UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
(_) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
--------------------- ------------------------
Commission File Number: 0-13084
WARRANTECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3178732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Westpark Way, Euless TX 76040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 544-9510
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 10, 2000
Common stock, par value $.007 per share 15,157,329 shares
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
I N D E X
Page No.
PART I - Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000
(Unaudited) and March 31, 2000..................................... 3
Condensed Consolidated Statements of Operations For the Three and Six
Months Ended September 30, 2000 and 1999 (Unaudited)............... 4
Condensed Consolidated Statements of Cash Flows For the Six Months
Ended September 30, 2000 and 1999 (Unaudited)...................... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 10
PART II - Other Information................................................. 13
Signatures ............................................................... 14
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
(Unaudited)
September 30, March 31,
2000 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 15,091,483 $ 10,035,003
Investments in marketable securities 3,305,898 4,638,875
Accounts receivable, (net of
allowances of $1,057,470 and $1,164,125, 16,425,523 11,858,653
respectively)
Other receivables, net 5,578,842 2,416,248
Income tax receivable 3,532,875 4,035,346
Deferred income taxes 976,302 926,321
Prepaid expenses and other current assets 1,713,980 1,238,051
------------ ------------
Total current assets 46,624,903 35,148,497
------------ ------------
Property and equipment, net 13,045,008 15,417,255
Other assets:
Excess of cost over fair value of
assets acquired (net of accumulated
amortization of $6,221,609
and $5,550,861, respectively) 1,936,924 2,607,671
Deferred income taxes 5,271,884 8,279,643
Deferred direct costs 63,528,086 80,797,199
Investments in marketable securities 1,844,056 1,499,247
Restricted cash 800,000 800,000
Split dollar life insurance policies 642,262 827,262
Notes receivable 802,614 1,167,725
Collateral security fund -- 199,389
Other assets 167,360 177,266
------------ ------------
Total other assets 74,993,186 96,355,402
------------ ------------
Total Assets $134,663,097 $146,921,154
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
September 30, March 31,
2000 2000
------------- -------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 997,893 $ 1,451,020
Insurance premiums payable 24,029,188 18,161,357
Income taxes payable 0 0
Accounts and commissions payable 10,588,876 8,857,556
Accrued expenses and other current liabilities 10,204,704 9,491,175
------------- -------------
Total current liabilities 45,820,661 37,961,108
------------- -------------
Deferred revenues 84,366,824 105,028,425
Long-term debt and capital lease obligations 1,390,701 1,668,478
Deferred rent payable 342,685 384,501
------------- -------------
Total liabilities 131,920,871 145,042,512
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized -
15,000,000 Shares issued - none at
September 30, 2000 and March 31, 2000 -- --
Common stock - $.007 par value authorized -
30,000,000 Shares issued - 16,516,978 shares
at September 30, 2000 and 16,501,911 shares
at March 31, 2000 115,541 115,541
Additional paid-in capital 23,737,835 23,737,835
Loans to directors and officers (9,660,606) (9,505,406)
Accumulated other comprehensive income, net
of taxes (58,331) (144,132)
Retained earnings (deficit) (7,168,046) (8,101,029)
------------- -------------
6,966,393 6,102,809
Treasury stock - at cost, 1,211,024 shares at
September 30, 2000 and 1,211,024 shares at
March 31, 2000 (4,224,167) (4,224,167)
------------- -------------
Total Stockholders' Equity 2,742,226 1,878,642
------------- -------------
Total Liabilities and Stockholders' Equity $134,663,097 $146,921,154
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
September 30, September 30,
--------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earned Administrative Fee $ 12,792,032 $ 10,098,863 $ 25,297,008 $ 19,563,188
------------ ------------ ------------ ------------
(Net of amortization of deferred costs)
Costs and expenses
Service, selling, and general and 9,738,490 12,557,798 19,836,632 25,557,750
administrative
Depreciation and amortization 1,837,294 1,457,331 3,382,220 2,870,678
Loss on abandonment of assets 1,049,552 1,049,552
------------ ------------ ------------ ------------
Total costs and expenses 12,625,336 14,015,129 24,268,404 28,428,428
------------ ------------ ------------ ------------
Income (loss) from continuing operations 166,696 (3,916,266) 1,028,604 (8,865,240)
Other income (expense) 237,673 257,352 404,785 510,447
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 404,369 (3,658,914) 1,433,389 (8,354,793)
Provision (benefit) for income taxes (288,014) (1,074,841) 500,406 (2,338,456)
------------ ------------ ------------ ------------
Net income (loss) $ 692,383 ($ 2,584,073) $ 932,983 ($ 6,016,337)
============ ============ ============ ============
Earnings per share:
Basic $ 0.05 ($ 0.17) $ 0.06 ($ 0.40)
============ ============ ============ ============
Diluted $ 0.05 ($ 0.17) $ 0.06 ($ 0.40)
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 15,305,954 15,224,236 15,305,272 15,223,554
============ ============ ============ ============
Diluted 15,305,954 15,224,236 15,305,272 15,223,554
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
September 30,
2000 1999
------------ ------------
Net cash flows from (used in ) operating
activities $ 5,906,938 $ 2,693,180
------------ ------------
Cash flows from investing activities:
Property and equipment purchased-net of
retirements (1,168,389) (2,012,469)
Purchase of marketable securities (350,000) (2,500,000)
Proceeds from sales of marketable securities 1,300,000 1,635,000
------------ ------------
Net cash (used in) investing activities (218,389) (2,877,469)
------------ ------------
Cash flows from financing activities:
(Increase) decrease in notes receivable 365,111 (1,080,993)
Exercise of common stock options and stock
grants -- 7,608
Repayments, notes and capital leases (997,180) (842,613)
------------ ------------
Net cash (used in) financing activities (632,069) (1,915,998)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 5,056,480 (2,100,287)
Cash and cash equivalents at beginning of period 10,035,003 15,032,473
------------ ------------
Cash and cash equivalents at end of period $ 15,091,483 $ 12,932,186
------------ ------------
Supplemental Cash Flow Information:
Cash payments for:
Interest $ 137,837 $ 191,673
============ ============
Income taxes $ 245,477 $ 88,414
============ ============
Non-Cash Investing and financing activities:
Property and equipment financed through $ 264,704 $ 356,746
capital leases
Exercise of restricted common stock options 9,335,588
Increase in loans to officers and directors (155,200) (9,279,064)
See accompanying notes to condensed consolidated financial statements.
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
1. THE COMPANY
Warrantech, through its wholly owned subsidiaries, develops, markets and
administers service contracts and extended warranties. The Company is a third
party administrator for a variety of dealer/clients in selected industries and
offers call center and technical computer services. The Company assists
dealer/clients in obtaining insurance policies from highly rated independent
insurance companies for all contracts and programs offered. The insurance
company is then responsible for the cost of repairs or replacements for the
contracts administered by Warrantech.
The Company operates under three major business segments: Automotive, Consumer
Products and International. The Automotive segment markets and administers
extended warranties on automobiles, light trucks, recreational vehicles and
automotive components. These products are sold principally by franchised and
independent automobile dealers, leasing companies, repair facilities, retail
stores and financial institutions. The Consumer Products segment markets and
administers extended warranties on household appliances, electronics and homes.
These products include home appliances, consumer electronics, televisions,
computers, home office equipment and homes. These products are sold principally
by retailers, distributors, manufacturers, utility companies and financial
institutions. Warrantech also direct markets these products to the ultimate
consumer through telemarketing and direct mail campaigns. The International
segment markets and administers outside the United States predominately the same
products and services of the other business segments. The International segment
is currently operating in Central and South America, Puerto Rico and the
Caribbean.
The predominant terms of the service contracts and extended warranties range
from twelve (12) to eighty-four (84) months. The Company acts as a third party
administrator on behalf of the dealer/clients and insurance companies. The
actual repairs and replacements required under the service contract agreements
are performed by independent third party authorized repair facilities. The cost
of these repairs is borne by the insurance companies which have the ultimate
responsibility for the claims. The insurance policy indemnifies the
dealer/clients against losses resulting from service contract claims and
protects the consumer by ensuring their claims will be paid.
The Company's service contract programs benefit consumers with expanded and/or
extended product coverage for a specified period of time (and/or mileage in the
case of automobiles and recreational vehicles), similar to that provided by
manufacturers under the terms of their product warranties. Such coverage
generally provides for the repair or replacement of the product, or a component
thereof, in the event of its failure. The Company's service contract programs
benefit the dealer/clients by providing enhanced value to the goods and services
they offer. It also provides the opportunity for increased revenue and income
while outsourcing the costs and responsibilities of operating an extended
warranty program.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by
<PAGE>
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2001. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10K/A for the
year ended March 31, 2000.
Certain prior year amounts may have been reclassified to conform to current year
presentation. Revenue Recognition Policy - The Company's revenue recognition
policy is segregated into two distinct categories depending on whether the
Company or the retailer/dealer is designated as the obligor on the service
contract sale. In either case, a highly rated independent insurance company
assumes all claims liabilities of the service contracts administered by the
Company.
Dealer obligor service contracts are sales in which the retailer/dealer is
designated as the obligor. For these service contract sales, using the
proportional performance method, the Company recognizes revenues in direct
proportion to the costs incurred in providing the service contract programs to
the Company's clients. Revenues in amounts sufficient to meet future
administrative costs and a reasonable gross profit thereon are deferred. Sales
of dealer obligor service contracts are reflected in gross revenues net of
premiums paid to insurance companies as well as related sales commissions
associated with the contracts.
Administrator obligor service contracts are sales in which Warrantech is
designated as the obligor. For these service contract sales, the Company
recognizes revenues in accordance with Financial Accounting Standards Board
Technical Bulletin 90-1 ("TB 90-1"), Accounting for Separately Priced Extended
Warranty and Product Maintenance Contracts, and Statement of Financial
Accounting Standards No. 60 ("SFAS 60"), Accounting and Reporting by Insurance
Enterprises. These accounting standards require the recognition of revenue over
the life of the contract on a straight-line basis, unless sufficient,
company-specific, historical evidence indicates that the costs of performing
services under these contracts are incurred on other than a straight-line basis.
The Company is recognizing revenue on administrative obligor contracts based on
company specific historical claims experience over the life of the contract.
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
September 30, September 30,
------------------------------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 692,383 ($2,584,073) $ 932,983 ($6,016,337)
Other Comprehensive Income, net of tax
Unrealized gain(loss) on investments 4,120 (10,620) 6,767 (19,551)
Foreign currency translation adjustments 139,455 75,933 79,034 33,431
----------- ----------- ----------- -----------
Comprehensive Income $ 835,958 ($2,518,760) $ 1,018,784 ($6,002,457)
=========== =========== =========== ===========
Comprehensive income per share:
Basic $ 0.05 ($ 0.17) $ 0.07 ($ 0.39)
=========== =========== =========== ===========
Diluted $ 0.05 ($ 0.17) $ 0.07 ($ 0.39)
=========== =========== =========== ===========
<CAPTION>
The components of accumulated September 30, March 31,
comprehensive income are as follows: 2000 2000
------------ ----------
<S> <C> <C>
Unrealized gain/(loss) on ($9,965) ($16,732)
investments
Accumulated translation (48,366) (127,400)
adjustments
----------- ----------
($58,331) ($144,132)
=========== ==========
</TABLE>
<PAGE>
4. EARNINGS PER SHARE
The computation of earnings per share are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) applicable to common stock $ 692,383 ($ 2,584,073) $ 932,983 ($ 6,016,337)
=========== ============ =========== ============
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,305,954 15,224,236 15,305,272 15,223,554
Stock Options (treasury method) -- -- -- --
----------- ------------ ----------- ------------
Diluted shares 15,305,954 15,224,236 15,305,272 15,223,554
=========== ============ =========== ============
Earnings Per Common Share:
Basic $ 0.05 ($ 0.17) $ 0.06 ($ 0.40)
=========== ============ =========== ============
Diluted $ 0.05 ($ 0.17) $ 0.06 ($ 0.40)
=========== ============ =========== ============
</TABLE>
In a net loss position options are anti-dilutive.
5. SEGMENTS
The Company defines its operations into three business segments: Automotive,
Consumer Products and International. All Other includes general corporate income
and expenses, inter-segment sales and expenses and other corporate assets not
related to the three business segments.
<TABLE>
<CAPTION>
Consumer Reportable
Three Months Ended Automotive Products International Segments Other Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 2000
Earned administrative fee $ 4,931,468 $ 7,470,833 $ 488,457 $ 12,890,758 ($ 98,726) $ 12,792,032
Profit (loss) from operations 3,082,799 2,420,750 (1,118,294) 4,385,255 (4,218,559) 166,696
Pretax Income (Loss) 2,104,166 534,047 (1,445,338) 1,192,875 (788,506) 404,369
Net Interest Income 17,733 18,070 (4,767) 31,036 199,686 230,722
Depreciation/Amortization 211,178 470,261 502,278 1,183,717 653,577 1,837,294
September 30, 1999
Earned administrative fee $ 1,890,255 $ 7,814,183 $ 656,859 $ 10,361,297 ($ 262,434) $ 10,098,863
Profit (loss) from operations (254,261) 1,031,354 (1,225,753) (448,660) (3,467,606) (3,916,266)
Pretax Income (Loss) (1,353,053) (1,232,652) (1,238,997) (3,824,702) 165,788 (3,658,914)
Net Interest Income 10,506 22,802 1,791 35,099 215,735 250,834
Depreciation/Amortization 188,348 376,888 221,811 787,047 670,284 1,457,331
Six Months Ended
September 30, 2000
Earned administrative fee $ 9,144,721 $ 15,372,085 $ 978,418 $ 25,495,224 ($ 198,216) $ 25,297,008
Profit (loss) from operations 5,457,468 5,299,935 (2,385,599) 8,371,804 (7,343,200) 1,028,604
Pretax Income (Loss) 3,586,890 1,701,840 (3,021,742) 2,266,988 (833,599) 1,433,389
Net Interest Income 29,349 12,250 (15,853) 25,746 365,667 391,413
Depreciation/Amortization 422,827 941,403 731,549 2,095,779 1,286,441 3,382,220
Total Assets 57,304,290 53,777,165 5,825,747 116,907,202 17,755,895 134,663,097
September 30, 1999
Earned administrative fee $ 5,470,825 $ 12,737,698 $ 1,804,105 $ 20,012,628 ($ 449,440) $ 19,563,188
Profit (loss) from operations 1,175,563 (1,403,769) (1,875,327) (2,103,533) (6,761,707) (8,865,240)
Pretax Income (Loss) (983,456) (5,721,259) (2,160,535) (8,865,250) 510,457 (8,354,793)
Net Interest Income 18,477 23,313 500 42,290 426,395 468,685
Depreciation/Amortization 370,265 730,482 437,885 1,538,632 1,332,046 2,870,678
Total Assets 67,517,963 72,943,530 8,548,798 149,010,291 22,580,731 171,591,022
</TABLE>
6. SIGNIFICANT CUSTOMERS
The Company has one significant customer, Staples, which accounted for
approximately 13% and 10% respectively, of consolidated gross revenues for the
six months ended September 30, 2000, and 1999.
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the matters discussed
below or elsewhere in this quarterly report are forward looking statements that
involve risks and uncertainties. The Company makes such forward looking
statements under the provisions of the "safe harbor" section of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are based
on management's beliefs and assumptions, as well as information currently
available to management. Such beliefs and assumptions are based on, among other
things, the Company's operating and financial performance over recent years and
its expectations about its business for the current fiscal year. Although the
Company believes that the expectations reflected in such forward looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Such statements are subject to certain risks, uncertainties
and assumptions, including (a) prevailing economic conditions may significantly
deteriorate, thereby reducing the demand for the Company's products and
services, (b) unavailability of technical support personnel or increases in the
rate of turnover of such personnel, reflecting increased demand for such
qualified personnel, (c) changes in the terms or availability of insurance
coverage for the Company's programs or (d) regulatory or legal changes affecting
the Company's business, although none of these risks are anticipated at the
present time. Should one or more of these or any other risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, estimated or expected.
Results of Operations
Three Months Ended September 30, 2000 Compared to the Three months ended
September 30, 1999
Net earned administrative fees for the three month period ended September 30,
2000 increased to $12,792,032 as compared with $10,098,863 for the same period a
year ago. This was an increase of $2,693,169 or 26.7%. The change was primarily
attributed to improved margins, higher volume from existing and new customers in
the Automotive segment and increased revenues recognized from prior periods. The
Automotive segment increased earned administrative fees to $4,931,468 from
$1,890,255 for the September 30, 1999 quarter. These results were partially
offset by lower volumes in the International segment resulting from the closing
of the U.K. operations.
Our South American and Puerto Rico markets also contributed higher volumes from
existing and new customers although earned administrative fees from the total
International segment declined from $656.859 for the quarter ended September 30,
1999 to $488,457 in the current quarter due to the closing of the U.K.
operations.
Effective September 30, 2000, the Company ceased operations in the U.K. The
closing was a result of unprofitable operations and will immediately benefit the
bottom line. Over the past fiscal year ended March 31, 2000 the United Kingdom
operation produced losses in excess of $4.1 million. Going forward, Warrantech
International's focus will be on growing and developing its higher-margin Latin
American operations.
Service, selling and general and administrative expenses (SG&A) for the three
months ended September 30, 2000 were reduced by $2,819,308 or 22.5% to
$9,738,490 as compared to $12,557,798 for the three months ended September 30,
1999. The decrease in SG&A expenses reflects the Company's improved technologies
and cost-cutting measures. Total employee and payroll related costs were down
21% from $7,269,277 for the quarter ended September 30, 1999 to $5,725,795 in
the current quarter.
Depreciation and amortization were $1,837,294 for the three months ended
September 30, 2000 as compared to $1,457,331 for the same period last year due
primarily to capital additions related to the Company's ongoing upgrade of its
computer systems.
The provision (benefit) for income taxes is based on the Company's projection of
its estimated effective tax rate for the fiscal year. The Provision for income
taxes for the three months ended September 30, 2000 has been reduced by
approximately $400,000 resulting from the loss on abandonment of approximately
$1,050,000 of net assets from its U.K. operations.
Net income for the three months ended September 30, 2000 was $692,383 or $.05
per diluted share compared to a net loss of ($2,584,073) or ($.17) per diluted
share for the comparable period last year. This change is the result of the
amortization of prior period deferred revenues and deferred costs being
recognized in the current year and the other factors listed above.
Six Months Ended September 30, 2000 Compared to the Six Months ended
September 30, 1999
Earned administrative fees for the six month period ended September 30, 2000
increased to $25,297,008 as compared with $19,563,188 for the same period last
year. This was an increase of $5,733,820 or 29.3% and is the result of higher
volume from existing and new customers and an increase in deferred revenue
recognition in the current quarter in the Automotive and Consumer Products
segment. Our South American and Puerto Rico markets also contributed higher
volumes from existing and new customers although earned administrative fees from
the total International segment declined from $1,804,105 for the six months
ended September 30, 1999 to $978,418 in the current year primarily due to the
closing of the U.K. operations. Effective September 30, 2000, the Company ceased
operations in the U.K. The closing was a result of unprofitable operations and
will immediately benefit the bottom line. Over the past Fiscal Year Ended March
31, 2000 the United Kingdom operation produced losses in excess of $4.1 million.
Service, selling and general and administrative expenses (SG&A) for the six
months ended September 30, 2000 were reduced by $5,721,118 or 22.4% to
$19,836,632 as compared to $25,557,750 for the six months ended September 30,
1999. The decrease in SG&A expenses reflects the Company's improved technologies
and cost-cutting measures.
Depreciation and amortization were $3,382,220 for the six months ended September
30, 2000 as compared to $2,870,678 for the same period last year due primarily
to capital additions related to the Company's ongoing upgrade of its computer
systems.
The provision (benefit) for income taxes is based on the Company's projection of
its estimated effective tax rate for the fiscal year. The Provision for income
taxes for the six months ended September 30, 2000 has been reduced by
approximately $400,000 resulting from the loss on abandonment of approximately
$1,050,000 of net assets from its U.K. operations.
<PAGE>
Net income for the six months ended September 30, 2000 was $932,983 or $0.06 per
diluted share compared to a net loss of ($6,016,337) or ($0.40) per diluted
share for the comparable period last year. This change is the result of the
amortization of prior period deferred revenues and deferred costs being
recognized in the current year and the other factors listed above.
Liquidity and Financial Resources
The primary source of liquidity during the current year was cash generated
by operations. Funds were utilized for working capital expenditures as well as
capital expenditures relating to the development of the Company's information
systems. The Company's cash position has improved $5,056,480 from $10,035,003 at
March 31, 2000 to $15,091,483 at September 30, 2000.
The Company has ongoing relationships with equipment financing companies
and intends to continue financing certain future equipment needs through leasing
transactions. The total amount financed through leasing transactions during the
six months ended September 30, 2000 amounted to $264,704. The Company is
presently in negotiations to obtain a bank line of credit.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of Warrantech's
Board of Directors, exercised 3,000,000 of their vested options to purchase
Warrantech common stock. Promissory notes totaling $8,062,500 were signed with
interest payable over three years at an annual rate of 6%. The promissory notes,
which are with recourse and secured by the stock certificates issued, mature
July 5, 2001. An additional promissory note was signed by Joel San Antonio for
$595,634 on March 22, 1999, which represents the amounts funded by the Company
with respect to his payroll taxes for the exercise of these options. The
exercise of these stock options and the anticipated tax benefit from this
transaction total approximately $10 million. These amounts have been recorded as
a contra-equity account, which is a reduction of stockholders' equity.
The Company recently agreed to restructure these loans by capitalizing the
interest due on the loans and making the loans payable over five (5) years, with
respect to Mr. Tweed and Mr. White, and over one (1) year with respect to Mr.
San Antonio. Interest on the new loans to Messrs. Tweed and White accrues
annually at the applicable federal rate (currently approximately 6.2%) but will
first become payable on the third anniversary of the new loans and will be
payable annually thereafter. The new loan to Mr. San Antonio, which is payable
in one year, is without interest. The total amount of the new loans, including
the capitalized interest, which accrued on the prior loans through June 30,
2000, is $9,582,582.
Working capital has improved to $804,242 at September 30, 2000 from a
deficiency at June 30, 2000 of ($3,312,158). The Company believes that
internally generated funds will be sufficient to finance its current operations
for at least the next twelve months. The Company is continuing its restructuring
plan to consolidate operations and reduce costs. This restructuring plan
includes the reduction of operational and administrative personnel,
consolidation of office space and an overall review of service, selling, general
and administrative expenses.
The effects of inflation have not been significant to the Company.
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
The Company is from time to time involved in litigation incidental to
the conduct of its business.
On December 9, 1999, a complaint and order to show cause were filed
against Warrantech Automotive, Inc. in the Supreme Court of the State of
New York by American Home Assurance Company, Illinois National Insurance
Company, National Union Insurance Company of Louisiana and the New
Hampshire Insurance Company (collectively, "AIG") in which AIG sought to
inspect and copy certain books and records kept by Warrantech in the course
of the business it conducted under a General Agency Agreement ("GAA") with
AIG. On December 14, 1999, this action was removed by Warrantech to the
United States District Court for the Southern District of New York. The
action is entitled "American Home Assurance Co., et al, v. Warrantech
Automotive, Inc., 99 Civ. 12040 (BSG)." At a December 16, 1999 hearing,
Warrantech agreed to make the books and records at issue available to AIG
for copying. On January 24, 2000 AIG made a motion (the "Motion to Amend")
to amend its complaint to add claims for replevin and a declaratory
judgment seeking possession of the originals of the books and records and
to add claims for breach of contract, breach of fiduciary duty, negligence
and gross negligence based on allegations that Warrantech mishandled claims
under the GAA. AIG seeks damages in excess of $20 million. AIG also moved
for summary judgment (the "Motion for Summary Judgment") on its claims
seeking possession of the books and records. In recent rulings, the court
denied the Motion for Summary Judgment but granted the Motion to Amend.
Warrantech believes that certain issues raised in the Service Guard
litigation (described below) are also contained in this action as set forth
in the amended complaint. Therefore, subsequent to the granting of the
Motion to Amend in New York, Warrantech moved to have all of the issues
between Warrantech and AIG consolidated in state court in Texas. The Texas
court has granted that motion and AIG's appeals, to date, have been denied.
A tentative trial date has been set for May of 2001. Warrantech is
presently moving in the New York court to have the jurisdiction of the
Texas court recognized and the New York litigation dismissed. Warrantech
continues to believe that all of AIG's claims are without merit and will
defend them vigorously.
Service Guard Insurance Agency, Inc. ("Service Guard") v. Warrantech
Automotive, Inc., New Hampshire Insurance Company, Ronald Glime and
Christopher Ford, Cause No. 99-12650, pending in the 126th Judicial
District Court of Travis County, Texas. Service Guard filed suit against
Warrantech Automotive and New Hampshire Insurance Company on October 28,
1999, seeking an injunction to transfer claims-handling administration over
automobile warranty claims to a third-party, and seeking an unspecified
amount of damages attributed to alleged improper claims handling and
tortious interference with contract. Service Guard never pursued its
original request for injunctive relief. On January 27, 2000, Service Guard
amended its petition to add AIG Warranty Services as a defendant, again
seeking to recover an unspecified amount of damages from all defendants. On
February 2, 2000, Service Guard filed an application for a temporary
restraining order against New Hampshire Insurance Company and AIG Warranty
Services to mediate within twenty-one days the disputes that form the basis
for the requested injunctive relief. Warrantech, Ford and Glime believe
Service Guard's claims against them are wholly without merit and intend to
vigorously defend against those claims.
Service Guard has amended its Complaint to (i) limit its claims against
Warrantech Automotive, Inc. and (ii) adding Warrantech Corporation as a
defendant. Warrantech Corporation and Warrantech Automotive, Inc. have
filed an answer denying Service Guard's allegations and have also filed a
cross-claim against New Hampshire Insurance Company and AIG Warranty
Services of Florida, Inc.
Warrantech has filed a claim for coverage of the above mentioned claims
under an errors and omissions policy issued by National Union fire
Insurance Company of Pittsburgh, PA., a member of the AIG family of
insurance companies ("National Union"). On June 7, 2000, National Union
filed a complaint in the supreme court of the State of New York, County of
New York, against Warrantech Automotive, Inc. and Warrantech Corporation.
The complaint seeks a declaration from the court that National Union has no
obligation under the policy to pay any of the claims submitted. Warrantech
believes National Union's position is without merit and intends to contest
the action vigorously.
Warrantech is not able to estimate its potential liability in either of the
above actions although Warrantech believes that these cases are without
merit, and accordingly, no reserves for potential liabilities have been
provided for either of these actions.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6 (a) Exhibits
(27) Financial Data Schedule
Item 6 (b) Reports on 8-K
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WARRANTECH CORPORATION
------------------------------------------
S/N/S Joel San Antonio
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Joel San Antonio - Chairman of the Board
Chief Executive Officer
Date: November 13, 2000
S/N/S Richard F. Gavino
------------------------------------------
Richard F. Gavino - Executive Vice
President and Chief Financial Officer
Date: November 13, 2000
