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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
(Mark One)
[ X ] FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
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.)
2220 Highway 121, Suite 100, Bedford, TX 76021
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 544-9510
-----------------------------
- --------------------------------------------------------------------------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [ X ]
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 October 31, 2003
- --------------------------------------- --------------------------------
Common stock, par value $.007 per share 15,409,314 shares
1
WARRANTECH CORPORATION AND SUBSIDIARIES
I N D E X
Page No.
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Statements of Operations -
For the Three and Six Months Ended September 30, 2003
and 2002 (Unaudited)........................................... 3
Condensed Consolidated Balance Sheets at September 30, 2003
(Unaudited) and March 31, 2003.................................. 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2003
and 2002 (Unaudited)............................................ 6
Notes to Condensed Consolidated Financial Statements................... 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations .................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 18
Item 4. Controls and Procedures........................................... 18
PART II - OTHER INFORMATION
Item 1: Legal Proceedings................................................. 19
Item 2: Changes in Securities............................................. 20
Item 3: Defaults Upon Senior Securities................................... 20
Item 4: Submission of Matters to a Vote of Security Holders............... 20
Item 5: Other Information................................................. 20
Item 6: Exhibits and Reports on Form 8-K.................................. 20
Signature ................................................................. 22
2
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
September 30, September 30,
---------------------------------- --------------------------------------
2003 2002 2003 2002
--------------- --------------- ------------------ -----------------
Earned administrative fee (net of amortization of $9,587,578 $9,938,267 $18,042,935 $18,972,403
deferred costs)
--------------- --------------- ------------------ -----------------
Costs and expenses
Service, selling, and general and administrative 8,024,878 7,894,879 15,530,728 15,097,222
Provision for bad debt expense 165,000 - 260,000 -
Depreciation and amortization 892,893 1,021,535 1,820,973 2,044,654
--------------- --------------- ------------------ -----------------
Total costs and expenses 9,082,771 8,916,414 17,611,701 17,141,876
--------------- --------------- ------------------ -----------------
Income from operations 504,807 1,021,853 431,234 1,830,527
Other income 605,858 336,552 892,726 566,509
--------------- --------------- ------------------ -----------------
Income before provision for income taxes 1,110,665 1,358,405 1,323,960 2,397,036
Provision for income taxes 329,259 467,880 327,259 794,151
--------------- --------------- ------------------ -----------------
Net income $781,406 $ 890,525 $ 996,701 $ 1,602,885
=============== =============== ================== =================
Earnings per share:
Basic $0.05 $0.06 $0.07 $0.10
=============== =============== ================== =================
Diluted $0.05 $0.06 $0.06 $0.10
=============== =============== ================== =================
Weighted average number of shares outstanding:
Basic 15,353,718 15,322,181 15,319,117 15,317,881
=============== =============== ================== =================
Diluted 16,179,600 15,430,348 16,143,599 15,398,910
=============== =============== ================== =================
See accompanying notes to condensed consolidated financial statements.
3
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
2003 2003
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $2,867,612 $5,478,095
Investments in marketable securities 1,465,088 843,980
Accounts receivable, (net of allowances of
$487,966 and $230,064, respectively) 25,772,315 22,008,608
Loan receivable - Butler Financial Solutions, 11,140,833 8,612,678
Inc.
Other receivables, net 6,254,832 5,299,887
Deferred income taxes 2,098,171 2,098,171
Employee receivables 55,533 73,833
Prepaid expenses and other current assets 1,468,208 1,218,392
-------------- --------------
Total current assets 51,122,592 45,633,644
-------------- --------------
Property and equipment, net 6,781,705 8,296,313
-------------- --------------
Other assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of 1,637,290 1,637,290
$5,825,405)
Deferred income taxes 653,504 800,406
Deferred direct costs 6,866,028 9,972,309
Investments in marketable securities 974,252 1,355,263
Restricted cash 825,000 825,000
Split dollar life insurance policies 877,126 877,126
Notes receivable 6,404,655 5,411,653
Other assets 51,095 47,124
-------------- --------------
Total other assets 18,288,950 20,926,171
-------------- --------------
Total Assets $76,193,247 $74,856,128
============== ==============
See accompanying notes to condensed consolidated financial statements.
4
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 31, March 30,
2003 2003
--------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 752,308 $ 802,070
Insurance premiums payable 40,475,558 36,070,992
Income taxes payable 181,846 81,236
Accounts and commissions payable 7,673,839 8,118,371
Accrued expenses and other current liabilities 4,069,460 3,534,106
--------------- -----------------
Total current liabilities 53,153,011 48,606,775
--------------- -----------------
Deferred revenues 10,831,022 15,065,547
Long-term debt and capital lease obligations 1,236,842 1,218,670
Deferred rent payable 375,593 417,720
--------------- -----------------
Total liabilities 65,596,468 65,308,712
--------------- -----------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000
Shares issued - none at September 30, 2003 and March 31, 2003 - -
Common stock - $.007 par value authorized - 30,000,000 Shares
issued - 16,541,324 shares at September 30, 2003 and
16,525,324 shares at March 31, 2003 115,784 115,714
Additional paid-in capital 23,767,079 23,760,809
Loans to directors and officers (10,604,782) (10,462,094)
Accumulated other comprehensive income (loss), net of taxes (95,077) (196,974)
Retained earnings 1,601,332 604,631
--------------- -----------------
14,784,336 13,822,086
Treasury stock - at cost, 1,187,607 shares at September 30, 2003
and 1,249,690 shares at March 31, 2003 (4,187,557) (4,274,670)
--------------- -----------------
Total Stockholders' Equity 10,596,779 9,547,416
--------------- -----------------
--------------- -----------------
Total Liabilities and Stockholders' Equity $76,193,247 $74,856,128
=============== =================
See accompanying notes to condensed consolidated financial statements.
5
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
September 30,
--------------------------------------
2003 2002
------------------ -------------------
Cash flows from operating activities:
Net income $ 996,701 $ 1,602,885
------------------ -------------------
Adjustments to reconcile net income to net cash provided by
operating activities: 818,222 (3,652,379)
----------------- -------------------
Net cash flows provided by (used in) by operating activities 1,814,923 (2,049,494)
----------------- -------------------
Cash flows from investing activities:
Property and equipment purchased (210,177) (470,098)
Purchase of marketable securities (695,000) (550,000)
Proceeds from sales of marketable securities 445,000 450,000
----------------- -------------------
Net cash used in investing activities (460,177)
(570,098)
----------------- -------------------
Cash flows from financing activities:
Issuance of common stock 6,270 2,100
Purchase treasury stock - (106,899)
Increase in loans and notes receivable (3,521,157) (747,383)
Repayments, notes and capital leases (450,342) (448,338)
----------------- -------------------
Net cash used in financing activities (3,965,229) (1,300,520)
----------------- -------------------
Net decrease in cash and cash equivalents (2,610,483) (3,920,112)
Cash and cash equivalents at beginning of period 5,478,095 7,033,448
----------------- -------------------
Cash and cash equivalents at end of period $ 2,867,612 $ 3,113,336
----------------- -------------------
Supplemental cash flow information:
Cash payments for:
Interest $ 148,358 $ 79,492
Income taxes $ 48,650 $ (1,247,975)
----------------- -------------------
Non-cash investing and financing activities:
Property and equipment financed through capital leases $ 427,073 $ 69,873
Increase in loans to officers and directors $ (142,688) $ (156,312)
Issuance of treasury stock $ 87,113 $ 105,745
See accompanying notes to condensed consolidated financial statements.
6
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. THE COMPANY
Warrantech, through its wholly owned subsidiaries, markets and
administers service contracts, extended warranties and replacement plans.
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's service contract programs benefit consumers by providing
them 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. 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 and by providing them with the opportunity for increased revenue
and income without the costs and responsibilities of operating an
extended warranty program.
The service contracts, extended warranties and replacement contracts
generally have terms ranging from three (3) to one hundred twenty (120)
months. Since the Company acts solely as a third party administrator on
behalf of the dealer/clients and insurance companies, the actual repairs
and/or replacements required under the agreements are performed by
independent third party authorized repair facilities or dealers. The cost
of repairs is generally paid for by the insurance companies which have
the ultimate responsibility for the claims or by Butler Financial
Solutions, LLC ("Butler"), if Reliance Insurance Company ("Reliance") or
the Company is the obligor. The insurance policy indemnifies the
dealer/clients against losses resulting from service contract claims and
protects consumers by ensuring their claims will be paid.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
management and are unaudited. These interim financial statements have
been prepared on the basis of accounting principles generally accepted in
the United States of America ("GAAP") 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 accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position and operating
results of the Company for the interim period have been included.
Operating results for the three months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2004. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 2003.
3. RESTATEMENT
The Company's financial statements for the three months and six months
ended September 30, 2002, have been restated to reflect a change in
accounting treatment in calculating net earned administrative fees as
more fully described in the Company's Annual Report on Form 10K for the
year ended March 31, 2003. For certain contracts, the Company previously
had deferred a portion of the revenue and would recognize such deferred
revenue at the cancellation or end of the contract's term. The Company
is now recognizing this revenue over the life of the contract's term.
7
The effect of this restatement for the three months and six months ended
September 30, 2002 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------------------------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------------------- ---------------------------
Statement of operations:
Earned administrative fee (net of amortization of $9,934,415 $9,938,267 $18,964,701 $18,972,403
deferred costs)
Income from operations 1,018,001 1,021,853 1,822,285 1,830,527
Income before provision for income taxes 1,354,553 1,358,405 2,389,334 2,397,036
Provision for income taxes 466,507 467,880 791,407 794,151
Net income $ 888,046 $ 890,525 $1,597,927 $1,602,885
Earnings per share:
Basic $0.06 $0.06 $0.10 $0.10
===== ===== ===== =====
Diluted $0.06 $0.06 $0.10 $0.10
===== ===== ===== =====
4. NOTES RECEIVABLE
Butler serves as the ultimate obligor under predominantly all service
contracts administered by the Company in exchange for a fee. Some of the
service contracts under which Butler is the obligor were insured by
Reliance and the liquidation of Reliance has eliminated the insurance
coverage to Butler.
To pay these Reliance obligations, the primary funding to Butler is
provided by a special surcharge, payable on certain vehicle service
contracts administered by the Company sold after November 19, 2001. The
surcharge is payable by agents through whom Reliance-insured service
contracts were sold.
Any shortfall between the claims obligations being paid and the special
surcharge, Warrantech is assisting Butler by providing loans to Butler.
Warrantech Automotive made an initial $1 million loan to Butler and
further loans through September 30, 2003 of $16,568,735.
Additionally, it will continue to assist Butler in addressing its
potential obligations under the service contracts previously insured by
Reliance for which Butler is, or the dealer or Warrantech was, the
obligor, by providing further loans, as necessary, for claims obligations
in excess of Butler's surcharge revenues. Subject to the terms of the
agreement between the Company and Butler, the Company has and will make
further loans to Butler, as necessary, for claims obligations in excess
of Butler's surcharge revenues. All of Warrantech's loans to Butler bear
interest at the rate of prime plus 2% per annum and will begin to be paid
down once Butler's fee revenues exceed the claims obligations.
Through September 30, 2003, Warrantech has loaned Butler $17,568,735.
RWC, which is not part of the Reliance liquidation, is obligated to pay
Butler $11,140,833 of that amount. The Company expects Butler to collect
the $11,140,833 from RWC during the third quarter of fiscal 2004 and,
simultaneously, the Company will collect this amount from Butler. The
portion of the Butler receivables for which RWC is legally responsible
for payment is reflected as "Loan Receivable" on the Consolidated Balance
Sheet. The remaining amount representing the loans due from Butler of
$6,427,902 at September 30, 2003, is classified as "Notes Receivable" on
the Consolidated Balance Sheet.
8
The following table sets forth the carrying amounts and fair values of
the Company's notes and other receivables at September 30, 2003.
2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Notes Receivable - Butler
Equals 2% above prime -- -- 2,563,129 $3,864,77 -- -- $6,427,902 $6,427,902
Loan Receivable - Butler;
Equals 2% above prime $11,140,833 -- -- -- -- -- $11,140,833 11,140,833
Other Receivable -
0% interest $6,254,832 -- -- -- -- -- $ 6,254,832 $6,254,832
5. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
For the Three Months Ended For the Six Months Ended
September 30, September 30,
------------------------------------- ------------------------------
2003 2002 2003 2002
--------------- ------------------- ------------- --------------
Net income $781,406 $890,525 $ 996,701 $1,602,885
Other Comprehensive Income, net of tax:
Unrealized gain on investments (6,307) 11,789 (9,749) 30,209
Foreign currency translation adjustments 88,610 (111,902) 111,646 (119,008)
--------------- ------------- ------------- --------------
Comprehensive Income $863,709 $790,412 $1,098,598 $1,514,086
=============== ============= ============= ==============
Comprehensive income per share $0.06 $0.05 $0.07 $0.10
=============== ============= ============= ==============
The components of accumulated comprehensive income, net of related tax, for the
periods ended September 30, 2003 and March 31, 2003, are as follows:
September 30, March 31,
2003 2003
--------------- -------------
Unrealized gain on investments $ 8,297 $ 18,046
Accumulated translation adjustments (103,374) (215,020)
--------------- -------------
Accumulated other comprehensive income $ (95,077) $ (196,974)
=============== =============
6. EARNINGS PER SHARE
The computations of earnings per share are as follows:
For the Three Months Ended For the Six Months Ended
September 30, September,
---------------------------------- -----------------------------
2003 2002 2003 2002
---------------- --------------- ------------ -------------
Numerator:
Net income applicable to common stock $781,406 $890,525 $996,701 $1,602,885
================ =============== ============ =============
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,353,718 15,322,181 15,319,117 15,317,881
Stock Options (treasury method) 825,882 108,167 824,482 81,029
---------------- --------------- ------------ -------------
Diluted shares 16,179,600 15,430,348 16,143,599 15,398,910
================ =============== ============ =============
Earnings Per Common Share:
Basic $0.05 $0.06 $0.07 $0.10
================ =============== ============ =============
Diluted $0.05 $0.06 $0.06 $0.10
================ =============== ============ =============
9
7. STOCK OPTION PLAN
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an Amendment of FASB Statement No. 123" (SFAS No. 148).
SFAS No. 148 provides alternative methods of transition for companies
making a voluntary change to fair value-based accounting for stock-based
employee compensation. The Company continues to account for its stock
option plan under the intrinsic value recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Effective for interim periods
beginning after December 15, 2002, SFAS No. 148 also requires disclosure of
pro-forma results on a quarterly basis as if the Company had applied the
fair value recognition provisions of SFAS No. 123.
As the exercise price of all options granted under the plan was equal to or
above the market price of the underlying common stock on the grant date, no
stock-based employee compensation is recognized in net income. The
following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS
No. 123, as amended, to options granted under the stock option plans and
rights to acquire stock granted under the company's Stock Participation
Plan, collectively called "options." For purposes of this pro-forma
disclosure, the value of the options is estimated using a Black-Scholes
option pricing model and amortized ratably to expense over the options'
vesting periods. Because the estimated value is determined as of the date
of grant, the actual value ultimately realized by the employee may be
significantly different.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------
2003 2002 2003 2002
--------------- --------------- -------------- -------------
Net income as reported $781,406 $890,525 $996,701 $1,602,885
Net income pro forma $758,906 $874,238 $954,522 $1,570,402
Shares - Basic 15,353,718 15,322,181 15,319,117 15,317,881
Basic earnings per share as reported $0.05 $0.06 $0.07 $0.10
Basic earnings per share pro forma $0.05 $0.06 $0.06 $0.10
The fair value of Warrantech stock options used to compute pro forma net
income and earnings per share disclosures is the estimated value at grant
date using the Black-Scholes option-pricing model with the following
weighted average assumptions for the three months and year ended
September 30, 2003 and 2002, respectively: expected dividend yield of 0%;
expected volatility of 30% - 50%; a risk free interest rate of 4.0% -
5.0%; and expected option life of 3 to 10 years.
Presented below is a summary of the status of the stock options in the
plan and the related transactions for the six months ended September 30,
2003 and 2002.
2003 2002
---------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------------------------------------------
Options outstanding at beginning of the 1,306, 380 $1.10 1,416,283 $1.54
period
Granted 180,000 2.18 215,238 0.42
Canceled/Surrendered - - (5,000) (0.42)
Exercised - - - -
Forfeited - - - -
---------------------------------------------
Options outstanding at end of period 1,486,380 $1.93 1,581,521 $1.31
=============================================
---------------------------------------------
Options exercisable at end of period 637,097 $1.3654 610,111 $1.21
=============================================
The weighted average fair value of stock options at date of grant,
calculated using the Black-Scholes option-pricing model, granted during
the six months ended September 30, 2003 and 2002 was is $0.54 and $0.48,
respectively.
10
The Company may issue options to purchase the Company's common stock to
officers, non-employees, non-employee directors or others as part of
settlements in disputes and/or incentives to perform services for the
Company. The Company accounts for stock options issued to vendors and
non-employees of the Company under SFAS No. 123 "Accounting for
Stock-based Compensation." The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model is charged to operations utilizing weighted average assumptions
identical to those used for options granted to employees.
The following table summarizes the status of all Warrantech's stock
options outstanding and exercisable at September 30, 2003.
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
---------------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES PRICE SHARES PRICE
- ----------------------------- -------------- ------------ ------------ ------------
$0.67 to $0.87 899,082 $0.74 356,666 $0.71
$1.26 to $1.595 616,008 $1.33 391,186 $1.33
$2.00 4,650,000 $2.00 3,000,000 $2.00
$3.25 to $3.375 101,290 $3.35 101,290 $3.27
-------------- ------------ ------------ ------------
Total at September 30, 2003 6,266,380 $1.97 3,849,142 $1.83
============== ============ ============ ============
8. SEGMENTS
The Company operates in three major business segments: Automotive,
Consumer Products and International. The Automotive segment markets and
administers extended warranties on automobiles, light trucks,
motorcycles, recreational vehicles and automotive components, which are
sold principally by franchised and independent automobile and motorcycle
dealers, leasing companies, repair facilities, retail stores, financial
institutions and other specialty marketers. The Consumer Products segment
develops, markets and administers extended warranties and product
replacement plans on household appliances, consumer electronics,
televisions, computers, home office equipment, jewelry, musical
instruments and homes and which are sold principally through retailers,
distributors, manufacturers, utility companies, financial institutions
and other specialty marketers. Warrantech also markets these warranties
and plans directly to the ultimate consumer on behalf of the
retailer/dealer and/or the manufacturer through telemarketing and direct
mail campaigns. The International segment markets and administers
predominately the same products and services as the other business
segments. The International segment is currently operating in Central and
South America, Puerto Rico and the Caribbean. "Other" includes
intersegment eliminations of revenues and receivables and net unallocated
corporate expenses.
CONSUMER REPORTABLE
SIX MONTHS ENDED AUTOMOTIVE PRODUCTS INTERNATIONAL SEGMENTS OTHER TOTAL
SEPTEMBER 30, 2003
Earned administrative fee $6,900,538 $8,026,927 $2,962,087 $17,889,552 $153,383 $18,042,935
Income (loss) from 2,456,214 1,029,548 962,724 4,448,486 (3,555,760) 892,726
operations
Pretax income (loss) (595,099) 188,793 962,505 556,199 (228,940) 327,259
Net interest income (145,611) (8,748) 6,288 (148,071) 677,516 529,445
(expense)
Depreciation/amortization 192,893 804,255 43,642 1,040,790 780,183 1,820,973
Total assets 43,999,663 19,771,192 4,221,632 67,992,487 8,200,760 76,193,247
SEPTEMBER 30, 2002
Earned administrative fee $10,558,403 $7,103,063 $1,477,090 $19,138,556 (166,153) $18,972,403
Income (loss) from 6,650,796 520,450 20,067 7,191,313 (5,360,786) 1,830,527
operations
Pretax income (loss) 2,719,379 (766,715) 16,238 1,968,902 428,134 2,397,036
Net interest income 12,644 3,318 6,841 22,803 350,113 372,916
Depreciation/amortization 194,736 876,888 42,759 1,114,383 930,271 2,044,654
Total assets 41,645,025 24,383,023 3,220,398 69,248,446 5,607,682 74,856,128
11
CONSUMER REPORTABLE
QUARTER ENDED AUTOMOTIVE PRODUCTS INTERNATIONAL SEGMENTS OTHER TOTAL
SEPTEMBER 30, 2003
Earned administrative fee $3,589,071 $4,143,072 $1,881,660 $9,613,803 ($26,225) $9,587,578
Profit (loss) from 1,381,638 562,755 702,291 2,646,684 (2,141,877) 504,807
operations
Pretax income (loss) (335,921) 182,418 698,673 545,170 565,495 1,110,665
Net interest income (84,920) (1,717) 4,382 (82,255) 494,514 412,259
Depreciation/amortization 97,187 399,421 22,201 518,809 374,084 892,893
SEPTEMBER 30, 2002
EARNED ADMINISTRATIVE FEE $5,549,271 $3,741,217 $760,817 $10,051,305 $ (113,038) $9,938,267
Profit (loss) from 3,571,656 562,095 (26,639) 4,107,112 (3,085,259) 1,021,853
operations
Pretax Income (loss) 1,287,640 (172,278) (31,045) 1,084,317 274,088 1,358,405
Net interest income (6,854) 13,891 3,289 10,326 274,300 284,626
Depreciation/amortization 95,229 440,321 21,522 557,072 464,463 1,021,535
12
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 report on Form 10-Q may contain forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
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 reflect the Company's views and assumptions, based on
information currently available to management. Such views 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 and
future fiscal years. When used in this Quarterly Report on Form 10-Q, the words
"believes," "estimates," "plans," "expects," and "anticipates" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it can give no assurance that its
expectations will prove to be correct. These statements are subject to certain
risks, uncertainties and assumptions, including, but not limited to, (a)
prevailing economic conditions which may significantly deteriorate, thereby
reducing the demand for the Company's products and services, (b) availability of
technical support personnel or increases in the rate of turnover of such
personnel, resulting from 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, (e)
loss of business from, or significant change in relationships with, any major
customer, (f) the ability to successfully identify and contract new business
opportunities, both domestically and internationally, (g) the ability to secure
necessary capital for general operating or expansion purposes, (h) the adverse
outcomes of litigation,(i) the non-payment of notes due from an officer and two
directors of the Company due in 2007, (j) the inability of any of the insurance
companies which insure the service contracts marketed and administered by the
Company to pay the claims under the service contracts, (k) the inability of
Butler to pay the claims previously insured by Reliance, (l) the termination of
extended credit terms being provided by the Company's current insurance company,
(m) the inability of the Company to collect the "Loan Receivable" in the amount
of $11,140,833 by the end of the Company's fiscal year, and (n) the outcome of
the review currently being conducted by the staff of the Securities and Exchange
Commission ("SEC") of the Company's financial statements and related
disclosures. Should one or more of these or any other risks or uncertainties
materialize or develop in a manner adverse to the Company, or should the
Company's underlying assumptions prove incorrect, actual results of operations,
cash flows or the Company's financial condition may vary materially from those
anticipated, estimated or expected and there could be a materially adverse
effect on the Company's business.
SEC REVIEW OF THE COMPANY'S FILINGS
In March of 2003, the Staff of the Division of Corporation Finance of the SEC
selected certain of the Company's periodic reports for review, including the
Annual Report on Form 10-K for the fiscal year ended March 31, 2002 and the
Quarterly Reports on Form 10-Q for the periods ended June 30, 2002, September
30, 2002 and December 31, 2002. The staff informed the Company that the purpose
of the review is to assist the Company in its compliance with applicable
disclosure requirements and to enhance the overall disclosure in the Company's
reports.
In the course of its review, the staff requested clarification of some of the
Company's disclosures and items in its financial statements and the Company
agreed to amend certain of them on a going-forward basis.
As a result of these communications with the SEC staff, the Company amended
certain of its disclosures as reflected in its Annual Report filed on Form 10K
for the fiscal year ended March 31, 2003. The Company also restated its
financial statements for prior periods to reflect certain changes in accounting
policy. The cumulative effect of the change to prior periods was a net benefit
of $1,721,184 to retained earnings.
13
The Company is still in discussions with the SEC staff on two remaining complex
issues regarding the Company's accounting treatment of the obligations of Butler
Financial Solutions, L.L.C. ("Butler") to pay claims under the service contracts
administered by the Company and the recognition of revenue from the
administration of service contracts.
If Warrantech is required to change its accounting policies as a result of
certain of the issues raised by the SEC staff, such changes could result in an
adverse change in the presentation of its past financial results and a
corresponding positive change in future results. As a result of the comments
from the SEC staff, the Audit Committee of the Company's Board of Directors has
retained a separate independent accounting firm to review the accounting and
disclosure issues raised by the SEC staff in its comment letters and report to
the Committee on its conclusions. The Company will respond to the staff's latest
comment letter after the Audit Committee receives the final report of this
accounting firm. Since the accounting issues raised in the comment letters from
the SEC staff are still under review, the resolution of those issues and their
effect on the Company's financial statements is not known at this time.
14
RESULTS OF OPERATIONS
GROSS REVENUES
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ----------------------------
2003 2002 2003 2002
------------ -------------- ------------ -------------
Automotive segment $29,739,829 $28,567,189 $58,023,231 $52,578,238
Consumer Products segment 10,364,652 8,933,123 20,344,271 17,432,574
International segment 2,649,533 1,321,018 4,561,380 2,513,815
Other (409,176) (113,039) (500,603) (166,152)
------------ -------------- ------------ -------------
Total gross revenues $42,344,838 $38,708,291 $82,428,279 $72,358,475
============ ============== ============ =============
Gross revenues for the three month period ended September 30, 2003 increased
$3,636,547, or 9%, over the same period in 2002. Gross revenues for the six
month period ended September 30, 2003 increased $10,069,804 or 14%, over the
same period in 2002. The Automotive and International segments reported
increased gross revenues of 4% and 101% respectively, in the three month period
ended September 30, 2003 over 2002 and 10% and 81% respectively, in the six
month period. The Automotive segment increase in gross revenues was due to
higher sales prices offsetting slightly lower volumes. The International segment
experienced higher sales volumes in both Puerto Rico and in South America. The
Consumer Products segment reported a 16% increase in gross revenues during the
three month and six month periods ended September 30, 2003 compared to the same
periods in 2002, as sales increased from its top customers and the Consumer
Products segment added new business.
NET EARNED ADMINISTRATIVE FEES
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- -------------- ------------- -------------
Automotive segment $3,589,071 $5,549,271 $6,900,538 $10,558,403
Consumer Products segment 4,143,072 3,741,217 8,026,927 7,103,063
International segment 1,881,660 760,817 2,962,087 1,477,090
Other (26,225) (113,038) 153,383 (166,153)
----------- -------------- ------------- -------------
Total net earned administrative fee $9,587,578 $9,938,267 $18,042,935 $18,972,403
=========== ============== ============= =============
Net earned administrative fees are gross revenues less directs costs, the
combined sum of net premiums, commissions and sales allowances plus or minus
deferred revenue. For the first six months of fiscal 2004, net earned
administrative fees were $18,042,935, compared to $18,972,403 for the
corresponding period last year. The reduction in net earned administrative fee
for the three months and first six months ended September 30, 2003, was due
primarily to lower margins and higher amounts of net deferred revenue recognized
last year. During the three month period ended September 30, 2003, net deferred
revenue was $631,129 compared to $896,598 in the same period for 2002. For the
six months ended September 30, 2003, net deferred revenue was $1,014,490
compared to $1,512,913 in the same period in the prior year.
The Automotive segment's net earned administrative fee was $3,589,071 during the
second quarter of 2004, a reduction of $1,960,200 from the $5,549,271 net earned
administrative fee in the same quarter 2003. For the first six months of fiscal
2004, Automotive segment net earned administrative fee was $6,900,538 compared
to $10,558,403 during the same period in 2003. Although the Automotive segment
had an increase in its gross revenue, its net earned administrative fee
decreased due to lower margins due to product mix and lower net deferred
revenues recognized this period.
The net earned administrative fee for the Consumer Products segment was
$4,143,072 in the second quarter of fiscal 2004, compared to $3,741,217 for the
same quarter in the previous year. For the six-month period of fiscal 2004, net
earned administrative fees for the Consumer Products segment were $8,026,927
compared to $7,103,063 in the same 2003 period. The increase was due to higher
volumes from existing clients and new business.
15
Net earned administrative fee for the International segment increased to
$1,881,660 in the second quarter 2004, from $760,817 for the same quarter in the
prior year. For the first six months of fiscal 2004, International net earned
administrative fees were $2,962,087, up from $1,477,090 in the same period last
year. The increase in the International's net earned administrative fee was the
result of increased volumes from existing clients, new business in South America
and increased market penetration in Puerto Rico.
SG&A
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------
2003 2002 2003 2002
----------- -------------- ------------ -------------
Service, selling and general $8,024,878 $7,894,879 $15,530,728 $15,097,222
administrative
Service, selling and general and administrative ("SG&A") for the quarter ended
September 30, 2003 increased $129,999, or 2%, compared to the same quarter in
the prior year. For the six month period, SG&A increased $433,506 compared to
the prior year six month period. Legal expenses decreased $573,110 and $756,575
for the three month and six month periods ended September 30, 2003,
respectively, compared to the same periods in 2002, primarily because of the
decrease in litigation expenses related to several lawsuits that were settled
during fiscal period 2003. Employee costs were higher at $4,751,413 during the
three month period ended September 30, 2003, compared to $4,521,704 in the three
month period ended September 30, 2002, primarily due to annual salary increases.
For the six months ended September 30, 2003 employee costs were $9,295,906
compared to $8,901,988 for the same period in the prior year, also due to annual
salary increases. Rent expense increased from $328,976 for the three month
period ended September 30, 2002 to $520,256 for the three month period ended
September 30, 2003 and from $755,998 to $1,123,778 for the six month period
ended September 30, 2003, reflecting the Company's move to its new corporate
headquarters in Bedford, Texas. Telephone expenses were reduced 26%, or
$220,863, to $612,574 as compared to $833,437 in the six month period ended
September 30, 2002, due to lower negotiated telephone usage rates and the
elimination of data transmission lines after the Company consolidated operations
into one building.
PROVISION FOR BAD DEBTS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
----------- -------------- ------------- ------------
Provision for Bad Debts $165,000 - $260,000 -
The Company began increasing its provision for bad debts during fiscal year
2003, as it anticipated the uncollectability of certain receivables from its
Consumer Products segment.
16
DEPRECIATION AND AMORTIZATION
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
----------- -------------- ------------- -------------
Depreciation and amortization $892,283 $1,021,535 $1,820,973 $2,044,654
Depreciation and amortization expenses were reduced by $129,252, or 13%, during
three month period ended September 30, 2003 compared to the same period for 2002
and $223,681 or 11% during the six month period ended September 30, 2003
compared to the same period for 2002. This decrease is the result of the
Company's assets maturing and the continued reduction of capital expenditures
for the past few years.
OTHER INCOME
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------
2003 2002 2003 2002
----------- -------------- ------------ ------------
Interest and dividend income $560,618 $284,626 $810,001
$460,455
Interest expense (148,358) (37,636) (280,556) (87,539)
Gain (loss) on sale of assets 2,999 (9,605) 2,976 (57,459)
Credit card usage rebate 74,991 100,455 204,168 247,349
Miscellaneous income 115,608 1,288 156,137 3,703
----------- -------------- ------------ ------------
Total other income $605,858 $336,552 $892,726 $566,509
=========== ============== ============ ============
Other income for three and six months ended September 30, 2003 increased
compared to the three and six months ended September 30, 2002. Higher interest
income, primarily from the Butler notes and loans receivable was partially
offset by higher interest expense incurred from the Company's extended payment
terms for its insurance premium payable. Miscellaneous income was higher,
resulting from sub lease rental income from the Company's former building
location.
INCOME TAX EXPENSE
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2003 2002 2003 2002
----------- -------------- ------------- ------------
Income taxes expense $329,259 $467,880 $327,259 $794,151
Income taxes expense decreased $466,892 for the six month period ended September
30, 2003 compared to the period ended September 30, 2002, primarily due to a
reduction in income before taxes and a lower effective tax rate From its
International segment.
LIQUIDITY AND FINANCIAL RESOURCES
During the six months ended September 30, 2003, the Company had a net decrease
in cash and cash equivalents of $2,610,483, which was primarily used in
financing activities to fund the Bulter loan and notes receivable. Working
capital was a negative $2.0 million at September 30, 2003, compared to a
negative $0.8 million at September 30, 2002, primarily due to an increase in the
loan to Butler. The Company believes that internally generated funds, collection
of the RWC loan obligations from Butler and the $3 million line of credit from
Great American Insurance Company, will be sufficient to finance its current
operations for at least the next twelve months. In addition, the Company is
aggressively pursuing new business both domestically and internationally to fund
future working capital. The Company plans to continue to contain its SG&A costs
and utilize technologies for operational efficiencies to further enhance both
its operating income and cash flows from operating activities.
17
The Company has ongoing relationships with equipment financing companies and
intends to continue financing certain future equipment needs through
lease/purchase transactions. The total amount financed through these
transactions during the six months ended September 30, 2003 amounted to $427,073
compared to $69,873 during the six months ended September 30, 2002.
SIGNIFICANT EVENTS
On September 19, 2003, the Company announced that the Board of Directors had
received a proposal by its founder -- Mr. Joel San Antonio -- of taking the
company private. The Board of Directors has appointed a special committee of
independent directors to evaluate Mr. San Antonio's proposal and all other
alternatives which are in the best interest of the Company's shareholders. Mr.
San Antonio's proposal involves cashing out all minority shareholders at a price
of $1.65 per share by means of a reverse stock split. The proposal is subject to
securing financing and does not address other details concerning the Company's
capitalization. The special committee will consult with independent financial
advisors and counsel in the course of its review. Any transaction considered by
the Company will be subject, among other things, to the determination of the
fairness of the price, full Board of Director approval and, if applicable,
obtaining suitable financing. There can be no assurance that a transaction will
occur, and, if any transaction occurs, what the exact structure or terms of such
transaction would be. The members of the special committee consist of Gordon
Paris and Lawrence Richenstein.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Note 1 to the Company's Consolidated Financial Statements
set forth in the "Item 8. - Financial Statements and Supplementary Data," in the
Company's Annual Report on Form 10-K for the year ended March 31, 2003,
describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. The following lists some
of the Company's critical accounting policies affected by judgments, assumptions
and estimates.
REVENUE RECOGNITION
Under SAB 101, the Company recognizes revenue when the revenue is realizable and
earned. The Company considers revenue realized and earned when a definitively
discrete earnings event has occurred. The Company has two discrete earnings
events (1) for marketing and administration of service contracts and (2) for
servicing fees. The marketing and administrative fee is paid by the retailer of
the service contract. This revenue is recognized at the time of the sale to the
retailer as the Company will have substantially completed the services it has
agreed to provide in connection with the sale of the service contract to the
consumer.
The second discrete earnings event occurs over the life of the contract. As
such, Warrantech recognizes and realizes the revenue over the contract life.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses potential impairment of its long-lived assets, which
include its property and equipment and its identifiable intangibles such as
software development costs, goodwill and deferred charges under the guidance of
SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Once
annually or as events or circumstances indicate that an asset may be impaired,
the Company assesses potential impairment of its long-lived assets. The Company
determines impairment by measuring the undiscounted future cash flow generated
by the assets, comparing the result to the assets' carrying value and adjusting
the assets to the lower of its carrying value or fair value and charging current
operations for any measured impairment. At September 30, 2003 and 2002, the
Company found no impairment to its property and equipment or its other
identifiable intangibles.
18
INCOME TAXES
Deferred tax assets and liabilities are determined using enacted tax rates for
the effects of net operating losses and temporary differences between the book
and tax bases of assets and liabilities. The Company records a valuation
allowance on deferred tax assets when appropriate to reflect the expected future
tax benefits to be realized. In determining the appropriate valuation allowance,
certain judgments are made relating to recoverability of deferred tax assets,
use of tax loss carryforwards, level of expected future taxable income and
available tax planning strategies. These judgments are routinely reviewed by
management. At September 30, 2003, the Company had deferred tax assets of
$2,751,675, net of a valuation allowance of $189,772. For further discussion,
see Note 12 to the Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the year ended March 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2003, the Company did not have any derivatives, debt or
hedges outstanding. Therefore, the Company was not subject to interest rate
risk. In addition, the risk of foreign currency fluctuation was and is not
material to the Company's financial position or results of operations.
Short-term marketable securities and long-term investments are comprised of
municipal bonds which bear interest at fixed rates. Interest income from these
securities is generally affected by changes in the U.S. interest rates. The
following tables provide information about the Company's financial instruments
that are sensitive to changes in interest rates. The tables present principal
cash flows and weighted-average interest rates by expected maturity dates. All
of the investments are considered "available for sale." The resultant
differences between amortized cost and fair value, net of taxes, have been
reflected as a separate component of accumulated other comprehensive income.
Principal amounts by expected maturity as of September 30, 2003 of marketable
securities are as follows:
Expected Maturity Date as of September 30,
------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total Cost Fair Value
---- ---- ---- ---- ---- ---------- ---------- ----------
Available for sale
securities $1,877,933 $441,427 $119,980 - - - $2,439,340 $2,439,340
Interest rate 4.36% 4.82% 4.87% - - -
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
are primarily responsible for the accuracy of the financial information that is
presented in this Quarterly Report on Form 10-Q. Each of them has, within 90
days of the filing date of this Quarterly Report, evaluated the Company's
disclosure controls and procedures, as defined in the rules of the SEC, and have
determined that such controls and procedures were effective in ensuring that
material information relating to the Company and its consolidated subsidiaries
was made known to them during the period covered by this Quarterly Report.
INTERNAL CONTROLS
To meet their responsibility for financial reporting, the CEO and CFO have
established internal controls and procedures which they believe are adequate to
provide reasonable assurance that the Company's assets are protected from loss.
These internal controls are reviewed by the Company's independent accountants to
support their audit work. In addition, the Company's Audit Committee, which is
composed entirely of outside directors, meets regularly with management and the
independent accountants to review accounting, auditing and financial matters.
This Committee and the independent accountants have free access to each other,
with or without management being present.
THERE WERE NO SIGNIFICANT CHANGES IN COMPANY'S INTERNAL CONTROLS OR IN OTHER
FACTORS THAT COULD SIGNIFICANTLY AFFECT INTERNAL CONTROLS SUBSEQUENT TO THE DATE
OF THE CEO'S AND CFO'S MOST RECENT EVALUATION.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
LLOYD'S UNDERWRITERS
Certain Underwriters at Lloyd's, London and Other Reinsurers Subscribing
to Reinsurance Agreements F96/2992/00 and No. F97/2992/00 v. Warrantech
Corporation, Warrantech Consumer Product Services, Inc. and Warrantech
Help Desk, Inc., District Court of Tarrant County, Texas, 17th Judicial
District.
During the period that Houston General was the underwriter of certain of
Warrantech's programs, it reinsured certain of the underwritten risks
with one or more Lloyd's insurance syndicates. At some point thereafter,
Houston General commenced an arbitration against the Lloyd's syndicates
seeking to recover approximately $46,000,000 under the reinsurance
treaties with respect to claims previously paid by Houston General on
warranty claims submitted by customers under Warrantech programs. The
Warrantech entities were not parties in the arbitration but were the
subject of extensive discovery by each of Houston General and the Lloyd's
syndicates. The arbitration concluded in August 2002 with an award of
approximately $39,000,000 in favor of Houston General.
The award supports the assertions of Houston General with respect to the
validity of the claims that it paid. Warrantech was not involved in the
selection of these re-insurers, has no contractual relationship with
them, and has had no reporting or other obligation to them. Despite these
facts, the Lloyd's syndicates now seek to recover some portion of the
arbitration award from the Warrantech entities on two theories of
liability. The first is that, at the time certain claims were presented
to Houston General for payment, the Warrantech entities either
fraudulently or negligently represented to Houston General that such
claims were valid. The second is that the Warrantech entities
intentionally failed to comply with their legal obligations to cooperate
with the parties during the discovery process for the arbitration. No
specific demand for damages is contained in the complaint.
Warrantech has filed a counterclaim against Lloyd's arising out of the
same set of facts that underlie the original litigation. Warrantech
alleges fraud, unfair claim settlement practices and bad faith and is
seeking damages of approximately $46,000,000. Warrantech is also asking
that any damage award be trebled as permitted under applicable Texas law.
The parties are presently engaged in extensive document discovery and, in
particular, the review of electronic files and databases.
Management believes that this case is without merit; however, it is not
able to predict the outcome of this litigation. The Company is unable at
this time to determine the Company's potential liability, if any, and as
such, the accompanying financial statements do not reflect any estimate
for losses.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
(a) On September 8, 2003, the Annual Meeting of the Stockholders of the Company
was held in Bedford, Texas for the purpose of electing a Board of Directors and
voting on the proposal described below. There were no solicitations in the
opposition to management's nominees for director as listed in the proxy
statement.
20
(c) Each of the directors nominated by the Board (which number
constitutes the entire Board of the Company) and listed in proxy statement was
elected with the votes as follows:
NOMINEES VOTES FOR VOTES WITHHELD
-------- --------- --------------
Joel San Antonio 14,942,478 88,599
William Tweed 14,943,018 88,059
Jeff J. White 14,943,363 87,714
Lawrence Richenstein 14,942,918 88,159
Gordon A. Paris 14,943,263 87,814
Ronald Glime 14,894,053 137,024
Richard Rodriguez 14,942,918 88,159
An amendment to the Company's 1998 Employee Incentive Stock Option
Plan ("the Plan"), increasing the maximum aggregate number of
shares of Common Stock which may be issued upon the exercise of
options granted under the Plan from 1,641,987 to 2,641,987 shares,
was approved with the following vote: 8,961,781 shares for;
533,701 shares against.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Amendment No. 3, dated September 8, 2003, to the
1998 Employee Incentive Stock Option Plan of the
Company, as amended and restated.
4(b) Amendment No. 3, dated October 7, 2003, to the
Warrantech 401K plan.
10(a) Employment Agreement dated July 9, 2003, between
Warrantech Corporation and Christopher L. Ford.
10(b) Employment Agreement dated July 1, 2003 between
Warrantech Corporation and Joel San Antonio.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of Sarbanes-Oxley Act.
21
(b) Reports on Form 8-K
Current Report on Form 8-K, dated August 11, 2003,
reporting, under Item 9, the Company's financial results
for the quarter ended June 30, 2003.
Current Report on Form 8-K, dated September 19, 2003,
reporting, under Item 5, Other Events', reported that the
Board of Directors received a proposal by its founder --
Mr. Joel San Antonio -- for taking the company private and
has appointed a special committee to evaluate the proposal
and all other alternatives which are in the best interest
of the shareholders.
22
SIGNATURE
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
--------------------------------------------------------
(Registrant)
/s/ Richard F. Gavino
--------------------------------------------------------
Richard F. Gavino - Executive Vice President, Chief
Financial Officer, Chief Accounting Officer and Treasurer
(Chief Financial Officer and Duly Authorized Officer)
Dated: November 7, 2003
23