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 June 30, 2002
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.)
150 Westpark Way, Euless TX 76040
(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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 31, 2002
Common stock, par value $.007 per share 15,303,355 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 Months Ended June 30, 2002 and 2001 (Unaudited)..... 3
Condensed Consolidated Balance Sheets at June 30, 2002
(Unaudited) and March 31, 2002 ................................... 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 2002
and 2001 (Unaudited) ............................................. 6
Notes to Condensed Consolidated Financial Statements .................... 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations .................... 10
PART II - Other Information
Item 1: Legal Proceedings .................................................. 12
Item 5: Other Information .................................................. 12
Item 6: Exhibits and Reports on Form 8-K ................................... 12
Certification of Financial Report............................................ 14
Signature ................................................................... 15
2
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
June 30,
--------------------------
2002 2001
----------- ------------
Earned administrative fee (net of amortization of $ 9,030,286 $ 9,227,622
deferred costs)
Costs and expenses
Service, selling, and general and administrative 7,202,343 7,965,387
Depreciation and amortization 1,023,119 1,334,601
----------- ------------
Total costs and expenses
8,225,462 9,299,988
----------- ------------
Income from operations 804,824 (72,366)
Other income (expense) 229,957 192,990
----------- ------------
Income before provision for income taxes 1,034,781 120,624
Provision (benefit) for income taxes 324,900 (10,599)
----------- ------------
Net income $ 709,881 $ 131,223
=========== ============
Earnings per share:
Basic $ 0.05 $ 0.01
=========== ============
Diluted $ 0.05 $ 0.01
=========== ============
Weighted average number of shares outstanding:
Basic 15,307,642 15,100,432
=========== ============
Diluted 15,386,538 15,100,432
=========== ============
See accompanying notes to condensed consolidated financial statements.
3
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, March 31,
2002 2002
----------- -----------
A S S E T S
Current assets:
Cash and cash equivalents $ 6,717,835 $ 7,033,448
Investments in marketable securities 855,755 954,653
Accounts receivable, (net of allowances of
$218,782 and $256,019, respectively) 20,028,366 18,442,135
Other receivables, net 6,887,848 4,931,749
Income tax receivable -- 1,129,076
Deferred income taxes 2,275,125 2,653,000
Prepaid expenses and other current assets 519,050 600,944
----------- -----------
Total current assets 37,283,979 35,745,005
----------- -----------
Property and equipment, net 8,515,795 9,299,713
----------- -----------
Other assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of $5,825,405) 1,637,290 1,637,290
Deferred income taxes 2,382,290 2,329,315
Deferred direct costs 19,421,275 22,570,930
Investments in marketable securities 1,496,717 1,376,619
Restricted cash 825,000 825,000
Split dollar life insurance policies 959,171 904,172
Notes receivable 3,049,589 2,818,639
Other assets 44,545 44,546
----------- -----------
Total other assets 29,815,877 32,506,511
----------- -----------
Total Assets $75,615,651 $77,551,229
=========== ===========
See accompanying notes to condensed consolidated financial statements
4
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, March 31,
2002 2002
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 746,871 $ 801,788
Insurance premiums payable 26,908,501 26,470,265
Accounts and commissions payable 6,474,037 6,960,465
Income tax payable 120,641 --
Accrued expenses and other current liabilities 3,590,319 3,168,666
------------ ------------
Total current liabilities 37,840,369 37,401,184
------------ ------------
Deferred revenues 30,692,610 33,559,379
Long-term debt and capital lease obligations 835,995 957,159
Deferred rent payable 163,970 190,260
------------ ------------
Total liabilities 69,532,944 72,107,982
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000
Shares issued - none at June 30, 2002 and March 31, 2002 -- --
Common stock - $.007 par value authorized - 30,000,000 Shares
issued - 16,525,324 shares at June 30, 2002 and
16,525,324 shares at March 31, 2002 115,679 115,679
Additional paid-in capital 23,745,944 23,745,944
Loans to directors and officers (10,245,610) (10,163,875)
Accumulated other comprehensive income, net of taxes (40,714) (52,028)
Retained earnings (deficit) (3,267,951) (3,977,832)
------------ ------------
10,307,348 9,667,888
Treasury stock - at cost, 1,212,159 shares at June 30, 2002
and 1,212,159 shares at March 31, 2002 (4,224,641) (4,224,641)
------------ ------------
Total Stockholders' Equity 6,082,707 5,443,247
------------ ------------
------------ ------------
Total Liabilities and Stockholders' Equity $ 75,615,651 $ 77,551,229
============ ============
See accompanying notes to condensed consolidated financial statements.
5
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
June 30,
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 709,881 $ 131,223
----------- -----------
Total Adjustments to reconcile net income to net cash
provided by operating activities: (320,363) (1,849,017)
----------- -----------
Net cash flows provided by operating activities 389,518 (1,717,794)
Cash flows from investing activities:
Property and equipment purchased (241,944) (630,169)
Purchase of marketable securities (445,000) (100,000)
(Increase) decrease in notes receivable 124,340 140,031
Proceeds from sales of marketable securities 450,000 1,160,304
----------- -----------
Net cash provided by investing activities (112,604) 570,166
Cash flows from financing activities:
Purchase treasury stock (8,865) --
Increase in notes receivable (355,290) --
Repayments, notes and capital leases (228,372) (501,861)
----------- -----------
Net cash provided used financing activities (592,527) (501,861)
----------- -----------
Net increase (decrease) in cash and cash equivalents (315,613) (1,649,489)
Cash and cash equivalents at beginning of period 7,033,448 3,001,924
----------- -----------
Cash and cash equivalents at end of period $ 6,717,835 $ 1,352,435
----------- -----------
Supplemental Cash Flow Information:
Cash payments (receipts) for:
Interest $ 49,903 $ 54,888
Income taxes $(1,252,774) $ 13,028
----------- -----------
Non-Cash Investing and financing activities:
Property and equipment financed through capital
leases $ 54,833 $ 75,391
Capital leases refinanced $ -- $ 151,727
Increase in loans to officers and directors $ (81,735) $ (81,735)
See accompanying notes to condensed consolidated financial statements.
6
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(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'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. 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 and by providing them with the opportunity for increased
revenue and income while outsourcing the costs and responsibilities of operating
an extended warranty program.
The terms of the service contracts, extended warranties and replacement
contracts generally have terms ranging from three (3) to eighty-four (84)
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 these repairs is
generally paid for by the insurance companies which have the ultimate
responsibility for the claims or by Butler Financial Solutions, LLC ("Butler"),
where Reliance Insurance Company ("Reliance") or the Company are the obligor.
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.
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 June 30, 2002
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2003. 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, 2002.
3. NOTES RECEIVABLE
Butler Financial Solutions LLC ("Butler") serves as the ultimate obligor under
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
Insurance Company ("Reliance"), and the liquidation of Reliance has eliminated
the insurance coverage to Butler under those contracts.
In order to assist Butler in addressing its potential obligations under the
service contacts previously insured by Reliance for which Butler is or
Warrantech was the obligor, Warrantech Automotive has made a loan to Butler. The
Company has and will make further loans to Butler, as required, for claim
obligations in excess of Butler's fee
7
revenues. All of Warrantech's loans to Butler bear or will 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.
Additionally, funding will be provided by a special surcharge, which will be
paid on all vehicle service contracts administered by the Company that are sold
after November 19, 2001. The surcharge will be paid by agents through whom
Reliance insured service contracts were sold. This funding will be utilized by
Butler to pay the claims previously insured by Reliance and will also be
available to repay Butler's loans from Warrantech.
During period ended June 30, 2002, Warrantech has loaned Butler $7,860,572.
Reliance Warranty Company ("RWC"), which is not part of the Reliance
liquidation, is obligated to pay $4,824,328 of that amount, which the Company
expects to receive in the second quarter of fiscal 2003 and is reflected as
"Other Receivables" on the Consolidated Balance Sheet. The remaining amount
representing the loans due from Butler of $3,036,244 is reflected as "Notes
Receivable" on the Consolidated Balance Sheet.
If Butler is unable to cover the claims previously insured by Reliance, or if
the Company's current insurance carrier ceases to provide credit to the Company
in order to fund shortfalls required, Warrantech Automotive may ultimately be
required to honor the claims under those service contracts in which Warrantech
Automotive was the obligor, which could have an adverse effect on the Company's
business. Since management is not able to determine the Company's potential
claims liability, if any, under such contracts, the Company has not taken a
reserve for claims losses for which the Company may ultimately be liable.
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
For the Three Months Ended
--------------------------
June 30,
----------------------
2002 2001
--------- ---------
Net income $ 709,881 $ 131,223
Other Comprehensive Income, net of tax
Unrealized gain (loss) on investments 18,420 (27,354)
Foreign currency translation adjustments (7,106) 29,863
--------- ---------
Comprehensive Income $ 721,195 $ 133,732
========= =========
Comprehensive income per share: $ 0.05 $ 0.01
========= =========
The components of accumulated comprehensive income are as follows:
June 30, March 31,
2002 2002
--------- ---------
Unrealized gain/(loss) on investments $ 22,753 $ 4,333
Accumulated translation adjustments (63,467) (56,361)
--------- ---------
Accumulated other comprehensive income ($ 40,714) ($ 52,028)
========= =========
8
5. EARNINGS PER SHARE
The computations of Earnings per share are as follows:
For the Three Months Ended
June 30,
------------------------
2002 2001
---------- -----------
Numerator:
Net income applicable to common stock $ 709,881 $ 131,223
========== ===========
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,307,642 15,100,432
---------- -----------
Diluted shares 15,386,538 15,100,432
========== ===========
Earnings Per Common Share:
Basic $ 0.05 $ 0.01
========== ===========
Diluted $ 0.05 $ 0.01
========== ===========
6. SEGMENTS
The Company operates in three major business segments: Automotive, Consumer
Products and International. Other includes general corporate income and
expenses, inter-segment sales and expenses and other corporate assets not
related to the three business segments.
Consumer Reportable
Year Ended Automotive Products International Segments Other Total
June 30, 2002 ---------- -------- ------------- -------- ----- -----
- -------------
Earned administrative fee $4,985,683 $3,381,443 $716,273 $9,083,399 ($53,113) $9,030,286
Profit (loss) from
operations 3,055,691 (22,047) 46,705 3,080,349 (2,275,525) 804,824
Pretax income (loss) 1,408,290 (574,839) 47,283 880,734 154,047 1,034,781
Net interest income 19,498 (4,452) 3,551 18,597 107,329 125,926
Depreciation/amortization 99,508 436,567 21,237 557,312 465,807 1,023,119
Total Assets 40,691,975 27,025,920 3,591,600 71,309,495 4,306,156 75,615,651
June 30, 2001
- -------------
Earned administrative fee $3,475,017 $4,644,874 $1,246,414 $9,366,305 ($138,683) $9,227,622
Profit (loss) from
operations 1,507,931 (421,793) 311,804 1,397,942 (1,470,308) (72,366)
Pretax Income (Loss) 951,963 (1,172,720) 117,023 (103,734) 93,135 (10,599)
Net Interest Income 20,434 3,808 (390) 23,852 172,468 196,320
Depreciation/Amortization 102,414 421,536 19,085 543,035 791,566 1,334,601
Total Assets 39,897,170 38,980,961 3,062,749 81,940,880 7,955,185 89,896,065
9
WARRANTECH CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the matters discussed
below or elsewhere in this annual report may contain forward-looking statements
that involve risks and uncertainties 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. 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, 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 of the Company, (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) adverse outcomes of litigation, (i) the
ability of Butler Financial Solutions, LLC ("Butler") to pay claims under the
service contacts insured by Reliance Insurance Company ("Reliance"), (j) if any
of the insurance companies which insure the service contracts marketed and
administered by the Company were unable to pay the claims under the service
contracts, it could have an adverse effect on the Company's business, (k) if
Butler is unable to cover the claims previously insured by Reliance, or if the
Company's current insurance carrier ceases to provide credit to the Company in
order to fund any shortfalls required, Warrantech Automotive may ultimately be
required to honor the claims under those service contracts in which Warrantech
Automotive was the obligor which could have a materially adverse effect on the
Company's business; since management is not able to determine the Company's
potential claims liability, if any, the Company may ultimately be liable; and
(l) the Company is currently negotiating an agreement with the Great American
Insurance Company pursuant to which, among other things, Great American will
provide funds that were held by Reliance Warranty Corporation to cover claims
under certain of the vehicle service contracts in which Butler is, or the
Company was the obligor; while the Company expects this agreement to be
finalized and the funds to be released, if the agreement is not finalized ,
there is a risk that the release of the funds by Reliance Warranty Corporation
will be withheld or delayed.. 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.
Results of Operations
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Net earned administrative fees for the three month period ended June 30, 2002
decreased slightly to $9,030,286 as compared with $9,227,622 for the same period
last year, a decrease of $197,336 or 2%. Increases in Automotive net earned
administrative fees were primarily offset with lower deferred revenues from
prior periods recognized this quarter versus the same period last
10
The Automotive segment net earned administrative fees increased $1,510,665 or
43% to $4,985,682 for the quarter ending June 30, 2002 from in the same quarter
last year. A 41% increase in the number of contracts sold contributed to the
increase in the Automotive segment. This increase was partially offset by higher
premium cost and lower deferred revenues from prior periods recognized this
quarter versus the same quarter last year.
The Consumer Products segment net earned administrative fees decreased to
$3,381,443 for the three month period ended June 30, 2002 from $4,644,874 for
same period last year. The change was primarily attributed to lower deferred
revenues from prior periods recognized this quarter versus the same quarter last
year.
The International segment net earned administrative fees decreased to $716,273
for the three month period ended June 30, 2002 from $1,246,414 for the same
period a year ago. The loss of a large customer in Chile was partially offset by
increased market penetration from existing customers in Puerto Rico.
Service, selling and general and administrative expenses (SG&A) for the three
months ended June 30, 2002 were reduced by $763,044 or 10% to $7,202,343 as
compared to $7,965,387 for the three months ended June 30, 2001. The decrease in
SG&A expenses reflects the Company's improved call center technologies, and cost
containment measures. Total employee and payroll related costs were down 4.5%
from $4,668,731 for the quarter ended June 30, 2001 to $4,380,283 in the current
quarter. Outside services, including consulting and legal fees, were down
$140,745 or 15.7% from $895,593 in the quarter ended June 30, 2001 to $754,848
in the current quarter and telephone expenses were reduced 38% from $701,332 in
the quarter ended June 30, 2001 to $437,171 in the current quarter.
Depreciation and amortization expenses were reduced by $311,482 to $1,023,119
for the three months ended June 30, 2001 as compared to $1,334,601 for the same
period last year. Depreciation and amortization decreased as a result of the
Company's assets maturing
Income from operations for the first quarter 2003 was $804,824 compared to a
loss of $72,366 for the first quarter 2002, as the Company's automotive segment
increased its volumes and the Company continued its reduction in its SG&A costs.
Net income for the three months ended June 30, 2002 was $709,981 or $0.05 per
diluted share compared to a net income of $131,223 or $0.01 per diluted share
for the comparable period last year. This change is the result of factors as
described above.
Liquidity and Financial Resources
During the three months ended June 30, 2002, the Company had a net decrease in
cash and cash equivalents of $315,613 which was primarily used in operating
activities to fund working capital. Working capital, which continues to improve,
was a negative $556,390 at June 30, 2002 compared to a negative $1,656,179 at
March 31, 2002. The Company believes that internally generated funds, resulting
primarily from reducing its average days outstanding accounts receivable and the
payment of the Other Receivable by RWC, will be sufficient to finance its
current operations for at least the next twelve months. To fund unanticipated
working capital requirements, the Company is finalizing an agreement with Great
American Insurance Company to extend a line of credit to the Company for up to
$3 million , subject to certain adjustments. Additionally, 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.
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 three months ended June 30, 2002 amounted to $54,833
compared to $75,391 during the three months ended June 30, 2001.
The Company will enter into a new office lease during the second quarter of
fiscal 2003 and, in the third quarter, consolidate it domestic operations into
one facility located in Bedford, Texas, which is within one mile of its existing
11
facilities. As a result, the Company's rent expense will increase slightly
beginning in the fourth fiscal quarter, which will be partially offset by
efficiencies gained in some personnel and telephone costs.
The effects of inflation and foreign currency changes have not been significant
to the Company.
PART II. Other Information
Item 1. Legal Proceedings
ACE Property and Casualty Insurance Company
In the Matter of the Arbitration between ACE Property and Casualty
Insurance Company f/k/a CIGNA Property and Casualty Insurance Company
v. Warrantech Corporation, Warrantech Consumer Product Services, Inc.,
WCPS of Florida, Inc. and Warrantech Help Desk, Inc.
In accordance with an Administrative Agreement between the various
named Warrantech entities and CIGNA, ACE has made a demand for
arbitration of a variety of claims that ACE asserted against
Warrantech. These claims can be divided into two general categories.
The first arises out of Warrantech's administration of its service
contract program with CompUSA prior to and immediately following the
termination of the relationship between Warrantech and CompUSA. The
remaining claims relate to Warrantech's general claims handling
procedures. Although all claims have not been set forth with
specificity, it is evident that ACE is seeking to recover damages in an
amount in excess of twenty million dollars ($20,000,000).
ACE provided Warrantech with its Preliminary Statement, an arbitration
panel was appointed and an arbitration schedule was agreed upon.
Following an extended standstill period during which the parties
engaged in various discussions, a conference call was held recently
among the arbitrators and the parties for the purpose of establishing a
new discovery schedule. At this time, it appears that the formal
arbitration proceeding will be held in the fourth quarter of 2002 or
the first quarter of 2003.
Michael A. Basone
Mr. Basone is a former Executive Vice President and Chief Operating
Officer of Warrantech, having resigned in February 2000. Several months
after resigning, Mr. Basone contacted the Company through his attorney
and claimed that the Company's conduct was such that he was forced to
resign. For this alleged "constructive termination" without cause, Mr.
Basone seeks an amount equal to what he would have received had he
completed the term of his employment agreement. The Company believes
this assertion is completely without merit and has rejected Mr.
Basone's demand for payment. Mr. Basone has filed a Demand for
Arbitration with the American Arbitration Association that seeks
damages in the amount of $300,000. An arbitration hearing was held on
May 13 - 14, 2002 and, on July 31, 2002, the arbitrator issued his
decision. The arbitrator has denied Mr. Basone's claim and has held
that wages withheld by Warrantech shall be applied to offset amounts
owed to Warrantech by Mr. Basone pursuant to a promissory note. Each
party will be responsible for its own attorney's fees and for one-half
of the costs of the arbitrator.
Market West Computer Group
M.W.C.G., Inc., d/b/a/ Market West Computer Group, on behalf of itself
and all others similarly situated v. ACE Property and Casualty
Insurance Company, Warranty Corporation of America ("WaCA"), Warrantech
Corporation and Warrantech Consumer Product Services, Inc. ("WCPS"),
United States District Court, Central District of California (Western
Division).
12
Market West is one of many service providers used by WCPS to repair
computer-related equipment pursuant to its service contract program.
When the administration of those service contracts underwritten by ACE
was transferred from WCPS to WaCA, many service providers like Market
West complained of material changes in claim adjustment procedures and
unreasonable delays in claim payment. Market West filed suit in state
court in California against the named parties to recover monies it
claims to be owed as a result of the repair work it has performed.
The amount sought by Market West under its initial claim was
approximately $225,000. Warrantech believes that if the claim were
successful, substantially all of any amount that is claimed by Market
West would be owed by the insurers that underwrote the liability.
Recently the lawsuit was removed to federal court and Market West is
attempting to have a national class of plaintiffs certified. If Market
West is successful in having such a class certified, Warrantech's
potential exposure would be increased significantly. At this time, both
parties are actively engaged in discovery on the issue of class
certification.
Although the Company believes that the actions described above are
without merit, it is not able to estimate its potential liability in
any of them, and accordingly, no reserves for potential liabilities
have been provided for any of these actions.
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
10(a) - Nonqualified stock option agreement dated June 4, 2002, by
and between Warrantech Corporation and Staples, Inc.
Item 6(b) Reports on 8-K
On June 13, 2002, the Company filed a Current Report on Form 8-K. In
this Current Report, Warrantech reported that, simultaneously with the
settlement of the litigation with Staples The Office Superstore, Inc.
("Staples"), it granted Staples options to purchase one million shares
of Warrantech's common stock at a purchase price of $2.00 per share.
The option is exercisable for a period of five years. Warrantech has
the right to redeem the options at any time if its shares trade at a
price of $3.00 per share or more on any five consecutive trading days.
The redemption price is $.001 per option. If Warrantech elects to
redeem the options, Staples will have the right to exercise the options
immediately prior to the redemption. In the event that Staples
exercises all of the options, it would hold approximately 6.5% of the
Company's outstanding shares.
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CERTIFICATION OF PERIODIC FINANCIAL REPORT
Pursuant to 18 U.S.C Section 1350
Pursuant to 18 U.S.C. Section 1350 Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned officers of Warrantech Corporation (the "Company") certifies that
the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30,
2002 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and information contained in that Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ Joel San Antonio
------------------------------------
Joel San Antonio
Chairman, Chief Executive Officer and
Director
Dated: August 12, 2002
/s/ Richard F. Gavino
------------------------------------
Richard F. Gavino - Executive Vice
President, Chief Financial Officer,
Chief Accounting Officer and Treasurer
Dated: August 12, 2002
This certification is made solely for purpose of 18 U.S.C. Section 1350,
subject to the knowledge standard contained therein, and not for any other
purpose.
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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: August 12, 2002
15