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, 1999
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 February 11, 2000
Common stock, par value $.007 per share 15,176,986 shares
1
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WARRANTECH CORPORATION AND SUBSIDIARIES
I N D E X
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Page No.
PART I - Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1999
(Unaudited) and March 31, 1999................................................... 3
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended December 31, 1999
and 1998 (Unaudited) ......................................................... 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, 1999
and 1998 (Unaudited)................................................... 5
Notes to Condensed Consolidated Financial Statements ........................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................ 10
PART II - Other Information..................................................................... 13
Signatures ...................................................................................... 15
</TABLE>
2
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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AS S E T S
(unaudited)
December 31, March 31,
-------------------- --------------------
1999 1999
-------------------- --------------------
Current assets:
Cash and cash equivalents $9,601,744 $15,032,473
Investments in marketable securities 3,446,994 2,961,602
Accounts receivable (net of allowances of
$1,201,357 and $1,115,285, respectively) 19,469,625 39,275,404
Other receivables, net 2,795,371 5,924,332
Income tax receivable 3,962,405 1,147,324
Deferred income taxes 1,123,776 1,419,854
Prepaid expenses and other current assets 1,632,130 1,537,633
-------------------- --------------------
Total current assets 42,032,045 67,298,622
Property and equipment, net 16,387,549 16,277,473
Other assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of $5,383,648
and $4,212,956 respectively) 2,774,885 3,276,524
Deferred income taxes 9,689,436 9,603,277
Deferred Direct Costs 86,041,468 86,107,696
Investments in marketable securities 1,602,803 1,321,019
Restricted cash 800,000 800,000
Split dollar life insurance policies 1,435,756 1,370,010
Notes receivable 1,507,733 477,767
Collateral security fund 199,389 199,389
Other assets 165,151 178,493
-------------------- --------------------
Total other assets 104,216,621 103,334,175
-------------------- --------------------
Total Assets $162,636,215 $186,910,270
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
December 31, March 31,
-------------------- --------------------
1999 1999
-------------------- --------------------
Current liabilities:
Current maturities of long-term debt and capital lease obligations $1,415,678 $1,558,447
Insurance premiums payable 23,809,449 36,585,920
Accounts and commissions payable 9,087,705 8,524,040
Legal settlements payable - 100,000
Accrued expenses and other current liabilities 7,337,538 8,346,440
-------------------- --------------------
Total current liabilities 41,650,370 55,114,847
Deferred revenues 116,402,565 118,497,564
Long-term debt and capital lease obligations 1,927,869 2,420,967
Deferred rent payable 392,404 476,890
-------------------- --------------------
Total liabilities 160,373,208 176,510,268
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000
issued - none at December 31, 1999 and March 31, 1999
Common stock - $.007 par value: authorized - 30,000,000
Shares issued; - 16,505,911 shares at December 31,1999
and 16,501,786 shares at March 31, 1999 115,541 115,513
Additional paid-in capital 23,737,835 23,728,881
Loans to directors and officers (9,408,052) (9,006,699)
Accumulated other comprehensive income, net of taxes (132,418) (93,534)
Retained earnings (7,563,395) 105,154
-------------------- --------------------
6,749,511 14,849,315
Treasury stock - at cost, 1,330,300 shares at December 31, 1999 and
1,280,300 shares at March 31, 1999 (4,486,504) (4,449,313)
-------------------- --------------------
Total Stockholders' Equity 2,263,007 10,400,002
-------------------- --------------------
Total Liabilities and Stockholders' Equity $162,636,215 $186,910,270
==================== ====================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months Ended For the Nine Months Ended
December 31, December 31,
---------------- ---------------- ----------------- ---------------
1999 1998 1999 1998
---------------- ---------------- ----------------- ---------------
Gross revenues $26,830,325 $37,865,775 $78,864,182 $108,529,304
Net decrease(increase) in deferred revenues 3,914,525 (7,593,094) 2,112,273 (22,592,813)
---------------- ---------------- ----------------- ---------------
Net revenues 30,744,850 30,272,681 80,976,455 85,936,491
Costs and expenses:
Direct costs 20,028,836 16,994,480 50,697,253 48,108,692
Service, selling, and general and administrative 11,311,378 13,756,606 36,869,128 41,169,354
Depreciation and amortization 1,504,709 1,336,174 4,375,387 3,747,815
---------------- ---------------- ----------------- ---------------
Total costs and expenses 32,844,923 32,087,260 91,941,768 93,025,861
---------------- ---------------- ----------------- ---------------
(Loss) from operations (2,100,073) (1,814,579) (10,965,313) (7,089,370)
Other income 275,742 311,217 786,189 828,438
---------------- ---------------- ----------------- ---------------
(Loss) before benefit for income taxes (1,824,331) (1,503,362) (10,179,124) (6,260,932)
(Benefit) for income taxes (172,119) (263,838) (2,510,575) (2,150,327)
---------------- ---------------- ----------------- ---------------
Net (loss) ($1,652,212) ($1,239,524) ($7,668,549) ($4,110,605)
================ ================ ================= ===============
Earnings per share:
Basic ($0.11) ($0.08) ($0.50) ($0.27)
================ ================ ================= ===============
Diluted ($0.11) ($0.08) ($0.50) ($0.27)
================ ================ ================= ===============
Weighted average number of shares outstanding:
Basic 15,196,263 15,520,411 15,214,422 14,981,328
================ ================ ================= ===============
Diluted 15,196,263 15,520,411 15,214,422 14,981,328
================ ================ ================= ===============
</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)
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For the Nine Months Ended
December 31,
----------------- ------------------
1999 1998
Cash flows from (used in) operating activities $925,322 ($10,166,006)
----------------- ------------------
Cash flows from investing activities:
Property and equipment purchased (3,280,179) (3,813,415)
Purchase of marketable securities (3,600,000) (2,205,420)
Proceeds from sales of marketable securities 2,835,000 542,586
----------------- ------------------
Net cash (used in) investing activities (4,045,179) (5,476,249)
----------------- ------------------
Cash flows from financing activities:
(Increase) decrease in notes receivable (1,029,966) 110,219
Exercise of common stock options and stock grants 8,982 268,733
Issue treasury stock (37,191) -
Purchase treasury stock - (3,126,743)
Repayments, notes and capital leases (1,252,697) (1,839,694)
----------------- ------------------
Net cash (used in) financing activities (2,310,872) (4,587,485)
----------------- ------------------
Net increase (decrease) in cash and cash equivalents (5,430,729) (20,229,740)
Cash and cash equivalents at beginning of period 15,032,473 24,062,052
----------------- ------------------
Cash and cash equivalents at end of period $9,601,744 $3,832,312
================= ==================
Supplemental Cash Flow Information:
Cash payments for:
Interest $276,663 $346,967
=================
==================
Income taxes $95,238 $1,033,436
================= ==================
Non-Cash Investing and financing activities:
Property and equipment financed through capital leases $616,830 $1,348,614
Exercise of restricted common stock options - 9,335,588
Increase in loans to officers and directors (401,353) (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, 1999
(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.
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 three and nine Months ended December 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending March 31, 2000. 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 year amounts may have been reclassified to conform to current year
presentation.
6
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Revenue Recognition Policy - The Company's revenue recognition policy is
segregated into two distinct categories 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 as well as related sales commissions
associated with the contracts.
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 costs 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.
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
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For the Three Months Ended For the Nine Months Ended
December 31, December 31,
------------------------------------ ---------------------------------
1999 1998 1999 1998
------------------------------------ ---------------------------------
Net (loss) ($1,652,212) ($1,239,524) ($7,668,549) ($4,110,605)
Other Comprehensive Income, net of tax
Foreign currency translation adjustments (40,825) (100,464) (7,394) (107,860)
Unrealized gain(loss) on investments (11,939) 643 (31,490) (1,912)
----------------- ----------------- ---------------- ---------------
Comprehensive Income (loss) ($1,704,976) ($1,339,345) ($7,707,433) ($4,220,377)
================= ================= ================ ===============
The components of accumulated other comprehensive income, net of related tax, are as follows
December 31, March 31,
1999 1999
------------------------------------
Accumulated translation adjustments ($108,380) ($100,986)
Unrealized gain/(loss) on investments (24,038) 7,452
----------------- -----------------
Accumulated other comprehensive income ($132,418) ($93,534)
================= =================
7
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4. EARNINGS PER SHARE
The computation of earnings per share was as follows:
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
---- ----- ----
----------------- ---------------- ----------------- ---------------
1999 1998 1999 1998
----------------- ---------------- ----------------- ---------------
Numerator:
Net (loss) applicable to common stock ($1,652,212) ($1,239,524) ($7,668,549) ($4,110,605)
================= ================ ================= ===============
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,196,263 15,520,411 15,214,422 14,981,328
Stock Options (treasury method) - - - -
----------------- ---------------- ----------------- ---------------
Diluted shares 15,196,263 15,520,411 15,214,422 14,981,328
================= ================ ================= ===============
Earnings Per Common Share:
Basic ($0.11) ($0.08) ($0.50) ($0.27)
================= ================ ================= ===============
Diluted ($0.11) ($0.08) ($0.50) ($0.27)
================= ================ ================= ===============
</TABLE>
In a net loss position options are anti-dilutive.
5. SEGMENTS
The Company defines its operations into three business segments: Automotive,
Consumer Products and International operations. All Other includes general
corporate income and expenses, inter-segment sales and expenses and other
corporate assets not related to the three business segments.
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Consumer Reportable All
Three Months Ended Automotive Products International Segments Other Total
December 31, 1999
Revenues $10,483,139 $12,862,372 $3,580,484 $26,925,995 ($95,670) $26,830,325
Pretax Income (Loss) (627,999) 629,235 (2,632,118) (2,630,882) 806,551 (1,824,331)
Net Interest Income 12,782 31,179 (162) 43,799 291,418 335,217
Depreciation/Amortization 183,593 409,495 230,614 823,702 681,007 1,504,709
December 31, 1998
Revenues $10,139,724 $25,144,519 $4,645,930 $39,930,173 ($2,064,398) $37,865,775
Pretax Income (Loss) (938,716) (273,686) (39,173) (1,251,575) (251,787) (1,503,362)
Net Interest Income 17,154 54,120 19,548 90,822 202,217 293,039
Depreciation/Amortization 178,582 300,207 216,225 695,014 641,160 1,336,174
Consumer Reportable All
Nine Months Ended Automotive Products International Segments Other Total
December 31, 1999
Revenues $32,879,659 $38,251,062 $8,955,869 $80,086,590 ($1,222,408) $78,864,182
Pretax Income (Loss) (1,611,456) (5,092,023) (4,792,653) (11,496,132) 1,317,008 (10,179,124)
Net Interest Income 31,259 54,492 338 86,089 717,812 803,901
Depreciation/Amortization 553,858 1,139,977 668,499 2,362,334 2,013,053 4,375,387
December 31, 1998
Revenues $35,964,480 $66,033,507 $12,301,317 $114,299,304 ($5,770,000) $108,529,304
Pretax Income (Loss) (1,095,238) (5,014,221) (362,267) (6,471,726) 210,794 (6,260,932)
Net Interest Income 33,301 102,252 91,287 226,840 508,482 735,322
Depreciation/Amortization 539,491 918,710 450,670 1,908,871 1,838,944 3,747,815
</TABLE>
8
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6. SIGNIFICANT CUSTOMERS
The Company had one significant customer, CompUSA, which accounted for
approximately 34%, 34% and 32%, respectively, of consolidated gross revenues for
the years ended March 31, 1999, 1998 and 1997. The Company notified CompUSA in
May 1999 of price increases resulting from premium increases imposed by CIGNA
Insurance Company. On June 28, 1999, Warrantech received formal notification of
termination from CompUSA effective July 28, 1999. The loss of CompUSA had and
will have a significant impact on current and future revenues.
9
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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 underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, estimated or expected.
Results of Operations
Three Months Ended December 31, 1999 Compared to the Three Months ended December
31, 1998
Gross revenues for the three month period ended December 31, 1999 decreased
$11,035,450 or 29.1% to $26,830,325 as compared with $37,865,775 for the same
period last year. This decrease is directly attributable to decreased sales in
the Consumer Products and International business segments. In the Consumer
Products and International business segments, the decrease in revenue for the
three months ended December 31, 1999 occurred from decreased sales in computer
related extended warranties as a result of the termination of the Company's
relationship in July 1999 with its most significant customer, CompUSA. This
decrease was partially offset by an increase in sales of home warranty service
contracts. During the fiscal year March 31, 1999, CompUSA accounted for
approximately 34% of consolidated gross revenues.
The net decrease in deferred revenues for the three months ended December 31,
1999 was $3,914,525 as compared with a net increase of $7,593,094 for the same
period last year. This current quarter decrease is directly attributable to the
sales of service contracts in the current period with a service duration over
one year being less than the amortization of revenues from previous periods
being recognized in the current year. The year to year change is also the result
of the increase in deferred revenue for dealer obligor service contracts
necessary to meet future administrative costs to service these contracts.
Lastly, the net change in deferred revenue is significantly impacted by the
decreased revenues resulting from the termination of the Company's agreement
with CompUSA.
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
$20,028,836 for the three month period ended December 31, 1999 as compared with
$16,994,480 for the comparable period last year. The increase in direct costs
are primarily the result of prior period amortization costs being greater than
the current period costs being deferred to future periods offset by the reduced
revenues due to the termination of the Company's administrative agreement with
CompUSA. This increase is also the result of a premium increase in the
Automotive business segment in the current period.
Service, selling and general and administrative expenses (SG&A) for the three
months ended December 31, 1999 were reduced by $2,445,228 or 17.8% to
$11,311,378 as compared to $13,756,606 for the three months ended December 31,
1998. The decrease in SG&A expenses reflects the Company's operational
efficiency initiatives which include the reengineering of its call center
process and consolidation of certain operating and administrative functions.
These initiatives resulted in lower payroll and payroll related expenses,
telephone and other miscellaneous operating costs.
10
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Depreciation and amortization was $1,504,709 for the three months ended December
31, 1999 compared to $1,336,174 for the same period last year due primarily to
capital additions related to the Company's ongoing upgrade of its computer
systems.
The provision (benefit) for income taxes is based on the Company's projection of
its estimated effective tax rate for the fiscal year.
Net loss for the three months ended December 31, 1999 was $1,652,212 or $0.11
per diluted share compared to a net loss of $1,239,524 or $0.08 per diluted
share for the comparable period last year. This change is the result of losses
incurred in the International segment, the termination of the Company's
relationship with its most significant customer during the period and the other
factors listed above.
Nine Months Ended December 31, 1999 Compared to the Nine Months ended December
31, 1998
Gross revenues for the nine months ended December 31, 1999 decreased $29,665,122
or 27.3% to $78,864,182 as compared with $108,529,304 for the same period last
year. This decrease is directly attributable to decreased revenue in the
Automotive, Consumer Products and International business segments. In the
Automotive segment, the decrease in revenue was primarily the result of a sales
mix change created by an increase in dealer obligor business and a decline in
the Company's private label business resulting from the termination of a high
volume/low margin account. In the Consumer Products and International business
segments, the decrease in revenue for the nine months ended December 31, 1999
occurred primarily from decreased sales in computer related extended warranties
as a result of the termination of the Company's relationship with its most
significant customer, CompUSA. This decrease was partially offset by an increase
in sales of home warranty service contracts. During the fiscal year March 31,
1999, CompUSA accounted for approximately 34% of consolidated gross revenues.
The net decrease in deferred revenues for the nine months ended December 31,
1999 was $2,112,273 as compared with a net increase of $22,592,813 for the same
period last year. These decreases are directly attributable to the sales of
service contracts in the current period with a service duration over one year
being less than the amortization of revenues from previous periods being
recognized in the current year. The year to year change is also the result of
the increase in deferred revenue for dealer obligor service contracts necessary
to meet future administrative costs to service these contracts. Lastly, the net
change in deferred revenue is significantly impacted by the decreased revenues
resulting from the termination of the Company's agreement with CompUSA.
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
$50,697,253 for the nine months ended December 31, 1999, as compared with
$48,108,692 for the nine months ended December 31, 1998. The increase in direct
costs are primarily the result of prior period amortization costs being greater
than the current period costs being deferred to future periods offset by the
reduced revenues due to the termination of the Company's administrative
agreement with CompUSA. This increase is also the result of a premium increase
in the Automotive business segment in the current period.
Service, selling and general and administrative expenses (SG&A) for the nine
months ended December 31, 1999 were reduced by $4,300,226 or 10.4% to
$36,869,128, compared to $41,169,354 for the nine months ended December 31,
1998. The decrease in SG&A expenses reflects the Company's operational
efficiency initiatives which included the reengineering of its call center
process and consolidation of certain operating and administrative functions.
These initiatives resulted in lower payroll and payroll related expenses and
other miscellaneous operating costs.
Depreciation and amortization was $4,375,387 for the nine months ended December
31, 1999 compared to $3,747,815 for the same period last year primarily as the
result of capital additions related to the Company's ongoing upgrade of its
computer systems.
The provision (benefit) for income taxes is based on the Company's projection of
its estimated effective tax rate for the fiscal year.
11
<PAGE>
Net loss for the nine months ended December 31, 1999 was $7,668,549 or $0.50 per
diluted share compared to a net loss of $4,110,605 or $0.27 per diluted share
for the comparable period last year. This change is the result of losses
incurred in the International segment, the termination of the Company's
relationship with its most significant customer during the period and the other
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. In addition, the Company had a revolving credit agreement with a
bank which originally provided for maximum aggregate borrowings up to $1,500,000
with interest at the bank's prevailing prime rate or LIBOR plus 2% that expired
on December 31, 1999. The Company is presently in negotiations to replace this
line of credit. Although it is anticipated that this will be completed by March
2000, no assurances can be given this will be accomplished. During the nine
months ended December 31, 1999 and the fiscal years ended March 31, 1998 and
1999 the Company did not have any borrowings under this line of credit.
Cash provided by operating activities during the nine months ended December 31,
1999 was $.9 million as compared to cash used by operating activities of $10.2
million during 1998. For the nine months ended December 31, 1999 and December
31, 1998, these amounts were not sufficient for the Company to fund its regular
operating needs primarily as a result of capital expenditures and the repayments
on capital leases which amounted to $1.3 million in 1999 and $1.8 million in
1998. The Company has now substantially completed its investment in information
and telecommunications technology. Capital spending is continuously reviewed and
subject to change, however the Company does not expect to continue these levels
of expenditures.
Cash flow from current operations and its equipment financing arrangements are
expected to be sufficient to meet its foreseeable liquidity and capital resource
needs.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief Executive
Officer, and William Tweed and Jeff J. White, members of the Warrantech's Board
of Directors, exercised 3,000,000 of their vested options to purchase Warrantech
common stock. Promissory notes totaling $8,062,500 were signed with interest
payable over three years at an annual interest rate of 6%. The promissory notes,
which are with recourse and secured by the stock certificates issued, mature
July 5, 2001. An additional promissory note was signed by Joel San Antonio for
$595,634 on March 22, 1999 which represents the amounts funded by the Company
with respect to his payroll taxes for the exercise of these options. These
amounts have been recorded as a contra-equity account, which is a reduction of
stockholders' equity. The Company is currently in discussions with the Messrs.
San Antonio, Tweed and White to renegotiate the payment terms of the notes. The
payment of interest, which was due July 6, 1999, has been deferred pending
finalization of such discussions.
The effect of inflation has not been significant to the Company since its
formation.
Year 2000
The Company has addressed the business, financial, technical, legal and other
implications related to the various Year 2000 date issues. A comprehensive Year
2000 program was put into place during fiscal 1998 and executed through December
31, 1999. The primary goal of the Year 2000 program was to implement the changes
needed to answer functionality in the Year 2000, as cost effectively and
expeditiously as possible. As of February 11, 2000, the Company experienced no
significant interruptions from any computer hardware, software or other business
operations.
12
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
Effective with the business written August 1, 1999, Warrantech began
placing its automotive service contract business with Reliance Insurance
Company. On December 18, 1999, American International Group (AIG), who was
the previous insurance carrier for the Automotive business for
substantially all contracts sold from March 1, 1993 through July 31, 1999,
assumed the administration of these service contracts.
On December 9, 1999, a complaint and order to show cause were filed against
Warrantech in the Supreme Court of the State of New York by American Home
Assurance Company, Illinois National Insurance Company, National Union
Insurance Company of Louisiana and The New Hampshire Insurance Company
(collectively, "AIG") in which AIG sought to inspect and copy certain books
and records kept by Warrantech in the course of the business it conducted
under a General Agency Agreement ("GAA") with AIG. On December 14, 1999,
this action was removed by Warrantech to the United States District Court
for the Southern District of New York. American Home Assurance Co. et al,
v. Warrantech Automotive, Inc., 99 Civ. 12040 (BSJ). At a December 16, 1999
hearing, Warrantech agreed to make the books and records at issue available
to AIG for copying. On January 24, 2000 AIG made a motion to amend its
complaint to add claims for replevin and a declaratory judgment seeking
possession of the originals of the books and records and to add claims for
breach of contract, breach of fiduciary duty, negligence and gross
negligence based on allegations that Warrantech mishandled claims under the
GAA. AIG seeks damages in excess of $20 million. AIG also moved for summary
judgment on its claims seeking possession of the books and records.
Warrantech believes all of these claims are without merit and intends to
defend them vigorously. On February 7, 2000, Warrantech filed papers
opposing AIG's motion to amend its complaint insofar as it seeks to add a
claim for replevin and a declaratory judgment and opposing its motion for
summary judgment. Warrantech intends to bring a claim against AIG.
Service Guard Insurance Agency, Inc. v. Warrantech Automotive, Inc., New
Hampshire Insurance Company, Ronald Glime and Christopher Ford, Cause No.
99-12650, pending in the 126th Judicial District Court of Travis County,
Texas. Service Guard filed suit against Warrantech Automotive and New
Hampshire Insurance Company on October 28, 1999, seeking an injunction to
transfer claims-handling administration over automobile warranty claims to
a third-party, and seeking an unspecified amount of damages attributed to
alleged improper claims handling and tortious interference with contract.
Service Guard never pursued its original request for injunctive relief. On
January 27, 2000, Service Guard amended its petition to add AIG Warranty
Services as a defendant, again seeking to recover an unspecified amount of
damages from all defendants. On February 2, 2000, Service Guard filed an
application for a temporary restraining order against New Hampshire
Insurance Company and AIG Warranty Services, and at a hearing conducted on
February 8, 2000, the Court ordered Service Guard, New Hampshire Insurance
Company and AIG Warranty Services to mediate within twenty-one days the
disputes that form the basis for the requested injunctive relief.
Warrantech, Ford and Glime believe Service Guard's claims against them are
wholly without merit and intend to vigorously defend against those claims.
13
<PAGE>
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
Report on Form 8-K reporting item 5 dated October 1, 1999 filed October 18,
1999
Report on Form 8-K reporting item 5 dated November 19, 1999 filed November
23, 1999
14
<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: February 14, 2000
By: /s/ Richard F. Gavino
------------------------------------
Richard F. Gavino - Executive Vice
President and Chief Financial Officer
Date: February 14, 2000
15
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