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, 1997
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
______________________________________________________________________________
(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
______________________________________________________________________________
(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all report
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 Registran
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 t
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
13,295,031 as of (June 17, 1997).
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant is $99,504,348 (as of June 17, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 1997 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 51.
Document contains 56 pages
================================================================================
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 (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 retailer', 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.
The VSC is a contract between the dealer/lessor (and in some states
WAI) and the vehicle purchaser/lessee that offers coverage that runs from one
(1) to eighty-four (84) months and 1,000 to 100,000 miles. Coverage is
afforded in the event of the failure of a broad range of mechanical components
that occurs during the term of the VSC, 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 Houston General
Insurance Company, a wholly-owned subsidiary of Tokyo Marine & Fire Insurance
Company, the world's largest insurance organization. At the present time, in
addition to Houston General, certain other programs offered by WCPS are also
being insured by Virginia Surety Company, a member of AON Insurance Company,
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.
During fiscal 1995, WCPS commenced a program to enhance its products
and services to solidify its position in the industry and broaden its market
base. This is a continuing effort that seeks to identify opportunities, weigh
their potential and develop programs and/or services to meet the needs of these
new venues. In connection with this effort WCPS has upgraded existing service
contract programs including the Repair Master Service contract program.
Special attention was given to the office products category with the emphasis
on the personal computer segment of the industry which is rapidly expanding.
This effort, which has continued in fiscal 1996, 1997, has resulted in
increased market share in this segment.
WCPS has one significant customer that accounted for approximately 23%
and 14% of consolidated gross revenues for the years ended March 31, 1997 and
1996, respectively.
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 Solution" during manufacturer's 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 and WCPS, and (ii) a growing list of other
vendors who wish to utilize WDI resources to enhance their own service
contract sales efforts. Second effort marketing consists of contacting product
purchasers who did not buy a service contract and offering them this
opportunity prior to the expiration of the manufacturer warranty. Renewal
marketing consists of the effort to renew service contracts on eligible
products upon the expiration of their current service contract coverage.
Warrantech Home Service Company
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 breakdow
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.
During fiscal 1997, WHSC signed an agreement with Zurich American
Insurance Company to underwrite its home service business, and signed a five
year agreement with MGIC Investment Corporation, the leading provider of home
mortgages in the United States, to an exclusive agreement to market its home
service contracts on a national basis.
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.
In conjunction with the foregoing alliance, in October 1993, AIG
purchased, for a price of $6,430,000, options and a special issue of preferred
stock which was convertible into an issue of new shares of common stock which,
subsequent to its issuance, would be equivalent to twenty percent (20%) of
the Company's issued and outstanding common stock. Under the terms of the
purchase agreement, AIG had the right to purchase an increased interest in the
Company, to a maximum of thirty percent (30%) of the Company's issued and
outstanding common stock, if certain operating goals were achieved by the
Company.
In April 1996, the Company and AIG agreed to terminate the joint
venture effective January 1, 1996. Under the terms of the agreement, AIG
agreed to purchase the Company's forty-nine percent (49%) investment in the
joint venture for approximately $3.8 million and to sell back to the Company
the 3,234,697 shares of convertible preferred stock held by AIG for its
original redemption value of $6,430,000 and further relinquish their rights to
other options under the original agreement. The balance due AIG of $2,395,960
for the preferred stock is in the form of a three year, non-interest bearing
note payable. In the event of default by the Company with respect to this
note payable, the Company would be required to reissue to AIG preferred stock
for the remaining amount due at the default date. AIG also agreed to continue
to insure certain extended warranty programs of the Company.
In July 1995, Warrantech International, Inc., acquired Home Guarantee
Corporation PLC (subsequently renamed Warrantech Europe Plc.), a British
company which markets home warranty products in the United Kingdom covering
mechanical breakdowns of the working systems and components in homes (e.g.,
furnaces, electrical and plumbing systems, and major appliances). In addition
to home warranty products, Warrantech Europe's business will 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 will also provide full
database management, marketing, training, brokerage services, and customer car
service for clients in the automotive, financial, manufacturing, retail and
service sectors to certain other subsidiaries of the Company.
In connection with the efforts of the Company in the South American
market, WII and GTA Corporation have ended their relationship. WII now
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 and WCPS to retailers/dealers,
distributors and manufacturers, to assist them in increasing the effectiveness
and profitability of their service contract program sales efforts. The Company
develops materials and conducts educational seminars. These seminars are
conducted either at the client's place of business or at the Company's
state-of-the-art training facility at its Euless, Texas administrative offices.
This facility features the latest in audio/video technology that enhances the
training and learning experience.
Competition
The Warrantech subsidiary companies compete with a number of
independent administrators, divisions of distributors and manufacturers,
financial institutions and insurance companies. While the Company believes
that it occupies a preeminent position among its competitors in its field, it
may not be the largest marketer and administrator of service contracts and
limited warranties, and some competitors may have greater operating experience
more employees and/or greater financial resources. Further, many
manufacturers, particularly those producing motor vehicles, market and
administer their own service contract programs for and through their dealers.
Insurance Coverage
Liability for performance under the terms of service contracts and
limited warranties issued by dealers/retailers, distributors or manufacturers
is assumed by the insurer in return for the payment of the agreed-upon premium
for the assumption of the risk from the insured. This coverage provides
indemnification against loss resulting from service contract claims and
protects the consumer by ensuring that their claim will be paid.
The insurance protection is provided for the WAI programs by the New
Hampshire Insurance Company, and other AIG member companies. These companies
are all rated A++ (Superior) by the A.M. Best Company. WCPS and its clients are
protected by insurance afforded by Houston General Insurance Company, a member
of the Tokyo Marine & Fire Insurance Company, Virginia Surety Company, a Member
of the AON Group and certain AIG member companies. Houston General and Virginia
Surety are rated A (Excellent) and A+ (Superior), respectively, by A.M. Best
Company. WHSC and its clients are protected by insurance through Zurich
American Insurance Company, and 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 the
profits earned by the service contract programs. The amounts to be received,
if any, are determined in accordance with certain specified formulas by the
type of program and by policy year. Certain of these agreements require
interim calculations and distributions for various programs, with final
calculations being made as contracts expire by term. The Company did not
accrue or receive any profit sharing advances during the 1997 fiscal year.
Federal and State Regulation
The service contract programs developed and marketed by the Company's
subsidiaries, and their related operations with regard to service contracts
and limited warranties, are regulated by federal law and the statutes of a
significant number of states. The Company continually reviews all existing and
proposed statutes and regulations to ascertain their applicability to its
existing operations, as well as new programs that are developed by the Company.
Generally speaking, these statutes concern the scope of service
contract coverage and content of the service contract or limited warranty
document. In such instances, the state statute will require that specific
wording be included in the service contract or limited warranty expressly
stating the consumer's rights in the event of a claim, how the service
contract may be canceled and identification of the insurance company that
indemnifies the dealers, distributors or manufacturers against loss for
performance under the terms of the service contract.
Statutes in some states have sought to interpret the consumer product
service contract, or certain items covered under the contract as a form of
insurance, requiring that the issuer be a duly licensed and chartered
insurance company. The Company and its subsidiaries do not believe that they
are insurers and have no intention of filing the documents and meeting the
capital and surplus requirements that are necessary to obtain such a license.
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 500
individuals, an increase of approximately 100 over the preceding fiscal year.
The increase is directly attributable to the expansion of customer service
and claims representatives to meet the needs of the Company's expanding
business. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its relations with its employees
to be good.
Item 2. Properties
The Company's executive offices are located in leased premises at
300 Atlantic Street, Stamford Connecticut. The premises, which are leased
pursuant to two lease agreements (the "Lease"), consist of approximately
13,729 and 6,683 square feet respectively. The Leases, which became effective
on March 1, 1989 and August 28, 1995 and expire on February 28, 1999 and
September 29, 1998, provide for remaining annual base rent payments ranging
from $389,512 to $359,333 and $106,928 to $53,464 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 annua
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. The Other Leases provide for annual base rent payments ranging
from $163,061 to $174,762.
The operating facilities of WCPS of Florida are located in leased
premises at 14502 North Dale Mabry Highway, Tampa, Florida. These premises are
leased pursuant to a lease agreement which provides for annual base rent
payments of $6,000 and expires on August 31, 1997.
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 94,050 to 108,450.
Item 3. Legal Proceedings
A. The Oak Agency, Inc. and The Oak Financial Services, Inc. v. Warrantech
Dealer Based Services, Inc. (WDBS).
This is a suit brought in the U.S. District Court, Northern District of
Illinois, by the Oak companies against WDBS (now known as Warrantech
Automotive, Inc.). Oak, a former agent of WDBS, alleges breach of a contract
that was entered into in 1986 between Dealer Based Services, the predecessor
company to WDBS, and Oak ("the predecessor Company to WDBS, and Oak"). The suit
alleges that WDBS contracted to pay agent commissions after the contract was
terminated. Oak sought a declaratory judgment and monetary damages of
approximately $23.0 million from WDBS arising from the termination of the
agency agreement with Oak.
A bench trial (to the Court rather to a jury) was held in the case during the
week of May 19, 1997. On June 5, 1997, the District Court issued oral findings
in which it held that: (i) Oak was owed sales commissions by WDBS for
post-termination sales of vehicle service contracts (VSC's) by the auto dealers
that Oak had solicited before it was terminated as an agent, and (ii) the
obligation to pay these sales commissions to Oak would continue as long as the
auto dealers solicited by Oak remained under contract to WDBS. The Court also
held that Oak was entitled to receive accrued pre-judgment interest on the
amount to be awarded in the judgment.
Although the Court did not determine the judgment amount, the Court held that
WDBS was entitled to offset approximately 23% of the commissions claimed by
Oak based on the fact that Oak did not provide service to auto dealers after it
was terminated as an agent by WDBS. The Court also stated that it was
excluding from the judgment amount commissions for the sale of VSC's by certain
auto dealers that had not been solicited by Oak before WDBS terminated the
agency agreement.
The parties appeared again before the District Court on June 16, 1997 to
provide their calculation of the commissions to be awarded to Oak based on the
Court's oral findings. The Court stated at this conference that it intends to
calculate the judgment on the basis of $54.00, after allowance of all offsets,
for each VSC sold by auto dealers that Oak had solicited before its termination
as an agent. Based upon this calculation, the Company estimates that the
amount of the judgment will be approximately $1.4 million. To the extent that
additional VSC's are sold by the subject dealers, the Company's obligation to
pay commissions to Oak on the sale of such VSC's after the entry of the
judgment will be based on the $54.00 rate, as well. The Company is considering
all of its available legal remedies (including an appeal) in anticipation of
the judgment that will be entered by the Court.
B. The Oak Agency, Inc., et al. v. Warrantech, Inc., et al.; Case No.
96C1106, filed in the United States District Court for the Northern
District of Illinois.
In February 1996, Oak filed this lawsuit in Federal District Court in the
Northern District of Illinois against WDBS, as well as against the Company,
Joel San Antonio, the Company's Chairman, and William Tweed, the Company's
then President.
This case was consolidated for trial with the other action involving Oak
described above. Before the case proceeded to trial, the parties agreed to
dismiss the individual parties, Joel San Antonio and William Tweed. Then, in
May 1997, the District Court granted Warrantech Corporation's motion for
summary judgment dismissing with prejudice all of the claims that Oak had
asserted, thereby disposing of this case.
C. In the Matter of Arbitration between David Robertson, Claimant, and
Warrantech Corporation and Warrantech Automotive, Respondents.
This was an arbitration between the Company and David Robertson, President of
Dealer Based Services, predecessor company of WDBS. and a former officer and
direct of the Company. Robertson alleged that the Company wrongfully
terminated an employment agreement between Robertson and WDBS, and that the
Company engaged in tortious interference and fraud. Robertson requested
damages up to $5 million. The Company asserted a counterclaim in the amount of
approximately $340,000 for reimbursement of attorney's fees advanced by it on
behalf of Robertson in connection with certain other actions. Following
hearings held between November 1996 and February 1997, the arbitration panel
issued awards in favor of Robertson on his claim and in favor of the Company
on its counterclaim. Before the awards were confirmed, the parties entered
into a settlement agreement on May 2, 1997, pursuant to which the Company
agreed to pay $235,000 to Dealer Based Services, Inc., a company owned and
controlled by Robertson, and the parties exchanged mutual general releases.
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, 1997.
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, 1997, there were 13,295,031 Common Shares outstanding. On that
date, the closing bid price for the Company's common stock, as reported by
NASDAQ was $11.50.
Following is a summary of the price range of the Company's Common Stock during
its 1997 and 1996 fiscal years:
Common Stock
Quarter of Fiscal 1997 High & Low Bid
First $ 4.67 $ 4.46
Second $ 6.09 $ 5.74
Third $ 14.17 $ 10.21
Fourth $ 10.43 $ 9.76
Quarter of Fiscal 1996 High & Low Bid
First $5.75 $4.81
Second $6.13 $4.13
Third $6.44 $4.13
Fourth $5.06 $3.50
The number of shareholders of record of the Company's Common Stock as of
June 17, 1997 was 988.
Dividends
No cash dividends have been paid to holders of Common Stock since inception of
the Company. The Company anticipates that, in the foreseeable future,
earnings, if any, will be retained for use in the business or for other
corporate purposes and it is not anticipated that cash dividends will be paid.
Item 6 - Selected Financial Data
The Selected Financial Data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this filing.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------- ------------------- ---------------------- ------------------------ ---------------------
1997 1996 1995 1994 1993
---------------------- ------------------- ---------------------- ----------------------- ------------------
<S> <C> <C> <C> <C> <C>
Gross revenue $161,044,135 $110,246,219 $ 71,239,070 $ 46,970,763 $43,841,017
Net (increase)
decrease in
deferred revenue (1,381,271) (1,165,495) (699,745) (316,290) 314,931
------------------ ---------------- ---------------------- ----------------------- -----------------
Net revenue 159,662,864 109,080,724 70,539,325 46,654,473 44,155,948
------------------ --------------- ---------------------- ----------------------- -----------------
Net income $ 4,794,715 $ 2,394,862 $ 2,895,788 $ 703,591 $ 1,061,471
================== =============== ====================== ======================= =================
Earnings per
common share:
Net income $0.32 $0.16 $0.19 $0.05 $0.08
================= ================= ====================== ======================= =================
Cash dividend declared NONE NONE NONE NONE NONE
================= ================= ====================== ======================= =================
Total assets $66,124,255 $56,613,710 $41,858,546 $ 33,828,572 $24,646,791
================= ================= ====================== ======================= =================
Long-term debt and
capital lease
obligations $ 2,491,786 $ 1,124,015 $ 293,648 $ 476,875 $ 853,101
================= ================= ====================== ======================= =================
Convertible
exchangeable
preferred stock - $ 6,420,363 $ 6,396,795 $ 6,343,614 -
================= ================= ====================== ======================= =================
Common stockholders'
equity $25,281,941 $19,656,931 $17,443,763 $14,300,322 $13,427,311
================= ================= ====================== =======================
Working capital $13,602,168 $13,221,212 $11,067,983 $ 9,768,580 $ 4,982,608
================= ================= ====================== ======================= =================
</TABLE>
14
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 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.
For the three month periods ended March 31, 1997 and 1996, gross
revenues were $44,249,472 and $31,481,357, respectively, an increase of
41%. The principal reason for this increase is the volume of business with new
customers during the fiscal quarter in the automotive, consumer
products and international businesses.
Fiscal 1996 vs. 1995
Gross revenues for the fiscal years ended March 31, 1996 and 1995
were $110,246,219 and $71,239,070, respectively, representing an increase
of 55%. The increase is the result of the Company's efforts in expanding its
market penetration in the personal computer industry as well as continued
market penetration in the other consumer products and automotive products
market segments. The gross revenues attributable to consumer product and
automotive programs increased approximately $37 million as a direct result of
approximately $20 million related to new business, approximately $14 million
related to volume increases with existing customers, and one time gains of
approximately $3 million resulting from the accession of service contract
portfolios from new customers. The balance of the increase is the result of
increased efforts with respect to renewals and second effort sales. Revenues
of Warrantech Europe (formerly Home Guarantee Corporation Plc acquired July
1995) were insignificant to consolidated gross revenues during the current
fiscal year.
For the three month periods ended March 31, 1996 and 1995, respectively, gross
revenues were $31,481,357 and $19,554,126, an increase of 61%. The principal
reason for this increase is the volume of business with new customers during
the fiscal quarter in both the automotive and consumer products
businesses.
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 contract volumes, (ii) the relationship of gross contract
revenues generated by shorter term extended service contracts to total gross
revenues, and (iii) administration contract revenues which are recognized over
a short term period.
Fiscal 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. For the three month period ended March 31, 1997, the net increase in
deferred revenues amounted to $423,030 as compared with $209,311 for the same
period a year ago. These increases are directly attributable to the increased
number of service contracts sold with a service period greater than one year
during the current year and three month periods ended March 31, 1997 and 1996
offset in part by the amounts earned on expiring contracts during the same
periods.
Fiscal 1996 vs. 1995
The net increase in deferred revenues for the year ended March 31,
1996 amounted to $1,165,495 as compared with $699,745 for the same period
in the prior year. For the three month period ended March 31, 1996, the net
increase in deferred revenues amounted to $209,311 as compared with
$175,353 for the same period in the prior year. These increases are directly
attributable to the increased number of service contracts sold with a
service period greater than one year during the current year and three month
periods ended March 31, 1996 and 1995 and amounts deferred with respect
to the accession of service contract portfolios from new customers in the
second and third quarter periods of fiscal 1996 offset in part by the
amounts earned on expiring contracts during the same periods.
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 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. Direct
costs for the three month periods ended March 31, 1997 and 1996 amounted to
$30,245,466 and $21,656,315, respectively. 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.
Fiscal 1996 vs. 1995
Direct costs for the fiscal year ended March 31, 1996 were $74,013,324
as compared with $46,140,548 for the fiscal year ended March 31, 1995. Direct
costs for the three month periods ended March 31, 1996 and 1995 amounted to
$21,656,315 and $11,457,907, respectively. The increases in direct costs for
the year and three month period ended March 31, 1996 are principally the result
of volume increases in contracts sold and to a lesser extent a higher level of
premium reflecting improved coverage on selected programs.
Service, Selling and General and Administrative Expenses
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. For the three month period ended
March 31, 1997, service, selling and general and administrative expenses
amounted to $10,380,211 as compared to $8,661,694 for the same period last
year. The relative dollar increase in both the current fiscal year and
quarter is directly attributable to increases in sales related costs and
payroll and payroll related costs arising from continued increases in head
count to meet the service requirements associated with the increased number
of service contracts being sold. As a percentage of gross revenues,
service, selling and general and administrative expenses have decreased 2% and
4% in the current fiscal year and quarter ended March 31, 1997, respectively,
which is indicative of the improved functional expense controls implemented by
management during fiscal 1997.
Fiscal 1996 vs. 1995
Service, selling and general and administrative expenses for the
fiscal year ended March 31, 1996 were $27,362,214 as compared to $20,716,655
for the fiscal year ended March 31, 1995. For the three month period ended
March 31, 1996, service, selling and general and administrative expenses
amounted to $8,661,694 as compared to $6,617,117 for the same period in the
prior year. The relative dollar increase in both the current fiscal year
and quarter is directly attributable to increases in sales related costs and
payroll and payroll related costs arising from continued increases in
head count to meet the service requirements associated with the increased
number of service contracts being sold. In addition, service, selling and
general and administrative expenses include approximately $1.2 million and
$.6 million of expenses for the fiscal year and quarter ended March 31,
1996, respectively, related to Warrantech Europe which was acquired in
July 1995. As a percentage of gross revenues, service, selling and general and
administrative expenses have decreased 4% and 6% in the current fiscal year
and quarter ended March 31, 1996, respectively, which is indicative of the
improved functional expense controls implemented by management during fiscal
1996.
Provision for Bad Debt Expense
For all years presented, the provision for bad debt expense results
from the write-off of accounts considered to be uncollectible
Depreciation and Amortization
Fiscal 1997 vs. 1996
Depreciation and amortization amounted to $2,619,981 and $868,808 for
the fiscal year and three month period ended March 31, 1997, respectively as
compared to $1,700,285 and $785,584 for the same periods in fiscal 1996,
respectively. The increases over the same periods a year ago reflect a higher
level of depreciation during the year resulting from approximately $5.4 million
in assets placed in service during the current fiscal year. This increase in
assets is directly attributable to (I) a continuing upgrade of the Company's
information systems and (ii) the purchase of additional computer equipment to
accommodate personnel growth and efficiency of operations.
Fiscal 1996 vs. 1995
Depreciation and amortization amounted to $1,700,285 and $785,584 for
the fiscal year and three month period ended March 31, 1996, respectively.
The increase over the same periods in the prior year reflect a higher level
of depreciation during the year resulting from approximately $3.5 million in
assets placed in service during the current fiscal year. This increase in
assets is directly attributable to an ongoing upgrade of the Company's
information systems.
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 1997, Other Income (Expense) primarily reflects net
interest income. For fiscal 1996, Other Income/(Expense) primarily reflects a
charge of $865,000 to profit sharing and a charge of $222,845 relating to a
residual amount due the Company from the sale of a business in a prior
year. It was during fiscal 1997 that the Company renegotiated certain of its
profit sharing arrangements with its insurers. The principal effect of
this modification was to change the nature of profit sharing to more long-term
in nature. The changes to these contracts and a reexamination of experience
affecting the estimated ultimate realization of the profit sharing through
expiration of the underlying contracts resulted in a charge of $1,300,000 in
the fourth quarter of fiscal 1996. For fiscal 1995, other income/(expense)
primarily reflects profit sharing income of $2,676,001.
Income Taxes
The income tax provision for fiscal 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, 1997 and 1996 contains a benefit of $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.
Net Income
Fiscal 1997 vs. 1996
Net income (loss) for the fiscal year and three month period ended
March 31, 1997 amounted to $4,794,715 and ($471,653) or $.32 and ($.03)
per primary share, respectively, as compared to $2,394,862 and ($489,910) or
$.16 and ($.04) per primary share, respectively, 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.
Fiscal 1996 vs. 1995
Net income (loss) for the fiscal year and three month period ended
March 31, 1996 amounted to $2,394,862 and ($489,910) or $.16 and ($.04)
per primary share, respectively as compared to $2,895,788 and $704,627 or $.19
and $.04 per primary share, respectively for the comparable period in
fiscal 1995. The decrease in net income and per share amounts for the fiscal
year is directly attributable to the Techmark losses, losses associated
with Warrantech Europe and a profit sharing charge of $1,300,000 recognized in
the fourth quarter of the fiscal year to reflect contractual changes
made to these agreements and a reexamination of experience related to the
underlying contracts which offset the profit increases resulting from the
increase in business and the one time gains associated with the accession of
two portfolios from new customers.
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 upgrading 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 1997 amounted to $1,992,136. 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, 1997. At March 31, 1997, 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, 1997,
$1,575,960 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. In order to
take full advantage of such opportunities a Mergers and Acquisitions team has
been formed. 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.
The effect of inflation has not been significant to the Company since
its formation.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("EPS") ("FAS 128"). FAS 128 specifies the computation presentation and
disclosure requirements for EPS and is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Earlier application is not permitted.
FAS 128 is designed to improve the EPS information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Some of the changes made to simplify
the EPS computations include: (a) eliminating the presentation of primary EPS
and replacing it with basic EPS, with the principal difference being
that common stock equivalents (CSEs) are not considered in computing basic EPS
(b) eliminating the modified treasury stock method and the three
percent materiality provision, and (c) revising the contingent share provisions
and the supplemental EPS data requirements. FAS 128 requires dual
presentation of basic and diluted EPS on the face of the income statements for
all entities with complex capital structure regardless of whether basic
and diluted EPS are the same, it also requires a reconciliation of the
numerator and denominator used in computing basic and diluted EPS.
Had FAS 128 been implemented for the fiscal year ended March 31, 1997,
basic EPS and diluted EPS would have been $0.37 and $0.31, respectively.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, Disclosure of
Information About Capital Structure ("FAS 129"). FAS 129 is effective for
financial statements for periods ending after December 15, 1997.
FAS 129 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 of rates and pertinent dates, significant terms of contracts
to issue additional shares and other similar items. The Company believes that
its current disclosures already comply with FAS 129.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Report of Independent Accountants.................... 22
Consolidated Financial Statements:
Balance Sheets as of March 31, 1997 and 1996.... 23
Statements of Operations For the Years Ended
March 31, 1997, 1996 and 1995................ 24
Statements of Common Stockholders' Equity
For the Years Ended March 31, 1997, 1996 and 1995 25
Statements of Cash Flows
For the Years Ended March 31, 1997, 1996 and 1995. . 26-27
Notes to Consolidated Financial Statements.............. 28-46
Consolidated Financial Statement Schedule
Schedule VIII - Valuation and Qualifying Accounts. 47
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 22. 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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each
of the three years in the period ended March 31, 1997 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 26, 1997
=============================================================================
============================================================================
23
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS S E T S
<TABLE>
<CAPTION>
March 31,
------------------------------
------------- -------------
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 17,031,925 $ 11,859,487
Investments in marketable securities 286,099 824,648
Accounts receivable, (net of allowances of $300,328
and $450,092, respectively) 23,290,035 16,160,209
Other receivables, net 3,874,451 8,610,919
Income tax receivable 115,064 -
Prepaid expenses and other current assets 1,633,699 988,936
------------- ----------
Total Current Assets 46,231,273 38,444,199
------------- ----------
Property and Equipment - Net 10,111,193 6,802,798
------------- ----------
Other Assets:
Excess of cost over fair value of assets acquired
( net of accumulated amortization of
$3,637,233 and $3,170,089, respectively) 3,651,400 4,118,544
Investment in and advances to joint venture - 1,885,674
Deferred income taxes 2,009,941 2,031,535
Investments in marketable securities 2,041,001 1,363,047
Restricted cash 800,000 700,000
Split dollar life insurance policies 865,542 683,893
Notes receivable - long-term 42,076 87,760
Collateral security fund 199,389 199,389
Other assets 172,440 296,871
------------- -----------
Total Other Assets 9,781,789 11,366,713
------------- ----------
Total Assets $66,124,255 $56,613,710
============= ============
</TABLE>
LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
------------ ----------
1997 1996
------------ -----------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations $ 1,997,835 $ 648,650
Insurance premiums payable 19,602,290 16,247,247
Income taxes payable - 1,795,018
Accounts and commissions payable 5,261,867 4,809,527
Legal settlements payable 1,635,000 -
Accrued expenses and other current liabilities 4,132,113 1,722,545
------------ ---------
Total Current Liabilities 32,629,105 25,222,987
----------- ----------
Deferred Revenues 5,019,190 3,654,794
----------- ----------
Long-Term Debt and Capital Lease Obligations 2,491,786 1,124,015
----------- ----------
Deferred Rent Payable 702,233 534,620
----------- ----------
Commitments and Contingencies (See Note 9)
Convertible Exchangeable Preferred Stock
- $.0007 par value
Authorized, 15,000,000 shares
Issued and outstanding 0 shares and 3,234,697 shares
at March 31, 1997 and 1996 respectively
(Redemption value - $6,430,000) - 6,420,363
----------- ----------
Common Stockholders' Equity:
Common stock - $.007 par value
Authorized - 30,000,000 shares
Issued - 13,261,636 shares
at March 31, 1997 and 13,082,181 shares
at March 31, 1996 90,911 89,375
Additional paid-in-capital 13,033,185 12,212,641
Unrealized loss on investments, net (1,563) (15,031)
Accumulated translation adjustments 16,544 (10,520)
Retained earnings 12,714,914 7,843,332
------------ -----------
25,853,991 20,119,797
Less: Deferred compensation (78,231 (70,116)
Treasury stock - at cost, 100,000 shares
at March 31, 1997 and 93,000 shares at
March 31, 1996 (493,819) (392,750)
----------- ------------
Total Common Stockholders' Equity 25,281,941 19,656,931
----------- ------------
Total Liabilities, Preferred Stock and
Common Stockholders' Equity $66,124,255 $56,613,710
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
=============================================================================
===============================================================================
<TABLE>
<CAPTION>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31,
-------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Gross revenues $161,044,135 $110,246,219 $71,239,070
Net increase in deferred revenues 1,381,271 1,165,495 699,745
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net revenues 159,662,864 109,080,724 70,539,325
----------------- ----------------- -----------------
Costs and expenses:
Direct costs 112,161,400 74,013,324 46,140,548
Service, selling, and general and administrative 36,320,524 27,362,214 20,716,655
Provision for bad debt expense 733,119 363,179 427,483
Depreciation and amortization 2,619,981 1,700,285 1,259,604
----------------- ----------------- -----------------
Total costs and expenses 151,835,024 103,439,002 68,544,290
----------------- ----------------- -----------------
Income from operations 7,827,840 5,641,722 1,995,035
----------------- ----------------- -----------------
Legal Settlements (2,274,170) - -
Gain on sale of equity joint venture 1,876,480 - -
Equity in operations of joint venture - (957,748) (298,272)
Other income/(expense) 324,585 (651,620) 3,107,561
----------------- ----------------- -----------------
Income before provision for income taxes 7,754,735 4,032,354 4,804,324
Provision for income taxes 2,960,020 1,637,492 1,908,536
----------------- ----------------- -----------------
Net Income $ 4,794,715 $ 2,394,862 $2,895,788
================= ================= =================
Earnings per share:
Primary $.32 $.16 $.19
================= ================= =================
Fully Diluted $.31 $.15 $.17
================= ================= =================
Weighted average number of shares outstanding:
Primary 15,218,454 15,152,043 15,588,145
================= ================= =================
Fully Diluted 15,394,869 16,465,833 16,894,351
================= ================= =================
See accompanying notes to consolidated financial statements.
</TABLE>
24
========================================================================
WARRANTECH CORPORATION AND SUBSIDIARIES
========================================================================
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS EQUITY
Total
Common
Additional Unrealized Accumulated Stock-
Common Stock Paid-In Loss on Translation Retained Deferred Treasury Stock holders
Shares Par Value Capital Investments Adjustments Earnings Compensation Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 12,965,302 88,557 $11,752,754 $ - $ - $2,629,431$(21,328) (41,000)(149,092)14,300,322
Issuance of common stock through
through exercise of common
stock option 75,000 525 321,350 321,875
Issuance of common stock 5,000 35 23,403 (23,438) -
Change in unrealized loss on investments,
net of tax of $27,089 (42,370) (42,370)
Amortization of deferred compensation 21,328 21,328
Imputed interest on preferred stock (53,180) (53,180)
Net income 2,895,788 2,895,788
----------- ---------- ----------- --------- --------- ----------- ----------- --------- ---------
Balance at March 31, 1995 13,045,302 89,117 12,097,507 (42,370) 5,472,039 (23,438) (41,000)(149,092)17,443,763
Issuance of common stock
through exercise of common
stock option 25,000 175 62,325 62,500
Issuance of common stock 11,879 83 52,809 (42,142) 10,750
Change in unrealized loss
on investments, net of tax
of $17,800 27,339 27,339
Translation adjustments (10,520) (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) (23,569)
Net income 2,394,862 2,394,862
----------- -------- ----------- --------- --------- ---------- ------- --------- --------- ---------
Balance at March 31, 1996 13,082,181 89,375 12,212,641 (15,031) (10,520) 7,843,332 (70,116) (93,000)(392,750) 19,656,931
Issuance of common stock
through exercise of common
stock option 175,251 1,227 709,653 710,880
Issuance of common stock 4,204 309 110,891 (47,197) 64,003
Change in unrealized loss on
investments, net of
tax of $8,484 13,468 13,468
Translation adjustment 27,064 27,064
Amortization of deferred compensation 39,082 39,082
Purchase of Treasury stock (7,000)(101,069) (101,069)
Imputed interest on preferred stock 76,867 76,867
Net income 4,794,715 4,794,715
---------- ---------- ----------- --------- --------- ----------- ----------- --------- ---------
Balance at March 31, 1997 13,261,636 $90,911 $13,033,185 $(1,563) 16,544 12,714,914 (78,231) (100,000)(493,819)25,281,941
=========== ========== =========== ========= ========= =========== =========== ========= =========
</TABLE>
See accompanying notes to consolidated financial state
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------ -- ------------------ -- ------------------
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,794,715 $ 2,394,862 $ 2,895,788
------------------ ------------------ ------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,619,981 1,712,431 1,259,604
Deferred revenues 1,364,396 1,184,345 699,744
Deferred income taxes 21,805 (1,002,452) (296,601)
Gain on sale of investment in joint venture (1,876,480) - -
Loss from equity joint venture - 957,748 298,272
Elimination of intercompany profits with joint venture - - (28,038)
Other (62,174) (2,822) 116,150
Increase (decrease) in cash flows as a result of
changes in asset and liability balances:
Accounts receivable (7,129,826) (3,450,088) (4,744,974)
Other receivables 4,736,468 5,090 (3,391,088)
Income tax receivable (115,064) - -
Prepaid expenses and other current assets (644,763) 97,536 557,043
Split dollar life insurance policies (181,649) 14,445 (102,550)
Other assets 24,431 681,981 423,100
Insurance premiums payable 3,355,043 7,016,870 2,117,103
Income taxes payable (1,795,018) 784,140 1,010,878
Accounts and commissions payable 452,340 2,102,284 343,073
Legal settlements payable 1,635,000 - -
Accrued expenses and other current liabilities 2,409,568 (18,002) 919,370
Deferred rent payable 167,613 94,375 76,796
------------------ ------------------ ------------------
------------------
Total adjustments 4,981,671 10,177,881 (742,118)
------------------
------------------ ------------------ ------------------
Net cash provided by operating activities 9,776,386 12,572,743 2,153,670
------------------ ------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment - - 23,396
Purchase of property and equipment (3,379,104) (3,489,974) (1,539,093)
Net cash paid for acquired company - (735,984) -
Certificates of deposit - - 27,000
Purchase of marketable securities (1,313,356) (948,602) (1,038,543)
Certificates of deposit and cash trust fund - restricted - - 157,602
Proceeds from sales, redemptions and maturities of
marketable securities 1,055,934 1,730,612 500,000
Investment in and advances to joint venture - 37,499 (2,123,440)
------------------ ------------------ ------------------
Net cash used in investing activities $ (3,636,526) $(3,406,449) $(3,993,078)
------------------ ------------------ ------------------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended March 31,
1997 1996 1995
-------------- ---- ----------------- ---- ----------------
<S> <C> <C> <C>
Cash flows from financing activities:
Decrease in notes receivable $ 45,684 $ 202,365 $ 600
Proceeds from exercise of common stock options 822,080 62,500 187,500
Purchase treasury stock (101,069) (243,658)
Repayments, notes and capital leases (1,734,117) (367,375) ( 333,613)
-------------- ---- ----------------- ---- ----------------
Net cash (used in) financing activities (967,422) (346,168) ( 145,513)
-------------- ---- ----------------- ---- ----------------
Net increase (decrease) in cash and cash equivalents 5,172,438 8,820,126 ( 1,984,921)
Cash and cash equivalents at beginning of year 11,859,487 3,039,361 5,024,282
-------------- ---- ----------------- ---- ----------------
Cash and cash equivalents at end of year $ 17,031,925 $ 11,859,487 $ 3,039,361
============== ==== ================= ==== ================
Supplemental Cash Flow Information:
Cash payments for:
Interest $ 410,109 $ 127,616 $ 74,815
============== ==== ================= ==== ================
Income taxes $ 4,879,377 $ 1,644,950 $ 1,071,363
============== ==== ================= ==== ================
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 1,989,136 $ 1,640,060 $ -
See accompanying notes to consolidated financial statements.
</TABLE>
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, 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 automotiv
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 manufacturer's warranties range from one (1) to eighty-four (84) months.
Basis of Presentation and Principles of Consolidation - The accompanying ]
consolidated financial statements have been prepared on the basis of generally
accepted accounting principles ("GAAP"). These consolidated financial
statements include the accounts of Warrantech Corporation and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation.
Amounts representing the Company's percentage interest in the underlying net
assets of less than majority-owned companies, in which a significant equity
ownership interest is held, are included in Investment 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 to be received, if any, are
determined based upon the residual value of the premiums set aside by the
nsurer 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 1997
was not available. Accordingly, the Company did not record any profit
sharing amounts in fiscal 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 - Earnings per share is calculated by dividing net income
less imputed interest on preferred stock, where applicable, by the
weighted average number of common shares outstanding and common share
equivalents outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("EPS") ("FAS
128"). FAS 128 specifies the computation, presentation and disclosure
requirements for EPS and is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted.
FAS 128 is designed to improve the EPS information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that common
stock equivalents (CSEs) are not considered in computing basic EPS;
(b) eliminating the modified treasury stock method and the three percent
materiality provision; and (c) revising the contingent share provisions and the
supplemental EPS data requirements. FAS 128 requires dual presentation of
basic and diluted EPS on the face of the income statements for all entities
with complex capital structures regardless of whether basic and diluted EPS are
the same; it also requires a reconciliation of the numerator and denominator
used in computing basic and diluted EPS.
Had FAS 128 been implemented for the fiscal year March 31, 1997, basic EPS and
diluted EPS would have been $.37 and $.31, respectively.
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, 1997 and 1996.
The Company had on deposit $16,028,940 and $11,256,101 of cash in excess of
federally secured limits as of March 31, 1997 and 1996, 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 to 7 years.
Excess of Cost Over Fair Value of Assets Acquired - The excess of cost over
fair value of the assets acquired is a result of the purchases of Dealer
Based Services, Inc. in 1989, and Home Guarantee Corporation, PLC in July 1995
and is being amortized on a straight-line basis over fifteen and ten years,
respectively. Amortization expense charged to operations for the years ended
March 31, 1997, 1996 and 1995 amounted to $467,144, $458,728 and $401,815,
respectively.
Deferred Compensation - Certain operating officers have been issued shares of
the Company's common stock as part of their compensation under their employment
agreements. Such compensation is to be earned by the officers and charged to
operations over five years, the term of the employment agreements. In addition,
certain employees have been issued restricted shares of the Company's common
stock as compensation. Such compensation is amortized over the restriction
period which is generally two years. Certain non-employees have been issued
options to purchase stock in lieu of compensation. The intrinsic value
of these warrants 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.
FAS 129 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.
Reclassification - Certain amounts from the prior years have been reclassified
to conform with the current year's presentation.
2. RESTRICTED CASH
At March 31, 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, 1997, investments in marketable securities are comprised of the
following:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Aggregate Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
<S> <C> <C> <C> <C> <C> <C>
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
Investments
in Marketable $2,329,468 $15,551 $(17,919) $2,327,100 $286,099 $2,041,001
Securities
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1996, investments in marketable securities are comprised of the following:
Amortized Gross Unrealized Aggregate Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds $1,880,633 $2,660 $(13,913) $1,869,380 $506,333 $1,363,047
Common Stock 330,880 - (12,565) 318,315 318,315 -
-------------- -------------- ------------- -------------- -------------- =============
Total
Investments
in Marketable
Securities $ 2,211,513 $ 2,660 $(26,478) $ 2,187,695 $ 824,648 $ 1,363,047
============== ============== ============= ============== ============== =============
</TABLE>
All of the above investments are considered "available for sale". The resultant
differences between cost and fair value, net of taxes, have been reflected as a
separate component of Common Stockholders' Equity.
The amortized cost and estimated fair value of fixed maturity 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
$ - $ -
Due after one year through five years 1,962,133 1,947,150
Due after five years through ten years 95,000 93,851
years
Due after ten years - -
=============== ===============
$ 2,057,133 $ 2,041,001
=============== ===============
4. OTHER RECEIVABLES, NET
The nature and amounts of other accounts receivable as of March 31, 1997 and
1996 is as follows:
March 31,
----------------------------------------
1997 1996
------------------ --------------------
Due from Insurance companies $ 3,150,554 $ 5,745,013
Profit sharing 106,008 3,540,792
Employee/Agent Advances 422,868 560,373
other 195,021 726,853
------------------ --------------------
3,874,451 10,573,031
Allowance for doubtful accounts - (1,962,112)
================== ====================
$ 3,874,451 $8,610,919
================== ====================
5. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1997 1996
<S> <C> <C>
Automobiles $ 65,273 $ 97,811
Equipment, furniture and fixtures 5,759,459 4,143,676
Leasehold improvements 854,466 382,938
Construction in progress 986,328 930,347
Software development costs 4,237,233 3,027,838
-------------------- -------------------
11,902,759 8,582,610
Less: Accumulated depreciation
and amortization 4,852,951 3,550,346
-------------------- -------------------
7,049,808 5,032,264
-------------------- -------------------
Assets under capital leases:
Cost 5,355,206 3,300,093
Less: Accumulated amortization 2,293,821 1,529,559
-------------------- -------------------
3,061,385 1,770,534
-------------------- -------------------
Total Property and Equipment, net $ 10,111,193 $ 6,802,798
==================== ===================
</TABLE>
Amortization expense on assets under capital leases for the years
ended March 31, 1997, 1996 and 1995 was $764,263, $334,866, and $289,765,
respectively. Depreciation expense on property and equipment other than under
capital leases for the years ended March 31, 1997, 1996 and 1995 was
$1,361,559, $911,112, and $515,596, respectively.
The Company capitalized $1,209,395 and $2,918,076 for the fiscal years ended
March 31, 1997 and 1996, 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.
6. COLLATERAL SECURITY FUND
At March 31, 1997 and 1996, 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, 1997 and 1996, the Company made payments on split
dollar insurance policies on the lives of six and five officers of the
Company, respectively. The cash surrender value of these policies is
$865,542 and $683,893, as of March 31, 1997 and 1996 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:
<TABLE>
<CAPTION>
March 31,
------------------------------------------
<S> <C> <C>
1997 1996
Capital lease obligations - for property and
equipment payable monthly with interest
rates ranging from 6.9% to 18.3% through 2002 $ 2,913,661 $ 1,768,475
Installment note - AIG, effective interest rate of 8.25% 1,575,960 -
Installment note - secured by equipment with
an undepreciated cost of $5,164 payable
in equal monthly installments of $393
including interest at 5.44% through
February, 1997. - 4,190
-------------------- ------------------
4,489,621 1,772,665
Less: Current maturities 1,997,835 648,650
-------------------- ------------------
Long-Term portion $ 2,491,786 $ 1,124,015
==================== ==================
</TABLE>
The aggregate amounts of maturities at March 31, 1997 were as follows:
Fiscal Year Installment Note Minimum Future
Lease Payments
1998 $ 820,000 $ 1,464,456
1999 755,960 1,119,489
2000 - 613,831
2001 - 218,843
2002 - 9,871
Thereafter - -
------------------------ -------------
1,575,960 3,426,490
Less amount representing
interest - 512,829
======================== =============
Net $ 1,575,960 $2,913,661
======================== =============
The capital lease obligations are collateralized by the property and
equipment related to the underlying leases.
9. INCOME TAXES
A reconciliation of the income tax provision to the amount computed
using the federal statutory rate is as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------- -- ---------------------------- --- ------------------------------
1997 1996 1995
-------------------------------- -- ---------------------------- --- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate $2,636,610 34.0% $ 1,411,324 35.0% $ 1,681,513 35.0%
State and local income
taxes net of federal tax
benefit 156,092 2.0 123,728 3.0 101,141 2.1
Amortization of excess cost
over net assets acquired 88,057 1.1 90,647 2.3 90,648 1.9
Other 79,261 1.1 11,793 0.3 35,234 0.7
------------- ----------- ------------- ------------ ------------ ------------
Provision for income taxes $2,960,020 38.2% $1,637,492 40.6% $ 1,908,536 39.7%
============= =========== ============= ============ ============ ============
</TABLE>
The components of tax expense are as follows:
<TABLE>
<CAPTION>
For the Year Ended 3/31/97:
Current Deferred Provision
-------------- ----------------- ----------------
<S> <C> <C> <C>
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
============== ================= ================
For the Year Ended 3/31/95:
Current Deferred Provision
-------------- ----------------- ----------------
Federal $ 2,076,907 $ (242,100) $ 1,834,807
State 101,141 (27,412) 73,729
-------------- ----------------- ----------------
Total $ 2,178,048 $ (269,512) $ 1,908,536
============== ================= ================
</TABLE>
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:
<TABLE>
<CAPTION>
March 31,
------------------- -- -------------------
1997 1996
------------------- -------------------
<S> <C> <C>
Deferred Tax Assets:
Deferred revenue $ 1,819,694 $ 1,418,018
Deferred rent 226,855 169,857
Provision for doubtful accounts 109,453 156,000
Reserve for customer refunds 41,105 159,327
Unrealized loss on securities 211 4,389
Foreign loss benefit 635,213 1,111,804
Other 51,124 60,959
------------------- -------------------
------------------- -------------------
Total assets 2,883,655 3,080,354
------------------- -------------------
Deferred Tax Liabilities:
Excess of tax over book depreciation 11,577 44,500
Section 174 expense 862,137 1,004,319
------------------- -------------------
Total liabilities 873,714 1,048,819
------------------- -------------------
Net deferred tax asset $ 2,009,941 $ 2,031,535
=================== ===================
</TABLE>
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 the gain on the sale of its foreign
joint venture recognized in the first quarter of fiscal 1997 (see Note 13) and
other future foreign income. Section 174 expense represents research and
experimental expenses related to the development of a proprietary relational
database and interactive software.
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, 1997, 1996 and 1995 was $1,907,694,
$1,371,446, and $894,121, respectively.
Future minimum lease commitments as at March 31, 1997 are as follows:
1998 $1,566,111
1999 1,464,815
2000 1,111,511
2001 994,671
2002 932,322
Thereafter through 2004 1,652,102
================
$7,721,532
================
Employment Contracts - The Company entered into employment agreements
with its officers and certain key employees which will provide for
aggregate annual salaries of $2,181,850. 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 years ended March 31,
1997, 1996 and 1995 the Company accrued for or charged expense for
profit sharing in the amounts of $0, $(865,000), and $2,676,001,
respectively. Such amounts are included in the financial statements
in other income/(expense).
The accrued profit sharing due the Company as of March 31, 1997 and
1996 is $106,008 and $1,820,791, and such amounts are included in
other receivables. All of these amounts have been collected.
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, 1997 the Company had no outstanding borrowings under
this agreement.
Litigation -
(i) In 1989, a lawsuit was filed in an Illinois court against a
subsidiary of the Company, WDBS, by a former agent, the Oak companies, alleging
breach of contract. This contract with Oak was entered into in 1986 by Dealer
Based Services, Inc., the predecessor company to WDBS. Oak sought a
declaratory judgment and monetary damages of approximately $23 million from
WDBS.
A bench trial (to the Court rather than to a jury) was held in the case during
the week of May 19, 1997. On June 5, 1997, the district court issued oral
findings in which it held that: (i) Oak was owed sales commissions by WDBS
for post-termination sales of vehicle service contracts (VSC's) by the auto
dealers that Oak had solicited before it was terminated as an agent, and (ii)
the obligation to pay these sales commissions to Oak would continue as long as
the auto dealers solicited by Oak remained under contract to WDBS. The Court
also held that Oak was entitled to receive accrued pre-judgment interest on the
amount to be awarded in the judgment.
Although the Court did not determine the judgment amount, the Court held that
WDBS was entitled to offset approximately 23% of the commissions claimed by Oak
based on the fact that Oak did not provide service to auto dealers after it wa
terminated as an agent by WDBS. The Court also stated that it was excluding
from the judgment amount commissions for the sale of VSC's by certain auto
dealers that had not been solicited by Oak before WDBS terminated the agency
agreement.
The parties appeared again before the District Court on June 16, 1997 to
provide their calculation of the commissions to be awarded to Oak based on the
Court's oral findings. The Court stated at this conference that it intends to
calculate the judgment on the basis of $54.00, after allowance of all offsets,
for each VSC sold by auto dealers that Oak had solicited before its termination
as an agent. Based upon this calculation, the Company estimates that the
amount of the judgment will be approximately $1.4 million. To the extent that
additional VSC's are sold by the subject dealers, the Company's obligation to
pay commissions to Oak on the sale of such VSC's after the entry of the
judgment will be based on the $54.00 rate, as well. The Company is considering
all of its available legal remedies (including an appeal) in anticipation of
the judgment that will be entered by the Court.
(ii) In December 1993, a lawsuit was filed by a former officer and director
of the Company, David Robertson. This was an arbitration before the American
Arbitration Association in Connecticut. David Robertson, alleged that the
Company wrongfully terminated an employment agreement between Robertson and a
subsidiary of the Company, Warrantech Dealer Based Services, Inc., now known as
Warrantech Automotive, Inc. ("Warrantech Automotive"), and that the Company
engaged in tortuous interference and fraud. Robertson requested damages in
excess of $5 million in the proceeding. Robertson commenced this proceeding
on or about December 10, 1993 in Texas state court but, at the Company's
request, the action was converted to an arbitration and the Texas action was
discontinued. The Company and/or Warrantech Automotive asserted counterclaims
in the arbitration seeking to recover (a) approximately $341,000 in legal fees
advanced on Robertson's behalf to cover the defense of certain litigation's;
and (b) a receivable which Robertson owed to the entity from which Warrantech
Automotive purchased assets.
Following hearings held between November 1996 and February 1997, the
three-member arbitration panel issued a decision awarding $612,000 infavor of
Robertson and $107,779 in favor of Warrantech Corporation/Warrantech
Automotive. Warrantech Corporation/Warrantech Automotive filed a proceeding
in Connecticut Superior Court seeking to vacate the award. Before the
application was heard by the Court, the parties settled the matter pursuant to
a settlement agreement in which Warrantech Automotive agreed to pay to
$235,000 to Dealer Based Services, Inc., a company controlled by Robertson
whose assets were acquired by Warrantech Automotive. The parties exchanged
mutual releases and all claims between the parties were resolved.
11. STOCK OPTION PLAN
At March 31, 1997, 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 $64,000 for fiscal 1997 and
none for fiscal years 1996 and 1995. 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,
---------------------------------
1997 1996
Net Income As Reported $ 4,794,715 $ 2,394,862
Pro Forma net income 4,424,684 2,384 386
Primary Earnings Per Share
As Reported $.32 $.16
Primary Pro Forma EPS $.29 $.16
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 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.
Effective August 21, 1996, the Company's Board of Directors approved the
issuance of options to a non-employee in lieu of compensation for the
purchase of 40,000 shares of common stock at an exercise price of $5.00.
Half of the warrants were exercisable upon issuance and the remaining half
exercisable one year later. The term of the warrants is five years from the
date exercisable.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Pesented 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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
March 31,
-------------- -------------- ------------ --------------- -------------- ---------
1997 1996 1995
-------------- -------------- ------------ --------------- -------------- ---------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- -------------- -------------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of 3,218,024 $ 2.88 3,233,500 $ 2.87 3,237,833 $ 2.87
year
Granted 369,129 5.06 9,524 5.25 91,667 4.56
Canceled (7,600) (6.70) - - (21,000) (4.69)
Exercised (95,000) (4.44) (25,000) (2.50) (75,000) (4.17)
Forfeited - - - - - -
----------- ----------- -------------- --------------- ------------ -----------
Options outstanding at end of year 3,484,553 3.06 3,218,024 2.88 3,233,500 2.89
----------- ----------- -------------- --------------- ------------ -----------
Options exerciseable at end of year 3,193,024 $ 2.89 3,218,024 $ 2.89 3,153,833 $ 2.84
=========== =========== ============== =============== ============== =========
</TABLE>
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, 1997 and March 31, 1996 is
$2.08 and $2.31 respectively.
The Company recognized costs of $39,082, $12,344 and $21,328 for the
years ended March 31, 1997, 1996 and 1995, respectively, for
stock-based compensation to employees.
The following table summarizes the status of Warrantech's stock
options outstanding and exercisable at March 31,1997.
<TABLE>
<CAPTION>
Stock Options Stock Options
Outstanding Exercisable
------------- -------------- ------------ ------------- ------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range Of Exercise Prices Shares Life Price Shares Price
------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
$ 1.63 to $4.56 3,211,329 .3 $2.81 3,103,000 $2.80
$ 5.00 to $6.38 260,024 3.0 5.27 90,024 5.78
$11.50 13,200 4.9 11.50 - -
============= ============== ============ ============= ============
Total 3,484,553 .5 $3.06 3,193,024 $2.89
============= ============== ============ ============= ============
</TABLE>
12. OTHER INCOME/(EXPENSE)
Other income/(expense) is comprised of the following:
March 31,
-------------------------------------------
1997 1996 1995
Interest and dividend income $722,560 $622,873 $519,592
Interest expense (433,990) (182,523) (88,032)
Profit sharing - (865,000) 2,676,001
Write-off note receivable - (222,845) -
Miscellaneous 36,015 (4,125) -
------------------ ----------------- -------------
$324,585 $(651,620) $3,107,561
================== ================= =============
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 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.
15. SIGNIFICANT CUSTOMERS
The Company has one significant customer that accounted for approximately 23%
of consolidated gross revenues for the year ended March 31, 1997. The Company
had two significant customers that accounted for 19% of consolidated gross
revenues for the year ended March 31, 1996 and one customer that accounted for
approximately 10% of consolidated gross revenues for the year ended March 31,
1995.
16. RELATED PARTY TRANSACTION
During the years ended March 31, 1997, 1996 and 1995 the Company recognized net
insurance expense of $43,559,423, $27,774,163 and $15,893,173, respectively
for insurance coverage provided by AIG for certain service contract programs.
At March 31, 1996 the Company had a receivable for accrued profit
sharing from AIG of $1,480,000.
===============================================================================
17. Quarterly Financial Data (Unaudited)
===============================================================================
The following fiscal 1997 and 1996 quarterly financial information for
each of the three month periods ended June 30, September 30,
December 31, 1996 and 1995 and March 31, 1997 and 1996 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.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, September 30, December 31, March 31,
1996 1995 1996 1995 1996 1995 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $35,632,324 $19,994,221 $38,409,126 $23,417,612 41,795,061 $34,396,845 $43,826,353 $31,272,046
Income from
operations 1,577,186 1,487,194 1,900,562 1,410,907 3,134,489 2,780,482 1,215,603 (36,861)
Income (loss)
before provision
for income taxes 3,466,445 1,390,502 1,932,842 1,095,485 3,001,979 3,016,148 (646,531)(1) (1,469,781)(2)
Net income(loss) $2,119,235 $650,460 1,315,080 $607,503 $1,832,053 $1,626,809 $(471,653) $(489,910)(3)
Earnings (loss)
per share:
Primary $.16 $.04 $.09 $.04 $.12 $.10 ($.03) ($.04)
Fully Diluted $.15 $.04 $.09 $.04 $.12 $.09 ($.03) ($.03)
</TABLE>
(1) 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.
(2) As a result of renegotiation of the Company's profit sharing
agreements, and a re-examination of it's current experience,
the Company recorded a charge of $1,300,000 during the fourth quarter
of fiscal 1996. In addition, the Company reserved for the potential
uncollectability of a note receivable in the amount of $222,845
related to a prior year's sale of a business.
(3) Based on the agreement to sell the Techmark Joint Venture
which will result in a gain to be recorded in fiscal
1997, a tax benefit of $627,000 was recorded in the fourth quarter
related to equity losses of Techmark recognized by the Company.
===========================================================================
===========================================================================
<TABLE>
<CAPTION>
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
- ------------------------------------------------------ ----------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
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
Year Ended March 31, 1995
Allowance for doubtful accounts
Trade A/R $ - $ 427,483 $ - $ 301,368 $ 126,115
Other A/R - - - - -
Profit Sharing 775,000 95,000 - - 870,000
</TABLE>
(a) Bad debt expense charged directly to operations pertaining t
accounts receivable was $705,119 for the year end March 31, 1997.
(b) Amount of receivables charged to the allowance during the year.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
N/A
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by Reference to the Proxy Statement.
Item 11. Executive Compensation
Incorporated by Reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by Reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by Reference to the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. and 2. Financial Statements and Financial Statement 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, 1996, between
the Company and Michael J. Salpeter.
(g) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Inacom Corporation. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31, 1992, file
no. 0-13084.
(h)- Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Damark Inc. Incorporated by reference to the Company's Report
on Form 10-K for the fiscal year ended March 31, 1992, file no.
0-13084.
(i) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts written in all states except
Florida.
(j) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by CompUSA.
(k) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida, Inc.
(excluding Inacom Corporation).
(l) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida, Inc.
through CompUSA.
(m)- Settlement and Runoff Agreement between the Company, its
wholly owned subsidiaries Warrantech Dealer Based Services, Inc.
and Warrantech Consumer Product Services, Inc. and American
Hardware Mutual Insurance Company ("AHM") regarding
termination of insurance coverage by AHM. (This document has
been omitted and accorded confidential treatment by the Securities
and Exchange Commission pursuant to an Order Granting
Application Pursuant to Rule 24b-2 Under the Securities Exchange
Act of 1934, As Amended, Respecting Confidential Treatment of
Exhibits 10(v) and 10(w) Contained in Registrant's Form 10-K for
the fiscal year ended March 31, 1992, issued by the Division of
Corporation Finance.)
(n)- Revolving Loan Agreement between the Company and Peoples Bank.
(o)- Administrator Agreement - Consumer Products, between Houston
General Insurance Company and Warrantech Consumer Product
Services, Inc. (This document has been omitted and has been filed
separately with the Securities and Exchange Commission pursuant to a
confidential Treatment Request.)
(p)- General Agency Agreement between American International Group, Inc.
and Warrantech Automotive. Inc. (This document has been omitted and
has been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Request.)
(q)- Master Agreement between American International Group, Inc. and the
Company (Section 1.6 of this document has been omitted and has been
filed separately with the Securities and Exchange Commission pursuant
to a Confidential Treatment Request.)
11. - Statements re: computation of per share earnings.
21. - Subsidiaries of the Company.
27. - Financial Data Schedule.
28. - Stipulation and Consent Order of Illinois. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1988, file no. 0-13084.
99(a) - Complaint in Action entitled David Robertson v. Warrantech
Corporation and Warrantech Automotive Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1993; file no. 0-13084.
(b) - Amended Complaint in Action entitled The Oak Agency, Inc.
and The Oak Financial Services,Inc. vs. Warrantech Dealer
Based Services, Inc., Case No. 91 C 6677, filed in the
United States District Court for the Northern District of
Illinois.
(c) - Complaint in Action entitled The Oak Agency, Inc., et al. v.
Warrantech, Inc., et al., Case No. 96 C 1106, filed in the
United States District Court for the Northern District of
Illinois.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized.
WARRANTECH CORPORATION
Dated: June 30, 1997 By: Joel San Antonio
______________________________
Joel San Antonio
Chairman of The Board and
Chief Executive Officer
Dated: June 30, 1997 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, Chairman June 30, 1997
of the Board and Director
- ------------------------
(Joel San Antonio)
William Tweed Vice Chairman and Director June 30, 1997
- ------------------------
(William Tweed)
Michael Salpeter President and Director June 30, 1997
- ------------------------
(Michael Salpeter)
Desiree Kim Caban Secretary June 30, 1997
- -----------------------
(Desiree Kim Caban)
Jeffrey J. White Director June 30, 1997
- -----------------------
(Jeffrey J. White)
Lawrence Richenstein Director June 30, 1997
- -----------------------
(Lawrence Richenstein)
Exhibit List
3(a) - Certificate of Incorporation filed June 22, 1983. Incorporated by
reference to the Company's Registration Statement on Form S-18,
filed on November 23, 1983, Registration No. 2-88097-NY.
(b) - Certificate of Amendment of Certificate of Incorporation filed
October 24, 1983. Incorporated by reference to the Company's
Registration Statement on Form S-18, filed on November 23,
1983, Registration No. 2-88097-NY.
(c) - Certificate of Amendment of Certificate of Incorporation dated
June 29, 1987. Incorporated by reference to the Company's Form
8 Amendment to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1987, file no. 0-13084.
(d) - Certificate of Designation of the Company with respect to the
Preferred Stock as filed with the Secretary of State of Delaware on
October 12, 1993. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31, 1994.
(e) - By-laws of the Company, as amended. Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 10, 1988, file no. 0-13084.
10(a) - Form of Sales Distributor Agreement. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985, file no. 0-13084.
(b) - Form of Service Center Agreement. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1985, file no. 0-13084.
(c) - Form of Dealer Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985, file no. 0-13084.
(d) - Form of Sales Agent Agreement. Incorporated by reference to the
Company's Registration Statement on Form S-1, filed on
September 5, 1986, Registration No. 3-8517.
(e) - 1988 Employee Incentive Stock Option Plan of the Company.
(f) - Employment Agreement dated April 1, 1996, between the Company and
Michael J. Salpeter.
(g) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Inacom Corporation. Incorporated by reference to the Company's
Report on Form 10-K for the fiscal year ended March 31, 1992, file
no. 0-13084.
(h) - Insurance policy between the Company and Houston General
Insurance Company pertaining to service contracts issued by
Damark Inc. Incorporated by reference to the Company's Report
on Form 10-K for the fiscal year ended March 31, 1992, file no.
0-13084
(i) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts written in all states except
Florida.
(j) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by CompUSA.
(k) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,
Inc.(excluding Inacom Corporation).
(l) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,
Inc. through CompUSA.
(m) - Settlement and Runoff Agreement between the Company, its
wholly owned subsidiaries Warrantech Dealer Based Services, Inc.
and Warrantech Consumer Product Services, Inc. and American
Hardware Mutual Insurance Company ("AHM") regarding
termination of insurance coverage by AHM. (This document has
been omitted and accorded confidential treatment by the Securities
and Exchange Commission pursuant to an Order Granting
Application Pursuant to Rule 24b-2 Under the Securities Exchange
Act of 1934, As Amended, Respecting Confidential Treatment of
Exhibits 10(v) and 10(w) Contained in Registrant's Form 10-K for
the fiscal year ended March 31, 1992, issued by the Division of
Corporation Finance.)
(n) - Revolving Loan Agreement between the Company and Peoples Bank.
(o) - Administrator Agreement - Consumer Products, between Houston
General Insurance Company and Warrantech Consumer Product
Services, Inc. (This document has been omitted and has been filed
separately with the Securities and Exchange Commission pursuant to
a confidential Treatment Request.)
(p) - General Agency Agreement between American International Group, Inc.
and Warrantech Automotive. Inc. (This document has been omitted and
has been filed separately with the Securities and Exchange
Commission pursuant to a Confidential Treatment Request.)
(q) - Master Agreement between American International Group, Inc. and the
Company (Section 1.6 of this document has been omitted and has been
filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Request.)
11. - Statements re: computation of per share earnings.
21. - Subsidiaries of the Company.
27. - Financial Data Schedule.
28. - Stipulation and Consent Order of Illinois. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1988, file no. 0-13084.
99(a) - Complaint in Action entitled David Robertson v. Warrantech
Corporation and Warrantech Automotive Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1993; file no. 0-13084.
(b) - Amended Complaint in Action entitled The Oak Agency, Inc. and The
Oak Financial Services, Inc. vs. Warrantech Dealer Based Services,
Inc., Case No. 91 C 6677, filed in the United States District Court
for the Northern District of Illinois.
(c - Complaint in Action entitled The Oak Agency, Inc., et al. v.
Warrantech, Inc., et al., Case No. 96 C 1106, filed in the United
States District Court for the Northern District of Illinois.
<TABLE>
<CAPTION>
WARRANTECH CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
For the Years Ended March 31,
---------------------- --- ---------------------- ---- ------------------------
<S> <C> <C> <C>
1997 1996 1995
Earnings:
Net Income $ 4,794,715 $ 2,394,862 $ 2,895,788
====================== ====================== ========================
Weighted average shares outstanding
Primary (A):
Common shares 13,054,611 12,998,547 12,951,514
Assumed exercise of stock options 2,163,843 721,387 725,730
Assumed conversion of preferred
stock -0- 1,432,109 1,910,900
====================== ====================== =========================
15,218,454 15,152,043 15,588,144
====================== ====================== =========================
Fully diluted (B)
Common shares 13,054,611 12,998,547 12,951,514
Assumed exercise of stock options 2,340,258 2,002,990 1,993,893
Assumed conversion of preferred
stock -0- 1,464,296 1,948,944
====================== ====================== =========================
15,394,869 16,465,833 16,894,351
====================== ====================== =========================
Earnings Per Common Share:
Primary (A) $0.32 $0.16 $0.19
Fully Diluted (B) $0.31 $0.15 $0.17
(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, 1997, 1996 and 1995.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,031,925
<SECURITIES> 286,099
<RECEIVABLES> 23,290,035
<ALLOWANCES> 940,328
<INVENTORY> 0
<CURRENT-ASSETS> 46,231,273
<PP&E> 17,257,965
<DEPRECIATION> 7,146,772
<TOTAL-ASSETS> 66,124,255
<CURRENT-LIABILITIES> 32,629,105
<BONDS> 0
<COMMON> 90,911
0
0
<OTHER-SE> 25,211,826
<TOTAL-LIABILITY-AND-EQUITY> 66,124,255
<SALES> 0
<TOTAL-REVENUES> 61,044,135
<CGS> 0
<TOTAL-COSTS> 151,835,024
<OTHER-EXPENSES> 324,585
<LOSS-PROVISION> 723,949
<INTEREST-EXPENSE> 433,990
<INCOME-PRETAX> 7,754,735
<INCOME-TAX> 2,960,020
<INCOME-CONTINUING> 4,794,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,794,715
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
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. WDBS OF CALIFORNIA INSURANCE SERVICES, 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
