UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 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 December 31, 1998
Common stock, par value $.007 per share 15,125,611 shares
___________________
* Registrant has filed all reports through the date of this report, however,
Registrant intends to file amendments to the Form 10-Qs for the periods ended
June 30, 1999 and September 30, 1999 to include information concerning
Registrant's financial results for those periods which was omitted from the
reports that were previously filed.
1
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WARRANTECH CORPORATION AND SUBSIDIARIES
I N D E X
<TABLE>
<S> <C>
Page No.
PART I - Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1998
(Unaudited) and March 31, 1998................................................... 3
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended December 31, 1998
and 1997 (Unaudited) ......................................................... 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, 1998
and 1997 (Unaudited) ......................................................... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) ..................................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................ 11
PART II - Other Information ................................................................... 13
Signatures ...................................................................................... 14
</TABLE>
2
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
A S S E T S
(Unaudited)
December 31, March 31,
------------------ -----------------------
1998 1998
------------------ -----------------------
Current assets:
Cash and cash equivalents $3,832,312 $24,062,052
Investments in marketable securities 2,012,841 537,924
Accounts receivable (net of allowances of
($894,041 and $1,223,173, respectively) 48,776,784 27,878,335
Other receivables, net 4,849,038 2,197,405
Deferred income taxes - 503,282
Prepaid expenses and other current assets 2,051,588 1,775,316
------------------ -----------------------
Total current assets 61,522,563 56,954,314
------------------ -----------------------
Property and equipment, net 15,620,829 13,639,921
Other assets:
Excess of cost over fair value of assets acquired (net of
accumulated amortization of $4,714,796 and $4,212,956,
respectively) 3,443,737 3,945,577
Deferred income taxes 11,090,054 8,121,666
Deferred direct costs 80,566,917 65,354,341
Investments in marketable securities 2,166,384 1,967,817
Restricted cash 800,000 800,000
Split dollar life insurance policies 1,352,109 1,054,045
Notes receivable 543,849 654,068
Collateral security fund 199,389 199,389
Other assets 138,116 120,128
------------------ -----------------------
Total other assets 100,300,555 82,217,031
------------------ -----------------------
Total assets $177,443,947 $152,811,266
================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
December 31, March 31,
1998 1998
------------------ -----------------------
Current liabilities:
Current maturities of long-term debt and capital lease obligations $1,983,832 $2,371,662
Insurance premiums payable 31,819,483 22,269,589
Income taxes payable 247,880 2,073,284
Accounts and commissions payable 8,525,919 7,698,948
Legal settlements payable - 200,000
Accrued expenses and other current liabilities 6,555,114 6,011,572
------------------ -----------------------
Total current liabilities 49,132,228 40,625,055
------------------ -----------------------
Deferred revenues 110,418,767 87,890,306
Long-term debt and capital lease obligations 2,050,036 2,153,286
Deferred rent payable 515,257 608,736
------------------ -----------------------
Total liabilities 162,116,288 131,277,383
------------------ -----------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000
Shares issued- none at December 31, 1998 and March 31, 1998 - -
Common stock - $.007 par value: authorized - 30,000,000
Shares issued; - 16,498,333 shares at December 31,1998 and
13,449,382 shares at March 31, 1998 115,488 94,146
Additional paid-in capital 23,518,341 14,124,700
Loans to directors and officers (8,291,784) -
Accumulated other comprehensive income, net of taxes (24,164) 85,608
Retained earnings 3,634,273 7,744,879
------------------ -----------------------
18,952,154 22,049,333
Less: Deferred compensation (3,933) (21,631)
Treasury stock - at cost, 1,025,300 shares at December 31,1998
and 100,000 at March 31, 1998 (3,620,562) (493,819)
------------------ -----------------------
Total Stockholders' Equity 15,327,659 21,533,883
------------------ -----------------------
Total Liabilities and Stockholders' Equity $177,443,947 $152,811,266
================== =======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
-------------- -------------- ----------------- ---------------
1998 1997 1998 1997
Gross revenues $37,865,775 $34,447,899 $108,529,304 $104,088,151
Net (increase) in deferred revenues (7,593,094) (5,763,603) (22,592,813) (16,561,250)
-------------- -------------- ----------------- ---------------
Net revenues 30,272,681 28,684,296 85,936,491 87,526,901
Costs and expenses:
Direct costs 16,994,480 12,453,595 48,108,692 42,382,185
Service, selling, and general and
administrative 13,756,606 13,673,500 41,169,354 35,806,136
Depreciation and amortization 1,336,174 935,164 3,747,815 2,436,115
-------------- -------------- ----------------- ---------------
Total costs and expenses 32,087,260 27,062,259 93,025,861 80,624,436
-------------- -------------- ----------------- ---------------
Income (loss) from operations (1,814,579) 1,622,037 (7,089,370) 6,902,465
Other income 311,217 253,855 828,438 649,766
-------------- -------------- ----------------- ---------------
Income (loss) before provision for income
taxes (1,503,362) 1,875,892 (6,260,932) 7,552,231
Provision (benefit) for income taxes (263,838) 710,013 (2,150,327) 2,746,490
-------------- -------------- ----------------- ---------------
Net income (loss) ($1,239,524) $1,165,879 ($4,110,605) $4,805,741
============== ============== ================= ===============
Earnings per share:
Basic ($0.08) $0.09 ($0.27) $0.36
============== ============== ================= ===============
Diluted ($0.08) $0.07 ($0.27) $0.30
============== ============== ================= ===============
Weighted average number of shares outstanding:
Basic 15,520,411 13,284,760 14,981,328 13,228,056
============== ============== ================= ===============
Diluted 15,520,411 15,786,572 14,981,328 13,785,414
============== ============== ================= ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
For the Nine Months Ended December 31,
-------------------- ----------------
1998 1997
-------------------- ----------------
Net cash provided by operating activities ($10,166,006) $7,339,879
Cash flows from investing activities:
Property and equipment purchased (3,813,415) (3,062,217)
Net cash paid for acquired business - (1,301,999)
Purchase of marketable securities (2,205,420) (447,253)
Proceeds from sales of marketable securities 542,586 383,368
-------------------- ----------------
Net cash (used in) investing activities (5,476,249) (4,428,101)
-------------------- ----------------
Cash flows from financing activities:
(Increase) decrease in notes receivable 110,219 (666,705)
Exercise of common stock options and stock grants 268,733 840,214
Purchase treasury stock (3,126,743) -
Repayments, notes and capital leases (1,839,694) (1,651,085)
-------------------- ----------------
Net cash (used in) financing activities (4,587,485) (1,477,576)
-------------------- ----------------
Net increase (decrease) in cash and cash equivalents (20,229,740) 1,434,202
Cash and cash equivalents at beginning of period 24,062,052 17,031,925
-------------------- ----------------
Cash and cash equivalents at end of period $3,832,312 $18,466,127
-------------------- ----------------
Supplemental Cash Flow Information:
Cash payments for:
Interest $346,967 $262,878
-------------------- ----------------
Income taxes $1,033,436 $2,132,175
-------------------- ----------------
Non-Cash Investing and financing activities:
Purchase of preferred stock - $6,420,363
Note issued in connection with purchase of preferred stock - 2,395,960
Property and equipment financed through capital leases $1,348,614 1,373,450
Exercise of restricted common stock options 9,146,250 -
Increase in loans to officers and directors (8,291,784) -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
1. THE COMPANY
Warrantech, through its wholly owned subsidiaries, markets and administers
service contracts and extended warranties. The Company is a third party
administrator for a variety of dealer/clients in selected industries and offers
call center and technical computer services. The Company assists dealer/clients
in obtaining insurance policies from highly rated independent insurance
companies for all contracts and programs offered. The insurance company is then
responsible for the cost of repairs or replacements for the contracts
administered by Warrantech.
The Company operates under three major business segments: Automotive, Consumer
Products and International. The Automotive segment markets and administers
extended warranties on automobiles, light trucks, recreational vehicles and
automotive components. These products are sold principally by franchised and
independent automobile dealers, leasing companies, repair facilities, retail
stores and financial institutions. The Consumer Products segment markets and
administers extended warranties on household appliances, electronics and homes.
These products include home appliances, consumer electronics, televisions,
computers, home office equipment and homes. These products are sold principally
by retailers, distributors, manufacturers, utility companies and financial
institutions. Warrantech also direct markets these products to the ultimate
consumer through telemarketing and direct mail campaigns. The International
segment markets and administers outside the United States predominately the same
products and services of the other business segments. The International segment
is currently operating in the United Kingdom, Central and South America, Puerto
Rico and the Caribbean.
The predominant terms of the service contracts and extended warranties range
from twelve (12) to eighty-four (84) months. The Company acts as a third party
administrator on behalf of the dealer/clients and insurance companies. The
actual repairs and replacements required under the service contract agreements
are performed by independent third party authorized repair facilities. The cost
of these repairs is borne by the insurance companies which have the ultimate
responsibility for the claims. The insurance policy indemnifies the
dealer/clients against losses resulting from service contract claims and
protects the consumer by ensuring their claims will be paid.
The Company's service contract programs benefit consumers with expanded and/or
extended product coverage for a specified period of time (and/or mileage in the
case of automobiles and recreational vehicles), similar to that provided by
manufacturers under the terms of their product warranties. Such coverage
generally provides for the repair or replacement of the product, or a component
thereof, in the event of its failure. The Company's service contract programs
benefit the dealer/clients by providing enhanced value to the goods and services
they offer. It also provides the opportunity for increased revenue and income
while outsourcing the costs and responsibilities of operating an extended
warranty program.
6
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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, 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 10K/A for the
year ended March 31, 1999.
Certain prior periods amounts may have been reclassified to conform to current
periods presentation.
Revenue Recognition Policy - The Company's revenue recognition policy is
segregated into two distinct methods depending on whether the Company or the
retailer/dealer is designated as the obligor on the service contract sale. In
either case, a highly rated independent insurance company assumes all claims
liabilities of the service contracts administered by the Company.
Dealer obligor service contracts are sales in which the retailer/dealer is
designated as the obligor. For these service contract sales, using the
proportional performance method, the Company recognizes revenues in direct
proportion to the costs incurred in providing the service contract programs to
the Company's clients. Revenues in amounts sufficient to meet future
administrative costs and a reasonable gross profit thereon are deferred. Sales
of dealer obligor service contracts are reflected in gross revenues net of
premiums paid to insurance companies.
Administrator obligor service contracts are sales in which Warrantech is
designated as the obligor. For these service contract sales, the Company
recognizes revenues in accordance with Financial Accounting Standards Board
Technical Bulletin 90-1 ("TB 90-1"), Accounting for Separately Priced Extended
Warranty and Product Maintenance Contracts, and Statement of Financial
Accounting Standards No. 60 ("SFAS 60"), Accounting and Reporting by Insurance
Enterprises. These accounting standards require the recognition of revenue over
the life of the contract on a straight-line basis, unless sufficient,
company-specific, historical evidence indicates that the cost of performing
services under these contracts are incurred on other than a straight-line basis.
The Company is recognizing revenue on administrative obligor contracts based on
company specific historical claims experience over the life of the contract.
The financial statements for the fiscal years ended March 31, 1998 and 1997 have
been restated to retroactively reflect the adoption of this change in accounting
policy. The financial statements for the period ending December 31, 1998 are
also restated to reflect the adoption of this accounting change and the effect
of the reversal of $2,600,000 of net revenue on the portfolio transfer of
Computer City by CompUSA. Previously the Company's Form 10-Q for the quarter
ended December 31, 1998 had recognized $2,600,000 of net revenue on the
portfolio transfer of Computer City by CompUSA. This recognition has now been
reversed due to the termination of Warrantech's administrative agreement with
CompUSA. The net effect on income was $1,529,000 or $.10 per share.
3. CHANGE IN ACCOUNTING POLICY
Effective with the fiscal year ended March 31, 1999, the Company changed its
accounting policy with respect to the recognition of revenue for service
contracts sold where Warrantech is named as the obligor. Revenue for
administrative obligor contracts is recognized in accordance with Financial
Accounting Standards Board Technical Bulletin 90-1 ("TB 90-1"), Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts, and
Statement of Financial Accounting Standards No. 60 ("SFAS 60"), Accounting and
Reporting by Insurance Enterprises. These accounting standards require the
recognition of revenue over the life of the contract on a straight-line basis,
unless sufficient, company-specific, historical evidence indicates that the cost
of performing services under these contracts are incurred on other than a
straight-line basis. The Company is recognizing revenue on administrative
obligor contracts based on company specific historical claims experience over
the life of the contract. In addition, the Company has adopted Statement of
Financial Accounting Standards No. 113 ("SFAS 113"), Accounting and Reporting
7
<PAGE>
for Reinsurance of Short-Duration and Long Duration Contracts. This requires
that insurance premium costs be ratably expensed over the life of the service
contract. The financial statements for the years ended March 31, 1998 and 1997
were previously prepared based on the proportional performance method which
recognized all revenues in direct proportion to the costs incurred in providing
the service contract programs to the Company's clients. Revenues in amounts
sufficient to meet future administrative costs and a reasonable gross profit
thereon were deferred.
Dealer obligor service contracts are sales in which the retailer/dealer is
designated as the obligor. For these service contract sales, using the
proportional performance method, the Company recognizes revenues in direct
proportion to the costs incurred in providing the service contract programs to
the Company's clients. Revenues in amounts sufficient to meet future
administrative costs and a reasonable gross profit thereon are deferred.
Effective with the fiscal year ended March 31, 1999, the Company changed its
accounting policy with respect to the presentation of revenue for dealer obligor
service contracts sold. Sales of dealer obligor service contracts are now
reflected in gross revenues net of premiums paid to insurance companies.
Previously, premiums paid to insurance companies were included in gross revenue
and the corresponding amount in direct costs.
The Company has given retroactive effect to this new accounting policy by
restating previously reported financial statements for the fiscal years ended
March 31, 1998 and 1997. In addition, retained earnings at April 1, 1996
reflects the cumulative $8,080,010 effect of the restatement through March 31,
1996. The aggregate reduction in net income of $10,948,664 represents deferred
revenues net of deferred direct costs which will be recognized in future
operating periods. The restatement of the 1998 and 1997 financial statements did
not adversely affect the Company's liquidity or cash flows.
The impact of the restatement for the fiscal year ended March 31, 1998 and 1997
is as follows:
<TABLE>
<S> <C> <C> <C> <C>
FOR THE YEARS ENDED MARCH 31,
---------------------------------- -------------------------------------
1998 1998 1997 1997
As Restated As Previously As Restated As Previously
Reported Reported
----------------- ---------------- ------------------ ------------------
Gross revenues $132,797,006 $201,724,332 $106,775,745 $161,044,135
Net (increase) in deferred revenue (21,447,327) (1,985,798) (20,501,768) (1,381,271)
----------------- ---------------- ------------------ ------------------
Net revenues 111,349,679 199,738,534 86,273,977 159,662,864
----------------- ---------------- ------------------ ------------------
Net income $5,619,823 $5,261,037 $2,284,867 $4,794,715
================= ================ ================== ==================
Basic earnings per common share $0.42 $0.40 $0.18 $0.37
================= ================ ================== ==================
Diluted earnings per common share $0.36 $0.34 $0.15 $0.31
================= ================ ================== ==================
Cash dividend declared NONE NONE NONE NONE
================= ================ ================== ==================
Total assets $152,811,266 $81,917,288 $117,120,031 $66,124,255
================= ================ ================== ==================
Long-term debt and
Capital lease obligations $2,153,286 $2,153,286 $2,491,786 $2,491,786
================= ================ ================== ==================
Common stockholders' equity $21,533,883 $31,764,955 $14,692,083 $25,281,941
================= ================ ================== ==================
Working capital $16,329,259 $16,551,543 $13,342,706 $13,602,168
================= ================ ================== ==================
</TABLE>
8
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The impact of the restatement for the Three and Nine Months ended December 31,
1998 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------------------- --------------------------------------
As Restated As Previously As Restated As Previously
Reported Reported
----------------- --------------- ---------------- --------------------
Gross revenues $37,865,775 $59,578,186 $108,529,304 $170,983,832
Net (increase) in deferred revenue (7,593,094) (786,474) (22,592,813) (1,928,052)
----------------- --------------- ---------------- --------------------
Net revenues 30,272,681 58,791,712 85,936,491 169,055,780
----------------- --------------- ---------------- --------------------
Net income (loss) ($1,239,524) $1,817,062 ($4,110,605) $1,183,367
================= =============== ================ ====================
Basic earnings per common share ($0.08) $0.12 ($0.27) $0.08
================= =============== ================ ====================
Diluted earnings per common share ($0.08) $0.12 ($0.27) $0.08
================= =============== ================ ====================
Cash dividend declared NONE NONE NONE NONE
================= =============== ================ ====================
Total assets $177,443,947 $92,250,482 $177,443,947 $92,250,482
================= =============== ================ ====================
Long-term debt and
Capital lease obligations $2,050,036 $2,050,036 $2,050,036 $2,050,036
================= =============== ================ ====================
Common stockholders' equity $15,327,659 $30,852,704 $15,327,659 $30,852,704
================= =============== ================ ====================
Working capital $12,390,335 $14,391,980 $12,390,335 $14,391,980
================= =============== ================ ====================
</TABLE>
4. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three and
nine month periods ended December 31, 1998 and 1997 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
------------------------------------- -------------------------------------
1998 1997 1998 1997
----------------- ----------------- ------------------ ----------------
Net income(loss) ($1,239,524) $1,165,879 ($4,110,605) $4,805,741
Other Comprehensive Income (loss), net of tax
Foreign currency translation adjustments (100,464) 41,577 (107,860) 20,641
Unrealized gain(loss) on investments 643 3,265 (1,912) 8,311
----------------- ----------------- ------------------ ----------------
Comprehensive Income(loss) ($1,339,345) $1,210,721 ($4,220,377) $4,834,693
================= ================= ================== ================
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
December 31, 1998 and March 31, 1998 are as follows:
December 31, March 31,
1998 1998
----------------- -------------
Unrealized gain on investments $5,143 $7,055
Foreign currency translation adjustments (29,307) 78,553
----------------- -------------
Accumulated other comprehensive income(loss) ($24,164) $85,608
================= =============
9
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5. EARNINGS PER SHARE
The computation of earnings per share at December 31, 1998 and December 31, 1997
was as follows:
<TABLE>
<S> <C> <C> <C> <C>
For The Three Months Ended For The Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
------------------------------------ -----------------------------------
Numerator:
Net income applicable to common stock ($1,239,524) $1,165,879 ($4,110,605) $4,805,741
=================== ================ ================= ================
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,520,411 13,284,760 14,981,328 13,228,056
Stock Options (treasury method) - 2,501,812 - 2,557,358
------------------- ---------------- ----------------- ----------------
Diluted shares 15,520,411 15,786,572 14,981,328 15,785,414
=================== ================ ================= ================
Earnings Per Common Share:
Basic ($0.08) $0.09 ($0.27) $0.36
=================== ================ ================= ================
Diluted ($0.08) $0.07 ($0.27) $0.30
=================== ================ ================= ================
</TABLE>
6. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 131 is effective for financial statements
for periods beginning after December 15, 1997. This Statement requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS 131 will have no impact on the Company's results of operations,
financial condition or liquidity.
10
<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 annual report may contain 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 and beyond.
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 (d) regulatory or
legal changes affecting the Company's business, or (e) loss of business from or
significant change in relationship with, any major customer of the Company.
Should one or more of these or any other risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or expected.
Three Months Ended December 31, 1998 Compared to the Three Months ended
December 31, 1997
Gross revenues for the three month period ended December 31, 1998 increased $3.4
million or 9.9% to $37,865,775 as compared with $34,447,899 for the same period
last year. This increase is directly attributable to increased revenue with new
and existing customers resulting from continued market penetration in the
Consumer Products and International markets.
The net increase in deferred revenues for the three month period ended December
31, 1998 amounted to $7,593,094 as compared with a net increase of $5,763,603
for the three month period ended December 31, 1997. These increases are directly
attributable to the increased number of service contracts sold with a service
period greater than one year during the current year offset in part by the
amounts earned on expiring contracts during the same periods.
Direct costs, which consist primarily of insurance premiums and commissions, are
those costs directly related to the production and acquisition of service
contracts where Warrantech is named as the obligor. Direct costs were
$16,994,480 for the three month period ended December 31, 1998 as compared with
$12,453,595 for the comparable period last year. The increases in direct costs
are primarily the result of volume increases in contracts sold and the
amortization of previously deferred direct costs being recognized in the current
year. Direct costs as a percentage of gross revenues increased to 44.9% from
36.2% compared to last year. This increase is due in part to increased volume of
lower margined Home service contracts, as well as higher premium costs.
Service, selling and general and administrative expenses (SG&A) for the three
months ended December 31, 1998 were $13,756,606 as compared to $13,673,500 for
the three months ended December 31, 1997. This increase is primarily due to the
increase in sales. SG&A as a percentage of sales improved to 36.3% for the third
quarter 1998 compared to 39.7% for the third quarter 1997. This decrease is the
result of the continued re-engineering of the Company's call center processes
and other cost cutting initiatives which began in the second quarter of the
current fiscal year.
Depreciation and amortization increased $401,010 to $1,336,174 for the three
months ended December 31, 1998 compared to $935,164 for the same period last
year primarily as the result of capital additions related to the Company's
ongoing upgrade of its computer systems.
Net loss for the three months ended December 31, 1998 amounted to ($1,239,524)
or ($0.08) per diluted share as compared to net income of $1,165,879 or $0.07
per diluted share for the comparable period last year. This change in net income
(loss) is the result of the factors listed above.
11
<PAGE>
Nine Months Ended December 31, 1998 Compared to the Nine Months Ended
December 31, 1997
Gross revenues for the nine months ended December 31, 1998 increased $4.4
million or 4.3% to $108,529,304 as compared with $104,088,151 for the same
period last year. This increase is directly attributable to increased revenue
with new and existing customers resulting from continued market penetration in
the Consumer Products and International markets.
Direct costs, which consist primarily of insurance premiums and commissions, are
those costs directly related to the production and acquisition of service
contracts where Warrantech is named as the obligor. Direct costs were
$48,108,692 for the nine months ended December 31, 1998, as compared with
$42,382,185 for the nine months ended December 31, 1997. The increases in direct
costs are primarily the result of volume increases in contracts sold and the
amortization of previously deferred direct costs being recognized in the current
year. Direct costs as a percentage of gross revenues increased to 44.3% from
40.7% compared to last year. This increase is due in part to increased volume of
lower margined Home service contracts, higher premium costs and a partial refund
of prior year insurance payments which reduced premium costs in the period ended
December 31, 1997.
Service, selling and general and administrative expenses (SG&A) for the nine
months ended December 31, 1998 were $41,169,354, an increase of $5.4 million or
15.0% compared to $35,806,136 for the nine months ended December 31, 1997. The
increase is primarily related to the increased revenue and higher payroll and
payroll related costs. As a percentage of sales SG&A increased to 37.9% for the
nine months ended December 31, 1998 as compared to 34.4% for the nine months
ended December 31, 1997.
Depreciation and amortization increased $1,311,700 to $3,747,815 for the nine
months ended December 31, 1998 compared to $2,436,115 for the same period last
year primarily as the result of capital additions related to the Company's
ongoing upgrade of its computer systems.
Net loss for the nine months ended December 31, 1998 amounted to ($4,110,605) or
($0.27) per diluted share, compared to net income of $4,805,741 or $0.30 per
diluted share for the comparable period last year. This change in net income
(loss) is the result of the factors listed above.
Liquidity and Financial Resources
The Company has ongoing relationships 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
nine month period ended December 31, 1998 amounted to $1,348,614. In addition,
the Company has a revolving credit agreement with a bank which originally
provided for maximum aggregate borrowings up to $10,000,000 with interest at the
bank's prevailing prime rate or LIBOR plus 2%. Subsequent to March 31, 1999, the
line of credit was adjusted to $1,500,000 and currently expired on December 31,
1999. The Company is presently in negotiations to increase and/or replace this
line of credit. Although it is anticipated that this will be completed by
February 2000, no assurances can be given this will be accomplished. During the
fiscal years ended March 31, 1998 and 1999 the Company did not have any
borrowings under this line of credit.
Cash used by operations during the nine months ended December 31, 1998 amounted
to $10,166,006 which is directly attributable to the temporary increase in
accounts receivable offset in part by increases in insurance premiums payable.
During the nine months ended December 31, 1998, the Company's cash position
decreased from $24,062,052 to $3,832,312, while its accounts receivable
increased from $27,878,335 to $48,776,784 resulting from the temporary delay in
receipt of payments for contracts closed prior to December 31, 1998. During the
nine months ended December 31, 1998, the Company's investments in marketable
securities increased by $1,673,484 to $4,179,225. As of March 31, 1999, the
Company's cash and cash equivalents returned to a normal level of approximately
$15,000,000. The reduction of cash and cash equivalents also reflects
expenditures to purchase an aggregate of 925,300 shares of the Company's common
stock for treasury purposes during the nine months ended December 31, 1998. 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.
12
<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
<TABLE>
<S> <C> <C> <C>
At the Company's Annual Meeting of Shareholders held on October 27, 1998, 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 12,404,274 200,273
William Tweed 12,404,274 200,273
Jeffrey J. White 12,404,124 200,423
Lawrence Richenstein 12,404,274 200,273
Gordon A. Paris 12,404,274 200,273
In addition, the shareholders approved the 1998 Stock Option Plan by a vote of 12,208,562 for, 345,281 against,
and 50,704 withheld.
</TABLE>
Item 5. Other Information
Not applicable.
Item 6 (a) Exhibits
(27) Financial Data Schedule
Item 6 Reports on Form 8-K
Not applicable
13
<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
By: /s/ Joel San Antonio
------------------------------------
Joel San Antonio - Chairman of the
Board and Chief Executive Officer
Date: January 5, 2000
By: /s/ Richard F. Gavino
------------------------------------
Richard F. Gavino - Executive Vice
President and Chief Financial Officer
Date: January 5, 2000
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 3,832,312
<SECURITIES> 2,012,841
<RECEIVABLES> 0
<ALLOWANCES> 894,041
<INVENTORY> 0
<CURRENT-ASSETS> 61,522,563
<PP&E> 28,518,058
<DEPRECIATION> 12,897,229
<TOTAL-ASSETS> 177,443,947
<CURRENT-LIABILITIES> 49,132,228
<BONDS> 0
<COMMON> 115,488
0
0
<OTHER-SE> 15,212,171
<TOTAL-LIABILITY-AND-EQUITY> 177,443,947
<SALES> 0
<TOTAL-REVENUES> 108,529,304
<CGS> 0
<TOTAL-COSTS> 93,025,861
<OTHER-EXPENSES> (1,175,405)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 346,967
<INCOME-PRETAX> (6,260,932)
<INCOME-TAX> (2,150,327)
<INCOME-CONTINUING> (4,110,605)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,110,605)
<EPS-BASIC> (.27)
<EPS-DILUTED> (.27)
</TABLE>
