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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED] for the transition period
from _______ to _______
Commission File No. 0-13084
WARRANTECH CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3178732
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 Atlantic Street, Stamford, Connecticut 06901
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (203) 975-1100
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each Exchange on which registered
Common Stock $.007 par value NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.007 par value
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(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all reports
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K [ ].
-------------------------------
The number of shares outstanding of the Registrant's common stock is
13,082,181 as of (June 21, 1996).
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant is $35,756,096 (as of June 21, 1996).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended are incorporated by reference in
Part III.
Index to Exhibits is on page 45.
PART I
Warrantech Corporation ("Warrantech" or the "Company") maintains
executive offices at 300 Atlantic Street, Stamford, Connecticut 06901, operating
facilities at 150 Westpark Way and, 1441 West Airport Freeway, Euless, Texas
76040, as well as other Texas locations. The telephone number of the executive
offices is (203) 975-1100.
Item 1. Business
Warrantech, through its wholly-owned subsidiaries, Warrantech
Automotive, Inc., Warrantech Consumer Product Services, Inc., Warrantech Direct,
Inc., Warrantech Home Service Company and Warrantech International, Inc. markets
and administers service contract programs for retailers, distributors and
manufacturers of automobiles, recreational vehicles, automotive components,
homes, home appliances, home entertainment products, computers and peripherals,
and office and communication equipment in the United States, Puerto Rico,
Mexico, Canada, and the United Kingdom. Additionally, third-party administrative
services are provided to manufacturers of consumer and automotive products and
other business entities requiring such services. The predominant terms of the
contracts and manufacturer's warranties range from twelve (12) to eighty-four
(84) months.
The Company assists dealer-clients in obtaining insurance coverage that
indemnifies the clients against losses resulting from service contract claims
and protects the consumer by ensuring that their claims will be paid.
Additionally, the Company and the insurers have agreements that provide
eligibility for the Company to participate in the profits generated by the
programs in return for providing administrative services to the insurer with
regard to the programs.
Service programs benefit consumers with expanded and/or extensions of
product coverage for a specified period of time (or mileage in the case of
automobiles and recreational vehicles), similar to that provided by the
manufacturer under the terms of their product warranty(ies). Such coverage
generally provides for the repair or replacement of the product, or a component
thereof, in the event of its failure.
From a marketing perspective, the Company's products and services
enhance the perceived value of the retailers', distributors', manufacturers' or
financial institutions' products.
Warrantech Automotive, Inc.
Warrantech Automotive, Inc. ("WAI") has operated as a wholly-owned
subsidiary since November, 1989. Through this subsidiary, the Company markets
and administers vehicle service contract ("VSC") programs, credit life and other
related automotive after-sale products, all of which enhance the profitability
of the sale of automobiles, recreational vehicles and automotive components.
These products are sold by franchised and independent automobile dealers,
leasing companies, repair facilities and retail stores.
Additionally, WAI has expanded its efforts in the automotive field to
provide administrative expertise and secure the placement of insurance coverage
to other parties requiring such services on either VSC's or similar products.
The VSC is a contract between the dealer/lessor (and in some states
WAI) and the vehicle purchaser/lessee that offers coverage that runs from one to
eighty-four months and 1,000 to 100,000 miles. Coverage is afforded in the event
of the failure of a broad range of mechanical components that occurs during the
term of the VSC.
The programs marketed and administered by WAI require that the dealer
enter into an agreement whereby WAI is the provider of services to the dealer.
Among these services is the development and distribution of marketing materials,
processing of dealer produced VSC's, and the administration and payment of
claims filed by contract holders under the terms of their VSC.
WAI utilizes the services of independent agents to call on dealers to
solicit their use of the VSC programs. At this time, Warrantech Automotive is
represented by more than 60 agents in 46 states as well as Puerto Rico and
Canada.
With respect to the VSC programs which Warrantech and WAI market and
administer, liability is borne by insurers who have issued insurance policies to
assume this risk in exchange for the payment of agreed upon premiums and fees.
Effective March 1, 1993, insurance for the WAI VSC programs is provided by the
New Hampshire Insurance Company and other American International Group, Inc.
("AIG") member companies.
Essential to the success of WAI is its ability to capture, maintain,
track and analyze all relevant data regarding a VSC. To support this function,
this subsidiary operates proprietary software developed internally and consists
of custom designed relational databases with interactive capabilities. This
configuration provides ample capacity and processing speed for current
requirements as well as the ability to support significant future growth in this
area.
Warrantech Consumer Product Services, Inc.
Warrantech Consumer Product Services, Inc. ("WCPS"), a wholly-owned
subsidiary, was formed in 1990 and, at that time, assumed the parent company's
efforts to develop, market and administer consumer product extended service
contract programs.
The programs marketed and administered by WCPS require that the selling
dealer, distributor or manufacturer enter into an agreement with WCPS that
outlines the duties of each party. Those duties specifically assumed by WCPS
include the development and distribution of marketing materials, sales and
motivational training, processing of service contracts, and adjustment and
payment of claims. WCPS has also entered into service center agreements with
consumer product repair centers located throughout North America, South America,
Mexico and the Caribbean.
In exchange for agreed upon premiums and fees from the insured,
liability for claims incurred by service contracts issued by a dealer,
distributor or manufacturer has in the past been assumed by Houston General
Insurance Company, a wholly-owned subsidiary of Tokyo Marine & Fire Insurance
Company, the world's largest insurance organization. At the present time, in
addition to Houston General, certain programs offered by the Company are being
insured by Virginia Surety Company, Inc, a member of Aon Insurance Company, and
AIG member companies.
It is also essential to the success of WCPS that it be able to capture,
maintain, and analyze all relevant information about its service contracts. To
support this function, WCPS has internally developed application programs that
allow the tracking of a database of hundreds of millions of service contracts.
This also allows for the development of current and historical statistical data
which is used to monitor its service contract program's performance, and also
will support significant growth of WCPS's business.
During fiscal 1995, WCPS commenced a program to enhance its products
and services to solidify its position in the industry and broaden its market
base. This is a continuing effort that seeks to identify opportunities, weigh
their potential and develop programs and/or services to meet the needs of these
new venues. In connection with this effort WCPS has upgraded existing service
contract programs including the Repair Master Service contract program. Special
attention was given to the office products category with the emphasis on the
personal computer segment of the industry which is rapidly expanding. This
effort, which has continued in fiscal 1996, has resulted in increased market
share in this segment during the current year.
The Company has two significant customers that accounted for
approximately 19% of consolidated gross revenues for the year ended March 31,
1996 and one customer that accounted for approximately 10% and 11% of
consolidated gross revenues for the years ended March 31, 1995 and 1994.
Warrantech Direct, Inc.
Warrantech Direct, Inc. ("WDI") is uniquely positioned to integrate the
customer, service and product resources of Warrantech, its subsidiaries and
their retail dealers and manufacturers, in order to fully exploit new business
opportunities in merchandising through data-base marketing to the end-user
consumer.
This subsidiary, which was formed in 1992, utilizes state-of-the-art
telemarketing and direct mail equipment and techniques to obtain second effort
sales and renewals of service contracts.
WDI's efforts are conducted on behalf of (i) the dealer/retailers,
distributors and manufacturers who utilize the service contract programs
marketed and administered by WAI and WCPS, and (ii) a growing list of other
vendors who wish to utilize WDI resources to enhance their own service contract
sales efforts. Second effort marketing consists of contacting product purchasers
who did not buy a service contract and offering them this opportunity prior to
the expiration of the manufacturer warranty. Renewal marketing consists of the
effort to renew service contracts on eligible products upon the expiration of
their current service contract coverage.
Warrantech Home Service Company
The Company has recently formed Warrantech Home Service Company, a
wholly-owned subsidiary, as the vehicle to develop, market and administer
service contract programs in the United States covering mechanical breakdowns of
the working systems and components in homes (eg., furnaces, electrical and
plumbing systems, and major appliances).
Warrantech International, Inc.
In July, 1993, the Company through Warrantech International, Inc., and
AIG formed a joint venture, Techmark Services Ltd. ("Techmark" or the "Joint
Venture") owned fifty-one percent (51%) by AIG and forty-nine percent (49%) by
the Company.
In conjunction with the foregoing alliance, in October, 1993, AIG
purchased, for a price of $6,430,000, options and a special issue of preferred
stock which was convertible into an issue of new shares of common stock which,
subsequent to its issuance, would be equivalent to twenty percent (20%) of the
Company's issued and outstanding common stock. Under the terms of the purchase
agreement, AIG had the right to purchase an increased interest in the Company,
to a maximum of thirty percent (30%) of the Company's issued and outstanding
common stock, if certain operating goals were achieved by the Company.
In April, 1996, the Company and AIG agreed to terminate the joint
venture effective January 1, 1996. Under the terms of the agreement, AIG agreed
to purchase the Company's forty-nine percent (49%) investment in the joint
venture for approximately $3.8 million and to sell back to the Company the
3,234,697 shares of convertible preferred stock held by AIG for its original
redemption value of $6,430,000 and further relinquish their rights to other
options under the original agreement. The balance due AIG of $2,395,960 for the
preferred stock is in the form of a three year, non-interest bearing note
payable. In the event of default by the Company with respect to this note
payable, the Company would be required to reissue to AIG preferred stock for the
remaining amount due at the default date. AIG also agreed to continue to insure
certain extended warranty programs of the Company.
In July, 1995, Warrantech International, Inc., acquired Home Guarantee
Corporation PLC (subsequently renamed Warrantech Europe Plc.), a British company
which markets home warranty products in the United Kingdom covering mechanical
breakdowns of the working systems and components in homes (e.g., furnaces,
electrical and plumbing systems, and major appliances). In addition to home
warranty products, Warrantech Europe's business will be expanded to include
extended warranties on a wide range of products including automobiles, business
equipment, office and home computers, mobile telephones, and major appliances as
well as credit card enhancement programs similar to those marketed in the United
States. This subsidiary will also provide full database management, marketing,
training, brokerage services, and customer care service for clients in the
automotive, financial, manufacturing, retail and service sectors.
In June 1996, Warrantech International, Inc., signed a master
distributor agreement with a major U.S. exporter of consumer electronics and
appliances to market extended warranty products throughout Central and South
America. Management believes that the expansion into these additional areas
should enable Warrantech's overall revenues from its Latin American operations
to exceed $10 million in the next twelve months and expect this program to
commence in September 1996. This projection is based on an analysis of the fact
that this distributor has already been marketing extended warranties in the area
and is based on information available to the company on market penetration of
other companies in this area. While the Company reasonably believes it can
achieve these results, there can be no assurances that these results will be
attained.
Sales and Marketing
The sales and marketing activities of the Warrantech subsidiary
companies are managed by each subsidiary's own sales and marketing personnel. In
certain circumstances, the subsidiaries have entered into marketing agreements
with independent organizations that solicit dealers at their own expense,
receiving a commission on all service contracts sold by such dealers.
The Warrantech subsidiary companies foster awareness of their
respective programs through cooperative advertising programs, which may be
jointly funded by the subsidiary and the dealer or independent agent.
Sales training and motivational programs are a primary form of
specialized assistance provided by WAI and WCPS to retailers/dealers,
distributors and manufacturers, to assist them in increasing the effectiveness
and profitability of their service contract program sales efforts. The Company
develops materials and conducts educational seminars. These seminars are
conducted either at the client's place of business or at the Company's
state-of-the-art training facility at its Euless, Texas administrative offices.
This facility features the latest in audio/video technology that enhances the
training and learning experience.
Competition
The Warrantech subsidiary companies compete with a number of
independent administrators, divisions of distributors and manufacturers,
financial institutions and insurance companies. While the Company believes that
it occupies a preeminent position among its competitors in its field, it may not
be the largest marketer and administrator of service contracts and limited
warranties, and some competitors may have greater operating experience, more
employees and/or greater financial resources. Further, many manufacturers,
particularly those producing motor vehicles, market and administer their own
service contract programs for and through their dealers.
Insurance Coverage
Liability for performance under the terms of service contracts and
limited warranties issued by dealers/retailers, distributors or manufacturers is
assumed by the insurer in return for the payment of the agreed-upon premium for
the assumption of the risk from the insured. This coverage provides
indemnification against loss resulting from service contract claims and protects
the consumer by ensuring that their claim will be paid.
The insurance protection is provided for the WAI programs by the New
Hampshire Insurance Company and other AIG member companies. These companies are
all rated A++ (Superior) by the A.M. Best Company. WCPS and its clients are
protected by insurance afforded by Houston General Insurance Company, a member
of the Tokyo Marine & Fire Insurance Company, Virginia Surety Company, Inc., a
member of Aon Insurance Company, and certain AIG member companies. Houston
General is rated Excellent by A.M. Best Company.
In accordance with the insurance arrangements with these insurers, a
fixed amount is remitted for each service contract or limited warranty sold. The
amount is based upon actuarial analysis of data collected and maintained for
each type of coverage and contract term. In no event is the insured, the Company
or its subsidiaries obligated to the insurer if claims exceed the premium
remitted.
Additionally, agreements between the Company and the insurers, contain
profit-sharing features that permit the Company to share in the profits earned
by the service contract programs. The amounts to be received, if any, are
determined in accordance with certain specified formulas by the type of program
and by policy year. Certain of these agreements require interim calculations and
distributions for various programs, with final calculations being made as
contracts expire by term. During the latter part of fiscal 1996, the Company
renegotiated certain of its profit sharing arrangements with its insurers. The
changes to these agreements resulted in a charge of $1,300,000 in the fourth
quarter of fiscal 1996 to reflect the estimated ultimate realization of the
profit sharing through expiration of the underlying contracts. During the 1996
fiscal year, the Company received profit sharing advances amounting to
approximately $2.0 million.
Federal and State Regulation
The service contract programs developed and marketed by the Company's
subsidiaries, and their related operations with regard to service contracts and
limited warranties, are regulated by federal law and the statutes of a
significant number of states. The Company continually reviews all existing and
proposed statutes and regulations to ascertain their applicability to its
existing operations, as well as new programs that are developed by the Company.
Generally speaking, these statutes concern the scope of service
contract coverage and content of the service contract or limited warranty
document. In such instances, the state statute will require that specific
wording be included in the service contract or limited warranty expressly
stating the consumer's rights in the event of a claim, how the service contract
may be canceled and identification of the insurance company that indemnifies the
dealers, distributors or manufacturers against loss for performance under the
terms of the service contract.
Statutes in some states have sought to interpret the consumer product
service contract, or certain items covered under the contract as a form of
insurance, requiring that the issuer be a duly licensed and chartered insurance
company. The Company and its subsidiaries do not believe that they are insurers
and have no intention of filing the documents and meeting the capital and
surplus requirements that are necessary to obtain such a license.
In many instances, the applicability of statutes and regulations to
programs marketed and administered by the Company, and compliance therewith,
involve issues of interpretation. The Company uses its best efforts to comply
with applicable statutes and regulations but it cannot assure that its
interpretations, if challenged, would be upheld by a court or regulatory body.
In any situation in which the Company has been specifically notified by any
regulatory bodies that its methods of doing business were not in compliance with
state regulation, the Company has taken the steps necessary to comply.
If the Company's right to operate in any state is challenged
successfully, the Company may be required to cease operations in the state and
the state might also impose financial sanctions against the Company. These
actions, should they occur, could have materially adverse consequences and could
affect the Company's ability to continue operating. However, within the
framework of currently known statutes, the Company does not feel that this is a
present concern.
Trademarks
The Company holds numerous registered United States trademarks, the
most important of which are the "WARRANTECH" and its stylized "W" logo service
marks. The registration for all service marks are kept current by the Company
and its trademark counsel. Additional service marks are registered covering
subsidiary names and product names and descriptions.
Employees
The Company and its subsidiaries currently employ approximately 400
individuals, an increase of approximately 120 over the preceding fiscal year.
The increase is directly attributable to the expansion of customer service and
claims representatives to meet the needs of the Company's expanding business.
None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
Item 2. Properties
The Company's executive offices are located in leased premises at 300
Atlantic Street, Stamford Connecticut. These premises, consisting of
approximately 24,854 square feet, are leased pursuant to a lease agreement (the
"Lease") which became effective on March 1, 1989 and expires on February 28,
1999. The annual base rent ranges from $490,074 to $412,796 during the term of
the Lease.
The operating facilities of WCPS are located in leased premises at 150
Westpark Way, Euless, Texas. The premises, consisting of approximately 24,000
square feet, are leased pursuant to a lease agreement (the "Texas Lease") which
was favorably renegotiated effective on March 1, 1993 and expires on July 31,
2003. The Texas Lease provides for annual base rent payments ranging from
$252,598 to $332,789 during the term of the lease.
The Company has recently leased an additional 36,814 square feet at
1441 West Airport Freeway, Euless, Texas to accommodate the operations of WAI
which moved June 1, 1996 from the Westpark Way facility due to the expansion of
the WCPS operations at that location. These premises are being leased pursuant
to a lease agreement that expires March 31, 2004. The lease provides for annual
base rent payments ranging from $404,954 to $441,768 during the term of the
lease.
Additional facilities that support the operations of WAI and WCPS, as
well as, those that house WDI, are located at 1441 West Airport Freeway, Euless,
Texas (approximately 13,000 square feet) and 7630-7632 Pebble Drive, Building
#28, (approximately 6,000 square feet), Fort Worth, Texas. These premises are
leased under the terms of leases (the "Other Leases") that were effective on
December 1, 1994 and March 1, 1996, respectively. The Other Leases provide
for annual base rent payments ranging from $163,056 and $174,762, respectively.
Item 3. Legal Proceedings
A. The Oak Agency, Inc. and The Oak Financial Services, Inc. vs. Warrantech
Dealer Based Services, Inc. (WDBS)
This is a suit brought in the U.S. District Court, Northern
District of Illinois, by the Oak companies against WDBS (now known as
Warrantech Automotive, Inc.). Oak, a former agent of WDBS, alleges breach
of contract between the parties. The suit alleges that WDBS contracted to
pay agent commissions even after the contract was terminated. Oak seeks a
declaratory judgment and monetary damages from WDBS arising from the
termination of the agency agreement with Oak.
Oak's complaint does not specify the dollar amount of its alleged
damages, but Oak retained an expert witness who estimates that Oak's
damages exceed $9,000,000.00. Recently, the District Court ruled that the
report from Oak's damages expert was not admissible at trial. This ruling
would preclude Oak's damages expert from offering trial testimony based
on legal theories contained in his report. WDBS has vigorously defended
the case, and has retained its own economic expert, who will directly
refute the opinions of Oak's financial expert regarding the magnitude of
Oak's alleged damages. WDBS' expert has concluded that the maximum amount
recoverable by Oak, if any, is less than $1,000,000.00 after allowance of
all appropriate offsets. WDBS's principal defenses in the case concern
Oak's conduct as a sales agent. WDBS contends, in part, that Oak
performed poorly and breached its duty of loyalty as an agent of WDBS.
However, the district court granted a partial summary judgment to Oak
that will preclude WDBS from presenting evidence at the non-jury trial of
Oak's breach of its duty of loyalty owed to WDBS. No trial date has been
set as yet.
The Complaint is attached hereto as an exhibit.
B. The Oak Agency, Inc., et al. v. Warrantech, Inc., et al., Case No. 96
C 1106, filed in the United States District Court for the Northern
District of Illinois.
In February 1996, Oak filed this lawsuit in Federal District Court in the
Northern District of Illinois against WDBS, as well as against Warrantech
Corporation, Joel San Antonio, the Corporation's Chairman, and William
Tweed, the Corporation's President. Oak filed the new suit after the
Illinois District Court in Oak's original action against WDBS had denied
Oak's motion seeking leave to add these three parties as additional
Defendants in that case.
In its new lawsuit, Oak alleges that the Defendants tortuously interfered
with Oak's business relationships with automobile dealers after WDBS
terminated Oak as a sales agent. Oak seeks to recover sales commissions
that it contends it would have earned if WDBS had not precluded Oak from
serving WDBS' dealership accounts after Oak's termination. In the
complaint, the Plaintiff has stated $8 million in compensatory damages.
Oak also seeks to recover punitive damages in the amount of $24 million.
C. In the Matter of the Arbitration Between David Robertson, Claimant, and
Warrantech Corporation and Warrantech Automotive, Respondents.
David Robertson, a former officer and director of the Company,
commenced this action on or about December 10, 1993 and the matter is
currently pending before the American Arbitration Association in
Connecticut. Robertson has alleged that the Company wrongfully terminated
an employment agreement between Robertson and WDBS, and that the Company
engaged in tortuous interference and fraud. Robertson has requested
damages ranging from $450,000 to $5 million which includes his request
for punitive damages. The Company has denied all material allegations in
the claims. The Company has asserted a counterclaim in the amount of
approximately $340,000 for reimbursement of attorneys' fees advanced by
it on behalf of Robertson in connection with certain other actions.
Management intends to vigorously defend against Robertson's claims and to
vigorously prosecute its counterclaims. No hearing is presently scheduled
on this matter.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of the Company's
shareholders, through the solicitation of proxies or otherwise, during
the fourth quarter of the Company's fiscal year ended March 31, 1996.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
The Company's Common Stock has been reported in the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), and
currently is reported on NASDAQ's National Market System ("NMS"), under the
trading symbol "WTEC".
As of June 21, 1996, there were 13,082,181 Common Shares outstanding. On that
date, the closing bid price for the Company's common stock, as reported by
NASDAQ was $4.31.
Following is a summary of the price range of the Company's Common Stock during
its 1996 and 1995 fiscal years:
Common Stock
Quarter of Fiscal 1996 High & Low Bid
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First $5.75 $4.81
Second $6.13 $4.13
Third $6.44 $4.13
Fourth $5.06 $3.50
Quarter of Fiscal 1995 High & Low Bid
--------------
First $5.13 $3.88
Second $6.25 $3.63
Third $6.13 $5.00
Fourth $5.38 $4.63
The number of shareholders of record of the Company's Common Stock as of June
21, 1996 was 1,206.
Dividends
No cash dividends have been paid to holders of Common Stock since inception of
the Company. The Company anticipates that, in the foreseeable future, earnings,
if any, will be retained for use in the business or for other corporate purposes
and it is not anticipated that cash dividends will be paid.
Item 6 - SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this filing.
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- -------------- --------------- -------------- -------------
Gross revenue $110,246,219 $ 71,239,070 $ 46,970,763 $43,841,017 $50,692,389
Net (increase)decrease
in deferred revenue (a) (1,165,495) (699,745) (316,290) 314,931 822,856
--------------- -------------- --------------- -------------- -------------
Net revenue (a) 109,080,724 70,539,325 46,654,473 44,155,948 51,515,245
--------------- -------------- --------------- -------------- -------------
Income before
cumulative effect of
change in accounting
principle 2,394,862 2,895,788 703,591 1,061,471 1,336,968
Accounting change - - - - (117,581)
--------------- -------------- --------------- -------------- ------------
Net income $ 2,394,862 $ 2,895,788 $ 703,591 $ 1,061,471 $ 1,219,387
=============== ============== =============== ============== ============
Earnings per
common share:
Income before
cumulative effect
of change in
accounting principle $0.16 $0.19 $0.05 $0.08 $0.11
Accounting change (a) - - - - (0.01)
-------------- ------------- --------------- ------------- -------------
Net income $0.16 $0.19 $0.05 $0.08 $0.10
============== ============= =============== ============= =============
Cash dividend declared NONE NONE NONE NONE NONE
============== ============= =============== ============= =============
Total assets (a) $56,613,710 $41,858,546 $ 33,828,572 $24,646,791 $25,548,186
============== ============= =============== ============= =============
Long-term debt and
capital lease
obligations $ 1,124,015 $ 293,648 $ 476,875 $ 853,101 $ 315,697
============== ============= =============== ============= =============
Convertible
exchangeable
preferred stock $ 6,420,363 $ 6,396,795 $ 6,343,614 - -
============== ============= =============== ============= =============
Common stockholders'
equity $19,656,931 $17,443,763 $14,300,322 $13,427,311 $12,161,683
============== ============= ================ ============= =============
Working capital $13,221,212 $11,067,983 $ 9,768,580 $ 4,982,608 $ 4,355,183
============== ============= ================ ============= =============
(a) The Company changed its revenue recognition policy, effective April 1,
1991, to the "proportional performance method" which recognizes revenues
in direct proportion to the costs incurred in providing the service
contract programs to its clients. Only revenues in an amount sufficient
to meet future administrative costs and reasonable gross profit thereon
are deferred. The new method of recognizing revenues more accurately
conforms to the Company's operations and properly matches the incurring
of costs with revenues.
This change in revenue recognition policy as of April 1, 1991, resulted
in a one time cumulative effect charge to operations, net of taxes, in
the amount of $117,581.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company, through its WCPS, WAI, Warrantech Direct, Warrantech Home
Service Company, and Warrantech International subsidiaries, provides marketing
and administrative services to over 3,000 retailers, distributors and
manufacturers of automobiles, recreational vehicles, automotive components,
homes, home appliances, home entertainment products, computers and peripherals,
office and communications equipment. The Company's administrative services
pertain primarily to extended service contracts and limited warranties, issued
by the retailer, distributor or manufacturer to the purchaser/lessee of the
consumer product. Additionally, the Company maintains administrative facilities
for, and provides administrative services to, insurance companies and financial
institutions for other types of insurance products such as credit card
enhancement programs like "purchase protection" and "unemployment" coverages.
Results of Operations
Gross Revenues
Fiscal 1996 vs. 1995
Gross revenues for the fiscal years ended March 31, 1996 and 1995 were
$110,246,219 and $71,239,070, respectively, representing an increase of 55% in
the current fiscal year. The increase is the result of the Company's efforts in
expanding its market penetration in the personal computer industry as well as
continued market penetration in the other consumer products and automotive
products market segments. The gross revenues attributable to consumer product
and automotive programs increased approximately $37 million as a direct result
of approximately $20 million related to new business, approximately $14 million
related to volume increases with existing customers, and one time gains of
approximately $3 million resulting from the accession of service contract
portfolios from new customers. The balance of the increase is the result of
increased efforts with respect to renewals and second effort sales. Revenues of
Warrantech Europe (formerly Home Guarantee Corporation Plc acquired July 1995)
were insignificant to consolidated gross revenues during the current fiscal
year.
For the three month periods ended March 31, 1996 and 1995,
respectively, gross revenues were $31,481,357 and $19,554,126, an increase of
61%. The principal reason for this increase is the volume of business with new
customers during the fiscal quarter in both the automotive and consumer products
businesses.
Fiscal 1995 vs. 1994
Gross revenues for the fiscal years ended March 31, 1995 and 1994 were
$71,239,070 and $46,970,763, respectively. This increase is the result of a 52%
increase in gross revenues attributable to electronic, household and other
non-automotive related consumer product programs reflecting increases in market
share and penetration and favorable product mix and pricing. Automotive related
program revenues increased 43% during this period as a result of new programs
and increased volumes resulting from the recovery in the overall automotive
industry.
For the three month periods ended March 31, 1995 and 1994,
respectively, gross revenues were $19,554,126 and $11,417,813, an increase of
71%. The principal reason for this increase was continued growth in the consumer
product related revenues and to a lesser degree an increase in automotive
related revenues.
Net Increase in Deferred Revenues
The Company recognizes revenues in direct proportion to the costs
incurred in providing the service contract programs to its clients. Only
revenues in an amount sufficient to meet future administrative costs and a
reasonable gross profit thereon are deferred. The amounts of gross revenues
deferred and earned from period to period are effected by (i) the mix of
automotive and consumer product contract volumes, (ii) the relationship of gross
contract revenues generated by shorter term extended service contracts to total
gross revenues, and (iii) administration contract revenues which are recognized
over a short term period.
Fiscal 1996 vs. 1995
The net increase in deferred revenues for the year ended March 31, 1996
amounted to $1,165,495 as compared with $699,745 for the same period a year ago.
For the three month period ended March 31, 1996, the net increase in deferred
revenues amounted to $209,311 as compared with $175,353 for the same period a
year ago. These increases are directly attributable to the increased number of
service contracts sold with a service period greater than one year during the
current year and three month periods ended March 31, 1996 and 1995 and amounts
deferred with respect to the accession of service contract portfolios from new
customers in the second and third quarter periods of fiscal 1996 offset in part
by the amounts earned on expiring contracts during the same periods.
Fiscal 1995 vs. 1994
The net increase in deferred revenues amounted to $699,745 and $316,290
as of March 31, 1995 and 1994, respectively, and was the result of an increase
in the number of service contracts in force at the end of March 31, 1995 with a
service period greater than one year.
Direct Costs
Direct costs are those costs directly related to the production and
acquisition of service contracts. These costs are insurance premium and
commission expenses.
Fiscal 1996 vs. 1995
Direct costs for the fiscal year ended March 31, 1996 were $74,013,324
as compared with $46,140,548 for the fiscal year ended March 31, 1995. Direct
costs for the three month periods ended March 31, 1996 and 1995 amounted to
$21,656,315 and $11,457,907, respectively. The increases in direct costs for the
year and three month period ended March 31, 1996 are principally the result of
volume increases in contracts sold and to a lesser extent a higher level of
premium reflecting improved coverage on selected programs.
Fiscal 1995 vs. 1994
Direct costs for the fiscal year ended March 31, 1995 were $46,140,548
as compared to $30,350,722 for the fiscal year ended March 31, 1994. Direct
costs for the three months ended March 31, 1995 were $11,457,907, as compared to
$6,516,238 for the same period in fiscal 1994. The increase in direct costs for
both the year and the quarter ended March 31, 1995 as compared with the
comparable periods for the preceding year is primarily attributable to the
proportionate increase in revenues during the year.
Service, Selling and General and Administrative Expenses
Fiscal 1996 vs. 1995
Service, selling and general and administrative expenses for the fiscal
year ended March 31, 1996 were $27,362,214 as compared to $20,716,655 for the
fiscal year ended March 31, 1995. For the three month period ended March 31,
1996, service, selling and general and administrative expenses amounted to
$8,661,694 as compared to $6,617,117 for the same period last year. The relative
dollar increase in both the current fiscal year and quarter is directly
attributable to increases in sales related costs and payroll and payroll related
costs arising from continued increases in head count to meet the service
requirements associated with the increased number of service contracts being
sold. In addition, service, selling and general and administrative expenses
include approximately $1.2 million and $.6 million of expenses for the fiscal
year and quarter ended March 31, 1996, respectively, related to Warrantech
Europe which was acquired in July 1995. As a percentage of gross revenues,
service, selling and general and administrative expenses have decreased 4% and
6% in the current fiscal year and quarter ended March 31, 1996, respectively,
which is indicative of the improved functional expense controls implemented by
management during fiscal 1996.
Fiscal 1995 vs. 1994
Service, selling, general and administrative expenses for the fiscal
year ended March 31, 1995 were $20,716,655 as compared to $14,674,158 for the
fiscal year ended March 31, 1994. The increase is directly attributable to
increases in sales related costs, payroll and payroll related costs arising from
an increase in head count to meet volume increases experienced during that year
as well as increased levels of commissions, and incentive compensation. Service,
selling and general and administrative expenses as a percentage of gross
revenues remained relatively consistent with fiscal 1994.
Provision for Bad Debt Expense
For all years presented, the provision for bad debt expense results
from the write-off of accounts considered uncollectible. The higher level of
expense in fiscal 1995 resulted from the settlement of certain litigation that
year.
Depreciation and Amortization
Fiscal 1996 vs. 1995
Depreciation and amortization amounted to $1,700,285 and $785,584 for
the fiscal year and three month period ended March 31, 1996, respectively. The
increase over the same periods a year ago reflect a higher level of depreciation
during the year resulting from an approximately $5.1 million increase in assets
placed in service during the current fiscal year. This increase in assets is
directly attributable to an ongoing upgrade of the Company's information
systems.
Fiscal 1995 vs. 1994
In fiscal 1995, as part of an Internal Revenue Service agent review of
the Company's 1992 and 1993 tax returns, certain adjustments were identified,
the most significant of which related to revenues originally recorded as
deferred revenues in connection with the 1989 acquisition of Dealer Based
Services, Inc., which should not have been included in taxable income for those
years subsequent to the acquisition. As a result, the Company reduced the amount
of remaining goodwill at April 1, 1994 that arose as part of this asset
acquisition by the estimated tax refund in the amount of $1,310,575. This
reduced the amount of the goodwill amortization recorded in fiscal 1995. The
amount of the estimated refund, including interest was received in full during
fiscal 1996.
Operations of Equity Joint Venture
In April 1996, the Company and its joint venture partner, AIG, agreed
to terminate the joint venture, Techmark Services Ltd, effective January 1,
1996. Under the terms of the agreement, AIG agreed to purchase the Company's
forty-nine percent (49%) investment in the joint venture for $3,762,154. As of
March 31,1996, the Company's carrying value of the joint venture investment
amounted to $1,885,674 which will result in a gain on the sale of the investment
of $1,876,480 to be recognized in the first quarter of fiscal 1997. The losses
in operations of the equity joint venture amounting to $957,748 represent the
Company's share of the joint venture losses from the beginning of the fiscal
year through the effective date of the transaction.
Other Income/(Expense)
Other Income/(expense) includes amounts recognized with respect to the
Company's profit sharing arrangements. During fiscal 1996, the Company
renegotiated certain of its profit sharing arrangements with its insurers. The
principal effect of this modification was to change the nature of profit sharing
to more long-term in nature. The changes to these contracts and a reexamination
of experience affecting the estimated ultimate realization of the profit sharing
through expiration of the underlying contracts resulted in a charge of
$1,300,000 in the fourth quarter of fiscal 1996 and a charge of $865,000 during
the current year as compared to income recorded in fiscal 1995 and 1994 for
profit sharing of $2,676,001 and $1,364,089, respectively. Also included in
other income/(expenses) is a charge of $222,845 relating to a residual amount
due the Company from the sale of a business in prior years.
Income Taxes
The income tax provision for fiscal 1996 differs from the statutory
rate due primarily to a tax benefit of $1.1 million recognized with respect
to foreign losses. Management expects to realize this tax benefit, which
has an indefinite carryforward period, against the gain on the sale of
the joint venture to be recognized in the first quarter of fiscal 1997 and
other future foreign income.
Net Income
Fiscal 1996 vs. 1995
Net income for the fiscal year and three month period ended March 31,
1996 amounted to $2,394,862 and ($489,910) or $.16 and ($.04) per primary share,
respectively as compared to $2,895,788 and $704,627 or $.19 and $.04 per primary
share, respectively for the comparable period in fiscal 1995. The decrease in
net income and per share amounts for the fiscal year is directly attributable to
the Techmark losses, losses associated with Warrantech Europe and a profit
sharing charge of $1,300,000 recognized in the fourth quarter of the current
year to reflect contractual changes made to these agreements and a
reexamination of experience related to the underlying contracts which
offset the profit increases resulting from the increase in business and
the one time gains associated with the accession of two portfolios from new
customers.
Fiscal 1995 vs. 1994
Net income for the fiscal year and three month period ended March 31,
1995 amounted to $2,895,788 and $704,627 or $.19 and $.04 per primary share,
respectively as compared to $703,591 and $608,894 or $.05 and $.04, respectively
for the comparable periods in fiscal 1994. The increase in fiscal year 1995 is
attributable to the increases in revenues in those respective periods, an
increase in profit sharing recognized, offset by start-up losses amounting to
approximately $580,000 of the Japanese operations of the Company's Techmark
joint venture.
Liquidity and Capital Resources
The primary source of liquidity during the current year was cash
generated by operations, including a federal tax refund, plus interest, related
to a Revenue Agent Review of prior year tax returns amounting to approximately
$1.7 million. Funds were utilized for working capital expenditures, capital
expenditures relating to the upgrading of the Company's information systems and
the purchase of Home Guarantee Plc during the second quarter of fiscal 1996.
On December 12, 1995, the Company completed the sale/leaseback of
certain computer equipment resulting in proceeds of $1,146,642. The Company has
an ongoing relationship with an equipment financing company and intends to
continue financing certain future equipment needs through leasing transactions.
The total amount financed through leasing transactions during fiscal 1996
amounted to $1,640,060. In addition, on December 21, 1995 the Company completed
an agreement to increase its line of credit with a bank from $1 million to $10
million, $6.5 million committed and $3.5 million standby. The line of credit is
secured by certain accounts receivable and expires on July 31, 1996. It is
anticipated that the line of credit will be extended to July 1997. At March 31,
1996, the Company did not have any borrowings under the line of credit.
In connection with the sale of the Company's joint venture interest to
AIG, the Company agreed to repurchase 3,234,697 shares of convertible
exchangeable preferred stock held by AIG at their redemption value of
$6,430,000. This amount will be offset by the amount due the Company for the
sale of its investment, with the net amount due AIG of $2,395,960 resulting in a
three year, non-interest bearing note payable. The note is payable in 11 equal
quarterly installments of $205,000 commencing June 30, 1996, with a final
installment of $140,960 due March 1999. Also, as part of the agreement, AIG
agreed to pay the Company $1,480,000 related to amounts due the Company under
its profit sharing arrangement. In connection with this payment, the Company
issued an irrevocable letter of credit to the benefit of AIG through December
31, 2002 which can be drawn against by AIG in the event that the ultimate profit
sharing amount due the Company is less than the amount paid. It is anticipated
that no amounts will be due AIG under this letter of credit.
The Company believes that internally generated funds will be sufficient
to finance its current operation for at least the next twelve months.
The effect of inflation has not been significant to the Company since
its formation.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Report of Independent Accountants.......................... 20-21
Consolidated Financial Statements:
Balance Sheets as of March 31, 1996 and 1995... 22
Statements of Operations For the Years Ended
March 31, 1996, 1995 and 1994................. 23
Statements of Common Stockholders' Equity
For the Years Ended March 31, 1996, 1995 and 1994 24
Statements of Cash Flows
For the Years Ended March 31, 1996, 1995 and 1994.... 25-26
Notes to Consolidated Financial Statements................. 27-40
Consolidated Financial Statement Schedule
Schedule VIII - Valuation and Qualifying Accounts. 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Warrantech Corporation:
We have audited the consolidated financial statements and the financial
statement schedule of Warrantech Corporation and subsidiaries (the "Company") as
of March 31, 1996 and 1995, and for the years then ended as listed in the
accompanying index on page 19. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 1996 and 1995 financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of March 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule as of and for the years ended March 31, 1996 and
1995, when considered in relation to the basic 1996 and 1995 consolidated
financial statements taken as a whole, present fairly, in all material respects
the information required to be included therein.
As discussed in Note 9 to the consolidated financial statements, the
Company is a defendant in certain litigation. The ultimate outcome of this
litigation cannot presently be determined. Accordingly, no provision for any
loss that may result upon resolution of these matters has been made in the
accompanying consolidated financial statements.
Coopers & Lybrand L.L.P.
Stamford, Connecticut
June 27, 1996
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Warrantech Corporation
We have audited the consolidated balance sheet of Warrantech
Corporation (the "Company") and subsidiaries as of March 31, 1994 (not
separately shown herein), and the related consolidated statements of
operations, common stockholders 'equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule for the
year ended March 31, 1994 listed in the Index on page 19. These financial
statements and financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an
opinion on the 1994 financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of March 31,
1994, and the results of its operations and its cash flows for the year ended
March 31, 1994 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule for the year ended
March 31, 1994, when considered in relation to the basic 1994 consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 9 to the consolidated financial statements, the
Company is a defendant in certain litigation. The ultimate outcome of this
litigation cannot presently be determined. Accordingly, no provision for any
loss that may result upon resolution of these matters has been made in the
accompanying financial statements.
As discussed in Note 8 to the consolidated financial statements,
the Company changed its method of accounting for income taxes to conform
with Statement of Financial Accounting Standards No. 109 in 1994.
Deloitte & Touche LLP
Stamford, Connecticut
June 29, 1994
================================================================================
WARRANTECH CORPORATION AND SUBSIDIARIES
================================================================================
CONSOLIDATED BALANCE SHEETS
A S S E T S
----------
March 31,
-------------------------------
------------- --------------
1996 1995
------------- --------------
Current Assets:
Cash and cash equivalents $ 11,859,487 $ 3,039,361
Investments in marketable securities 824,648 472,344
Accounts receivable,
(net of allowances of $450,092
and $126,115, respectively) 16,160,209 12,705,664
Other receivables, net 8,610,919 8,599,198
Prepaid expenses, prepaid income taxes
and other current assets 988,936 1,065,062
------------- ------------
Total Current Assets 38,444,199 25,881,629
------------- ------------
Property and Equipment - Net 6,802,798 2,865,910
------------- -------------
Other Assets:
Excess of cost over fair value of assets
acquired (net of accumulated amortization
of $3,170,089 and $2,723,429, respectively) 4,118,544 3,850,724
Investment in and advances to joint venture 1,885,674 2,880,921
Deferred income taxes 2,031,535 1,029,083
Investments in marketable securities 1,363,047 2,671,507
Certificates of deposit and cash trust fund -
restricted 700,000 500,000
Split dollar life insurance policies 683,893 698,338
Receivable from insurance company - long term - 505,606
Notes receivable - long-term 87,760 290,125
Collateral security fund 199,389 199,389
Other assets 296,871 485,314
------------- -------------
Total Other Assets 11,366,713 13,111,007
------------- --------------
Total Assets $56,613,710 $41,858,546
============= =============
LIABILITIES, PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations $ 648,650 $ 205,200
Insurance premiums payable 16,247,247 9,230,377
Income taxes payable 1,795,018 1,010,878
Accounts and commissions payable 4,809,527 2,641,843
Accrued expenses and other current liabilities 1,722,545 1,725,348
------------- ------------
Total Current Liabilities 25,222,987 14,813,646
------------- ------------
Deferred Revenues 3,654,794 2,470,449
------------- ------------
Long-Term Debt and Capital Lease Obligations 1,124,015 293,648
------------- ------------
Deferred Rent Payable 534,620 440,245
------------- ------------
Commitments and Contingencies (See Note 9)
Convertible Exchangeable Preferred Stock
- $.0007 par value
Authorized, 15,000,000 shares
Issued and outstanding - 3,234,697 shares at
March 31, 1996 and 1995
(Redemption value - $6,430,000) 6,420,363 6,396,795
------------- ------------
Common Stockholders' Equity:
Common stock - $.007 par value
Authorized - 30,000,000 shares
Issued and outstanding - 13,082,181 shares
at March 31, 1996 and 13,045,302 shares at
March 31, 1995 89,375 89,117
Additional paid-in-capital 12,212,641 12,097,507
Net unrealized loss on investments, net of income
taxes of $4,389 (15,031) (42,370)
Accumulated translation adjustments (10,520) -
Retained earnings 7,843,332 5,472,039
------------ ------------
20,119,797 17,616,293
Less: Deferred compensation (70,116) (23,438)
Treasury stock - at cost, 93,000 shares
at March 31, 1996 and 41,000 shares at
March 31, 1995 (392,750) (149,092)
------------ ------------
Total Common Stockholders' Equity 19,656,931 17,443,763
------------ ------------
Total Liabilities, Preferred Stock
and Stockholders' Equity $56,613,710 $41,858,546
============ ============
See accompanying notes to consolidated financial statements.
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31,
-------------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Gross revenues $110,246,219 $71,239,070 $46,970,763
Net increase in deferred revenues 1,165,495 699,745 316,290
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net revenues 109,080,724 70,539,325 46,654,473
----------------- ----------------- -----------------
Costs and expenses:
Direct costs 74,013,324 46,140,548 30,350,722
Service, selling, and general and administrative 27,362,214 20,716,655 14,674,158
Provision for bad debt expense 363,179 427,483 10,955
Depreciation and amortization 1,700,285 1,259,604 1,503,866
----------------- ----------------- -----------------
Total costs and expenses 103,439,002 68,544,290 46,539,701
----------------- ----------------- -----------------
Income from operations 5,641,722 1,995,035 114,772
----------------- ----------------- -----------------
Equity in operations of joint venture (957,748) (298,272) (538,385)
Other income/(expense) (651,620) 3,107,561 1,426,860
----------------- ----------------- -----------------
Income before provision for income taxes 4,032,354 4,804,324 1,003,247
Provision for income taxes 1,637,492 1,908,536 299,656
----------------- ----------------- -----------------
Net Income $ 2,394,862 $2,895,788 $ 703,591
================= ================= =================
Earnings per share:
Primary $.16 $.19 $.05
================= ================= =================
Fully Diluted $.15 $.17 $.04
================= ================= =================
Weighted average number of shares outstanding:
Primary 15,152,043 15,588,145 14,569,479
================= ================= =================
Fully Diluted 16,465,833 16,894,351 16,748,075
================= ================= =================
See accompanying notes to consolidated financial statements.
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Net Total
Common Stock Additional Unrealized Accumulated Deferred Common
----------------- Paid-In Loss on Translation Retained Compen- Treasury Stock Stockholders
Shares Par Value Capital Investments Adjustments Earnings sation Shares Amount Equity
------------------ ----------- ---------- ---------- ---------- --------- -------- ---------- -----------
Balance at April 1,1993 $12,916,802 $88,218 $11,638,418 $1,925,840 $(57,891) (46,000) $(167,274) $13,427,311
Issuance of common stock
through exercise of
common stock options 40,500 283 87,454 87,737
Issuance of common stock 8,000 56 22,564 22,620
Issuance of treasury stock 4,318 5,000 18,182 22,500
Amortization of deferred 36,563 36,563
compensation
Net income 703,591 703,591
---------- ------ ------------ -------- ----------- ---------- --------- -------- ---------- ------------
Balance at March 31,1994 12,965,302 88,557 11,752,754 2,629,431 (21,328) (41,000) (149,092) 14,300,322
Issuance of common stock
through exercise of 75,000 525 321,350 321,875
common stock options
Issuance of common stock 5,000 35 23,403 (23,438) -
Net unrealized loss on (42,370) (42,370)
investments
Amortization of deferred
compensation 21,328 21,328
Imputed interest
on preferred stock (53,180) (53,180)
Net income 2,895,788 2,895,788
---------- ------ ----------- --------- ----------- ---------- --------- -------- ---------- -----------
Balance at March 31,1995 13,045,302 89,117 12,097,507 (42,370) 5,472,039 (23,438) (41,000) (149,092) 17,443,763
Issuance of common stock
through exercise of 25,000 175 62,325 62,500
common stock options
Issuance of common stock 11,879 83 52,809 (42,142) 10,750
Purchase of treasury shares (56,000) (260,538) (260,538)
Issuance of treasury shares (16,880) 4,000 16,880 -
Net unrealized loss on 27,339 27,339
investments
Translation adjustments (10,520) (10,520)
Amortization of deferred
compensation 12,344 12,344
Imputed interest on (23,569) (23,569)
Preferred Stock
Net income 2,394,862 2,394,862
========== ======= =========== ========= =========== ========== ========= ======== ========= ============
Balance at March 31,1996 $13,082,181 $89,375 $12,212,641 $(15,031) $(10,520) $7,843,332 $(70,116) (93,000) $(392,750) $19,656,931
========== ======= =========== ========= =========== ========== ========= ======== ========= ============
See accompanying notes to consolidated financial statements.
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31,
------------------ -- ------------------ -- ------------------
1996 1995 1994
------------------ ------------------ ------------------
Cash flows from operating activities:
Net income $ 2,394,862 $ 2,895,788 $ 703,591
------------------ ------------------ ------------------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,712,431 1,259,604 1,503,866
Deferred income taxes (1,002,452) (296,601) (688,387)
Increase in deferred rent payable 94,375 76,796 65,674
Loss from equity joint venture 957,748 298,272 538,385
Elimination of intercompany profits with joint venture - (28,038) 176,400
Other (2,822) 116,150 57,301
Increase (decrease) in cash flows as a result of
changes in asset and liability balances:
Accounts receivable (3,450,088) (4,744,974) (1,267,393)
Other receivable 5,090 (3,391,088) (3,802,436)
Prepaid expenses, prepaid income taxes and
other current assets 97,536 557,043 (530,854)
Collateral security fund - - (18,566)
Split dollar life insurance policies 14,445 (102,550) (142,779)
Other assets and receivable from insurance company 681,981 423,100 (48,995)
Insurance premiums payable 7,016,870 2,117,103 2,249,239
Income taxes payable 784,140 1,010,878 (459,681)
Accounts and commissions payable 2,102,284 343,073 104,112
Accrued expenses and other current liabilities (18,002) 919,370 154,356
Deferred revenues 1,184,345 699,744 316,291
------------------ ------------------ ------------------
Total adjustments 10,177,881 (742,118) (1,793,467)
------------------ ------------------ ------------------
Net cash provided by (used in) operating activities 12,572,743 2,153,670 (1,089,876)
------------------ ------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment - 23,396 24,000
Purchase of property and equipment (3,489,974) (1,539,093) (449,720)
Net cash paid for acquired company (735,984) - -
Certificates of deposit - 27,000 71,707
Purchase of marketable securities (948,602) (1,038,543) (1,800,000)
Certificates of deposit and cash trust fund - restricted - 157,602 (330,602)
Proceeds from sales redemptions and maturities of
marketable securities 1,730,612 500,000 -
Investment in and advances to joint venture 37,499 (2,123,440) (1,715,000)
------------------ ------------------ ------------------
Net cash used in investing activities $(3,406,449) $(3,993,078) $(4,199,615)
------------------ ------------------ ------------------
(Continued)
See accompanying notes to consolidated financial statements.
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended March 31,
-------------- ---- ----------------- ---- ----------------
1996 1995 1994
-------------- ---- ----------------- ---- ----------------
Cash flows from financing activities:
Decrease in notes receivable $ 202,365 $ 600 $ 34,394
Proceeds from exercise of common stock options 62,500 187,500 87,737
Purchase treasury stock (243,658) - -
Proceeds from the sale of preferred stock, net
of underwriting costs - - 6,343,614
Loan payable - officer - - ( 118,383)
Proceeds from borrowings - - 1,500,000
Repayments of borrowings (367,375) ( 333,613) ( 1,846,458)
-------------- --------------- ----------------
Net cash provided by (used in) financing activities (346,168) ( 145,513) 6,000,904
-------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents 8,820,126 ( 1,984,921) 711,413
Cash and cash equivalents at beginning of year 3,039,361 5,024,282 4,312,869
-------------- -------------- ----------------
Cash and cash equivalents at end of year $11,859,487 $ 3,039,361 $ 5,024,282
============== ============== ================
Supplemental Cash Flow Information:
Cash payments for:
Interest $ 127,616 $ 74,815 $ 137,702
============== ============== ================
Income taxes $ 1,644,950 $ 1,071,363 $ 1,506,739
============== ============== ================
Non-Cash Investing Activities:
Property and equipment financed through capital leases $ 1,640,060 $ - $ -
============== =============== ================
See accompanying notes to consolidated financial statements.
WARRANTECH CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Warrantech Corporation ("Warrantech"or the
"Company"), through its wholly-owned subsidiaries, Warrantech
Automotive, Inc., Warrantech Consumer Product Services, Inc.,
Warrantech Direct, Inc., Warrantech Home Service Company and Warrantech
International, Inc. markets and administers service contract programs
for retailers, distributors and manufacturers of automobiles,
recreational vehicles, automotive components, homes, home appliances,
home entertainment products, computers and peripherals, and office and
communication equipment in the United States, Puerto Rico, Mexico,
Canada, and the United Kingdom. Additionally, third-party
administrative services are provided to manufacturers of consumer and
automotive products and other business entities requiring such
services. The predominant terms of the contracts and manufacturer's
warranties range from one (1) to eighty-four (84) months.
Basis of Presentation and Principles of Consolidation - The
accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles ("GAAP"). These
consolidated financial statements include the accounts of Warrantech
Corporation and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Amounts representing the Company's percentage interest in the
underlying net assets of less than majority-owned companies, in which a
significant equity ownership interest is held, are included in
"investment and advances." The Company's share of the results of
operations of these companies is included in the Consolidated
Statements of Operations caption "Equity in operations of joint
venture."
Risks and Uncertainties - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions which affect the reporting
of assets and liabilities as of the dates of the financial statements
and revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Revenue Recognition Policy - The Company's revenue recognition policy
is based on the proportional performance method which recognizes
revenues in direct proportion to the costs incurred in providing the
service contract programs to the Company's clients. Only revenues in an
amount sufficient to meet future administrative costs and a reasonable
gross profit thereon are deferred.
Direct Costs - Direct costs are those costs directly related to
the production and acquisition of service contracts. Those costs are
insurance premium and commission expenses.
Profit Sharing Arrangement - Pursuant to agreements with its insurers,
the Company is eligible to share a portion of the insurers' profits on
the Company's service contract programs. The amounts to be received, if
any, are determined by loss experience, by the type of program and by
policy year. The amounts recorded are based on contractual arrangements
and management's best estimate of the Company's expected ultimate loss
experience. Any adjustments to those estimates will be reflected in
income, when known.
Provision for Bad Debts Expense - An allowance for doubtful accounts is
provided when accounts are determined to be uncollectible. The
provision for bad debt expense results from the write-off of accounts
considered uncollectible.
Earnings Per Share - Earnings per share is calculated by dividing net
income less imputed interest on preferred stock, where applicable, by
the weighted average number of common shares outstanding and common
share equivalents outstanding during the period.
Cash and Cash Equivalents - Cash and cash equivalents for the purpose
of reporting cash flows for all periods presented include cash on
deposit and highly liquid debt instruments purchased with a maturity of
three months or less.
Investments in Marketable Securities - Effective March 31, 1995, the
Company adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), Accounting for Certain Investments in Debt and Equity
Securities. As a result, all investments have been classified as
available-for-sale and are carried at fair value with changes in
unrealized gains and losses being reflected as a separate component of
Stockholders' Equity, net of tax.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is provided using a straight-line method over the
estimated useful lives of the assets ranging between 3 to 7 years.
Excess of Cost Over Fair Value of Assets Acquired - The excess of cost
over fair value of the assets acquired is a result of the purchases of
Dealer Based Services, Inc. in 1989, and Home Guarantee Corporation,
PLC in July 1995 and is being amortized on a straight-line basis over
fifteen and ten years, respectively. Amortization expense charged to
operations for the years ended March 31, 1996, 1995 and 1994 amounted
to $458,728, $401,815 and $525,648, respectively.
Deferred Compensation - Certain operating officers have been issued
shares of the Company's common stock as part of their compensation
under their employment agreements. Such compensation is to be earned by
the officers and charged to operations over five years, the term of the
employment agreements. In addition, certain employees have been issued
restricted shares of the Company's common stock as compensation. Such
compensation is amortized over the restriction period which is
generally two years.
Income Taxes - Effective April 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for
Income Taxes. Under SFAS 109, the deferred taxes are determined under
the liability method. Under this method, deferred tax assets and
liabilities are recognized for the expected tax effect of temporary
differences between the financial statement carrying amount and the tax
basis of assets and liabilities using presently enacted tax rates in
effect for the years in which the differences are expected to reverse.
Foreign Currency Translation -Financial statement accounts expressed in
foreign currencies are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation". The functional currency for the Company's United Kingdom
operations is the British pound. Transaction gains and losses are
reflected in operations, while translation gains and losses are
reflected as a separate component of equity.
Reclassification - Certain amounts from the prior years have been
reclassified to conform with the current year's presentation.
2. CERTIFICATES OF DEPOSIT AND CASH TRUST FUND - RESTRICTED
At March 31, 1996 $700,000 is on deposit with a Florida regulatory
agency to comply with its state insurance laws. These funds are
classified as non-current.
3. INVESTMENTS IN MARKETABLE SECURITIES
At March 31, 1996, investments in marketable securities are comprised
of the following:
Amortized Gross Unrealized Aggregate Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
Municipal Bonds $1,880,633 $2,660 $(13,913) $1,869,380 $506,333 $1,363,047
Common Stock 330,880 - (12,565) 318,315 318,315 -
------------- ------------- ------------- ------------- ------------- -------------
Total Investments
in Marketable
Securities $2,211,513 $2,660 $(26,478) $2,187,695 $824,648 $1,363,047
============= ============= ============= ============= ============= =============
At March 31, 1995, investments in marketable securities are comprised of
the following:
Amortized Gross Unrealized Aggregate Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
Corporate Bonds $ 336,325 $ 962 $ (606) $ 336,681 $ 272,344 $ 64,337
Municipal Bonds 2,676,985 221 (70,036) 2,607,170 - 2,607,170
Callable Preferred
Stock 200,000 - - 200,000 200,000 -
-------------- -------------- ------------- -------------- -------------- -------------
Total Investments
in Marketable
Securities $ 3,213,310 $ 1,183 $ (70,642) $3,143,851 $ 472,344 $2,671,507
============== ============== ============= ============== ============== =============
As discussed in Note 1, the Company adopted SFAS 115 as of March 31,
1995. All of the above investments are considered "available for sale".
The resultant differences between cost and fair value, net of taxes,
have been reflected as a separate component of Stockholders' Equity.
The amortized cost and estimated fair value of marketable securities, by
contractual maturity date, are listed below. Expected maturities may
differ from contracted maturities because borrowers may have the right
to call or prepay obligations with or without penalties.
Amortized Aggregate
Cost Fair Value
--------------- ---------------
Investments available for sale:
Due in one year or less $ 506,679 $ 506,633
Due after one year through five years 1,373,954 1,363,047
Due after five years through ten - -
years
Due after ten years - -
=============== ===============
$1,880,633 $1,869,380
=============== ===============
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
March 31,
--------------------------------------------
1996 1995
Automobiles $ 97,811 $ 16,901
Equipment, furniture and fixtures 8,101,861 4,725,444
Leasehold improvements 382,938 300,272
-------------------- -------------------
8,582,610 5,042,617
Less: Accumulated depreciation
and amortization 3,550,346 2,639,234
-------------------- -------------------
5,032,264 2,403,383
-------------------- -------------------
Assets under capital leases:
Cost 3,300,093 1,657,220
Less: Accumulated amortization 1,529,559 1,194,693
-------------------- -------------------
1,770,534 462,527
-------------------- -------------------
Total Property and Equipment, net $ 6,802,798 $ 2,865,910
==================== ===================
Amortization expense on assets under capital leases for the years ended
March 31, 1996, 1995 and 1994 was $334,866, $289,765, and $357,370,
respectively. Depreciation expense on property and equipment other than
under capital leases for the years ended March 31, 1996, 1995 and 1994
was $911,112, $515,596, and $584,285, respectively.
During fiscal 1996, the Company capitalized $2,918,076 related to the
development and implementation of its proprietary relational database
and interactive operating software. The Company is amortizing the cost
of this software over its estimated useful life not to exceed five
years.
5. COLLATERAL SECURITY FUND
At March 31, 1996 and 1995, a former insurance carrier of the Company,
is holding $199,389 in escrow accounts as collateral for the
performance of the administrative runoff of outstanding contracts. Such
amounts are returnable to the Company when the contracts expire under
this policy.
6. SPLIT DOLLAR LIFE INSURANCE POLICIES
As of March 31, 1996 and 1995, the Company made payments on split
dollar insurance policies on the lives of five officers of the Company.
Included in other assets non-current is the cash surrender value of
these policies totaling $683,893 and $698,338, as of March 31, 1996 and
1995 respectively. The Company will receive a refund of all
split-dollar premiums advanced. The Company is the beneficiary of any
proceeds of the policies up to the amount of premiums paid and interest
earned thereon.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consists of the following:
March 31,
------------------------------------------
1996 1995
Capital lease obligations - for property and
equipment payable monthly with interest
rates ranging from 9.1% to 13.4% through 2001 $ 1,768,475 $ 490,343
Installment note - secured by equipment with an undepreciated cost of
$5,164 payable in equal monthly installments of $393 including
interest at 5.44% through
February, 1997. 4,190 8,505
-------------------- ------------------
1,772,665 498,848
Less: Current maturities 648,650 205,200
-------------------- ------------------
Long-term portion $ 1,124,015 $ 293,648
==================== ==================
The aggregate amounts of maturities at March 31, 1996 were as follows:
Fiscal Year Installment Note Minimum Future
Lease Payments
1997 $ 4,190 $ 806,507
1998 - 657,842
1999 - 384,195
2000 - 187,932
2001 - 53,105
Thereafter - -
------------------------ --------------
4,190 2,089,581
Less amount representing
interest - 321,106
======================== ==============
Net $ 4,190 $1,768,475
======================== ==============
The capital lease obligations are collateralized by the property and
equipment related to the underlying leases.
8. INCOME TAXES
A reconciliation of the income tax provision to the amount computed
using the federal statutory rate is as follows:
March 31,
-------------------------------- -- ---------------------------- --- ------------------------------
1996 1995 1994
-------------------------------- -- ---------------------------- --- ------------------------------
Federal statutory rate $ 1,411,324 35.0% $ 1,681,513 35.0% $ 351,000 35.0%
State and local income
taxes net of federal tax
benefit 123,728 3.0 101,141 2.1 70,000 6.9
Amortization of excess cost
over net assets acquired 90,647 2.3 90,648 1.9 - -
Other
(323,419) (8.0) (69,161) (1.5) 2,656 0.2
Benefit for recognition of
tax deductibility of prior
years' amortization of
acquired customer list - - - - (312,000) (31.0)
Loss of foreign joint venture 335,212 8.3 104,395 2.2 188,000 18.7
------------- ----------- ------------- ------------ ------------ ------------
Provision for income taxes $1,637,492 40.6% $ 1,908,536 39.7% $299,656 29.8%
============= =========== ============= ============ ============ ============
The components of tax expense are as follows:
For the Year Ended 3/31/96:
Current Deferred Provision
----------------- ----------------- ----------------
Federal $ 2,479,759 $ (966,087) $ 1,513,672
State 160,185 ( 36,365) 123,820
----------------- ----------------- ----------------
Total $ 2,639,944 $ (1,002,452) $ 1,637,492
================= ================= ================
For the Year Ended 3/31/95:
Current Deferred Provision
-------------- ----------------- ----------------
Federal $ 2,076,907 $ (242,100) $ 1,834,807
State 101,141 ( 27,412) 73,729
-------------- ----------------- ----------------
Total $ 2,178,048 $ (269,512) $ 1,908,536
============== ================= ================
For the Year Ended 3/31/94:
Current Deferred Provision
-------------- ----------------- ----------------
Federal $ 527,656 $ (294,000) $ 233,656
State 99,000 (33,000) 66,000
-------------- ----------------- ----------------
Total $ 626,656 $ (327,000) $ 299,656
============== ================= ================
In accordance with SFAS 109, deferred income tax assets and liabilities reflect
the impact of temporary differences between values recorded as assets and
liabilities for financial reporting purposes and values utilized for
remeasurement in accordance with tax laws. The components of the net deferred
asset are as follows:
March 31,
------------------- -- -------------------
1996 1995
Deferred Tax Assets:
Deferred revenue $ 1,418,018 $ 963,475
Deferred rent 169,857 171,696
Provision for doubtful accounts 156,000 -
Reserve for customer refunds 159,327 -
Unrealized loss on securities 4,389 27,089
Foreign loss benefit 1,111,804 -
Other 60,959 55,283
------------------- -------------------
------------------- -------------------
Total assets 3,080,354 1,217,543
------------------- -------------------
Deferred Tax Liabilities:
Excess of tax over book depreciation 44,500 102,659
Section 174 expense 1,004,319
Installment sales - 85,801
------------------- -------------------
Total liabilities 1,048,819 188,460
------------------- -------------------
Net deferred tax assets $ 2,031,535 $ 1,029,083
=================== ===================
Management believes that it is more likely than not that the deferred tax assets
will be realized and therefore no valuation allowance is considered necessary.
Management expects to realize the foreign loss benefit, which has an indefinite
carryforward period, against the gain on the sale of its foreign joint venture
interest to be recognized in the first quarter of fiscal 1997 (see Note 12) and
other future foreign income.
As discussed in Note 1, the Company adopted SFAS No. 109, during the fiscal
year ended March 31, 1994. The effect of adopting SFAS No. 109 did not have a
material impact on the Company's financial position or results of operations
for the year ended March 31, 1994.
9. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments - The Company leases office and warehouse
space under noncancellable operating leases. These leases include
scheduled rent increases over their respective terms. The accompanying
consolidated statements of operations reflect rent expense on a
straight-line basis over the lease terms, which differ from the cash
payments required. Rent expense charged to operations for the years
ended March 31, 1996, 1995 and 1994 was $1,371,446, $894,121, and
$730,917, respectively.
Future minimum lease commitments as at March 31, 1996 are as follows:
1997 $1,476,552
1998 1,483,001
1999 1,432,358
2000 1,081,294
2001 972,757
Thereafter through 2004 2,538,208
================
$8,984,170
================
Employment Contracts - The Company entered into employment agreements
with its officers and certain key employees which will provide for
aggregate annual salaries of approximately $1,752,150. Certain
agreements call for (i) annual increases (ii) cost of living increases,
and (iii) additional compensation, but only if certain defined
performance levels are attained. This additional compensation is to be
paid in the form of cash and or Company common stock.
Bonus Incentive Plans - The Company has bonus incentive plans designed
to reward key management personnel with bonuses based on the attainment
of specified operating goals. Total bonuses under the bonus incentive
plans for the years ended March 31, 1996, 1995 and 1994, were $
405,948, $1,413,057, and $46,669, respectively.
Profit Sharing Arrangement - For the fiscal years ended March 31, 1996,
1995 and 1994 the Company accrued for profit sharing in the
amounts of $(865,000), $2,676,001, and $1,364,089, respectively.
Such amounts are included in the financial statements in other
income/(expense). (refer to Note 11)The accrued profit sharing due
the Company as of March 31, 1996 and 1995 is $1,820,791 and
$4,467,104, and such amounts are included in other receivables.
Bank Line of Credit - The Company has a revolving credit agreement with
a bank which provides for a maximum aggregate borrowing up to
$10,000,000 with interest at the bank's prime rate or LIBOR plus 2%. As
of March 31, 1996 the Company had no outstanding borrowings under this
agreement.
Letters of Credit - At March 31, 1996, the Company was contingently
liable for letters of credit which are as follows:
(i) Standby letter of credit in the amount of $42,623 issued to
the landlord in lieu of a rent security deposit.
(ii) Standby letter of credit in the amount of $16,339 issued to
a lessor on certain equipment leased. The Company has
pledged funds in a certificate of deposit as collateral for
the letter of credit.
Litigation -
(i) In 1989, a lawsuit was filed in an Illinois court against a
subsidiary of the Company by a former agent alleging breach of
contract. While the complaint does not specify the dollar
amounts of its alleged damages, the Plaintiff retained an
expert witness who estimates the Plaintiff's damages in excess
of $9 million. Recently, the District Court ruled that the
report from Plaintiff's damage expert was not admissible at
trial. This ruling would preclude Plaintiff's expert from
offering trial testimony based on legal theories contained in
his report. The Company has retained its own economic expert
who will directly refute the magnitude of the plaintiff's
damages. The Company's expert has concluded that the maximum
amount recoverable by the Plaintiff, if any, is less than $1
million after allowances of all appropriate offsets. The
Company intends to vigorously defend this lawsuit. No trial
date has been set as yet.
In February 1996, the Plaintiff in this matter filed another
lawsuit in an Illinois court against a subsidiary of the
Company, the parent Company, the parent Company's Chairman and
the parent Company's President alleging that the Defendants
tortuously interfered with the Plaintiff's business
relationships after the Plaintiff was terminated as an agent.
The Plaintiff seeks to recover commissions that it contends it
would have earned if the Defendants had not precluded the
Plaintiff from servicing certain accounts after the
Plaintiff's termination. In the Complaint the Plaintiff is
seeking $8 million in compensatory damages. The Plaintiff also
seeks to recover punitive damages in the amount of $24
million. All of the Defendants deny and dispute Plaintiff's
claims against them in this case, and they intend to
vigorously defend and oppose those claims.
(ii) In December 1993, a lawsuit was filed by a former officer and
director of the Company, David Robertson ,against the Company
and one of its subsidiaries in a Texas Court. The matter is
currently pending before the American Arbitration Association
in Connecticut. Robertson has alleged that the Company
wrongfully terminated an employment agreement between
Robertson and WDBS, and that the Company engaged in tortuous
interference and fraud. Robertson has requested damages
ranging from $450,000 to $5 million which includes his request
for punitive damages. The Company has denied all material
allegations in the claims. The Company has asserted a
counterclaim in the amount of approximately $340,000 for
reimbursement of attorneys' fees advanced by it on behalf of
Robertson in connection with certain other actions. Management
intends to vigorously defend against Robertson's claims and to
vigorously prosecute its counterclaims. No hearing is
presently scheduled on this matter.
Management believes that the ultimate outcome of these matters
will not have a substantial impact on the operations of the
company.
10. CAPITAL STOCK
Stock Options and Stock Option Plan - Under the Employee Incentive
Stock Option Plan (the "Plan"), there are 300,000 shares of the
Company's common stock reserved for issuance to employees (including
officers). The options are to be granted at an exercise price not less
than 100% of the fair market value of the Company's common stock at
date of grant. The number of shares granted, terms of exercise, and
expiration dates are to be decided at the date of grant of each option
by the Company's Board of Directors. The Plan will terminate in
November 1998 unless sooner terminated by the Board of Directors.
On April 16, 1992 the Company's Board of Directors and subsequently on
October 22, 1992 the shareholders of the Company at the annual meeting
voted to approve stock options to three directors (two of whom are
officers and one is a former officer of the Company). The stock options
entitle the three Directors to purchase an aggregate of 3,000,000
shares of the Company's common stock at an exercise price of $2.6875
per share; the market price at the date of grant.
The term of the options is five (5) years from the date on which they
become exercisable or thirty days after termination of employment,
whichever occurs earlier. Of the total options granted, fifty percent
(50%) may be exercised beginning one year following October 22, 1992 in
increments of 10% per year for a five-year period.
The portions of the options that are based upon the Company's earnings,
consisting of fifty percent (50%) of the total options
granted, became exercisable on October 22, 1995.
Stock options granted during the years ended March 31, are as follows:
March 31,
----------------- -- ------------------ -- ---------------------
1996 1995 1994
Options outstanding at beginning of
year - shares 3,233,500 3,237,833 3,214,500
Options granted 9,524 91,667 121,833
Options canceled - (21,000) (58,000)
Options exercised (25,000) (75,000) (40,500)
----------------- ------------------ ---------------------
Options outstanding
at end of year 3,218,024 3,233,500 3,237,833
================= ================== =====================
Exercise price options outstanding $1.63-$6.38 $1.63-$6.38 $1.63-$6.38
================= ================== =====================
Exercise price of options exercised $2.50 $2.50 $1.63-$2.50
================= ================== =====================
In October 1995 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation. This statement establishes new financial
accounting and reporting standards for stock-based employee
compensation plans, including stock option and stock purchase plans.
Compensation resulting from the award of stock-based compensation must
be determined based on the fair value of consideration received or fair
value of the equity instrument issued, whichever is more reliably
measurable. Such compensation expense, net of income taxes, may be
recognized in the Statement of Operations over the service period of
the employee (generally the vesting period). In lieu of recording such
compensation expense, entities are permitted to disclose its pro-forma
impact, net of income taxes, on reported net income and earnings per
share. Entities choosing such disclosure will continue to measure
compensation expense from stock-based compensation in the Statement of
Operations based on the intrinsic value method prescribed in Accounting
Principles Board No. 25, Accounting for Stock Issued to Employee.
Management is evaluating the effect of the new pronouncement on its
stock option plans and has not determined which option will be utilized when
implemented.
11. OTHER INCOME/(EXPENSE)
Other income/(expense) is comprised of the following:
March 31,
-------------------------------------------------------------
1996 1995 1994
Interest and dividend income $622,873 $519,592 $209,301
Interest expense (182,523) (88,032) (146,530)
Profit sharing (refer to Note 9) (865,000) 2,676,001 1,364,089
Write-off note receivable (222,845) - -
Miscellaneous (4,125) - -
------------------ ----------------- -----------------
$(651,620) $3,107,561 $1,426,860
================== ================= =================
Profit Sharing amounts were reflected as a component of Direct Costs in prior
years' financial statements.
12. JOINT VENTURE AGREEMENT AND SALE
In July, 1993, the Company and American International Group Inc.
("AIG") formed a corporate joint venture, Techmark Services Ltd.
("Techmark" or the "Joint Venture") owned fifty-one percent (51%) by
AIG and forty-nine percent (49%) by the Company.
In conjunction with the foregoing alliance, in October, 1993, AIG
purchased, for a price of $6,430,000, options and a special issue of
preferred stock which was convertible into an issue of new shares of
common stock which, subsequent to its issuance, would be equivalent to
twenty percent (20%) of the Company's issued and outstanding common
stock. Under the terms of the purchase agreement, AIG had the right to
purchase an increased interest in the Company, to a maximum of thirty
percent (30%) of the Company's issued and outstanding common stock, if
certain operating goals were achieved by the Company.
On April 18, 1996, the Company and AIG consumated an agreement for the
termination of the Techmark Joint Venture (the "Agreement"). Under the
terms of the Agreement, AIG agreed to purchase the Company's forty-nine
(49%) interest in the joint venture for approximately $3.8 million and
for the Company to repurchase the 3,234,697 shares of convertible
preferred stock held by AIG for its original redemption value of
$6,430,000 and further relinquish their rights to other options under
the original agreement. As a result of this transaction, the Company no
longer has any investment in or liability to the Joint Venture and will
no longer record any equity in the operations of the Joint Venture. The
redemption value will be offset by the amount due the Company from the
sale of its investment, with the net amount due AIG of $2,395,960
resulting in a three year, non-interest bearing note payable in 11
equal quarterly installments of $205,000 commencing June 30, 1996 with
a final installment of $140,960 due March 1999. In the event of default
by the Company under the note payable, the Company would be required to
reissue to AIG preferred stock for the remaining amount due at the
default date.
At March 31, 1996, the Company's carrying value of its investment
amounted to $1,885,674 which will result in a gain on the sale of the
investment of $1,876,480, the excess of the proceeds over the carrying
value, to be recognized in the first quarter of fiscal 1997.
Also, as part of the agreement, AIG paid the Company $1,480,000 related
to amounts due the Company as of March 31, 1996, under its profit
sharing arrangement. In connection with this payment, the Company
issued an irrevocable letter of credit to the benefit of AIG through
December 2002 which can be drawn upon by AIG in the event the ultimate
profit sharing amount due the Company is less than the amount
previously paid. It is anticipated that no amounts will be due AIG
under the letter of credit.
13. ACQUISITION
In July of 1995, Warrantech International, Inc., acquired Home
Guarantee Corporation Plc (subsequently renamed Warrantech Europe Plc.)
a British Company, which markets home warranty products, as well as,
other warranty products similar to those marketed by the Company in the
United States. The acquisition was accounted for as a purchase and the
resultant goodwill amounting to $695,800 is being amortized over a 10
year period.
14. SIGNIFICANT CUSTOMERS
The Company has two significant customers that accounted for
approximately 19% of consolidated gross revenues for the year ended
March 31, 1996 and one customer that accounted for approximately 10%
and 11% of consolidated gross revenues for the years ended March 31,
1995 and 1994, respectively.
15. RELATED PARTY TRANSACTION
During the years ended March 31, 1996 and 1995 the Company recognized
net insurance expense of $27,774,163, $15,893,173, respectively for
insurance coverage provided by AIG for certain service contract
programs. At March 31, 1996 and 1995 the Company had a receivable for
accrued profit sharing from AIG of $1,480,000 and $1,524,920,
respectively.
================================================================================
16. Quarterly Financial Data (Unaudited)
================================================================================
The following fiscal 1996 quarterly financial information for each of
the three month periods ended June 30, September 30, December 31, 1995
and 1994 and March 31, 1996 and 1995 is unaudited. However, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results
shown.
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, September 30, December 31, March 31,
-------- ------------- ------------ ---------
1995 1994 1995 1994 1995 1994 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
Net revenues $19,994,221 $13,939,184 $23,417,612 $17,018,432 $34,396,845 $20,202,935 $31,272,046 $19,378,774
Income from
operations 1,487,194 52,333 1,410,907 289,917 2,780,482 678,391 (36,861) 974,394
Income
before provision
for income taxes 1,390,502 968,155 1,095,485 834,275 3,016,148 1,271,041 (1,469,781)(1) 1,730,853
Net income $650,460 $ 618,813 $607,503 $539,652 $1,626,809 $1,032,696 $ (489,910)(2)$ 704,627(3)
Earnings per
share:
Primary $.04 $.04 $.04 $.04 $.10 $.07 ($.04) $.04
Fully Diluted $.04 $.04 $.04 $.03 $.09 $.06 ($.03) $.04
(1) As a result of renegotiation of the Company's profit sharing agreements,
and a reexamination of it's current experience, the Company recorded a
charge of $1,300,000 during the fourth quarter of fiscal 1996. In
addition, the Company reserved for the potential uncollectability of a
note receivable in the amount of $222,845 related to a prior year's sale
of a business.
(2) Based on the agreement to sell the Techmark Joint Venture (see Note 12),
which will result in a gain to be recorded in fiscal 1997, a tax benefit
of $627,000 was recorded in the fourth quarter related to equity losses
of Techmark recognized by the Company.
(3) As a result of reviews with its insurers of profit sharing
calculations, the Company increased its profit sharing income by
approximately $700,000 in the fourth quarter of fiscal 1995.
================================================================================
================================================================================
WARRANTECH CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------ --------------------------------------------------
Column Column Column Column Column
A B C D E
- ------------------------------------------------------------------------------ --------------------------------------------------
- ------------------------------------------------------ ----------------------- --------------------------------------------------
Balance at Additions Deductions Balance at
Description Beginning Charged to Costs Charged to Other End of
of Year and Expense (a) Accounts-Describe Describe (b) Year
- ------------------------------------------------------------------------------------------------------ --------------------------
Year Ended March 31, 1996:
Allowance for doubtful accounts $ 126,115 $ 363,179 $ - $ 39,202 $ 450,092
Year Ended March 31, 1995:
Allowance for doubtful accounts - 427,483 - 301,368 126,115
Year Ended March 31, 1994:
Allowance for doubtful accounts 5,000 10,995 - 15,995 -
(a) Bad debt expense charged to operations pertaining to accounts receivable.
(b) Amount of write-offs during the year.
Item 9. Disagreements on Accounting and Financial Disclosures
The Company's independent public accountants for the fiscal year ended
March 31, 1994 were Deloitte & Touche. On August 11, 1994 the Company's Board of
Directors authorized the dismissal of Deloitte & Touche as its independent
accountants. The Board of Directors of the Company and its audit committee
participated in and approved the decision to dismiss Deloitte & Touche as
independent accountants for the Company.
The report of Deloitte & Touche on the financial statements of the Company
for the fiscal year ended March 31, 1994 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles, except that reference was made to certain
litigation and to a change in the Company's accounting for income taxes to
conform with Statement of Financial Accounting Standards No. 109 in fiscal 1994.
The Company believes that in connection with its audit of the fiscal year
ended March 31, 1994 and through August 11, 1994, there were no disagreements
with Deloitte & Touche on any matter of accounting principles or practices,
financial disclosure or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Deloitte & Touche would have caused them to make
reference thereto in their report on the financial statements for the fiscal
year ended March 31, 1994. In discussions with Deloitte & Touche in connection
with the preparation of the Form 8-K, announcing their dismissal as independent
accountants, Deloitte & Touche informed the Company that there were three issues
raised during the course of their audit of the Company's financial statements
for the fiscal year ended March 31, 1994, which they believe constituted
disagreements. All of these issues were, however, resolved to Deloitte &
Touche's satisfaction in the presentation of the financial statements. The
issues raised by Deloitte & Touche were as follows:
- Profit sharing recognition methodology, whereby Deloitte & Touche
evaluated the Company's methodology for the recognition of profit sharing
which is based on a calculation of profits as determined in accordance
with contractual agreements between the Company and certain insurance
companies, and concluded that the profit sharing calculation methodology
should instead be based on an estimate of ultimate profit, if any, to be
earned under the contractual agreements (contractually stipulated maximum
allowable losses less actuarial estimate of ultimate losses) multiplied by
the ratio of losses paid to date to the actuarial estimate of ultimate
losses to be incurred under the contractual agreements.
- Restriction on auditing scope and procedures, arising out of the
Company's reluctance to have Deloitte & Touche perform an actuarial study
of its profit sharing calculations, because the Company did not believe
that actuarial consultants, unfamiliar with the Company's industry and
business, could properly perform such a study, taking into consideration
all the factors necessary to make an informed judgment in the time
permitted. Nevertheless, the Company acceded to Deloitte & Touche's
request to have such study performed and accepted the findings of the
study as presented to it by Deloitte & Touche.
- Capitalization of start-up costs with respect to the Company's joint
venture, Techmark Services Ltd., formed in July 1993, whereby the Company
inquired as to the appropriateness of the deferral of certain start-up
costs of the joint venture. While there were several discussions relating
to the accounting for such costs, the determination by Deloitte & Touche
that deferral of such costs would be inappropriate was agreed to by the
Company and no adjustment ever was proposed, insisted upon or required by
the Company.
- Consolidation of the Company's joint venture, Techmark Services Ltd.,
whereby the Company requested Deloitte & Touche to consider the
appropriateness of consolidating this significant joint venture. It should
be noted that the Company's interest in such joint venture has from
inception and continues to be accounted for by the Company under the
equity method of accounting approved by Deloitte & Touche and the
Company's request to Deloitte & Touche was a theoretical one, in
contemplation of certain proposed changes in ownership of the joint
venture that have not occurred.
Management and Deloitte & Touche discussed these issues during the course
of the audit and the Board of Directors of the Company was made aware of these
discussions by management. Deloitte & Touche informed the audit committee of its
position on these issues, and the audit committee determined that all of the
issues were resolved to the satisfaction of Deloitte & Touche in the
presentation of all matters included in the financial statements as filed in the
Company's Form 10-K for the fiscal year ended March 31, 1994.
Upon filing a report on Form 8-K with the SEC relating to the dismissal of
Deloitte & Touche, the Company requested that Deloitte & Touche furnish it with
a letter addressed to the Securities and Exchange Commission (the "Commission")
stating whether or not it agreed with the statements contained therein. A copy
of Deloitte & Touche's letter, dated September 30, 1994, is filed as an exhibit
to the amendment filed October 4, 1994 to the Company's report on Form 8-K dated
August 18, 1994.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by Reference to the Company's Definitive Proxy
Statement for its 1996 Annual Meeting of Shareholders to be filed pursuant to
regulation 14A promulgated under the Securities and Exchange Act of 1934, as
amended (the "Proxy Statement").
Item 11. Executive Compensation
Incorporated by Reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by Reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by Reference to the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. and 2. Financial Statements and Financial Statement Schedules: see
accompanying Index to Financial Statements and Financial Statement Schedule,
page 19.
(b) Reports on Form 8-K during the last quarter: None.
(c) Exhibits
3(a) - Certificate of Incorporation filed June 22, 1983. Incorporated by
reference to the Company's Registration Statement on Form S-18,
filed on November 23, 1983, Registration No. 2-88097-NY.
(b) - Certificate of Amendment of Certificate of Incorporation filed
October 24, 1983. Incorporated by reference to the Company's
Registration Statement on Form S-18, filed on November 23,
1983, Registration No. 2-88097-NY.
(c) - Certificate of Amendment of Certificate of Incorporation dated
June 29, 1987. Incorporated by reference to the Company's Form
8 Amendment to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1987, file no. 0-13084.
(d) - Certificate of Designation of the Company with respect to the
Preferred Stock as filed with the Secretary of State of Delaware on
October 12, 1993. Incorporated by reference to the Company's Report
on Form 10- K for the fiscal year ended March 31, 1994.
(e) - By-laws of the Company, as amended. Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 10, 1988, file no. 0-13084.
10(a) - Form of Sales Distributor Agreement. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985, file no. 0-13084.
(b) - Form of Service Center Agreement. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985, file no. 0-13084.
(c) - Form of Dealer Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985, file no. 0-13084.
(d) - Form of Sales Agent Agreement. Incorporated by reference to the
Company's Registration Statement on Form S-1, filed on September 5,
1986, Registration No. 3-8517.
(e) - 1988 Employee Incentive Stock Option Plan of the Company.
(f) - Employment Agreement dated April 1, 1996, between the Company and
Michael J. Salpeter.
(g) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Inacom Corporation. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31, 1992, file
no. 0-13084.
(h) - Insurance policy between the Company and Houston
General Insurance Company pertaining to service
contracts issued by Damark Inc. Incorporated by
reference to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1992, file no.
0-13084.
(i) - Insurance policy between the Company and Houston
General Insurance Company pertaining to service
contracts written in all states except Florida.
(j) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by CompUSA.
(k) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,
Inc.(excluding Inacom Corporation).
(l) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,
Inc. through CompUSA.
(m) - Settlement and Runoff Agreement between the Company, its
wholly owned subsidiaries Warrantech Dealer Based Services, Inc.
and Warrantech Consumer Product Services, Inc. and American
Hardware Mutual Insurance Company ("AHM") regarding
termination of insurance coverage by AHM. (This document has
been omitted and accorded confidential treatment by the Securities
and Exchange Commission pursuant to an Order Granting
Application Pursuant to Rule 24b-2 Under the Securities Exchange
Act of 1934, As Amended, Respecting Confidential Treatment of
Exhibits 10(v) and 10(w) Contained in Registrant's Form 10-K for
the fiscal year ended March 31, 1992, issued by the Division of
Corporation Finance.)
(n)- Revolving Loan Agreement between the Company and Peoples Bank.
(o)- Administrator Agreement - Consumer Products,
between Houston General Insurance Company and
Warrantech Consumer Product Services, Inc. (This
document has been omitted and has been filed
separately with the Securities and Exchange
Commission pursuant to a confidential Treatment
Request.)
(p)- General Agency Agreement between American International Group, Inc.
and Warrantech Automotive. Inc. (This document has been omitted and
has been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Request.)
(q)- Master Agreement between American International Group, Inc. and the
Company (Section 1.6 of this document has been omitted and has been
filed separately with the Securities and Exchange Commission pursuant
to a Confidential Treatment Request.)
11 - Statements re: computation of per share earnings.
21 - Subsidiaries of the Company.
27 - Financial Data Schedule.
28 - Stipulation and Consent Order of Illinois. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1988, file no. 0-13084.
99(a)- Complaint in Action entitled David Robertson v. Warrantech
Corporation and Warrantech Automotive Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1993; file no. 0-13084.
(b)- Amended Complaint in Action entitled The Oak Agency, Inc. and The
Oak Financial Services,Inc. vs. Warrantech Dealer Based Services,
Inc., Case No. 91 C 6677, filed in the United States District Court for
the Northern District of Illinois.
(c)- Complaint in Action entitled The Oak Agency, Inc., et al. v.
Warrantech, Inc., et al., Case No. 96 C 1106, filed in the United
States District Court for the Northern District of Illinois.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized.
WARRANTECH CORPORATION
Dated: June 28, 1996 By: Joel San Antonio
------------------------------
Joel San Antonio
Chairman of The Board and
Principal Executive Officer
Dated: June 28, 1996 By: Bernard J. White
-------------------------------
Bernard J. White, Vice President, Finance
& Treasurer/ Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
Joel San Antonio Principal Executive Officer, June 28, 1996
Chairman of the Board and Director
- ------------------------------------------------
(Joel San Antonio)
William Tweed Vice Chairman and Director June 28, 1996
- ------------------------------------------------
(William Tweed)
Michael Salpeter President and Director June 28, 1996
- ------------------------------------------------
(Michael Salpeter)
Desiree Kim Caban Secretary June 28, 1996
- ------------------------------------------------
(Desiree Kim Caban)
Jeffrey J. White Director June 28, 1996
- ------------------------------------------------
(Jeffrey J. White)
Lawrence Richenstein Director June 28, 1996
- ------------------------------------------------
(Lawrence Richenstein)
Exhibit List
3(a)- Certificate of Incorporation filed June 22, 1983. Incorporated by
reference to the Company's Registration Statement on Form S-18,
filed on November 23, 1983, Registration No. 2-88097-NY.
(b) - Certificate of Amendment of Certificate of Incorporation filed
October 24, 1983. Incorporated by reference to the Company's
Registration Statement on Form S-18, filed on November 23,
1983, Registration No. 2-88097-NY.
(c) - Certificate of Amendment of Certificate of Incorporation dated
June 29, 1987. Incorporated by reference to the Company's Form
8 Amendment to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1987, file no. 0-13084.
(d)- Certificate of Designation of the Company with
respect to the Preferred Stock as filed with the
Secretary of State of Delaware on October 12, 1993.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 1994.
(e)- By-laws of the Company, as amended. Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 10, 1988, file no. 0-13084.
10(a)- Form of Sales Distributor Agreement. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985, file no. 0-13084.
(b)- Form of Service Center Agreement, Incorported by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985, file no. 0-13084.
(c)- Form of Dealer Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985, file no. 0-13084.
(d)- Form of Sales Agent Agreement. Incorporated by reference to the
Company's Registration Statement on Form S-1, filed on
September 5, 1986, Registration No. 3-8517.
(e)- 1988 Employee Incentive Stock Option Plan of the Company.
(f)- Employment Agreement dated April 1, 1996, between
the Company and Michael J. Salpeter.
(g)- Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Inacom Corporation. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31, 1992, file
no. 0-13084.
(h)-Insurance policy between the Company and Houston
General Insurance Company pertaining to service
contracts issued by Damark Inc. Incorporated by
reference to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1992, file no.
0-13084
(i)-Insurance policy between the Company and Houston
General Insurance Company pertaining to service
contracts written in all states except Florida.
(j)-Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by CompUSA.
(k)-Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,Inc.
(excluding Inacom Corporation).
(l)-Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,Inc.
through CompUSA.
(m)-Settlement and Runoff Agreement between the Company, its
wholly owned subsidiaries Warrantech Dealer Based Services, Inc.
and Warrantech Consumer Product Services, Inc. and American
Hardware Mutual Insurance Company ("AHM") regarding
termination of insurance coverage by AHM. (This document has
been omitted and accorded confidential treatment by the Securities
and Exchange Commission pursuant to an Order Granting
Application Pursuant to Rule 24b-2 Under the Securities Exchange
Act of 1934, As Amended, Respecting Confidential Treatment of
Exhibits 10(v) and 10(w) Contained in Registrant's Form 10-K for
the fiscal year ended March 31, 1992, issued by the Division of
Corporation Finance.)
(n)-Revolving Loan Agreement between the Company and Peoples Bank.
(o)-Administrator Agreement - Consumer Products,
between Houston General Insurance Company and
Warrantech Consumer Product Services, Inc. (This
document has been omitted and has been filed
separately with the Securities and Exchange
Commission pursuant to a confidential Treatment
Request.)
(p)-General Agency Agreement between American International Group, Inc.
and Warrantech Automotive. Inc. (This document has been omitted and
has been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Request.)
(q)- Master Agreement between American International Group, Inc. and the
Company (Section 1.6 of this document has been omitted and has been
filed separately with the Securities and Exchange Commission pursuant
to a Confidential Treatment Request.)
11 - Statements re: computation of per share earnings.
21 - Subsidiaries of the Company.
27 - Financial Data Schedule
28 - Stipulation and Consent Order of Illinois. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1988, file no. 0-13084.
99(a) - Complaint in Action entitled David Robertson v. Warrantech
Corporation and Warrantech Automotive Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1993; file no. 0-13084.
(b)- Amended Complaint in Action entitled The Oak Agency, Inc. and The
Oak Financial Services,Inc. vs. Warrantech Dealer Based Services,
Inc., Case No. 91 C 6677, filed in the United States District Court for
the Northern District of Illinois.
(c)- Complaint in Action entitled The Oak Agency, Inc., et al. v.
Warrantech, Inc., et al., Case No. 96 C 1106, filed in the United States
District Court for the Northern District of Illinois.