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, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2002
Common stock, par value $.007 per share 15,319,355 shares
WARRANTECH CORPORATION AND SUBSIDIARIES
I N D E X
Page No.
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PART I - FINANCIAL INFORMATION:
Item 1: Financial Statements
Condensed Consolidated Statements of Operations -
For the Three Months and Six Months Ended
September 30, 2002 and 2001 (Unaudited) .......................... 3
Condensed Consolidated Balance Sheets at September 30, 2002
(Unaudited) and March 31, 2002 ................................... 4
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended September 30, 2002
and 2001 (Unaudited) ............................................. 6
Notes to Condensed Consolidated Financial Statements (Unaudited) ........ 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations .................... 11
Item 3: Quantitative and Qualitative Disclosures about Market Risk ......... 16
Item 4: Controls and Procedures ............................................ 16
PART II - OTHER INFORMATION
Item 1: Legal Proceedings .................................................. 18
Item 4: Submission of Matters to a Vote of Security Holders ................ 20
Item 5: Other Information .................................................. 20
Item 6: Exhibits and Reports on Form 8-K ................................... 20
Certification of Financial Report ........................................... 21
Signature ................................................................... 23
2
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,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Earned administrative fee (net of amortization of
deferred costs) $ 9,934,415 $ 9,265,963 $ 18,964,701 $ 18,493,585
------------ ------------ ------------ ------------
Costs and expenses
Service, selling, and general and administrative 7,894,879 7,882,693 15,097,222 15,848,080
Legal settlement -- (824,332) -- (824,332)
Depreciation and amortization 1,021,535 1,367,162 2,044,654 2,701,763
------------ ------------ ------------ ------------
Total costs and expenses 8,916,414 8,425,523 17,141,876 17,725,511
------------ ------------ ------------ ------------
Income from operations 1,018,001 840,440 1,822,825 768,074
Other income 336,552 148,007 566,509 340,996
------------ ------------ ------------ ------------
Income before provision for income taxes 1,354,553 988,447 2,389,334 1,109,070
Provision for income taxes 466,507 440,200 791,407 429,600
------------ ------------ ------------ ------------
Net income $ 888,046 $ 548,247 $ 1,597,927 $ 679,470
============ ============ ============ ============
Earnings per share:
Basic $ 0.06 $ 0.04 $ 0.10 $ 0.04
============ ============ ============ ============
Diluted $ 0.06 $ 0.04 $ 0.10 $ 0.04
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 15,322,181 15,239,712 15,317,881 15,209,681
============ ============ ============ ============
Diluted 15,430,348 15,239,712 15,398,910 15,209,681
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
3
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
2002 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,113,336 $ 7,033,448
Investments in marketable securities 653,570 954,653
Accounts receivable, (net of allowances of
$183,661 and $256,019, respectively) 22,842,552 18,442,135
Other receivables, net 9,964,850 4,931,749
Income tax receivable -- 1,129,076
Deferred income taxes 1,881,500 2,653,000
Prepaid expenses and other current assets 1,382,417 600,944
----------- -----------
Total current assets 39,838,225 35,745,005
----------- -----------
Property and equipment, net 7,727,039 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 2,329,315 2,329,315
Deferred direct costs 16,271,621 22,570,930
Investments in marketable securities 1,610,443 1,376,619
Restricted cash 825,000 825,000
Split dollar life insurance policies 969,171 904,172
Notes receivable 3,566,022 2,818,639
Other assets 42,433 44,546
----------- -----------
Total other assets 27,251,295 32,506,511
----------- -----------
Total Assets $74,816,559 $77,551,229
=========== ===========
See accompanying notes to condensed consolidated financial statements
4
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
2002 2002
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 684,103 $ 801,788
Insurance premiums payable 29,940,557 26,470,265
Income taxes payable 114,484 --
Accounts and commissions payable 6,686,754 6,960,465
Accrued expenses and other current liabilities 3,222,279 3,168,666
------------ ------------
Total current liabilities 40,648,177 37,401,184
------------ ------------
Deferred revenues 26,550,286 33,559,379
Long-term debt and capital lease obligations 685,472 957,159
Deferred rent payable 135,555 190,260
------------ ------------
Total liabilities 68,019,490 72,107,982
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000 Shares
issued - none at September 30, 2002 and March 31, 2002 -- --
Common stock - $.007 par value authorized - 30,000,000 Shares
issued - 16,530,324 shares at September 30, 2002 and
16,525,324 shares at March 31, 2002 115,714 115,679
Additional paid-in capital 23,748,009 23,745,944
Loans to directors and officers (10,320,187) (10,163,875)
Accumulated other comprehensive income, net of taxes (140,767) (52,028)
Retained earnings (deficit) (2,379,905) (3,977,832)
------------ ------------
11,022,864 9,667,888
Treasury stock - at cost, 1,214,469 shares at September 30, 2002
and 1,212,159 shares at March 31, 2002 (4,225,795) (4,224,641)
------------ ------------
Total Stockholders' Equity 6,797,069 5,443,247
============ ============
Total Liabilities and Stockholders' Equity $ 74,816,559 $ 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 Six Months Ended
September 30,
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 1,597,927 $ 679,470
Total adjustments to reconcile net income to net cash
provided by operating activities: (3,647,421) (291,578)
----------- -----------
Net cash flows provided (used) by operating activities (2,049,494) 387,892
Cash flows from investing activities:
Property and equipment purchased (470,098) (1,019,774)
Purchase of marketable securities (550,000) (100,000)
(Increase) decrease in notes receivable 161,371 266,329
Proceeds from sales of marketable securities 450,000 1,088,304
----------- -----------
Net cash provided (used) by investing activities (408,727) 234,859
Cash flows from financing activities:
Exercise of common stock options and stock grants 2,100 --
Purchase treasury stock (106,899) --
Increase in notes receivable (908,754) --
Repayments, notes and capital leases (448,338) (540,368)
----------- -----------
Net cash provided (used) by financing activities (1,461,891) (540,368)
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,920,112) 82,383
Cash and cash equivalents at beginning of period 7,033,448 3,001,924
----------- -----------
Cash and cash equivalents at end of period $ 3,113,336 $ 3,084,307
=========== ===========
Supplemental Cash Flow Information:
Cash payments (receipts) during the period for:
Interest $ 79,492 $ 103,555
=========== ===========
Income taxes $(1,247,975) $ --
=========== ===========
Non-Cash Investing and Financing Activities:
Property and equipment financed through capital leases $ 69,873 $ 202,377
Capital leases refinanced $ -- $ 151,727
Increase in loans to officers and directors $ (156,312) $ (164,368)
Issuance of treasury stock for services rendered $ 105,745 $ 74,410
See accompanying notes to condensed consolidated financial statements.
6
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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 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, and
the liquidation of Reliance has eliminated the insurance coverage to
Butler under those contracts. The Company was also the obligor under some
of the service contracts insured by Reliance, but, pursuant to an
agreement entered into between the Company and Butler, Butler agreed to
assume the obligations of the Company under those service contracts.
7
In order to assist Butler in addressing its potential obligations under
the service contracts previously insured by Reliance for which Butler is
or Warrantech was the obligor, the Company has made a loan to Butler and
will make further loans to Butler, as required, for claim obligations in
excess of Butler's fee 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 on all
vehicle service contracts administered by the Company sold after November
19, 2001. 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.
As of the period ended September 30, 2002, Warrantech has loaned Butler
$10,250,474, including $133,000 of interest. Pursuant to the GAIC
agreement (see Liquidity and Financial Resources), the Company expects to
receive $6,660,765 of that amount prior to the end of fiscal 2003, as
reflected as "Other Receivables" on the Consolidated Balance Sheet. The
remaining $3,589,709 of loans due from Butler 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. OTHER RECEIVABLES, NET
The nature and amounts of other receivables, net as of September 30, 2002
and March 31, 2002 are as follows:
SEPTEMBER 30, MARCH 31,
2002 2002
------------- ----------
Due from Reliance Warranty Corporation $6,660,765 $2,754,691
Due from insurance companies/dealers 2,814,481 1,795,972
Employee/agent advances 251,677 334,198
Other 237,927 46,888
---------- ----------
Total Other Receivables, net $9,964,850 $4,931,749
========== ==========
The Company advanced $6,660,765 and $2,754,691, at September 30, 2002 and
March 31, 2002, respectively, to Butler on certain claims which it expects
to receive reimbursement prior to the end fiscal year 2003.
5. COMPREHENSIVE INCOME
Comprehensive income includes net income and certain items recorded
directly to stockholders' equity and classified as Other Comprehensive
Income. The following table illustrates the calculation of comprehensive
income for the three month and six month periods ended September 30, 2002
and 2001, respectively. During the three months ending September 30, 2002,
the foreign currency rate in Chile decreased and resulted in an $111,902
unrealized loss to comprehensive income for foreign currency translation
adjustments.
8
For the Three Months Ended For the Six Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 888,046 $ 548,247 $ 1,597,927 $ 679,470
Other Comprehensive Income, net of tax:
Unrealized gain on investments 11,789 43,545 30,209 16,191
Foreign currency translation adjustments (111,902) (32,637) (119,008) (2,774)
----------- ----------- ----------- -----------
Comprehensive Income $ 787,933 $ 559,155 $ 1,509,128 $ 692,887
=========== =========== =========== ===========
Comprehensive income per share $ 0.05 $ 0.04 $ 0.10 $ 0.05
=========== =========== =========== ===========
The components of accumulated comprehensive income, net of related tax,
for the periods ended September 30, 2002 and March 31, 2002, are as
follows:
September 30, March 31,
2002 2002
------------ ---------
Unrealized gain on investments $ 34,542 $ 4,333
Accumulated translation adjustments (175,309) (56,361)
--------- ---------
Accumulated other comprehensive income ($140,767) ($ 52,028)
========= =========
6. EARNINGS PER SHARE
The computations of earnings per share are as follows:
For the Three Months Ended For the Six Months Ended
September 30, September,
-------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Numerator:
Net income applicable to common stock $ 888,046 $ 548,247 $ 1,597,927 $ 679,470
=========== =========== =========== ===========
Denominator:
Average outstanding shares used in
the computation of per share earnings:
Common Stock issued-Basic shares 15,322,181 15,239,712 15,317,881 15,209,681
Stock Options (treasury method) 108,167 -- 81,029 --
----------- ----------- ----------- -----------
Diluted shares 15,430,348 15,239,712 15,398,910 15,209,681
=========== =========== =========== ===========
Earnings Per Common Share:
Basic $ 0.06 $ 0.04 $ 0.10 $ 0.04
=========== =========== =========== ===========
Diluted $ 0.06 $ 0.04 $ 0.10 $ 0.04
=========== =========== =========== ===========
7. DIRECTOR LOANS
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of the
Board of Directors, exercised options to purchase an aggregate of
3,000,000 shares of Common Stock in consideration for the delivery of
secured recourse promissory notes totaling $8,062,500 with interest
payable over three years at an annual interest rate of 6%. On March 22,
1999, Mr. San Antonio signed an additional promissory note for $595,634,
the amount funded by the Company for payroll taxes payable by him as a
result of his exercise of these options.
In February 2000, the Company agreed to restructure the loans to Messrs.
Tweed and White by capitalizing the interest due and extending the loan
maturity date from July 5, 2001 until January 31, 2005. Interest on the
restructured loans accrued annually at the applicable federal rate of
6.2%. Under the restructuring, interest first became payable on the third
anniversary of the restructuring and was payable annually thereafter. In
July 2002, the Company extended the loan maturity dates until February 1,
2007 (the "loan extension"). The interest which accrued on the notes up to
the time of the loan extension was added to the principal of the notes.
The new principal
9
amount of Mr. Tweed's note is $3,189,675 and of Mr. White's note is
$2,912,430. The applicable federal interest rate on the notes following
the loan extension is 4.6%. Under the loan extension, interest on the
notes will accrue until February 1, 2005 and, at that time, the accrued
interest will be added to the principal of the notes. Interest on the new
principal amounts will thereafter become payable annually until maturity.
In February 2000, the Company also agreed to restructure the two existing
loans to Mr. San Antonio (as restructured, the "Combined Loan"). The
Combined Loan, finalized in March 2001, was due on January 31, 2005 and
accrued interest annually at 5.2%. In July 2002, the Company extended the
loan maturity date until February 1, 2007 and the interest rate was
changed to the now applicable federal rate of 4.6%. The principal amount
of Mr. San Antonio's note is $4,165,062. Interest will be forgiven as long
as Mr. San Antonio continues to be employed by the Company
8. SEGMENT INFORMATION
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
THREE MONTHS ENDED Automotive Products International Segments Other Total
---------- -------- ------------- -------- ----- -----
SEPTEMBER 30, 2002
Earned administrative fee $ 5,525,822 $ 3,760,816 $ 760,817 $ 10,047,455 ($ 113,040) $ 9,934,415
Profit (loss) from
operations 3,548,207 581,693 (26,639) 4,103,261 (3,085,260) 1,018,001
Pretax income (loss) 1,264,191 (152,680) (31,045) 1,080,466 274,087 1,354,553
Net interest income (loss) (6,854) 13,891 3,289 10,326 274,300 284,626
Depreciation/amortization 95,229 440,321 21,522 557,072 464,463 1,021,535
SEPTEMBER 30, 2001
Earned administrative fee $ 4,951,752 $ 3,788,346 $ 667,281 $ 9,407,379 ($ 141,416) $ 9,265,963
Profit (loss) from
operations 3,133,193 (802,319) (125,828) 2,205,046 (1,364,606) 840,440
Pretax income (loss) 2,291,301 (1,289,763) (233,953) 767,585 220,862 988,447
Net interest income 13,777 2,233 11,196 27,206 189,921 217,127
Depreciation/amortization 101,492 436,457 18,666 556,615 810,547 1,367,162
Consumer Reportable
SIX MONTHS ENDED Automotive Products International Segments Other Total
---------- -------- ------------- -------- ----- -----
SEPTEMBER 30, 2002
Earned administrative fee $ 10,511,505 $ 7,142,259 $ 1,477,090 $ 19,130,854 ($ 166,153) $ 18,964,701
Profit (loss) from
operations 6,603,898 559,646 20,067 7,183,611 (5,360,786) 1,822,825
Pretax income (loss) 2,672,481 (727,519) 16,238 1,961,200 428,134 2,389,334
Net interest income 12,644 3,318 6,841 22,803 350,113 372,916
Depreciation/amortization 194,736 876,888 42,759 1,114,383 930,271 2,044,654
Total assets 42,161,783 24,792,169 3,220,398 70,174,350 4,642,209 74,816,559
SEPTEMBER 30, 2001
Earned administrative fee $ 8,426,769 $ 8,433,220 $ 1,913,695 $ 18,773,684 (280,099) $ 18,493,585
Profit (loss) from
operations 4,641,124 (1,224,112) 185,976 3,602,988 (2,834,914) 768,074
Pretax income (loss) 3,243,264 (2,462,484) (116,929) 663,851 445,219 1,109,070
Net interest income 34,212 6,149 11,197 51,558 416,778 468,336
Depreciation/amortization 203,906 857,993 37,751 1,099,650 1,602,113 2,701,763
Total assets 31,013,117 36,545,935 3,477,207 71,036,259 6,880,570 77,916,829
10
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; (l)
payment of the Company's "Other Receivables" in the amount of $6,660,765 by the
end of the Company's fiscal year is contingent on Great American Insurance
Company consummating certain transactions with third parties; and 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 SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Net earned administrative fees for the three month period ended September 30,
2002 increased to $9,934,415 as compared to $9,265,963 for the same period last
year, an increase of $668,452 or 7%. The Automotive and International segments
recorded increases in net earned administrative fees, while the Consumer
Products segment remained flat. The significant increases in Automotive segment
net earned administrative fees were reduced by lower deferred revenues from
prior periods recognized this quarter versus the same period last year.
11
The Automotive segment net earned administrative fees increased $574,070 or 12%
to $5,525,822 for the quarter ending September 30, 2002 from the same quarter
last year. A 69% increase in the number of contracts sold contributed to this
increase. 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 remained flat at
$3,760,816 for the three month period ended September 30, 2002 as compared to
the same period last year. Sales increases from the segment's top five customers
was partially offset by the loss of a customer and from lower deferred revenues
from prior periods recognized this quarter versus the same quarter last year.
The International segment net earned administrative fees increased to $760,817
for the three month period ended September 30, 2002 from $667,281 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 both Chile and Puerto
Rico.
Service, selling and general and administrative expenses (SG&A) for the three
months ended September 30, 2002 were flat at $7,894,879 as compared to
$7,882,693 for the three months ended September 30, 2001, excluding an $824,332
legal settlement the Company received in the prior year quarter. Legal fees were
$820,056 higher for the three months ended September 30, 2002 as compared to the
prior year quarter, primarily due to ongoing litigation expenses related to
several lawsuits. The decrease in SG&A expenses, excluding legal expenses,
reflects the Company's improved call center technologies, and cost containment
measures. Total employee and payroll related costs were down 6.6% from
$4,840,313 in the quarter ended September 30, 2001 to $4,521,704 in the current
quarter. Outside services, including consulting fees, were down $218,602 or 38%
from $590,489 in the quarter ended September 30, 2001 to $371,887 in the current
quarter and telephone expenses were reduced 40% from $662,818 in the quarter
ended September 30, 2001 as compared to $396,266 in the current quarter.
Depreciation and amortization expenses were reduced by $345,627 to $1,021,535
for the three months ended September 30, 2002 as compared to $1,367,162 for the
same period last year. Depreciation and amortization decreased as a result of
the Company's assets maturing and contributed by the Company's continued
reduction of capital expenditures for the past few years.
Income from operations for the second fiscal quarter 2003 was $1,018,001 as
compared to an $840,440 for the second fiscal quarter 2002, as the Company's
Automotive segment increased its volumes and the Company lowered its
depreciation and amortization expense.
Other income for the three months ended September 30, 2002 was $336,552 as
compared to $148,007 for the three months ended September 30, 2001. The increase
was primarily due to interest earned on the Butler note receivable and a rebate
from the use of the Company's purchase card.
Net income for the three months ended September 30, 2002 was $888,046 or $0.06
per diluted share compared to a net income of $548,247 or $0.04 per diluted
share for the comparable period last year; a 62% increase. This change is the
result of factors described above.
SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2001
Net earned administrative fees for the six month period ended September 30, 2002
increased to $18,964,701 as compared with $18,493,585 for the same period last
year, an increase of $471,116 or 3%. Increases in Automotive segment net earned
administrative fees were reduced by lower deferred revenues from prior periods
recognized in the first six months of fiscal 2003 versus the same period in
fiscal 2002.
12
The Automotive segment net earned administrative fees increased $2,084,736 or
25% to $10,511,505 for the six month ending September 30, 2002 from the same
quarter last year. A 56% increase in the number of contracts sold contributed to
this increase. The increase generated by higher volume was partially offset by
higher premium cost and lower deferred revenues from prior periods recognized in
the first six months of fiscal 2003 versus the same period last year.
The Consumer Products segment net earned administrative fees decreased
$1,290,961 or 15% to $7,142,259 for the six month period ended September 30,
2002 as compared to $8,433,220 for the same period last year. The change was
primarily attributed to lower deferred revenues from prior periods recognized in
the current fiscal year versus the same period in the prior year.
The International segment net earned administrative fees decreased to $1,477,090
for the six month period ended September 30, 2002 from $1,913,695 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.
SG&A for the six months ended September 30, 2002 decreased to $15,097,222 as
compared to $15,848,080 for the six months ended September 30, 2001, excluding
an $824,332 legal settlement the Company received in the prior year. Legal fees
were $1,191,833 higher for the six months ended September 30, 2002 as compared
to the six months ended September 30, 2001, primarily due to ongoing litigation
expenses related to several lawsuits. 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 6% from $9,509,044 for the
six months ended September 30, 2001 to $8,901,988 for the six months ended
September 30, 2002. Outside services, including consulting fees, were down
$675,494 or 52% from $1,300,019 in the six months ended September 30, 2001 to
$624,525 in the six months ended September 30, 2002 and telephone expenses were
reduced 39% from $1,364,150 in the six months ended September 30, 2001 as
compared to $833,437 in the six months ended September 30, 2002.
Depreciation and amortization expenses were reduced by $657,109 to $2,044,654
for the six months ended September 30, 2002 as compared to $2,701,763 for the
same period last year. Depreciation and amortization decreased as a result of
the Company's assets maturing and contributed by the Company's continued
reduction of capital expenditures for the past few years.
Income from operations for the six month ended September 30, 2002 was $1,822,825
as compared to a $768,074 for the same period in 2001, as the Company's
Automotive segment increased its volumes and the Company reduced its
depreciation and amortization expense.
Other income for the six months ended September 30, 2002 was $566,509 as
compared to $340,996 for the six months ended September 30, 2001. The increase
was primarily due to interest earned on the Butler note receivable and a rebate
from the use of the Company's purchase card.
Net income for the six months ended September 30, 2002 was $1,597,927 or $0.10
per diluted share as compared to a net income of $679,470 or $0.04 per diluted
share for the comparable period last year; a 135% increase. This change is the
result of factors as described above.
LIQUIDITY AND FINANCIAL RESOURCES
During the six months ended September 30, 2002, the Company had a net decrease
in cash and cash equivalents of $3,920,112, which was primarily used in
operating activities to fund working capital. Working capital was a negative
$809,952 at September 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, the $3 million line of
credit secured from GIAC and the payment of the $6,660,765 other receivable
which the Company anticipates receiving pursuant to the GAIC agreement described
below, 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
13
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.
On October 9, 2002 the Company executed an agreement with Great American
Insurance Company ("GAIC") that will provide it with extended payment terms and
a $3 million line of credit ("GAIC Agreement"). Under the terms of the GAIC
Agreement, the receivable of $6,660,765 reflected as "Other Receivables" on the
Consolidated Balance Sheet will be paid to Warrantech by GAIC in the event that
certain contingencies set forth in the GAIC Agreement are satisfied. While
GAIC's payment of the "Other Receivable" is contingent on the consummation of a
transaction to which Warrantech is not a party, and certain other contingencies
set forth in the GAIC Agreement, Warrantech's management has been monitoring the
negotiation of the transaction and currently expects the transaction to be
completed and the receivable amount to be paid by the end of fiscal 2003. All of
the Company's obligations to GAIC pursuant to the GAIC Agreement are secured
with the Company's accounts receivable.
If the proceeds acquired by GAIC from RWC are not sufficient to cover the RWC
claims obligations, Warrantech will use its restricted cash to indemnify GAIC
for any further obligations which GAIC incurs to pay the RWC claims obligations
and to fund further loans to Butler covering Butler's obligations under the
Reliance claims obligations. (See Notes to the Condensed Consolidated Financial
Statements.) The Reliance claims obligations as well as the RWC obligations, are
covered under the Butler arrangement described in Note 3 of the Notes to the
Condensed Consolidated Financial Statements.
In consideration of GAIC entering into the GAIC Agreement, Warrantech granted
GAIC an option to purchase up to 1,650,000 common shares of Warrantech
Corporation at an exercise price of $2 per share. The option is exercisable no
earlier than January 1, 2006 nor later than December 31, 2006 and does not
contain antidilution provisions. In the event that Warrantech stock does not
trade above $2 per share for 10 consecutive trading days prior to January 1,
2004, the exercise price will be reduced automatically to $1 per share.
The Company has entered into a new ten year office lease during the second
quarter of fiscal 2003 and, in the third quarter, will consolidate its domestic
operations into one facility located in Bedford, Texas, which is within one mile
of its existing 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.
As a condition of obtaining the office lease, the Company negotiated an
irrevocable standby letter of credit in the amount of $750,000 expiring in
January 2004. In conjunction with the letter of credit, the Company entered into
a collateral pledge agreement with a financial institution and transferred
long-term investments to a trust account in amounts sufficient to support the
letter of credit.
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, 2002 was $69,873 as
compared to $202,377 during the six months ended September 30, 2001. The Company
anticipates that amounts to be financed in the remaining half of fiscal 2003 are
expected to increase, due to the Company's move into its new facilities.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief Executive
Officer, and William Tweed and Jeff J. White, members of the Board of Directors,
exercised options to purchase an aggregate of 3,000,000 shares of Common Stock
in consideration for the delivery of secured recourse promissory notes totaling
$8,062,500 with interest payable over three years at an annual interest rate of
6%. On March 22, 1999, Mr. San Antonio signed an additional promissory note for
$595,634, the amount funded by the Company for payroll taxes payable by him as a
result of his exercise of these options.
In February 2000, the Company agreed to restructure the loans to Messrs. Tweed
and White by capitalizing the interest due and extending the loan maturity date
from July 5, 2001 until January 31, 2005. Interest on the restructured loans
14
accrued annually at the applicable federal rate of 6.2%. Under the
restructuring, interest first became payable on the third anniversary of the
restructuring and was payable annually thereafter. In July 2002, the Company
extended the loan maturity dates until February 1, 2007 (the "loan extension").
The interest, which accrued on the notes up to the time of the loan extension,
was added to the principal of the notes. The new principal amount of Mr. Tweed's
note is $3,189,675 and of Mr. White's note is $2,912,430. The applicable federal
interest rate on the notes following the loan extension is 4.6%. Under the loan
extension, interest on the notes will accrue until February 1, 2005 and, at that
time, the accrued interest will be added to the principal of the notes. Interest
on the new principal amounts will thereafter become payable annually until
maturity.
In February 2000, the Company also agreed to restructure the two existing loans
to Mr. San Antonio (as restructured, the "Combined Loan"). The Combined Loan,
finalized in March 2001, was due on January 31, 2005 and accrued interest
annually at 5.2%. In July 2002, the Company extended the loan maturity date
until February 1, 2007 and the interest rate was changed to the now applicable
federal rate of 4.6%. The principal amount of Mr. San Antonio's note is
$4,165,062. Interest will be forgiven as long as Mr. San Antonio continues to be
employed by the Company. The $223,460 interest, which accrued on the note during
the fiscal year 2002, and the $230,460 of interest, which accrued from February
1, 2001 through March 31, 2001, was forgiven and charged to operations as
additional compensation in the respective fiscal years the interest income was
accrued.
The effects of inflation have not been significant to the Company.
During the quarter ending September 30, 2002, the foreign currency valuation in
Chile decreased and resulted in an $111,902 unrealized loss to comprehensive
income for foreign currency translation adjustments. There is the risk that the
foreign currency value will continue to decline, resulting in further unrealized
losses to comprehensive income.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Note 1 to the Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended March 31, 2002,
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 impacted by judgments, assumptions
and estimates.
REVENUE RECOGNITION
The Company's revenue recognition policy is segregated into two distinct methods
depending on whether the Company, a third party or the retailer/dealer is
designated as the obligor on the service contract sale.
Dealer/third party obligor service contracts are sales in which the
retailer/dealer or a third party is designated as the obligor. For these service
contract sales, the Company uses the proportional performance method to
recognize revenues in direct proportion to the costs incurred in providing the
service contract programs to the Company's clients. Revenues in amounts
sufficient to meet future administrative costs and a reasonable gross profit
thereon are deferred. Sales of dealer/third party obligor service contracts are
reflected in gross revenues net of premiums paid to insurance companies.
Administrator obligor service contracts are sales in which Warrantech is
designated as the obligor. For these service contract sales, the Company
recognizes revenues over the life of the contract on a straight-line basis,
unless sufficient, company-specific, historical evidence indicates that the cost
of performing services under these contracts are incurred on other than a
straight-line basis. In determining the amount of revenue to recognize on
administrative obligor contracts, the Company utilizes the historical data bases
to estimate Company specific historical claims experience over the life of the
contract.
15
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 and deferred charges under the guidance of SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". The Company
continually determines if a permanent impairment of its long-lived assets has
occurred and the write-down of the assets to their fair values and charge
current operations for the measured impairment is required.
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, 2002, the Company had deferred tax assets of
$4,210,815, net of a valuation allowance of approximately $550,000 based on
projected net loss carryforwards. For further discussion, see Note 11 to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended March 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
As of September 30, 2002, the Company did not have any derivatives, debt or
hedges outstanding and as such is no t subject to interest rate risk. The
Company does maintain investments in fixed rate municipal bonds. As interest
rates fluctuate, the value of the bonds increase or decrease accordingly. The
Company adjusts the carrying value for the bonds to market rate each quarter.
Due to the limited amount of investments and the short term nature of the
investment, the Company considers its interest rate risk to be insignificant to
its results of operations and financial condition.
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 the Quarterly Report. Each of them has, within 90 days of the
filing date of this quarterly report, evaluated the Company's disclosure
controls and procedures, as defined in the rules of the SEC and have determined
that such controls and procedures were effective in ensuring that material
information relating to the Company and its consolidated subsidiaries was made
known to them during the period covered by this Quarterly Report.
INTERNAL CONTROLS
To meet their responsibility for financial reporting, the CEO and CFO have
established internal controls and procedures, which they believe, are adequate
to provide reasonable assurance that the Company's assets are protected from
loss. These internal controls are reviewed by the independent accountants to
support their audit work. In addition, the
16
Company's Audit Committee, which is composed entirely of outside directors,
meets regularly with management and the independent accountants to review
accounting, auditing and financial matters. This Committee and the independent
accountants have free access to each other, with or without management being
present.
There were no significant changes in Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the CEO's and CFO's most recent evaluation.
17
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 new
discovery schedule was agreed to and the parties are proceeding with discovery
according to that schedule. It is currently anticipated that the actual
arbitration will take place in the first or second 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 sought 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).
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.
18
The amount sought by Market West under its initial claim was approximately
$225,000. Warrantech believed that if the claim were successful, substantially
all of the amount that is awarded to Market West would be owed by the insurers
that underwrote the liability. Following removal of the lawsuit to federal
court, Market West attempted to have a national class of plaintiffs certified.
The class certification petition was denied by the court and Market West was
directed to proceed with its individual claim. Market West then entered into
settlement discussions with Warrantech and a settlement agreement was recently
executed. Under this agreement, Warrantech's maximum exposure is less than
one-half of the amount originally sought and will be further reduced as
Warrantech processes valid claims through the appropriate underwriters.
LLOYD'S UNDERWRITERS
Certain Underwriters at Lloyd's, London and Other Reinsurers Subscribing to
Reinsurance Agreements F96/2992/00 and No. F97/2992/00 v. Warrantech
Corporation, Warrantech Consumer Product Services, Inc. and Warrantech Help
Desk, Inc., District Court of Tarrant County, Texas, 17th Judicial District.
During the period that Houston General was the underwriter of certain of
Warrantech's programs, it reinsured certain of the underwritten risks with one
or more Lloyd's insurance syndicates. At some point thereafter, Houston General
commenced an arbitration against the Lloyd's syndicates seeking to recover
approximately $46,000,000 under the reinsurance treaties with respect to claims
previously paid by Houston General on warranty claims submitted by customers
under the Warrantech programs. The Warrantech entities n 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.
Although Warrantech has not been provided with a copy of the arbitrators'
decision, the award supports the assertions of Houston General with respect to
the validity of the claims that it paid. Warrantech was not involved in the
selection of these re-insurers, has no contractual relationship with them, and
has had no reporting or other obligation to them. Despite these facts, the
Lloyd's syndicates now seek to recover some portion of the arbitration award
from the Warrantech entities on two theories of liability. The first is that, at
the time certain claims were presented to Houston General for payment, the
Warrantech entities either fraudulently or negligently represented to Houston
General that such claims were valid. The second is that the Warrantech entities
intentionally failed to comply with their legal obligations to cooperate with
the parties during the discovery process for the arbitration. No specific demand
for damages is contained in the complaint. At this time, the litigation is in
the earliest stages of discovery.
The Company believes that the ongoing actions described above are without merit
and it intends to defend them vigorously. Since it is not able to estimate
accurately its potential liability in either of them, no reserves for potential
liabilities have been provided for these actions.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
19
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) On October 8, 2002, the Annual Meeting of the Stockholders of the Company
was held in New York City, New York, for the purpose of electing a Board of
Directors. There were no solicitations in the opposition to management's
nominees for director as listed in the proxy statement.
(c) Each of the directors nominated by the Board (which number constitutes the
entire Board of the Company) and listed in proxy statement was elected with the
votes as follows:
NOMINEES SHARES FOR SHARES WITHHELD
-------- ---------- ---------------
Joel San Antonio 13,809,440 73,145
William Tweed 13,808,950 73,635
Jeff J. White 13,808,800 73,785
Lawrence Richenstein 13,809,800 72,785
Gordon A. Paris 13,909,950 72,635
Ronald Glime 13,808,950 73,635
Richard Rodriguez 13,808,950 73,635
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6(A). EXHIBITS
4(a) - Amendment No. 2, dated October 8, 2002, to the 1998 Employee
Incentive Stock Option Plan of the Company, as amended and
restated, effective September 25, 2001.
10(a) - Promissory Note agreement and pledge, as amended July 24, 2002
between the Company and Mr. William Tweed.
10(b) - Promissory Note agreement and pledge, as amended, July 24, 2002
between the Company and Joel San Antonio.
10(c) - Promissory Note agreement and pledge, as amended July 24, 2002
between the Company and Mr. Jeff J. White.
10(d) - Summary of lease for real property dated July 10, 2002 between the
Company and 121 Airport Centre II, LP.
10(e) - Security Agreement between the Company and Great American
Insurance Company dated October 1, 2002.
10(f) - Support Agreement between the Company and Great American Insurance
Company dated October 1, 2002.
10(g) - Employment agreement between the Company and James F.
Morganteen dated January 1, 2002.
10(h) - Schedule 10 (h) identifying contracts that are substantially
similar to Exhibit 10 (g), the Employment Agreement between the
Company and James F. Morganteen, in all material respects except
as to the parties thereto, the dates of execution, or other
details.
99(a) - CEO Certification Pursuant to 18 U.S.C. Section 1350
99(b) - CFO Certification Pursuant to 18 U.S.C. Section 1350
ITEM 6(B). REPORTS ON FORM 8-K
None
20
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Joel San Antonio, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Warrantech
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Joel San Antonio
-------------------------------------
Joel San Antonio
Chairman, Chief Executive Officer and
Director
21
CERTIFICATION OF CHIEF FINANCIAL OFFICER PER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Richard F. Gavino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Warrantech
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Richard F. Gavino
-------------------------------------
Richard F. Gavino
Executive Vice President, Chief
Financial Officer and Accounting
Officer and Treasurer
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARRANTECH CORPORATION
--------------------------------------
(Registrant)
/s/ Richard F. Gavino
--------------------------------------
Richard F. Gavino - Executive Vice
President, Chief Financial Officer,
Chief Accounting Officer and Treasurer
(Chief Financial Officer and Duly
Authorized Officer)
Dated: November 14, 2002
23
EXHIBIT INDEX
Exhibit
Number Description Page
------- ----------- ----
4(a) - Amendment No. 2, dated October 8, 2002, to the 1998 Employee
Incentive Stock Option Plan of the Company, as amended and
restated, effective September 25, 2001. 1
10(a) - Promissory Note agreement and pledge, as amended July 24, 2002
between the Company and Mr. William Tweed. 2
10(b) - Promissory Note agreement and pledge, as amended, July 24,
2002 between the Company and Joel San Antonio. 3
10(c) - Promissory Note agreement and pledge, as amended July 24, 2002
between the Company and Mr. Jeff J. White. 6
10(d) - Summary of lease for real property dated July 10, 2002 between
the Company and 121 Airport Centre II, LP. 9
10(e) - Security Agreement between the Company and Great American
Insurance Company dated October 1, 2002. 10
10(f) - Support Agreement between the Company and Great American
Insurance Company dated October 1, 2002.
10(g) - Employment agreement between the Company and James F.
Morganteen dated January 1, 2002. 25
10(h) - Schedule 10 (h) identifying contracts that are substantially
similar to Exhibit 10 (g), the Employment Agreement between the
Company and James F. Morganteen, in all material respects except as
to the parties thereto, the dates of execution, or other details. 33
99(a) - CEO Certification Pursuant to 18 U.S.C. Section 1350 34
99(b) - CFO Certification Pursuant to 18 U.S.C. Section 1350 35
i