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, 1997
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, 1997
Common stock, par value $.007 per share 13,295,031 shares
WARRANTECH CORPORATION AND SUBSIDIARIES
JUNE 30, 1997
(Unaudited)
I N D E X
Page No.
PART I - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet at June 30, 1997 (Unaudited)
and March 31, 1997.................................... 3
Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 1997
and 1996 (Unaudited) ................................. 4
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended June 30, 1997
and 1996 (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
<TABLE>
Page 2
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
June 30, March 31,
-------------------------------
------------- --------------
1997 1997
------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $21,395,619 $ 17,031,925
Investments in marketable securities 268,860 286,099
Accounts receivable, (net of allowances of $419,516
and $300,328, respectively) 29,402,135 23,290,035
Other receivables, net 3,463,214 3,874,451
Income tax receivable - 115,064
Prepaid expenses and other current assets 1,963,880 1,633,699
------------- --------------
Total Current Assets 56,493,708 46,231,273
------------- --------------
Property and Equipment - Net 10,751,603 10,111,193
------------- --------------
Other Assets:
Excess of cost over fair value of assets acquired
( net of accumulated amortization of
$3,760,881 and $3,637,233, respectively) 3,527,751 3,651,400
Deferred income taxes 1,856,743 2,009,941
Investments in marketable securities 2,051,492 2,041,001
Restricted cash 800,000 800,000
Split dollar life insurance policies 875,542 865,542
Notes receivable - long-term 13,127 42,076
Collateral security fund 199,389 199,389
Other assets 112,961 172,440
------------- --------------
Total Other Assets 9,437,005 9,781,789
------------- --------------
Total Assets $76,682,316 $66,124,255
============= ==============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY June 30, March 31,
1997 1997
--------------- --------------
(Unaudited)
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations $ 1,807,900 $ 1,997,835
Insurance premiums payable 27,496,610 19,602,290
Income taxes payable 244,116 -
Accounts and commissions payable 7,590,404 5,261,867
Legal settlements payable 1,400,000 1,635,000
Accrued expenses and other current liabilities 2,800,332 4,132,113
--------------- --------------
Total Current Liabilities 41,339,362 32,629,105
--------------- --------------
Deferred Revenues 5,397,411 5,019,190
--------------- --------------
Long-Term Debt and Capital Lease Obligations 2,486,119 2,491,786
--------------- --------------
Deferred Rent Payable 684,814 702,233
--------------- --------------
Common Stockholders' Equity:
Common stock - $.007 par value
Authorized - 30,000,000 shares
Issued - 13,295,031 shares
at June 30, 1997 and 13,261,636 shares
at March 31, 1997 91,096 90,911
Additional paid-in-capital 13,171,753 13,033,185
Unrealized loss on investments, net (4,264)
(1,563)
Accumulated translation adjustments 31,863 16,544
Retained earnings 14,042,005 12,714,914
--------------- --------------
27,332,453 25,853,991
Less: Deferred compensation (62,024) (78,231)
Treasury stock - at cost, 100,000 shares
at June 30, 1997 and 100,000 shares at
March 31, 1997 (493,819) (493,819)
--------------- --------------
Total Common Stockholders' Equity 26,776,610 25,281,941
--------------- --------------
Total Liabilities and Common Stockholders' Equity $76,682,316 $66,124,255
=============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months Ended
June 30,
-----------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Gross revenues $53,327,030 $36,000,025
Revenues deferred to future periods (558,208) (461,229)
Deferred revenues earned 149,049 93,528
------------------ ------------------
Net revenues 52,917,871 35,632,324
------------------ ------------------
Costs and expenses:
Direct costs 38,945,085 26,173,699
Service, selling, and general and administrative 11,206,101 7,410,636
Provision for bad debt expense 108,674 41,156
Depreciation and amortization 725,956 519,889
------------------ ------------------
Total costs and expenses 50,985,816 34,145,380
------------------ ------------------
Income from operations 1,932,055 1,486,944
------------------ ------------------
Gain on sale of equity joint venture - 1,876,480
Other income 197,379 103,021
------------------ ------------------
Income before provision for income taxes 2,129,434 3,466,445
Provision for income taxes 802,230 1,347,210
------------------ ==================
Net Income $ 1,327,204 $ 2,119,235
================== ==================
Earnings per share:
Primary $.09 $.16
Fully Diluted $.08 $.15
Weighted average number of shares outstanding:
Primary 15,543,323 13,644,452
Fully Diluted 15,661,561 13,709,869
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months
Ended June 30,
----------------------------------------------
1997 1996
--------------------- ---------------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 5,619,796 $ 2,613,571
--------------------- ---------------------
Cash flows from investing activities:
Purchase of property and equipment ( 900,886) ( 361,363)
Investment in marketable securities ( 1,016) ( 126,678)
Proceeds from sale of marketable securities - 100,000
--------------------- ---------------------
Net cash provided by (used in) investing activities ( 901,902) ( 388,041)
--------------------- ---------------------
Cash flows from financing activities:
(Increase) decrease in notes receivable 28,949 2,736
Repayments of borrowings ( 521,902) ( 400,244)
Proceeds from exercise of common stock options 138,753 -
--------------------- ---------------------
Net cash provided by (used in) financing activities ( 354,200) ( 397,508)
--------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 4,363,694 1,828,022
Cash and cash equivalents at beginning of period 17,031,925 11,859,487
--------------------- ---------------------
Cash and cash equivalents at end of period $21,395,619 $13,687,509
===================== =====================
Supplemental Cash Flows Information:
Cash Payments for the Periods:
Interest $ 60,249 $ 78,601
===================== =====================
Income taxes $ 222,185 $ 1,769,725
===================== =====================
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 323,600 434,649
See accompanying notes to condensed consolidated financial statements.
</TABLE>
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
1. THE COMPANY
Warrantech, through its wholly-owned subsidiaries, Warrantech
Automotive, Inc., Warrantech Consumer Product Services, Inc., Warrantech Help
Desk, Inc., Warrantech Direct, Inc., Warrantech Home Service Company and
Warrantech International, Inc., provides outsourcing of business services
through call center services and technical computer services and markets and
administers service contract programs for retailers, distributors and
manufacturers of automobiles, homes, home appliances, home entertainment
products, computers and peripherals, and office and communication equipment,
in the United States, Puerto Rico, Mexico, Canada, Caribbean, South America,
Central America 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 manufacturers' warranties range from
twelve (12) 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, 1997 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1998. 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, 1997.
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.
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, 1997 and 1996 were
$53,327,030 and $36,000,025, respectively, representing an increase of 48%.
The gross revenues attributable to consumer product and automotive programs
reflect increases of approximately $8 million related to new business and
$9 million related to volume increases with existing customers and renewals.
Warrantech Europe contributed approximately $2 million of the increase in new
business to consolidated gross revenues vs the same period a year ago.
The net increase in deferred revenues for the three month period ended
June 30, 1997 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 $38,945,085 for the three month period
ended June 30, 1997 as compared to $26,173,699 for the three month period
ended June 30, 1996. The increase is directly attributable to the volume
increases in contracts sold and also reflect a shift in the mix of business.
Service, selling, general and administrative expenses for the three month
period ended June 30, 1997 amounted to $11,206,101 as compared with $7,410,636
for the three month period ended June 30, 1996. 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, and start-up costs associated with Warrantech
Help Desk and Warrantech Home Services of approximately $600,000.
In April 1996, the Company and its joint venture partner, AIG, agreed to
terminate the joint venture, Techmark Services Ltd., effective January 1, 1996.
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 provision for income taxes is based on the Company's projection of its
estimated effective tax rate for the fiscal year.
Net income for the three month period ended June 30, 1997 was $1,327,204 or
$.09 based on the weighted average primary shares as compared with $2,119,235
or $.16 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 of $.08 per share.
Liquidity and Financial Resources
The Company has an ongoing relationship with an equipment financing company and
intends to continue financing certain future equipment needs through leasing
transactions. The total amount financed through leasing transactions during
the three month period ended June 30, 1997 amounted to $323,600. 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, 1997, the Company did not have any borrowing under the line of credit.
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, 1997
amounted to $5,619,796 which is principally attributable to new accounts as
compared with comparable levels of accounts receivable at June 30, 1996.
Management believes that there are significant opportunities for growth through
acquisitions in the business services industry. In order to take full
advantage of such opportunities a Mergers and Acquisitions team has been formed.
While there can be no assurance that any transactions will materialize, to the
extent that capital resources are required in connection with any proposed
transaction, the Company believes that it will be able to meet its needs
through a combination of available cash on hand, borrowings against its
available bank credit line, and additional third-party financing. Based on
discussions with third parties, the Company believes such funding will be
available to the Company if needed on acceptable terms, although such
availability cannot be assured.
In connection with the sale of the Company' 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.
PART II. Other Information
Item 1. Legal Proceedings
A. No material developments regarding litigation have occurred
since 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, 1997.
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.
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 , 1997
S/N/S Harris Miller
Harris Miller
(Chief Financial Officer)
Date: August , 1997
<TABLE>
WARRANTECH CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
For the Three Months Ended June 30,
--------------------------------------------------
1997 1996
<S> <C> <C>
Earnings:
Net Income $ 1,327,204 $ 2,119,235
====================== ======================
Weighted average shares outstanding
Primary (A):
Common shares 13,176,344 12,989,181
Assumed exercise of stock options 2,366,979 655,271
====================== ======================
15,543,323 13,644,452
====================== ======================
Fully diluted (B)
Common shares 13,176,344 12,989,181
Assumed exercise of stock options 2,485,217 720,688
====================== ======================
15,561,661 13,709,869
====================== ======================
Earnings Per Common Share:
Primary (A) $0.09 $0.16
Fully Diluted (B) $0.08 $0.15
(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 three months ended June 30, 1997 and 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 21,395,619
<SECURITIES> 286,860
<RECEIVABLES> 29,402,135
<ALLOWANCES> 419,516
<INVENTORY> 0
<CURRENT-ASSETS> 56,493,708
<PP&E> 18,485,151
<DEPRECIATION> 7,733,548
<TOTAL-ASSETS> 76,682,316
<CURRENT-LIABILITIES> 41,339,362
<BONDS> 0
<COMMON> 91,096
0
0
<OTHER-SE> 26,685,514
<TOTAL-LIABILITY-AND-EQUITY> 76,682,316
<SALES> 0
<TOTAL-REVENUES> 53,327,030
<CGS> 0
<TOTAL-COSTS> 50,985,316
<OTHER-EXPENSES> (257,628)
<LOSS-PROVISION> 108,674
<INTEREST-EXPENSE> 60,249
<INCOME-PRETAX> 2,129,434
<INCOME-TAX> 802,230
<INCOME-CONTINUING> 1,327,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,327,204
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
