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 September 30, 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 January 10, 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
<TABLE>
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Page No.
PART I - Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999
(Unaudited) and March 31, 1999................................................... 3
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended September 30, 1999
and 1998 (Unaudited) ......................................................... 4
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended September 30, 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 ...................................................................................... 14
</TABLE>
2
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<S> <C> <C>
(Unaudited)
September 30, March 31,
1999 1999
----------------- ----------------
Current assets:
Cash and cash equivalents $11,867,978 $15,032,473
Investments in marketable securities 3,613,896 2,961,602
Accounts receivable (net of allowances of
$1,244,440 and $1,115,285, respectively) 22,691,978 39,275,404
Other receivables, net 4,494,618 5,924,332
Income tax receivable 2,844,556 1,147,324
Deferred income taxes 1,420,053 1,419,854
Prepaid expenses and other current assets 1,727,447 1,537,633
----------------- ----------------
Total current assets 48,660,526 67,298,622
Property and equipment, net 16,078,638 16,277,473
Other assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of $5,216,435
and $4,212,956, respectively) 2,942,098 3,276,524
Deferred income taxes 10,325,747 9,603,277
Deferred direct costs 87,898,761 86,107,696
Investments in marketable securities 1,515,081 1,321,019
Restricted cash 800,000 800,000
Split dollar life insurance policies 1,433,504 1,370,010
Notes receivable 1,558,760 477,767
Collateral security fund 199,389 199,389
Other assets 178,518 178,493
----------------- ----------------
Total other assets 106,851,858 103,334,175
----------------- ----------------
Total Assets $171,591,022 $186,910,270
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
September 30, March 31,
1999 1999
----------------- ----------------
Current liabilities:
Current maturities of long-term debt and capital lease obligations $1,578,100 $1,558,447
Insurance premiums payable 26,247,967 36,585,920
Accounts and commissions payable 10,028,110 8,524,040
Legal settlements payable - 100,000
Accrued expenses and other current liabilities 6,919,636 8,346,440
----------------- ----------------
Total current liabilities 44,773,813 55,114,847
Deferred revenues 120,318,281 118,497,564
Long-term debt and capital lease obligations 1,915,447 2,420,967
Deferred rent payable 450,693 476,890
----------------- ----------------
Total liabilities 167,458,234 176,510,268
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000
issued - none at September 30, 1999 and March 31, 1999
Common stock - $.007 par value: authorized - 30,000,000 Shares
issued; - 16,504,536 shares at September 30, 1999
and 16,501,783 shares at March 31, 1999 115,532 115,513
Additional paid-in capital 23,736,470 23,728,881
Loans to directors and officers (9,279,064) (9,006,699)
Accumulated other comprehensive income, net of taxes (79,654) (93,534)
Retained earnings (5,911,183) 105,154
----------------- ----------------
8,582,101 14,849,315
Treasury stock - at cost, 1,280,300 shares at September 30,1999 and March 31, 1999 (4,449,313) (4,449,313)
----------------- ----------------
Total Stockholders' Equity 4,132,788 10,400,002
----------------- ----------------
Total Liabilities and Stockholders' Equity $171,591,022 $186,910,270
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Six Months Ended
September 30, September 30,
------------------ ----------------- ------------------ -----------------
1999 1998 1999 1998
------------------ ----------------- ------------------ -----------------
Gross revenues $22,753,974 $39,786,757 $52,033,857 $70,663,529
Net decrease (increase) in deferred revenues 4,223,678 (8,257,093) (1,802,252) (14,999,719)
------------------ ----------------- ------------------ -----------------
Net revenues 26,977,652 31,529,664 50,231,605 55,663,810
Costs and expenses:
Direct costs 16,878,789 18,488,090 30,668,417 31,114,212
Service, selling, and general and administrative 12,557,798 13,235,901 25,557,750 27,412,748
Depreciation and amortization 1,457,331 1,137,027 2,870,678 2,411,641
------------------ ----------------- ------------------ -----------------
Total costs and expenses 30,893,918 32,861,018 59,096,895 60,938,601
------------------ ----------------- ------------------ -----------------
(Loss) from operations (3,916,266) (1,331,354) (8,865,240) (5,274,791)
Other income 257,352 347,261 510,447 517,221
------------------ ----------------- ------------------ -----------------
(Loss) before provision for income taxes (3,658,914) (984,093) (8,354,793) (4,757,570)
Provision (benefit) for income taxes (1,074,841) 96,948 (2,338,456) (1,886,489)
------------------ ----------------- ------------------ -----------------
Net (loss) ($2,584,073) ($1,081,041) ($6,016,337) ($2,871,081)
================== ================= ================== =================
Earnings per share:
Basic ($0.17) ($0.07) ($0.40) ($0.20)
================== ================= ================== =================
Diluted ($0.17) ($0.07) ($0.40) ($0.20)
================== ================= ================== =================
Weighted average number of shares outstanding:
Basic 15,224,236 16,043,736 15,223,554 14,710,342
================== ================= ================== =================
Diluted 15,224,236 16,043,736 15,223,554 14,710,342
================== ================= ================== =================
</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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<S> <C> <C>
For the Six Months Ended
September 30,
----------------------------------
1999 1998
---------------- -----------------
Net cash flows from operating activities $1,628,972 $2,077,053
---------------- -----------------
Cash flows from investing activities:
Property and equipment purchased (2,012,469) (2,568,331)
Purchase of marketable securities (2,500,000) (205,420)
Proceeds from sales of marketable securities 1,635,000 542,586
---------------- -----------------
Net cash (used in) investing activities (2,877,469) (2,231,165)
---------------- -----------------
Cash flows from financing activities:
(Increase) decrease in notes receivable (1,080,993) 86,253
Exercise of common stock options and stock grants 7,608 268,733
Purchase treasury stock (1,732,217)
Repayments, notes and capital leases (842,613) (1,417,251)
---------------- -----------------
Net cash (used in) financing activities (1,915,998) (2,794,482)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents (3,164,495) (2,948,594)
Cash and cash equivalents at beginning of period 15,032,473 24,062,052
---------------- -----------------
Cash and cash equivalents at end of period $11,867,978 $21,113,458
================ =================
Supplemental Cash Flow Information:
Cash payments for:
Interest $191,673 $237,720
================ =================
Income taxes $88,414 $980,536
================ =================
Non-Cash Investing and financing activities:
Property and equipment financed through capital leases $356,746 $391,157
Exercise of restricted common stock options - 9,146,250
Increase in loans to officers and directors (272,365) (8,169,853)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 six months ended September 30,
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:
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Six Months Ended
September 30, September 30,
------------------------------------ ---------------------------------
1999 1998 1999 1998
------------------------------------ ---------------------------------
Net (loss) ($2,584,073) ($1,081,041) ($6,016,337) ($2,871,081)
Other Comprehensive Income, net of tax
Foreign currency translation adjustments 75,933 12,965 33,431 (7,396)
Unrealized gain/(loss) on investments (10,620) (1,422) (19,551) (2,555)
----------------- ----------------- ---------------- ---------------
Comprehensive Income (loss) ($2,518,760) ($1,069,498) ($6,002,457) ($2,881,032)
================= ================= ================ ===============
The components of accumulated other comprehensive income, net of related tax, are as follows:
September 30, March 31,
1999 1999
------------------------------------
Accumulated translation adjustments ($67,555) ($100,986)
Unrealized gain/(loss) on investments (12,099) 7,452
----------------- -----------------
Accumulated other comprehensive income(loss) ($79,654) ($93,534)
================= =================
</TABLE>
7
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4. EARNINGS PER SHARE
The computation of earnings per share was as follows:
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Six Months Ended
September 30, September 30,
----------------- ---------------- ----------------- ---------------
1999 1998 1999 1998
----------------- ---------------- ----------------- ---------------
Numerator:
Net (loss) applicable to common stock ($2,584,073) ($1,081,041) ($6,016,337) ($2,871,081)
================= ================ ================= ===============
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,224,236 16,043,736 15,223,554 14,710,342
Stock Options (treasury method) - - - -
----------------- ---------------- ----------------- ---------------
Diluted shares 15,224,236 16,043,736 15,223,554 14,710,342
================= ================ ================= ===============
Earnings Per Common Share:
Basic ($0.17) ($0.07) ($0.40) ($0.20)
================= ================ ================= ===============
Diluted ($0.17) ($0.07) ($0.40) ($0.20)
================= ================ ================= ===============
</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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Consumer Reportable
Three Months Ended Automotive Products International Segments All Other Total
September 30, 1999
Revenues $10,740,731 $10,222,037 $2,314,243 $23,277,011 ($523,037) $22,753,974
Pretax Income (Loss) (1,353,053) (1,232,652) (1,238,997) (3,824,702) 165,788 (3,658,914)
Net Interest Income 10,506 22,802 1,791 35,099 215,735 250,834
Depreciation/Amortization 188,348 376,888 221,811 787,047 670,284 1,457,331
September 30, 1998
Revenues $13,064,206 $24,256,160 $4,462,994 $41,783,360 ($1,996,603) $39,786,757
Pretax Income (Loss) (21,609) (1,309,726) (163,005) (1,494,340) 510,247 (984,093)
Net Interest Income 1,918 17,214 64,262 83,394 205,309 288,703
Depreciation/Amortization 179,942 232,694 119,601 532,237 604,790 1,137,027
Consumer Reportable
Six Months Ended Automotive Products International Segments All Other Total
September 30, 1999
Revenues $22,396,520 $25,388,690 $5,375,385 $53,160,595 ($1,126,737) $52,033,857
Pretax Income (Loss) (983,456) (5,721,259) (2,160,535) (8,865,250) 510,457 (8,354,793)
Net Interest Income 18,477 23,313 500 42,290 426,394 468,684
Depreciation/Amortization 370,265 730,482 437,885 1,538,632 1,332,046 2,870,678
September 30, 1998
Revenues $25,824,756 $40,888,988 $7,655,387 $74,369,131 ($3,705,602) $70,663,529
Pretax Income (Loss) (156,522) (4,740,535) (323,094) (5,220,151) 462,581 (4,757,570)
Net Interest Income 16,147 48,132 71,739 136,018 306,265 442,283
Depreciation/Amortization 360,909 618,503 234,445 1,213,857 1,197,784 2,411,641
</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 September 30, 1999 Compared to the Three Months ended
September 30, 1998
Gross revenues for the three month period ended September 30, 1999 decreased
$17,032,783 or 42.8% to $22,753,974 as compared with $39,786,757 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
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 three months ended September
30, 1999 occurred 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 three months ended September 30,
1999 was $4,223,678 as compared with a net increase of $8,257,093 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
$16,878,789 for the three month period ended September 30, 1999 as compared with
$18,488,090 for the comparable period last year. The decrease in direct costs
are primarily attributable to the termination of the Company's administrative
agreement with CompUSA and the amortization of current period deferred direct
costs which were lower as a result of reduced revenues. This decrease was offset
slightly by 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 September 30, 1999 were $12,557,798 as compared to $13,235,901 for
the three months ended September 30, 1998. The decrease in SG&A expenses
reflects the Company's operational efficiency initiatives which include the
10
<PAGE>
reengineering of its call center process and consolidation of certain operating
and administrative functions. These initiatives resulted in lower payroll and
payroll related expenses which were offset slightly by higher telephone costs.
Depreciation and amortization was $1,457,331 for the three months ended
September 30, 1999 compared to $1,137,027 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 September 30, 1999 was $2,584,073 or $0.17
per diluted share compared to a net loss of $1,081,041 or $0.07 per diluted
share for the comparable period last year. This change is the result of the
termination of the Company's relationship with its most significant customer
during the period and the other factors listed above.
Six Months Ended September 30, 1999 Compared to the Six Months ended September
30, 1998
Gross revenues for the six months ended September 30, 1999 decreased $18,629,672
or 26.4% to $52,033,857 as compared with $70,663,529 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 six months ended September 30, 1999
occurred 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 increase in deferred revenues for the six months ended September 30,
1999 was $1,802,252 as compared with a net increase of $14,999,719 for the same
period last year. These increases are directly attributable to the sales of
service contracts in the current period with a service duration over one year
being greater 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
$30,668,417 for the six months ended September 30, 1999, as compared with
$31,114,212 for the six months ended September 30, 1998. The decrease in direct
costs are primarily attributable to the termination of the Company's
administrative agreement with CompUSA and the amortization of current period
deferred direct costs which were lower as a result of reduced revenues. This
decrease was offset slightly by a premium increase in the Automotive business
segment in the current period.
Service, selling and general and administrative expenses (SG&A) for the six
months ended September 30, 1999 were $25,557,750, compared to $27,412,748 for
the six months ended September 30, 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 which were offset slightly by higher telephone costs.
Depreciation and amortization was $2,870,678 for the six months ended September
30, 1999 compared to $2,411,641 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 six months ended September 30, 1999 was $6,016,337 or $0.40 per
diluted share compared to a net loss of $2,871,081 or $0.20 per diluted share
for the comparable period last year. This change is the result of 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
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 provided by operating activities during the six months ended September 30,
1999 was $1.6 million as compared to $2.1 million during 1998. For the six
months ended September 30, 1999 and September 30, 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 $2.8 million in 1999 and $4.0 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. The
exercise of these stock options and the anticipated tax benefit from this
transaction total approximately $10 million. 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 January 10, 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
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
Report on Form 8-K reporting item 5 dated July 15, 1999 filed July 30,
1999
Report on Form 8-K reporting item 5 dated August 25, 1999 filed August
27, 1999
Report on Form 8-K reporting item 5 dated September 9 1999 filed
September 10, 1999
Report on Form 8-K/A reporting item 5 dated September 8, 1999 filed
September 10, 1999
Report on Form 8-K/A reporting item 5 dated August 25, 1999 filed
September 14, 1999
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 14, 2000
By: /s/ Richard F. Gavino
------------------------------------
Richard F. Gavino - Executive Vice
President and Chief Financial Officer
Date: January 14, 2000
14
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 11,867,978
<SECURITIES> 3,613,896
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0
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