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, 1998
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, 1998_
Common stock, par value $.007 per share 13,323,573 shares
1
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
I N D E X
Page No.
PART I - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet at June 30, 1998
(Unaudited) and March 31, 1998................... 3
Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 1998
and 1997 (Unaudited) ............................ 4
Condensed Consolidated Statement of Comprehensive Income
For the Three Months Ended June 30, 1998
and 1997 (Unaudited) ............................ 5
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended June 30, 1998
and 1997 (Unaudited) ............................ 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) ............................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - Other Information 11
Signatures .............................................. 12
2
<PAGE>
<TABLE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
A S S E T S
(Unaudited)
June 30, March 31,
-------------------------------
1998 1998
------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 19,480,875 $ 24,062,052
Investments in marketable securities 2,541 537,924
Accounts receivable, (net of allowances of $908,512
and $1,223,173, respectively) 29,778,269 27,878,335
Other receivables, net 2,611,771 2,197,405
Prepaid expenses and other current assets 1,785,008 1,775,316
--------------- --------------
Total Current Assets 52,658,464 56,451,032
------------- --------------
Property and Equipment - Net 13,794,138 13,639,921
------------- --------------
Other Assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of
$4,380,369 and $4,212,956, respectively) 3,778,163 3,945,577
Deferred income taxes 3,122,591 3,085,311
Investments in marketable securities 2,163,130 1,967,817
Restricted cash 800,000 800,000
Split dollar life insurance policies 1,029,930 1,054,045
Notes receivable 631,457 654,068
Collateral security fund 199,389 199,389
Other assets 120,973 120,128
------------- --------------
Total Other Assets 11,845,633 11,826,335
------------- --------------
Total Assets $ 78,298,235 $81,917,288
============= ==============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
(Unaudited)
June 30, March 31,
-------------------------------
1998 1998
------------- --------------
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations $ 1,952,445 $ 2,371,662
Insurance premiums payable 24,617,519 22,269,589
Income taxes payable 167,448 1,850,999
Accounts and commissions payable 7,703,833 7,698,948
Legal settlements payable 100,000 200,000
Accrued expenses and other current liabilities 3,468,056 6,011,572
--------------- --------------
Total Current Liabilities 38,009,301 40,402,770
--------------- --------------
Deferred Revenues 7,421,843 6,987,541
Long-term debt and capital lease obligations 1,882,647 2,153,286
Deferred rent payable 584,009 608,736
--------------- --------------
Total Liabilities 47,897,800 50,152,133
--------------- --------------
Commitments and contingencies
Stockholders' Equity:
Common stock - $.007 par value
Authorized - 30,000,000 shares
Issued and outstanding - 13,483,573 shares
at June 30, 1998 and 13,449,382 shares
at March 31, 1998 94,385 94,146
Additional paid-in capital 14,329,804 14,124,700
Accumulated other comprehensive income,
net of taxes 64,114 85,608
Retained earnings 16,749,324 17,975,951
--------------- --------------
31,237,627 32,280,405
Less: Deferred compensation (15,732) (21,631)
Treasury stock - at cost, 160,000 shares
at June 30, 1998 and March 31, 1998 (821,460) (493,819)
--------------- --------------
Total Common Stockholders' Equity 30,400,435 31,764,955
--------------- --------------
Total Liabilities and
Stockholders' Equity $ 78,298,235 $81,917,288
=============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C>
For the Three Months Ended
June 30,
------------------------------------------
-------------------- ---------------------
1998 1997
-------------------- ---------------------
Gross revenues $50,264,482 $53,327,030
Revenues deferred to future periods (780,951) (558,208)
Deferred revenues earned 290,901 149,049
-------------------- ---------------------
Net revenues 49,774,432 52,917,871
Costs and expenses:
Direct costs 36,535,216 38,945,085
Service, selling, and general and administrative 14,176,847 11,314,775
Depreciation and amortization 1,274,614 725,956
-------------------- ---------------------
Total costs and expenses 51,986,677 50,985,816
-------------------- ---------------------
Income (loss) from operations (2,212,245) 1,932,055
Other income, net 169,960 197,379
-------------------- ---------------------
Income (loss) before provision (benefit) for income taxes (2,042,285) 2,129,434
Provision (benefit) for income taxes (815,658) 802,230
-------------------- ---------------------
Net income (loss) ($1,226,627) $1,327,204
==================== =====================
Earnings per share:
Basic ($0.09) $0.10
==================== =====================
Diluted ($0.09) $0.08
==================== =====================
Weighted average shares outstanding:
Basic 13,362,303 13,176,344
==================== =====================
Diluted 13,362,303 15,661,561
==================== =====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended
--------------- ---------------
June 30,
--------------- ---------------
1998 1997
---------------------------------
Net income (loss) ($1,226,627) $1,327,204
Other Comprehensive Income, net of tax
Unrealized gain(loss) on investments (1,133) (5,709)
Foreign currency translation adjustments (20,361) 15,319
---------------------------------
Comprehensive income (loss) ($1,248,121) $1,336,814
=============== ===============
5
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
For the Three Months
Ended June 30,
-------------------------------------------------
1998 1997
-------------------------- -------------------
Net cash (used in) provided by operating activities ($ 2,904,060) $ 5,619,796
-------------------------- -------------------
Cash flows from investing activities:
Property and equipment purchased (1,065,906) (900,886)
Purchase of marketable securities (205,420) (1,016)
Proceeds from sales of marketable securities 540,045
-------------------------- -------------------
Net cash (used in) investing activities (731,281) (901,902)
Cash flows from financing activities:
Decrease in notes receivable 22,611 28,949
Proceeds from exercise of common stock options 205,343 138,753
Purchase of Treasury Stock (327,641) -
Repayments, notes and capital leases (846,149) (521,902)
-------------------------- -------------------
Net cash (used in) financing activities (945,836) (354,200)
-------------------------- -------------------
Net (decrease) increase in cash and cash equivalents (4,581,177) 4,363,694
Cash and cash equivalents at beginning of period 24,062,052 17,031,925
-------------------------- -------------------
Cash and cash equivalents at end of period $ 19,480,875 $21,395,619
========================== ===================
Supplemental Cash Flows Information
Cash Payments for the Periods:
Interest $ 135,574 $ 60,249
========================== ===================
Income taxes $ 903,668 $ 222,185
========================== ===================
Noncash Investing and Financing Activities
Capital lease obligations incurred $ 156,293 $ 323,600
========================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. THE COMPANY
Warrantech Corporation ("Warrantech" or the "Company"), 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., 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 and operates call center
services and technical computer services in the United States, Puerto Rico,
Mexico, Canada, Caribbean, South 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
actual repair service under such extended service contracts and limited
warranties is provided by third party repair facilities and the cost of such
repair services is borne by the insurance companies. 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, 1998 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K and Form
10K/A for the year ended March 31, 1998.
Certain prior year amounts may have been reclassified to conform to current year
presentation.
7
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3. COMPREHENSIVE INCOME
<TABLE>
<S> <C> <C> <C>
For the Three Months Ended
--------------- ---------------
June 30,
--------------- ---------------
1998 1997
---------------------------------
Net income (loss) ($1,226,627) $1,327,204
Other Comprehensive Income, net of tax
Unrealized gain(loss) on investments (1,133) (5,709)
Foreign currency translation adjustments (20,361) 15,319
--------------- ---------------
Comprehensive income ($1,248,121) $1,336,814
=============== ===============
Unrealized Foreign Total
Other Comprehensive Income: Gain (Loss) Currency Other
The accumulated balances for the components On Translation Comprehensive
of Other Comprehensive Income are: Investments Adjustments Income
--------------- --------------- ------------------
Balance at March 31, 1997 $ 1,445 $ 16,544 $ 17,989
Current Period (5,709) 15,319 9,610
--------------- --------------- ------------------
Balance at June 30, 1997 $ (4,264) $ 31,863 $ 27,599
=============== =============== ==================
Balance at March 31, 1998 $ 7,055 $ 78,553 $ 85,608
Current Period (1,133) (20,361) (21,494)
--------------- --------------- ------------------
Balance at June 30, 1998 $ 5,922 $ 58,192 $ 64,114
=============== =============== ==================
</TABLE>
4. SUBSEQUENT EVENTS
On July 6, 1998, Joel San Antonio, Warrantech' Chairman and Chief Executive
Officer, and William Tweed and Jeff J. White, members of Warrantech's Board of
Directors, exercised all of their vested options to purchase Warrantech common
stock. A total of 3,000,000 shares are being purchased through the exercise. It
is anticipated that the Company will receive a tax benefit from this
transaction.
5. EARNINGS PER SHARE
The computation of earnings per share at June 30, 1998 and June 30, 1997 was as
follows:
For the three months Ended June 30,
------------------------------------
1998 1997
------------ -------------
Numerator:
Net (loss) income applicable
to common stock $ (1,226,627) $ 1,327,204
=============== =============
Denominator
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 13,362,303 13,176,344
Stock Options (treasury method) - 2,485,217
--------------- -------------
Diluted shares 13,362,303 15,661,561
=============== =============
Earnings Per Common Share:
Basic $(.09) $.10
Diluted $(.09) $.08
In a net loss position option are anti-dilutive
8
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the matters discussed
below or elsewhere in this quarterly report are forward looking statements that
involve risks and uncertainties. The Company makes such forward looking
statements under the provisions of the "safe harbor" section of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are based
on management's beliefs and assumptions, as well as information currently
available to management. Such beliefs and assumptions are based on, among other
things, the Company's operating and financial performance over recent years and
its expectations about its business for the current fiscal year. Although the
Company believes that the expectations reflected in such forward looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Such statements are subject to certain risks, uncertainties
and assumptions, including (a) prevailing economic conditions may significantly
deteriorate, thereby reducing the demand for the Company's products and
services, (b) unavailability of technical support personnel or increases in the
rate of turnover of such personnel, reflecting increased demand for such
qualified personnel, (c) changes in the terms or availability of insurance
coverage for the Company's programs, or (d) regulatory or legal changes
affecting the Company's business, although none of these risks are anticipated
at the present time. Should one or more of these or any other risks or
uncertainties materialize, or should the underline assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
expected.
Results of Operations
Gross revenues for the three months ended June 30, 1998 decreased 5.1% to
$50,264,482 as compared with $53,327,030 for the three months ended June 30,
1997. This decrease was primarily attributable to the termination of a high
volume, low margin dealer agreement and second, the decline in unit prices in
computers and consumer electronic products.
The net increase in deferred revenues for the three month period ended June 30,
1998 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 that period of time offset in part by amounts earned on expiring
contracts during the same period.
Direct costs are those costs directly related to the production and acquisition
of service contracts. Direct costs were $36,535,216 or 72.7% of gross revenues
for the three months ended June 30, 1998 as compared with $38,945,085 or 73.0%
for the comparable period last year. This decrease is attributable to the change
in mix of contracts sold and the termination of a high volume, low margin dealer
agreement.
Service, selling and general and administrative expenses for the three months
ended June 30, 1998 were $14,176,847 or 28.2% of gross revenues as compared with
$11,314,775 or 21.2% for the same period last year. The increases in SG&A
expenses reflect an increase in expenses due to increased temporary staffing of
technical support staff in its call centers. The Company is in the process of
reengineering its= call center processes and systems implementation with a goal
of improving operational efficiency. These increases are also related to higher
payroll and payroll related costs resulting from the development of Help Desk,
Inc.
9
<PAGE>
It is anticipated that the reengineering of call center processes will result in
improved response time and decreased call processing time, and that the current
cost initiatives and reengineered processes will return the Company to
profitability in the fiscal second quarter.
The increase in depreciation and amortization for the three months ended June
30, 1998 compared to the same period last year is the result of capital
additions related to the Company=s ongoing up-grade of its computer systems and
the additional equipment requirements resulting from the increase in service
contracts in force.
The provision (benefit) for income taxes is based on the Company's projection of
its estimated effective tax rate for the fiscal year.
Liquidity and Financial Resources
The Company has an ongoing relationship with equipment financing companies 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, 1998 amounted to $135,574. 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, which expires on August 31, 1998, is secured
by certain accounts receivable. At June 30, 1998, 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 used by
operations during the three months ended June 30, 1998 amounted to $2,904,060
which is principally attributable to payroll and payroll related costs resulting
from the increase in service levels to both new and existing accounts.
Management believes that there are significant opportunities for growth through
acquisitions in the business services industry. 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.
The effect of inflation has not been significant to the Company since its
formation.
10
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
Not applicable.
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
(27) Financial Data Schedule
Item 6 (b) Reports on 8-K
None.
11
<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 13, 1998
S/N/S Richard F. Gavino
Richard F. Gavino - Executive Vice President
and Chief Financial Officer
Date: August 13, 1998
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 19,480,875
<SECURITIES> 2,541
<RECEIVABLES> 28,778,269
<ALLOWANCES> 908,512
<INVENTORY> 0
<CURRENT-ASSETS> 52,658,464
<PP&E> 25,136,923
<DEPRECIATION> 11,342,785
<TOTAL-ASSETS> 78,298,235
<CURRENT-LIABILITIES> 38,009,301
<BONDS> 0
<COMMON> 94,385
0
0
<OTHER-SE> 30,306,050
<TOTAL-LIABILITY-AND-EQUITY> 78,298,235
<SALES> 0
<TOTAL-REVENUES> 50,264,482
<CGS> 0
<TOTAL-COSTS> 51,986,677
<OTHER-EXPENSES> (305,534)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,574
<INCOME-PRETAX> (2,042,285)
<INCOME-TAX> (815,658)
<INCOME-CONTINUING> (1,226,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,226,627)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
