UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
( ) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 0-13084
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WARRANTECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3178732
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Highway 121, Suite 100, Bedford, Texas 76021
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 544-9510
---------------------
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(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 November 1, 2004
- --------------------------------------- ------------------------------------
Common stock, par value $.007 per share 15,398,674 shares
WARRANTECH CORPORATION AND SUBSIDIARIES
I N D E X
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Page No.
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PART I - Financial Information
Item 1: Financial Statements
Condensed Consolidated Statements of Operations -
For the Three and Six Months Ended
September 30, 2004 and 2003 (Unaudited) ..................... 2
Condensed Consolidated Balance Sheets at
September 30, 2004 (Unaudited) and March 31, 2004............ 3-4
Condensed Consolidated Statements of Cash Flows
For the Three and Six Months Ended
September 30, 2004 and 2003 (Unaudited).................... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk..... 18
Item 4: Controls and Procedures........................................ 19
PART II - Other Information
Item 1: Legal Proceedings.............................................. 20
Item 2: Changes in Securities and Use of Proceeds and Issuer
Purchases of Equity Securities......................... 21
Item 3: Defaults Upon Senior Securities................................ 21
Item 4: Submission of Matters to a Vote of Security Holders............ 21
Item 5: Other Information.............................................. 21
Item 6: Exhibits and Reports on Form 8-K............................... 21
Signature .............................................................. 22
1
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,
---------------------------- ----------------------------
2004 2003 * 2004 2003 *
------------ ------------ ------------ ------------
Gross revenues $23,567,267 $41,416,828 $56,562,203 $80,586,985
Revenues deferred to future periods (22,788,173) (2,961,567) (53,830,872) (12,582,153)
Deferred revenues earned 24,037,996 (5,480,038) 45,947,250 (4,635,787)
------------ ------------ ------------ ------------
Net (increase) decrease in deferred revenues 1,249,823 (8,441,605) (7,883,622) (17,217,940)
------------ ------------ ------------ ------------
Net revenues 24,817,090 32,975,223 48,678,581 63,369,045
Direct costs 19,138,847 23,973,097 36,538,921 47,071,625
------------ ------------ ------------ ------------
Gross profit 5,678,243 9,002,126 12,139,660 16,297,420
Operating expenses
Service, selling, and general and administrative 6,671,319 7,752,032 13,636,526 15,102,799
Provision for bad debt expense 111,278 165,000 242,557 260,000
Depreciation and amortization 722,187 892,893 1,450,676 1,820,973
------------ ------------ ------------ ------------
Total costs and expenses 7,504,784 8,809,925 15,329,759 17,183,772
------------ ------------ ------------ ------------
Income (loss) from operations (1,826,541) 192,201 (3,190,099) (866,352)
Other income 328,589 515,663 507,230 719,985
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (1,497,952) 707,864 (2,682,869) (166,367)
Provision (benefit) for income taxes 96,086 179,722 (329,292) (219,518)
------------ ------------ ------------ ------------
Net income (loss) $(1,594,038) $528,142 $(2,353,577) $53,151
============ ============ ============ ============
Earnings (loss) per share:
Basic ($0.10) $0.03 ($0.15) $0.00
============ ============ ============ ============
Diluted ($0.10) $0.03 ($0.15) $0.00
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 15,389,412 15,352,718 15,394,020 15,319,117
============ ============ ============ ============
Diluted 15,389,412 16,178,600 15,394,020 16,143,599
============ ============ ============ ============
* Restated for Comparability
See accompanying notes to condensed consolidated financial statements.
2
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
2004 March 31,
(Unaudited) 2004
-------------- --------------
ASSETS
------
Current assets:
Cash and cash equivalents $3,175,175 $5,229,773
Investments in marketable securities 1,086,937 1,370,731
Accounts receivable, (net of allowances of $437,696 15,680,453 23,369,612
and $233,667, respectively)
Other receivables, net 8,623,970 7,322,289
Deferred income taxes 3,478,250 3,478,250
Employee receivables 41,822 70,908
Prepaid expenses and other current assets 558,759 728,265
-------------- --------------
Total current assets 32,645,366 41,569,828
-------------- --------------
Property and equipment, net 4,845,105 5,746,851
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 19,576,871 18,879,171
Deferred direct costs 196,031,302 186,513,417
Investments in marketable securities 1,145,808 1,083,400
Restricted cash 800,000 825,000
Split dollar life insurance policies 900,145 900,145
Other assets 37,060 29,448
-------------- --------------
Total other assets 220,128,476 209,867,871
-------------- --------------
Total Assets $257,618,947 $257,184,550
============== ==============
See accompanying notes to condensed consolidated financial statements.
3
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
2004 March 31,
(Unaudited) 2004
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
- ---------------------------------------------------------
Current liabilities:
Current maturities of long-term debt and capital lease obligations $573,520 $664,406
Insurance premiums payable 30,115,922 31,613,047
Income taxes payable 31,154 48,099
Accounts and commissions payable 5,903,469 7,083,459
Claims liability - Reliance 3,419,587 5,608,893
Accrued expenses and other current liabilities 4,602,556 3,776,199
------------- -------------
Total current liabilities 44,646,208 48,794,103
------------- -------------
Deferred revenues 236,725,838 228,955,971
Claims liability - Reliance 3,224,620 3,882,685
Long-term debt and capital lease obligations 938,699 980,903
Deferred rent payable 433,075 369,839
------------- -------------
Total liabilities 285,968,440 282,983,501
------------- -------------
Commitments and contingencies - -
Stockholders' equity (Capital deficiency):
Preferred stock - $.0007 par value authorized - 15,000,000
Shares issued - none at September 30, 2004 and March 31, 2004 - -
Common stock - $.007 par value authorized - 30,000,000
Shares issued - 16,586,283 shares at
September 30, 2004 and March 31, 2004 116,106 116,106
Additional paid-in capital 23,800,228 23,800,228
Loans to directors and officers (10,890,157) (10,747,470)
Accumulated other comprehensive income, net of taxes 96,855 150,801
Retained earnings (deficit) (37,284,636) (34,931,059)
------------- -------------
(24,161,604) (21,611,394)
Treasury stock - at cost, 1,187,606 shares at
September 30, 2004 and March 31, 2004 (4,187,889) (4,187,557)
------------- -------------
Total Stockholders' Equity (Capital Deficiency) (28,349,493) (25,798,951)
------------- -------------
------------- -------------
Total Liabilities and Stockholders' Equity (Capital Deficiency) $257,618,947 $257,184,550
============= =============
See accompanying notes to condensed consolidated financial statements.
4
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
September 30,
------------------------------
2004 2003*
------------- -------------
Cash flows from operating activities:
Net income (loss) $(2,353,577) $53,151
Total adjustments to reconcile net income to net cash
provided (used) by operating activities: 870,808 (1,621,148)
------------- -------------
Net cash flows used by operating activities (1,482,769) (1,567,997)
------------- -------------
Cash flows from investing activities:
Property and equipment purchased (292,394) (210,177)
Purchase of marketable securities (855,000) (695,000)
Proceeds from sales of marketable securities 950,000 445,000
------------- -------------
Net cash used by investing activities (197,394) (460,177)
------------- -------------
Cash flows from financing activities:
Purchase of treasury stock (23,960) -
Issuance of common stock - 6,270
Repayments, notes and capital leases (350,475) (450,342)
------------- -------------
Net cash used by financing activities (374,435) (444,072)
------------- -------------
Net increase (decrease) in cash and cash equivalents (2,054,598) (2,472,246)
Cash and cash equivalents at beginning of period 5,229,773 6,422,530
------------- -------------
Cash and cash equivalents at end of period $3,175,175 $3,950,284
------------- -------------
Supplemental Cash Flow Information:
Cash payments for:
Interest $76,736 $148,358
------------- -------------
Income taxes $370,276 $48,650
------------- -------------
Non-cash investing and financing activities:
Property and equipment financed through capital leases $251,884 $427,073
Increase in loans to officers and directors $(142,687) $(142,688)
Issuance of treasury stock $23,628 $87,113
* Restated for comparability.
See accompanying notes to condensed consolidated financial statements.
5
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
1. THE COMPANY
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General Information
Warrantech, through its wholly owned subsidiaries, designs, develops, markets
and acts as a third party administrator for programs ("Programs") for service
contracts, limited warranties and replacement plans (collectively, "Plans"). The
Company provides these services to a variety of clients in selected industries.
On a Program by Program basis, the Company contracts with highly rated
independent insurance companies or risk retention groups available to provide
coverage for the Plans to be sold or issued under the Programs. This coverage
obligates the insurer to pay the cost of repairs or replacements of the products
covered by the Plans.
Plans issued under the Company's Programs provide consumers with expanded and/or
extended product breakdown 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 Programs provide clients
with the opportunity for increased revenue and income without incurring the
costs and responsibilities of operating their own programs.
The Plans generally have terms extending up to one hundred twenty (120) months
or, in the case of mileage based Plans, up to one hundred fifty thousand
(150,000) miles. All repairs and/or replacements required under the Plans are
performed by independent third party repair facilities or dealers. The cost of
any repair or replacement is generally paid by the insurance company or
retention group with which the Company has contracted to provide coverage for
the Plan.
Termination of Butler Agreement
Certain Plans were insured by Reliance Insurance Company ("Reliance") which was
placed in liquidation in 2002. However, although not legally obligated, all
Reliance claims incurred by its existing dealers have been paid by Butler
Financial Solutions, LLC ("Butler").
On June 22, 2004, the Company notified Butler, that effective October 22, 2004,
the Company will terminate the Obligor Agreement between the two Companies. As a
result of the agreement termination, that will benefit liquidity, Butler will no
longer be the obligor on service contracts sold by Warrantech after October 22,
2004. Butler remains the obligor on service contracts sold prior to October 22,
2004.
Other Recent Developments
On June 30, 2004, the Company terminated its relationship with Cruz del Sur, its
primary insurance carrier in Chile, as of December 31, 2004. To arrange for
continuity of coverage beginning January 1, 2005, the Company is in the process
of completing negotiations with another insurance carrier that has a world-wide
presence.
On September 1, 2004, the Company began offering one-year extended home product
warranties. Unlike the Company's other Plans, these warranties will not be
insured by a third party insurance company, but will be obligations solely of
the Company. The Company has established a claims liability reserve to pay
claims arising under these Plans.
6
2. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). These consolidated financial statements include the accounts
of Warrantech Corporation, its subsidiaries, all of which are wholly owned, and
certain transactions involving Butler due to its related interest with the
Company. All intercompany accounts and transactions have been eliminated in
consolidation. 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 and six months ended
September 30, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2005. 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, 2004.
3. OTHER RECEIVABLES
-----------------
The nature and amounts of Other Receivables as of September 30, 2004 and March
31, 2004 are as follows:
---------------------------
September 30, March 31,
2004 2004
------------ ------------
Other receivables, net
Due from insurance companies $4,976,596 $4,555,772
Due from dealers 489,078 464,436
Due from insurance companies - reimbursement
of legal fees 2,865,183 1,865,399
------------ ------------
Due from insurance companies/dealers 8,330,857 6,885,607
Agent advances 78,078 109,604
Other 215,035 327,078
------------ ------------
8,623,970 7,322,289
Allowance for doubtful accounts - -
------------ ------------
Total other receivables, net $8,623,970 $7,322,289
============ ============
The following table sets forth the carrying amounts and fair values of the
Company's other receivables at September 30, 2004.
Expected Maturity Date
---------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total Fair Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other receivables, net $8,623,970 - - - - - $8,623,970 $8,623,970
4. COMPREHENSIVE INCOME (LOSS)
---------------------------
The components of comprehensive income (loss) are as follows:
For the Three Months Ended For the Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss) ($1,594,038) $528,142 ($2,353,577) $53,151
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on investments 3,139 (6,307) (7,984) (9,749)
Foreign currency translation adjustments 7,294 88,610 (45,962) 111,646
------------ ------------ ------------ ------------
Comprehensive income (loss) ($1,583,605) $610,445 ($2,407,523) $155,048
============ ============ ============ ============
Comprehensive income (loss) per share: ($0.10) $0.04 ($0.16) $0.01
============ ============ ============ ============
7
The components of accumulated comprehensive income, net of related tax, as of
the periods ended September 30, 2004 and March 31, 2004, are as follows:
September 30, March 31,
2004 2004
------------- -------------
Unrealized gain/ (loss) on investments ($7,021) $963
Accumulated translation adjustments 103,876 149,838
------------- -------------
Accumulated other comprehensive income $96,855 $150,801
============= =============
5. EARNINGS PER SHARE
------------------
The following table sets forth the calculation of earnings per share for the
three months and six months ended September 30, 2004 and 2003.
For the Three Months Ended For the Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator:
Net income (loss) applicable to common stock ($1,594,038) $528,142 ($2,353,577) $53,151
============ ============ ============ ============
Denominator:
Average outstanding shares used in the
Computation of per share earnings:
Common Stock issued-Basic shares 15,389,412 15,352,718 15,394,020 15,319,117
Stock Options (treasury method) 342,900 825,882 278,912 824,482
------------ ------------ ------------ ------------
Diluted shares 15,732,312 16,178,600 15,672,932 16,143,599
============ ============ ============ ============
Earnings (loss) Per Common Share:
Basic ($0.10) $0.03 ($0.15) $0.00
============ ============ ============ ============
Diluted ($0.10) $0.03 ($0.15) $0.00
============ ============ ============ ============
6. STOCK BASED COMPENSATION
------------------------
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 charged to operations. 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 the 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.
8
For the Six Months Ended
March 30,
----------------------------
2004 2003
------------ ------------
Net income (loss) as reported $(2,353,577) $53,151
Net income (loss) pro forma $(2,401,445) $10,972
Shares - Basic 15,426,520 15,319,117
Basic earnings (loss) per share as reported ($0.15) $0.00
Basic earnings (loss) per share pro forma ($0.16) $0.00
The fair value of the 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 six months ended September 30, 2004 and 2003, 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, 2004 and 2003.
2004 2003
---------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------------------------------------------
Options outstanding at beginning of the period 1,332,789 $1.35 1,306,380 $1.10
Granted 308,826 0.68 180,000 2.18
Canceled/Surrendered - - - -
Exercised - - - -
Forfeited - - - -
---------------------------------------------------
Options outstanding at end of period 1,641,615 $1.12 1,486,380 $1.23
===================================================
---------------------------------------------------
Options exercisable at end of period 914,408 $1.31 637,097 $1.36
===================================================
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, 2004 and 2003, was $0.39 and $0.54, respectively.
The Company may issue options to purchase 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, 2004.
Stock Options Stock Options
Outstanding Exercisable
------------------------ ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Range Of Exercise Prices Shares Price Shares Price
- ---------------------------------- ---------- ----------- ----------- ------------
$0.42 to $0.99 1,002,836 $0.75 421,054 $0.79
$1.00 1,650,000 $1.00 1,650,000 $1.00
$1.26 to $1.595 592,065 $1.41 467,065 $1.36
$3.25 to $3.375 101,290 $3.26 101,290 $3.26
---------- ----------- ----------- ------------
Total at September 30, 2004 3,346,190 $1.56 2,639,409 $1.74
========== =========== =========== ============
9
7. SEGMENTS
--------
The Company operates in three major business segments: Automotive, Consumer
Products and International segments. The category "Other" includes intersegment
eliminations of revenues and receivables and net unallocated corporate expenses.
The Automotive segment designs, develops, markets and acts as a third party
administrator for vehicle service contract programs and other related automotive
after-sale products, all of which enhance the dealer's profitability from the
sale of automobiles, light trucks, recreational vehicles, personal watercraft
and automotive components. These products are sold principally by franchised and
independent automobile 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 and home office equipment, which are sold
principally through retailers, distributors, manufacturers, utility companies,
financial institutions and other specialty marketers. The Company 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. In addition, the Company offers call center and technical computer
services.
The International segment designs, develops, markets and acts as a third party
administrator for many of the same Programs and services outside the United
States that Warrantech Automotive and Warrantech Consumer Products market and
administer in the United States and Canada. The International segment is
currently operating in Puerto Rico, Guatemala, El Salvador, Chile and Peru.
Three Months Ended Consumer Reportable
September 30, 2004 Automotive Products International Segments Other Total
- ------------------ ------------- ------------- ------------- ------------- ------------- -------------
Gross revenues $11,995,763 $10,010,068 $1,860,279 $23,866,110 $(298,843) $23,567,267
Gross profit (loss) 2,076,637 3,777,754 (212,017) 5,642,374 35,869 5,678,243
Profit (loss) from operations 318,186 906,546 (806,032) 418,700 (2,245,241) (1,826,541)
Pretax income (loss) (891,240) (301,449) (804,532) (1,997,222) 499,270 (1,497,952)
Net interest income/expense 65,006 29,362 1,404 95,772 (82,954) 12,818
Depreciation/amortization 76,570 246,928 19,747 343,245 378,942 722,187
September 30, 2003
- ------------------
Gross revenues $29,739,829 $9,475,543 $2,610,633 $41,826,005 $(409,177) $41,416,828
Gross profit 2,599,812 4,076,463 1,881,660 8,557,935 444,191 9,002,126
Profit (loss) from operations 644,285 517,086 702,290 1,863,661 (1,671,460) 192,201
Pretax income (loss) (1,073,274) 136,748 698,672 (237,854) 945,718 707,864
Net interest income/expense (84,919) (1,717) 4,382 (82,254) 404,319 322,065
Depreciation/amortization 97,187 399,421 22,201 518,809 374,084 892,893
10
Six Months Ended Consumer Reportable
September 30, 2004 Automotive Products International Segments Other Total
- ------------------ ------------- ------------- ------------- ------------- ------------- -------------
Gross revenues $33,823,852 $19,366,561 $3,942,622 $57,133,035 $(570,832) $56,562,203
Gross profit 3,863,979 7,110,089 970,503 11,944,571 195,089 12,139,660
Profit (loss) from operations 55,950 1,388,991 (709,240) 735,701 (3,925,800) (3,190,099)
Pretax income (loss) (2,005,350) (771,082) (708,559) (3,484,991) 802,122 (2,682,869)
Net interest income/expense (69,396) (39,143) 1,928 (106,610) 177,104 70,494
Depreciation/amortization 158,409 493,685 39,678 691,772 758,904 1,450,676
Total assets 178,563,336 68,686,439 6,128,904 253,378,679 4,240,268 257,618,947
September 30, 2003
- ------------------
Gross revenues $58,023,231 $18,580,708 $4,483,650 $81,087,589 $(500,604) $80,586,985
Gross profit 4,110,716 7,902,731 2,962,087 14,975,534 1,321,886 16,297,420
Profit (loss) from operations 57,314 942,359 962,724 1,962,397 (2,848,749) (886,352)
Pretax income (loss) (2,993,999) 101,604 962,505 (1,929,890) 1,763,523 (166,367)
Net interest income/expense (145,610) (8,748) 6,288 (148,070) 504,774 356,704
Depreciation/amortization 192,893 804,255 43,642 1,040,790 780,183 1,820,973
Total assets 187,199,859 67,601,593 4,248,746 259,050,198 (3,299,903) 255,750,295
11
WARRANTECH CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
Except for the historical information contained herein, the matters discussed
below or elsewhere in this Quarterly Report 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,
including, 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,
o prevailing economic conditions which may significantly deteriorate,
thereby reducing the demand for the Company's products and services,
o availability of technical support personnel or increases in the rate
of turnover of such personnel, resulting from increased demand for
such qualified personnel,
o changes in the terms or availability of insurance coverage for the
Company's programs,
o regulatory or legal changes affecting the Company's business,
o Loss of business from, or significant change in relationships with,
any major customer,
o the Company's ability to replace lost revenues in its Automotive
segment,
o the ability to successfully identify and contract new business
opportunities, both domestically and internationally,
o the ability to secure necessary capital for general operating or
expansion purposes,
o the adverse outcomes of litigation,
o the non-payment of notes due from an officer and two directors of the
Company in 2007, which would result in a charge against earnings in
the period in which the event occurred,
o the inability of any of the insurance companies which insure the
service contracts marketed and administered by the Company to pay
claims under the service contracts,
o the termination of extended credit terms being provided by the
Company's current insurance company, and
o the illiquidity of the Company's stock.
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 and/or the
Company's financial condition may vary materially from those anticipated,
estimated or expected.
12
Results of Operations
- ---------------------
Gross Revenues
For the Three Months For the Six Months
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Automotive segment $11,995,763 $29,739,829 $33,823,852 $58,023,231
Consumer Products segment 10,010,068 9,475,543 19,366,561 18,580,708
International segment 1,860,279 2,610,633 3,942,622 4,483,650
Other (298,843) (409,177) (570,832) (500,604)
------------ ------------ ------------ ------------
Total gross revenues $23,567,267 $41,416,828 $56,562,203 $80,586,985
============ ============ ============ ============
Gross revenues for the three month period ended September 30, 2004 decreased
$17,849,561, or 43%, from the same period in 2003. Gross revenues for the six
month period ended September 30, 2004 decreased $24,024,782, or 30%, from the
same period in 2003.
The Automotive and International segments reported decreased gross revenues of
$17,744,066, or 60%, and $750,354, or 29%, respectively, in the three month
period ended September 30, 2004 over 2003 and $24,199,379, or 41%, and $541,028,
or 12%, respectively, in the six month period. The decrease in gross revenues in
the Automotive segment was due to the downturn in sales of new cars and a
reduction in volume arising from premium rate increases. The International
segment decrease in gross revenues resulted from lower sales volumes in Puerto
Rico due to the discontinuance of auto warranty sales; however, this decrease
was partially offset by higher sales volume from customers in South America.
The Consumer Products segment reported a 4% increase in gross revenues during
the six month period ended September 30, 2004, compared to the same period in
2003, as a result of increased sales to its major customers and new business.
Gross revenues during the three month period ended September 30, 2004, compared
to the same period in 2003, increased slightly because the upward sales trend
during the second fiscal quarter 2004 was partially interrupted as sales to one
of the Company's major customers, and by the Company's own telemarketing
activities in Florida, were temporarily suspended due to the hurricanes in
Florida.
Gross Profit
For the Three Months For the Six Months
September 30, September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Automotive segment $2,076,637 $2,599,812 $3,863,979 $4,110,716
Consumer Products segment 3,777,754 4,076,463 7,110,089 7,902,731
International segment (212,017) 1,881,660 970,503 2,962,087
Other 35,869 444,191 195,088 1,321,886
------------ ------------ ------------ ------------
Total gross profit $5,678,243 $9,002,126 $12,139,660 $16,297,420
============ ============ ============ ============
Gross profit for the three months and six months ended September 30, 2004
decreased $3,323,883, or 37%, and $4,157,760, or 26%, over the same periods in
2003. Gross profit in those periods decreased, respectively, within the
Automotive segment by $523,175, or 20%, and $246,737, or 6%; within the Consumer
Products segment by $298,709, or 7%, and $792,642, or 10%; and within the
International segment by $2,093,677, or 111%, and $1,991,584, or 67%.
13
SG&A
For the Three Months For the Six Months
September 30, September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Total SG&A $6,671,319 $7,752,032 $13,636,526 $15,102,799
============ ============ ============ ============
Service, selling and general and administrative ("SG&A") for the three months
and six months ended September 30, 2004 decreased $1,080,713, or 14%, and
$1,466,273, or 10%, compared to the same periods in the prior year, primarily
because employee salary costs were lower at $4,020,329 and $8,320,056 during the
respective 2004 periods, compared to $4,585,278 and $9,039,794 in the respective
2003 periods.
Provision for Bad Debts
For the Three Months For the Six Months
Ended September 30, Ended September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Provision for bad debts $111,278 $165,000 $242,557 $260,000
============ ============ ============ ============
The Company began providing for bad debts during fiscal year 2003 in
anticipation of not being able to collect certain receivables in its Consumer
Products and International segments.
Depreciation and amortization
For the Three Months For the Six Months
September 30, September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Total depreciation and
amortization $722,187 $892,893 $1,450,676 $1,820,973
============ ============ ============ ============
As a result of the maturation of the Company's assets and reduced capital
expenditures over the past several years, depreciation and amortization expenses
were reduced by $170,706, or 19%, and by $370,297, or 20%, respectively, during
the three months and six months ended September 30, 2004 from the same periods
in 2003.
Other Income
For the Three Months For the Six Months
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest and dividend income $137,936 $470,423 $288,573 $637,260
Interest expense (125,118) (148,358) (218,080) (280,556)
Gain (loss) on sale of assets - 2,999 1,100 2,976
Credit card usage rebate 316,354 74,991 436,174 204,168
Miscellaneous income (583) 115,608 (537) 156,139
------------ ------------ ------------ ------------
Total other income $328,589 $515,663 $507,230 $719,985
============ ============ ============ ============
Other income for three and six months ended September 30, 2004 decreased
compared to the three and six months ended September 30, 2003 as a result of
lower interest income. That decrease was partially offset by higher income from
credit card usage rebates.
14
Income Tax Expense (Benefit)
For the Three Months For the Six Months
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Total income tax expense (benefit) $96,086 $179,722 $(329,292) $(219,518)
============ ============ ============ ============
Income taxes expense (benefit) decreased $83,636 in the three months ended
September 30, 2004 from the same period in 2003, primarily due to a reduction in
taxable income; similarly, the income tax benefit increased $109,774 for the six
months ended September 30, 2004 compared to the six months ended September 30,
2003 for the same reason.
Liquidity and Financial Resources
- ---------------------------------
During the six months ended September 30, 2004, the Company had a decrease in
cash and cash equivalents of $2,054,598. The cash was primarily used to pay
claims arising under Reliance insured service contracts. Working capital was a
negative $12.0 million at September 30, 2004, compared to a negative $7.2
million at March 31, 2004, primarily due to reduced receivables caused by
reduced automotive business. While the downturn in the automotive industry and
premium rate increases have affected the automotive segment, management believes
that new programs and products will enable the Automotive segment to recover
some of the reductions and increase its existing volumes.
The Company believes that internally generated funds and extended terms,
combined with the $3 million line of credit from Great American Insurance
Company ("GAIC"), will be sufficient to finance its current operations for at
least the next twelve months. The Company is aggressively pursuing new business
both domestically and internationally to fund future working capital
requirements. The Company intends 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.
As a result of a change in regulations, the State of Ohio no longer requires a
cash reserve. Accordingly, during the period ended September 30, 2004, the
Company reduced its restricted cash balance by $25,000.
During the three and six months ended September 30, 2004, the Company
repurchased 32,500 shares of Company common stock at a cost of $23,960.
On June 22, 2004, the Company notified Butler Financial Solutions, LLC
("Butler"), that effective as of October 22, 2004, the Company will terminate
the Obligor Agreement between the two Companies. As a result of the agreement
termination, which will benefit liquidity due to the elimination of the fee paid
to Butler, Butler will no longer be the obligor on service contracts sold by
Warrantech after October 22, 2004. Butler remains the obligor on service
contracts sold prior to October 22, 2004.
On June 30, 2004, the Company terminated its relationship with Cruz del Sur, its
primary insurance carrier in Chile, effective December 31, 2004. To arrange for
continuity of coverage beginning January 1, 2005, the Company is in the process
of completing negotiations with another insurance carrier that has a world-wide
presence.
On September 1, 2004, the Company began offering one-year extended home product
warranties. Unlike the Company's other Plans, these warranties will not be
insured by third party insurance companies but will be obligations solely of the
Company. The Company has established a claims liability to pay claims arising
under these Plans.
The effect of inflation has not been significant to the Company.
15
Commitments
- -----------
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, 2004 amounted to $251,884
compared to $427,073 during the six months ended September 30, 2003.
During the fiscal quarter ended September 30, 2004, the Company paid claims
totaling $1,096,293 under service contracts previously insured by Reliance
Insurance Company ("Reliance-Insured contracts"). The total amount of claims
paid by the Company under such contracts during the first six months of the
current fiscal year is $2,847,371.
Set forth below is information about the Company's commitments outstanding at
September 30, 2004.
Payments due by period
------------------------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Total 1 year Years Years 5 years
------------ ------------ ------------ ------------ ------------
Capital lease obligations $1,555,560 $573,520 $683,771 $298,269 $-
Operating leases 10,770,060 1,332,144 2,495,479 2,540,373 4,402,064
Employment agreements 5,728,917 1,953,292 2,729,375 1,046,250 -
Claims loss liability 6,644,207 3,419,587 3,224,620 - -
------------ ------------ ------------ ------------ ------------
Total $24,698,744 $7,278,543 $9,133,245 $3,884,892 $4,402,064
============ ============ ============ ============ ============
Lines of Credit
- ---------------
The Company executed an agreement with GAIC on October 9, 2002, whereby, GAIC
agreed to provide funding by extending a favorable change of its credit terms to
the Company. GAIC also agreed to extend a separate line of credit for an amount
up to $3 million to the Company, subject to certain adjustments, to fund
unanticipated working capital requirements. Interest is charged on monies
advanced from the line of credit at an annual rate equal to the prime interest
rate plus 2%. As of September 30, 2004, no amounts were drawn on the line of
credit.
The Company maintains a $750,000 letter of credit for the benefit of the
landlord of its headquarters office building. This letter of credit is
automatically renewed annually through January 31, 2013.
The Company also maintains a $200,000 letter of credit for the benefit of its
credit card processor which expires December 16, 2004.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 "Item 8. - Financial Statements and Supplementary Data,"
in the Company's Annual Report on Form 10-K for the year ended March 31, 2004,
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
Revenue from administrator-obligor contracts is recognized in accordance with
Financial Accounting Standards Board Technical Bulletin 90-1, `Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts," ("TB
90-1"). The Company recognizes such revenue over the life of the contract on a
straight-line basis. In addition the Company charges the costs of contracts to
operations over the life of the contracts on a straight-line basis.
Revenue from dealer-obligor service contracts, are sales in which the
retailer/dealer or a third party is designated as the obligor. Historically,
through June 30, 2003, the Company
16
recognized revenues from these contracts in direct proportion to the costs
incurred in providing the service contract programs to the Company's clients.
Revenues in amounts sufficient to meet future administrative costs and a
reasonable gross profit were deferred.
Since Butler has been determined to be a nominally capitalized entity, all
transactions concerning Butler obligor-contracts are treated in a manner similar
to the accounting principles discussed in Financial Accounting Standards Board
Emerging Issues Task Force Topic No. D-14, "Transactions Involving
Special-Purpose Entities." The Company treats the Butler-obligor contracts as if
they were administrator-obligor contracts and recognizes revenues under such
contracts pursuant to TB 90-1. Additionally, because the Company is treating the
Butler-obligor contracts as Warrantech-obligor contracts for financial reporting
purposes only, the Company eliminated the transactions between Warrantech and
Butler from its financial statements.
Reflecting these transactions for financial reporting purposes does not alter
the legal obligations under the applicable agreements in which the Company is
not responsible for, and has not assumed the obligations of Butler. Butler
remains legally obligated under such agreements and the service contracts in
which it is the named obligor. Butler is not deemed a "consolidated subsidiary"
of the Company, as that term is used in this Report, including, but not limited
to, the Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002 which are annexed to this Report. Butler's income, expenses, assets
and liabilities have not been consolidated with those of the Company. Butler is
an independent entity owned by parties unrelated to the Company and, except for
the transactions between Butler and Warrantech as described in this Report,
Warrantech does not have knowledge of, or control over, Butler's affairs or
financial reporting. Warrantech also has no knowledge of, nor has it established
or evaluated, Butler's internal controls or disclosure controls or procedures.
Any reference to "consolidated subsidiary," internal controls or disclosure
controls and procedures in this Report, including, but not limited to, the
Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
2002 which are annexed to this Report, do not pertain to Butler.
Prior to July 1, 2003, the Company recognized revenue from service contracts in
which dealers or other third parties (other than Butler) were the obligor
(dealer-obligor contracts) in direct proportion to the costs incurred in
providing the service contract programs to the Company's clients. Revenues in
amounts sufficient to meet future administrative costs and a reasonable gross
profit were deferred. With the issuance of EITF Abstracts Issue No. 00-21 (EITF
No. 00-21), "Revenue Arrangements with Multiple Deliverables", as of July 1,
2003, the Company recognizes revenue from these dealer-obligor contracts on a
straight-line basis over the life of the service contract, pursuant to Staff
Accounting Bulletin 101.
Now that the Company is required to recognize revenues from all service
contracts over the life of the service contracts, the Company believes that it
is unlikely that the Company will be able to report operating profits until at
least 2008 when the Company expects that the revenues recognized from prior
periods will begin to equal the revenue being deferred to future periods.
However, there can be no assurance that the Company will be profitable at that
time. In the meantime, the revenue recognition policies adopted by the Company
do not have an impact on the Company's cash flows, and it is an important
measure of the Company by reviewing the Statements of Cash Flows which are part
of these financial statements.
Direct Costs
Direct costs, consisting primarily of insurance premiums and commissions, are
costs directly related to the production and acquisition of service contracts.
Effective with the application of the revenue recognition policy(s) described
above on all service contracts, the Company recognizes direct costs according to
Statement of Financial Accounting Standards No. 113 ("SFAS 113"), "Accounting
and Reporting for Reinsurance of Short-Duration and Long Duration Contracts"
which requires that insurance premium costs be ratably expensed over the life of
the service contract.
17
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 flows generated
by the assets, comparing the result to the assets' carrying value and adjusting
the assets to the lower of their carrying value or fair value and charging
current operations for any measured impairment. At September 30, 2004 and 2003,
the Company found no impairment to its property and equipment or its other
identifiable intangibles.
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, 2004, the Company had deferred tax assets of
$23,055,121 net of a valuation allowance of $270,699.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
As of September 30, 2004, 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.
18
Principal amounts by expected maturity as of September 30, 2004 of marketable
securities are as follows:
Expected Maturity Date as of September 30,
-----------------------------------------------------------------------------
1 year 2 years 3 years 4 years 5 years Thereafter Total Cost Fair Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Available for sale
securities $1,070,000 $960,000 $150,000 - - - $2,180,000 $2,232,745
Interest rate 3.65% 3.96% 4.74% - - -
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 before the filing date of this Quarterly Report, evaluated the Company's
disclosure controls and procedures, as defined under SEC rules, 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 Board meets regularly with the
independent accountants and such other members of management as they deem
necessary. The Board and the independent accountants have free access to each
other, with or without management being present.
There were no significant changes in the 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., Warrantech Help
Desk, Inc., and Joel San Antonio, 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. The complaint seeks ordinary, punitive and
exemplary damages although no specific amount is requested. On January 6,
2004, the plaintiff filed an amended complaint that added Joel San Antonio,
Chairman and Chief Executive Officer of Warrantech Corporation, as a party
defendant in his individual capacity.
Warrantech filed a counterclaim against Lloyd's arising out of the same set
of facts that underlie the original litigation. Warrantech alleged fraud,
unfair claim settlement practices and bad faith and sought damages of
approximately $46 million. Warrantech also asked that treble damages for
$138 million be awarded as permitted under applicable Texas law.
This case was originally brought in the District Court of Tarrant County,
Texas, 17th Judicial District. On March 19, 2004, Defendant San Antonio
filed a notice of removal to the United States District Court which motion
was joined by all other defendants. Following removal, Lloyd's filed a
motion to remand the case to state court. Upon consideration of the
arguments and authorities submitted by all parties, Judge McBryde denied
Lloyd's motion with the result that the case was removed to United States
District Court in Fort Worth. Subsequent to the removal, both parties filed
summary judgment motions. Judge McBryde granted partial summary judgment to
Lloyd's, striking Warrantech's counterclaim and certain affirmative
defenses advanced by Warrantech. Based on this decision, Lloyd's again
moved to have the litigation remanded to state court and Judge McBryde
granted this motion. The case is now moving forward in state court while
Warrantech is appealing Judge McBryde's rulings in the Court of Appeals for
the Fifth Circuit.
Management continues to believe that this case is without merit. At this
time, however, it is not able to predict the outcome of the litigation. For
this reason, the Company is unable to determine its potential liability, if
any, and as such, the accompanying financial statements do not reflect any
estimate for losses.
20
Universal Insurance Company
---------------------------
In the Matter of Arbitration between Universal Insurance Company and
Warrantech Consumer Product Services, Inc.; Jane Doe; and ABC Corporation
Universal Insurance Company ("Universal") provided insurance for the
vehicle service contracts marketed and administered by Warrantech
International in Puerto Rico pursuant to an Administrative Agreement that
was effective as of April 1, 1998. On October 16, 2003, Universal, claiming
a material breach of the agreement by Warrantech, terminated the agreement
and assumed responsibility for administering the applicable service
contracts.
Universal served Warrantech with a Demand for Arbitration, dated October
15, 2004, seeking to recover a portion of the fees Warrantech received to
provide administrative services under the contracts, approximating
$2,155,000, together with interest thereon from the effective date of
termination.
Management believes this case is without merit. At this time, however, it
is not able to predict the outcome of the arbitration. For this reason, the
Company is unable to determine its 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 and Issuer Purchases
--------------------------------------------------------------
of Equity Securities
--------------------
Purchase of Equity Securities for the Three Months Ended September 30, 2004
---------------------------------------------------------------------------
Total Number of Average Price
Period Shares purchased Cost Paid per Share
-------------------- ----------------- ------------------ ---------------
7/1/04 - 7/31/04 - - -
8/1/04 - 8/31/04 5,000 $3,860 $0.77
9/1/04 - 9/30/04 27,500 $20,100 $0.73
----------------- ------------------
Total 32,500 $23,960 $0.73
================= ==================
*These shares were not purchased pursuant to a publicly announced plan or
program regarding stock repurchases in as much as the Company has no such
plan or program. The shares were purchased in open market transactions.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
31.1 Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 Statement by the Chief Executive Officer and the Chief Financial
Officer furnished pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended.
21
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,
Principal Financial Officer, Chief Accounting
Officer and Treasurer
(Chief Financial Officer and Duly Authorized
Officer)
Dated: November 15, 2004
22