commissions payable 4,549,427 2,641,843
Accrued expenses and other current liabilities 1,695,316 1,725,348
-------------- --------------
Total Current Liabilities 31,068,829 14,813,646
-------------- --------------
Deferred Revenues 3,669,565 2,470,449
-------------- --------------
Long-Term Debt and Capital Lease Obligations 916,314 293,648
-------------- --------------
Deferred Rent Payable 437,711 440,245
-------------- --------------
Convertible Exchangeable
Preferred Stock - $.0007 par value
Authorized, issued
and outstanding - 3,234,697 shares
(Redemption value - $6,430,000) 6,420,363 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 - 13,070,552 shares
and 13,045,302 shares, respectively 89,294 89,117
Additional paid-in-capital 12,161,080 12,097,507
Net unrealized loss on investments, net of income
taxes of $72,545 and $27,089, respectively ( 134,727) ( 42,370)
Retained earnings 8,329,144 5,472,039
-------------- --------------
20,444,791 17,616,293
Less: Deferred compensation ( 24,688) ( 23,438)
Treasury stock - at cost 57,000 shares
and 41,000 shares, respectively ( 229,622) ( 149,092)
-------------- --------------
Total Common Stockholders' Equity 20,190,481 17,443,763
-------------- --------------
Total Liabilities and Common Stockholders' Equity $62,703,263 $ 41,858,546
============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
Page 3
<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,
----------------------------------------------------------------
1995 1994 1995 1994
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Gross revenues $78,764,862 $51,684,943 $34,830,265 $20,384,794
Net (increase) decrease in deferred revenues (956,184) (524,392) (433,420) (181,859)
------------ ------------ ------------ -----------
Net revenues 77,808,678 51,160,551 34,396,845 20,202,935
------------ ------------ ------------ -----------
Costs and expenses:
Direct costs 51,922,009 33,214,823 24,102,334 13,824,556
Service, selling, and general and administrative 18,700,520 14,099,538 7,230,661 4,725,400
Bad debt expense 157,865 275,543 20,409 270,830
Depreciation and amortization 914,701 1,082,188 262,959 362,270
------------ ------------ ------------ ------------
Total costs and expenses 71,695,095 48,672,092 31,616,363 19,183,056
------------ ------------ ----------- ------------
Income from operations 6,113,583 2,488,459 2,780,482 1,019,879
------------ ------------ ----------- ------------
Other income (expenses):
Interest and dividend income 414,993 418,996 262,918 247,379
Interest expense ( 63,039) ( 61,183) ( 21,946) ( 19,829)
Other ( 5,654) ( 8,022) 4,849 23,612
Equity in operations of joint venture ( 957,748) 235,223 ( 10,155) -
------------ ------------- ------------- ------------
Total other income (expenses) ( 611,448) 585,014 235,666 251,162
------------ ------------- ------------- ------------
Income before provision for income taxes 5,502,135 3,073,473 3,016,148 1,271,041
Provision for income taxes 2,617,363 882,312 1,389,339 238,345
------------- ------------- ------------- ------------
Net Income $ 2,884,772 $ 2,191,161 $ 1,626,809 $ 1,032,696
============= ============= ============= ============
Earnings per share:
Primary $.18 $.14 $.10 $.07
==== ==== ==== ====
Fully Diluted $.17 $.13 $.09 $.06
==== ==== ==== ====
Weighted average number of shares outstanding:
Primary 15,724,944 15,541,772 15,770,697 15,869,763
Fully Diluted 16,941,129 16,884,343 16,943,919 16,903,528
See accompanying notes to condensed consolidated financial statements.
</TABLE>
Page 4
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
----------------------------------------------
1995 1994
--------------------- ---------------------
<S> <C> <C>
Net cash provided by operating activities $ 7,633,949 $ 3,569,732
--------------------- ---------------------
Cash flows from investing activities:
Purchase of property and equipment ( 3,854,521) ( 932,245)
Proceeds from sale of equipment - 23,446
Maturity of certificates of deposit - 27,000
Investment in marketable securities ( 948,602) -
Proceeds from sale of marketable securities 1,730,612 457,602
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 ( 3,753,434) ( 1,567,515)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings 805,821 -
Repayments of borrowings ( 954,638) ( 251,451)
Proceeds from sale/leaseback of equipment 1,146,642 -
Increase in notes receivable ( 28,180) ( 979,722)
Purchase of treasury stock ( 80,530) -
Issuance of common stock 62,500 125,000
--------------------- ---------------------
Net cash (used in) provided by financing activities 951,615 ( 1,106,173)
--------------------- ---------------------
Net increase in cash and cash equivalents 4,832,130 896,044
Cash and cash equivalents at beginning of period 3,039,361 5,024,282
--------------------- ---------------------
Cash and cash equivalents at end of period $7,871,491 $ 5,920,326
===================== =====================
Supplemental Cash Flows Information:
Cash Payments for the Periods:
Interest $ 39,763 $ 61,183
===================== =====================
Income taxes $1,570,450 $ 464,363
===================== =====================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
Page 5
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 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
<PAGE>
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:
December 31, March 31,
1995 1995
------------------- ----------------
Current Assets $ 9,849,879 $ 6,033,375
Total Assets 11,551,155 7,291,722
Current Liabilities 5,198,087 3,045,517
Noncurrent Liabilities and Equity 6,353,068 4,246,205
For the Nine Months ended
December 31,
--------------------------------------
1995 1994
------------------- ------------------
Net Revenues $ 1,580,535 $47,427,465
Net (Loss) Income $(1,954,588) $ 597,127
The loss from the joint venture for the nine months ended December 31, 1995 is
principally the result of continued start-up expenses related to Techmark's
operations in Japan.
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 nine months ended December 31, 1995 and 1994 were
$78,764,862 and $51,684,943, respectively, representing an increase of 52%. The
gross revenues attributable to consumer product programs reflect increases of
approximately $11 million related to new business, approximately $4.1 million
related to volume increases with existing customers and renewals, and one time
gains of approximately $3.0 million resulting from the accession of portfolios
from new customers. Automotive related revenues reflect increases of
approximately $3.1 million resulting from new customers and approximately $5.9
million related to increased volumes and new programs with existing customers.
Gross revenues for the three month period ended December 31, 1995 and 1994 were
$34,830,265 and $20,384,794, respectively, representing a 71% increase over the
comparable period a year ago. This increase is directly attributable to new
customers, a gain of approximately $2.5 million from the accession of a new
customer portfolio, new automotive programs and increases with existing
customers.
The net increase in deferred revenues for the nine and three month periods ended
December 31, 1995 is the direct result of the increased volume of contracts
processed in the respective periods including amounts deferred with respect to
the accession of portfolios of business in the second and third quarter periods
of fiscal 1996.
Direct costs are those costs directly related to the production and acquisition
of service contracts. Direct costs were $51,922,009 and $24,102,334 for the nine
and three month periods ended December 31, 1995, respectively, as compared with
$33,214,823 and $13,824,556 for the comparable periods ended December 31, 1994.
The increases in direct costs for the nine and three months periods ended
December 31, 1995 are principally the result of the volume increase in contracts
processed and to a lesser degree a higher level of premium reflecting improved
coverages on selected programs.
Service, selling and general and administrative expenses for the nine and three
months periods ended December 31, 1995 were $18,700,520 and $7,230,661,
respectively, as compared with $14,099,538 and $4,725,400 for the nine and three
month periods ended December 31, 1994. The increase is directly attributable to
increases in sales related costs, payroll and payroll related costs arising from
increased head count to meet volume increases. As a percentage of revenues,
service, selling, and general and administrative expenses have decreased which
is indicative of the improved functional expense controls implemented by
management.
The provision for bad debts results from the write off of accounts considered
uncollectible at December 31, 1995 and 1994, respectively.
Page 8
<PAGE>
The reduction in depreciation and amortization for the nine and three month
periods ended December 31, 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.
"Equity in operations of joint venture" represents the Company's share of net
income (loss) of the operations of Techmark UK and Techmark Japan. The loss for
the nine months ended December 31, 1995 is the result of start-up costs
associated with the operations in Japan and the recognition of costs associated
with the decision to scale back the UK operations this fiscal year. During the
third quarter of fiscal 1996, Techmark Japan entered into a number of new
contracts to provide administrative services. As a result, the initial revenue
generated by these new contracts contributed to a decline in the level of losses
arising from the joint venture for the three months ended December 31, 1995.
Liquidity and financial Resources
The primary source of liquidity during the nine months ended December 31, 1995
was cash generated by operations. Funds were utilized for working capital
requirements, capital expenditures related to the Company's ongoing information
systems upgrade project and the purchase of Home Guarantee PLC during the second
quarter of fiscal 1996.
On December 12, 1995, the Company completed the sale/leaseback of certain
computer equipment resulting in proceeds of $1,146,642. It is anticipated that
future additions of computer equipment will be financed through additional
sale/leaseback transactions. In addition, on December 21, 1995 the Company
completed an agreement to increase its line of credit with a bank from $1
million to $10 million, $6.5 million committed and $3.5 million standby. The
line of credit is secured by certain accounts receivable and expires on July 31,
1996. It is anticipated that the line of credit will be extended to July 1997.
At December 31, 1995, the Company did not have any borrowing under the line of
credit.
In January 1996, the Company commenced discussions with American International
Group ("AIG") the purpose of which is to reach an agreement that will result in
a comprehensive restructuring of the relationship between the Company and AIG.
Although these discussions are at an early stage, it is contemplated that these
discussions will address the Techmark joint venture, AIG's preferred stock
interest in the Company, and contingent commissions and other fees and
commissions due the Company from AIG. Both AIG and the Company have agreed that
their business relationship in the United States under which AIG insures
automotive service programs, and for which the Company is the administrator,
will continue. Pursuant to the terms of the Company's agreement with AIG, under
certain conditions, AIG has the option to convert its preferred stock interest
into an 8% subordinated note, in the principal amount of $6,430,000, with a
maturity date that is ten years from the date of issuance, or 3,234,697 shares
of the Company's common stock. The Company's cash investment in, and advances
to, the joint venture
Page 9
<PAGE>
amounted to approximately $3.8 million and the Company has receivables of
approximately $2.0 million representing contingent commissions and other fees
and commissions due from AIG to the Company at December 31, 1995. AIG has
indicated that it wants to resolve all of these matters as part of a single
comprehensive resolution. At this early phase of the discussions, the ultimate
effect of a resolution of these matters cannot be determined, however, it is
management's opinion that, regardless of the outcome of its discussions with
AIG, the Company's overall liquidity will not be negatively affected.
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 10
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
A. 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. Oak Agency, Inc. ("Oak") previously filed a
Motion seeking permission to file an Amended Complaint to
add additional defendants as well as new claims against
all defendants in the lawsuit. On January 5, 1996, the
Court issued an Order denying Plaintiff's Motion to add
Warrantech Corporation, Joel San Antonio and William Tweed
as defendants. The Court also rejected Oak's attempts to
add new claims for alleged tortuous interference with
Oak's business relationships. The Court allowed Oak to add
Warrantech Dealer Based Services, Inc., a Connecticut
corporation and Warrantech Automotive, Inc., a Connecticut
corporation, which the Court noted was probably
unnecessary as WDBS is merely Automotive's predecessor in
name.
B. No material developments regarding litigation have occurred
since March 31, 1995, except as disclosed above and in the
Company's Form 10-Q for the quarter ended September 30, 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, 1995.
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
14, 1995, 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.
For Withheld
Joel San Antonio 8,660,866 131,399
William Tweed 8,660,866 131,399
Jeffrey J. White 8,659,311 132,954
William Rueger 8,659,386 132,879
Michael J. Salpeter 8,659,186 133,079
Kurt R. Schwamberger 8,593,781 198,484
Jo Ann Duarte 8,657,866 134,399
Lawrence Richenstein 8,660,741 131,524
Page 11
<PAGE>
At a meeting of the Board of Directors immediately following the
Annual Meeting of Shareholders, Jo Ann Duarte resigned as a
Director and Joseph Umansky was appointed as a Director.
Item 5. Other Information
None
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 12
<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, 1996
S/N/S Bernard J. White
Bernard J. White
(Chief Financial Officer)
Date: February 14, 1996
Page 13
<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,
---------------------------------------- -----------------------------------
1995 1994 1995 1994
----------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Earnings:
Net income $ 2,884,772 $ 2,191,161 $ 1,626,809 $ 1,032,696
================= =================== ================= ================
Weighted average shares outstanding:
Primary (A):
Common shares 13,000,142 12,936,106 13,002,932 12,955,291
Assumed exercise of stock options 755,389 712,610 773,129 846,132
Assumed conversion of preferred
stock 1,969,413 1,893,056 1,994,636 2,068,340
================= =================== ================= ================
15,724,944 15,541,772 15,770,697 15,869,763
================= =================== ================= ================
Fully diluted (B):
Common shares 13,000,142 12,936,106 13,002,932 12,955,291
Assumed exercise of stock options 1,992,868 2,013,601 1,992,868 2,013,601
Assumed conversion of preferred
stock 1,948,119 1,934,636 1,948,119 1,934,636
================ =================== ================= ================
16,941,129 16,884,343 16,943,919 16,903,528
================= =================== ================= ================
Earnings Per Common Share:
Primary (A):
Net income $.18 $.14 $.10 $.07
================= =================== ================= ================
Fully diluted (B):
Net income $.17 $.13 $.09 $.06
================= =================== ================= ================
(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 nine and three months ended December
31, 1995 and 1994, respectively.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 7,871,491
<SECURITIES> 633,917
<RECEIVABLES> 27,982,460
<ALLOWANCES> 124,207
<INVENTORY> 0
<CURRENT-ASSETS> 44,977,600
<PP&E> 10,633,552
<DEPRECIATION> 4,452,537
<TOTAL-ASSETS> 62,703,263
<CURRENT-LIABILITIES> 31,068,829
<BONDS> 0
<COMMON> 89,294
0
6,420,363
<OTHER-SE> 20,101,187
<TOTAL-LIABILITY-AND-EQUITY> 62,703,263
<SALES> 0
<TOTAL-REVENUES> 78,764,862
<CGS> 0
<TOTAL-COSTS> 71,695,095
<OTHER-EXPENSES> 2,087
<LOSS-PROVISION> 157,865
<INTEREST-EXPENSE> 63,039
<INCOME-PRETAX> 5,502,135
<INCOME-TAX> 2,617,363
<INCOME-CONTINUING> 2,884,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,884,772
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
