- -
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from _______ to _______
Commission File No. 0-13084
WARRANTECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3178732
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
150 Westpark Way Euless, Texas 76040
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (800) 544-9510
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 None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.007 par value
(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 |X|.
The number of shares outstanding of the Registrant's common stock is
15,313,165 as of May 29, 2002.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $10,106,689 as of May 29, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders 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 46
Document contains 50 pages
1
WARRANTECH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........... 8
PART II
Item 5. Market of the Registrant's Common Equity and Related
Stockholder Matters .......................................... 9
Item 6. Selected Financial Data....................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Item 7A. Qualitative and Quantitative Disclosures About Market Risk.... 19
Item 8. Financial Statements and Supplementary Data................... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.......................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant ........... 45
Item 11. Executive Compensation........................................ 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 45
Item 13. Certain Relationships and Related Transactions................ 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................... 46
Signatures ............................................................ 49
2
PART I
Warrantech Corporation (a Delaware corporation) and its subsidiaries
(collectively, "Warrantech" or the "Company") maintain executive offices and
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 (800) 544-9510.
Item 1. Business
Warrantech, through its wholly owned subsidiaries, markets and administers
service contracts and extended warranties. The Company is a third party
administrator for a variety of dealer/clients in selected industries and offers
call center and technical computer services. The Company assists dealer/clients
in obtaining insurance policies from highly rated independent insurance
companies for all contracts and programs offered. The insurance company is then
responsible for the cost of repairs or replacements for the contracts
administered by Warrantech.
The Company's service contract programs benefit consumers by providing them with
expanded and/or extended product coverage for a specified period of time (and/or
mileage in the case of automobiles and recreational vehicles), similar to that
provided by manufacturers under the terms of their product warranties. Such
coverage generally provides for the repair or replacement of the product, or a
component thereof, in the event of its failure. The Company's service contract
programs benefit the dealer/clients by providing enhanced value to the goods and
services they offer and by providing them with the opportunity for increased
revenue and income while outsourcing the costs and responsibilities of operating
an extended warranty program.
The service contracts, extended warranties and replacement contracts generally
have terms ranging from three (3) to eighty-four (84) months. Since the Company
acts solely as a third party administrator on behalf of the dealer/clients and
insurance companies, the actual repairs and/or replacements required under the
agreements are performed by independent third party authorized repair facilities
or dealers. The cost of these repairs is generally paid for by the insurance
companies which have the ultimate responsibility for the claims or by Butler
Financial Solutions, LLC ("Butler"), if Reliance Insurance Company ("Reliance")
or the Company is the obligor. The insurance policy indemnifies the
dealer/clients against losses resulting from service contract claims and
protects the consumer by ensuring their claims will be paid.
Essential to Warrantech's success is its ability to capture, maintain, track and
analyze all relevant information regarding its service contracts. To support
this function, Warrantech operates proprietary software developed internally
that allows the tracking for millions of service contracts and consists of
custom designed relational databases with interactive capabilities. This
configuration provides ample capacity and processing speed for current
requirements. The software programs allows for the development of current and
historical statistical data, which are used to monitor its service contract
program performances and support the significant future growth.
The Company operates in three major business segments: Automotive, Consumer
Products and International, discussed below.
Warrantech Automotive Segment
The Company's Automotive segment 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,
light trucks, motorcycles, recreational vehicles and automotive components.
These products are sold principally by franchised and independent automobile and
motorcycle dealers, leasing companies, repair facilities, retail stores,
financial institutions and other specialty marketers.
3
Additionally, Warrantech Automotive 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.
Warrantech Automotive employs sales personnel and 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 100 agents and
sub-agents in 46 states and provinces in the United States and in Canada.
The VSC is a contract between the dealer/lessor or third party obligor and the
vehicle purchaser/lessee (and, for the State of Florida only, Warrantech
Automotive) that offers coverage for a term ranging from three (3) to
eighty-four (84) months and/or 3,000 to 100,000 miles. Coverage is available in
the event of the failure of a broad range of mechanical components occurring
during the term of the VSC, exclusive of failures covered by a manufacturers
warranty.
Under the programs marketed and administered by Warrantech Automotive, it
provides services to the dealer, such as developing and distribution of
marketing materials, processing dealer produced VSC's and administering and
paying of claims filed by contract holders under the terms of their VSC.
Under the Warrantech Automotive VSC programs, liability is borne by insurers who
have issued insurance policies assuming this risk in exchange for premiums and
fees. Currently, Great American Insurance Company ("GAIC") insures the
Warrantech Automotive's VSC programs. The Company also has an agreement with
Heritage Insurance Risk Retention Group and is reinsured by one of North
America's largest reinsurance companies on reinsurance programs offered to large
automobile dealerships. Previously, a portion of the Warrantech VSC programs
were insured by either Reliance (see "Management's Discussion and Analysis -
Significant Insurer in Liquidation" below), the New Hampshire Insurance Company
or other American International Group, Inc. ("AIG") member companies.
Warrantech Consumer Products Segment
The Company's Consumer Products segment develops, markets and administers
consumer product extended warranties and product replacement plans on household
appliances, electronics, including home appliances, consumer electronics,
televisions, computers and home office equipment. The Company administers
warranties and replacement plans sold principally through retailers,
distributors, manufacturers, utility companies, financial institutions and other
specialty marketers. Warrantech also markets these warranties and plans directly
to the ultimate consumer on behalf of the retailer/dealer and for manufacturer's
programs through telemarketing and direct mail campaigns. This segment also
offers call center and technical computer services. The extended warranties and
product replacement plans administered by Warrantech Consumer Products are
service contracts between the purchaser and the retailer/dealer and/or the
insurance company that typically offers coverage ranging from twelve (12) to
sixty (60) months.
The Warrantech Consumer Products segment also develops, markets and administers
service contract programs in the United States and Canada covering mechanical
breakdowns of the working systems and components in homes. The core program
protects homeowners against the cost of repairs in case of a breakdown of one or
more of the major home systems including heating and air conditioning, plumbing,
electrical and built-in appliances. The Warrantech Home Service warranty is one
of the first of its kind. It offers greater protection than was previously
available and it provides this security at a lower cost.
The programs marketed and administered by Warrantech Consumer Products require
that the selling dealer, distributor or manufacturer enter into an agreement
with Warrantech that outlines the duties of each party. Those duties
specifically assumed by Warrantech Consumer Products include the development and
distribution of marketing materials, sales and motivational training, processing
of service contracts, operating a call center and the adjustment and payment of
claims. Warrantech has also entered into service center agreements with
independent third party authorized repair facilities located throughout the
United States and Canada.
4
Effective February 12, 2000, the Company entered into an agreement with GAIC
pursuant to which GAIC insures any new service contracts issued. Insurance for
service contracts issued between August 1, 1997 until February 12, 2000 are
covered by Cigna Insurance Company.
During the two fiscal years ended March 31, 2001 and 2000, the Consumer Products
segment had one significant customer, Staples the Office Superstore ("Staples"),
which accounted for approximately 23% of gross revenue of this business segment
in each of those fiscal years. Because Warrantech could not reach an agreement
with Staples to extend its agreement on terms which would not erode
profitability of the program, the program expired on February 26, 2001.
Warrantech International Segment
Warrantech International markets and administers the same products and services
outside the United States that Warrantech Automotive and Warrantech Consumer
Products market and administer in the United States and Canada.
Warrantech International also conducts its efforts on a direct basis and has
developed relationships with retailers and distributors throughout the Caribbean
and Central and South America. The Company is currently doing business in Puerto
Rico, Guatemala, Chile and Peru and from July 1995 until September 2000 in the
United Kingdom. The Company's expansion in South American markets will be
facilitated by it's strategic alliance with Atento, a multi-national call center
owned by Spain's Grupo Telefonica, which should allow the Company to readily
enter markets in Latin America where Atento has existing call center operations.
Sales and Marketing
Warrantech's sales and marketing activities are managed by each segment's own
sales and marketing personnel. In certain circumstances, the business segments
have entered into marketing agreements with independent organizations that
solicit dealers at their own expense, and receive a commission on all service
contracts sold by such dealers.
The Warrantech business segments foster awareness of their respective programs
through cooperative advertising programs, which may be jointly funded by
Warrantech and the client/dealer or independent agent.
Sales training and motivational programs are a primary form of specialized
assistance provided by the Company to retailers/dealers, distributors and
manufacturers to assist them in increasing the effectiveness and profitability
of their service contract program sales efforts. The Company also develops
materials and provides educational seminars. These seminars are conducted either
at the client's place of business, an offsite facility 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.
Warrantech also markets directly to the ultimate consumer on behalf of the
retailer/dealer and for manufacturer's programs through telemarketing and direct
mail campaigns. These direct marketing campaigns generate sales through renewals
of expiring contracts and second-effort sales to customers who did not buy an
extended service contract at the time of purchase.
Significant Customers
During the two fiscal years ended March 31, 2001 and 2000, the Company had one
significant customer, Staples, which accounted for approximately 10% of
consolidated gross revenues in each of those years. Because Warrantech could not
reach an agreement with Staples to extend its agreement on terms which would not
erode the profitability of the program, the program expired on February 26,
2001.
5
Competition
Warrantech competes with a number of independent administrators and divisions of
distributors and manufacturers, as well as financial institutions and insurance
companies. The Company 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. However, the Company believes that it occupies a preeminent position
among competitors in its field.
Contract Obligor
In April 2000, the Company formed a relationship with Butler Financial
Solutions, LLC ("Butler"), whereby Butler would assume obligations for all
service contracts where the dealer is not the obligor, including certain
contacts where the Company may have been the obligor. For each of such service
contracts Butler receives fees for its services.
Insurance Coverage
Liability for performance under the terms of service contracts and limited
warranties administered by Warrantech is assumed by the insurance company in
return for agreed upon premiums. This coverage provides indemnification against
loss resulting from service contract claims and protects the consumers by
ensuring that their claims will be paid.
The current insurance protection is provided by highly rated independent
insurance companies. In the United States and Canada, providers include Great
American Insurance Company which is rated A - (Excellent) and Heritage Insurance
Risk Retention Group and reinsured by one of the largest reinsurance companies
in North America, which is an A rated carrier. Other programs have been or are
currently insured by New Hampshire Insurance Company, other AIG member companies
and Tokio Marine & Fire Insurance Company each of which is rated A++ (Superior)
and CIGNA Insurance Company owned by (ACE) which is rated A - (Excellent).
Internationally, insurance protection is provided by Cruz del Sur in Chile, La
Positiva in Peru, and Universal Insurance Company in Puerto Rico, which is rated
A - (Excellent). All ratings for the United States, Canada and Puerto Rico are
made by A.M. Best Company.
In accordance with the arrangements with these insurers, a fixed amount is
remitted by the retailer/dealer to Warrantech and passed on to the carrier for
each service contract or limited warranty sold. The amount is contractually
agreed upon and is based upon actuarial analysis of data collected and
maintained for each type of coverage and contract term. The insured or the
Company is not obligated to the insurer if claims exceed the premiums remitted.
Additionally, agreements between the Company and the insurers may contain
profit-sharing features that permit the Company to share in underwriting profits
earned by the service contract programs. The amounts to be received, if any, are
determined in accordance with certain specified formulae 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. The Company did not accrue or receive any profit
sharing amounts during the 2002, 2001 or 2000 fiscal years. The Company
anticipates that, beginning in fiscal year 2003, the Company will receive profit
sharing as a result of its new agreement with its current carrier.
Federal and State Regulation
The service contract and limited warranty programs developed and marketed by the
Company's subsidiaries and their related operations 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
6
ascertain their applicability to its existing operations, as well as to new
programs that the Company is developing.
Generally, these statutes apply to the scope of service contract coverage and
content of the service contract or limited warranty document. Statutes typically
require that specific wording 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.
Insurance departments 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 does not believe that it or any of its
subsidiaries is an insurer and has no intention of filing the documents and
meeting the capital and surplus requirements that are necessary to obtain such a
license.
There are instances where 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 a
regulatory body that its methods of doing business were not in compliance with
state regulations, 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 an adverse consequence to the Company's operations. However,
within the framework of currently known statutes, the Company does not believe
that this is a present concern.
Intellectual Properties
The Company holds numerous registered United States trademarks, the most
important of which are the "Warrantech" and its stylized "W" logo service marks.
Additional service marks are registered covering subsidiary names and product
names and descriptions. The Company and its trademark counsel keep the
registration for all service marks current.
The Company developed proprietary software that consists of custom designed
relational databases with interactive capabilities. Essential to the success of
Warrantech Automotive and Warrantech Consumer Products is their ability to
capture, maintain, track and analyze all relevant data regarding the contracts
they administer. Development costs associated with this proprietary software
have been capitalized and are being amortized over the expected useful life of
the software.
Employees
The Company and its subsidiaries employed approximately 381 individuals as of
March 31, 2002, a decrease of approximately 75 employees over the preceding
fiscal year. The decrease is attributable to the consolidation and cost
reduction initiatives instituted by the Company. As of May 25, 2002, the Company
had approximately 363 employees. None of the Company's employees are covered by
a collective bargaining agreement. The Company considers its relations with its
employees to be good.
Financial information about foreign and domestic operations
Refer to Item 8 - Consolidated Financial Statements and Supplementary Data, in
this Annual Report, Footnote 17 in the Notes to Consolidated Financial
Statements, for financial information related to the Company's foreign and
domestic operations. Such information is hereby incorporated by reference.
7
Item 2. Properties
The Company's executive offices are located in leased premises at 150 Westpark
Way, Euless, Texas. The premises, consisting of approximately 29,531 square
feet, are leased pursuant to three separate lease agreements. These leases
expire in July 31, 2003 and provide for remaining annual base rent payments
ranging of $415,350 in fiscal year 2003 and $143,598 in fiscal year 2004. These
premises also accommodate the Company's Home Services and Direct Marketing
operations.
The Company also leases an additional 48,053 square feet at 1441 West Airport
Freeway, Euless, Texas. These premises are being leased pursuant to lease
agreements expiring March 31, 2004 and provide for annual base rent of $570,185.
These premises accommodate the Company's Automotive and Consumer Products
operations.
RepairMaster Canada's operations are located in leased premises at 3011 Viking
Way, Suite 215 Richmond BC, Canada pursuant to a lease that expires February 28,
2003. The lease provides for annual base rent of $10,200 for 820 square feet.
Warrantech International's Puerto Rico operations are located in leased premises
at 1225 Ponce de Leon Avenue, Santurce, Puerto Rico pursuant to a lease that
expires March 31, 2003. The lease provides for annual base rent of $54,928 for
3,433 square feet.
Warrantech International's Chile operations are located in leased premises at
Avenida 11 de Septembre No. 1881 Officia No. 1619 Providencia, Santiago, Chile.
This office supports the operations in Chile, and is displayed as the Company's
flagship operation to pursue and help implement the Company's international
expansion strategies throughout South America. The lease provides for monthly
base rent payments of $1,750 for 145 square meters.
The Company is currently negotiating a lease for premises located at 121 Airport
Centre II, Bedford, Texas to replace the office space at 150 Westpark Way and
1441 West Airport Freeway, Euless Texas. The premises consist of 56,696 square
feet. It is anticipated that the lease will provide for annual base rent of
$1,054,545 and will have a term of 10 years.
Item 3. Legal Proceedings
Information regarding legal proceedings is set forth in Note 12 of the Notes to
Consolidated Financial Statements under the subheading "Litigation," which is
hereby incorporated by reference.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of the Company's Stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the Company's
fiscal year ended March 31, 2002.
8
PART II
Item 5. Market for Warrantech's Common Equity and Related Stockholder Matters
The Company's common stock, $.007 par value per share (the "Common Stock")
trades under the symbol "WTEC." Trades are reported on the Over-The-Counter
("OTC") electronic quotation service of the National Association of Securities
Dealers Market Makers. It is the Company's intention to seek to be listed on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
or the American Stock Exchange if and when the Company satisfies the
requirements for listing.
As of May 29, 2002, there were 15,313,165 shares of outstanding Common Stock and
approximately 971 stockholders of record. On that date, the closing bid price
for the Common Stock, as reported on the OTC was $0.66.
Following is a summary of the price range of the Company's Common Stock during
fiscal years 2002 and 2001:
Common Stock
Fiscal 2002 Fiscal 2001
----------- -----------
Quarter High & Low Bid High & Low Bid
------- -------------- --------------
First $ 0.89 $ 0.50 $ 2.00 $ 0.69
Second $ 0.69 $ 0.32 $ 1.63 $ 0.53
Third $ 0.91 $ 0.32 $ 1.02 $ 0.38
Fourth $ 0.85 $ 0.57 $ 0.88 $ 0.53
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.
9
Item 6. Selected Financial Data
The Selected Financial Data should be read in conjunction with the consolidated
financial statements and related notes as of and for the years ended March 31,
2002, 2001 and 2000.
For The Years Ended March 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998 (a)
------------ ------------ ------------ ------------ ------------
Net earned administrative fee $ 37,327,306 $ 49,700,944 $ 43,319,781 $ 50,727,313 $ 62,686,102
============ ============ ============ ============ ============
Profit (loss) from operations $ 2,902,856 $ 2,463,492 ($11,874,287) ($12,232,124) $ 8,513,036
============ ============ ============ ============ ============
Net income (loss) $ 2,256,273 $ 1,866,924 ($ 8,206,183) ($ 7,639,725) $ 5,619,823
============ ============ ============ ============ ============
Basic earnings (loss) per common share $ 0.15 $ 0.12 ($ 0.54) ($ 0.51) $ 0.42
============ ============ ============ ============ ============
Diluted earnings (loss) per common share $ 0.15 $ 0.12 ($ 0.54) ($ 0.51) $ 0.36
============ ============ ============ ============ ============
Cash dividend declared None None None None None
------------ ------------ ------------ ------------ ------------
Total assets $ 77,551,229 $ 97,117,173 $146,921,154 $186,910,270 $152,811,266
============ ============ ============ ============ ============
Long-term debt and
------------ ------------ ------------ ------------ ------------
capital lease obligations $ 957,159 $ 1,209,853 $ 1,668,478 $ 2,420,967 $ 2,153,286
============ ============ ============ ============ ============
Common stockholders' equity $ 5,443,247 $ 3,417,944 $ 1,878,642 $ 10,400,002 $ 21,533,883
============ ============ ============ ============ ============
(a) The financial information for the fiscal year ended March 31, 1998 has been
restated to effect the change in accounting policy adopted in the fiscal year
ended March 31, 1999 for the recognition of revenue on service contracts.
10
WARRANTECH CORPORATION AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Except for the historical information contained herein, the matters discussed
below or elsewhere in this annual report may contain forward-looking statements
that involve risks and uncertainties that could cause actual results to differ
materially from those contemplated by the forward-looking statements. The
Company makes such forward-looking statements under the provisions of the "safe
harbor" section of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements reflect the Company's views and assumptions, based on
information currently available to management. Such views and assumptions are
based on, among other things, the Company's operating and financial performance
over recent years and its expectations about its business for the current and
future fiscal years. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Such statements are
subject to certain risks, uncertainties and assumptions, including, but not
limited to, (a) prevailing economic conditions which may significantly
deteriorate, thereby reducing the demand for the Company's products and
services, (b) availability of technical support personnel or increases in the
rate of turnover of such personnel, resulting from increased demand for such
qualified personnel, (c) changes in the terms or availability of insurance
coverage for the Company's programs, (d) regulatory or legal changes affecting
the Company's business, (e) loss of business from or significant change in
relationships with, any major customer of the Company, (f) the ability to
successfully identify and contract new business opportunities, both domestically
and internationally, (g) the ability to secure necessary capital for general
operating or expansion purposes, (h) the ability of Butler Financial Solutions,
LLC ("Butler") to pay claims under the service contacts insured by Reliance
Insurance Company ("Reliance") or (i) adverse outcomes of litigation, (j)
additionally, if any of the insurance companies which insure the service
contracts marketed and administered by the Company were unable to pay the claims
under the service contracts, it could have a materially adverse effect on the
Company's business. Should one or more of these or any other risks or
uncertainties materialize or develop in a manner adverse to the Company, or
should the Company's underlying assumptions prove incorrect, actual results of
operations, cash flows or the Company's financial condition may vary materially
from those anticipated, estimated or expected.
Warrantech, through its wholly owned subsidiaries, markets and administers
service contracts and extended warranties. The Company is a third party
administrator for a variety of dealer/clients in selected industries and offers
call center and technical computer services. The Company assists dealer/clients
in obtaining insurance policies from highly rated independent insurance
companies for all contracts and programs offered. The insurance company is then
responsible for the cost of repairs or replacements for the contracts
administered by Warrantech.
The Company operates in three major business segments: Automotive, Consumer
Products and International. The Automotive segment markets and administers
extended warranties on automobiles, light trucks, motorcycles, recreational
vehicles and automotive components. These warranties are sold principally by
franchised and independent automobile and motorcycle dealers, leasing companies,
repair facilities, retail stores, financial institutions and other specialty
marketers. The Consumer Products segment develops, markets and administers
consumer product extended warranties and product replacement plans on household
appliances, electronics and homes. These warranties and replacement plans
include home appliances, consumer electronics, televisions, computers, home
office equipment and homes and are sold principally by retailers, distributors,
manufacturers, utility companies and financial institutions. Warrantech also
markets these warranties and plans directly to the ultimate consumer on behalf
of the retailer/dealer and for manufacturing programs through telemarketing and
direct mail campaigns. The International segment markets and administers outside
the United States and Canada predominately the same products and services of
the other business segments. The International segment is currently operating in
Central and South America, Puerto Rico and the Caribbean.
11
The Company's service contract programs benefit consumers by providing them with
expanded and/or extended product coverage for a specified period of time (and/or
mileage in the case of automobiles and recreational vehicles), similar to that
provided by manufacturers under the terms of their product warranties. Such
coverage generally provides for the repair or replacement of the product, or a
component thereof, in the event of its failure. The Company's service contract
programs benefit the dealer/clients by providing enhanced value to the goods and
services they offer and by providing them with the opportunity for increased
revenue and income while outsourcing the costs and responsibilities of operating
an extended warranty program.
The service contracts, extended warranties and replacement contracts generally
have terms ranging from three (3) to eighty-four (84) months. Since the Company
acts solely as a third party administrator on behalf of the dealer/clients and
insurance companies, the actual repairs and/or replacements required under the
agreements are performed by independent third party authorized repair facilities
or dealers. The cost of these repairs is generally paid for by the insurance
companies which have the ultimate responsibility for the claims or by Butler, if
Reliance or the Company is the obligor. The insurance policy indemnifies the
dealer/clients against losses resulting from service contract claims and
protects the consumer by ensuring their claims will be paid.
Dealer/third party obligor service contracts are sales in which the
retailer/dealer or a third party is designated as the obligor. For these service
contract sales, using the proportional performance method, the Company
recognizes revenues in direct proportion to the costs incurred in providing the
service contract programs to the Company's clients. Revenues in amounts
sufficient to meet future administrative costs and a reasonable gross profit
thereon are deferred. Beginning April 1, 2000, substantially all of the
Company's service contract sales are dealer/third party obligor service
contracts.
Revenue for administrative obligor contracts is recognized in accordance with
Financial Accounting Standards Board Technical Bulletin 90-1 ("TB 90-1"),
Accounting for Separately Priced Extended Warranty and Product Maintenance
Contracts, and Statement of Financial Accounting Standards No. 60 ("SFAS 60"),
Accounting and Reporting by Insurance Enterprises. These accounting standards
require the recognition of revenue over the life of the contract on a
straight-line basis, unless sufficient, company-specific, historical evidence
indicates that the cost of performing services under these contracts are
incurred on other than a straight-line basis. The Company is recognizing revenue
on administrative obligor contracts based on company specific historical claims
experience over the life of the contract. In addition, the Company has adopted
Statement of Financial Accounting Standards No. 113 ("SFAS 113"), Accounting and
Reporting for Reinsurance of Short-Duration and Long Duration Contracts. This
requires that insurance premium costs be ratably expensed over the life of the
service contract. However, effective March 31, 2000 the Company has
substantially ceased selling administrative obligor contracts.
Significant Events
Loss of Significant Customers - During the two fiscal years ended March 31, 2001
and 2000, the Company had one significant customer, Staples, which accounted for
approximately 10% of consolidated gross revenues and 23% of the Consumer
Products segment's gross revenues in each of those years. Because Warrantech
could not reach an agreement with Staples to extend its agreement on terms which
would not erode the profitability of the program, the program expired on
February 26, 2001.
Closing of United Kingdom operations - Effective September 30, 2000, the Company
ceased operations in the United Kingdom. The closing was a result of
unprofitable operations.
Results of Operations
The following information should be read in conjunction with the information
contained in the Consolidated Financial Statements and the notes thereto
included in Item 8 of this Annual Report.
12
Fiscal Year Ended March 31, 2002 Compared to the Fiscal Year Ended March 31,
2001
Net earned administrative fees for the year ended March 31, 2002 decreased to
$37,327,306 as compared with $49,700,944 for the year ended March 31, 2001, a
decrease of $12,373,638 or 25%. The change was primarily due to the loss of
Staples as a customer in February 2001 and decreased deferred revenue from prior
periods recognized this year versus last year. Excluding the loss of Staples,
the Company experienced an appreciable increase in net earned administrative
fees from its existing and new dealers.
The foregoing Results of Operations include net earned administrative fees of
$6,557,263 from the contract with Staples for the fiscal year ended March 31,
2001. The loss of the Staples contract, which represented 10% of the Company's
consolidated gross revenues and 23% of the Consumer Products segment gross
revenues during fiscal year 2001, had an adverse impact on both the Company and
its Consumer Products segment's net earned administrative fee during the year
ended March 31, 2001 and 2002.
The Automotive segment's net earned administrative fees increased $3,013,299 or
19% to $19,019,558 for the fiscal year end March 31, 2002 from $16,006,259 in
the same period last year, primarily resulting from higher sales volumes and a
$1,060,274 increase in deferred revenue from prior periods recognized in the
current year.
The Consumer Products segment's net earned administrative fees decreased
$15,875,758 or 49% to $16,364,702 from $32,240,460 for same period last year.
The change was primarily attributed to the loss of Staples as a customer and a
decrease in deferred revenue from prior periods recognized this year versus last
year.
The International segment's net earned administrative fees increased $537,791 or
30% to $2,353,491 for the fiscal year ended March 31, 2002 from $1,815,700 for
the same period a year ago. The South American market contributed higher volumes
from new customers in Peru and Chile and increased market penetration from
existing customers in Chile.
Service, selling and general and administrative ("SG&A") expenses for the fiscal
year ended March 31, 2002, including the legal settlement, were reduced by
$9,831,531 or 25% to $29,944,008 as compared to $39,775,539 for the fiscal year
ended March 31, 2001. The decrease reflects the Company's improved call center
technologies, cost containment measures and the closing of the United Kingdom
operations. Total employee and payroll related expenses were down $3,767,040 or
17% from $22,356,260 for the fiscal year ended March 31, 2001 to $18,589,220 for
the fiscal year ended March 31, 2002. Additionally, the decrease in SG&A
expenses reflects the reimbursement by AIG of $824,332 in August 2001 for legal
fees associated with its lawsuit against the Company. Outside services,
including consulting and legal fees, were down $3,639,514 or 56% from $6,479,217
in the fiscal year ended March 31, 2001 to $2,839,703 in the fiscal year ended
March 31, 2002, primarily due to the settlement with AIG and a reduction in
computer system development. Rent expense for the fiscal year ended March 31,
2002 decreased $988,387 from the same period last year, primarily as result of
the Company's relocation of its headquarters to Texas and to a lesser degree,
the closing of the United Kingdom offices.
Loss on abandonment of assets was $1,029,731 for the fiscal year ended March 31,
2001. Effective September 30, 2000, the Company ceased operations in the United
Kingdom as a result of unprofitable operations and recorded a loss on its
operations.
Depreciation and amortization expenses were reduced by $1,936,673 or 30% to
$4,480,442 for the fiscal year ended March 31, 2002 as compared to $6,417,115
for the same period last year as a result of the early adoption of SFAS 142,
which allowed the Company to elect not to amortize its remaining goodwill and
the maturing of the Company's net property and equipment. Additionally,
depreciation was lower in the current twelve months versus the prior year as a
result of the closing of the United Kingdom operations.
13
Income from operations for the fiscal year ended March 31, 2002 was $2,902,856
as compared to $2,463,492 for the fiscal year ended March 31, 2001. Despite net
earned administrative fee decreases as a result of the loss of the Staples
account and decreased deferred revenue from prior periods recognized this year
versus last year, the increase in income from operations resulted from reduction
in losses from the United Kingdom operations, the benefit from the legal
settlement with AIG, lower SG&A expenses and lower depreciation and
amortization.
The Automotive segment's income from operations for fiscal year ended March 31,
2002 was $12,183,739 or $3,793,723 higher than the prior fiscal year. This was
primarily the result of higher sales volume, higher amortization of deferred net
earned administrative fee ($1,060,274), lower SG&A costs ($347,638) and lower
depreciation ($432,787).
The Consumer Products segment's loss from operations for fiscal year ended March
31, 2002 was $1,531,102 compared to the segment's income of $11,672,546 for the
fiscal year ended 2001. This decrease is the result of the loss of Staples as a
customer and a reduction of $5,604,332 in deferred revenue recognized in the
current fiscal year versus fiscal year 2001. Substantially lower SG&A, caused
primarily from decreases in the number of employees and payroll related costs
($1,853,171) and a reduction in telephone expenses ($749,638) helped to
partially reduce the segment's losses.
The International segment's loss from operations for the fiscal year ended March
31, 2002 was $578,137 or $1,528,722 lower than the $2,106,859 operating loss in
fiscal year ended March 31, 2001. This reduction results entirely from the
closing of the Company's operations in the United Kingdom. South American net
earned administrative fees increased 89% in fiscal year 2002 to $1,432,683 from
$758,250 in fiscal 2001, while increases in SG&A expenses offset almost all of
the net earned administrative fee improvement. Puerto Rico net earned
administrative fees increased 10%, while SG&A expense also increased slightly to
offset the improvement.
The net deferred tax asset as of March 31, 2002 and 2001 contains a benefit of
$594,599 and $280,625, respectively, related to foreign losses. Management
expects to realize this tax benefit, which has an indefinite carry-forward
period, against future foreign income.
Net income for the fiscal year ended March 31, 2002 was $2,256,273 or $0.15 per
basic share compared to $1,866,924 or $0.12 per basic share for the fiscal year
ended March 31, 2001. This increase is the result of all the other factors
listed above.
Fiscal Year Ended March 31, 2001 Compared to the Fiscal Year Ended March 31,
2000
Net earned administrative fees for the year ended March 31, 2001 increased to
$49,700,944 as compared to $43,319,781 for the year ended March 31, 2000. This
was an increase of $6,381,163 or 15%. The change is due to an increase of
deferred net earned administrative fees of $2,171,703, primarily in the
Automotive segment and an increase in Consumer Products business.
The foregoing Results of Operations include net earned administrative fees of
$6,557,263 and $6,926,959 from the contract with Staples for the fiscal years
ended March 31, 2001 and 2000, respectively. The loss of the Staples contract,
which represented 10% of the Company's consolidated gross revenues and 23% of
the Consumer Products segment gross revenues during fiscal year 2001, will have
a significant impact on both the Company and its Consumer Products segment's net
earned administrative fee in future periods.
SG&A expenses for the fiscal year ended March 31, 2001 were reduced by
$9,389,405 or 19% to $39,775,539 as compared to $49,164,944 for the fiscal year
ended March 31, 2000. This decrease in SG&A expenses reflected the Company's
improved technologies and cost-cutting measures. Decreases in the number of
employees and payroll related costs, reduction in outside provided services and
telephone expenses, and the closing of the United Kingdom operations as of
September 30, 2000 contributed to the lower SG&A expenses. United Kingdom SG&A
expenses were
14
$1,563,234 for fiscal year ended March 31, 2001 compared to $4,694,107 for
fiscal year ended March 31, 2000.
Depreciation and amortization amounted to $6,417,115 for the fiscal year ended
March 31, 2001 compared to $5,997,648 for the fiscal year ended March 31, 2000.
The increase compared to the previous year reflects a higher level of Corporate
and Consumer Products depreciation during the year, partially offset by lower
International depreciation due to the closing of the United Kingdom operations.
The higher level of Corporate and Consumer Products depreciation resulted from
additional assets being placed in service during the current and prior fiscal
years. The increase in assets was directly attributable to (i) the continued
development of the Company's information systems and (ii) the purchase of
additional computer equipment to accommodate efficiency of operations.
The Automotive segment's income from operations for fiscal year 2001 was
$8,390,016 or $6,441,217 higher than the prior fiscal year. This was primarily
the result of higher amortization of deferred net earned administrative fee
($5,568,505) and lower employee related costs ($944,757). Excluding the
amortization of deferred net earned administrative fees, net earned
administrative fee was flat from fiscal year 2001 to fiscal year 2000.
The Consumer Products segment's income from operations for fiscal year 2001 was
$11,672,546 or $5,409,764 higher than fiscal year 2000. This increase was the
result of substantially lower SG&A, caused primarily from decreases in the
number of employees and payroll related costs ($2,038,601), lower outside
services ($624,956) and a reduction in telephone expenses ($536,247).
Additionally, the Consumer Products segment's net earned administrative fee was
slightly higher in fiscal year 2001. Lower net revenues during fiscal year 2001
were mostly offset by higher amortization of prior year deferred earned
administrative fee.
The International segment's loss from operations for the fiscal year ended March
31, 2001 was $2,106,859 or $3,612,517 lower than the $5,719,376 operating loss
in fiscal year ended March 31, 2000. This reduction in operating loss was
primarily the result of an improvement in United Kingdom operating results from
a loss of $4,513,077 in fiscal year 2000 to an operating profit of $513,300 in
fiscal year 2001. United Kingdom operations benefited from reduced SG&A expenses
($3,204,428), primarily related to lower employee costs resulting from the
closing of the operation on September 30, 2000. South American net earned
administrative fees increased 76% in fiscal year 2001 to $758,250 from $430,470
in fiscal 2000, while SG&A expense were reduced by $208,901. Puerto Rico net
earned administrative fees remained flat, while SG&A expense increased slightly.
The provision (benefit) for income taxes was based on the Company's projection
of its estimated effective tax rate for the fiscal year. The income tax
provisions for the fiscal years ended March 31, 2001 and 2000 differed from the
statutory rate primarily due to state and local taxes, the non-deductibility of
goodwill amortization and the loss on abandonment of approximately $1,029,731 of
net assets from its United Kingdom operations. The net deferred tax asset as of
March 31, 2001 and 2000 contained a benefit of $280,625 and $2,097,349,
respectively, related to foreign losses. Management expects to realize this tax
benefit, which has an indefinite carry-forward period, against future foreign
income.
Net income for the fiscal year ended March 31, 2001 was $1,866,924 or $0.12 per
basic share compared to net loss of ($8,206,183) or ($0.54) per basic share for
the fiscal year ended March 31, 2000. This change is primarily the result of the
amortization of prior period deferred revenues and deferred costs being
recognized in the current year and the other factors listed above.
Liquidity and Capital Resources
Significant insurer in liquidation
During the second fiscal quarter 2002, the Pennsylvania Insurance Commissioner
informed the Company that Reliance would be liquidated and cease making payments
on claims. The Pennsylvania Insurance
15
Commissioner determined that Reliance was not likely to be able to satisfy all
of the claims that will be submitted to it due to the circumstances arising out
of the September 11, 2001 terrorist attacks on the World Trade Center. Reliance
underwrote approximately 48% of the automotive service contracts that were sold
by Warrantech Automotive during a period of approximately one and one-half years
ending in November 2001. Approximately 52% of the automotive service contracts
sold by Warrantech Automotive during that time period are not affected by the
Reliance liquidation. Service contracts sold before and after that period are
not affected because they are underwritten by other carriers.
Warrantech Automotive was the obligor, as well as the administrator, under some
of the vehicle service contracts that were insured by Reliance. As the obligor,
Warrantech Automotive would ultimately be responsible for paying for the repairs
under the service contracts. Prior to Reliance's liquidation, Reliance covered
the cost of the repairs under the insurance policies it provided. In light of
the liquidation of Reliance, insurance coverage for the Company's obligations
under those service contracts was no longer available. If Warrantech Automotive
were to be required to begin paying claims under these contracts, such payments
could have a material adverse impact on the Company's liquidity and earnings.
Consequently, the Company has taken steps, described below, to arrange for
coverage of the cost of the claims which were previously covered by Reliance
(see "Agreements" below).
Additionally, the Company is attempting to ascertain if recovery is available
from the Pennsylvania Insurance Department Insurance Funds and any other state
guaranty funds, if any, or if any Federal subsidies to the insurance industry in
general or Reliance specifically, will be made available as a result of the
terrorist attacks to pay vehicle service contract claims. If such subsidies are
available, it could take years before recovery, if any, is obtained.
The Company is aware that significant financial pressures have been placed on
insurance companies, due to the terrorist attacks on the World Trade Center on
September 11, 2001, however, the Company is not aware that either American
International Group, Inc. or Great American Insurance Company, which insure most
of the obligations under the other service contracts marketed and administered
by the Company, are under any such financial pressures. If for any reason, the
insurance companies were not able to cover claims under the service contracts
marketed and administered by the Company due to their financial insolvency or
other reasons, there could be a material adverse effect on the Company's future
business.
Agreements
In exchange for a fee, Butler Financial Solutions, LLC ("Butler") serves as the
ultimate obligor under all service contracts administered by the Company. Some
of the service contracts under which Butler is the obligor were insured by
Reliance, and the liquidation of Reliance has eliminated this insurance
coverage.
In order to assist Butler in addressing its potential obligations under the
service contacts previously insured by Reliance for which Butler is or
Warrantech was the obligor, Warrantech Automotive has made an initial $1 million
loan to Butler. The Company has and will make further loans to Butler, as
required, for claim obligations in excess of Butler's fee revenues. All of
Warrantech's loans to Butler bear or will bear interest at the rate of prime
plus 2% per annum and will begin to be paid down once Butler's fee revenues
exceed the claims obligations.
Additionally, funding will be provided by a special surcharge that will be paid
on all vehicle service contracts administered by the Company that are or were
sold after November 21, 2001. The surcharge is paid by agents through whom
Reliance insured service contracts were sold. This funding will be utilized by
Butler to pay the claims previously insured by Reliance and will also be
available to repay Butler's loans from Warrantech.
16
During fiscal year ended March 31, 2002, Warrantech loaned or advanced Butler
$5,435,646. Reliance Warranty Corporations ("RWC"), which is not part of the
Reliance liquidation, is obligated to pay $2,754,691 of that amount, which the
Company expects to receive in the second quarter of fiscal 2003 and is reflected
as "Other Receivables" on the Consolidated Balance Sheet. The remaining amount
representing the loans to Butler of $2,680,955 is reflected as "Notes
Receivable" on the Consolidated Balance Sheet. The Company anticipates the
cumulative loan(s) to Butler to increase to $3.9 million, including interest
during the next fiscal year.
In order to provide capital to the Company to make loans under its agreement
with Butler, the Company executed a letter of understanding with GAIC, by which
GAIC agreed to provide funding by extending a favorable change of its credit
terms to the Company. A definitve agreement is excepted to be finalized during
the second fiscal quarter 2003. As a result of the more favorable credit terms,
the Company's insurance premium payable increased $3.9 million. GAIC also agreed
to extend a separate line of credit to the Company for an amount up to $3
million, subject to certain adjustments, to fund unanticipated working capital
requirements. Interest will be paid on monies made available for the line of
credit at an annual rate of prime plus 2%.
As part of the agreement that is being negotiated, GAIC will receive options to
purchase up to 1,650,000 shares of Warrantech's common stock at an exercise
price of $2.00 per share subject to certain adjustments. In the event that GAIC
exercises all of these options, it would own approximately 10.8% of the
Company's outstanding shares.
The Company believes that the arrangements with Butler and GAIC described above
provide a mechanism to cover the claims under all of the service contracts in
which the Company was the obligor and will also provide Butler with funds
necessary to repay its loan from the Company. If, however, Butler, for any
reason, becomes unable to pay any such claims, which were previously insured by
Reliance, or if GAIC ceases to provide credit to the Company in order to fund
any shortfalls required by Butler, Warrantech Automotive may ultimately be
required to honor the claims under those contracts in which it was the obligor.
The total amount of the Company's potential obligations with respect to such
claims is not known since it is subject to a number of uncertainties. However,
it is unlikely that the Company would be able to honor such claims without
finding other sources of capital. There is also no assurance that Butler will
have the funds to repay its loan from the Company.
Liquidity and Capital Resources
As of March 31, 2002, total cash and short-term investments totaled $9,364,720,
up from $6,292,254 at fiscal year end March 31, 2001. During the fiscal year
ended March 31, 2002, the Company's operations provided $7,322,896 of net cash
compared to a net use of cash from operations of ($7,135,812) for the fiscal
year ended March 31, 2001. The positive change in net cash from operations,
primarily relates to favorable changes in its working capital from negative
$2,807,496 at March 31, 2001 to a negative $1,656,179 at March 31, 2002. The
change in working capital primarily resulted from advances made by the Company
to the claims payment fund described in the agreements. During fiscal year 2002,
the Company decreased its other accounts receivable by $2.3 million and its
income tax receivable by $4.3 million, while increasing its insurance premium
payable $7.3 million and accounts receivable by $6.3 million, thereby generating
a $7.6 million net source of cash for the fiscal year. The decrease in deferred
revenue and deferred direct costs reflects the continued amortization of prior
year net earned administrative fees.
The Company believes that internally generated funds, reimbursement of claims
paid by RWC and the $3 million line of credit from GAIC, will be sufficient to
finance its current operations for at least the next twelve months. The Company
is aggressively pursuing new business both domestically and internationally to
fund future working capital. The Company plans to continue to contain its SG&A
costs and utilize technologies for operational efficiencies to further enhance
both its operating income and cash flows from operating activities.
17
During the fiscal year ended March 31, 2002, the Company used $49,311 in cash
from investing activities compared to $1.5 million provided from investing
activities in the prior year. During the current fiscal year, the Company spent
less on computer development and equipment purchases than in the prior year and
purchased fewer marketable securities. The Company has ongoing relationships
with equipment financing companies and intends to continue financing certain
future equipment needs through leasing transactions. The total amount financed
through leasing transactions during the fiscal year ended March 31, 2002
amounted to $443,232 compared to $519,369 during the fiscal year ended March 31,
2001. At fiscal year end 2002, the Company had $1,758,947 in debt from capital
lease obligations compared to $2,011,118 at fiscal year-end 2001.
During the fiscal year ended March 31, 2002, the Company used $3.2 million in
cash from financing activities compared to $1.4 million in fiscal year 2001. The
variance was primarily due to a $2,680,955 increase in notes receivable and
partially offset by a reduction in repayment of capital leases during fiscal
2002 versus fiscal year 2001. The increase in notes receivable is mostly the
result of loans to Butler described above.
During the fiscal year ended March 31, 2002, the Company did not repurchase any
of its stock. During the fiscal year ended March 31, 2001, the Company
repurchased 450,000 shares of its common stock for treasury purposes. The
aggregate amount of these purchases totaled $308,920. The Board of Directors has
authorized the repurchase of up to $1,500,000 of additional shares of Warrantech
Corporation common stock as part of its stock repurchase program. The repurchase
program does not obligate the Company to acquire a specific number of shares and
may be discontinued at any time.
Loans to Directors
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief Executive
Officer, and William Tweed and Jeff J. White, members of Warrantech's Board of
Directors, exercised an aggregate of 3,000,000 of their vested options to
purchase Warrantech common stock. Promissory notes totaling $8,062,500 were
signed with interest payable over three years at an annual rate of 6%. The
promissory notes, which were with recourse and secured by the stock certificates
issued, matured July 5, 2001. On March 22,1999, Joel San Antonio delivered an
additional promissory note for $595,634, payable to the Company, representing
the amounts funded by the Company for the payroll taxes payable by him upon for
the exercise of these options. The exercise of these stock options and the
anticipated tax benefit from this transaction represented approximately $10
million. These amounts were recorded as a contra-equity account, which is a
reduction of stockholders' equity.
In February 2000, the Company agreed to restructure the loans to Mr. Tweed and
Mr. White by capitalizing the interest due on the loans and making the loans
payable over five (5) years. Interest on the restructured loans accrues annually
at the applicable federal rate (approximately 6.2%), but will first become
payable on the third anniversary of the restructured loans and will be payable
annually thereafter.
In February 2000, the Company also agreed to restructure the loan to Mr. San
Antonio. The initial terms of these restructured loan provided for a conversion
of the two original loans into a one-year loan without interest. Prior to the
execution of the documents concerning this restructuring, Mr. San Antonio and
the Company agreed to revise the new loan terms to provide that the new combined
note (the "New Note") would become due on January 31, 2005. Interest due on the
New Note accrues annually at 5.2% and will be forgiven, and charged to Mr. San
Antonio as additional compensation, as long as Mr. San Antonio continues to be
employed by the Company. The $330,631 interest which accrued on the note during
fiscal year 2002 was forgiven in the current fiscal year, the $230,460 of
interest which accrued from February 1, 2001 through March 31, 2002, was
forgiven in fiscal year 2001. The interest was charged to operations as
additional compensation in the respective fiscal years the interest income was
accrued.
The total amount of the restructured loans to Mr. Tweed, Mr. White and Mr. San
Antonio, including the capitalized interest, is $10,163,875.
18
Outlook
The effect of inflation has not been significant to the Company.
The Company continues to improve customer service and technology with the
introduction in fiscal 2002 of its innovative web-based platform for its
Consumer Products Services segment. WCPS Online will provide real-time
capabilities that meet the needs of dealers, service providers and consumers. It
is designed to reduce paperwork and cut the time and costs of administering
warranties for dealers and service providers, while providing a better
experience and faster service for their customers. The future profitability of
this segment of the Company is dependent on its ability to provide technology
and customer service and on acquiring new business. The Company is currently
negotiating with prospective new customers which are projected to begin programs
in fiscal year 2003. Until such events develop, this segment may continue to
incur losses.
During the fiscal year, the Company signed a three-year agreement with BoatU.S.,
the nation's largest recreational boating Association, to offer the Warrantech
Xchange Product Replacement Program to its 530,000 member base. BoatU.S. is the
Company's first client in the boating industry and represents the third new
market Warrantech has penetrated during the last twelve months, in addition to
the motorcycles and golf cart markets. The Company has also focused on expanding
its presence in the Canadian market and opened a sales office in Canada in
January 2002.
The Company announced in fiscal 2002 that an agreement had been reached with AIG
to provide marketing services for reinsurance programs for large automobile
dealerships. The terms of the contract allowed Warrantech Automotive to begin
marketing a new reinsurance program to the nation's larger automobile
dealerships on January 1, 2002. This program along with other new programs in
the Automotive segment is allowing the Company to experience an increase in
automotive contracts sold and which is expected to continue into fiscal year
2003.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2002, the Company did not have any derivatives, debt or hedges
outstanding. Therefore, the Company was not subject to interest rate risk. In
addition, the risk of foreign currency fluctuation was and is not material to
the Company's financial position or results of operations.
19
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page No.
Report of Independent Auditors......................................... 21
Consolidated Financial Statements:
Statements of Operations and Comprehensive Income
For the Fiscal Years Ended March 31, 2002, 2001 and 2000...... 22
Balance Sheets as of March 31, 2002 and 2000.................. 23-24
Statements of Common Stockholders' Equity
For the Fiscal Years Ended March 31, 2002, 2001 and 2000...... 25
Statements of Cash Flows
For the Fiscal Years Ended March 31, 2002, 2001 and 2000...... 26
Notes to Consolidated Financial Statements............................. 27
Consolidated Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts...................... 44
All other schedules for which provision is made in applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted or the
information is presented in the consolidated financial statements or
accompanying notes.
20
[LOGO] WSL WEINICK
-------------------------------------------------------------
SANDERS 1515 BROADWAY
LEVENTHAL & CO., LLP NEW YORK, N.Y. 10036-5788
CERTIFIED PUBLIC ACCOUNTANTS
212-869-3333
FAX 212-764-3060
WWW.WSLCO.COM
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Warrantech Corporation
We have audited the accompanying consolidated balance sheets of Warrantech
Corporation and subsidiaries as of March 31, 2002 and 2001, and the related
consolidated statements of operations and comprehensive income, common
stockholders' equity and cash flows for the fiscal years ended March 31, 2002,
2001 and 2000. Our audits also included the financial statement schedules listed
in the index. These consolidated financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Warrantech Corporation and subsidiaries at March 31, 2002 and 2001, and the
consolidated results of their operations and comprehensive income and their cash
flows for the years ended March 31, 2002, 2001 and 2000, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related consolidated financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/Weinick Sanders Leventhal & Co., LLP
New York, NY
May 24, 2002
21
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended March 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Earned Administrative Fee $ 37,327,306 $ 49,700,944 $ 43,319,781
------------ ------------ ------------
(Net of amortization of deferred costs)
Costs and expenses
Service, selling, and general and
administrative 30,768,340 39,775,539 49,164,944
Legal Settlement (824,332) -- --
Provision for bad debt expense -- 15,067 31,476
Depreciation and amortization 4,480,442 6,417,115 5,997,648
Loss on abandonment of assets -- 1,029,731 --
------------ ------------ ------------
Total costs and expenses 34,424,450 47,237,452 55,194,068
------------ ------------ ------------
Income (loss) from operations 2,902,856 2,463,492 (11,874,287)
Other income (expense) 857,466 1,022,512 906,288
------------ ------------ ------------
Income (loss) before provision for income taxes 3,760,322 3,486,004 (10,967,999)
Provision (benefit) for income taxes 1,504,049 1,619,080 (2,761,816)
------------ ------------ ------------
Net income (loss) $ 2,256,273 $ 1,866,924 ($8,206,183)
============ ============ ============
Earnings (loss) per share:
Basic $ 0.15 $ 0.12 ($0.54)
============ ============ ============
Diluted $ 0.15 $ 0.12 ($0.54)
============ ============ ============
Weighted average number of shares outstanding:
Basic 15,259,437 15,265,114 15,231,146
============ ============ ============
Diluted 15,261,444 15,271,218 15,231,146
============ ============ ============
For the Years Ended March 31,
------------------------------------------
Comprehensive Income (Loss) 2002 2001 2000
------------ ------------ ------------
Net income (loss) $ 2,256,273 $ 1,866,924 ($8,206,183)
Other comprehensive income, net of tax:
Foreign currency translation adjustments (11,143) 82,182 (26,414)
Unrealized gain (loss) on investments (8,936) 30,001 (24,184)
------------ ------------ ------------
Comprehensive income (loss) $ 2,236,194 $ 1,979,107 ($8,256,781)
============ ============ ============
See report of independent auditors and accompanying notes to consolidated
financial statements.
22
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
----------------------------
2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 7,033,448 $ 3,001,924
Investments in marketable securities 954,653 196,154
Accounts receivable, (net of allowances of
$256,019 and $1,079,946, respectively) 18,442,135 12,152,515
Other receivables, net 4,931,749 7,065,531
Income tax receivable 1,129,076 5,378,648
Deferred income taxes 2,653,000 571,182
Prepaid expenses and other current assets 600,944 964,929
------------ ------------
Total current assets 35,745,005 29,330,883
------------ ------------
Property and equipment, net 9,299,713 11,898,890
Other assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of $5,825,405) 1,637,290 1,637,290
Deferred income taxes 2,329,315 2,724,096
Deferred direct costs 22,570,930 46,258,971
Investments in marketable securities 1,376,619 3,094,176
Restricted cash 825,000 800,000
Split dollar life insurance policies 904,172 708,262
Notes receivable 2,818,639 599,796
Other assets 44,546 64,809
------------ ------------
Total other assets 32,506,511 55,887,400
------------ ------------
------------ ------------
Total Assets $ 77,551,229 $ 97,117,173
============ ============
See report of independent auditors and accompanying notes to consolidated
financial statements.
23
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
----------------------------
2002 2001
------------ ------------
Current liabilities:
Current maturities of long-term debt and capital lease
obligations $ 801,788 $ 801,265
Insurance premiums payable 26,470,265 19,100,164
Accounts and commissions payable 6,960,465 6,346,872
Accrued expenses and other current liabilities 3,168,666 5,890,078
------------ ------------
Total current liabilities 37,401,184 32,138,379
------------ ------------
Deferred revenues 33,559,379 60,057,704
Long-term debt and capital lease obligations 957,159 1,209,853
Deferred rent payable 190,260 293,293
------------ ------------
Total liabilities 72,107,982 93,699,229
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000
Shares issued - none at March 31, 2002 and March 31, 2001 -- --
Common stock - $.007 par value authorized - 30,000,000 Shares
issued - 16,525,324 shares at March 31, 2002 and
16,514,228 shares at March 31, 2001 115,679 115,580
Additional paid-in capital 23,745,944 23,742,868
Loans to directors and officers (10,163,875) (9,833,244)
Accumulated other comprehensive income, net of taxes (52,028) (31,949)
Retained earnings (deficit) (3,977,832) (6,234,105)
------------ ------------
9,667,888 7,759,150
Treasury stock - at cost, 1,212,159 shares at March 31, 2002
and 1,415,171 shares at March 31, 2001 (4,224,641) (4,341,206)
------------ ------------
Total stockholders' equity 5,443,247 3,417,944
------------ ------------
------------ ------------
Total Liabilities and Stockholders' Equity $ 77,551,229 $ 97,117,173
============ ============
See report of independent auditors and accompanying notes to consolidated
financial statements.
24
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
For the Years Ended March 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Common stock outstanding (shares)
Balance, beginning of year 16,514,228 16,505,911 16,501,786
Exercise of common stock options -- -- --
Issuance of common stock 11,096 8,317 4,125
------------ ------------ ------------
Balance, end of year 16,525,324 16,514,228 16,505,911
============ ============ ============
Common stock
Balance, beginning of year $ 115,580 $ 115,541 $ 115,513
Exercise of unrestricted common stock options -- -- --
Exercise of restricted stock options -- -- --
Issuance of common stock 99 39 28
------------ ------------ ------------
Balance, end of year $ 115,679 $ 115,580 $ 115,541
============ ============ ============
Additional paid-in capital
Balance, beginning of year $ 23,742,868 $ 23,737,835 $ 23,728,881
Exercise of unrestricted common stock options -- -- --
Exercise of restricted common stock options -- -- --
Issuance of common stock 3,076 5,033 8,954
------------ ------------ ------------
Balance, end of year $ 23,745,944 $ 23,742,868 $ 23,737,835
============ ============ ============
Loans to directors and officers
Balance, beginning of year ($9,833,244) ($9,505,406) ($9,006,699)
Loans for exercise of restricted common stock
options and accrued interest (330,631) (327,838) (498,707)
------------ ------------ ------------
Balance, end of year ($10,163,875) ($9,833,244) ($9,505,406)
============ ============ ============
Accumulated other comprehensive income
Balance, beginning of year ($31,949) ($144,132) ($93,534)
Foreign currency translation adjustments (11,143) 82,182 (26,414)
Unrealized gain (loss) on investments (8,936) 30,001 (24,184)
------------ ------------ ------------
Balance, end of year ($52,028) ($31,949) ($144,132)
============ ============ ============
Retained earnings (deficit)
Balance, beginning of year ($6,234,105) ($8,101,029) $ 105,154
Net income (loss) 2,256,273 1,866,924 (8,206,183)
------------ ------------ ------------
Balance, end of year ($3,977,832) ($6,234,105) ($8,101,029)
============ ============ ============
Common stock in treasury (shares)
Balance, beginning of year (1,415,171) (1,211,024) (1,280,300)
Purchase of treasury shares -- (450,000) (100,000)
Issuance of treasury shares 203,012 245,853 169,276
------------ ------------ ------------
Balance, end of year (1,212,159) (1,415,171) (1,211,024)
============ ============ ============
Common stock in treasury (amount)
Balance, beginning of year ($4,341,206) ($4,224,167) ($4,449,313)
Purchase of treasury shares -- (308,920) (74,383)
Issuance of treasury shares 116,565 191,881 299,529
------------ ------------ ------------
Balance, end of year ($4,224,641) ($4,341,206) ($4,224,167)
============ ============ ============
------------ ------------ ------------
Total Stockholders' Equity $ 5,443,247 $ 3,417,944 $ 1,878,642
============ ============ ============
See report of independent auditors and accompanying notes to consolidated
financial statements.
25
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 2,256,273 $ 1,866,924 ($8,206,183)
------------ ------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,480,442 6,417,115 5,997,648
Provision for bad debt expense -- 15,067 31,476
Deferred revenues (26,498,325) (44,970,721) (13,469,139)
Deferred direct costs 23,688,041 34,538,228 5,310,497
Deferred income taxes (1,687,037) 5,910,686 1,817,167
Deferred rent payable (103,033) (91,208) (92,389)
Other (357,818) (66,450) 274,986
Increase (decrease) in cash flows as a result of
changes in asset and liability balances:
Accounts receivable (6,289,620) (293,862) 27,416,751
Other receivables 2,133,782 (4,649,283) 3,508,084
Income taxes receivable 4,249,572 (1,343,302) (2,888,022)
Prepaid expenses and other current assets 363,985 273,122 299,582
Split dollar life insurance policies (195,910) 119,000 542,748
Other assets 20,263 311,846 1,227
Insurance premiums payable 7,370,101 938,807 (18,424,563)
Accounts and commissions payable 613,593 (2,510,684) 333,516
Legal settlements payable -- -- (100,000)
Accrued expenses and other current liabilities (2,721,412) (3,601,097) 1,144,735
------------ ------------ ------------
Total adjustments 5,066,624 (9,002,736) 11,704,304
------------ ------------ ------------
Net cash provided by (used in) by operating activities 7,322,897 (7,135,812) 3,498,121
------------ ------------ ------------
Cash flows from investing activities:
Property and equipment purchased-net of retirements (1,496,747) (1,930,448) (4,133,870)
Purchase of marketable securities (430,000) (715,000) (5,805,000)
(Increase) decrease in notes receivable 462,112 567,929 (689,958)
Proceeds from sales of marketable securities 1,415,304 3,600,000 3,935,000
------------ ------------ ------------
Net cash provided by (used in) investing activities (49,331) 1,522,481 (6,693,828)
------------ ------------ ------------
Cash flows from financing activities:
Exercise of common stock options and stock grants -- 5,072 8,982
Purchase treasury stock -- (308,920) (74,383)
Issuance of treasury stock -- 191,881 --
Increase in notes receivable (2,680,955) -- --
Repayments of notes and capital leases (561,087) (1,307,781) (1,736,362)
------------ ------------ ------------
Net cash (used in) financing activities (3,242,042) (1,419,748) (1,801,763)
------------ ------------ ------------
Net (decrease) in cash and cash equivalents 4,031,524 (7,033,079) (4,997,470)
Cash and cash equivalents at beginning of year 3,001,924 10,035,003 15,032,473
------------ ------------ ------------
Cash and cash equivalents at end of year $ 7,033,448 $ 3,001,924 $ 10,035,003
============ ============ ============
Supplemental Cash Flow Information:
Cash payments made (recovered) during the year for:
Interest $ 217,072 $ 234,102 $ 344,969
============ ============ ============
Income taxes ($1,107,494) $ 259,224 $ 93,638
============ ============ ============
Non-Cash Investing and financing activities:
Property and equipment financed through capital leases $ 443,232 $ 519,369 $ 537,293
Increase in loans to officers and directors (330,631) (327,838) (498,707)
Issuance of treasury stock 116,565 191,881 299,529
Capital leases refinanced 151,565 -- 339,153
See report of independent auditors and accompanying notes to consolidated
financial statements.
26
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Warrantech, through its wholly owned subsidiaries,
markets and administers service contracts and extended warranties. The
Company is a third party administrator for a variety of dealer/clients in
selected industries and offers call center and technical computer
services. The Company assists dealer/clients in obtaining insurance
policies from highly rated independent insurance companies for all
contracts and programs offered. The insurance company is then responsible
for the cost of repairs or replacements for the contracts administered by
Warrantech.
The Company's service contract programs benefit consumers by providing
them with expanded and/or extended product coverage for a specified period
of time (and/or mileage in the case of automobiles and recreational
vehicles), similar to that provided by manufacturers under the terms of
their product warranties. Such coverage generally provides for the repair
or replacement of the product, or a component thereof, in the event of its
failure. The Company's service contract programs benefit the
dealer/clients by providing enhanced value to the goods and services they
offer and by providing them with the opportunity for increased revenue and
income while outsourcing the costs and responsibilities of operating an
extended warranty program.
The terms of the service contracts, extended warranties and replacement
contracts generally have terms ranging from three (3) to eighty-four (84)
months. Since the Company acts solely as a third party administrator on
behalf of the dealer/clients and insurance companies, the actual repairs
and/or replacements required under the agreements are performed by
independent third party authorized repair facilities or dealers. The cost
of these repairs is generally paid for by the insurance companies which
have the ultimate responsibility for the claims or by Butler Financial
Solutions, LLC ("Butler"), where Reliance Insurance Company ("Reliance")
or the Company are the obligor. The insurance policy indemnifies the
dealer/clients against losses resulting from service contract claims and
protects the consumer by ensuring their claims will be paid.
Basis of Presentation and Principles of Consolidation - The accompanying
consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America
("GAAP"). These consolidated financial statements include the accounts of
Warrantech Corporation and its subsidiaries, all of which are wholly
owned. All intercompany accounts and transactions have been eliminated in
consolidation.
Risks and Uncertainties - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
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
segregated into two distinct methods depending on whether the Company, a
third party or the retailer/dealer is designated as the obligor on the
service contract sale. In either case, a highly rated independent
insurance company assumes all claims liabilities of the service contracts
administered by the Company.
Dealer/third party obligor service contracts are sales in which the
retailer/dealer or a third party is designated as the obligor. For these
service contract sales, using the proportional performance method, the
Company recognizes revenues in direct proportion to the costs incurred in
providing
27
the service contract programs to the Company's clients. Revenues in
amounts sufficient to meet future administrative costs and a reasonable
gross profit thereon are deferred. Sales of dealer/third party obligor
service contracts are reflected in gross revenues net of premiums paid to
insurance companies.
Administrator obligor service contracts are sales in which Warrantech is
designated as the obligor. For these service contract sales, the Company
recognizes revenues in accordance with Financial Accounting Standards
Board Technical Bulletin 90-1 ("TB 90-1"), Accounting for Separately
Priced Extended Warranty and Product Maintenance Contracts, and Statement
of Financial Accounting Standards No. 60 ("SFAS 60"), Accounting and
Reporting by Insurance Enterprises. These accounting standards require the
recognition of revenue over the life of the contract on a straight-line
basis, unless sufficient, company-specific, historical evidence indicates
that the cost of performing services under these contracts are incurred on
other than a straight-line basis. The Company is recognizing revenue on
administrative obligor contracts based on company specific historical
claims experience over the life of the contract.
Direct Costs - Direct costs, which consist primarily of insurance premiums
and commissions, are those costs directly related to the production and
acquisition of service contracts for administrative obligor service
contracts. For administrative obligor service contracts, the Company
recognizes direct cost according to Statement of Financial Accounting
Standards No. 113 ("SFAS 113"), Accounting and Reporting for Reinsurance
of Short-Duration and Long Duration Contracts. This requires that
insurance premium costs be ratably expensed over the life of the service
contract.
Profit Sharing Arrangement - Pursuant to certain agreements with its
insurers, the Company may be 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 based upon the residual value of the
premiums set aside by the insurer to pay losses (the "Loss Fund"). The
residual value is comprised of underwriting profits and investment income
earned on the monies in the Loss Fund. Subsequent adjustments to original
estimates are solely changes in estimates based upon current information,
affording the Company better determination of ultimate profit sharing
revenues and are reflected in income when known. The Company did not
accrue or receive any profit sharing amounts in the fiscal years ended
March 31, 2002, 2001 or 2000.
Provision for Bad Debt Expense - The Company's policy is to establish an
allowance for doubtful accounts when receivables are determined to be
uncollectible.
Earnings Per Share - The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", which modified the
calculation of earnings per share ("EPS"). This Statement replaced the
previous presentation of primary and fully diluted EPS to basic and
diluted EPS. Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS includes the dilution of common stock
equivalents, and is computed similarly to fully diluted EPS pursuant to
APB Opinion 15. All prior periods presented have been restated to reflect
this adoption.
Cash and Cash Equivalents - Cash and cash equivalents for the purpose of
reporting cash flows for all periods presented include cash on deposit and
certificates of deposit. There were no other cash equivalents at March 31,
2002 and 2001.
The Company had on deposit $6,659,178 and $1,451,416 of cash in excess of
federally insured limits at March 31, 2002 and 2001, respectively.
Investments in Marketable Securities - All investments in marketable
securities 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 accumulated other comprehensive income, net of
tax.
28
Property and Equipment - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets ranging between 3 and 7 years.
Advertising Costs -The Company expenses advertising costs as incurred.
Advertising expenses for the years ended March 31, 2002, 2001 and 2000
were $388,085, $473,553 and $463,937, respectively.
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, Home Guarantee Corporation, PLC in
July 1995, and certain assets of Distributors & Dealers Service Co., Inc.
in October 1997. Prior to the early adoption of Statement of Financial
standards No. 142 "Goodwill and Intangible Assets" on April 1, 2001 (See
Note 2), the excess of cost over fair value of assets acquired was being
amortized on a straight-line basis over 15, 10 and 4.5 years,
respectively. As a result of the Company closing its offices in Europe
during 2001, the excess of Cost over Fair Value of Assets acquired from
Home Guarantee Corporation, PLC was fully amortized. Amortization expense
charged to operations for the years ended March 31, 2002, 2001 and 2000
amounted to $0, $970,382 and $668,852, respectively.
Stock Based Compensation - The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its stock-based compensation
plans. Under APB 25, compensation expense for stock option and award plans
is recognized as the difference between the fair value of the stock at the
date of the grant less the amount, if any, the employee or director is
required to pay. 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.
Certain non-employees have been issued options to purchase stock in lieu
of compensation. The intrinsic value of these options at the time of grant
has been charged to expense.
Income Taxes - Deferred taxes are determined under the liability method
whereby deferred tax assets and liabilities are recognized for the
expected tax effect of temporary differences between the financial
statement carrying amount and the tax bases 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 ("SFAS") No. 52 "Foreign
Currency Translation". The functional currency for the Company's United
Kingdom operations was the British pound. The functional currency for the
Company's Chilean and Peruvian operations are their respective local
currencies. Transaction gains and losses are reflected in operations,
while translation gains and losses are reflected as a separate component
of accumulated other comprehensive income, net of tax.
Comprehensive Income - The Company has adopted SFAS No. 130 "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had minimal impact on the Company's net
income or stockholders' equity. SFAS No. 130 requires unrealized gains or
losses to be recorded on the Company's available for sale securities and
foreign currency translation adjustments, which prior to the adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income.
29
2. NEW ACCOUNTING STANDARD
On June 29, 2001, the Financial Accounting Standards Board (FASB) approved
for issuance SFAS No. 142, "Goodwill and Intangible Assets," which is
effective for fiscal years beginning after March 15, 2001. SFAS 142
provides that goodwill and intangible assets with indefinite lives not be
amortized, and instead, be tested for impairment annually and whenever
there is an impairment indicator. Early adoption of SFAS 142 is permitted
for companies with fiscal years beginning after March 15, 2001 but only if
they have not issued their first quarter financial statements prior to
adoption. The Company adopted SFAS 142 effective April 1, 2001 and ceased
amortization of its goodwill. The following table presents pro forma
condensed consolidated statements of operations of the Company for the
twelve months ended March 31, 2002 and 2001, as though SFAS 142 had not
been adopted. The pro forma condensed consolidated statements of
operations reflects $599,268 of amortization of goodwill in the twelve
months ended March 31, 2002 which would have been reflected in the
statements of operations prior to the adoption of SFAS 142.
For the Twelve Months Ended
March 31,
------------------------------
2002 2001
------------ ------------
Earned Administrative Fee (net of amortization of deferred costs) $ 37,327,306 $ 49,700,944
------------ ------------
Costs and expenses
Service, selling, and general and administrative 30,768,340 39,775,539
Provision for Bad Debt -- 15,067
Legal settlement (824,332) --
Depreciation and amortization 5,079,710 6,417,115
Loss on abandonment of assets -- 1,029,731
------------ ------------
Total costs and expenses 35,023,718 47,237,452
------------ ------------
Income from operations 2,303,588 2,463,492
Other income (expense) 857,466 1,022,512
------------ ------------
Income before provision for income taxes 3,161,054 3,486,004
Provision (benefit) for income taxes 1,504,049 1,619,080
------------ ------------
Net income $ 1,657,005 $ 1,866,924
============ ============
Earnings per share:
Basic & Diluted $ 0.11 $ 0.12
============ ============
3. LOSS ON ABANDONMENT OF ASSETS
Effective September 30, 2000, the Company ceased operations in the United
Kingdom because of unprofitable operations. As a result of the closing and
abandonment of the United Kingdom operations, the Company wrote down its
investment in the assets of the United Kingdom operations and recorded a
$1,029,731 loss on the abandonment of these assets.
30
4. RESTRICTED CASH
At March 31, 2002 and 2001 cash in the amount of $825,000 and $800,000,
respectively is on deposit with Florida and Ohio regulatory agencies to
comply with their state insurance laws.
5. INVESTMENTS IN MARKETABLE SECURITIES
At March 31, 2002, investments in marketable securities were comprised of
the following:
Gross Unrealized Aggregate Carrying Amount
Amortized ---------------- Fair ---------------
Cost Gains (Losses) Value Short Term Long Term
---------- -------------------------- ---------- -------------------------
Municipal Bonds $2,309,454 $ 24,373 ($2,555) $2,331,272 $ 954,653 $1,376,619
---------- -------------------------- ---------- -------------------------
Total Investments in
Marketable Securities $2,309,454 $ 24,373 ($2,555) $2,331,272 $ 954,653 $1,376,619
========== ========================== ========== =========================
At March 31, 2001, investments in marketable securities are comprised of
the following:
Gross Unrealized Aggregate Carrying Amount
Amortized ---------------- Fair ---------------
Cost Gains (Losses) Value Short Term Long Term
---------- ------------------------- ---------- -------------------------
Municipal Bonds $3,254,411 $ 36,825 ($906) $3,290,330 $ 196,154 $3,094,176
---------- ------------------------- ---------- -------------------------
Total Investments in
Marketable Securities $3,254,411 $ 36,825 ($906) $3,290,330 $ 196,154 $3,094,176
========== ========================= ========== =========================
All of the above investments are considered "available for sale." The
resultant differences between amortized cost and fair value, net of taxes,
have been reflected as a separate component of accumulated other
comprehensive income.
The amortized cost and estimated fair value of marketable securities, by
contractual maturity date as of March 31, 2002, 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.
Aggregate
Amortized Fair
Cost Value
---------- ----------
Investments available for sale:
Due in one year or less $ 948,327 $ 954,653
Due after one year through five years 1,361,127 1,376,619
---------- ----------
$2,309,454 $2,331,272
========== ==========
6. OTHER RECEIVABLES, NET
The nature and amounts of other receivables, net as of March 31, 2002 and
2001 are as follows:
March 31,
--------------------------
2002 2001
---------- -----------
Due from Reliance Warranty Corporation $2,754,691 --
Due from insurance companies/dealers 1,795,972 $ 5,500,806
Employee/agent advances 334,198 788,611
Other 46,888 821,614
---------- -----------
4,931,749 7,111,031
Allowance for doubtful accounts -- (45,500)
---------- -----------
Total Other Receivables, net $4,931,749 $ 7,065,531
========== ===========
31
During the current fiscal year, the Company advanced money on claims for which
Reliance Warranty Corporation ("RWC") is obligated to pay. As of the end of the
fiscal year ended March 31, 2002, $2,754,691 of such claims had been paid. The
Company expects to receive funds from RWC during fiscal year 2003 which would
reimburse the Company for claims paid out on RWC's behalf.
7. PROPERTY AND EQUIPMENT
March 31,
---------------------------
2002 2001
----------- -----------
Automobiles $ 61,280 $ 33,179
Equipment, furniture and fixtures 9,981,999 9,729,706
Leasehold improvements 1,384,322 1,377,338
Software development costs 14,665,867 13,573,771
----------- -----------
26,093,468 24,713,994
Less: Accumulated depreciation and amortization 18,392,289 15,044,711
----------- -----------
7,701,179 9,669,283
----------- -----------
Assets under capital leases:
Cost 9,010,339 9,304,479
Less: Accumulated amortization 7,411,805 7,074,872
----------- -----------
1,598,534 2,229,607
----------- -----------
----------- -----------
Total Property and Equipment, net $ 9,299,713 $11,898,890
=========== ===========
Amortization expense on assets under capital leases for the years ended
March 31, 2002, 2001 and 2000 was $1,955,798, $1,399,860 and $1,616,808,
respectively. Depreciation expense on property and equipment other than
under capital leases for the years ended March 31, 2002, 2001 and 2000 was
$2,524,644, $4,046,873 and $3,711,988, respectively.
The Company capitalized $954,657 and $2,245,478 for the fiscal years ended
March 31, 2002 and 2001, respectively, of costs consisting of amounts paid
to independent consultants related to the implementation and enhancement
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.
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
March 31,
-------------------------
2002 2001
---------- ----------
Capital lease obligations - for property and
equipment payable monthly with interest
rates ranging from 8.572% to 19.998% through 2007 $1,726,793 $2,011,118
Less: Current maturities 769,634 801,265
---------- ----------
Long-term portion $ 957,159 $1,209,853
========== ==========
32
The aggregate amounts of maturities at March 31, 2002 are as follows:
Minimum Future
Fiscal Year Lease Payments
--------------
2003 $ 893,684
2004 593,224
2005 276,734
2006 69,873
2007 and thereafter 93,056
----------
1,926,571
Less amount representing interest 199,778
----------
Net $1,726,793
==========
The capital lease obligations are collateralized by the property and
equipment related to the underlying leases.
9. SPLIT DOLLAR LIFE INSURANCE POLICIES
Through March 31, 2002 and 2001, the Company made payments on split dollar
insurance policies on the lives of seven and eight officers of the
Company, respectively. The cash surrender value of these policies is
$904,172 and $708,262 as of March 31, 2002 and 2001, respectively. The
Company will receive a refund of all split-dollar premiums advanced. The
Company is the beneficiary of any proceeds from the policies up to the
amount of premiums paid.
10. NOTES RECEIVABLE
Butler Financial Solutions LLC serves as the ultimate obligor under all
service contracts administered by the Company in exchange for a fee. Some
of the service contracts under which Butler is the obligor were insured by
Reliance Insurance Company, and the liquidation of Reliance has eliminated
the insurance coverage to Butler under those contracts.
In order to assist Butler in addressing its potential obligations under
the service contacts previously insured by Reliance for which Butler is or
Warrantech was the obligor, Warrantech Automotive has made a $1 million
loan to Butler. The Company has and will make further loans to Butler, as
required, for claim obligations in excess of Butler's fee revenues. All of
Warrantech's loans to Butler bear or will bear interest at the rate of
prime plus 2% per annum and will begin to be paid down once Butler's fee
revenues exceed the claims obligations.
Additionally, funding will be provided by a special surcharge, which will
be paid on all vehicle service contracts administered by the Company that
are sold after November 19, 2001. The surcharge will be paid by agents
through whom Reliance insured service contracts were sold. This funding
will be utilized by Butler to pay the claims previously insured by
Reliance and will also be available to repay Butler's loans from
Warrantech.
During fiscal year ended March 31, 2002, Warrantech has loaned Butler
$5,435,646. RWC, which is not part of the Reliance liquidation, is
obligated to pay $2,754,691 of that amount, which the Company expects to
receive in the second quarter of fiscal 2003 and is reflected as "Other
Receivables" on the Consolidated Balance Sheet. The remaining amount
representing the loans due from Butler of $2,680,955 is reflected as
"Notes Receivable" on the Consolidated Balance Sheet.
33
11. INCOME TAXES
A reconciliation of the income tax provision to the amount computed using
the federal statutory rate is as follows:
For the Years Ended March 31,
--------------------------------------------------------------------------------
2002 2001 2000
--------------------- ----------------------- -----------------------
Federal statutory rate $1,278,509 34.0% $ 1,185,241 34.0% ($3,729,118) 34.0%
State tax effect 87,089 2.3% 300,442 8.6% 111,381 (1.0)%
Goodwill -- -- 281,370 8.1% 178,850 (1.6)%
Non-deductible items 34,179 0.9% -- -- -- --
Other 104,272 2.8% (147,973) (4.2)% 677,071 (6.2)%
--------------------- ----------------------- -----------------------
Provision for income taxes $1,504,049 40.0% $ 1,619,080 46.5% ($2,761,816) 25.2%
===================== ======================= =======================
Provision
For the Year Ended March 31, 2002 Current Deferred (Benefit)
- --------------------------------- ----------- ----------- -----------
Federal $ 3,025,722 ($1,718,189) $ 1,307,533
State 176,629 (44,676) 131,953
Foreign 100,573 (36,010) 64,563
----------- ----------- -----------
Total $ 3,302,924 ($1,798,875) $ 1,504,049
=========== =========== ===========
For the Year Ended March 31, 2001
- ---------------------------------
Federal ($4,207,054) $ 3,968,279 ($ 238,775)
State 92,579 16,504 109,083
Foreign (109,440) 1,858,212 1,748,772
----------- ----------- -----------
Total ($4,223,915) $ 5,842,995 $ 1,619,080
=========== =========== ===========
For the Year Ended March 31, 2000
- ---------------------------------
Federal ($4,714,450) $ 3,247,050 ($1,467,400)
State 120,773 418,144 538,917
Foreign 14,694 (1,848,027) (1,833,333)
----------- ----------- -----------
Total ($4,578,983) $ 1,817,167 ($2,761,816)
=========== =========== ===========
Deferred income tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income taxes. The components of the deferred tax asset are as follows:
March 31,
------------------------------
2002 2001
------------ ------------
Deferred Tax Assets:
Deferred revenue $ 11,754,497 $ 21,169,928
Deferred rent 68,151 103,410
Provision for doubtful accounts 88,152 405,112
Accrued bonus 260,123 166,070
Foreign loss benefit 594,599 280,625
Net operating loss 2,310,365 --
Net state benefit 32,955 132,949
Tax vs. book depreciation 14,024 --
Other 3,588 16,476
------------ ------------
Total assets 15,126,454 22,274,570
Deferred Tax Liabilities:
Deferred Direct Costs (7,932,968) (16,381,144)
Tax vs. book depreciation -- (606,964)
Section 174 expense (1,633,366) (1,796,916)
------------ ------------
Total liabilities (9,566,334) (18,785,024)
------------ ------------
5,560,120 3,489,546
Less: Valuation Allowance (577,805) (194,268)
------------ ------------
Net deferred tax asset $ 4,982,315 $ 3,295,278
============ ============
34
Management believes that it is not likely the deferred tax asset
attributable to certain foreign operations will be realized and,
accordingly, has reflected a valuation allowance of $577,805 and $194,268
at March 31, 2002 and 2001. Section 174 expense represents research and
experimental expenses related to the development of a proprietary
relational database and interactive software.
12. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments - The Company leases office and warehouse
space under noncancellable operating leases expiring in 2004. These leases
include scheduled rent increases over their respective terms. In some
cases, 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, net of sub-lease income, charged
to operations for the years ended March 31, 2002, 2001 and 2000 was
$1,389,764, $2,403,489 and $2,758,830, respectively. Sub-lease income will
be $31,675 through the term of the lease, expiring July 2003.
Future minimum commitments under these leases that have initial or
remaining lease terms in excess of one year at March 31, 2002, are as
follows:
Fiscal Year
-----------
2003 $1,161,852
2004 733,616
----------
Total future minimum lease payments $1,895,468
==========
Employment Contracts - The Company has employment contracts with its
officers and certain key employees. These employment contracts, expiring
on various dates through 2004, provide for aggregate minimum annual base
compensation of $2,230,337. Certain agreements call for (i) annual
increases, (ii) cost of living increases, (iii) automobile allowances and
(iv) additional compensation, if certain defined performance levels are
attained. This additional compensation is to be paid in the form of cash
and/or Company common stock. The Company also agreed to forgive interest
which has accrued annually on a note between the Company and its CEO, for
as long as the CEO remains in the Company's employ.
Line of Credit - The Company executed a Letter of Understanding with Great
American Insurance Company ("GAIC"), whereby, GAIC agreed to provide
funding by extending a favorable change of its credit terms to the
Company. GAIC has also agreed to extend a separate line of credit for an
amount up to $3 million to the Company, subject to certain adjustments, to
fund unanticipated working capital requirements. Interest will be paid on
monies made available for the line of credit at an annual rate of prime
plus 2%.
Equipment Financing - The Company has ongoing relationships with equipment
financing companies and intends to continue financing certain future
equipment needs through leasing transactions. The total amount financed
through leasing transactions during the fiscal year ended March 31, 2002
amounted to $443,232 for new leases and $151,565 for leases refinanced.
Litigation - The Company is from time to time involved in litigation
incidental to the conduct of its business.
Staples the Office Superstore, Inc.
Staples the Office Superstore, Inc. ("Staples") v. ACE Property and
Casualty Insurance Company, Warrantech Consumer Product Services, Inc. and
Warrantech Help Desk, Inc., No. 2001-02277, District Court of Harris
County, Texas.
In accordance with a Service Contract Administration Agreement, Warrantech
administered a service contract program for Staples. For a period of time,
that program was underwritten by ACE Property and Casualty Insurance
Company (f/k/a CIGNA Property and Casualty Insurance
35
Company). In March 2001, ACE informed Warrantech that it was implementing
changes in the process pursuant to which claims underwritten by ACE were
to be adjusted and paid. Although Warrantech would continue to take
inbound calls and validate coverage, ACE would now confirm diagnoses,
dispatch service and pay servicer invoices. Shortly after implementation
of these changes, Staples reported that it had witnessed a material
increase in complaints from customers holding service contracts
underwritten by ACE. These complaints were primarily focused on inordinate
delays in service delivery. Although Staples discussed these problems with
Warrantech, ACE continued to operate under the new claims handling
procedures. In an effort to satisfy customer complaints, Staples stated
that it had spent a substantial amount of its own funds to repair or
replace covered products.
This action has two distinct components. Initially, Staples sought a
Temporary Injunction against ACE and Warrantech. The motion, as filed,
asked that (i) Staples be given control of the toll free telephone lines
on which customers call for service and (ii) ACE be required to
re-institute those claims handling procedures that were in place prior to
March 2001. That motion was denied but the parties entered into
an Agreed Order that governs the administration of the Staples portfolio
of service contracts.
Staples was also pursuing an action for damages against both ACE and
Warrantech. It seeks to recover the amounts it spent to satisfy its
customers and certain unspecified amounts representing loss of business
and damage to its reputation. It claimed entitlement to these amounts is
based on a variety of theories including breach of contract, fraud and
tortuous interference with business. Warrantech believes the claims as
asserted against it were without merit. Warrantech also believes it has
meritorious claims against ACE arising out of these allegations which
claims may be asserted in this litigation or in the arbitration referred
to below. Settlement discussions were concluded and all parties to the
litigation executed a settlement agreement which the court approved and
subsequently dismissed the case.
ACE Property and Casualty Insurance Company
In the Matter of the Arbitration between ACE Property and Casualty
Insurance Company f/k/a CIGNA Property and Casualty Insurance Company v.
Warrantech Corporation, Warrantech Consumer Product Services, Inc., WCPS
of Florida, Inc. and Warrantech Help Desk, Inc.
In accordance with an Administrative Agreement between the various named
Warrantech entities and CIGNA, ACE has made a demand for arbitration of a
variety of claims that ACE asserted against Warrantech. These claims can
be divided into two general categories. The first arises out of
Warrantech's administration of its service contract program with CompUSA
prior to and immediately following the termination of the relationship
between Warrantech and CompUSA. The remaining claims relate to
Warrantech's general claims handling procedures. Although all claims have
not been set forth with specificity, it is evident that ACE is seeking to
recover damages in an amount in excess of twenty million dollars
($20,000,000).
ACE provided Warrantech with its Preliminary Statement, an arbitration
panel was appointed and an arbitration schedule was agreed upon. Minimal
discovery has been commenced and all parties have significant discovery
work to complete. Preliminary discussions have been held but, at this
stage of the discussions, it is impossible to predict whether or not such
discussions will be successful.
Michael A. Basone
Mr. Basone is a former Executive Vice President and Chief Operating
Officer of Warrantech, having resigned in February 2000. Several months
after resigning, Mr. Basone contacted the Company through his attorney and
claimed that the Company's conduct was such that he was forced to resign.
For this alleged "constructive termination" without cause, Mr. Basone
seeks an amount equal to what he would have received had he completed the
term of his employment
36
agreement. The Company believes this assertion is completely without merit
and has rejected Mr. Basone's demand for payment. Mr. Basone has filed a
Demand for Arbitration with the American Arbitration Association that
seeks damages in the amount of $300,000. An arbitration hearing was held
on May 13 - 14, 2002. The arbitrator's decision is expected in July or
August 2002.
Although the Company believes that the actions described above are without
merit, it is not able to estimate its potential liability in any of them,
and accordingly, no reserves for potential liabilities have been provided
for any of these actions.
Insurance liability - As a consequence of the September 11, 2001
tragedies, one of the Company's former insurance carriers, Reliance,
incurred potential claim losses that were greatly in excess of its ability
to pay them. Consequently, the Pennsylvania Insurance Commissioner placed
Reliance in receivership in October 2001. Reliance had been an insurer of
the Company's automotive contracts until August 2000. The Company was the
obligor under approximately 20% of the outstanding Reliance - insured
contracts. As disclosed in Note 10 of this Report on Form 10-K, Butler has
assumed the obligation of the Company. The Company has agreed to make
loans to Butler to fund the required claims payments it assumed. The
Company believes that the arrangements with Butler and GAIC provide a
mechanism to cover the claims under all of the service contracts in which
the Company was the obligor. If, however, Butler, for any reason, becomes
unable to pay such claims, which were previously insured by Reliance, or
if GAIC ceases to provide credit to the Company in order to fund any
shortfalls required by Butler, the Company may ultimately be required to
honor the claims, if any, under those contracts in which it was the
obligor. Management, as well as the carrier, is not able to determine the
Company's potential claims liability, if any, and as such, the
accompanying financial statements do not reflect any estimate for claims
losses.
13. STOCK OPTION AND OTHER BENEFIT PLANS
At March 31, 2002, the Company had one stock option plan, which is
described below. SFAS No. 123, "Accounting for Stock-based Compensation,"
defines a fair value method of accounting for an employee stock option.
SFAS No. 123 allows a company to continue to measure compensation costs
for theses plans using APB No. 25 and related interpretations. The Company
has elected to continue using APB No. 25 for accounting for its employee
stock compensation plan. Accordingly, no compensation cost has been
recognized for its fixed stock option plan, except for stock options
granted to non-employees. No compensation cost has been incurred or
charged against income for non-employees awarded stock options for the
fiscal years ended March 31, 2002, 2001 and 2000. If Warrantech had
determined compensation cost for its stock option plan based on the fair
value at the grant dates for awards under the plan, consistent with the
method prescribed by SFAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts as follows:
For the Years Ended March 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net Income (loss) as reported $ 2,256,273 $ 1,866,924 ($8,206,183)
Net income (loss) Pro Forma $ 2,014,877 $ 1,044,140 ($8,638,433)
Shares - Basic 15,259,437 15,265,114 15,231,146
Basic Earnings Per Share as reported $ 0.15 $ 0.12 ($0.54)
Basic Earnings Per Share Pro Forma $ 0.13 $ 0.07 ($0.57)
The fair value of Warrantech stock options used to compute pro forma net
income and earnings per share disclosures is the estimated value at grant
date using the Black-Scholes option-pricing model with the following
weighted average assumptions for years ended March 31, 2002, 2001 and 2000
respectively: expected dividend yield of 0%; expected volatility of 50%; a
risk free interest rate of 5.0%; and expected option life of 5 years.
37
Stock Incentive Plans - Under the 1998 Employee Incentive Stock Option
Plan, which was adopted by the Company's Board of Directors on August 25,
1998 and approved by the Company's shareholders on October 27, 1998 (the
"1998 Plan"), to 1,041,987 shares of the Company's common stock reserved
for issuance to employees (including officers) upon exercise of options
granted under the 1998 Plan. On September 25, 2001, the Company's
shareholders approved an amendment to the 1998 Plan increasing the number
of shares issuable by 600,000 shares (the "1998 Amended Plan"). As a
result, a total of 1,641,987 shares are issuable under the 1998 Amended
Plan. 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 1998 Amended Plan will terminate in
August 2008 unless sooner terminated by the Board of Directors.
Presented below is a summary of the status of the stock options in the
plan and the related transactions for the years ended March 31, 2002, 2001
and 2000.
2002 2001 2000
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------
Options outstanding at beginning of year 1,185,748 $ 2.18 582,090 $ 3.51 1,014,225 $ 4.36
Granted 361,253 0.89 671,301 1.23 -- --
Canceled/Surrendered (70,108) (1.32) -- -- (432,135) 5.51
Exercised -- -- -- -- -- --
Forfeited (60,610) (1.35) (67,643) (4.24) -- --
-----------------------------------------------------------------------------------
Options outstanding at end of year 1,416,283 $ 1.93 1,185,748 $ 2.18 582,090 $ 3.51
===================================================================================
-----------------------------------------------------------------------------------
Options exercisable at end of year 531,261 $ 1.54 164,912 $ 2.18 81,663 $ 4.47
===================================================================================
The weighted average fair value of stock options at date of grant,
calculated using the Black-Scholes option-pricing model, granted during
the years ended March 31, 2002, 2001 and 2000 is $1.22, $0.84 and $0.00,
respectively.
The Company recognized costs of $75,416, $0.00 and $0.00 for the years
ended March 31, 2002, 2001 and 2000, respectively, for stock-based
compensation to employees.
The following table summarizes the status of all Warrantech's stock
options outstanding and exercisable at March 31, 2002.
Stock Options Stock Options
Outstanding Exercisable
-----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range Of Exercise Prices Shares Life (Yrs) Price Shares Price
-----------------------------------------------------------------
$0.67 to $0.87 377,696 9.10 $0.74 176,886 $ 0.72
$1.3125 to $1.50 510,353 6.91 $1.33 241,137 $ 1.33
$2.00 2,000,000 4.50 $2.00 2,000,000 $ 2.00
$3.25 to $3.375 528,234 2.60 $3.35 113,234 $ 3.27
-----------------------------------------------------------------
Total 3,416,283 5.02 $1.97 2,531,257 $ 1.90
=================================================================
38
Stock Awards
Restricted common stock of the Company may be awarded to officers, key
employees, non-employee directors and certain other non-employees. Shares
granted are subject to certain restrictions on ownership and
transferability. Such restrictions on current restricted stock awards
typically lapse one to three years after the award. The deferred
compensation expense related to restricted stock grants is amortized to
expense on a straight-line basis over the period of time of the
restrictions are in place. Restricted common stock awards to employees
reduce stock options otherwise available for future grants. Approximately
207,137 restricted shares were awarded to directors, employees and
non-employees during the year ended March 31, 2002. Common stock awards
totaling 251,353 shares were granted to directors, employees and
non-employees during the fiscal year ended March 31, 2001.
Other Stock Options
The Company may issue options to purchase the Company's common stock to
officers, non-employees, non-employee directors or others as part of
settlements in disputes and/or incentives to perform services for the
Company. In addition to the options described below, the Company issued
options to purchase 10,000 shares of common stock to vendors during the
fiscal year ended March 31, 2002 at a weighted average exercise price of
$0.675 per option and options to purchase 100,000 shares of common stock
to non-employee board of directors at a exercise price of $1.3125 during
the fiscal year ended March 31, 2001.
As part of the Letter of Understanding between the Company and GAIC to
provide extended credit terms, GAIC will receive options to purchase up to
1,650,000 shares of Warrantech's common stock at an exercise price of
$2.00 per share (the "GAIC Options"). If GAIC exercises all of these
options, it would own approximately 10.8% of the Company's outstanding
shares.
On June 11, 2002, simultaneously with the settlement of the litigation
with Staples, the Company granted Staples options to purchase one (1)
million shares of Warrantech's common stock at an exercise price of $2.00
per share (the "Staples Options"). If Staples exercises all of the
options, it would hold an equity position in Warrantech of approximately
6.5% of the Company's outstanding shares.
On August 24, 2001, simultaneously with the settlement of the litigation
among Service Guard Insurance Agency, Inc., American International Group,
Inc. ("AIG") and related entities, the Company granted AIG options to
purchase two (2) million shares of Warrantech's common stock at an
exercise price of $2.00 per share (the "AIG Options"). If AIG exercises
all of the options, it would own approximately 12% of the Company's
outstanding common shares.
The GAIC Options, Staples Options and AIG Options are exercisable for a
period of five years. Warrantech has the right to redeem these options at
any time if its shares trade at a price of $3.00 per share or more on any
five consecutive trading days. The redemption price is $.001 per option.
However, if Warrantech elects to redeem the options, GAIC, Staples and AIG
will have the right to exercise their respective options immediately prior
to the redemption.
In 1992, options 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 were granted to three directors, Joel
San Antonio, William Tweed and Jeff J. White (two of whom were officers
and one a former officer of the Company). Of the total options granted,
fifty percent (50%) became exercisable beginning one year following
October 22, 1992 in increments of 10% per year for a five-year period. The
remaining fifty percent (50%) of
39
the total options granted, which were based upon the Company's earnings,
became exercisable on October 22, 1995.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of
Warrantech's Board of Directors, exercised an aggregate of 3,000,000 of
their vested options to purchase Warrantech common stock. Promissory notes
totaling $8,062,500 were signed with interest payable over three years at
an annual rate of 6%. The promissory notes, which were with recourse and
secured by the stock certificates issued, matured July 5, 2001. On March
22,1999, Joel San Antonio delivered an additional promissory note for
$595,634, payable to the Company, representing the amounts funded by the
Company for the payroll taxes payable by him upon for the exercise of
these options. The exercise of these stock options and the anticipated tax
benefit from this transaction represented approximately $10 million. These
amounts were recorded as a contra-equity account, which is a reduction of
stockholders' equity.
In February 2000, the Company agreed to restructure the loans to Mr. Tweed
and Mr. White by capitalizing the interest due on the loans and making the
loans payable over five (5) years. Interest on these restructured loans
accrues annually at the applicable federal rate (approximately 6.2%), but
will first become payable on the third anniversary of the restructured
loans and will be payable annually thereafter.
In February 2000, the Company also agreed to restructure the loan to Mr.
San Antonio. The initial terms of the restructured loan provided for a
conversion of the two original loans into a one-year loan without
interest. Prior to the execution of the documents concerning this
restructuring, Mr. San Antonio and the Company agreed to revise the new
loan terms to provide that the new combined note (the "New Note") would
become due on January 31, 2005. Interest due on the New Note accrues
annually at 5.4% and will be forgiven, and charged to Mr. San Antonio as
additional compensation, as long as Mr. San Antonio continues to be
employed by the Company. The $330,631 interest which accrued on the note
during fiscal year 2002 was forgiven in the current fiscal year, the
$230,460 of interest which accrued from February 1, 2001 through March 31,
2002, was forgiven in fiscal year 2001. The interest was charged to
operations as additional compensation in the respective fiscal years the
interest income was accrued.
The total amount of the restructured loans to Mr. Tweed, Mr. White and Mr.
San Antonio, including the capitalized interest, is $10,163,875.
Savings and Retirement Plan
The Company and its qualified employees also participate in a Savings and
Retirement Plan also known as the 401(k) Plan (the "Plan"). All of the
Company's domestic employees who have completed one year of service with
the Company are eligible to participate in the Plan. The Company
contributes 33% of an eligible employee's contribution to the Plan, up to
4% of the employee's contribution. The Company's contribution vests after
an employee has been employed by the Company for three years. The Company
contributed $88,762 and $101,959 to the Plan during the fiscal years ended
March 31, 2002 and 2001, respectively.
14. OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
For the Years Ended March 31,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Interest and dividend income $ 855,877 $ 1,292,335 $ 1,325,638
Interest expense (217,072) (234,102) (344,969)
Gain (loss) on sale of assets (45,018) (23,258) (63,350)
Miscellaneous Income (expense) 263,679 (12,463) (11,031)
----------- ----------- -----------
Total Other Income $ 857,466 $ 1,022,512 $ 906,288
=========== =========== ===========
15. SIGNIFICANT CUSTOMERS
During the two fiscal years ended March 31, 2001 and 2000, the Company had
one significant customer, Staples, which accounted for approximately 10%
of consolidated gross revenues and 23% of the Consumer Products segment's
gross revenues in each of those years. Because
40
Warrantech could not reach an agreement with Staples to extend its
agreement on terms which would not erode the profitability of the program,
the program expired on February 26, 2001.
16. EARNINGS PER SHARE
The computations of earnings per share for the years ended March 31, 2002,
2001 and 2000 are as follows:
For the Years Ended March 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
Numerator:
Net income (loss) applicable to common stock $ 2,256,273 $ 1,866,924 ($8,206,183)
============ ============ ============
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,259,437 15,265,114 15,231,146
Stock Options (treasury method) -- 6,104 --
------------ ------------ ------------
Diluted shares 15,261,444 15,271,218 15,231,146
============ ============ ============
Earnings Per Common Share:
Basic $ 0.15 $ 0.12 ($0.54)
============ ============ ============
Diluted $ 0.15 $ 0.12 ($0.54)
============ ============ ============
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of related
tax, for the years ended March 31, 2002, 2001 and 2000 are as follows:
For the Years Ended March 31,
-------------------------------------
2002 2001 2000
-------- -------- ---------
Unrealized gain/(loss) on investments $ 4,333 $ 13,269 ($16,732)
Accumulated translation adjustments (56,361) (45,218) (127,400)
-------- -------- ---------
Accumulated other comprehensive income ($52,028) ($31,949) ($144,132)
======== ======== =========
18. SEGMENT INFORMATION
The Company operates in three major business segments: Automotive,
Consumer Products and International. The Automotive segment markets and
administers extended warranties on automobiles, light trucks, motorcycles,
recreational vehicles and automotive components. These warranties are sold
principally by franchised and independent automobile and motorcycle
dealers, leasing companies, repair facilities, retail stores, financial
institutions and other specialty marketers. The Consumer Products segment
develops, markets and administers consumer product extended warranties and
product replacement plans on household appliances, electronics and homes.
These warranties and replacement plans include home appliances, consumer
electronics, televisions, computers, home office equipment and homes and
are sold principally by retailers, distributors, manufacturers, utility
companies and financial institutions. Warrantech also markets these
warranties and plans directly to the ultimate consumer on behalf of the
retailer/dealer and manufacturer's programs through telemarketing and
direct mail campaigns. The International segment markets and administers
outside the United States and Canada, predominately the same products and
services of the other business segments. The International segment is
currently operating in Central and South America, Puerto Rico and the
Caribbean. Other includes intersegment eliminations of revenues and
receivables and net unallocated Corporate expenses.
41
Consumer Reportable
Year Ended Automotive Products International Segments Other Total
- ---------- ---------- -------- ------------- -------- ----- -----
March 31, 2002
- --------------
Earned Administrative Fee $ 19,019,558 $ 16,364,702 $ 2,353,491 $ 37,737,751 ($410,445) $ 37,327,306
Income (Loss) From Operations 12,183,739 (1,531,102) (578,137) 10,074,500 (7,171,644) 2,902,856
Pretax Income (Loss) 7,729,176 (3,704,242) (907,600) 3,117,334 642,988 3,760,322
Net Interest/Dividend Income 95,080 55,526 26,477 177,083 461,722 638,805
Depreciation/Amortization 398,229 1,674,238 79,999 2,152,466 2,327,976 4,480,442
Total Assets 38,627,491 30,403,020 3,418,178 72,448,689 5,102,540 77,551,229
March 31, 2001
- --------------
Earned Administrative Fee $ 16,006,259 $ 32,240,460 $ 1,815,700 $ 50,062,419 ($361,475) $ 49,700,944
Income (Loss) From Operations 8,390,016 11,672,546 (2,106,859) 17,955,703 (15,492,211) 2,463,492
Pretax Income (Loss) 4,277,109 3,927,266 1,392,294 9,596,669 (6,110,665) 3,486,004
Net Interest/Dividend Income 68,219 52,383 (16,851) 103,751 954,482 1,058,233
Depreciation/Amortization 831,016 1,871,897 768,762 3,471,675 2,945,440 6,417,115
Total Assets 45,339,353 41,495,701 2,879,066 89,714,120 7,403,053 97,117,173
March 31, 2000
- -------------
Earned Administrative Fee $ 10,332,834 $ 31,364,899 $ 2,240,455 $ 43,938,188 ($618,407) $ 43,319,781
Income (Loss) From Operations 1,948,799 6,262,782 (5,719,376) 2,492,205 (14,366,492) (11,874,287)
Pretax Income (Loss) (2,235,798) (2,057,869) (7,066,903) (11,360,570) 392,571 (10,967,999)
Net Interest/Dividend Income 50,146 66,104 4,093 120,343 860,326 980,669
Depreciation/Amortization 777,101 1,601,833 893,666 3,272,600 2,725,048 5,997,648
Total Assets 64,836,045 59,014,454 7,035,343 130,885,842 16,035,312 146,921,154
42
WARRANTECH CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
(Unaudited)
The following fiscal 2002 and 2001 quarterly financial information for
each of the three month periods ended June 30, September 30, December 31,
2001 and 2000 and March 31, 2002 and 2001 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,
-------- ------------- ------------ ---------
2001 2000 2001 2000 2001 2000 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Net Earned Administrative
Fees $ 9,227,622 $12,504,977 $9,265,963 $12,792,032 $8,549,955 $11,724,995 $10,283,766 $12,678,940
Income (Loss) from Operations (72,366) 861,909 840,440 166,696 418,177 1,070,548 1,716,605 364,339
Income Before Provision
For Income Taxes 120,623 1,029,019 988,447 404,369 755,804 1,309,515 1,895,448 743,101
Net income $ 131,223 $ 240,600 $ 548,247 $ 692,383 $ 491,204 $ 909,927 $ 1,085,599 $ 24,014
Earnings Per Share
Basic $ 0.01 $ 0.02 $ 0.04 $ 0.05 $ 0.03 $ 0.06 $ 0.07 $ 0.00
Fully Diluted $ 0.01 $ 0.02 $ 0.04 $ 0.05 $ 0.03 $ 0.06 $ 0.07 $ 0.00
43
WARRANTECH CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
Column Column Column Column Column
A B C D E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions Deductions-
Balance at ----------------------------------- Balance at
Description Beginning Charged to Costs Charged to Other End of
of Year and Expense Accounts-Describe Describe (a) Year
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2002
Allowance for doubtful accounts:
Trade A/R $1,079,946 (823,927) -- $ 256,019
Other A/R 45,500 (45,500) -- --
Year Ended March 31, 2001
Allowance for doubtful accounts:
Trade A/R $1,164,125 (84,179) -- $1,079,946
Other A/R 1,168,891 (1,123,391) -- 45,500
Year Ended March 31, 2000
Allowance for doubtful accounts:
Trade A/R 1,115,285 258,190 209,350 1,164,125
Other A/R 1,918,256 (226,714) 522,651 1,168,891
(a) Amount of receivables charged to the allowance during the year.
See independent auditor's report and accompanying notes to consolidated
financial statements
44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
Item 10. Directors and Executive Officers of the Registrant
See Security Ownership of Certain Beneficial Owners and Management, which is
incorporated herein by reference to the Company's Definitive Proxy Statement for
its 2002 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
See Compliance with Section 16(a) of the Securities Exchange Act of 1934 in the
Proxy Statement, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See Security Ownership of Certain Beneficial Owners and Management in the Proxy
Statement, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See Certain Relationships and Related Transactions in the Proxy Statement, which
is incorporated herein by reference.
45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. and 2. Financial Statements and Financial Statement Schedule: see
accompanying Index to Financial Statements and Financial Statement
Schedule, page 20.
(b) Reports on Form 8-K during the last quarter:
None
(c) Exhibits
Exhibits not incorporated herein by reference to a prior filing are
designated by an asterisk (*) and are filed herewith; all exhibits not so
designated are incorporated herein by reference as indicated. Management
contracts or compensatory plans, contracts or arrangements with directors
and executive officers of the Company are listed in Exhibits 10(a) through
10(w).
Exhibit List Description of Exhibit
------------ ----------------------
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.
3(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.
3(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.
3(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, file no. 0-13084.
3(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.
10(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.
10(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.
10(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.
46
10(e) - 1998 Employee Incentive Stock Option Plan of the
Company, as amended and restated, effective September
25, 2001. Incorporated by reference to the Company's
Report on Form 10-Q for the quarter ended September 30,
2001, file no. 0-13084.
10(f) - Employment Agreement dated April 1, 1998 between the
Company and Joel San Antonio. Incorporated by reference
to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999, file no. 0-13084.
10(g) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts
written in all states except Florida. Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file no. 0-13084.
10(h) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued
by CompUSA. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31,
1996, file no. 0-13084.
10(i) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts
written by WCPS of Florida, Inc. (excluding Inacom
Corporation). Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31,
1996, file no. 0-13084.
10(j) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts
written by WCPS of Florida, Inc. through CompUSA.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 1996, file
no. 0-13084.
10(k) - 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). Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file no. 0-13084.
10(l) - 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). Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file no. 0-13084.
10(m) - 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). Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file no. 0-13084.
10(n) - Employment Agreement dated April 16, 1998, as amended
April 6, 2002 between the Company and Richard F. Gavino.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 2001, file
no. 0-13084.
10(o) - Promissory Note agreement and pledge dated March 15,
2002 between the Company and Joel San Antonio.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 2001, file
no. 0-13084.
10(p) - Promissory Note agreement and pledge dated January 31,
2001 between the Company and Mr. William Tweed.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 2001, file
no. 0-13084.
47
10(q) - Promissory Note agreement and pledge dated January 31,
2001 between the Company and Mr. Jeff J. White.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 2001, file
no. 0-13084.
10(r) - Insurance policy between Warrantech Consumer Product
Services, Inc. and Warrantech Carribean LTD and Great
American Insurance Company pertaining to Service Plan
Agreement. Incorporated by reference to the Company's
Report on Form 10-Q for the quarter ended December 31,
2001, file no. 0-13084.
10(s) - Schedule 10(v) identifying contracts that are
substantially similar to Exhibit 10(r), the Insurance
policy between Warrantech Consumer Product Services,
Inc. and Warrantech Carribean LTD and Great American
Insurance Company pertaining to Service Plan Agreement,
in all material respects except as to the parties
thereto, the dates of execution, or other details.
Incorporated by reference to the Company's Report on
Form 10-Q for the quarter ended December 31, 2001, file
no. 0-13084.
10(t) - Nonqualified stock option agreement dated August 22,
2001, by and between Warrantech Corporation, American
International Group, Inc., and others. Incorporated by
reference to the Company's Report on Form 10-Q for the
quarter ended December 31, 2001, file no. 0-13084.
*10(u) - Obligor agreement between Butler Financial Solutions LLC
and the Company, dated April 1, 2000.
*10(v) - Master Agreement between Butler Financial Solutions, LLC
and the Company, dated November 21, 2001.
*10(w) - Employment Agreement dated April 1, 2000 between the
Company and Rick Rodriguez.
*21 - Subsidiaries of the Company.
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 March 31, 1988, file
no. 0-13084.
48
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 20, 2002 By: /s/ Joel San Antonio
------------------------------
Joel San Antonio,
Chairman of the Board and
Chief Executive Officer
Dated: June 20, 2002 By: /s/ Richard F. Gavino
-------------------------------
Richard F. Gavino,
Executive Vice President and
Chief Financial Officer
49
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 indicated on June 20, 2002.
/s/ Joel San Antonio Chairman, Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
Joel San Antonio
/s/ Richard F. Gavino Executive Vice President and Chief Financial Officer
- ------------------------- (Principal Accounting and Financial Officer)
Richard F. Gavino
/s/ William Tweed Vice Chairman and Director
- -------------------------
William Tweed
/s/ Lawrence Richenstein Director
- -------------------------
Lawrence Richenstein
/s/ Gordon Paris Director
- -------------------------
Gordon Paris
/s/ Jeff J. White Director
- -------------------------
Jeff J. White
/s/ Ronald Glime Director
- -------------------------
Ronald Glime
50
Exhibit List Description of Exhibit
------------ ----------------------
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.
3(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.
3(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.
3(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, file no. 0-13084.
3(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.
10(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.
10(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.
10(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.
10(e) - 1998 Employee Incentive Stock Option Plan of the
Company, as amended and restated, effective September
25, 2001. Incorporated by reference to the Company's
Report on Form 10-Q for the quarter ended September 30,
2001, file no. 0-13084.
10(f) - Employment Agreement dated April 1, 1998 between the
Company and Joel San Antonio. Incorporated by reference
to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999, file no. 0-13084.
10(g) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts
written in all states except Florida. Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file no. 0-13084.
10(h) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued
by CompUSA. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31,
1996, file no. 0-13084.
10(i) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts
written by WCPS of Florida, Inc. (excluding Inacom
Corporation). Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31,
1996, file no. 0-13084.
10(j) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts
written by WCPS of Florida, Inc. through CompUSA.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 1996, file
no. 0-13084.
10(k) - 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). Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file no. 0-13084.
10(l) - 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). Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file no. 0-13084.
10(m) - 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). Incorporated by
reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file no. 0-13084.
10(n) - Employment Agreement dated April 16, 1998, as amended
April 6, 2002 between the Company and Richard F. Gavino.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 2001, file
no. 0-13084.
10(o) - Promissory Note agreement and pledge dated March 15,
2002 between the Company and Joel San Antonio.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 2001, file
no. 0-13084.
10(p) - Promissory Note agreement and pledge dated January 31,
2001 between the Company and Mr. William Tweed.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 2001, file
no. 0-13084.
10(q) - Promissory Note agreement and pledge dated January 31,
2001 between the Company and Mr. Jeff J. White.
Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 2001, file
no. 0-13084.
10(r) - Insurance policy between Warrantech Consumer Product
Services, Inc. and Warrantech Carribean LTD and Great
American Insurance Company pertaining to Service Plan
Agreement. Incorporated by reference to the Company's
Report on Form 10-Q for the quarter ended December 31,
2001, file no. 0-13084.
10(s) - Schedule 10(v) identifying contracts that are
substantially similar to Exhibit 10(r), the Insurance
policy between Warrantech Consumer Product Services,
Inc. and Warrantech Carribean LTD and Great American
Insurance Company pertaining to Service Plan Agreement,
in all material respects except as to the parties
thereto, the dates of execution, or other details.
Incorporated by reference to the Company's Report on
Form 10-Q for the quarter ended December 31, 2001, file
no. 0-13084.
10(t) - Nonqualified stock option agreement dated August 22,
2001, by and between Warrantech Corporation, American
International Group, Inc., and others. Incorporated by
reference to the Company's Report on Form 10-Q for the
quarter ended December 31, 2001, file no. 0-13084.
*10(u) - Obligor agreement between Butler Financial Solutions,
LLC and the Company, dated April 1, 2000.
*10(v) - Master Agreement between Butler Financial Solutions, LLC
and the Company, dated November 21, 2001.
*10(w) - Employment Agreement dated April 1, 2000 between the
Company and Rick Rodriguez.
*21 - Subsidiaries of the Company.
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 March 31, 1988, file
no. 0-13084.
51