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THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON JUNE 30, 1998
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from _______ to _______
Commission File No. 0-13084
WARRANTECH CORPORATION
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(Exact name of registrant as specified in its charter)
_____Delaware____ ___13-3178732____
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
300 Atlantic Street, Stamford, Connecticut ___06901___
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (203) 975-1100 Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each Exchange on which registered
Common Stock $.007 par value NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.007 par value
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(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes__X__ No_______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K [ ].
-------------------------------
The number of shares outstanding of the Registrant's common stock is 13,359,380
as of (June 17, 1998).
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant is $57,133,798 (as of June 17, 1998).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended are incorporated by reference in
Part III.
Index to Exhibits is on page 44.
Document contains 50 pages
1
PART I
Warrantech Corporation ("Warrantech" or the "Company") maintains executive
offices at 300 Atlantic Street, Stamford, Connecticut 06901, operating
facilities at 150 Westpark Way and 1441 West Airport Freeway, Euless, Texas
76040, as well as other Texas locations. The telephone number of the executive
offices is (203) 975-1100.
Item 1. Business
Warrantech, through its wholly-owned subsidiaries, Warrantech Automotive,
Inc., Warrantech Consumer Product Services, Inc., Warrantech Help Desk, Inc.,
Warrantech Direct, Inc., Warrantech Home Service Company and Warrantech
International, Inc., provides outsourcing of business services through call
center services and technical computer services and markets and administers
service contract programs for retailers, distributors and manufacturers of
automobiles, homes, home appliances, home entertainment products, computers and
peripherals, and office and communication equipment, in the United States,
Puerto Rico, Mexico, Canada, Caribbean, South America, Central America and the
United Kingdom. Additionally, third-party administrative services are provided
to manufacturers of consumer and automotive products and other business entities
requiring such services. The predominant terms of the contracts and
manufacturer's warranties range from twelve (12) to eighty-four (84) months.
The Company assists dealer-clients in obtaining insurance coverage that
indemnifies the clients against losses resulting from service contract claims
and protects the consumer by ensuring that their claims will be paid.
Additionally, the Company and the insurers have agreements that provide
eligibility for the Company to participate in the profits.
Service contract programs benefit consumers with expanded and/or extensions
of 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 warranty(ies). Such coverage
generally provides for the repair or replacement of the product, or a component
thereof, in the event of its failure.
From a marketing perspective, the Company's products and services enhance
the perceived value of the retailers', distributors', manufacturers' or
financial institutions' products.
Warrantech Automotive, Inc.
Warrantech Automotive, Inc. ("WAI") has operated as a wholly-owned
subsidiary since November 1989. Through this subsidiary, the Company markets and
administers vehicle service contract ("VSC") programs, credit life and other
related automotive after-sale products, all of which enhance the profitability
of the sale of automobiles, recreational vehicles and automotive components.
These products are sold by franchised and independent automobile dealers,
leasing companies, repair facilities, retail stores, and financial institutions.
Additionally, WAI has expanded its efforts in the automotive field to
provide administrative expertise and secure the placement of insurance coverage
to other parties requiring such services on either VSC's or similar products.
2
The VSC is a contract between the dealer/lessor (and in some states WAI)
and the vehicle purchaser/lessee that offers coverage that runs from (12) to
eighty-four (84) months and/or 1,000 to 100,000 miles. Coverage is afforded in
the event of the failure of a broad range of mechanical components that occurs
during the term of the VSC, exclusive of failures covered by a manufacturers
warranty.
The programs marketed and administered by WAI require that the dealer enter
into an agreement whereby WAI is the provider of services to the dealer. Among
these services is the development and distribution of marketing materials,
processing of dealer produced VSC's, and the administration and payment of
claims filed by contract holders under the terms of their VSC.
WAI utilizes the services of independent agents to call on dealers to
solicit their use of the VSC programs. At this time, Warrantech Automotive is
represented by more than 90 agents in 46 states as well as Puerto Rico and
Canada.
With respect to the VSC programs which Warrantech and WAI market and
administer, liability is borne by insurers who have issued insurance policies to
assume this risk in exchange for the payment of agreed upon premiums and fees.
Effective March 1, 1993, insurance for the WAI VSC programs is provided by the
New Hampshire Insurance Company and other American International Group, Inc.
("AIG") member companies.
Essential to the success of WAI is its ability to capture, maintain, track
and analyze all relevant data regarding a VSC. To support this function, this
subsidiary operates proprietary software developed internally which consists of
custom designed relational databases with interactive capabilities. This
configuration provides ample capacity and processing speed for current
requirements as well as the ability to support significant future growth in this
area.
Warrantech Consumer Product Services, Inc.
Warrantech Consumer Product Services, Inc. ("WCPS"), a wholly-owned
subsidiary, was formed in 1990 and, at that time, assumed the parent company's
efforts to develop, market and administer consumer product extended service
contract programs.
The programs marketed and administered by WCPS require that the selling
dealer, distributor or manufacturer enter into an agreement with WCPS that
outlines the duties of each party. Those duties specifically assumed by WCPS
include the development and distribution of marketing materials, sales and
motivational training, processing of service contracts, and adjustment and
payment of claims. WCPS has also entered into service center agreements with
consumer product repair centers located throughout North America, South America,
Mexico and the Caribbean.
In exchange for agreed upon premiums and fees from the insured, liability
for claims incurred by service contracts issued by a dealer, distributor or
manufacturer has been assumed by Cigna Insurance Company. At the present time,
in addition to Cigna, certain programs offered by WCPS are being insured by
Houston General, a member of the Tokyo Marine and Fire Insurance Company,
Virginia Surety Company, a member of AON Insurance Company, and certain AIG
member companies.
It is also essential to the success of WCPS that it be able to capture,
maintain, and analyze all relevant information about its service contracts. To
support this function, WCPS has internally developed application programs that
allow the tracking of a database of millions of service contracts. This also
allows for the development of current and historical statistical data which is
used to monitor its service contract program's performance, and also will
support significant growth of WCPS's business.
3
Warrantech Help Desk, Inc.
The Company formed Warrantech Help Desk, Inc. ("WHD") a wholly-owned
subsidiary, on March 25, 1997, to provide information technology outsourcing
support services to large national and multi-national corporations, government
agencies and service organizations. This subsidiary offers its services through
two business units: (i) Call Center Services, which provides its clients with
inbound telephone support for their computer product end-users and (ii)
Corporate Computer Services, which provides corporations with technical
staffing. The call center is staffed by Technical Service Representatives with
extensive technical training in computers and peripherals. Using centralized
dispatch capabilities, WHD is able to provide "One Call Service Solutions"
during manufacturers' warranty period and beyond. Support services includes call
dispatch, parts acquisition, service call resolution and specialized reporting
back to our clients. The WHD expanded service network includes national as well
as international coverage. In addition, the service expertise of WHD will
enhance the programs offered by certain other subsidiaries of the Company
through the expediting of troubleshooting and problem solving over the phone.
This should result in cost-savings by reducing the number of on-site calls and
equipment returns.
Warrantech Direct, Inc.
Warrantech Direct, Inc. ("WDI") is uniquely positioned to integrate the
customer, service and product resources of Warrantech, its subsidiaries and
their retail dealers and manufacturers, in order to fully exploit new business
opportunities in merchandising through data-base marketing to the end-user
consumer.
This subsidiary, which was formed in 1992, utilizes state-of-the-art
telemarketing and direct mail equipment and techniques to obtain second effort
sales and renewals of service contracts.
WDI's efforts are conducted on behalf of (i) the dealer/retailers,
distributors and manufacturers who utilize the service contract programs
marketed and administered by WAI, WHD, WCPS and WDI, and (ii) a growing list of
other vendors who wish to utilize WDI resources to enhance their own service
contract sales efforts. Second effort marketing consists of contacting product
purchasers who did not buy a service contract and offering them this opportunity
prior to the expiration of the manufacturer warranty. Renewal marketing consists
of the effort to renew service contracts on eligible products upon the
expiration of their current service contract coverage.
Warrantech Home Service Company
In fiscal 1996, the Company commenced operations of Warrantech Home Service
Company ("WHSC"), a wholly-owned subsidiary, as the vehicle to develop, market
and administer service contract programs in the United States covering
mechanical breakdowns of the working systems and components in homes. 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 what
has been available until now and it provides this security at a lower cost.
Warrantech International, Inc.
In July 1993, the Company through Warrantech International, Inc. ("WII")
and AIG formed a joint venture, Techmark Services Ltd. ("Techmark" or the "Joint
Venture") owned fifty-one percent (51%) by AIG and forty-nine percent (49%) by
the Company.
4
In conjunction with the foregoing alliance, in October 1993, AIG
purchased, for a price of $6,430,000, options and a special issue of preferred
stock which was convertible into an issue of new shares of common stock which,
subsequent to its issuance, would be equivalent to twenty percent (20%) of the
Company's issued and outstanding common stock. Under the terms of the purchase
agreement, AIG had the right to purchase an increased interest in the Company,
to a maximum of thirty percent (30%) of the Company's issued and outstanding
common stock, if certain operating goals were achieved by the Company.
In April 1996, the Company and AIG agreed to terminate the joint venture
effective January 1, 1996. Under the terms of the agreement, AIG agreed to
purchase the Company's forty-nine percent (49%) investment in the joint venture
for approximately $3.8 million and to sell back to the Company the 3,234,697
shares of convertible preferred stock held by AIG for its original redemption
value of $6,430,000 and further relinquish their rights to other options under
the original agreement. The balance due AIG of $2,395,960 for the preferred
stock is in the form of a three year, non-interest bearing note payable. In the
event of default by the Company with respect to this note payable, the Company
would be required to reissue to AIG preferred stock for the remaining amount due
at the default date. AIG also agreed to continue to insure certain extended
warranty programs of the Company.
In July 1995, WII, acquired Home Guarantee Corporation PLC (subsequently
renamed Warrantech Europe Plc.), a British company which markets home warranty
products in the United Kingdom covering mechanical breakdowns of the working
systems and components in homes (e.g., furnaces, electrical and plumbing
systems, and major appliances). In addition to home warranty products,
Warrantech Europe's business will continue to expand to include extended
warranties on a wide range of products including automobiles, business
equipment, office and home computers, mobile telephones, and major appliances as
well as credit card enhancement programs similar to those marketed in the United
States. This subsidiary also provides full database management, marketing,
training, brokerage services, and customer care service for clients in the
automotive, financial, manufacturing, retail and service sectors to certain
other subsidiaries of the Company.
WII conducts its efforts on a direct basis and has developed relationships
with the retailers and distributors who will market and sell the programs. In
addition, WII has made contact with various insurers in certain South American
countries to provide the insurance for the programs offered by such retailers
and distributors. The Company believes that its direct efforts will result in
greater penetration in the South American marketplace.
Sales and Marketing
The sales and marketing activities of the Warrantech subsidiary companies
are managed by each subsidiary's own sales and marketing personnel. In certain
circumstances, the subsidiaries have entered into marketing agreements with
independent organizations that solicit dealers at their own expense, and receive
a commission on all service contracts sold by such dealers.
The Warrantech subsidiary companies foster awareness of their
respective programs through cooperative advertising programs, which may be
jointly funded by the subsidiary and the dealer or independent agent.
Sales training and motivational programs are a primary form of specialized
assistance provided by WAI, WHD and WCPS to retailers/dealers, distributors and
manufacturers, to assist them in increasing the effectiveness and profitability
of their service contract program sales efforts. The Company develops materials
and conducts educational seminars. These seminars are conducted either at the
client's place of business, 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.
5
Significant Customers
The Company has one significant customer, CompUSA, that accounted for
approximately 24% and 23% of consolidated gross revenues for the years ended
March 31, 1998 and 1997. The Company had two significant customers, CompUSA and
Tops, that accounted for approximately 19% of consolidated gross revenues for
the year ended March 31, 1996.
Competition
The Warrantech subsidiary companies compete with a number of independent
administrators, divisions of distributors and manufacturers, financial
institutions and insurance companies. While the Company believes that it
occupies a preeminent position among its competitors in its field, it may not be
the largest marketer and administrator of service contracts and limited
warranties, and some competitors may have greater operating experience, more
employees and/or greater financial resources. Further, many manufacturers,
particularly those producing motor vehicles, market and administer their own
service contract programs for and through their dealers.
Insurance Coverage
Liability for performance under the terms of service contracts and
limited warranties issued by dealers/retailers, distributors or manufacturers is
assumed by the insurer in return for the payment of the agreed-upon premium for
the assumption of the risk from the insured. This coverage provides
indemnification against loss resulting from service contract claims and protects
the consumer by ensuring that their claim will be paid.
The insurance protection is provided for the WAI programs by the New
Hampshire Insurance Company, and other AIG member companies. These companies are
all rated A++ (Superior) by the A.M. Best Company. WCPS,WHDI and its clients are
protected by insurance afforded by Cigna Insurance Company, Houston General
Insurance Company, a member of the Tokyo Marine & Fire Insurance Company,
Virginia Surety Company, a member of the AON Group and certain AIG member
companies. Cigna and Houston General are rated A (Excellent) and Virginia Surety
is rated A+ (Superior) by A.M. Best Company. WHSC and its clients are protected
by insurance through Zurich American Insurance Company, an A+ (Superior) rated
carrier by A.M. Best Company.
In accordance with the insurance arrangements with these insurers, a fixed
amount is remitted for each service contract or limited warranty sold. The
amount is based upon actuarial analysis of data collected and maintained for
each type of coverage and contract term. In no event is the insured, the Company
or its subsidiaries obligated to the insurer if claims exceed the premium
remitted.
Additionally, agreements between the Company and the insurers, contain
profit-sharing features that permit the Company to share in underwriting profits
earned by the service contract programs. The amounts to be received, if any, are
determined in accordance with certain specified formulas by the type of program
and by policy year. Certain of these agreements require interim calculations and
distributions for various programs, with final calculations being made as
contracts expire by term. The Company did not accrue or receive any profit
sharing advances during the 1998 or 1997 fiscal years.
6
Federal and State Regulation
The service contract programs developed and marketed by the Company's
subsidiaries, and their related operations with regard to service contracts and
limited warranties, are regulated by federal law and the statutes of a
significant number of states. The Company continually reviews all existing and
proposed statutes and regulations to ascertain their applicability to its
existing operations, as well as new programs that are developed by the Company.
Generally speaking, these statutes concern the scope of service contract
coverage and content of the service contract or limited warranty document. In
such instances, the state statute will require that specific wording be included
in the service contract or limited warranty expressly stating the consumer's
rights in the event of a claim, how the service contract may be canceled and
identification of the insurance company that indemnifies the dealers,
distributors or manufacturers against loss for performance under the terms of
the service contract.
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 and its subsidiaries do not believe that they are
insurers and have no intention of filing the documents and meeting the capital
and surplus requirements that are necessary to obtain such a license.
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 any
regulatory bodies that its methods of doing business were not in compliance with
state regulation, the Company has taken the steps necessary to comply.
If the Company's right to operate in any state is challenged successfully,
the Company may be required to cease operations in the state and the state might
also impose financial sanctions against the Company. These actions, should they
occur, could have materially adverse consequences and could affect the Company's
ability to continue operating. However, within the framework of currently known
statutes, the Company does not feel that this is a present concern.
Trademarks
The Company holds numerous registered United States trademarks, the most
important of which are the "WARRANTECH" and its stylized "W" logo service marks.
The registration for all service marks are kept current by the Company and its
trademark counsel. Additional service marks are registered covering subsidiary
names and product names and descriptions.
Employees
The Company and its subsidiaries currently employ approximately 700
individuals, an increase of approximately 200 over the preceding fiscal year.
The increase is directly attributable to the expansion of customer service and
claims representatives to meet the needs of the Company's expanding business.
None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
7
Item 2. Properties
The Company's executive offices are located in leased premises at 300
Atlantic Street, Stamford Connecticut. The premises, which are leased pursuant
to a lease agreement (the "Leases"), consists of approximately 14,317 square
feet for space A and 6,683 square feet for space B. The Lease, which was renewed
effective on April 1, 1998 and expires on March 31, 2005, provide for remaining
annual base rent payments ranging from $207,173 to $472,461 respectively.
The operating facilities of WCPS and WHSC are located in leased premises at
150 Westpark Way, Euless, Texas. The premises, consisting of approximately
25,505 square feet, are leased pursuant to a lease agreement (the "Texas Lease")
which was favorably renegotiated effective on March 1, 1993 and amended
effective on March 1, 1996 to add an additional 1,448 square feet to the
original 24,057. The Texas Lease expires on July 31, 2003 and provides for
remaining annual base rent payments ranging from $291,182 to $352,819.
Effective April 15, 1996, the Company leased an additional 36,814 square
feet at 1441 West Airport Freeway, Euless, Texas to accommodate the operations
of WAI and WHD which moved June 1, 1996 from the Westpark Way facility due to
the expansion of the WCPS operations and the start-up of WHSC operations at that
location. These premises, are being leased pursuant to a lease agreement that
expires March 31, 2004. The lease provides for annual base rent payments ranging
from $404,954 to $441,768 during the term of the lease.
Additional facilities that support the operations of WDI are located at
1441 West Airport Freeway, Euless, Texas (approximately 12,901 square feet) and
7630-7632 Pebble Drive, Building #28, Fort Worth, Texas (approximately 6,000
square feet). These premises are leased under the terms of leases (the "Other
Leases") that were effective on December 1, 1994 and March 1, 1996, respectively
expiring March 31, 2004 and February 28, 2001 respectively. The Other Leases
provide for annual base rent payments ranging from $163,061 to $174,762.
The operating facilities of Warrantech Europe, plc are located in leased
premises at 248A Marylebone Road, London. These premises are leased pursuant to
a lease agreement which expires June 23, 2010 and provides for remaining annual
base rent payments ranging from L94,050 to L108,450.
Warrantech International's Puerto Rico operations are located in leased
premises at 1225 Ponce de Leon avenue, Santurce, Puerto Rico pursuant to a lease
agreement which expires March 31, 2003. The remaining annual base rent payments
ranging from $52,353 to $54,928.
Item 3. Legal Proceedings
Intercontinental Brokerage, Incorporated ("IBI") v. Warrantech Consumer
Product Services, Inc. and Warrantech Corporation (collectively, "Warrantech").
This suit was filed in the 67th District Court, Tarrant County, Texas on
October 10, 1997. IBI had provided various insurance services to and on behalf
of Warrantech over a period of years. Warrantech asserts, however, that it
terminated its relationship with IBI in 1996 and has not requested or used IBI's
services since the date of termination. IBI alleges in this action that it
continued to perform services for Warrantech though June 30, 1997 and that it is
entitled to be compensated for these services under several theories of
liability. IBI is seeking specified damages of up to $1,330,000 as well as such
other sums as the Court may find it is entitled to recover.
8
Both parties are actively engaged in the discovery process and the first
depositions have been noticed. No trial date has been set at this time.
Warrantech denies all allegations and is pursuing all of the legal rights and
remedies available to it.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of the Company's
shareholders, through the solicitation of proxies or otherwise, during the
fourth quarter of the Company's fiscal year ended March 31, 1998.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been reported in the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), and
currently is reported on NASDAQ's National Market System ("NMS"), under the
trading symbol "WTEC".
As of June 17, 1998 there were 13,359,380 Common Shares outstanding. On
that date, the closing bid price for the Company's common stock, as reported by
NASDAQ was $6.50.
Following is a summary of the price range of the Company's Common Stock during
its 1998 and 1997 fiscal years:
Common Stock
Quarter of Fiscal 1998
High & Low Bid
First $12.38 $ 8.88
Second $12.81 $ 9.25
Third $13.25 $ 7.88
Fourth $10.69 $ 5.19
Quarter of Fiscal 1997 High & Low Bid
First $ 5.38 $ 3.81
Second $ 10.13 $ 3.63
Third $ 15.38 $ 8.13
Fourth $ 12.13 $ 8.50
The number of shareholders of record of the Company's Common Stock as of June
17, 1998 was 987.
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.
10
Item 6 - Selected Financial Data.
The Selected Financial Data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this filing.
FOR THE YEARS ENDED MARCH 31,
----- ------ ------ ------
-------------------- ------------------- ------------------- -------------------- -----------------
1998 1997 1996 1995 1994
-------------------- ------------------- ------------------- -------------------- -----------------
Gross revenue $201,724,332 $161,044,135 $110,246,219 $71,239,070 $46,970,763
Net increase in
deferred revenue (1,985,798) (1,381,271) (1,165,495) (699,745) (316,290)
-------------------- ------------------- ------------------- -------------------- -----------------
Net revenue 199,738,534 159,662,864 109,080,724 70,539,325 46,654,473
-------------------- ------------------- ------------------- -------------------- -----------------
Net income $5,261,037 $4,794,715 $2,394,862 $2,895,788 $703,591
==================== =================== =================== ==================== =================
Basic Earnings Per Share
Net income $0.40 $0.37 $0.18 $0.22 $0.05
==================== =================== =================== ==================== =================
Cash dividend declared NONE NONE NONE NONE NONE
==================== =================== =================== ==================== =================
Total assets $81,917,288 $66,124,255 $56,613,710 $41,858,546 $33,828,572
==================== =================== =================== ==================== =================
Long-term debt and
capital lease
Obligations $2,153,286 $2,491,786 $1,124,015 $293,648 $476,875
==================== =================== =================== ==================== ==================
Convertible Exchangeable
preferred stock - - $6,420,363 $6,396,795 $6,343,614
==================== =================== =================== ==================== ==================
Common stockholders'
equity $31,764,955 $25,281,941 $19,656,931 $17,443,763 $14,300,322
==================== =================== =================== ==================== ==================
Working capital $16,048,262 $13,602,168 $13,221,212 $11,067,983 $9,768,580
==================== =================== =================== ==================== ==================
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company, through its WAI, WCPS, WDI, WHSC, and WII subsidiaries,
provides marketing and administrative services to over 3,000 retailers,
distributors and manufacturers of automobiles, recreational vehicles, automotive
components, homes, home appliances, home entertainment products, computers and
peripherals, office and communications equipment. The Company's administrative
services pertain primarily to extended service contracts and limited warranties,
issued by the retailer, distributor or manufacturer to the purchaser/lessee of
the consumer product. Additionally, the Company maintains administrative
facilities for, and provides administrative services to, insurance companies and
financial institutions for other types of insurance products such as credit card
enhancement programs like "purchase protection" and "unemployment" coverages.
Results of Operations
Gross Revenues
Fiscal 1998 vs. 1997
Gross revenues for the fiscal years ended March 31, 1998 and 1997 were
$201,724,332 and $161,044,135, respectively, representing an increase of 25% in
the current fiscal year. The increase is the result of the Company's efforts in
expanding its market penetration in the personal computer industry as well as
continued market penetration in the consumer products and automotive products
and international market segments. The gross revenues attributable to consumer
product , personal computer and automotive programs increased approximately $ 41
million as a direct result of approximately $18 million related to new business
and approximately $23 million related to volume increases with existing
customers.
Fiscal 1997 vs. 1996
Gross revenues for the fiscal years ended March 31, 1997 and 1996 were
$161,044,135 and $110,246,219, respectively, representing an increase of 46% in
the current fiscal year. The increase is the result of the Company's efforts in
expanding its market penetration in the personal computer industry as well as
continued market penetration in the other consumer products and automotive
products market segments. The gross revenues attributable to consumer product
and automotive programs increased approximately $50 million as a direct result
of approximately $27 million related to new business and approximately $23
million related to volume increases with existing customers. This increase in
business includes the result of increased efforts with respect to renewals and
second effort sales, and revenues of Warrantech Europe of $1,318,186.
Net Increase in Deferred Revenues
The Company recognizes revenues in direct proportion to the costs incurred
in providing the service contract programs to its clients. Revenues in an amount
sufficient to meet future administrative costs and a reasonable gross profit
thereon are deferred. The amounts of gross revenues deferred and earned from
period to period are effected by (i) the mix of automotive and consumer product
and personal computer contract volumes, (ii) the relationship of gross contract
revenues generated by shorter term extended service contracts to total gross
revenues, and (iii) administration contract revenues which are recognized over a
short term period.
12
Fiscal 1998 vs. 1997
The net increase in deferred revenues for the year ended March 31, 1998
amounted to $1,985,798 as compared with $1,381,271 for the same period a year
ago. These increases are directly attributable to the increased number of
service contracts sold with a service period greater than one year during the
current year offset in part by the amounts earned on expiring contracts during
the same periods.
Fiscal 1997 vs. 1996
The net increase in deferred revenues for the year ended March 31, 1997
amounted to $1,381,271 as compared with $1,165,495 for the same period a year
ago. These increases are directly attributable to the increased number of
service contracts sold with a service period greater than one year during the
current year.
Direct Costs
Direct costs are those costs directly related to the production and
acquisition of service contracts. These costs consist primarily of insurance
premiums and commission expenses.
Fiscal 1998 vs. 1997
Direct costs for the fiscal year ended March 31, 1998 were $137,789,893 as
compared with $112,161,400 for the fiscal year ended March 31, 1997. These
increases in direct costs are principally the result of volume increases in
contracts sold. These increases were partially offset by the reduction of direct
costs to recognize approximately $5.3 million of over remittances of insurance
premiums made in prior periods.
Fiscal 1997 vs. 1996
Direct costs for the fiscal year ended March 31, 1997 were $112,161,400 as
compared with $74,013,324 for the fiscal year ended March 31, 1996. These
increases in direct costs are principally the result of volume increases in
contracts sold and to a lesser extent a higher level of premium on WAI programs
which reflect improved coverages.
Service, Selling and General and Administrative Expenses
Fiscal 1998 vs. 1997
Service, selling and general and administrative expenses for the fiscal
year ended March 31, 1998 were $49,505,178 as compared to $36,320,524 for the
fiscal year ended March 31, 1997. The increase is directly attributable to
increases in sales related costs, communication costs, payroll and payroll
related costs arising from the service requirements associated with the
increased number of service contracts being sold.
Fiscal 1997 vs. 1996
Service, selling and general and administrative expenses for the fiscal
year ended March 31, 1997 were $36,320,524 as compared to $27,362,214 for the
fiscal year ended March 31, 1996. The relative dollar increase in both the
current fiscal year is directly attributable to increases in sales related costs
and payroll and payroll related costs arising from continued increases in head
count to meet the service requirements associated with the increased number of
service contracts being sold. As a percentage of gross revenues, service,
selling and general and administrative expenses have decreased 2% in the current
13
fiscal year which is indicative of the improved functional expense controls
implemented by management during fiscal 1997.
Provision for Bad Debt Expense
For all years presented, the provision for bad debt expense results from
the allowance for accounts considered to be uncollectible.
Depreciation and Amortization
Fiscal 1998 vs. 1997
Depreciation and amortization amounted to $3,758,213 for the fiscal year
ended March 31, 1998 as compared to $2,619,981 for the same period in fiscal
1997. The increases over a year ago reflect a higher level of depreciation
during the year resulting from additional assets being placed in service during
the current fiscal year. This increase in assets is directly attributable to (i)
the continued development of the Company's information systems and (ii) the
purchase of additional computer equipment to accommodate personnel growth and
efficiency of operations.
Fiscal 1997 vs. 1996
Depreciation and amortization amounted to $2,619,981 for the fiscal year
ended March 31, 1997, as compared to $1,700,285 for the same period in fiscal
1996, respectively. The increases over a year ago reflect a higher level of
depreciation during the year resulting from additional assets placed in service
during the current fiscal year. This increase in assets is directly attributable
to (i) the continued development of the Company's information systems and (ii)
the purchase of additional computer equipment to accommodate personnel growth
and efficiency of operations.
Operations of Equity Joint Venture
In April 1996, the Company and its joint venture partner, AIG, agreed to
terminate the joint venture, Techmark Services Ltd, effective January 1, 1996.
Under the terms of the agreement, AIG agreed to purchase the Company's
forty-nine percent (49%) investment in the joint venture for $3,762,154. As of
March 31,1996, the Company's carrying value of the joint venture investment
amounted to $1,885,674 which resulted in a gain on the sale of the investment of
$1,876,480 recognized in the first quarter of fiscal 1997. The losses in
operations of the equity joint venture amounting to $957,748 represent the
Company's share of the joint venture losses from the beginning of fiscal year
1996 through the effective date of the transaction, January 1, 1996.
Other Income(Expense)
For fiscal 1998 and 1997, Other Income (Expense) primarily reflects net
interest .
Income Taxes
The income tax provision for fiscal 1998, 1997 and 1996 differs from the
statutory rate primarily due to state and local taxes and the non-deductibility
of goodwill amortization. The net deferred tax asset as of March 31, 1998, 1997
and 1996 contains a benefit of $465,919, $635,213 and $1,111,804, respectively,
related to foreign losses. Management expects to realize this tax benefit, which
has an indefinite carryforward period, against future foreign income.
14
Net Income
Fiscal 1998 vs. 1997
Net income for the fiscal year ended March 31, 1998 amounted to $5,261,037
or $.40 per basic share as compared to $4,794,715 or $.37 per basic share for
the comparable period in fiscal 1997. The increase in net income and per share
amounts for the fiscal year is directly attributable to the increase in new
business and volume increases for existing customers.
Fiscal 1997 vs. 1996
Net income for the fiscal year ended March 31, 1998 amounted to $4,794,715
or $.37 per basic share, compared to $2,394,862 or $.18 for the comparable
period in fiscal 1996. The increase in net income and per share amounts for the
fiscal year is directly attributable to the gain on the sale of the Techmark
Joint Venture, the increase in new business and volume increases for existing
customers.
Liquidity and Capital Resources
The primary source of liquidity during the current year was cash generated
by operations. Funds were utilized for working capital expenditures and capital
expenditures relating to the development of the Company's information systems.
The Company has an ongoing relationship with an equipment financing company
and intends to continue financing certain future equipment needs through leasing
transactions. The total amount financed through leasing transactions during
fiscal 1998 amounted to $2,047,136. In addition, on June 30, 1996 the Company
completed an agreement to extend its line of credit with a bank for $10 million,
$6.5 million committed and $3.5 million standby. The line of credit is
collateralized by certain accounts receivable and expires on July 31, 1998. At
March 31, 1998, the Company did not have any borrowings under the line of
credit.
In connection with the sale of the Company's joint venture interest to AIG,
the Company agreed to repurchase 3,234,697 shares of convertible exchangeable
preferred stock held by AIG at their redemption value of $6,430,000. This amount
will be offset by the amount due the Company for the sale of its investment,
with the net amount due AIG of $2,395,960 resulting in a three year,
non-interest bearing note payable. The note is payable in 11 equal quarterly
installments of $205,000 commencing June 30, 1996, with a final installment of
$140,960 due March 1999. As of March 31, 1998, $960,960 was outstanding. Also,
as part of the agreement, AIG agreed to pay the Company $1,480,000 related to
amounts due the Company under its profit sharing arrangement. In connection with
this payment, the Company issued an irrevocable letter of credit for the benefit
of AIG through December 31, 2002 which can be drawn against by AIG in the event
that the ultimate profit sharing amount due the Company is less than the amount
paid. It is anticipated that no amounts will be due AIG under this letter of
credit.
The Company believes that internally generated funds will be sufficient to
finance its current operation for at least the next twelve months.
Management believes that there are significant opportunities for growth
through acquisitions in the business services industry. While there can be no
assurance that any transactions will materialize, to the extent that capital
resources are required in connection with any proposed transaction, the Company
believes that it will be able to meet its needs through a combination of
available cash on hand, borrowings against its available bank credit line, and
additional third-party financing. Based on discussions with third parties, the
Company believes such funding will be available to the Company if needed on
acceptable terms, although such availability cannot be assured.
15
The effect of inflation has not been significant to the Company.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings per Share, which modifies the calculation of earnings per share
("EPS"). This Statement replaces the previous presentation of primary and fully
diluted EPS to basic and diluted EPS. Basic EPS excludes dilution and 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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130"). FAS
130 is effective for fiscal years beginning after December 15, 1997. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. FAS 130 will have no impact on the Company's results of
operations, financial condition or liquidity.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("FAS 131"). FAS 131 is effective for financial statements
for periods beginning after December 15, 1997. This Statement requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. FAS 131 will have no impact on the Company's results of operations,
financial condition or liquidity.
In March of 1998, The American Institute of Certified Public Accountants
issued a Statement of Position 98-1 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"), This SOP provides
guidance on accounting for the costs of computer software developed or obtained
for internal use which includes:
Definition of computer software costs
Accounting for various stages of development
Accounting for internal and external costs
Need to assess impairment under SFAS 121
Amortization method and period to be utilized
This SOP is effective for fiscal years beginning after December15, 1998 and
restatement of previously incurred costs is not permitted
The Company believes its current accounting policies are consistent with
those prescribed by SOP 98-1 and does not believe the adoption of this SOP will
have any impact on its results of operations, financial condition or liquidity.
Readiness For Year 2000
The Company is subject to the Year 2000 computer program issue. That is,
certain of the computer systems, software products or other business systems may
not accept, input, store or output dates in the years 1999, 2000 and there after
without error or interruption. If such a deficiency is not
16
corrected, it is possible that some applications could fail or create
erroneous results by or at the Year 2000.
The Company has taken actions to understand the nature and extent of the
work required to make its systems, products and infrastructure Year 2000
compliant. Warrantech has formed a task force to identify the extent of an
effort to prepare its products and financial information and other
computer-based systems for the Year 2000. The Company continues to evaluate the
estimated costs associated with these efforts and expenses them as incurred.
Based on available information, the Company believes, that it will be able to
manage its Year 2000 transition without any material adverse impact on its
results of operations, financial condition or liquidity.
Common European Currency
On January 1, 1999, certain of the member nations of the European Economic
and Monetary Union (EMU) will adopt a common currency, the Euro. Once the
national currencies are phased out, the Euro will be the sole legal tender of
each of these nations. During the transition period, commerce of these nations
will be transacted in the Euro or in the currently existing national currency.
The Company is aware of the issues with respect to the phase in and will
consider its impact on WII as its business expands. Any costs associated with
the adoption of the Euro will be expensed as incurred and the Company does not
expect these to be material to its results of operations, financial condition or
liquidity.
17
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Report of Independent Accountants.........................................19
Consolidated Financial Statements:
Balance Sheets as of March 31, 1998 and 1997.....................20
Statements of Operations
For the Years Ended March 31, 1998, 1997 and 1996................21
Statements of Common Stockholders' Equity
For the Years Ended March 31, 1998, 1997 and 1996................22
Statements of Cash Flows
For the Years Ended March 31, 1998, 1997 and 1996 ............. 23-24
Notes to Consolidated Financial Statements............................... 25-41
Consolidated Financial Statement Schedule
Schedule VIII - Valuation and Qualifying Accounts................42
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Warrantech Corporation:
We have audited the consolidated financial statements and the financial
statement schedule of Warrantech Corporation and Subsidiaries (the "Company")
listed in the accompanying index on page 18. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Warrantech
Corporation and Subsidiaries as of March 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
June 25, 1998
19
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES, PREFERRED STOCK
A S S E T S AND COMMON STOCKHOLDERS' EQUITY
March 31, March 31,
------------------------------- ------------------------
1998 1997 1998 1997
---------------- -------------- ----------- ----------
Current assets: Current liabilities:
Cash and cash equivalents $24,062,052 $17,031,925 Current maturities of long-term $2,371,662 $1,997,835
debt and capital lease obligations
Investments in marketable securities 537,924 286,099 Insurance premiums payable 22,269,589 19,602,290
Income taxes payable 1,850,999 -
Accounts receivable, (net of allowances of Accounts and commissions payable 7,698,948 5,261,867
$1,223,173 and $300,328, respectively) 27,878,335 23,290,035 Legal settlements payable 200,000 1,635,000
Accrued expenses and other 6,011,572 4,132,113
current liabilities ------------ -----------
Other receivables, net 2,197,405 3,874,451 Total current liabilities 40,402,770 32,629,105
Income tax receivable - 115,064
Prepaid expenses and other current assets 1,775,316 1,633,699 Deferred revenues 6,987,541 5,019,190
--------------- --------------
Total current assets 56,451,032 46,231,273
---------------- ------------- Long-term debt and
capital lease obligations 2,153,286 2,491,786
Deferred rent payable 608,736 702,233
------------ -----------
Total Liabilities 50,152,333 40,842,314
------------ -----------
Commitments and contingencies
(See Note 9)
Property and equipment net 13,639,921 10,111,193
Other assets:
Excess of cost over fair value of Stockholders' equity:
assets acquired (net of Common stock - $.007 par value
accumulated amortization of authorized - 30,000,000
$4,212,956 and $3,637,233, respectively) 3,945,577 3,651,400 issued - 13,449,382 shares
at March 31, 1998 and 13,261,636
Deferred income taxes 3,085,311 2,009,941 shares at March 31, 1997 94,146 90,911
Investments in marketable securities 1,967,817 2,041,001 Additional paid-in capital 14,124,700 13,033,185
Restricted cash 800,000 800,000 Unrealized gain (loss) on
investments, net of taxes 7,055 (1,563)
Split dollar life insurance policies 1,054,045 865,542 Accumulated translation
adjustments 78,553 16,544
Retained earnings 17,975,951 12,714,914
------------ -----------
Notes receivable 654,068 42,076 32,280,405 25,853,991
Collateral security fund 199,389 199,389 Less: Deferred compensation (21,631) (78,231)
Other assets 120,128 172,440 Treasury stock - at cost,
------------- -------------- 100,000 shares at March 31,
Total other assets 11,826,335 9,781,789 1998 and March 31, 1997 (493,819) (493,819)
-------------- -------------- ------------ -----------
Total
Stockholders' Equity 31,764,955 25,281,941
------------ -----------
Total Liabilities
and Stockholders'
Total Assets $81,917,288 $66,124,255 Equity $81,917,288 $66,124,255
============== ============= ============= ===========
See accompanying notes to consolidated financial statements.
20
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended March 31,
------ -----
-------------------- -------------------- --------------------
1998 1997 1996
-------------------- -------------------- --------------------
Gross revenues $201,724,332 $161,044,135 $110,246,219
Revenues deferred to future periods (2,798,417) (1,852,237) (1,553,853)
Deferred revenues earned 812,619 470,966 388,358
-------------------- -------------------- --------------------
Net revenues 199,738,534 159,662,864 109,080,724
Costs and expenses:
Direct costs 137,789,893 112,161,400 74,013,324
Service, selling, and general and administrative 49,504,178 36,320,524 27,362,214
Provision for bad debt expense 910,675 733,119 363,179
Depreciation and amortization 3,758,213 2,619,981 1,700,285
-------------------- -------------------- --------------------
Total costs and expenses 191,962,959 151,835,024 103,439,002
-------------------- -------------------- --------------------
Income from operations 7,775,575 7,827,840 5,641,722
-------------------- -------------------- --------------------
Legal settlements - (2,274,170) -
Gain on sale of equity joint venture - 1,876,480 -
Equity in operations of joint venture - - (957,748)
Other income(expense) 819,732 324,585 (651,620)
-------------------- -------------------- --------------------
Income before provision for income taxes 8,595,307 7,754,735 4,032,354
Provision for income taxes 3,334,270 2,960,020 1,637,492
-------------------- -------------------- --------------------
Net income $5,261,037 $4,794,715 $2,394,862
==================== ==================== ====================
Earnings per share:
Basic $0.40 $0.37 $0.18
==================== ==================== ====================
Diluted $0.34 $0.31 $0.15
==================== ==================== ====================
Weighted average number of shares outstanding:
Basic 13,259,964 13,054,611 12,988,547
==================== ==================== ====================
Diluted 15,617,350 15,394,869 16,465,833
==================== ==================== ====================
21
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS EQUITY
Unrealized
Additional Loss on Accumulated
Common Stock Paid-In Investments, Translation Retained
---------------------------- Capital Net Adjustments Earnings
Shares Par Value
Balance at March 31, 1995 13,045,302 $89,117 $12,097,507 ($42,370) $ - $5,472,039
Issuance of common stock through
Exercise of common stock options 25,000 175 62,325
Issuance of common stock 11,879 83 52,809
Change in unrealized loss on investments, 27,339
net of taxes of $18,301
Translation adjustments (10,520)
Amortization of deferred compensation
Purchase of treasury shares
Issuance of treasury shares
Imputed interest on preferred stock (23,569)
Net income 2,394,862
-------------- ----------- -------------- -------------- -------------- --------------
Balance at March 31, 1996 13,082,181 89,375 12,212,641 (15,031) (10,520) 7,843,332
Issuance of common stock through
Exercise of common stock options 175,251 1,227 709,653
Issuance of common stock 4,204 309 110,891
Change in unrealized loss on investments, 13,468
net of taxes of $7,983
Translation adjustments 27,064
Amortization of deferred compensation
Purchase of treasury shares
Imputed interest on preferred stock 76,867
Net income 4,794,715
-------------- ----------- -------------- -------------- -------------- --------------
Balance at March 31, 1997 13,261,636 90,911 13,033,185 (1,563) 16,544 12,714,914
Issuance of common stock through
Exercise of common stock options 142,262 996 697,355
Issuance of common stock 45,484 2,239 394,160
Change in unrealized loss on investments, 8,618
net of taxes of $5,853
Translation adjustments 62,009
Amortization of deferred compensation
Net income 5,261,037
-------------- ----------- -------------- -------------- -------------- --------------
Balance at March 31, 1998 13,449,382 $94,146 $14,124,700 $7,055 $78,553 $17,975,951
============== =========== ============== ============== ============== ==============
Total Common
Deferred Treasury Stock Stockholders
Compensation ------------------------- Equity
Shares Amount
Balance at March 31, 1995 ($23,438) (41,000) ($149,092) $17,443,763
Issuance of common stock through
Exercise of common stock options 62,500
Issuance of common stock (42,142) 10,750
Change in unrealized loss on investments, 27,339
net of taxes of $18,301
Translation adjustments (10,520)
Amortization of deferred compensation 12,344 12,344
Purchase of treasury shares (56,000) (260,538) (260,538)
Issuance of treasury shares (16,880) 4,000 16,880 -
Imputed interest on preferred stock (23,569)
Net income 2,394,862
-------------- ----------- ------------- --------------
Balance at March 31, 1996 (70,116) (93,000) (392,750) 19,656,931
Issuance of common stock through
Exercise of common stock options 710,880
Issuance of common stock (47,197) 64,003
Change in unrealized loss on investments, 13,468
net of taxes of $7,983
Translation adjustments 27,064
Amortization of deferred compensation 39,082 39,082
Purchase of treasury shares (7,000) (101,069) (101,069)
Imputed interest on preferred stock 76,867
Net income 4,794,715
-------------- ----------- ------------- --------------
Balance at March 31, 1997 (78,231) (100,000) (493,819) 25,281,941
Issuance of common stock through
Exercise of common stock options 698,351
Issuance of common stock 396,399
Change in unrealized loss on investments, 8,618
net of taxes of $5,853
Translation adjustments 62,009
Amortization of deferred compensation 56,600 56,600
Net income 5,261,037
-------------- ----------- ------------- --------------
Balance at March 31, 1998 ($21,631) (100,000) ($493,819) $31,764,955
============== =========== ============= ==============
See accompanying notes to consolidated financial statements.
22
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31,
---------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Cash flows from operating activities:
Net income $5,261,037 $4,794,715 $2,394,862
------------------- ------------------- -------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,758,213 2,619,981 1,712,431
Provision for bad debt 910,675 733,119 363,179
Deferred revenues 1,985,798 1,381,271 1,165,495
Deferred income taxes (1,073,680) 21,805 (1,002,452)
Gain on sale of investment in joint venture - (1,876,480) -
Loss from equity joint venture - - 957,748
Other 81,900 (79,049) 16,028
Increase (decrease) in cash flows as a result
of changes in asset and liability balances:
Accounts receivable (5,511,145) (7,862,945) (3,813,267)
Other receivables 1,677,046 4,736,468 5,090
Income tax receivable 115,064 (115,064) -
Prepaid expenses and other current assets (141,617) (644,763) 97,536
Split dollar life insurance policies (188,503) (181,649) 14,445
Other assets 52,312 24,431 681,981
Insurance premiums payable 2,667,299 3,355,043 7,016,870
Income taxes payable 1,850,999 (1,795,018) 784,140
Accounts and commissions payable 2,437,081 452,340 2,102,284
Legal settlements payable (1,435,000) 1,635,000 -
Accrued expenses and other current liabilities 1,879,459 2,409,568 (18,002)
Deferred rent payable (93,497) 167,613 94,375
------------------- ------------------- -------------------
Total adjustments 8,972,404 4,981,671 10,177,881
------------------- ------------------- -------------------
Net cash provided by operating activities 14,233,441 9,776,386 12,572,743
------------------- ------------------- -------------------
Cash flows from investing activities:
Property and equipment purchased (4,609,623) (3,379,104) (3,489,974)
Net cash paid for acquired business (888,541) - (735,984)
Purchase of marketable securities (360,324) (1,313,356) (948,602)
Proceeds from sales of Marketable securities 184,225 1,055,934 1,730,612
Investment in and advances to joint venture - - 37,499
------------------- ------------------- -------------------
Net cash used in investing activities ($5,674,263) ($3,636,526) ($3,406,449)
------------------- ------------------- -------------------
See accompanying notes to consolidated financial statements.
23
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
1998 1997 1996
------------------- ------------------- -------------------
Cash flows from financing activities:
(Increase) decrease in notes receivable ($611,992) $45,684 $202,365
Proceeds from exercise of common stock options 1,094,750 822,080 62,500
Purchase treasury stock - (101,069) (243,658)
Repayments, notes and capital leases (2,011,809) (1,734,117) (367,375)
------------------- ------------------- -------------------
Net cash (used in) financing activities (1,529,051) (967,422) (346,168)
------------------- ------------------- -------------------
Net increase in cash and cash equivalents 7,030,127 5,172,438 8,820,126
Cash and cash equivalents at beginning of year 17,031,925 11,859,487 3,039,361
------------------- ------------------- -------------------
Cash and cash equivalents at end of year $24,062,052 $17,031,925 $11,859,487
------------------- ------------------- -------------------
Supplemental Cash Flow Information:
Cash payments for:
Interest $378,812 $410,109 $127,616
------------------- ------------------- -------------------
Income taxes $2,426,098 $4,879,377 $1,644,950
------------------- ------------------- -------------------
Non-Cash Investing and financing activities:
Purchase of preferred stock - $6,420,363 -
Note issued in connection with purchase of preferred stock - 2,395,960 -
Property and equipment financed through capital leases $ 2,047,136 $ 1,989,136 $ 1,640,060
See accompanying notes to consolidated financial statements.
24
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Warrantech Corporation ("Warrantech" or the
"Company"), through its wholly-owned subsidiaries, Warrantech
Automotive, Inc., Warrantech Consumer Product Services, Inc.,
Warrantech Help Desk, Inc., Warrantech Direct, Inc., Warrantech Home
Service Company and Warrantech International, Inc., markets and
administers service contract programs for retailers, distributors and
manufacturers of automobiles, recreational vehicles, automotive
components, homes, home appliances, home entertainment products,
computers and peripherals, office and communication equipment and
operates call center services and technical computer services in the
United States, Puerto Rico, Mexico, Canada, Caribbean, Central and
South America and the United Kingdom. Additionally, third-party
administrative services pertaining primarily to extended service
contracts and limited warranties are provided to manufacturers of
consumer and automotive products and other business entities requiring
such services. The actual repair service under such extended service
contracts and limited warranties is provided by third party repair
facilities and the cost of such repair services is borne by the
insurance companies. The predominant terms of the contracts and
manufacturers' warranties range from twelve (12) to eighty-four (84)
months.
Basis of Presentation and Principles of Consolidation - The
accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles ("GAAP"). These
consolidated financial statements include the accounts of Warrantech
Corporation and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Amounts representing the Company's percentage interest in the
underlying net assets of less than majority-owned companies, in which
a significant equity ownership interest is held, were included in
Investment in and advances to joint venture. The Company's share of
the results of operations of these companies is included in the
Consolidated Statement of Operations caption Equity in operations of
joint venture.
Risks and Uncertainties - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions which affect the
reporting of assets and liabilities as of the dates of the financial
statements and revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Revenue Recognition Policy - The Company's revenue recognition policy
is based on the proportional performance method which recognizes
revenues in direct proportion to the costs incurred in providing the
service contract programs to the Company's clients. Only revenues in
an amount sufficient to meet future administrative costs and a
reasonable gross profit thereon are deferred. The Company does not
generate revenue or incur costs from separately priced extended
warranty or product maintenance contracts.
Direct Costs - Direct costs, which consists primarily of insurance
premiums and commissions, are those costs directly related to the
production and acquisition of service contracts. The Company does not
generate revenue or incur costs from separately priced extended
warranty or product maintenance contracts.
Profit Sharing Arrangement - Pursuant to agreements with its insurers,
the Company is eligible to share a portion of the insurers' profits on
the Company's service contract programs. The amounts
25
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, in the fourth quarter of fiscal 1996,
renegotiated these agreements. The principal effect of these
modifications was to change the nature of profit sharing to more
long-term and eliminate interim payments. As a result of the
renegotiation and a significant number of new products covered and new
coverages provided by the extended service contracts and limited
warranties administered by the Company, sufficient historical data to
reliably estimate the amount of profit sharing revenues earned in
fiscal 1998 and 1997 was not available. Accordingly, the Company did
not record any profit sharing amounts in fiscal 1998 or 1997.
Provision for Bad Debts Expense - The Company has a policy to
establish an allowance for doubtful accounts when receivables are
determined to be uncollectible.
Earnings Per Share -The Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share, which modifies the
calculation of earnings per share ("EPS"). This Statement replaces the
previous presentation of primary and fully diluted EPS to basic and
diluted EPS. Basic EPS excludes dilution and 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, 1998 and 1997.
The Company had on deposit $22,245,565 and $16,028,940 of cash in
excess of federally secured limits as of March 31, 1998 and 1997,
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 Common Stockholders' Equity, net
of tax.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is provided using a straight-line method over the
estimated useful lives of the assets ranging between 3 and 7 years.
Excess of Cost Over Fair Value of Assets Acquired - The excess of cost
over fair value of the assets acquired is a result of the purchases of
Dealer Based Services, Inc. in 1989 , Home Guarantee Corporation, PLC
in July 1995, and certain assets of Distributors & Dealers Service
Co., Inc. in October 1997 and is being amortized on a straight-line
basis over 15, 10 and 4.5 years, respectively. Amortization expense
charged to operations for the years ended March 31, 1998, 1997 and
1996 amounted to $594,364, $467,144 and $458,728, respectively.
Stock Based Compensation - Certain operating officers have been issued
shares of the Company's common stock as part of their compensation
under their employment agreements. Such compensation is to be earned
by the officers and charged to operations over five years, the term of
the employment agreements. In addition, certain employees have been
issued restricted shares of the Company's common stock as
compensation. Such compensation is amortized over the restriction
period which is generally two years. Certain non-employees have been
issued options
26
to purchase stock in lieu of compensation. The intrinsic value of
these options at the time of grant has been charged to expense.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("FAS 123"). This Statement establishes new
financial accounting and reporting standards for stock-based employee
compensation plans, including stock option and stock purchase plans.
Compensation resulting from the award of stock-based compensation must
be determined based on the fair value of consideration received or
fair value of the equity instrument issued, whichever is more reliably
measurable. Such compensation expense, net of income taxes, may be
recognized in the Statement of Operations over the service period of
the employee (generally the vesting period). In lieu of recording such
compensation expense, entities are permitted to disclose its pro-forma
impact, net of income taxes, on reported net income and earnings per
share. Entities choosing such disclosure will continue to measure
compensation expense from stock-based compensation in the Statement of
Operations based on the intrinsic value method prescribed in
Accounting Principles Board No. 25, Accounting for Stock Issued to
Employee ("APB 25").
The Company continues to account for its stock-based compensation plan
under APB 25.
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 No. 52 Foreign
Currency Translation. The functional currency for the Company's United
Kingdom operations is the British pound. Transaction gains and losses
are reflected in operations, while translation gains and losses are
reflected as a separate component of equity.
Capital Structure - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting No. 129
Disclosure of Information About Capital Structure ("FAS 129"). FAS 129
is effective for financial statements for periods ending after
December 15, 1997. This Statement requires disclosure about an
entity's capital structure including a brief discussion of rights and
privileges for securities outstanding, dividend and liquidation
preferences, participation rights, exercise prices or rates and
pertinent dates, significant terms of contracts to issue additional
shares and other similar items. The Company believes that its current
disclosures are in compliance with FAS 129.
In addition to common stock, the Company has convertible exchangeable
preferred stock with par value of $.0007. As of March 31, 1998 and
1997, 15,000,000 shares were authorized and no shares were issued or
outstanding.
New Accounting Pronouncements - The Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("FAS 130"). FAS 130 is effective for
fiscal years beginning after December 15, 1997. This Statement
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. FAS 130 will have no impact on the
Company's results of operations, financial condition or liquidity.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("FAS 131").
27
FAS 131 is effective for financial statements for periods beginning
after December 15, 1997. This Statement requires that a public
business enterprise report financial and descriptive information about
its reportable operating segments. Operating segments are components
of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to
segments. FAS 131 will have no impact on the Company's results of
operations, financial condition or liquidity.
In March of 1998, The American Institute of Certified Public
Accountants issued a Statement of Position 98-1 Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use
("SOP 98-1"), This SOP provides guidance on accounting for the costs
of computer software developed or obtained for internal use which
includes:
Definition of computer software costs
Accounting for various stages of development
Accounting for internal and external costs
Need to assess impairment under SFAS 121
Amortization method and period to be utilized
This SOP is effective for fiscal years beginning after December 15,
1998 and restatement of previously incurred costs is not permitted
The Company believes its current accounting policies are consistent
with those prescribed by SOP 98-1 and does not believe the adoption of
this SOP will have any impact on its results of operations, financial
condition or liquidity.
Reclassification - Certain amounts from the prior years have been
reclassified to conform with the current year's presentation.
28
2. RESTRICTED CASH
At March 31, 1998 and 1997 cash in the amount of $800,000 is on deposit
with a Florida regulatory agency to comply with its state insurance laws.
3. INVESTMENTS IN MARKETABLE SECURITIES
At March 31, 1998, investments in marketable securities are comprised of
the following:
Amortized Gross Unrealized Aggregate Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
Municipal Bonds $2,156,472 $13,919 $(1,816) $2,168,575 $ 200,758 $1,967,817
Money Market 337,166 - - 337,166 337,166 -
--------------- ----------------- ------------------ ------------------ ------------------ -------------
Total Investment
in Marketable
Securities $2,493,638 $13,919 $(1,816) $2,505,741 $537,924 $1,967,817
=============== ================== ================== ================= ================== ============
At March 31, 1997, investments in marketable securities are comprised of
the following:
Amortized Gross Unrealized Aggregate Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
Municipal Bonds $2,057,133 $1,787 $(17,919) $2,041,001 $ - $2,041,001
Common Stock 272,335 13,764 - 286,099 286,099 -
---------------- ------------------- ---------------- ---------------- ---------------- -------------
Total Investment
in Marketable
Securities $2,329,468 $15,551 $(17,919) $2,327,100 $286,099 $2,041,001
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 Common Stockholders' Equity.
The amortized cost and estimated fair value of marketable securities, by
contractual maturity date, are listed below. Expected maturities may differ from
contracted maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
Amortized Aggregate
Cost Fair Value
------------------- ----------------
Investments available for sale:
Due in one year or less $ 200,950 $ 200,758
Due after one year through five years - -
Due after five years through ten years 1,955,522 1,967,817
Due after ten years - -
Money Market 337,166 337,166
------------------- ------------------
$2,493,638 $2,505,741
=================== ==================
29
4. OTHER RECEIVABLES, NET
The nature and amounts of other receivables, net as of March 31, 1998 and
1997 is as follows:
March 31,
---------------------------------------------
1998 1997
------------------- ----------------------
Due from Insurance companies $ 1,540,895 $ 3,150,554
Profit sharing - 106,008
Employee/Agent Advances 305,945 422,868
Other 350,565 195,021
------------------- -----------------------
$ 2,197,405 $ 3,874,451
=================== ======================
5. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
March 31,
1998 1997
----------------------- -----------------------
Automobiles $ 304,693 $ 65,273
Equipment, furniture and fixtures 7,618,978 5,759,459
Leasehold improvements 978,557 854,466
Construction in progress - 986,328
Software development costs 7,604,440 4,237,233
----------------------- -----------------------
16,506,668 11,902,759
Less: Accumulated depreciation
and amortization 6,792,809 4,852,951
----------------------- -----------------------
9,713,859 7,049,808
----------------------- -----------------------
Assets under capital leases:
Cost 7,408,056 5,355,206
Less: Accumulated amortization 3,481,994 2,293,821
----------------------- -----------------------
3,926,062 3,061,385
----------------------- -----------------------
Total Property and Equipment, net $ 13,639,921 $ 10,111,193
======================= =======================
Amortization expense on assets under capital leases for the years ended
March 31, 1998, 1997 and 1996 was $1,188,173, $764,263, and $334,866,
respectively. Depreciation expense on property and equipment other than
under capital leases for the years ended March 31, 1998, 1997 and 1996 was
$1,939,858, $1,361,559, and $911,112, respectively.
The Company capitalized $2,380,879 and $1,209,395 for the fiscal years
ended March 31, 1998 and 1997, 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.
30
6. COLLATERAL SECURITY FUND
At March 31, 1998 and 1997, a former insurance carrier of the Company, is
holding $199,389 in escrow accounts as collateral for the performance of the
administrative runoff of outstanding contracts. Such amounts are returnable to
the Company when the contracts expire under this policy.
7. SPLIT DOLLAR LIFE INSURANCE POLICIES
As of March 31, 1998 and 1997, the Company made payments on split dollar
insurance policies on the lives of ten and six officers of the Company,
respectively. The cash surrender value of these policies is $1,054,045 and
$865,542, as of March 31, 1998 and 1997 respectively. The Company will receive a
refund of all split-dollar premiums advanced. The Company is the beneficiary of
any proceeds of the policies up to the amount of premiums paid.
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consists of the following:
March 31,
---------------------------------------------
1998 1997
Capital lease obligations - for property and
equipment payable monthly with interest
rates ranging from 6.9% to 15.3% through 2002 $3,563,988 $2,913,661
Installment note - AIG, effective interest rate of 8.25% 960,960 1,575,960
---------------------- --------------------
4,524,948 4,489,621
Less: Current maturities 2,371,662 1,997,835
---------------------- --------------------
Long-term portion $2,153,286 $2,491,786
====================== ====================
The aggregate amounts of maturities at March 31, 1998 were as follows:
Fiscal Year Installment Note Minimum Future
Lease Payments
1998 $960,960 $ 1,908,240
1999 - 1,357,770
2000 - 739,210
2001 - 162,686
2002 - -
Thereafter - -
----------------------------- ------------------------------
960,960 4,167,906
Less amount representing
interest - 603,918
----------------------------- ------------------------------
Net $960,960 $3,563,988
============================= ==============================
The capital lease obligations are collateralized by the property and
equipment related to the underlying leases.
31
9. INCOME TAXES
A reconciliation of the income tax provision to the amount computed using
the federal statutory rate is as follows:
March 31,
- - - - -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - - - -----------------------------------------------------------------------------------------------------------------
Federal statutory rate $ 2,922,404 34.0% $ 2,636,610 34.0% $ 1,411,324 35.0%
State and local income
taxes net of federal tax
benefit 206,503 2.4 156,092 2.0 123,728 3.0
Amortization of excess cost
over net assets acquired 202,084 2.4 158,829 2.0 155,967 3.9
Other 3,279 - 8,489 .2 (53,527) (1.3)
-------------- ------ ------------- ------ ------------- ------
Provision for income taxes $ 3,334,270 38.8% $ 2,960,020 38.2% $1,637,492 40.6%
============== ====== ============= ====== ============= ======
The components of tax expense are as follows:
For the Year Ended 3/31/98:
Current Deferred Provision
------------------- ---------------------- --------------------
Federal $ 4,094,150 $ (1,224,787) $ 2,869,363
State 313,800 15,459 329,259
Foreign 135,648 135,648
------------------- ---------------------- --------------------
Total $ 4,407,950 $ (1,073,680) $ 3,334,270
=================== ====================== ====================
For the Year Ended 3/31/97:
Current Deferred Provision
------------------- ---------------------- --------------------
Federal $ 2,701,712 $ 72,627 $ 2,774,339
State 236,503 172,405 408,908
Foreign - (223,227) (223,227)
------------------- ---------------------- --------------------
Total $ 2,938,215 $ 21,805 $ 2,960,020
=================== ====================== ====================
For the Year Ended 3/31/96:
Current Deferred Provision
------------------- ---------------------- ---------------------
Federal $ 2,516,216 $ (550,246) $ 1,965,970
State 123,728 ( 40,220) 83,508
Foreign - (411,986) (411,986)
-------------------- ---------------------- ---------------------
Total $ 2,639,944 $ (1,002,452) $ 1,637,492
==================== ====================== =====================
32
Deferred income tax assets and liabilities reflect the impact of temporary
differences between values recorded as assets and liabilities for financial
reporting purposes and values utilized for remeasurement in accordance with tax
laws. The components of the net deferred tax asset are as follows:
March 31,
1998 1997
----------------- -----------------
Deferred Tax Assets:
Deferred revenue $2,478,977 $1,819,694
Deferred rent 215,652 226,855
Provision for doubtful accounts 431,869 109,453
Reserve for customer refunds 70,050 41,105
Unrealized loss on securities 1,363 211
Foreign loss benefit 466,457 635,213
Excess of Book over tax depreciation 63,414 -
Other 75,104 51,124
---------------- -----------------
Total assets 3,802,886 2,883,655
Deferred Tax Liabilities:
Excess of tax over book depreciation - 11,577
Section 174 expense 717,575 862,137
----------------- -----------------
Total liabilities 717,575 873,714
Net deferred tax asset $3,085,311 $2,009,941
================= =================
Management believes that it is more likely than not that the net deferred
tax asset will be realized and therefore no valuation allowance is considered
necessary. Management expects to realize the foreign loss benefit, which has an
indefinite carryforward period, against future foreign income. Section 174
expense represents research and experimental expenses related to the development
of a proprietary relational database and interactive software.
33
10. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments - The Company leases office and warehouse
space under noncancellable operating leases. These leases include
scheduled rent increases over their respective terms. 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 charged to operations
for the years ended March 31, 1998, 1997 and 1996 was $2,187,174,
$1,907,694, and $1,371,446, respectively.
Future minimum lease commitments as at March 31, 1998 are as follows:
1999 $1,812,712
2000 1,814,864
2001 1,719,024
2002 1,659,250
2003 1,669,877
2004 and Thereafter 2,095,153
-----------------
$10,770,880
=================
Employment Contracts - Employment contracts exist between the Company
and its officers and certain key employees which provide for annual
base compensation of $2,775,258. Certain agreements call for (i)
annual increases (ii) cost of living increases, and (iii) additional
compensation, but only if certain defined performance levels are
attained. This additional compensation is to be paid in the form of
cash and/or Company common stock.
Profit Sharing Arrangement - For the fiscal year ended March 31, 1996
the Company charged expense for profit sharing in the amount
($865,000). Such amount is included in the financial statements in
other income(expense).
The Company has not accrued for or expensed any profit sharing for the
fiscal years ended March 31, 1998 and 1997.
Bank Line of Credit - The Company has a revolving credit agreement
with a bank which provides for a maximum aggregate borrowing up to
$10,000,000 with interest at the bank's prime rate or LIBOR plus 2%.
As of March 31, 1998 the Company had no outstanding borrowings under
this agreement.
34
Litigation -
(i) The Oak Agency, Inc. and The Oak Financial Services, Inc.
(collectively, "Oak") v. Warrantech Dealer Based Services, Inc.
("WDBS").
Final judgment in this matter was entered on November 12, 1997. WDBS
was directed to pay Oak (i) $1,243,359 which represents commissions
earned by Oak for the period July 1, 1991 through May 31, 1997, (ii)
$28,500 which represents costs of the action recoverable by Oak, and
(iii) future commissions earned on vehicle service contracts sold on
or after June 1, 1997 by a specified group of automobile dealers.
Furthermore, Oak was directed to pay Warrantech Corporation $7,500
which represents Warrantech's recoverable costs of a separate action
which previously had been dismissed by the Court with prejudice.
WDBS has made all payments described in clauses (i) and (ii) above and
continues to make those periodic payments described in clause (iii).
No further legal action is anticipated and WDBS considers this matter
closed.
(ii) Intercontinental Brokerage, Incorporated ("IBI") v. Warrantech
Consumer Product Services, Inc. and Warrantech Corporation
(collectively, "Warrantech").
This suit was filed in the 67th District Court, Tarrant County, Texas
on October 10, 1997. IBI had provided various insurance services to
and on behalf of Warrantech over a period of years. Warrantech
asserts, however, that it terminated its relationship with IBI in 1996
and has not requested or used IBI's services since the date of
termination. IBI alleges in this action that it continued to perform
services for Warrantech though June 30, 1997 and that it is entitled
to be compensated for these services under several theories of
liability. IBI is seeking specified damages of up to $1,330,000 as
well as such other sums as the Court may find it is entitled to
recover.
Both parties are actively engaged in the discovery process and the
first depositions have been noticed. No trial date has been set at
this time. Warrantech denies all allegations and is pursuing all of
the legal rights and remedies available to it. The Company believes
that any outcome should not have a material adverse impact on its
results of operations, financial condition or liquidity.
35
11. STOCK OPTION PLAN
At March 31, 1998, Warrantech has one stock option plan, which is described
below. The Company applies APB 25 and related interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized for its fixed
stock option plan, except for stock options granted to non-employees. The
compensation cost that has been charged against income for non-employees awarded
stock options, was $92,400 for fiscal 1998, $64,000 for fiscal 1997 and none for
fiscal year 1996. 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 FAS 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below.
Twelve Months Ended March 31,
---------------------------------------------------------------------------
1998 1997 1996
-------------------- ----------------------- -----------------------
Net Income As Reported $ 5,261,037 $ 4,794,715 $ 2,394,862
Pro Forma net income 4,921,485 4,424,684 2,384 386
Basic Earnings Per Share As Reported .40 .37 .18
Basic Pro Forma EPS .37 .34 .18
The fair value of Warrantech stock options used to compute pro forma net income
and earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions for 1998, 1997 and 1996: expected dividends of 0%; expected
volatility of 50%; a risk free interest rate of 6.5%; and expected life of 5
years.
Stock Options and Stock Option Plan - Under the Employee Incentive Stock Option
Plan (the "Plan"), there are options for up to 600,000 shares of the Company's
common stock reserved for issuance to employees (including officers). On
November 25,1996 the stockholders authorized for issuance an increase of 300,000
shares, to the current aggregate of 600,000 shares. The options are to be
granted at an exercise price not less than 100% of the fair market value of the
Company's common stock at date of grant. The number of shares granted, terms of
exercise, and expiration dates are to be decided at the date of grant of each
option by the Company's Board of Directors. The Plan will terminate in November
1998 unless sooner terminated by the Board of Directors.
On April 16, 1992 the Company's Board of Directors and subsequently on October
22, 1992 the shareholders of the Company at the annual meeting voted to approve
stock options to three directors (two of whom are officers and one is a former
officer of the Company). The stock options entitle the three Directors to
purchase an aggregate of 3,000,000 shares of the Company's common stock at an
exercise price of $2.6875 per share, the market price at the date of grant. The
term of the options is five (5) years from the date on which they become
exercisable or thirty days after termination of employment, whichever occurs
earlier. Of the total options granted, fifty percent (50%) may be exercised
beginning one year following October 22, 1992 in increments of 10% per year for
a five-year period. The portions of the options that are based upon the
Company's earnings, consisting of fifty percent (50%) of the total options
granted, became exercisable on October 22, 1995.
The Company's Board of Directors approved the issuance of options to a
non-employee in lieu of compensation for the purchase of 60,000 shares of common
stock at an exercise price of $5.00. Half of the options were exercisable upon
issuance and the remaining half exercisable one year later. The term of the
options is two years from the date exercisable.
36
Presented below is a summary of the status of the stock options held by
Warrantech's employees, and the related transactions for the twelve months ended
March 31, 1998, 1997 and 1996.
March 31,
-------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------------
Options outstanding at beginning of year 3,484,553 $3.06 3,218,024 $2.88 3,233,500 $2.87
Granted 92,147 7.27 369,129 5.06 9,524 5.25
Canceled (138,904) (5.40) (7,600) (6.70) - -
Exercised (142,262) (4.91) (95,000) (4.44) (25,000) (2.50)
Forfeited - - - - - -
-------------------------------------------------------------------------------------------
Options outstanding at end of year 3,295,534 $3.00 3,484,553 $3.06 3,218,024 $2.88
===========================================================================================
-------------------------------------------------------------------------------------------
Options exerciseable at end of year 3,132,374 $2.84 3,193,024 $2.89 3,218,024 $2.89
===========================================================================================
The weighted average fair value of stock options at date of grant,
calculated using the Black-Scholes option-pricing model, granted during the
twelve months ended March 31, 1998, March 31, 1997 and March 31, 1996 is $3.08,
$2.08 and $2.31 respectively.
The Company recognized costs of $56,599, $39,082 and $12,344 for the
years ended March 31, 1998, 1997 and 1996, respectively, for stock-based
compensation to employees..
The following table summarizes the status of Warrantech's stock options
outstanding and exercisable at March 31,1998.
Stock Options Stock Options
Outstanding Exercisiable
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range Of Exercise Prices Shares Life(Yrs) Price Shares Price
-------------------------------------------------------------------------------
$ 1.63 to $4.56 3,123,328 2.6 $2.81 3,047,374 $2.77
$ 5.00 to $6.38 139,762 2.8 5.25 85,000 5.40
$9.87 To $11.75 32,444 4.7 11.46 - -
-------------------------------------------------------------------------------
Total 3,295,534 2.6 $3.00 3,132,374 $2.84
===============================================================================
37
12. OTHER INCOME(EXPENSE)
Other income(expense) is comprised of the following:
March 31,
------------------ --------------- ----------
1998 1997 1996
------------------ --------------- ----------
------------------ --------------- ----------
Interest and dividend income $1,120,701 $722,560 $622,873
Interest expense (378,812) (433,990) (182,523)
Profit sharing - - (865,000)
Write-off note receivable - - (222,845)
Miscellaneous 77,843 36,015 (4,125)
------------------ --------------- -----------
$819,732 $324,585 $(651,620)
================== =============== ===========
13. JOINT VENTURE AGREEMENT AND SALE
In July, 1993, the Company and American International Group Inc.
("AIG") formed a corporate joint venture, Techmark Services Ltd.
("Techmark" or the "Joint Venture") owned fifty-one percent (51%) by
AIG and forty-nine percent (49%) by the Company.
In conjunction with the foregoing alliance, in October, 1993, AIG
purchased, for a price of $6,430,000, options and a special issue of
preferred stock which was convertible into an issue of new shares of
common stock which, subsequent to its issuance, would be equivalent to
twenty percent (20%) of the Company's issued and outstanding common
stock. Under the terms of the purchase agreement, AIG had the right to
purchase an increased interest in the Company, to a maximum of thirty
percent (30%) of the Company's issued and outstanding common stock, if
certain operating goals were achieved by the Company.
On April 18, 1996, the Company and AIG consummated an agreement for
the termination of the Techmark Joint Venture (the "Agreement"). Under
the terms of the Agreement, AIG agreed to purchase the Company's
forty-nine (49%) interest in the joint venture for approximately $3.8
million and for the Company to repurchase the 3,234,697 shares of
convertible preferred stock held by AIG for its original redemption
value of $6,430,000 and further relinquish their rights to other
options under the original agreement. As a result of this transaction,
the Company no longer has any investment in or liability to the Joint
Venture and will no longer record any equity in the operations of the
Joint Venture. The redemption value will be offset by the amount due
the Company from the sale of its investment, with the net amount due
AIG of $2,395,960 resulting in a three year, non-interest bearing note
payable in 11 equal quarterly installments of $205,000 commencing June
30, 1996 with a final installment of $140,960 due March 1999. The
effective interest rate of this note is 8.25%. In the event of default
by the Company under the note payable, the Company would be required
to reissue to AIG preferred stock for the remaining amount due at the
default date.
At March 31, 1996, the Company's carrying value of its investment
amounted to $1,885,674 which resulted in a gain on the sale of the
investment of $1,876,480, for the excess of the proceeds over the
carrying value, which was recognized in the first quarter of fiscal
1997.
Also, as part of the agreement, AIG paid the Company $1,480,000
related to amounts due the Company as of March 31, 1996, under its
profit sharing arrangement. In connection with this payment, the
Company issued an irrevocable letter of credit to the benefit of AIG
through
38
December 2002 which can be drawn upon by AIG in the event the ultimate
profit sharing amount due the Company is less than the amount
previously paid. It is anticipated that no amounts will be due AIG
under the letter of credit.
14. ACQUISITION
In July of 1995, Warrantech International, Inc., acquired Home
Guarantee Corporation Plc (subsequently renamed Warrantech Europe
Plc.) a British Company, which markets home warranty products, as well
as, other warranty products similar to those marketed by the Company
in the United States. The acquisition was accounted for as a purchase
and the resultant goodwill amounting to $695,800 is being amortized
over a 10 year period. In October 1997, the Company acquired certain
assets of Distributors & Dealers Service Co., Inc. for $888,541 and
the resulting goodwill is being amortized over 4.5 years.
15. SIGNIFICANT CUSTOMERS
The Company has one significant customer, CompUSA, that accounted for
approximately 24% and 23% of consolidated gross revenues for the years
ended March 31, 1998 and 1997. The Company had two significant
customers, CompUSA and Tops, that accounted for approximately 19% of
consolidated gross revenues for the year ended March 31, 1996.
16. RELATED PARTY TRANSACTIONS
During the years ended March 31, 1997 and 1996 the Company recognized
net insurance expense of $43,559,423 and $27,774,163, respectively for
insurance coverage provided by AIG for certain service contract
programs. At March 31, 1997 and 1996 the company had an insurance
premium payable to AIG for $5,172,790 and $5,982,086, respectively.
The Company had a receivable for accrued profit sharing from AIG of
$1,480,000 at March 31, 1996.
17. EARNINGS PER SHARE
The computation of earnings per share at March 31, 1998,1997 and 1996
was as follows:
For the Years Ended March 31,
------------------------------------- ----------------
1998 1997 1996
---------------- ----------------- ----------------
Numerator:
Net income applicable to common stock $ 5,261,037 $ 4,794,715 $ 2,394,862
================ ================= ================
Denominator
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 13,259,964 13,054,611 12,988,547
Stock Options (treasury method) 2,357,386 2,340,258 3,477,286
---------------- ----------------- ----------------
Diluted shares 15,617,350 15,394,869 16,465,833
================ ================= ================
Earnings Per Common Share:
Basic $.40 $.37 $.18
================ ================= ================
Diluted $.34 $.31 $.15
================ ================= ================
39
18. Quarterly Financial Data (Unaudited)
The following fiscal 1998 and 1997 quarterly financial information for
each of the three month periods ended June 30, September 30, December
31, 1997 and 1996 and March 31, 1998 and 1997 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,
1997 1996 1997 1996 1997 1996 1998 1997
Net revenues $52,917,871 $35,632,324 $49,790,199 $38,409,126 $52,596,230 $41,795,061 $44,434,234 $43,826,353
Income from 1,932,055 1,577,186 2,375,079 1,900,562 1,392,368 3,134,489 2,076,073 1,215,603
operations
Income (loss)
before provision for
income taxes 2,129,434 3,466,445 2,573,611 1,932,842 1,646,223 3,001,979 2,246,039(1) (646,531)(2)
Net income (loss) $1,327,204 $2,119,235 $1,569,680 $1,315,080 $1,012,324 $1,832,053 $1,351,829 ($471,653)
Earnings (loss) per Share
Basic $0.10 $0.16 $0.12 $0.10 $0.08 $0.14 $0.10 ($0.04)
Diluted $0.08 $0.15 $0.10 $0.09 $0.06 $0.12 $0.09 ($0.04)
(1) Direct costs were reduced by approximately $5.3 million in the fourth
quarter of fiscal 1998 to recognize the over remittance of insurance premiums in
prior periods.
(2) As a result of the culmination of litigation, the Company recorded a
charge for legal settlements of $1,700,000 plus legal expenses, in the fourth
quarter of fiscal 1997.
40
WARRANTECH CORPORATION AND SUBSIDIARIES FINANCIAL
STATEMENT SCHEDULE
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Column Column Column Column Column
A B C D E
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Balance at Additions Deductions- Balance at
-------------------------------------------
Description Beginning Charged to Costs Charged to Other End of
of Year and Expense (a) Accounts-Describe Describe (b) Year
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1998 Allowance
for doubtful accounts:
Trade A/R $300,328 $1,085,675 - $162,830 $1,223,173
Other A/R - - - - -
Profit Sharing - - - - -
Year Ended March 31, 1997 Allowance
for doubtful accounts:
Trade A/R 450,092 28,000 - 177,764 300,328
Other A/R 242,112 - - 242,112 -
Profit Sharing 1,720,000 - - 1,720,000 -
Year Ended March 31, 1996 Allowance
for doubtful accounts:
Trade A/R 126,115 363,179 - 39,202 450,092
Other A/R - 242,112 - - 242,112
Profit Sharing 870,000 850,000 - - 1,720,000
(a) Bad debt expense charged directly to operations pertaining to accounts
receivable was $705,119 for the year ended March 31, 1997.
(b) Amount of receivables charged to the allowance during the year.
41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
N/A
42
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by Reference to the Company's Definitive Proxy Statement
for its 1998 Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A promulgated under the Securities and Exchange Act of
1934, as amended (the "Proxy Statement").
Item 11. Executive Compensation
Incorporated by Reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by Reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by Reference to the Proxy Statement.
43
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 21.
(b) Reports on Form 8-K during the last quarter: None.
(c) Exhibits
3(a) - Certificate of Incorporation filed June 22, 1983.
Incorporated by reference to the Company's Registration
Statement on Form S-18, filed on November 23, 1983,
Registration No. 2-88097-NY.
(b) - Certificate of Amendment of Certificate of Incorporation
filed October 24, 1983. Incorporated by reference to the
Company's Registration Statement on Form S-18, filed on
November 23, 1983, Registration No. 2-88097-NY.
(c) - Certificate of Amendment of Certificate of Incorporation
dated June 29, 1987. Incorporated by reference to the
Company's Form 8 Amendment to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1987, file no.
0-13084.
(d) - Certificate of Designation of the Company with respect to
the Preferred Stock as filed with the Secretary of State of
Delaware on October 12, 1993. Incorporated by reference to
the Company's Report on Form 10-K for the fiscal year ended
March 31, 1994.
(e) - By-laws of the Company, as amended. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 10, 1988, file no.
0-13084.
10(a) - Form of Sales Distributor Agreement. Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1985, file no. 0-13084.
(b) - Form of Service Center Agreement. Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1985, file no. 0-13084.
(c) - Form of Dealer Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985, file no. 0-13084.
(d) - Form of Sales Agent Agreement. Incorporated by reference
to the Company's Registration Statement on Form S-1, filed
on September 5, 1986, Registration No. 3-8517.
(e) - 1988 Employee Incentive Stock Option Plan of the Company.
(f) - Employment Agreement dated April 1, 1995, between
44
the Company and Joel San Antonio.
(g) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Inacom Corporation. Incorporated by reference to the
Company's Report on Form 10-K for the fiscal year ended
March 31, 1992, file no. 0-13084.
(h) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Damark Inc. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31,
1992, file no. 0-13084.
(i) - Insurance policy between the Company and Houston
General Insurance Company pertaining to service
contracts written in all states except Florida.
(j) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
CompUSA.
(k) - Insurance policy between the Company and Houston General
Insurance company pertaining to service contracts written by
WCPS of Florida, Inc. (excluding Inacom Corporation).
(l) - Insurance policy between the Company and Houston General
Insurance company pertaining to service contracts written by
WCPS of Florida, Inc. through CompUSA.
(m) - Settlement and Runoff Agreement between the Company, its
wholly owned subsidiaries Warrantech Dealer Based Services,
Inc. and Warrantech Consumer Product Services, Inc. and
American Hardware Mutual Insurance Company ("AHM") regarding
termination of insurance coverage by AHM. (This document has
been omitted and accorded confidential treatment by the
Securities and Exchange Commission pursuant to an Order
Granting Application Pursuant to Rule 24b-2 Under the
Securities Exchange Act of 1934, As Amended, Respecting
Confidential Treatment of Exhibits 10(v) and 10(w) Contained
in Registrant's Form 10-K for the fiscal year ended March
31, 1992, issued by the Division of Corporation Finance.)
(n) - Revolving Loan Agreement between the Company and Peoples
Bank.
(o) - Administrator Agreement - Consumer Products, between
Houston General Insurance Company and Warrantech Consumer
Product Services, Inc. (This document has been omitted and
has been filed separately with the Securities and Exchange
Commission pursuant to a confidential Treatment Request.)
(p) - General Agency Agreement between American International
Group, Inc. and Warrantech Automotive. Inc. (This document
has been omitted and has been filed separately with the
Securities and Exchange Commission pursuant to a
Confidential Treatment Request.)
45
(q) - Master Agreement between American International Group,
Inc. and the Company (Section 1.6 of this document has been
omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Request.)
11. - Statements re: computation of per share earnings.
21. - Subsidiaries of the Company.
27. - Financial Data Schedule.
28. - Stipulation and Consent Order of Illinois. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1988, file no.
0-13084.
99(a) - Complaint in Action entitled David Robertson v. Warrantech
Corporation and Warrantech Automotive Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1993; file no.
0-13084.
(b)- Amended Complaint in Action entitled The Oak Agency, Inc.
and The Oak Financial Services, Inc. vs. Warrantech Dealer
Based Services, Inc., Case No. 91 C 6677, filed in the
United States District Court for the Northern District of
Illinois. Incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1997, file 0-13084.
(c) - Complaint in Action entitled The Oak Agency, Inc., et al.
v. Warrantech, Inc., et al., Case No. 96 C 1106, filed in
the United States District Court for the Northern District
of Illinois. Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1997, file 0-13084.
46
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 29, 1998 By: Joel San Antonio
------------------------------
Joel San Antonio
Chairman of The Board and
Chief Executive Officer
Dated: June 29, 1998 By: Harris Miller
-------------------------------
Harris Miller,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
Joel San Antonio Chief Executive Officer, June 29, 1998
Chairman of the Board and
- - - - -------------------------------------------------- Director
(Joel San Antonio)
William Tweed Director June 29 1998
- - - - --------------------------------------------------
(William Tweed)
Director June 29, 1998
Gordon Paris
- - - - --------------------------------------------------
(Gordon Paris)
Jeffrey J. White Director June 29, 1998
- - - - --------------------------------------------------
(Jeffrey J. White)
Lawrence Richenstein Director June 29, 1998
- - - - --------------------------------------------------
(Lawrence Richenstein)
47
Exhibit List
3(a) - Certificate of Incorporation filed June 22, 1983.
Incorporated by reference to the Company's Registration
Statement on Form S-18, filed on November 23, 1983,
Registration No. 2-88097-NY.
(b) - Certificate of Amendment of Certificate of Incorporation
filed October 24,1983. Incorporated by reference to the
Company's Registration Statement on Form S-18, filed on
November 23, 1983, Registration No. 2-88097-NY.
(c) - Certificate of Amendment of Certificate of Incorporation
dated June 29, 987. Incorporated by reference to the
Company's Form 8 Amendment to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1987, file no.
0-13084.
(d) - Certificate of Designation of the Company with respect to
the Preferred Stock as filed with the Secretary of State of
Delaware on October 12, 1993. Incorporated by reference to
the Company's Report on Form 10-K for the fiscal year ended
March 31, 1994.
(e) - By-laws of the Company, as amended. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 10, 1988, file no.
0-13084.
10(a) - Form of Sales Distributor Agreement. Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1985, file no. 0-13084.
(b) - Form of Service Center Agreement. Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1985, file no. 0-13084.
(c) - Form of Dealer Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985, file no. 0-13084.
(d) - Form of Sales Agent Agreement. Incorporated by reference
to the Company's Registration Statement on Form S-1, filed
on September 5, 1986, Registration No. 3-8517.
(e) - 1988 Employee Incentive Stock Option Plan of the Company.
(f) - Employment Agreement dated April 1, 1995, between the
Company and Joel San Antonio.
48
(g) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Inacom Corporation. Incorporated by reference to the
Company's Report on Form 10-K for the fiscal year ended
March 31, 1992, file no. 0-13084.
(h) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Damark Inc. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31,
1992, file no. 0-13084
(i) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts written in
all states except Florida.
(j) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
CompUSA.
(k) - Insurance policy between the Company and Houston General
Insurance company pertaining to service contracts written by
WCPS of Florida, Inc. (excluding Inacom Corporation).
(l) - Insurance policy between the Company and Houston General
Insurance company pertaining to service contracts written by
WCPS of Florida, Inc. through CompUSA.
(m) - Settlement and Runoff Agreement between the Company, its
wholly owned subsidiaries Warrantech Dealer Based Services,
Inc. and Warrantech Consumer Product Services, Inc. and
American Hardware Mutual Insurance Company ("AHM") regarding
termination of insurance coverage by AHM. (This document has
been omitted and accorded confidential treatment by the
Securities and Exchange Commission pursuant to an Order
Granting Application Pursuant to Rule 24b-2 Under the
Securities Exchange Act of 1934, As Amended, Respecting
Confidential Treatment of Exhibits 10(v) and 10(w) Contained
in Registrant's Form 10-K for the fiscal year ended March
31, 1992, issued by the Division of Corporation Finance.)
(n) - Revolving Loan Agreement between the Company and Peoples
Bank.
(o) - Administrator Agreement - Consumer Products, between
Houston General Insurance Company and Warrantech Consumer
Product Services, Inc. (This document has been omitted and
has been filed separately with the Securities and Exchange
Commission pursuant to a confidential Treatment Request.)
(p) - General Agency Agreement between American International
Group, Inc and Warrantech Automotive. Inc. (This document
has been omitted and
49
has been filed separately with the Securities and
Exchange Commission pursuant to a Confidential Treatment
Request.)
(q) - Master Agreement between American International Group,
Inc. and the Company (Section 1.6 of this document has been
omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Request.)
11. - Statements re: computation of per share earnings.
21. - Subsidiaries of the Company.
27. - Financial Data Schedule.
28. - Stipulation and Consent Order of Illinois. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1988, file no.
0-13084.
99(a) - Complaint in Action entitled David Robertson v. Warrantech
Corporation and Warrantech Automotive Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1993; file no.
0-13084.
(b)- Amended Complaint in Action entitled The Oak Agency, Inc.
and The Oak Financial Services, Inc. vs. Warrantech Dealer
Based Services, Inc., Case No. 91 C 6677, filed in the
United States District Court for the Northern District of
Illinois. Incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1997, file 0-13084.
(c) - Complaint in Action entitled The Oak Agency, Inc., et al.
v. Warrantech, Inc., et al., Case No. 96 C 1106, filed in
the United States District Court for the Northern District
of Illinois. Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1997, file 0-13084.
50
EXHIBIT 10(f)
EMPLOYMENT AGREEMENT
Agreement made as of the 1st day of April, 1995, between WARRANTECH
CORPORATION, (the "Company"), a Delaware corporation having its principal office
at 300 Atlantic Street, Stamford, Connecticut 06901, and Joel San Antonio (the
"Executive"), an individual residing at 1300 Rockrimmon Road, Stamford,
Connecticut 06902.
W I T N E S S E T H:
WHEREAS, the Executive has been instrumental in the development of the
Company since its inception in an executive capacity; and
WHEREAS, the Company believes that Executive's continued services would be
of great value to it and desires to retain his services, and Executive has
indicated his willingness to enter into an agreement upon the terms and
conditions set forth; and
WHEREAS, the execution by the Company of this Agreement has been duly
authorized and approved;
IT IS, THEREFORE, AGREED AS FOLLOWS:
1. Duties.
The Company hereby employs the Executive as Chairman and Chief Executive
Officer of the Company. Executive shall have responsibility (subject to the
Board of Directors) for the management and operations of the Company and all
corporations controlled by the Company, now or hereafter acquired, performing
all such services as shall be consistent with his position. If Executive shall
serve as an officer, director or employee of any affiliate of the Company, he
shall not receive any additional compensation, unless otherwise mutually agreed
upon.
2. Salary and Other Compensation.
A. The Company shall pay the Executive during the term of this Agreement a
base salary at the annual rate of $450,000 during the first 12 months of this
Agreement, which base salary shall automatically increase by 10% annually
thereafter during the term of this Agreement. Such base compensation shall be
payable in accordance with the Company's payroll practices as in effect from
time to time.
B. The Executive also shall receive an incentive bonus equal to four
percent of net after tax income, the terms and conditions of which are set forth
in Exhibit A annexed hereto. C. The Company also shall maintain in full force
and effect for the benefit of the Executive the split dollar life insurance
policy annexed here as Exhibit B.
3. Expenses.
It is contemplated that in performing services under this Agreement the
Executive will be required to incur expenses on behalf of and in furtherance of
Company business. The Executive is authorized to incur such reasonable expenses
in performing his duties including, but not limited to, expenses for travel,
transportation, entertainment, gifts and similar items, which expenses shall be
paid by the Company. At the end of each month and upon submission of appropriate
bills or vouchers, the Company shall pay all such expenses incurred by the
Executive during that month. Such payment may be made either directly to the
payees named in such bills or vouchers or, to the extent paid by the Executive,
by reimbursement to him. The Executive agrees to maintain adequate records of
all expenses to be reimbursed by the Company.
4. Automobile.
It is contemplated that to perform the services required by this Agreement
the Executive shall obtain and remain fully responsible for the maintenance and
repair of an automobile, for which the Company shall provide the Executive with
an expense allowance of $12,000 per year.
5. Vacations.
The Executive shall be entitled to 5 weeks of vacation time per year in
accordance with such policies as are from time to time adopted by the Company's
Board of Directors.
6. Disability.
A. For purposes of this Agreement, disability shall mean physical or mental
illness or condition rendering the Executive incapable of performing
substantially all of his normal duties with the Company.
B. In the event the Executive becomes disabled, for a continuous period of
twelve months, the Company, at its option and upon at least thirty days written
notice to the Executive or his personal representative (but before the Executive
has recovered from such disability), may terminate the Executive's employment.
C. In the event of the Executive's disability hereunder, and from the date
thereof, the Company shall continue to pay the Executive his salary and other
compensation (pursuant to paragraph 2) for a period not to exceed twelve months
at the rate provided for on the date of the commencement of such disability. The
Executive shall be entitled to annual increases and cost of living adjustments
pursuant to paragraph 2 if otherwise applicable. If the
-2-
Executive shall receive any disability payments from any insurance company under
a Company sponsored disability plan, as provided for below, the salary payable
to the Executive under this sub-paragraph shall be reduced accordingly, dollar
for dollar. Should the Company's obligation to pay the disabled Executive's
salary expire as provided for herein for any reason whatsoever, the Executive
shall be entitled to receive and retain all disability insurance proceeds of
such disability plan.
D. Subject to insurability, the Company shall purchase and maintain group
disability insurance for its senior executives including the Executive pursuant
to the Disability Income Policy annexed hereto as Exhibit B.
7. Additional Benefits.
A. The Company also shall be eligible to receive such additional bonuses
and awards as the Board of Directors or Compensation Committee of the Board of
Directors may from time to time grant to him, and he also shall be eligible and
shall be entitled to participate in any stock option plan, bonus participation
or extra compensation plan, pension, group insurance or other benefits which the
Company may, in its sole discretion, provide for its senior executive employees
generally.
B. The Company shall obtain, and maintain in full force and effect, a
comprehensive major medical, hospitalization Blue Cross-Blue Shield group plan
(or the equivalent) with dental coverage for the benefit of the Executive and
his immediate family. The nature and scope of the coverage will be identical to
that provided to all other senior executives.
8. Restrictive Covenants.
A. The Executive shall devote his full time and efforts to the business and
affairs of the Company and shall use his best efforts to promote its interests.
B. The Executive shall perform his duties on a full-time basis primarily at
either the Company's offices in Stamford, Connecticut or the Company's offices
in Euless, Texas.
C. During the term of this Agreement and for two years following its
termination for any reason, the Executive shall not, directly or indirectly,
participate in the ownership, management, control, employ, or serve as an agent
or render any services to, any company which competes with any part of the
business of the Company, its subsidiaries or affiliates, without the prior
written consent of the Company's Board of Directors.
-3-
D. During the term of this Agreement and thereafter, Executive will not,
directly or indirectly, disclose or use any confidential information, records,
trade secrets or any other secret or confidential matter relating to the
clients, employees, business, products or services of the Company, whether or
not it is identified as secret or confidential, without first obtaining the
prior written consent of the Company. This covenant includes, but is not limited
to: disclosing or using information concerning Company customers, customer
requirements, trade secrets, markets, costs, products; product development,
marketing and business plans or strategies; divulging the identity of Company
clients or employees; or soliciting Company clients or employees.
E. Executive agrees that this paragraph constitutes an independent and
severable covenant, which shall be enforceable notwithstanding any rights or
remedies that the Company may have under any other provision of this Agreement
or otherwise, that the remedy at law for any breach hereof will be inadequate
and that the Company shall be entitled to temporary and permanent injunctive
relief without the necessity of proving damages. Additionally, if Executive
should breach these covenants, Executive agrees to indemnify the Company for any
loss, damage, or expense which the Company may incur, including but not limited
to, attorney's fees and disbursements resulting from any such breach by
Executive.
F. If any of the covenants contained hereinabove, or any part thereof, is
hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the covenant or covenants, which shall be given full effect,
without regard to the invalid portions.
G. If any of the covenants contained hereinabove, or any part thereof, is
held to be unenforceable because of the duration of such provision or the area
covered thereby, the parties agree that the court making such determination
shall have the power to reduce the duration and/or area of such provisions and,
in its reduced form, said provision shall then be enforceable.
9. Duration.
This Agreement shall be in full force and effect for the period commencing
as of April 1, 1995 and ending March 31, 1998 (hereinafter referred to as the
"term of this Agreement"). Thereafter, this Agreement shall continue in full
force and effect for additional one year periods, provided, however, that either
party may terminate this Agreement by giving prior written notice at least 90
days prior to the end of the term hereof or any renewal term. This Agreement may
be terminated before the end of its term by agreement of the parties or upon the
death or disability of the Executive, or in the event of termination as provided
in paragraphs 9 or 10 hereof. This Agreement also will
-4-
automatically terminate upon execution of another Agreement between the parties
that explicitly supersedes this Agreement.
10. Termination for Cause by the Company.
The Company may terminate the Executive's employment at any time with cause
upon thirty (30) days prior written notice to the Executive. Notice of
termination for cause must specify with particularity the actions or inactions
constituting such cause.
Cause shall exist upon the occurrence of any of the following:
(i) the Executive's conviction for any crime involving the Company
which constitutes a felony in the jurisdiction involved;
(ii) the Executive's willful failure or refusal to substantially
perform his duties as required by this Agreement;
(iii) misappropriation of Company money or property or other dishonest
act relating to the Company, its assets or operations;
(iv) the material breach by the Executive of any of the covenants of
this Agreement;
(v) any other acts or omissions which constitute cause under the laws
of the State of New York.
If termination under this section occurs, the Company shall pay to the
Executive all amounts due under this Agreement which are then accrued but unpaid
within fifteen (15) days after date of the notice of termination.
11. Termination Without Cause.
A. The Company shall have no right to terminate this Agreement except as
expressly set forth above. Any other termination of this Agreement by the
Company shall constitute wrongful termination. Except as provided below, in the
event of any wrongful termination, the Company shall pay the Executive an amount
equal to the lesser of $450,000 or the base salary payable hereunder through the
end of the term or any renewal term. Such payment shall be made within 30 days
of termination and shall be deemed liquidated damages for the Executive's loss
of salary but shall not preclude, diminish or in any way affect the Executive's
right to pursue whatever additional remedies may be available to him with
respect to damages suffered other than for loss of salary. The liquidated
damages provided
-5-
above shall be payable regardless of whether or not the Executive mitigates or
attempts to mitigate his damages.
B. If within two years following a Change In Control (as hereinafter
defined) of the Company, the Company shall terminate the Executive's employment
other than by reason of the Executive's disability for cause (as defined above)
or the Executive shall terminate his employment by the Company for Good Reason
(as hereinafter defined) then (1) on or before the Executive's last day of
employment with the Company, the Company shall pay to the Executive as
compensation for services rendered to the Company a lump sum cash amount
(subject to applicable payroll or other taxes required to be withheld computed
at the rate for supplemental payments) equal to three times the Executive's
actual base salary for the 12 month period preceding such termination date, and
(2) the Company shall not recover its contributions under the split dollar life
insurance policy until the expiration of the term of this Agreement and the
Company shall be required to continue making its contributions to the
Executive's split dollar life insurance policy and other benefits until the
expiration of the term of the Agreement.
C. "Change In Control" means (1) the acquisition by any person, directly or
indirectly, of the beneficial ownership of securities of the Company entitled to
cast 40% or more or the total vote to which all the Company's outstanding
securities are then entitled to cast in the election of directors unless the
Executive is such person or an affiliate of such person or (2) a change in the
composition of the board of directors of the Company which results in a majority
of the members thereof being persons who were not elected by, or nominated for
election as directors by, the board of directors of the Company as the same was
constituted, immediately prior to such change in the composition thereof.
D. "Good Reason" shall mean any of the following which occurs following a
Change of Control: a significant reduction or alteration of the Executive's
duties, authority or responsibility; removal of the Executive from the highest
corporate office held by him prior to such Change In Control; any modification
of the compensation terms of this Agreement adverse to the Executive; any
material reduction in perquisites, benefits or support facilities previously
available to the Executive in order to perform his obligations under this
Agreement.
E. In the event Executive's employment is terminated pursuant to Paragraph
10A or 10B, the Executive shall be entitled to immediate vesting of any and all
stock options issued by the Company pursuant to its incentive stock option plan
and to any and all other options, warrants, or shares under substantially the
terms as to which the Executive was entitled before such termination.
-6-
12. Assignment
This Agreement shall inure to the benefit of and be binding upon the
Company, its successors and assigns, and the Executive, his heirs and personal
representatives. However, the Executive's rights under this Agreement are
personal and shall not be voluntarily or involuntarily assigned or otherwise
transferred.
13. Notices.
Any notice required or permitted to be given under this Agreement shall be
in writing and delivered by hand or by receipted overnight express to the
Executive at his residence set forth above or to the Company at its principal
office set forth above.
14. Arbitration.
Any disagreement, controversy or claim arising out of, or relating to this
Agreement, or the breach thereof, if not involving the need for equitable
relief, shall be settled by arbitration in Fairfield County, State of
Connecticut in accordance with the rules then obtaining of the American
Arbitration Association and judgment upon the award rendered may be entered and
enforced in any court having jurisdiction thereof. Nothing contained herein
shall prevent either party from seeking equitable relief from the appropriate
court, if such relief would not be available in Arbitration.
15. Attorney Fees.
If any action or proceeding whether at law, in equity, or in arbitration,
is commenced to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, arbitrator's fees, costs
and necessary disbursements in addition to any other relief to which it may be
entitled.
16. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Connecticut.
17. Entire Agreement.
This instrument contains the entire agreement of the parties. It may not be
modified orally; it may ne modified only by an agreement in writing signed by
the party against whom enforcement of any waiver, modification or discharge is
sought.
-7-
IN WITNESS WHEREOF, the parties have set their hands and seal to this
Agreement on the day and year first above written.
Attest: WARRANTECH CORPORATION
_____________ By:__________________________
__________________________
JOEL SAN ANTONIO
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EXHIBIT A
Terms of Incentive Bonus
The Executive shall receive an annual incentive bonus equal to four percent
of the Company's net after tax income.
Distributions and calculations of the amount of such bonus shall be made
quarterly and shall be cumulative within each fiscal year. If at any time during
a fiscal year the bonus award previously distributed hereunder exceed the
amounts to which the Executive is entitled, as calculated on a cumulative
year-to-date basis, the Company shall promptly notify the Executive of the
amount of the excess distribution and the Executive shall be required to
promptly repay such amount to the Company.
In calculating net after tax income and determining distributions
hereunder, the Company shall rely upon the Company's financial statements as
prepared by the Company's Independent Certified Public Accountants, which
financial statements shall be prepared in a manner consistent with generally
accepted accounting principles. Subject to the quarterly adjustments provided
for above, such calculations when made shall be final, conclusive and binding
upon the Company and the Executive.
-9-
WARRANTECH CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
For the Years Ended March 31,
---------------------------------------------------- ----------------------
1998 1997 1996
----------------------- ------------------------ ----------------------
Earnings:
Net income $ 5,261,037 $ 4,794,715 $ 2,394,862
======================= ======================== ======================
Weighted average shares outstanding:
Basic:
Common shares 13,259,964 13,054,611 12,988,547
======================= ======================== ======================
Fully diluted:
Common shares 13,259,964 13,054,611 12,988,547
Assumed exercise of stock options 2,357,386 2,340,258 3,477,286
----------------------- ------------------------ ----------------------
15,617,350 15,394,869 16,465,833
======================= ======================== ======================
Earnings Per Common Share:
Basic:
Net income $.40 $.37 $.18
======================= ======================== ======================
Fully diluted:
Net income $.34 $.31 $.15
======================= ======================== ======================
(A) The treasury method was used in the calculation of primary earnings per
share for all periods presented.
(B) The modified treasury method was used in the calculation of fully
diluted earnings per share for the years ended March 31, 1998, 1997 and 1996.
EXHIBIT 21
LIST OF SUBSIDIARIES OF WARRANTECH CORPORATION
1. WARRANTECH CONSUMER PRODUCT SERVICES, INC.
a Connecticut corporation
2. WCPS OF FLORIDA, INC.
a Florida corporation
3. WARRANTECH AUTOMOTIVE, INC.
a Connecticut corporation
4. WARRANTECH AUTOMOTIVE OF CALIFORNIA, INC.
a California corporation
5. WARRANTECH AUTOMOTIVE RISK PURCHASING GROUP, INC.
a Michigan corporation
6. WARRANTECH AUTOMOTIVE OF FLORIDA, INC.
a Florida corporation
7. WARRANTECH DIRECT, INC.
a Texas corporation
8. WARRANTECH (UK) LIMITED
company incorporated in England
9. WARRANTECH OF PUERTO RICO, INC.
a Puerto Rico corporation
10. WARRANTECH INTERNATIONAL, INC.
a Delaware corporation
11. WCPS OF CANADA, INC.
a Connecticut corporation
12. WARRANTECH AUTOMOTIVE OF CANADA, INC.
a Connecticut corporation
13. WARRANTECH EUROPE PLC
a company incorporated in England
14. WARRANTECH REINSURANCE COMPANY, LTD
a company incorporated in the Cayman Islands
15. WARRANTECH ADDITIVE, INC.
a Texas corporation
16. WARRANTECH HOME SERVICE COMPANY
a Connecticut corporation
17. WARRANTECH DEL CARIBE, INC.
a Puerto Rico corporation
18. WARRANTECH HOME ASSURANCE COMPANY
a Florida corporation
19. WARRANTECH HELP DESK, INC.
a Delaware corporation
20. WCPS DIRECT, INC.
a Texas corporation
21. WHSC DIRECT, INC.
a Texas corporation
22. WARRANTECH HOME ASSURANCE COMPANY.
a Connecticut corporation
23. WARRANTECH INTERNATIONAL de CHILE.
a Chile corporation