UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] FORM 10-K/A
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, 1999
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 None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.007 par value
________________________________________________________________________________
(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_ _X__ No_______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K [ ].
_______________________________
The number of shares outstanding of the Registrant's common stock is
15,125,611 as of December 21, 1999.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $11,518,865 as of December 21, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended are incorporated by reference in
Part III.
Index to Exhibits is on page 56
Document contains 61 pages
1
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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, markets and administers
service contracts and extended warranties. The Company is a third party
administrator for a variety of dealer/clients in selected industries and offers
call center and technical computer services. The Company assists dealer/clients
in obtaining insurance policies from highly rated independent insurance
companies for all contracts and programs offered. The insurance company is then
responsible for the cost of repairs or replacements for the contracts
administered by Warrantech.
The Company operates under three major business segments: Automotive,
Consumer Products and International. The Automotive segment markets and
administers extended warranties on automobiles, light trucks, recreational
vehicles and automotive components. These products are sold principally by
franchised and independent automobile dealers, leasing companies, repair
facilities, retail stores and financial institutions. The Consumer Products
segment markets and administers extended warranties on household appliances,
electronics and homes. These products include home appliances, consumer
electronics, televisions, computers, home office equipment and homes. These
products are sold principally by retailers, distributors, manufacturers, utility
companies and financial institutions. Warrantech also direct markets these
products to the ultimate consumer through telemarketing and direct mail
campaigns. The International segment markets and administers outside the United
States predominately the same products and services of the other business
segments. The International segment is currently operating in the United
Kingdom, Central and South America, Puerto Rico and the Caribbean.
The predominant terms of the service contracts and extended warranties
range from twelve (12) to eighty-four (84) months. The Company acts as a third
party administrator on behalf of the dealer/clients and insurance companies. The
actual repairs and replacements required under the service contract agreements
are performed by independent third party authorized repair facilities. The cost
of these repairs is borne by the insurance companies which have the ultimate
responsibility for the claims. The insurance policy indemnifies the
dealer/clients against losses resulting from service contract claims and
protects the consumer by ensuring their claims will be paid.
The Company's service contract programs benefit consumers with expanded
and/or extended product coverage for a specified period of time (and/or mileage
in the case of automobiles and recreational vehicles), similar to that provided
by manufacturers under the terms of their product warranties. Such coverage
generally provides for the repair or replacement of the product, or a component
thereof, in the event of its failure. The Company's service contract programs
benefit the dealer/clients by providing enhanced value to the goods and services
they offer. It also provides the opportunity for increased revenue and income
while outsourcing the costs and responsibilities of operating an extended
warranty program.
2
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Warrantech Automotive Segment
The Company's Automotive segment markets and administers vehicle service
contract ("VSC") programs, credit life and other related automotive after-sale
products, all of which enhance the profitability of the sale of automobiles,
light trucks, recreational vehicles and automotive components. These products
are sold principally by franchised and independent automobile dealers, leasing
companies, repair facilities, retail stores, and financial institutions.
Additionally, Warrantech Automotive has expanded its efforts in the
automotive field to provide administrative expertise and secure the placement of
insurance coverage to other parties requiring such services on either VSC's or
similar products.
The VSC is a contract between the dealer/lessor or Warrantech Automotive
and the vehicle purchaser/lessee that offers coverage which run from twelve (12)
to eighty-four (84) months and/or 1,000 to 100,000 miles. Coverage is afforded
in the event of the failure of a broad range of mechanical components that
occurs during the term of the VSC, exclusive of failures covered by a
manufacturers warranty.
The programs marketed and administered by Warrantech Automotive require
that the dealer enter into an agreement whereby Warrantech Automotive 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.
Warrantech Automotive 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 Canada.
With respect to the VSC programs which Warrantech Automotive markets and
administers, 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. The Company recently reached an agreement with Reliance Insurance Group
(Reliance) pursuant to which Reliance insures effective January 1, 1999, a
portion of the new Warrantech Automotive VSC programs. As of November 1, 1999,
all new Warrantech Automotive programs are insured by Reliance. Effective from
March 1, 1993 until July 31, 1999 (except with respect to certain reinsurance
contracts which are immaterial), insurance for the Warrantech Automotive VSC
programs was provided by the New Hampshire Insurance Company and other American
International Group, Inc. ("AIG") member companies.
Essential to the success of Warrantech Automotive is its ability to
capture, maintain, track and analyze all relevant data regarding a VSC. To
support this function, the Company operates proprietary software developed
internally that 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 Products Segment
The Company's Consumer Product segment develops, markets and administers
consumer product extended warranties on household appliances, electronics and
homes and offers call center and technical computer services. These products
include home appliances, consumer electronics, televisions, computers, home
office equipment and homes. These products are sold principally through
retailers, distributors, manufacturers, utility companies and financial
institutions. Warrantech also direct markets these products to the ultimate
consumer through telemarketing and direct mail campaigns. The extended
warranties are service contracts between the retailer/dealer or Warrantech
Consumer Products and the purchaser that offers coverage which run predominantly
from twelve (12) to sixty (60) months.
3
<PAGE>
The Warrantech Consumer Product segment has developed a niche market by
specializing in the personal computer industry. This segment has expanded to
include some of the premier retailers and distributors of computer and computer
related products. The call center is staffed by technical service
representatives with extensive training in computers and peripherals.
The Consumer Products segment had one significant customer, CompUSA Inc.
("CompUSA"), which accounted for approximately 58% of revenue of this business
segment. The Company notified CompUSA in May 1999 of price increases resulting
from premium increases imposed by CIGNA Insurance Company. On June 28, 1999,
Warrantech received formal notification of termination from CompUSA effective
July 28, 1999. The loss of CompUSA will have an adverse impact on future
revenues.
The Warrantech Consumer Product segment also develops, markets and
administers service contract programs in the United States covering mechanical
breakdowns of the working systems and components in homes. The core program
protects homeowners against the cost of repairs in case of a breakdown of one or
more of the major home systems including heating and air conditioning, plumbing,
electrical, and built-in appliances. The Warrantech Home Service warranty is one
of the first of its kind. It offers greater protection than what has been
available until now and it provides this security at a lower cost.
The programs marketed and administered by Warrantech Consumer Products
require that the selling dealer, distributor or manufacturer enter into an
agreement with Warrantech that outlines the duties of each party. Those duties
specifically assumed by Warrantech Consumer Products include the development and
distribution of marketing materials, sales and motivational training, processing
of service contracts, operating a call center and the adjustment and payment of
claims. Warrantech has also entered into service center agreements with
independent third party authorized repair facilities located throughout North
America.
In exchange for agreed upon premiums and fees, the liability for claims
incurred by service contracts issued by a dealer, distributor or manufacturer
have been assumed by CIGNA Insurance Company (CIGNA). At the present time, in
addition to CIGNA, certain programs offered by Warrantech Consumer Products are
being insured by Reliance Insurance Group and certain AIG member companies.
It is essential to the success of Warrantech Consumer Products that it be
able to capture, maintain, and analyze all relevant information about its
service contracts. To support this function, Warrantech has internally developed
application programs that allow the tracking of a database for 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 will also support significant growth of Warrantech's
Consumer Product business.
Warrantech International Segment
In July 1995, Warrantech International, Inc. (WII) acquired Home Guarantee
Corporation plc (subsequently renamed Warrantech Europe Plc.), a British company
which markets home warranty products in the United Kingdom covering mechanical
breakdowns of the working systems and components in homes (e.g., furnaces,
electrical and plumbing systems, and major appliances). In addition to home
warranty products, Warrantech Europe's business has expanded to include extended
warranties on a wide range of products including automobiles, business
equipment, office and home computers, mobile telephones, and major appliances as
well as credit card enhancement programs similar to those marketed in the United
States. This subsidiary also provides database management, marketing, training,
brokerage services, and customer care service for clients in the automotive,
financial, manufacturing, retail and service sectors, including other segments
of the Company.
4
<PAGE>
WII also conducts its efforts on a direct basis and has developed
relationships with retailers and distributors throughout Puerto Rico, Central
and South America. The Company is currently doing business in Mexico, Chile,
Peru and Guatemala.
Sales and Marketing
The sales and marketing activities of Warrantech are managed by each
segment's own sales and marketing personnel. In certain circumstances, the
business segments have entered into marketing agreements with independent
organizations that solicit dealers at their own expense, and receive a
commission on all service contracts sold by such dealers.
The Warrantech business segments foster awareness of their respective
programs through cooperative advertising programs, which may be jointly funded
by Warrantech and the client/dealer or independent agent.
Sales training and motivational programs are a primary form of specialized
assistance provided by the Company to retailers/dealers, distributors and
manufacturers, to assist them in increasing the effectiveness and profitability
of their service contract program sales efforts. The Company develops materials
and conducts educational seminars. These seminars are conducted either at the
client's place of business, an offsite facility or at the Company's
state-of-the-art training facility at its Euless, Texas administrative offices.
This facility features the latest in audio/video technology that enhances the
training and learning experience.
Warrantech also direct markets to the ultimate consumer through
telemarketing and direct mail campaigns. The direct marketing campaigns generate
sales through renewals of expiring contracts and second-effort sales to
customers who did not buy at the time of purchase.
Significant Customers
The Company had one significant customer, CompUSA, which accounted for
approximately 34%, 34% and 32%, respectively, of consolidated gross revenues for
the years ended March 31, 1999, 1998 and 1997. The Company notified CompUSA in
May 1999 of price increases resulting from premium increases imposed by CIGNA
Insurance Company. On June 28, 1999, Warrantech received formal notification of
termination from CompUSA effective July 28, 1999. The loss of CompUSA will have
a significant impact on future revenues.
Competition
Warrantech competes 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 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 clients/dealers, retailers, distributors, utility companies
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.
5
<PAGE>
The insurance protection is provided by highly rated independent insurance
companies. This includes Reliance Insurance Group and CIGNA Insurance Company
which are rated A - (Excellent) by A.M. Best Company. Other programs have been
or are currently insured by New Hampshire Insurance Company, and other AIG
member companies and Tokio Marine & Fire Insurance Company each of which is
rated A++ (Superior) by the A.M. Best Company and by Zurich American Insurance
Company, which is rated A+ (Superior) by A.M. Best Company. Warrantech is
currently in the process of exploring strategic relations with other highly
rated insurance companies regarding the Consumer Products Services business
segment.
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. The insured or the Company are not
obligated to the insurer if claims exceed the premium remitted.
Additionally, agreements between the Company and the insurers may contain
profit-sharing features that permit the Company to share in underwriting profits
earned by the service contract programs. The amounts to be received, if any, are
determined in accordance with certain specified 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 amounts during the 1999, 1998 or 1997 fiscal years.
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. As discussed in the financial statements of Part II of
this report, Warrantech's obligor status has an effect on its method of revenue
recognition.
Insurance departments in some states have sought to interpret the consumer
product service contract, or certain items covered under the contract as a form
of insurance, requiring that the issuer be a duly licensed and chartered
insurance company. The Company and its subsidiaries do not believe that they are
insurers and have no intention of filing the documents and meeting the capital
and surplus requirements that are necessary to obtain such a license.
There are instances where the applicability of statutes and regulations to
programs marketed and administered by the Company and compliance therewith,
involve issues of interpretation. The Company uses its best efforts to comply
with applicable statutes and regulations but it cannot assure that its
interpretations, if challenged, would be upheld by a court or regulatory body.
In any situation in which the Company has been specifically notified by any
regulatory bodies that its methods of doing business were not in compliance with
state regulation, the Company has taken the steps necessary to comply.
If the Company's right to operate in any state is challenged successfully,
the Company may be required to cease operations in the state and the state might
also impose financial sanctions against the Company. These actions, should they
occur, could have materially adverse consequences and could affect the Company's
ability to continue operating. However, within the framework of currently known
statutes, the Company does not feel that this is a present concern.
6
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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 employed approximately 750 individuals as
of March 31, 1999, an increase of approximately 50 over the preceding fiscal
year. The increase was partly attributable to the conversion of temporary
employees as of March 31, 1999 versus the prior year and to the expansion of
customer service and claims representatives to meet the needs of the Company's
then 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. As of December 21, 1999, the Company had approximately 590
employees. This reduction is due to the consolidation and cost reduction
initiatives recently instituted by the Company.
Item 2. Properties
The Company's executive offices are located in leased premises at 300
Atlantic Street, Stamford, Connecticut. The premises, which are leased pursuant
to a lease agreement (the "Lease"), consists of approximately 14,317 square feet
for space A and 6,683 square feet for space B. The Lease, which was renewed
effective on April 1, 1998 and expires on March 31, 2005, provides for remaining
annual base rent payments ranging from $651,000 to $693,000 respectively. The
Company initiated the termination of the lease for space B as part of its recent
cost reduction initiatives. The termination was effective November 30, 1999 at
no cost to the Company. The remaining annual base rental payments for space A
effective November 30, 1999 range from $443,827 to $472,461.
The operating facilities are located in leased premises at 150 Westpark
Way, Euless, Texas. The premises, consisting of approximately 29,531 square
feet, are leased pursuant to 3 separate lease agreements. These leases expire
through July 31, 2003 and provide for remaining annual base rent payments
ranging from $389,267 to $430,794.
Effective beginning April 15, 1996, the Company signed leases for an
additional 48,053 square feet at 1441 West Airport Freeway, Euless, Texas to
accommodate the expanding operations. These premises are being leased pursuant
to lease agreements that expire March 31, 2004. These leases provide for annual
base rent payments ranging from $522,132 to $570,185.
Additional facilities that supported the direct marketing operation were
located at 2701/2705 Brown Trail, Bedford, Texas (4,915 square feet). These
premises were leased under the terms of leases (the "Other Leases") that were
effective on December 1, 1994, March 1, 1996 and December 1, 1997, respectively,
expiring March 31, 2004, February 28, 2001 and November 30, 1998 respectively.
The Other Leases provided for annual base rent payments ranging from $255,651 to
$177,162. The lease which expired November 30, 1998 was being utilized on a
month to month basis. Effective November 1999, these leases were terminated at
no cost to the Company as part of its recent cost reduction initiatives. The
direct marketing operations were moved to the 150 Westpark Way facilities.
The operating facilities of Warrantech Europe, plc were located in leased
premises at 248A Marylebone Road, London. These premises, which totaled 6,000
square feet, were leased pursuant to a lease agreement which expired June 23,
2010 and provided for remaining annual base rent payments ranging from L 94,050
to L 108,450 through June 2000. Effective June 2000, this lease was to adjust to
fair market value which the Company estimated at approximately L 200,000 per
year. Effective October 1999, the lease for the Marylebone Road premises was
terminated and the operating facilities were relocated to Watford,
Hertfordshire. The new lease provides for 16,300 square feet and an annual base
rent of L 300,995 through December 31, 2009. The Company has sublet a portion of
the new premises for approximately L 100,000 per year. The approximate exchange
rate is L 1 equals $1.60.
Warrantech International's Puerto Rico operations are located in leased
premises at 1225 Ponce de Leon Avenue, Santurce, Puerto Rico pursuant to a lease
agreement which expires March 31, 2003. The remaining annual base rent payments
range from $52,353 to $54,928.
Item 3. Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business. As of December 21, 1999, the Company is not aware of
any material existing litigation to which it is a party.
The Oak Agency, Inc. and The Oak Financial Services, Inc. (collectively,
"Oak") v. Warrantech Dealer Based Services, Inc. ("WDBS").
Final judgment in this matter was entered on November 12, 1997. WDBS was
directed to pay Oak (i) $1,243,359 which represents commissions earned by
Oak for the period July 1, 1991 through May 31, 1997, (ii) $28,500 which
represents costs of the action recoverable by Oak, and (iii) future
commissions earned on vehicle service contracts sold on or after June 1,
1997 by a specified group of automobile dealers. Furthermore, Oak was
directed to pay Warrantech Corporation $7,500 which represents Warrantech's
recoverable costs of a separate action which previously had been dismissed
by the Court with prejudice.
WDBS has made all payments described in clauses (i) and (ii) above and
continues to make those periodic payments described in clause (iii). No
further legal action is anticipated and WDBS considers this matter closed.
Proteva, Inc. v. Warrantech Help Desk, Inc. v. William Lynch, Civil Action
No. 499CV162BE (U.S. District Court, Northern District of Texas). This
matter arose out of an Agreement, effective as of December 9, 1997, between
Proteva, Inc. ("Proteva") and Warrantech Help Desk, Inc. ("Warrantech")
pursuant to which Warrantech was to provide administration services for the
warranties on certain personal computers manufactured by Proteva. In
December 1998, Warrantech determined that Proteva had failed to report a
material number of computers subject to the Agreement and remit the
corresponding fees. Therefore, Warrantech notified Proteva in January 1999
that it was terminating the Agreement. Proteva sought injunctive relief in
the Illinois State courts and commenced a lawsuit against Warrantech
alleging failure to provide service in accordance with the requirements of
the Agreement and failure to remit certain payments. Warrantech had the
litigation removed to Federal District Court in Chicago and it was
subsequently transferred to the Northern District of Texas. Following that
transfer, Warrantech counterclaimed against Proteva and its Chairman,
William Lynch, alleging fraud and breach of the Agreement arising out of
the under-reporting of computer sales and the failure to remit
corresponding fees. The parties have reached agreement on a Settlement
Agreement and Mutual Release which will result in a final dismissal of this
action. Warrantech will receive financial and other considerations as part
of the settlement although specific details are subject to a
confidentiality agreement among the parties.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of the Company's Stockholders, through
the solicitation of proxies or otherwise, during the fourth quarter of the
Company's fiscal year ended March 31, 1999.
8
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PART II
Item 5. Market for Warrantech's Common Equity and Related Stockholder Matters
The Company's common stock, $.007 par value (the "common stock") had been
reported in the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), and on NASDAQ's National Market System ("NMS"), under the
trading symbol "WTEC". The Company was delisted on September 3, 1999. The Common
Stock now trades over-the-counter on an electronic quotation service for
National Association of Securities Dealers Market Makers. It is the Company's
intention to again seek to be listed on NASDAQ if and when the Company satisfies
the requirements for listing.
As of December 21, 1999, there were 15,125,611 Common Shares outstanding.
On that date, the closing bid price for the Company's common stock, as reported
on the OTC was $1.38.
Following is a summary of the price range of the Company's Common Stock
during the current, 1999 and 1998 fiscal years:
Common Stock
Quarter of Fiscal 2000
High & Low Bid
First $ 3.81 $ 2.13
Second $ 2.75 $ .63
Third, through Dec 21, 1999 $ 1.75 $ .59
Quarter of Fiscal 1999
High & Low Bid
First $ 7.44 $ 3.94
Second $ 4.31 $ 2.44
Third $ 4.25 $ 2.44
Fourth $ 5.00 $ 2.72
Quarter of Fiscal 1998
High & Low Bid
First $12.38 $ 8.88
Second $12.81 $ 9.25
Third $13.25 $ 7.88
Fourth $10.69 $ 5.19
The number of stockholders of record of the Company's Common Stock as of
December 21, 1999 was 985.
Dividends
No cash dividends have been paid to holders of Common Stock since inception
of the Company. The Company anticipates that, in the foreseeable future,
earnings, if any, will be retained for use in the business or for other
corporate purposes and it is not anticipated that cash dividends will be paid.
9
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Item 6 - Selected Financial Data.
The Selected Financial Data should be read in conjunction with the consolidated
financial statements and related notes for the years ended March 31, 1999, 1998
and 1997.
<TABLE>
<S> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------
Gross revenues $148,868,791 $132,797,006 $106,775,745 $70,830,766 $44,833,429
Net (increase) in deferred revenue (30,640,470) (21,447,327) (20,501,768) (13,885,618) (7,632,081)
---------------- ---------------- ------------------- --------------------------------
Net revenues 118,228,321 111,349,679 86,273,977 56,945,148 37,201,348
---------------- ---------------- ------------------- --------------------------------
Net income (loss) ($7,639,725) $5,619,823 $2,284,867 $396,606 $1,532,948
================ ================ =================== ================================
Basic earnings (loss) per common share ($0.51) $0.42 $0.18 $0.03 $0.10
================ ================ =================== ================================
Diluted earnings (loss) per common
share ($0.51) $0.36 $0.15 $0.02 $0.09
================ ================ =================== ================================
Cash dividend declared NONE NONE NONE NONE NONE
================ ================ =================== ================================
Total assets $186,910,270 $152,811,266 $117,120,031 $91,072,027 $65,377,408
================ ================ =================== ================================
Long-term debt and
capital lease obligations $2,420,967 $2,153,286 $2,491,786 $1,124,015 $293,648
================ ================ =================== ================================
Convertible exchangeable
preferred stock - - - $6,420,363 $6,396,795
================ ================ =================== ================================
Common stockholders' equity $10,400,002 $21,533,883 $14,692,083 $11,576,921 $11,362,009
================ ================ =================== ================================
Working capital $12,183,775 $16,329,259 $13,342,706 $13,003,624 $11,067,983
================ ================ =================== ================================
</TABLE>
The financial information for the fiscal years ended March 31, 1998, 1997, 1996
and 1995 has been restated to effect the change in accounting policy adopted in
the fiscal year ended March 31, 1999 for the recognition of revenue of service
contracts.
10
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WARRANTECH CORPORATION AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Except for the historical information contained herein, the matters discussed
below or elsewhere in this annual report may contain forward-looking statements
that involve risks and uncertainties. The Company makes such forward-looking
statements under the provisions of the "safe harbor" section of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are based
on management's beliefs and assumptions, as well as information currently
available to management. Such beliefs and assumptions are based on, among other
things, the Company's operating and financial performance over recent years and
its expectations about its business for the current fiscal year and beyond.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such statements are subject to certain
risks, uncertainties and assumptions, including (a) prevailing economic
conditions may significantly deteriorate, thereby reducing the demand for the
Company's products and services, (b) unavailability of technical support
personnel or increases in the rate of turnover of such personnel, reflecting
increased demand for such qualified personnel, (c) changes in the terms or
availability of insurance coverage for the Company's programs (d) regulatory or
legal changes affecting the Company's business, or (e) loss of business from or
significant change in relationship with, any major customer of the Company.
Should one or more of these or any other risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or expected.
Warrantech, through its wholly owned subsidiaries, markets and administers
service contracts and extended warranties. The Company is a third party
administrator for a variety of dealer/clients in selected industries and offers
call center and technical computer services. The Company assists dealer/clients
in obtaining insurance policies from highly rated independent insurance
companies for all contracts and programs offered. The insurance company is then
responsible for the cost of repairs or replacements for the contracts
administered by Warrantech.
The Company operates under three major business segments: Automotive,
Consumer Products and International. The Automotive segment markets and
administers extended warranties on automobiles, light trucks, recreational
vehicles and automotive components. These products are sold principally by
franchised and independent automobile dealers, leasing companies, repair
facilities, retail stores and financial institutions. The Consumer Products
segment markets and administers extended warranties on household appliances,
electronics and homes. These products include home appliances, consumer
electronics, televisions, computers, home office equipment and homes. These
products are sold principally by retailers, distributors, manufacturers, utility
companies and financial institutions. Warrantech also direct markets these
products to the ultimate consumer through telemarketing and direct mail
campaigns. The International segment markets and administers outside the United
States predominately the same products and services of the other business
segments. The International segment is currently operating in the United
Kingdom, Central and South America, Puerto Rico and the Caribbean.
The predominant terms of the service contracts and extended warranties
range from twelve (12) to eighty-four (84) months. The Company acts as a third
party administrator on behalf of the dealer/clients and insurance companies. The
actual repairs and replacements required under the service contract agreements
are performed by independent third party authorized repair facilities. The cost
of these repairs is borne by the insurance companies which have the ultimate
responsibility for the claims. The insurance policy indemnifies the
dealer/clients against losses resulting from service contract claims and
protects the consumer by ensuring their claims will be paid.
The Company's service contract programs benefit consumers with expanded
and/or extended product coverage for a specified period of time (and/or mileage
in the case of automobiles and recreational vehicles), similar to that provided
by manufacturers under the terms of their product warranties. Such coverage
generally provides for the repair or replacement of the product, or a component
thereof, in the event of its failure. The Company's service contract programs
benefit the dealer/clients by providing enhanced value to the goods and services
they offer. It also provides the opportunity for increased revenue and income
while outsourcing the costs and responsibilities of operating an extended
warranty program.
11
<PAGE>
Effective with the fiscal year ended March 31, 1999, the Company changed
its accounting policy with respect to the recognition of revenue for service
contracts sold where Warrantech is named as the obligor. Revenue for
administrative obligor contracts is recognized in accordance with Financial
Accounting Standards Board Technical Bulletin 90-1 ("TB 90-1"), Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts, and
Statement of Financial Accounting Standards No. 60 ("SFAS 60" ), Accounting and
Reporting by Insurance Enterprises. These accounting standards require the
recognition of revenue over the life of the contract on a straight-line basis,
unless sufficient, company-specific, historical evidence indicates that the cost
of performing services under these contracts are incurred on other than a
straight-line basis. The Company is recognizing revenue on administrative
obligor contracts based on company specific historical claims experience over
the life of the contract. In addition, the Company has adopted Statement of
Financial Accounting Standards No. 113 ("SFAS 113"), Accounting and Reporting
for Reinsurance of Short-Duration and Long Duration Contracts. This requires
that insurance premium costs be ratably expensed over the life of the service
contract. The financial statements for the years ended March 31, 1998 and 1997
were previously prepared based on the proportional performance method which
recognized revenues in direct proportion to the costs incurred in providing the
service contract programs to the Company's clients. Revenues in amounts
sufficient to meet future administrative costs and a reasonable gross profit
thereon were deferred.
Dealer obligor service contracts are sales in which the retailer/dealer is
designated as the obligor. For these service contract sales, using the
proportional performance method, the Company recognizes revenues in direct
proportion to the costs incurred in providing the service contract programs to
the Company's clients. Revenues in amounts sufficient to meet future
administrative costs and a reasonable gross profit thereon are deferred.
Effective with the fiscal year ended March 31, 1999, the Company changed its
accounting policy with respect to the presentation of revenue for dealer obligor
service contracts sold. Sales of dealer obligor service contracts are now
reflected in gross revenues net of premiums paid to insurance companies.
Previously, premiums paid to insurance companies were included in gross revenue
and the corresponding amount in direct costs.
The Company has given retroactive effect to this new accounting policy by
restating previously issued financial statements for the fiscal years ended
March 31, 1998 and 1997. Net income for the fiscal year ended March 31, 1998 was
restated from $5,261,037 as previously reported to $5,619,823. Net income for
the fiscal year ended March 31, 1997 was restated from $4,794,715 as previously
reported to $2,284,867. In addition, retained earnings at April 1,1996 reflects
the cumulative $8,080,010 effect of the restatement through March 31, 1996. The
aggregate cumulative reduction in net income of $10,948,664 represents deferred
revenues net of deferred direct costs which will be reflected in future
operating results. The restatement of the 1998 and 1997 financial statements did
not adversely affect the Company's liquidity or cash flows.
Results of Operations
Fiscal Year Ended March 31, 1999 Compared to the Fiscal Year Ended
March 31, 1998
Gross revenues for the fiscal year ended March 31, 1999 were $148,868,791,
an increase of 12.1% or $16,071,785 as compared to $132,797,006 for the fiscal
year ended March 31, 1998. This increase is directly attributable to increased
revenue with new and existing customers resulting from continued market
penetration in the Consumer Products and International business segments. Gross
revenues in the Consumer Products business segment increased 17% or $13,142,758
to $90,623,968 from $77,481,210 for the comparable periods. The Consumer Product
business segment had significant revenue increases in the Home warranty
business. Fiscal year ending March 31, 1999 was the first year of significant
revenue for Home Warranties. Gross revenues in the International business
segment increased 40.9% or $5,153,384 to $17,746,685 from $12,593,301 for the
comparable periods.
12
<PAGE>
The net increase in deferred revenues for the fiscal year ended March 31,
1999 amounted to $30,640,470 as compared with a net increase of $21,447,327 for
the fiscal year ended March 31, 1998. These increases are directly attributable
to the increased number of service contracts sold with a service period greater
than one year during the current year offset in part by the amounts earned on
expiring contracts during the same periods. This change is also the result of
the increase in deferred revenue for dealer obligor service contracts necessary
to meet future administrative costs.
Direct costs, which consist primarily of insurance premiums and
commissions, are those costs directly related to the production and acquisition
of service contracts where Warrantech is named as the obligor. Direct costs for
the fiscal year ended March 31, 1999 were $67,501,088 as compared with
$48,663,577 for the fiscal year ended March 31, 1998. The increases in direct
costs are primarily the result of volume increases in contracts sold and the
amortization of previously deferred direct costs being recognized in the current
year. Direct costs as a percentage of gross revenues increased to 45.3% from
36.6% compared to last year. This increase is due in part to higher premium
costs and a $3.1 million refund of prior year insurance payments which reduced
premium costs in the fiscal year ended March 31, 1998.
Service, selling and general and administrative expenses ("SG&A") for the
fiscal year ended March 31, 1999 were $55,522,487 as compared to $49,504,178 for
the fiscal year ended March 31, 1998. This increase is primarily related to
increases in payroll and payroll related costs and telecommunication expenses.
SG&A as a percentage of gross revenues remained constant at 37.3% for the
comparable periods. Beginning the second quarter of the fiscal year, the Company
benefited from several cost cutting and operational efficiency initiatives which
included the reengineering of its call center process and consolidation of
certain operating and administrative functions. Despite these efforts, the
Company experienced increased costs of operations relating to the Consumer
Product business segment and its most significant customer during the year,
CompUSA.
Provision for bad debt expense increased to $2,288,580 for the fiscal year
ended March 31, 1999 as compared to $910,675 for the fiscal year ended March 31,
1998. This increase was caused primarily by the write-off of CompUSA accounts
receivables and the termination of the Company's relationship with Proteva, Inc.
Depreciation and amortization amounted to $5,148,370 for the fiscal year
ended March 31, 1999 as compared to $3,758,213 for the fiscal year ended March
31, 1998. The increases compared to last year reflect a higher level of
depreciation during the year resulting from additional assets being placed in
service during the current and prior fiscal year. This increase in assets is
directly attributable to (i) the continued development of the Company's
information systems and (ii) the purchase of additional computer equipment to
accommodate personnel growth and efficiency of operations.
Other income increased to $1,043,201 for the fiscal year ended March 31,
1999 compared to $819,732 for the fiscal year ended March 31, 1998. Other income
primarily reflects net interest. This increase is primarily the result of the
interest earned on the promissory notes reflecting the obligation resulting from
the exercise of stock options by the Chairman of the Board / Chief Executive
Officer and two members of Warrantech's Board of Directors.
The Company's pretax net income (loss) for the fiscal year ended March
31,1999 for the Automotive, Consumer Products, International reportable segments
and Other, which includes corporate, was $493,193, ($10,626,187), ($95,157) and
($960,772), respectively.
The Automotive segment's pretax operating results in 1999 were $10,757,000
lower than the prior year. This reduction is a result of increased net deferred
revenues, increased general and administrative expenses in the current year and
in 1998 direct costs were reduced by a $3,100,000 refund of prior years
insurance payments. The Consumer Products segment's pretax operating results in
1999 were $11,100,000 lower than the prior year. This reduction is the combined
result of increased net deferred revenues, increased general and administrative
expenses and increased provision for doubtful accounts by this segment in 1999.
The International segment's reduced its $2,176,000 operating loss in 1998 to an
operating loss of $96,000 in the current period primarily through attaining
higher gross margins in the current year.
13
<PAGE>
The income tax provision for the fiscal year ended March 31, 1999 and 1998
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, 1999 and 1998 contains a benefit of $136,662 and $466,503,
respectively, related to foreign losses. Management expects to realize this tax
benefit, which has an indefinite carry-forward period, against future foreign
income.
Net loss for the fiscal year ended March 31, 1999 was $7,639,725 or $0.51
per basic share as compared to net income of $5,619,283 or $.42 per basic share
for the fiscal year ended March 31, 1998. This change in net income (loss) is
the result of the factors listed above.
Fiscal Year Ended March 31, 1998 Compared to the Fiscal Year Ended
March 31,1997
Gross revenues for the fiscal year ended March 31, 1998 were $132,797,006,
an increase of 24.4% or $26,021,261 as compared to $106,775,745 for the fiscal
years ended March 31, 1997. The increase is the result of the Company's efforts
in expanding its market penetration in the Automotive and International market
segments. Gross revenues in the Automotive business segment increased 48.2% or
$15,531,773 to $47,787,563 from $32,255,790 for the comparable periods. Gross
revenues in the International business segment increased 265.4% or $9,146,844 to
$12,593,301 from $3,446,457 for the comparable periods.
The net increase in deferred revenues for the fiscal year ended March 31,
1998 amounted to $21,447,327 as compared with a net increase of $20,501,768 for
the fiscal year ended March 31, 1997. These increases are directly attributable
to the increased number of service contracts sold with a service period greater
than one year during the current year offset in part by the amounts earned on
expiring contracts during the same periods.
Direct costs, which consist primarily of insurance premiums and
commissions, are those costs directly related to the production and acquisition
of service contracts where Warrantech is named as the obligor. Direct costs for
the fiscal year ended March 31, 1998 were $48,663,577 as compared with
$42,704,103 for the fiscal year ended March 31, 1997. The increases in direct
costs are primarily the result of volume increases in contracts sold and the
amortization of previously deferred direct costs being recognized in the current
year. Direct costs as a percentage of gross revenues decreased to 36.6% from 40%
compared to last year. This decrease is due in part to a $3.1 million refund of
prior year insurance payments which reduced premium costs in the fiscal year
ended March 31, 1998.
Service, selling and general and administrative expenses ("SG&A") for the
fiscal year ended March 31, 1998 were $49,504,178 as compared to $36,320,524 for
the fiscal year ended March 31, 1997. The increase is directly attributable to
increases in sales related costs, communication costs, payroll and payroll
related costs arising from the service requirements associated with the
increased number of service contracts being sold. SG&A as a percentage of gross
revenues increased to 37.3% compared to 34.0% for the comparable periods.
Provision for bad debt expense increased to $910,675 for the fiscal year
ended March 31, 1998 as compared to $733,119 for the fiscal year ended March 31,
1997. This is primarily the result of the increase in gross revenues.
Depreciation and amortization amounted to $3,758,213 for the fiscal year
ended March 31, 1998 as compared to $2,619,981 for the fiscal year ended March
31, 1997. The increases over a year ago reflect a higher level of depreciation
during the year resulting from additional assets being placed in service during
the current fiscal year. This increase in assets is directly attributable to (i)
the continued development of the Company's information systems and (ii) the
purchase of additional computer equipment to accommodate personnel growth and
efficiency of operations.
14
<PAGE>
In April 1996, the Company and its joint venture partner, American
International Group ("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
the fiscal year ended March 31, 1997. This gain on the sale of investment was
offset during the fiscal year ended March 31, 1997 by a $2,274,170 legal
settlement.
Other income increased to $819,732 for the fiscal year ended March 31, 1998
compared to $324,585 for the fiscal year ended March 31, 1997. Other income
primarily reflects net interest.
The Company's pretax net income (loss) for the fiscal year ended March
31,1998 for the Automotive, Consumer Products, International reportable segments
and Other, which includes corporate, was $11,249,911, $474,285, ($2,175,507) and
($215,921), respectively.
The income tax provision for the fiscal year ended March 31, 1998 and 1997
differs from the statutory rate primarily due to state and local taxes and the
non-deductibility of goodwill amortization. The net deferred tax asset as of
March 31, 1998 and 1997 contains a benefit of $466,503 and $635,213,
respectively, related to foreign losses. Management expects to realize this tax
benefit which has an indefinite carry-forward period, against future foreign
income.
Net income for the fiscal year ended March 31, 1998 amounted to $5,619,823
or $.42 per basic share, compared to $2,284,867 or $.18 for the fiscal year
ended March 31, 1997. This increase in net income is the result of the factors
listed above.
Liquidity and Capital Resources
The primary source of liquidity during the current year was cash generated
by operations. Funds were utilized for working capital expenditures and capital
expenditures relating to the development of the Company's information systems.
The Company has ongoing relationships with equipment financing companies
and intends to continue financing certain future equipment needs through leasing
transactions. The total amount financed through leasing transactions during the
fiscal year ended March 31, 1999 amounted to $2,134,097. In addition, the
Company has a revolving credit agreement with a bank which originally provided
for maximum aggregate borrowings up to $10,000,000 with interest at the bank's
prevailing prime rate or LIBOR plus 2%. Subsequent to March 31, 1999, the line
of credit was adjusted to $1,500,000 and currently expires on December 31, 1999.
The Company is presently in negotiations to increase and/or replace this current
line of credit. Although it is anticipated that this will be completed by
February 2000, no assurances can be given that this will be accomplished. During
the fiscal years ended March 31, 1998, 1999 and through December 21, 1999, the
Company did not have any borrowings under this line of credit.
During the fiscal year ended March 31, 1999 the Company repurchased
1,180,300 shares of Warrantech Corporation common stock for treasury purposes.
The aggregate amount of these purchases totaled $3,955,494. For the period from
April 1, 1999 through December 21, 1999, the Company repurchased an additional
100,000 shares at an aggregate amount of $74,382. The Board of Directors has
authorized the repurchase of up to $1,500,000 of additional shares of Warrantech
Corporation common stock as part of its stock repurchase program.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of the
Warrantech's Board of Directors, exercised 3,000,000 of their vested options to
purchase Warrantech common stock. Promissory notes totaling $8,062,500 were
signed with interest payable over three years at an annual interest rate of 6%.
The promissory notes, which are with recourse and secured by the stock
certificates issued, mature July 5, 2001. An additional promissory note was
signed by Joel San Antonio for $595,634 on March 22, 1999 which represents the
amounts funded by the Company with respect to his payroll taxes for the exercise
of these options. The exercise of these stock options and the anticipated tax
benefit from this transaction total approximately $10 million. These amounts
have been recorded as a contra-equity account, which is a reduction of
stockholders' equity. The Company is currently in discussions with the Messrs.
San Antonio, Tweed and White to renegotiate the payment terms of the notes. The
payment of interest, which was due July 6, 1999, has been deferred until January
6, 2000.
15
<PAGE>
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
was offset by the amount due the Company for the sale of its investment in the
joint venture, with the net amount due AIG of $2,395,960 resulting in a three
year, non-interest bearing note payable. The note was payable in 11 equal
quarterly installments of $205,000 commencing June 30, 1996, with a final
installment of $140,960 due March 1999. All amounts relating to this note were
paid in full prior to March 31, 1999. Also, as part of the agreement, AIG agreed
to pay the Company $1,480,000 related to amounts due the Company under its
profit sharing arrangement. In connection with this payment, the Company issued
an irrevocable letter of credit for the benefit of AIG through December 31, 2002
which can be drawn against by American International Group ("AI ) in the event
that the ultimate profit sharing amount due the Company is less than the amount
paid. It is anticipated that no amounts will be due AIG under this letter of
credit.
The Company believes that internally generated funds will be sufficient to
finance its current operation for at least the next twelve months.
The Company's relationship with its most significant customer, CompUSA, was
terminated effective July 28, 1999. The Company is evaluating the effect of this
termination on its operating structure, financial condition and cash flows. The
Company has implemented a restructuring plan to consolidate operations and
reduce costs. This restructuring plan includes the reduction of operational and
administrative personnel, consolidation of office space and an overall review of
selling, general and administrative expenses. The loss of the customer will have
an adverse impact on current operating results.
The effect of inflation has not been significant to the Company.
New Accounting Pronouncements
In March of 1998, The American Institute of Certified Public Accountants
issued a Statement of Position 98-1 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"), This SOP provides
guidance on accounting for the costs of computer software developed or obtained
for internal use which includes:
- Definition of computer software costs
- Accounting for various stages of development
- Accounting for internal and external costs
- Need to assess impairment under SFAS 121
- Amortization method and period to be utilized
This SOP is effective for fiscal years beginning after December 15, 1998
and restatement of previously incurred costs is not permitted.
The Company believes its current accounting policies are consistent with
those prescribed by SOP 98-1 and does not believe the adoption of this SOP will
have any impact on its results of operations, financial condition or liquidity.
Readiness For Year 2000
The Company has addressed the business, financial, technical, legal and
other implications that arise due to the Year 2000 date issues. A comprehensive
Year 2000 program was put into place during fiscal 1998. The primary goal of the
Year 2000 program was to implement the changes needed to answer functionality in
the Year 2000, as cost effectively and expeditiously as possible. Towards that
goal, the Company established the following objectives:
16
<PAGE>
- Implementation of overall Year 2000 program
- Develop and implement a methodology for assessment, project planning,
development, testing and implementation
- Implement a business partner management framework
- Develop a risk management approach
Scope
The scope of the Year 2000 program included both Information Technology and
non-Information Technology assets:
IT Assets:
- Micro-computer software and hardware
- In-house application software
- Acquired third-party vendor application software
- Operating system components
- Proprietary mid-range computers
- Network and communication hardware and software
Non-IT assets:
- Energy management systems
- Security systems
- Fire protection systems
- UPS systems
- Automated HVAC systems
- Elevators
- Vaults
Overall Project Plan
The Year 2000 program was structured into five major phases, with the
overall objective to have Warrantech Corporation Year 2000 compliant by
September 30, 1999.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Phase Tasks Target Completion Objectives
- --------------------------------------------------------------------------------------------------------------------------------
Formalize Project Define: November 1997 Communicate issues to management
- Process
- Roles
- Responsibilities % Complete-100%
- Deliverables
- --------------------------------------------------------------------------------------------------------------------------------
Assessment Inventory of systems affected January 1998 Define Scope
Identify resource needs for 1998-99
Set expectations for future impact
% Complete-100%
- --------------------------------------------------------------------------------------------------------------------------------
Strategy Formulation Develop projects and estimates March 1998 Ensure necessary funding is included in the
% Complete-100% Annual Operating Plan
- --------------------------------------------------------------------------------------------------------------------------------
Execute - Upgrade/Develop new September 1999 Compliant systems
- Test % Complete-100%
- Employment (as tested)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
YEAR 2000 PROGRAM STATUS
Overall, the Company has reviewed and tested each of the following
functional areas:
- Business applications
- Hardware
- Major business partners
Business Applications
In conjunction with the Company's 1995 reengineering and restructuring
initiatives, the Company began a complete process redesign and new system's
architecture including desktops, networking and development infrastructure,
which was completed in September 1999. These new systems, which are Year 2000
compliant as tested, replaced substantially all of the Company's critical
business application software.
As a result of this new architecture, the Company replaced significant
portions of its software and hardware. In connection with such installation, the
Company's vendors have represented to the Company that the new hardware and
applications software are Year 2000 compliant. Therefore, the Company's existing
information technology systems are 100% compliant.
The total cost of the Year 2000 project was estimated at $250,000 and was
being funded through operating cash flows.
A full application survey, by subsidiary, has been completed and
remediation strategies created. Critical third-party packaged software vendors
have been identified and assessed for compliance. Contingency plans have been
developed and put into place on compliant versions of the software package.
Compliance statements identifying software product release levels have been
received. Software upgrade implementation and testing plans were completed.
Outside vendors and internal resources were used to implement third-party
software upgrades.
Hardware
A complete computer, telecommunications, and office equipment hardware
inventory has been taken by each functional area. Manufacturer compliance plans
and timing have been requested. The Company has installed new/upgraded products
and has tested products for compliance in local environments.
The Company has standardized desktop and server platforms, Gateway and
Compaq, respectfully. Risk assessment on current hardware inventory is low.
Manufacturers of 95% of the Company's desktop and server hardware have published
compliance assertions. Their published compliance assertions are not a
substitute for a formal statement of vendor intent targeted to a specific
product. The Company has sent vendor certification letters to all vendors to
document their Year 2000 strategies. An assessment of critical vendors'
commitment to compliance has been performed. A risk factor rating system has
been applied to all vendors. A vendor letter has been sent to obtain formal
vendor commitments.
Major Business Partners
Customers:
Critical to performing service contract administration is the ability to
acquire contract sales data from our customers. Due to the nature of the service
contract business (five-year contract expiration dates, etc.) electronic data
import modules have been programmed to interpret the criteria based upon data
windowing techniques. In the event sales data is not available, the ability to
verify and administer should not be impeded due to the current processes already
in place at many of the subsidiaries.
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<PAGE>
The Company has identified critical customers and suppliers and has
assessed their plans and progress in addressing the Year 2000 problem.
Customer letters requesting certification, compliance plans and timing have
been sent to all of the Company's major customers. As part of system's
development, data acquisition (electronic data feeds) from major customers have
been redeveloped. This process has allowed the Company to identify, review, and
compensate for inadequacies in the customer's internal data reporting processes.
The Company has also identified alternative reporting methods should the need
arise.
Insurance Companies:
Insurance companies require the Company to report sales and claims
information periodically. As part of systems development, the Company has
developed its data feeds and has successfully tested Year 2000 compliance as of
September 30, 1999.
RESULTS ON OPERATIONS
The Company has ascertained that failure to alleviate the Year 2000 problem
within its application systems could result in possible failure or
miscalculations causing disruptions of operations. These problems could be
substantially alleviated with manual processing. However, this would cause
delays and additional costs to the administration process. The Company has
identified the following key areas at risk:
- Call Center operations
- Contract sales acquisition
- Service fulfillment
- Payment of invoices
- Insurance company reporting
- Financial reporting
Contingency plans are being developed to address each area of risk
depending upon levels and magnitude of risk.
Worst Case Scenarios
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
Scenario I Contingency Plan
- -----------------------------------------------------------------------------------------------------------------
- External vendors telecommunications systems do not work Developing vendor redundancy plans to minimize impact
on operations
- -----------------------------------------------------------------------------------------------------------------
Scenario II Contingency Plan
- -----------------------------------------------------------------------------------------------------------------
- Customers' Point of Sales systems cannot record sales - Manual entry of contract sales
- -----------------------------------------------------------------------------------------------------------------
Scenario III Contingency Plan
- -----------------------------------------------------------------------------------------------------------------
- Internal systems breakdown - Manual operations
- -----------------------------------------------------------------------------------------------------------------
Scenario IV Contingency Plan
- -----------------------------------------------------------------------------------------------------------------
- Banking system failure Temporary increase in short-term cash holdings
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Based upon current information, the Company does not anticipate costs
associated with the Year 2000 issue to have a material financial impact.
However, there can be no assurances that there will not be interruptions or
other limitations of financial and operating systems functionality, or other
problems which cannot be anticipated at this time, or that the Company will not
incur significant financial costs to avoid such interruptions, limitations or
other problems. The Company's expectations about future costs associated with
the Year 2000 issue are subject to uncertainties that could cause actual results
to have a greater financial impact than currently anticipated. Factors that
could influence the amount and timing of future costs include the success of the
Company in identifying systems and programs that contain two-digit year codes,
the nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs,
and the success of the Company's partnerships in addressing the Year 2000 issue.
Common European Currency
On January 1, 1999, certain of the member nations of the European Economic
and Monetary Union ("EMU") adopted a common currency, the Euro. Once the
national currencies are phased out, the Euro will be the sole legal tender of
each of these nations. During the transition period, commerce of these nations
will be transacted in the Euro or in the currently existing national currency.
The Company is aware of the issues with respect to the phase in and will
consider its impact on Warrantech International as its business expands. Any
costs associated with the adoption of the Euro will be expensed as incurred and
the Company does not expect these to be material to its results of operations,
financial condition or liquidity.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 1999, the Company does not have any derivatives, debt or
hedges outstanding. In addition, the risk of foreign currency fluctuation is not
material to the Company's financial position or results of operations. The
Company's available line of credit requires interest on outstanding borrowings
at various rates. Therefore, the Company is not subject to interest rate risk,
but could be subject to fluctuating cash flows on outstanding borrowings.
20
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page No.
Reports of Independent Auditors.............................................. 22
Consolidated Financial Statements:
Balance Sheets as of March 31, 1999 and 1998............................ 23
Statements of Operations and Comprehensive Income
For the Fiscal Years Ended March 31, 1999, 1998 and 1997................ 24
Statements of Common Stockholders' Equity
For the Fiscal Years Ended March 31, 1999, 1998 and 1997................ 25
Statements of Cash Flows
For the Fiscal Years Ended March 31, 1999, 1998 and 1997 ............... 26
Notes to Consolidated Financial Statements ............................... 27-42
Consolidated Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts................ ........... 43
All other schedules for which provision is made in applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted or the
information is presented in the consolidated financial statements or
accompanying notes.
21
<PAGE>
WEINICK SANDERS LEVENTHAL & CO., LLP
REPORTS OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Warrantech Corporation:
We have audited the accompanying consolidated balance sheets of Warrantech
Corporation and Subsidiaries as of March 31, 1999 and 1998 and its related
consolidated statements of operations and comprehensive income, common
stockholders' equity and cash flows for the fiscal years ended March 31, 1999,
1998 and 1997. Our audits also included the financial statement schedules listed
in the index. These consolidated financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audit.
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Warrantech Corporation and Subsidiaries at March 31, 1999 and 1998 and the
consolidated results of their operations and comprehensive income and their cash
flows for the years ended March 31, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
consolidated financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The consolidated financial statements for the fiscal years ended March 31,
1998 and 1997 have been restated as described in Note 2.
Weinick Sanders Leventhal & Co., LLP
New York, NY
December 10, 1999
22
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
A S S E T S
March 31,
--------------------------------
1999 1998
---------------- ---------------
Current assets:
Cash and cash equivalents $15,032,473 $24,062,052
Investments in marketable securities 2,961,602 537,924
Accounts receivable, (net of allowances of
$1,115,285 and $1,223,173, respectively) 39,275,404 27,878,335
Other receivables, net 5,924,332 2,197,405
Income tax receivable 1,147,324 -
Deferred income taxes 1,419,854 503,282
Prepaid expenses and other current assets 1,537,633 1,775,316
---------------- ---------------
Total current assets 67,298,622 56,954,314
---------------- ---------------
Property and equipment, net 16,277,473 13,639,921
Other assets:
Excess of cost over fair value of assets
acquired (net of accumulated amortization
of $4,882,009 and $4,212,956, respectively) 3,276,524 3,945,577
Deferred income taxes 9,603,277 8,121,666
Deferred direct costs 86,107,696 65,354,341
Investments in marketable securities 1,321,019 1,967,817
Restricted cash 800,000 800,000
Split dollar life insurance policies 1,370,010 1,054,045
Notes receivable 477,767 654,068
Collateral security fund 199,389 199,389
Other assets 178,493 120,128
---------------- ---------------
Total other assets 103,334,175 82,217,031
---------------- ---------------
Total Assets $186,910,270 $152,811,266
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
--------------------------------
1999 1998
---------------- ---------------
Current liabilities:
Current maturities of long-term debt and capital lease
obligations $1,558,447 $2,371,662
Insurance premiums payable 36,585,920 22,269,589
Income taxes payable - 2,073,284
Accounts and commissions payable 8,524,040 7,698,948
Legal settlements payable 100,000 200,000
Accrued expenses and other current liabilities 8,346,440 6,011,572
---------------- ---------------
Total current liabilities 55,114,847 40,625,055
---------------- ---------------
Deferred revenues 118,497,564 87,890,306
Long-term debt and capital lease obligations 2,420,967 2,153,286
Deferred rent payable 476,890 608,736
---------------- ---------------
Total liabilities 176,510,268 131,277,383
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized
- 15,000,000 Shares Issued - none at
March 31, 1999 and March 31, 1998 - -
Common stock - $.007 par value authorized -
30,000,000 Shares Issued - 16,501,786 shares
at March 31, 1999 and 13,449,382 shares
at March 31, 1998 115,513 94,146
Additional paid-in capital 23,728,881 14,124,700
Loans to directors and officers (9,006,699) -
Accumulated other comprehensive income, net of taxes (93,534) 85,608
Retained earnings 105,154 7,744,879
---------------- ---------------
14,849,315 22,049,333
Less: Deferred compensation - (21,631)
Treasury stock - at cost, 1,280,300 shares
at March 31, 1999 (4,449,313) (493,819)
and 100,000 shares at March 31, 1998
---------------- ---------------
Total Stockholders' Equity 10,400,002 21,533,883
---------------- ---------------
Total Liabilities and Stockholders' Equity $186,910,270 $152,811,266
================ ===============
</TABLE>
See independent auditors' report and accompanying notes to consolidated
financial statements
23
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<S> <C> <C> <C>
For the Years Ended March 31,
--------------- --------------- ----------------
1999 1998 1997
--------------- --------------- ----------------
Gross revenues $148,868,791 $132,797,006 $106,775,745
Net increase in deferred revenues (30,640,470) (21,447,327) (20,501,768)
--------------- --------------- ----------------
Net revenues 118,228,321 111,349,679 86,273,977
Costs and expenses:
Direct costs 67,501,008 48,663,577 42,704,103
Service, selling, and general and
administrative 55,522,487 49,504,178 36,320,524
Provision for bad debt expense 2,288,580 910,675 733,119
Depreciation and amortization 5,148,370 3,758,213 2,619,981
--------------- --------------- ----------------
Total costs and expenses 130,460,445 102,836,643 82,377,727
--------------- --------------- ----------------
Income (loss) from operations (12,232,124) 8,513,036 3,896,250
--------------- --------------- ----------------
Legal settlements - - (2,274,170)
Gain on sale of equity joint venture - - 1,876,480
Other income 1,043,201 819,732 324,585
--------------- --------------- ----------------
Income (loss) before provision for income taxes (11,188,923) 9,332,768 3,823,145
Provision (benefit) for income taxes (3,549,198) 3,712,945 1,538,278
--------------- --------------- ----------------
Net income (loss) ($7,639,725) $5,619,823 $2,284,867
=============== =============== ================
Earnings per share:
Basic ($0.51) $0.42 $0.18
=============== =============== ================
Diluted ($0.51) $0.36 $0.15
=============== =============== ================
Weighted average number of shares outstanding:
Basic 15,098,242 13,259,964 13,054,611
=============== =============== ================
Diluted 15,098,242 15,617,350 15,394,869
=============== =============== ================
COMPREHENSIVE INCOME
For the Years Ended March 31,
--------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
Net income (loss) ($7,639,725) $5,619,823 $2,284,867
Other comprehensive income, net of tax:
Foreign currency translation adjustments (179,539) 62,009 27,064
Unrealized gain on investments 397 8,618 13,468
--------------- --------------- ----------------
Comprehensive Income ($7,818,867) $5,690,450 $2,325,399
=============== =============== ================
For the Years Ended March 31,
--------------------------------------------------
Accumulated other comprehensive income: 1999 1998 1997
--------------- --------------- ----------------
Unrealized gain(loss) gain on investments $7,452 $7,055 ($1,563)
Accumulated translation adjustments (100,986) 78,553 16,544
--------------- --------------- ----------------
Accumulated other comprehensive income ($93,534) $85,608 $14,981
=============== =============== ================
</TABLE>
See independent auditors' report and accompanying notes to consolidated
financial statements.
24
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
For the Years Ended March 31,
--------------------- -----------------------------------
1999 1998 1997
--------------------- ------------------ ----------------
Common Stock Outstanding (shares):
Balance, beginning of year 13,449,382 13,261,636 13,082,181
Exercise of common stock options 3,010,000 142,262 175,251
Issuance of common stock 42,404 45,484 4,204
--------------------- ------------------ ----------------
Balance, end of year 16,501,786 13,449,382 13,261,636
===================== ================== ================
Common Stock
Balance, beginning of year $94,146 $90,911 $89,375
Exercise of unrestricted common stock options 70 996 1,227
Exercise of restricted common stock options 21,000 - -
Issuance of common stock 297 2,239 309
--------------------- ------------------ ----------------
Balance, end of year $115,513 $94,146 $90,911
===================== ================== ================
Additional paid-in capital
Balance, beginning of year $14,124,700 $13,033,185 $12,212,641
Exercise of unrestricted common stock options 49,930 697,355 709,653
Exercise of restricted common stock options 9,314,588 - -
Issuance of common stock 239,663 394,160 110,891
--------------------- ------------------ ----------------
Balance, end of year $23,728,881 $14,124,700 $13,033,185
===================== ================== ================
Loans to directors and officers
Balance, beginning of year $0 $0 $0
Loans for exercise of restricted common
stock options and accrued interest (9,006,699) - -
--------------------- ------------------ ----------------
Balance, end of year ($9,006,699) $0 $0
===================== ================== ================
Accumulated other comprehensive income
Balance, beginning of year $85,608 $14,981 ($25,551)
Unrealized gain (loss) on investments (179,142) 70,627 40,532
--------------------- ------------------ ----------------
Balance, end of year ($93,534) $85,608 $14,981
===================== ================== ================
Retained earnings
Balance, beginning of year $7,744,879 $2,125,056 ($236,678)
Net income (loss) (7,639,725) 5,619,823 2,284,867
Imputed interest on preferred stock - - 76,867
--------------------- ------------------ ----------------
Balance, end of year $105,154 $7,744,879 $2,125,056
===================== ================== ================
Deferred compensation
Balance, beginning of year ($21,631) ($78,231) ($70,116)
Issuance of common stock - - (47,197)
Amortization of deferred compensation 21,631 56,600 39,082
--------------------- ------------------ ----------------
Balance, end of year $0 ($21,631) ($78,231)
===================== ================== ================
Common stock in treasury (shares)
Balance, beginning of year (100,000) (100,000) (93,000)
Purchase of treasury shares (1,180,300) - (7,000)
--------------------- ------------------ ----------------
Balance, end of year (1,280,300) (100,000) (100,000)
===================== ================== ================
Common stock in treasury (amount)
Balance, beginning of year ($493,819) ($493,819) ($392,750)
Purchase of treasury shares (3,955,494) - (101,069)
--------------------- ------------------ ----------------
Balance, end of year ($4,449,313) ($493,819) ($493,819)
===================== ================== ================
Total Stockholders' Equity $10,400,002 $21,533,883 $14,692,083
===================== ================== ================
</TABLE>
See independent auditors' report and accompanying notes to consolidated
financial statements.
25
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
For the Years Ended March 31,
-------------------------------------------------
1999 1998 1997
------------------ -------------- ---------------
Cash flows from operating activities:
Net income (loss) ($7,639,725) $5,619,823 $2,284,867
------------------ -------------- ---------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,148,370 3,758,213 2,619,981
Provision for bad debt 2,288,580 910,675 733,119
Deferred revenues 30,640,470 21,447,327 20,501,768
Deferred income taxes (2,398,183) (657,828) (1,441,811)
Gain on sale of investment in joint venture - - (1,876,480)
Other 14,074 81,900 (79,049)
Increase (decrease) in cash flows as a result of
changes in asset and liability balances:
Deferred direct costs (20,753,355) (20,198,990) (15,188,907)
Accounts receivable (11,767,393) (5,511,145) (7,862,945)
Other receivables (5,645,183) 1,677,046 4,736,468
Income taxes (3,220,608) 1,928,886 (1,868,208)
Prepaid expenses and other current assets 237,683 (141,617) (644,763)
Split dollar life insurance policies (315,965) (188,503) (181,649)
Other assets (58,365) 52,312 24,431
Insurance premiums payable 14,316,331 2,667,299 3,355,043
Accounts and commissions payable 825,092 2,437,081 452,340
Legal settlements payable (100,000) (1,435,000) 1,635,000
Accrued expenses and other current liabilities 2,334,868 1,879,459 2,409,568
Deferred rent payable (131,846) (93,497) 167,613
------------------ -------------- ---------------
Total adjustments 11,414,570 8,613,618 7,491,519
------------------ -------------- ---------------
Net cash provided by operating activities 3,774,845 14,233,441 9,776,386
Cash flows from investing activities:
Property and equipment purchased (4,870,260) (4,609,623) (3,379,104)
Net cash paid for acquired business - (888,541) -
Purchase of marketable securities (3,307,886) (360,324) (1,313,356)
Proceeds from sales of marketable securities 1,542,586 184,225 1,055,934
------------------ -------------- ---------------
Net cash (used in) investing activities (6,635,560) (5,674,263) (3,636,526)
------------------ -------------- ---------------
Cash flows from financing activities:
(Increase) decrease in notes receivable 176,301 (611,992) 45,684
Exercise of unrestricted common stock options
and grants 289,960 1,094,750 822,080
Purchase treasury stock (3,955,494) - (101,069)
Repayments, notes and capital leases (2,679,631) (2,011,809) (1,734,117)
------------------ -------------- ---------------
Net cash (used in) financing activities (6,168,864) (1,529,051) (967,422)
------------------ -------------- ---------------
Net increase (decrease) in cash and cash equivalents (9,029,579) 7,030,127 5,172,438
Cash and cash equivalents at beginning of year 24,062,052 17,031,925 11,859,487
------------------ -------------- ---------------
Cash and cash equivalents at end of year $15,032,473 $24,062,052 $17,031,925
------------------ -------------- ---------------
Supplemental Cash Flow Information:
Cash payments for: Interest $458,598 $378,812 $410,109
------------------ -------------- ---------------
: Income taxes $1,109,616 $2,428,590 $4,879,377
------------------ -------------- ---------------
Non-Cash Investing and financing activities:
Purchase of preferred stock - - $6,420,363
Note issued in connection with purchase of
preferred stock - - $2,395,960
Property and equipment financed through
capital leases $2,134,097 $2,047,136 $1,989,136
Exercise of restricted common stock options 9,335,588 - -
Increase in loans to officers and directors (9,006,699) - -
</TABLE>
See independent auditors' report and accompanying notes to consolidated
financial statements.
26
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature Of Business - Warrantech, through its wholly owned subsidiaries,
markets and administers service contracts and extended warranties. The
Company is a third party administrator for a variety of dealer/clients in
selected industries and offers call center and technical computer services.
The Company assists dealer/clients in obtaining insurance policies from
highly rated independent insurance companies for all contracts and programs
offered. The insurance company is then responsible for the cost of repairs
or replacements for the contracts administered by Warrantech.
The Company operates under three major business segments: Automotive,
Consumer Products and International. The Automotive segment markets and
administers extended warranties on automobiles, light trucks, recreational
vehicles and automotive components. These products are sold principally by
franchised and independent automobile dealers, leasing companies, repair
facilities, retail stores and financial institutions. The Consumer Products
segment markets and administers extended warranties on household
appliances, electronics and homes. These products include home appliances,
consumer electronics, televisions, computers, home office equipment and
homes. These products are sold principally by retailers, distributors,
manufacturers, utility companies and financial institutions. Warrantech
also direct markets these products to the ultimate consumer through
telemarketing and direct mail campaigns. The International segment markets
and administers outside the United States predominately the same products
and services of the other business segments. The International segment is
currently operating in the United Kingdom, Central and South America,
Puerto Rico and the Caribbean.
The predominant terms of the service contracts and extended warranties
range from twelve (12) to eighty-four (84) months. The Company acts solely
as a third party administrator on behalf of the dealer/clients and
insurance companies. The actual repairs and replacements required under the
service contract agreements are performed by independent third party
authorized repair facilities. The cost of these repairs is borne by the
insurance companies which have the ultimate responsibility for the claims.
The insurance policy indemnifies the dealer/clients against losses
resulting from service contract claims and protects the consumer by
ensuring their claims will be paid.
The Company's service contract programs benefit consumers with expanded
and/or extensions of product coverage for a specified period of time
(and/or mileage in the case of automobiles and recreational vehicles),
similar to that provided by manufacturers under the terms of their product
warranties. Such coverage generally provides for the repair or replacement
of the product, or a component thereof, in the event of its failure. The
Company's service contract programs benefit the dealer/clients by providing
enhanced value to the goods and services they offer. It also provides the
opportunity for increased revenue and income while outsourcing the costs
and responsibilities of operating an extended warranty program.
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
subsidiaries, all of which are wholly owned. All intercompany accounts and
transactions have been eliminated in consolidation.
Risks and Uncertainties - The preparation of financial statements in
conformity with 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
segregated into two distinct methods depending on whether the Company or
the retailer/dealer is designated as the obligor on the service contract
sale. In either case, a highly rated independent insurance company assumes
all claims liabilities of the service contracts administered by the
Company.
27
<PAGE>
Dealer obligor service contracts are sales in which the retailer/dealer is
designated as the obligor. For these service contract sales, using the
proportional performance method, the Company recognizes revenues in direct
proportion to the costs incurred in providing the service contract programs
to the Company's clients. Revenues in amounts sufficient to meet future
administrative costs and a reasonable gross profit thereon are deferred.
Sales of dealer obligor service contracts are reflected in gross revenues
net of premiums paid to insurance companies.
Administrator obligor service contracts are sales in which Warrantech is
designated as the obligor. For these service contract sales, the Company
recognizes revenues in accordance with Financial Accounting Standards Board
Technical Bulletin 90-1 ("TB 90-1"), Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts, and Statement of
Financial Accounting Standards No. 60 ("SFAS 60"), Accounting and Reporting
by Insurance Enterprises. These accounting standards require the
recognition of revenue over the life of the contract on a straight-line
basis, unless sufficient, company-specific, historical evidence indicates
that the cost of performing services under these contracts are incurred on
other than a straight-line basis. The Company is recognizing revenue on
administrative obligor contracts based on company specific historical
claims experience over the life of the contract.
The financial statements for the fiscal years ended March 31, 1998 and 1997
have been restated to retroactively reflect the adoption of a change in
accounting policy. (See note 2.)
Direct Costs - Direct costs, which consist primarily of insurance premiums
and commissions, are those costs directly related to the production and
acquisition of service contracts for administrative obligor service
contracts. For administrative obligor service contracts, the Company
recognizes direct cost according to Statement of Financial Accounting
Standards No. 113 ("SFAS 113"), Accounting and Reporting for Reinsurance of
Short-Duration and Long Duration Contracts. This requires that insurance
premium costs be ratably expensed over the life of the service contract.
Profit Sharing Arrangement - Pursuant to certain agreements with its
insurers, the Company may be eligible to share a portion of the insurers'
profits on the Company's service contract programs. The amounts to be
received, if any, are determined based upon the residual value of the
premiums set aside by the insurer to pay losses (the "Loss Fund"). The
residual value is comprised of underwriting profits and investment income
earned on the monies in the Loss Fund. Subsequent adjustments to original
estimates are solely changes in estimates based upon current information,
affording the Company better determination of ultimate profit sharing
revenues and are reflected in income when known. The Company did not accrue
or receive any profit sharing amounts in the fiscal years ended March 31,
1999, 1998 or 1997.
Provision for Bad Debt Expense - The Company's policy is to establish an
allowance for doubtful accounts when receivables are determined to be
uncollectible.
Earnings Per Share -During the fiscal year ended March 31, 1998, the
Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", which modified the calculation of earnings per share
("EPS"). This Statement replaced the previous presentation of primary and
fully diluted EPS to basic and diluted EPS. Basic EPS is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS includes
the dilution of common stock equivalents, and is computed similarly to
fully diluted EPS pursuant to APB Opinion 15. All prior periods presented
have been restated to reflect this adoption.
Cash and Cash Equivalents - Cash and cash equivalents for the purpose of
reporting cash flows for all periods presented include cash on deposit and
certificates of deposit. There were no other cash equivalents at March 31,
1999 and 1998.
The Company had on deposit $12,521,188 and $22,245,565 of cash in excess of
federally insured limits at March 31, 1999 and 1998, respectively.
Investments in Marketable Securities - All investments in marketable
securities have been classified as available-for-sale and are carried at
fair value with changes in unrealized gains and losses being reflected as a
separate component of accumulated other comprehensive income, net of tax.
28
<PAGE>
Property and Equipment - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets ranging between 3 and 7 years.
Advertising Costs -The Company expenses advertising costs as incurred.
Advertising expenses for the years ended March 31, 1999, 1998 and 1997 were
$790,070, $780,945 and $696,398, respectively.
Excess of Cost Over Fair Value of Assets Acquired - The excess of cost over
fair value of the assets acquired is a result of the purchases of Dealer
Based Services, Inc. in 1989 , Home Guarantee Corporation, PLC in July
1995, and certain assets of Distributors & Dealers Service Co., Inc. in
October 1997 and is being amortized on a straight-line basis over 15, 10
and 4.5 years, respectively. Amortization expense charged to operations for
the years ended March 31, 1999, 1998 and 1997 amounted to $669,053,
$594,364 and $467,144, respectively.
Stock Based Compensation -The Company applies Accounting Principles Board
Opinion statement No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and related interpretations in accounting for its stock-based
compensation plans. Under APB 25, compensation expense for stock option and
award plans is recognized as the difference between the fair value of the
stock at the date of the grant less the amount, if any, the employee or
director is required to pay. Certain operating officers have been issued
shares of the Company's common stock as part of their compensation under
their employment agreements. Such compensation is to be earned by the
officers and charged to operations over five years, the term of the
employment agreements. In addition, certain employees have been issued
restricted shares of the Company's common stock as compensation. Such
compensation is amortized over the restriction period which is generally
two years. Certain non-employees have been issued options to purchase stock
in lieu of compensation. The intrinsic value of these options at the time
of grant has been charged to expense.
Income Taxes - Deferred taxes are determined under the liability method
whereby deferred tax assets and liabilities are recognized for the expected
tax effect of temporary differences between the financial statement
carrying amount and the tax bases of assets and liabilities using presently
enacted tax rates in effect for the years in which the differences are
expected to reverse.
Foreign Currency Translation - Financial statement accounts expressed in
foreign currencies are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards 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 accumulated other comprehensive income, net of tax.
Comprehensive Income - On April 1, 1998 the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("FAS No. 130"). FAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's net income or
stockholders' equity. FAS No. 130 requires unrealized gains or losses to be
recorded on the Company's available for sale securities and foreign
currency translation adjustments, which prior to the adoption were reported
separately in the stockholders' equity, to be included in other
comprehensive income. Prior years financial statements have been
reclassified to conform to the requirements of FAS No. 130.
New Accounting Pronouncements - In March of 1998, The American Institute of
Certified Public Accountants issued a Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), This SOP provides guidance on accounting for
the costs of computer software developed or obtained for internal use which
includes:
- Definition of computer software costs
- Accounting for various stages of development
- Accounting for internal and external costs
- Need to assess impairment under SFAS 121
- Amortization method and period to be utilized
This SOP is effective for fiscal years beginning after December 15, 1998
and restatement of previously incurred costs is not permitted.
29
<PAGE>
The Company believes its current accounting policies are consistent with
those prescribed by SOP 98-1 and does not believe the adoption of this SOP
will have any impact on its results of operations, financial condition or
liquidity.
Reclassification - Certain amounts from the prior years have been
reclassified to conform with the current year's presentation.
2. CHANGE IN ACCOUNTING POLICY
Effective with the fiscal year ended March 31, 1999, the Company changed
its accounting policy with respect to the recognition of revenue for
service contracts sold where Warrantech is named as the obligor. Revenue
for administrative obligor contracts is recognized in accordance with
Financial Accounting Standards Board Technical Bulletin 90-1 ("TB 90-1"),
Accounting for Separately Priced Extended Warranty and Product Maintenance
Contracts, and Statement of Financial Accounting Standards No. 60 ( SFAS
60"), Accounting and Reporting by Insurance Enterprises. These accounting
standards require the recognition of revenue over the life of the contract
on a straight-line basis, unless sufficient, company-specific, historical
evidence indicates that the cost of performing services under these
contracts are incurred on other than a straight-line basis. The Company is
recognizing revenue on administrative obligor contracts based on company
specific historical claims experience over the life of the contract. In
addition, the Company has adopted Statement of Financial Accounting
Standards No. 113 ("SFAS 113"), Accounting and Reporting for Reinsurance of
Short-Duration and Long Duration Contracts. This requires that insurance
premium costs be ratably expensed over the life of the service contract.
The financial statements for the years ended March 31, 1998 and 1997 were
previously prepared based on the proportional performance method which
recognized all revenues in direct proportion to the costs incurred in
providing the service contract programs to the Company's clients. Revenues
in amounts sufficient to meet future administrative costs and a reasonable
gross profit thereon were deferred.
Dealer obligor service contracts are sales in which the retailer/dealer is
designated as the obligor. For these service contract sales, using the
proportional performance method, the Company recognizes revenues in direct
proportion to the costs incurred in providing the service contract programs
to the Company's clients. Revenues in amounts sufficient to meet future
administrative costs and a reasonable gross profit thereon are deferred.
Effective with the fiscal year ended March 31, 1999, the Company changed
its accounting policy with respect to the presentation of revenue for
dealer obligor service contracts sold. Sales of dealer obligor service
contracts are now reflected in gross revenues net of premiums paid to
insurance companies. Previously, premiums paid to insurance companies were
included in gross revenue and the corresponding amount in direct costs.
The Company has given retroactive effect to this new accounting policy by
restating previously reported financial statements for the fiscal years
ended March 31, 1998 and 1997. In addition, retained earnings at April 1,
1996 reflects the cumulative $8,080,010 effect of the restatement through
March 31, 1996.
30
<PAGE>
The impact of the restatement for the fiscal year ended March 31, 1998 and
1997 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------------------------------
1998 1998 1997 1997
As Restated As Previously As Restated As Previously
Reported Reported
----------------- ----------------- --------------------- -------------------
Gross revenues $132,797,006 $201,724,332 $106,775,745 $161,044,135
Net (increase) in deferred revenue (21,447,327) (1,985,798) (20,501,768) (1,381,271)
----------------- ----------------- --------------------- -------------------
Net revenues 111,349,679 199,738,534 86,273,977 159,662,864
----------------- ----------------- --------------------- -------------------
Net income $5,619,823 $5,261,037 $2,284,867 $4,794,715
================= ================= ===================== ===================
Basic earnings per common share $0.42 $0.40 $0.18 $0.37
================= ================= ===================== ===================
Diluted earnings per common share $0.36 $0.34 $0.15 $0.31
================= ================= ===================== ===================
Cash dividend declared NONE NONE NONE NONE
================= ================= ===================== ===================
Total assets $152,811,266 $81,917,288 $117,120,031 $66,124,255
================= ================= ===================== ===================
Long-term debt and
Capital lease obligations $2,153,286 $2,153,286 $2,491,786 $2,491,786
================= ================= ===================== ===================
Common stockholders' equity $21,533,883 $31,764,955 $14,692,083 $25,281,941
================= ================= ===================== ===================
Working capital $16,329,259 $16,551,543 $13,342,706 $13,602,168
================= ================= ===================== ===================
</TABLE>
3. RESTRICTED CASH
At March 31, 1999 and 1998 cash in the amount of $800,000 is on deposit
with a Florida regulatory agency to comply with its state insurance laws.
4. INVESTMENTS IN MARKETABLE SECURITIES
At March 31, 1999, investments in marketable securities are comprised of
the following:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Aggregate
Amortized Gross Unrealized Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
-------------------------------------- -------------------------------------------
Municipal Bonds $4,264,244 $18,513 ($136) $4,282,621 $2,961,602 $1,321,019
Total Investments in
-------------------------------------- -------------------------------------------
Marketable Securities $4,264,244 $18,513 ($136) $4,282,621 $2,961,602 $1,321,019
====================================== ===========================================
At March 31, 1998, investments in marketable securities are comprised of
the following:
Aggregate
Amortized Gross Unrealized Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
-------------------------------------- -------------------------------------------
Municipal Bonds $2,156,472 $13,919 ($1,816) $2,168,575 $200,758 $1,967,817
Money Market 337,166 - - 337,166 337,166 -
Total Investments in
-------------------------------------- -------------------------------------------
Marketable Securities $2,493,638 $13,919 ($1,816) $2,505,741 $537,924 $1,967,817
====================================== ===========================================
</TABLE>
All of the above investments are considered "available for sale". The
resultant differences between amortized cost and fair value, net of taxes,
have been reflected as a separate component of accumulated other
comprehensive income.
The amortized cost and estimated fair value of marketable securities, by
contractual maturity date as of March 31, 1999, 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.
31
<PAGE>
Aggregate
Amortized Fair
Cost Value
-------------- --------------
Investments available for sale:
Due in one year or less $2,958,087 $2,961,602
Due after one year through five years 1,306,157 1,321,019
-------------- --------------
$4,264,244 $4,282,621
============== ==============
5. OTHER RECEIVABLES, NET
The nature and amounts of other receivables, net as of March 31, 1999 and
1998 are as follows:
March 31,
---------------------------------------
1999 1998
---------------------------------------
Due from Insurance companies $4,337,277 $1,540,895
Due From Dealers 2,103,012 -
Employee/Agent Advances 530,910 305,945
Other 871,389 350,565
------------------ ------------------
7,842,588 2,197,405
Allowance for doubtful accounts (1,918,256) -
------------------ ------------------
$5,924,332 $2,197,405
================== ==================
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
March 31,
-------------------------------------------
1999 1998
-------------------- --------------------
Automobiles $277,304 $304,693
Equipment, furniture and fixtures 7,423,893 7,618,978
Leasehold improvements 1,290,543 978,557
Software development costs 11,281,344 7,604,440
-------------------- --------------------
20,273,084 16,506,668
Less: Accumulated depreciation
and amortization 8,474,162 6,792,809
-------------------- --------------------
11,798,922 9,713,859
-------------------- --------------------
Assets under capital leases:
Cost 8,980,018 7,408,056
Less: Accumulated amortization 4,501,467 3,481,994
-------------------- --------------------
4,478,551 3,926,062
-------------------- --------------------
Total Property and equipment, net $16,277,473 $13,639,921
==================== ====================
Amortization expense on assets under capital leases for the years ended
March 31, 1999, 1998 and 1997 was $1,573,695, $1,188,173 and $764,263,
respectively. Depreciation expense on property and equipment other than
under capital leases for the years ended March 31, 1999, 1998 and 1997 was
$2,883,991, $1,939,858, and $1,361,559, respectively.
The Company capitalized $3,676,904 and $2,380,879 for the fiscal years
ended March 31, 1999 and 1998, 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.
32
<PAGE>
7. COLLATERAL SECURITY FUND
At March 31, 1999 and 1998 an 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.
8. SPLIT DOLLAR LIFE INSURANCE POLICIES
As of March 31, 1999 and 1998, the Company made payments on split dollar
insurance policies on the lives of ten and six officers of the Company,
respectively. The cash surrender value of these policies is $1,370,010 and
$1,054,045 as of March 31, 1999 and 1998, 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.
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<S> <C> <C>
March 31,
---------------------------------------------
1999 1998
---------------------------------------------
Capital lease obligations - for property and
equipment payable monthly with interest
rates ranging from 6.9% to 15.3% through 2005 $3,979,414 $3,563,988
Installment note - AIG, effective interest rate of 8.25% - 960,960
--------------------- --------------------
3,979,414 4,524,948
Less: Current maturities 1,558,447 2,371,662
--------------------- --------------------
Long-term portion $2,420,967 $2,153,286
===================== ====================
</TABLE>
The aggregate amounts of maturities at March 31, 1999 are as follows:
Fiscal Year Minimum Future
Lease Payments
-----------------------
2000 $1,866,555
2001 1,293,382
2002 659,727
2003 366,175
2004 250,682
Thereafter 187,110
-----------------------
$4,623,631
Less amount representing interest 644,217
-----------------------
Net $3,979,414
=======================
The capital lease obligations are collateralized by the property and
equipment related to the underlying leases.
33
<PAGE>
10. INCOME TAXES
A reconciliation of the income tax provision to the amount computed using
the federal statutory rate is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the Years Ended March 31,
-------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ------------------------ ------------------------
Federal statutory rate ($3,804,232) -34.0% $3,212,327 34.0% $1,299,905 34.0%
State tax effect (88,135) -0.8% 83,597 0.9% 105,537 2.8%
Goodwill 178,919 1.6% 147,186 1.6% 110,269 2.9%
Other 164,250 1.5% 269,835 3.3% 22,567 0.5%
--------------------------- ------------------------ ------------------------
Provision for income taxes ($3,549,198) -31.7% $3,712,945 39.8% $1,538,278 40.2%
=========================== ======================== ========================
</TABLE>
The components of tax expense are as follows:
<TABLE>
<S> <C> <C> <C>
Provision
For the Year Ended March 31, 1999: Current Deferred (Benefit)
---------------- --------------- ---------------
Federal ($1,495,460) ($2,408,382) ($3,903,842)
State 303,795 (351,636) (47,841)
Foreign 402,485 402,485
---------------- --------------- ---------------
Total ($1,191,665) ($2,357,533) ($3,549,198)
================ =============== ===============
For the Year Ended March 31, 1998: Current Deferred Provision
---------------- --------------- ---------------
Federal $4,059,160 ($1,071,248) $2,987,912
State 312,934 276,451 589,385
Foreign 135,648 135,648
---------------- --------------- ---------------
Total $4,372,094 ($659,149) $3,712,945
================ =============== ===============
For the Year Ended March 31, 1997: Current Deferred Provision
---------------- --------------- ---------------
Federal $2,709,821 ($1,318,684) $1,391,137
State 236,486 133,882 370,368
Foreign (223,227) (223,227)
---------------- --------------- ---------------
Total $2,946,307 ($1,408,029) $1,538,278
================ =============== ===============
</TABLE>
34
<PAGE>
Deferred income tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income taxes. The
components of the deferred tax asset are as follows:
<TABLE>
<S> <C> <C>
March 31,
------------------ ----------------
1999 1998
------------------ ----------------
Deferred Tax Assets
Deferred revenue $41,912,394 $31,463,274
Deferred rent 166,525 215,652
Provision for doubtful accounts 1,076,093 431,876
Reserve for customer refunds 99,435 70,049
Accrued bonus 194,796 -
Litigation Reserve 39,940 -
Depreciation 63,418
Foreign loss benefit 136,662 466,503
Net state operating loss C/F benefit 332,367
Other 42,642 76,475
------------------ ----------------
Total assets 44,000,854 32,787,247
Deferred Tax Liabilities
Deferred direct costs (30,465,376) (23,444,669)
Depreciation (415,302) -
Section 174 expense (1,892,630) (717,630)
------------------ ----------------
Total liabilities (32,773,308) (24,162,299)
------------------ ----------------
Net deferred tax asset 11,227,546 8,624,948
Less: Valuation allowance (204,415)
------------------ ----------------
Net deferred tax asset $11,023,131 $8,624,948
================== ================
</TABLE>
Management believes that it is more likely than not that the net deferred tax
asset will be realized and therefore only a minimal valuation allowance is
considered necessary. Section 174 expense represents research and experimental
expenses related to the development of a proprietary relational database and
interactive software.
11. 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, 1999, 1998 and 1997 was $2,305,598, $2,187,174, and $1,907,694,
respectively.
Future minimum lease commitments as at March 31, 1999 are as follows:
2000 $2,086,979
2001 2,041,584
2002 2,012,033
2003 2,023,227
2004 1,699,670
2005 and thereafter 965,942
----------------
$10,829,435
================
35
<PAGE>
Employment Contracts - Employment contracts exist between the Company and
its officers and certain key employees which provide for annual base
compensation of $2,564,225. 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.
Bank Line of Credit - The Company has a revolving credit agreement with a
bank which originally provided for maximum aggregate borrowing up to
$10,000,000 with interest at the bank's prevailing prime rate or LIBOR plus
2%. Subsequent to March 31, 1999, the line of credit was adjusted to
$1,500,000 and currently expires on December 31, 1999. The Company is
currently in negotiations to increase and/or replace the current line of
credit. Although it is anticipated that this will be completed by February
2000, no assurances can be given that this will be accomplished. During the
fiscal years ended March 31, 1998, 1999 and through December 21, 1999, the
Company did not have any borrowings under this line of credit.
Litigation -
The Company is from time to time involved in litigation incidental to the
conduct of its business. As of December 21, 1999, the Company is not aware
of any material existing litigation to which it is a party.
The Oak Agency, Inc. and The Oak Financial Services, Inc. (collectively,
"Oak") v. Warrantech Dealer Based Services, Inc. ("WDBS").
Final judgment in this matter was entered on November 12, 1997. WDBS was
directed to pay Oak (i) $1,243,359 which represents commissions earned by
Oak for the period July 1, 1991 through May 31, 1997, (ii) $28,500 which
represents costs of the action recoverable by Oak, and (iii) future
commissions earned on vehicle service contracts sold on or after June 1,
1997 by a specified group of automobile dealers. Furthermore, Oak was
directed to pay Warrantech Corporation $7,500 which represents Warrantech's
recoverable costs of a separate action which previously had been dismissed
by the Court with prejudice.
WDBS has made all payments described in clauses (i) and (ii) above and
continues to make those periodic payments described in clause (iii). No
further legal action is anticipated and WDBS considers this matter closed.
Proteva, Inc. v. Warrantech Help Desk, Inc. v. William Lynch, Civil Action
No. 499CV162BE (U.S. District Court, Northern District of Texas). This
matter arose out of an Agreement, effective as of December 9, 1997, between
Proteva, Inc. ("Proteva") and Warrantech Help Desk, Inc. ("Warrantech")
pursuant to which Warrantech was to provide administration services for the
warranties on certain personal computers manufactured by Proteva. In
December 1998, Warrantech determined that Proteva had failed to report a
material number of computers subject to the Agreement and remit the
corresponding fees. Therefore, Warrantech notified Proteva in January 1999
that it was terminating the Agreement. Proteva sought injunctive relief in
the Illinois state courts and commenced a lawsuit against Warrantech
alleging failure to provide service in accordance with the requirements of
the Agreement and failure to remit certain payments. Warrantech had the
litigation removed to Federal District Court in Chicago and it was
subsequently transferred to the Northern District of Texas. Following that
transfer, Warrantech counterclaimed against Proteva and its Chairman,
William Lynch, alleging fraud and breach of the Agreement arising out of
the under-reporting of computer sales and the failure to remit
corresponding fees. The parties have reached agreement on a Settlement
Agreement and Mutual Release which will result in a final dismissal of this
action. Warrantech will receive financial and other considerations as part
of the settlement although specific details are subject to a
confidentiality agreement among the parties.
36
<PAGE>
12. STOCK OPTION PLAN
At March 31, 1999, 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 $0 for fiscal 1999, $92,400 for
fiscal 1998 and $64,000 for fiscal 1997. 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.
For the Years Ended March 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
Net Income (loss) as reported ($7,639,725) $5,619,823 $2,284,867
Pro Forma net income (loss) (8,663,980) 5,280,271 1,914,836
Basic Earnings Per Share as reported ($0.51) $0.42 $0.18
Basic Pro Forma EPS ($0.57) $0.40 $0.15
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 1999, 1998 and 1997: 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 1,200,000 shares of
the Company's common stock reserved for issuance to employees (including
officers). On October 27, 1998 the stockholders authorized for issuance an
increase of 600,000 shares, to the current aggregate of 1,200,000 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 August 2008 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 stockholders 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.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of the
Warrantech's Board of Directors, exercised 3,000,000 of their vested
options to purchase Warrantech common stock. Promissory notes totaling
$8,062,500 were signed with interest payable over three years at an annual
interest rate of 6%. The promissory notes, which are with recourse and
secured by the stock certificates issued, mature July 5, 2001. An
additional promissory note was signed by Joel San Antonio for $595,634 on
March 22, 1999 which represents the amounts funded by the Company with
respect to his payroll taxes for the exercise of these options. The
exercise of these stock options and the anticipated tax benefit from this
transaction represent approximately $10 million. These amounts have been
recorded as a contra-equity account, which is a reduction of stockholders'
equity. The Company is currently in discussions with the Messrs. San
Antonio, Tweed and White to renegotiate the payment terms of the notes. The
payment of interest, which was due July 6, 1999, has been deferred until
January 6, 2000.
37
<PAGE>
Presented below is a summary of the status of the stock options and the
related transactions for the years ended March 31, 1999, 1998 and 1997.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------------------- -------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------------------------
Options outstanding at beginning of year 3,295,534 $2.95 3,484,553 $3.01 3,218,024 $2.89
Granted 996,837 4.54 92,147 7.27 369,129 5.06
Canceled (197,615) (5.93) (138,904) (5.40) (7,600) (6.70)
Exercised (3,010,000) (2.70) (142,262) (4.91) (95,000) (6.55)
Forfeited (70,531) (7.59)
----------------------------------------------------------------------------------------------
Options outstanding at end of year 1,014,225 $4.36 3,295,534 $2.95 3,484,553 $3.01
==============================================================================================
----------------------------------------------------------------------------------------------
Options exercisable at end of year 114,587 $4.47 3,132,374 $2.84 3,193,024 $2.89
==============================================================================================
</TABLE>
The weighted average fair value of stock options at date of grant,
calculated using the Black-Scholes option-pricing model, granted during the
years ended March 31, 1999, 1998 and 1997 is $2.82, $3.08, and $2.08
respectively.
The Company recognized costs of $21,631, $56,599 and $39,082 for the years
ended March 31, 1999, 1998 and 1997, respectively, for stock-based
compensation to employees.
The following table summarizes the status of Warrantech's stock options
outstanding and exercisable at March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C>
Stock Options Stock Options
Outstanding Exercisable
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of exercise prices Shares Life(Yrs) Price Shares Price
-------------------------------------------------------------------------------
$3.25 to $3.50 592,794 6.1 $3.35 - -
$4.31 to $5.25 116,491 6.6 4.48 114,587 $4.47
$6.13 to $6.50 304,940 9.1 6.28 - -
-------------------------------------------------------------------------------
Total 1,014,225 7.0 $4.36 114,587 $4.47
===============================================================================
</TABLE>
38
<PAGE>
13. OTHER INCOME (EXPENSE)
<TABLE>
<S> <C> <C> <C>
Year Ended March 31,
1999 1998 1997
------------------------------ ------------------- --------------------
Interest and dividend income $1,303,410 $1,120,701 $722,560
Interest expense (458,598) (378,812) (433,990)
Gain on sale of assets 103,988 - -
Miscellaneous 94,401 77,843 36,015
------------------------------ ------------------- --------------------
$1,043,201 $819,732 $324,585
============================== =================== ====================
</TABLE>
14. 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 percent (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 was 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. All amounts relating to this note were
paid in full prior to March 31, 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.
39
<PAGE>
15. ACQUISITION
In July 1995, Warrantech International, Inc., acquired Home Guarantee
Corporation Plc (subsequently renamed Warrantech Europe Plc.) a British Company,
which markets home warranty products as well as other warranty products similar
to those marketed by the Company in the United States. The acquisition was
accounted for as a purchase and the resultant goodwill amounting to $695,800 is
being amortized over a 10 year period. In October 1997, the Company acquired
certain assets of Distributors & Dealers Service Co., Inc. for $888,541 and the
resulting goodwill is being amortized over 4.5 years.
16. SIGNIFICANT CUSTOMERS
The Company has one significant customer, CompUSA, which accounted for
approximately 34%, 34% and 32%, respectively, of consolidated gross revenues for
the years ended March 31, 1999, 1998 and 1997. The Company notified CompUSA in
May 1999 of price increases resulting from premium increases imposed by CIGNA
Insurance Company . On June 24, 1999, CompUSA publicly announced as part of a
major corporate restructuring their intentions to leverage their internal call
center capabilities by taking over customer contact regarding extended warranty
repair calls. On June 28, 1999 Warrantech received formal notification of
termination from CompUSA effective July 28, 1999. The loss of CompUSA will have
an adverse impact on future revenues.
17. EARNINGS PER SHARE
The computations of earnings per share for the years ended March 31, 1999, 1998
and 1997 are as follows:
<TABLE>
<S> <C> <C> <C>
For the Years Ended March 31,
1999 1998 1997
---------------- -------------- ---------------
Numerator:
Net income (loss) applicable to common stock ($7,639,725) $5,619,823 $2,284,867
================ ============== ===============
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,098,242 13,259,964 13,054,611
Stock Options (treasury method) - 2,357,386 2,340,258
---------------- -------------- ---------------
Diluted shares 15,098,242 15,617,350 15,394,869
================ ============== ===============
Earnings Per Common Share:
Basic ($0.51) $0.42 $0.18
================ ============== ===============
Diluted ($0.51) $0.36 $0.15
================ ============== ===============
</TABLE>
18. COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of related tax,
for the years ended March 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<S> <C> <C> <C>
For the Years Ended March 31,
----------------- ----------------- ----------------
1999 1998 1997
------------------------------------- ----------------
Unrealized gain/(loss) on investments $7,452 $7,055 ($1,563)
Accumulated translation adjustments (100,986) 78,553 16,544
----------------- ----------------- ----------------
Accumulated other comprehensive income ($93,534) $85,608 $14,981
================= ================= ================
</TABLE>
40
<PAGE>
19. SEGMENT INFORMATION
The Company operates under three major business segments: Automotive, Consumer
Products and International. The Automotive segment markets and administers
extended warranties on automobiles, light trucks, recreational vehicles and
automotive components. These products are sold principally by franchised and
independent automobile dealers, leasing companies, repair facilities, retail
stores and financial institutions. The Consumer Products segment markets and
administers extended warranties on household appliances, electronics and homes.
These products include home appliances, consumer electronics, televisions,
computers, home office equipment and homes. These products are sold principally
by retailers, distributors, manufacturers, utility companies and financial
institutions. Warrantech also direct markets these products to the ultimate
consumer through telemarketing and direct mail campaigns. The International
segment markets and administers outside the United States predominately the same
products and services of the other business segments. The International segment
is currently operating in the United Kingdom, Central and South America, Puerto
Rico and the Caribbean.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Consumer Reportable
Year ended Automotive Products International Segments Other Total
-------------- ------------- -------------- -------------- ------------- --------------
March 31,1999
Revenues $47,298,852 $90,623,968 $17,746,685 $155,669,505 ($6,800,714) $148,868,791
Segment Profit (Loss) from
operations 2,966,588 (3,422,670) 692,245 236,163 (12,468,287) (12,232,124)
Pretax Income (Loss) 493,193 (10,626,187) (95,157) (10,228,151) (960,772) (11,188,923)
Net Interest Income 37,063 102,633 25,978 165,674 679,138 844,812
Depreciation/Amortization 717,677 1,343,881 482,245 2,543,803 2,604,567 5,148,370
Total Assets 63,002,934 96,477,403 9,962,523 169,442,860 17,467,410 186,910,270
March 31,1998
Revenues $47,787,563 $77,481,210 $12,593,301 $137,862,074 ($5,065,068) $132,797,006
Segment Profit (Loss) from
operations 13,509,718 7,991,812 785,111 22,286,641 (13,773,605) 8,513,036
Pretax Income (Loss) 11,249,911 474,285 (2,175,507) 9,548,689 (215,921) 9,332,768
Net Interest Income 32,276 98,567 53,561 184,404 557,486 741,890
Depreciation/Amortization 685,308 879,167 297,696 1,862,171 1,896,042 3,758,213
Total Assets 51,564,970 69,345,686 12,537,080 133,447,736 19,363,530 152,811,266
March 31,1997
Revenues $32,255,790 $80,191,560 $3,446,457 $115,893,807 ($9,118,062) $106,775,745
Segment Profit (Loss) from
operations 2,302,259 10,521,992 (235,379) 12,588,872 (8,692,622) 3,896,250
Pretax Income (Loss) (956,885) 5,145,008 (728,070) 3,460,053 363,092 3,823,145
Net Interest Income 29,069 146,964 7,163 183,196 105,374 288,570
Depreciation/Amortization 584,236 822,415 175,873 1,582,524 1,037,457 2,619,981
Total Assets 46,951,209 61,064,870 4,128,074 112,144,153 4,975,878 117,120,031
</TABLE>
NOTE: Other includes intersegment eliminations of revenues and receivables and
net unallocated Corporate expenses.
41
<PAGE>
20. Quarterly Financial Data (Unaudited)
The following fiscal 1999 and 1998 quarterly financial information for each of
the three month periods ended June 30, September 30, December 31, 1998 and 1997
and March 31, 1999 and 1998 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>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, September 30, December 31, March 31,
1998 1997 1998 1997 1998 1997 1999 1998
Net revenues $24,134,146 $31,849,146 $31,529,664 $26,993,458 $30,272,681 $28,684,296 $32,291,830 $23,822,778
Income from operations (3,943,437) 2,496,348 (1,331,354) 2,784,080 (1,814,579) 1,622,037 (5,142,754) 1,610,571
Income (loss)
before provision for
income taxes (3,773,477) 2,693,727 (984,093) 2,982,612 (1,503,362) 1,875,892 (4,927,991) 1,780,537
Net income (loss) (1,790,040) 1,782,200 (1,081,041) 1,857,662 (1,239,524) 1,165,879 (3,529,120) 814,082
Earnings (loss) per Share
Basic ($0.13) $0.14 ($0.07) $0.14 ($0.08) $0.09 ($0.23) $0.05
Diluted ($0.13) $0.11 ($0.07) $0.12 ($0.08) $0.07 ($0.23) $0.05
</TABLE>
Amounts restated to reflect the effect of the reversal of $2,600,000 of net
revenue on the portfolio transfer of Computer City by CompUSA. The effect on net
income was $1,529,000 or $.10 per share.
42
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Column Column Column Column Column
A B C D E
- ----------------------------------------------------------------------------------------------------------------
Balance at Additions Deductions-
----------------------------
Description Beginning Charged to Charged to Other Balance at
Costs and Accounts - End of
of Year Expense Describe) Describe(b) Year
- ----------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999
Allowance for doubtful accounts:
Trade A/R $1,223,173 $370,324 - $478,212 $1,115,285
Other A/R - 1,918,256 - - 1,918,256
Profit Sharing - - - - -
Year Ended March 31, 1998
Allowance for doubtful accounts:
Trade A/R 300,328 1,035,675 - 112,830 1,223,173
Other A/R - - - - -
Profit Sharing - - - - -
Year Ended March 31, 1997
Allowance for doubtful accounts:
Trade A/R 450,092 28,000 - 177,764 300,328
Other A/R 242,112 - - 242,112 -
Profit Sharing 1,720,000 - - 1,720,000 -
</TABLE>
(a) Bad debt expense charged directly to operations pertaining to accounts
receivable was $705,119 for the fiscal year ended March 31, 1997.
(b) Amount of receivables charged to the allowance during the year.
See independent auditors's report and accompanying notes to consolidated
financial statements
43
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
N/A
44
<PAGE>
PART III
Item 10. Directors And Executive Officers Of The Registrant
A Board of Directors consists of five directors. All directors hold office
until the next annual meeting and until their successors are duly elected and
qualified.
<TABLE>
<S> <C> <C> <C>
Director
Name Age Positions with Company Since
Joel San Antonio 47 Chairman of the Board, Chief Executive Officer
and Director 1983
William Tweed 59 Director 1983
Jeff J. White 48 Director 1983
Lawrence Richenstein 46 Director 1993
Gordon A. Paris 46 Director 1998
</TABLE>
No family relationships exist among any of the Company's executive officers
or directors, except that Randall San Antonio, President of Warrantech Direct,
Inc., a subsidiary of the Company, is the brother of Joel San Antonio.
The business experience of each of the Company's directors and nominees for
election to the Board of Directors is as follows:
Joel San Antonio, 47, one of the Company's founders, was a director, Chief
Executive Officer and President of the Company from incorporation through
February 1988. Since February 1988 Mr. San Antonio has been a director, Chief
Executive Officer and Chairman of the Board of Directors and since October 1989,
he has also been Chairman and Chief Executive Officer of the Company's principal
operating subsidiaries. In 1975, Mr. San Antonio founded and, thereafter through
August 1982, served as President of Little Lorraine, Ltd., a company engaged in
the manufacturing of women's apparel. Mr. San Antonio is currently a member of
the Southwestern Connecticut Area Commerce & Industry Association, the World
Forum, the Connecticut Business and Industry Association, the Metropolitan
Museum of Art, and the Young Presidents' Organization, Inc. Mr. San Antonio was
a director of Corniche Group Incorporated, a company in the insurance and/or
insurance-related businesses based in Euless, Texas from May 1998 until
September 1999.
William Tweed, 59, one of the Company's founders, was a director, Vice
President and Secretary of the Company from incorporation through February 1988.
From February 1988 until April 1996, Mr. Tweed was a director and President of
the Company. From April 1996 to March 1998, Mr. Tweed was Executive Vice
President of European Operations and director for the Company. Mr. Tweed
relinquished his title of Vice President on April 1, 1998. From July 1976
through August 1982, he was Vice President of Little Lorraine, Ltd. Mr.Tweed
served as a director of Nationwide Extended Warranty Service, Inc. from on or
about October 1981 through on or about January 1983.
Jeff J. White, 48, one of the Company's founders, has been a director of
the Company from its inception. Mr. White was Vice President of the Company from
its inception until June 1988 and Treasurer of the Company from its inception
until October 1990. In September 1982, Mr. White, with two partners, established
Marchon Eyewear, Inc. a leading international distributor and manufacturer of
eyewear and sunwear, including such worldwide well-known collections as Calvin
Klein, Fendi, Disney, and Flexon, their patented frames utilizing a
state-of-the-art metal with a "memory". He is Co-President of Marchon (along
with his two partners) and is responsible for internal operations, information
systems, and interfacing with counsel on patent, trademark, and general legal
matters. Mr. White also serves as an associate trustee of the North Shore
University Hospital Health System.
45
<PAGE>
Lawrence Richenstein, 46, has been a director of the Company since 1993. In
early 1997, Mr. Richenstein formed Laral Group LLC. Laral Group manufacturers a
line of wireless audio/video and computer accessories under its Unwired brand.
It is also an OEM supplier of wireless multimedia products to the automotive
market. Mr. Richenstein has been President and Chief Executive Officer of Peak
Ventures, Inc., since May 1996. Peak Ventures, Inc., located in Farmingdale, New
York, provides services to the consumer electronics industry. Mr. Richenstein
also has been a managing member of Long Hall Technologies, L.L.C. since 1994.
Long Hall Technologies, L.L.C. is a consumer electronics company located in
Farmingdale, New York. Long Hall Technologies manufactures products under the
Nickelodeon brand under license from MTV Networks. From 1985 until July 1996,
Mr. Richenstein was President and Chief Executive Officer of Lodestar
Technologies, Ltd., a consumer electronics company located in Hicksville, New
York. Lonestar Technologies, Ltd. filed for Chapter 11 bankruptcy protection on
January 22, 1996. The proceeding was subsequently converted to a Chapter 7
bankruptcy liquidation effective July 2, 1996. In addition to having sales and
marketing experience, Mr. Richenstein is involved in product development. Mr.
Richenstein is an attorney admitted to practice in New York and has, in the
past, served as a director of two public companies, both of which were involved
in the electronics industry.
Gordon A. Paris, 46, has been a director of the Company since April 1998.
Mr. Paris is Managing Director and Group Head of High Yield Origination and
Capital Markets and Mergers and Acquisitions at TD Securities (USA) Inc., a
subsidiary of The Toronto-Dominion Bank since March 1996. From June 1994 to
March 1996, Mr. Paris was a Managing Director in the Leveraged Finance Group
with CS First Boston. From March 1991 to June 1994, Mr. Paris was a Managing
Director at Lehman Brothers in charge of the High Yield and Restructuring Group.
Other Executive Officers and Key Employees
Michael A. Basone, 41, has been Vice President and Chief Information
Officer since joining the Company in August 1994 and Chief Operating Officer
since January 1997 and Executive Vice President since April 1998. From 1986 to
1994, Mr. Basone held various management positions with Pepsi-Cola
International, ultimately serving as Director of Management Information Systems.
Desiree Kim Caban, 34, has been Secretary of the Company since July 1993
and Senior Vice President of Human Resources since April 1998. From October 1996
to March 1998, Ms. Caban was the Vice President of Human Resources. Prior to
October 1996 and since 1989, Ms. Caban served as the Director of Human
Resources, Executive Assistant to the Chairman and the Office Services Manager
for the Company. She has been employed by the Company since May 1986. Ms. Caban
is currently a member of the National Association for Female Executives and a
member of the Society for Human Resource Professionals. Ms. Caban resigned from
the company effective December 1999.
Jeanine Folz, 34, has been the Senior Vice President of Insurance Services
since April 1998 and has been Assistant Secretary of the Company since January
1995. From October 1995 to March 1998 Ms. Folz was the Vice President of
Insurance Services. Ms. Folz joined the Company in 1987. From 1987 to 1995, Ms.
Folz held various positions including Director of Insurance Services and other
customer service and project analyst positions. She is currently a member of the
Risk and Insurance Management Society and the National Association for Female
Executives.
Christopher Ford, 51, has been President of Warrantech Automotive Inc., a
wholly owned subsidiary of the Company, since May 1999. From 1994 until 1999,
Mr. Ford held various executive positions with American International Group
(AIG) in Japan and Australia. From 1968 until 1979 Mr. Ford held various
management positions with The Ford Motor Company and American Motors Jeep
Corporation. From 1989 to 1994 he held several key marketing and management
positions within the vehicle service contract industry.
Richard F. Gavino, 52, has been Executive Vice President, Chief Financial
Officer and Treasurer since April 1998. From 1995 to March 1998, Mr. Gavino was
Chief Financial Officer at Maxon Auto Group, one of the largest automobile
retailers in New Jersey. From 1993 to 1995, Mr. Gavino was a turnaround
46
<PAGE>
consultant. From 1984 to 1993, Mr. Gavino was Senior Vice President and Chief
Financial Officer of Tops Appliance City, a publicly traded consumer electronics
and appliance superstore chain.
Ronald Glime, 54, has been President of U.S. and Canadian Operations since
March 1999. From October 1992 to March 1999 Mr. Glime was President of
Warrantech Automotive, Inc., a wholly owned subsidiary of the Company. Prior
thereto he was Regional Sales Manager for Warrantech Automotive, Inc. (then
known as Warrantech Dealer Based Services, Inc.) from February 1991 through
October 1992. From 1983 through February 1991, Mr. Glime was an independent
insurance agent for various insurance companies. From 1978 through 1982, Mr.
Glime was employed by American Warranty Corp., a company in the warranty
administration business. He resigned as its President in 1982. Mr. Glime was a
director of Corniche Group Incorporated, a company in the insurance and/or
insurance-related businesses based in Euless, Texas, from May 1998 until
September 1999.
Sean Hicks, 32, has been Chief Operating Officer for Warrantech Consumer
Product Services, Inc. and Warrantech Help Desk Inc. since May 1999 and
President of Warrantech Home Service Company since January 1999. Mr. Hicks
joined Warrantech Home Service Company in 1997 as Vice President Operations and
was later appointed to Senior Vice President, Marketing and has served in that
capacity until January 1999. With over 10 years experience in the service
industry, Mr. Hicks previously was Director of Product Services at Montgomery
Ward and held various positions with Sears, Roebuck & Co., Inc.
Andrew Impavido, 57, has been Senior Vice President of Warrantech
Motivation a Corporate Division which consists of Training and Development,
Multimedia Services, and Corporate Communications since April 1998. Mr. Impavido
joined the Company in 1991 as Director of Training and has held the position of
Vice President of Training and Development prior to his present position. Prior
thereto, Mr. Impavido had spent over 25 years in the retail industry and has
held various management and training positions, with industry leaders such as
Sears, Montgomery Ward, and the 350 store Belk Chain.
James F. Morganteen, 49, has been General Counsel for the Company since
April 1997 and Senior Vice President since February 1998. Mr. Morganteen most
recently served as a Vice President for Bankers Trust of New York with
responsibility for counseling its OTC risk management operations. From 1987
through 1994, Mr. Morganteen served as Senior Counsel to Xerox Corporation
managing the legal function of Xerox Credit Corporation, the financial services
unit of Xerox Corporation.
Richard Rodriguez, 45, has been President of Warrantech International,
Inc., a wholly owned subsidiary of the Company, since May 1999. From April 1998
until May 1999, Mr. Rodriguez was President of Warrantech Consumer Product
Services, Inc., a wholly owned subsidiary of the Company. From December 1996
until March 1998, Mr. Rodriguez has been Vice President and Managing Director of
Warrantech International, Inc. From February 1992 until December 1996, Mr.
Rodriguez served as Chief Operating Officer of the Company's Texas operating
facilities. From 1987 until 1992, Mr. Rodriguez served in various executive
positions with the Company. Prior to 1987, Mr. Rodriguez served as an executive
and/or consultant to retailers and manufacturers of consumer electronic
products.
Randall San Antonio, 45, has been President of Warrantech Direct, Inc., a
wholly owned subsidiary of the Company, since June 1996 and from May 1994 to
June 1996 served as that subsidiary's Vice President and General Manager. Prior
thereto he was Vice President of Finance of Castle Hill Productions Inc. from
June 1984.
Judith M. Thomas, 45, has been President of Warrantech Help Desk, Inc., a
wholly owned subsidiary of the Company, since April 1997. Ms. Thomas has been
President of Unlimited Business Services, Inc., a consulting company that
specializes in the improvement of operational, financial and revenue streams of
major retailers, including the development and implementation of service
contract programs since 1993. From 1970 until 1993 Ms. Thomas was employed by
Highland Superstores, holding various positions during her tenure, ending her
employment with that Company as Corporate Vice President-Operations. Ms. Thomas
resigned from the company effective November 1999.
47
<PAGE>
Information Concerning Meetings of the Board of Directors
During the fiscal year ended March 31, 1999, the Board of Directors held
seven meetings. All such meetings were fully attended. The Company has an Audit
Committee consisting of Messrs. Paris, Richenstein and White. Such committee met
3 times during the 1999 fiscal year. The Company has a Compensation Committee
consisting of Messrs. Paris, Richenstein and White. This committee met 1 time
during the 1999 fiscal year.
48
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table provides information for the years ended March 31,
1999, 1998 and 1997, concerning the annual and long-term compensation of the
Chief Executive Officer and the next four highest paid executive officers of the
Company for the fiscal year ended March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards (1)
---------------------------------------------- --------------------------------
Other Annual Restricted Stock Stock Option All Other
Name of Principal Positions Year Salary Bonus Compensation(2) (Shares) Awards (Shares) Awards Compensation(3)
Joel San Antonio 1999 $590,430 $1,600 $29,750 $ - 400,000 $2,245
Chairman of the Board 1998 557,865 211,941 28,104 - - 1,070
and Chief Executive Officer 1997 507,150 193,089 26,525 - - -
Ronald Glime 1999 $200,000 $52,951 $9,523 $ - 70,816 $1,547
President of U.S. and Canadian 1998 160,385 110,903 7,837 - - 1,972
Operations 1997 137,404 60,500 4,034 - 24,749 -
Richard F. Gavino 1999 $182,308 $25,000 $9,587 $25,000 92,308 $ -
Executive Vice President, Chief 1998 - - - - - -
Financial Officer and Treasurer 1997 - - - - - -
Judith M. Thomas(4) 1999 $171,154 $2,999 $15,985 $50,000 24,490 $702
President of Warrantech Help 1998 150,000 45,050 30,230 - - 455
Desk, Inc. 1997 - - - - - -
Michael A. Basone 1999 $193,269 $400 $12,677 $ - 32,653 $1,106
Executive Vice President, Chief 1998 158,939 43,277 12,318 - - 2,341
Information Officer and 1997 159,940 25,100 15,343 - 11,600 -
Chief Operating Officer
</TABLE>
(1) (The 1998 Stock Option Plan is the Company's only long-term incentive plan.
(2) Included in Other Annual Compensation are auto allowances given to each
officer in fiscal 1997, 1998 and 1999, life insurance premiums for the
years 1997, 1998 and 1999, and relocation expenses paid Mr. Basone in
fiscal 1997 and Ms. Thomas in fiscal 1998.
(3) Represents amounts contributed by the Company in accordance with the
Company's 401(K) Plan.
(4) Ms. Thomas is also President of Unlimited Business Services, Inc., which
was paid $328,690 in 1999 pursuant to a representative agreement.
49
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to options
to purchase Common Stock granted during the fiscal year ended March 31, 1999 to
each of the named executive officers.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Potential Realizable Value
At Assumed Annual Rates
Of Stock Price Appreciation
__________________________________Individual Grants__________________________ ___For Option Term_(1)_
Number of % of Total
Securities Options/SARs
Underlying granted to Exercise or
Options/SARs Employee in Base Price Expiration
Granted Fiscal Year Per Share Date 5%($) 10%($)
Joel San Antonio 400,000 43.2% 3.370 08/24/03 1,627,514 2,053,722
Ronald Glime 40,816 4.4% 6.125 04/26/08 211,954 337,501
30,000 3.2% 3.500 03/14/09 155,787 248,066
Richard F. Gavino 92,308 10.0% 3.250 04/26/08 479,348 763,281
Judith M. Thomas 24,490 2.6% 6.125 04/26/08 127,175 202,504
Michael A. Basone 32,653 3.5% 6.125 04/26/08 169,564 270,003
</TABLE>
(1) Based upon the Company's price per share of $3.188, as reported on
NASDAQ National Market System on March 31, 1999.
Note: The closing bid price for the Company's common stock as reported on
the OTC was $1.38 as of December 21, 1999.
50
<PAGE>
Options Exercised and Holdings
The following table sets forth information with respect to the individuals
listed in the Summary Compensation Table above, concerning unexercised options
held as of the end of the 1999 fiscal year.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Shares Acquired Number of Unexercised Options Value of Unexercised In-the-Money Options
Name On Exercise Value Realized at Fiscal Year-End (#) at Fiscal Year-End ($)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------
Joel San Antonio 1,204,080 $ 4,515,300 - 400,000 $ - $ -
Ronald Glime - - 24,749 70,816 - -
Richard F. Gavino - - - 92,308 - -
Judith M. Thomas - - - 24,490 - -
Michael A. Basone - - 14,458 34,557 - -
</TABLE>
(1) Based upon the Company's price per share of $3.188, as reported on the
NASDAQ National Market System on March 31, 1999.
Note: The closing bid price for the Company's common stock as reported on the
OTC was $1.38 as of December 21, 1999.
51
<PAGE>
Employment Agreements
On August 25, 1998, the Company entered into a five year employment
agreement, effective April 1, 1998, with Joel San Antonio. Under the terms of
the agreement, Mr. San Antonio's initial base compensation is $585,000 per
annum, subject to an increase of 5% per annum beginning January 1, 1999 through
the term of the agreement. Mr. San Antonio is entitled to be reimbursed for all
ordinary, reasonable and necessary expenses incurred by him in the performance
of his duties, including an automobile allowance of $12,000 per annum. The
Company provides Mr. San Antonio with a comprehensive medical dental insurance
policy as well as disability coverage and a life insurance death benefit policy
in excess of $1,000,000. Mr. San Antonio is entitled to an incentive bonus equal
to 2% of the net after tax profits of the Company. In connection with his
entering into such agreement, the Board awarded Mr. San Antonio options to
purchase an aggregate of 400,000 shares of the Company's common stock at an
exercise price of $3.37 (fair market value on the date of grant plus 10%) per
share, all of which options vest contingent upon the Company achieving certain
specified performance goals. The employment agreement continues in full force
and effect for additional one year periods unless either party terminates by
giving 90 days written notice prior to the end of any term or renewal term. Mr.
San Antonio also entered into an agreement not to compete for two years with the
Company which may be exercised by the Company upon the expiration or earlier
termination of the employment agreement by delivery to Mr. San Antonio of an
aggregate of 100,000 shares of the Company's common stock.
Effective January 1, 1998 the Company entered into an employment agreement
with Michael Basone to serve as the Company's Executive Vice President, Chief
Information Officer and Chief Operating Officer. Under the terms of such
Agreement, Mr. Basone's current salary is $225,000, subject to automatic
increases of 5% after the first fifteen months and annually thereafter during
the term of the Agreement. Mr. Basone was granted stock options in April 1998,
pursuant to the Agreement, to purchase $200,000 of the Company's stock which
vest equally over a three year period. In addition he will be entitled to
receive cash bonuses based upon the Company and its subsidiaries achieving
certain revenue and operating goals. The Company provides Mr. Basone with
medical and dental insurance, an automobile allowance of $6,000 per annum and
life insurance benefits similar to that provided by the Company to certain of
its other executives.
Effective January 1, 1998 Warrantech Automotive, Inc. entered into a
five-year employment agreement with Ronald Glime, its President. Under the terms
of such Agreement Mr. Glime is entitled to an initial annual base salary of
$200,000 subject to automatic increases of 5% after the first fifteen months and
annually thereafter during the term of the Agreement. Mr. Glime's annual base
salary, in conjunction with his new role as President of U.S. and Canadian
Operations, is $295,000. Mr. Glime was granted stock options in April 1998,
pursuant to the Agreement, to purchase $250,000 of the Company's stock which
vest equally over a five year period. Mr. Glime was also granted stock options
in August 1999 to purchase an aggregate of 50,000 shares of the Company's common
stock which vest over a three year period. Mr. Glime is entitled to receive a
cash bonus based upon a percentage of the Company's operating performance. The
Company provides Mr. Glime with medical and dental insurance, an automobile
allowance of $6,000 per annum and life insurance benefits similar to that
provided by the Company to certain of its other executives.
Effective April 16, 1998, the Company entered into a three year employment
agreement with Mr. Richard F. Gavino to serve as the Company's Executive Vice
President, Chief Financial Officer and Treasurer. Under the terms of such
Agreement, Mr. Gavino is entitled to an initial annual base salary of $200,000
subject to annual increases of 5%. Mr. Gavino received a $25,000 bonus upon
signing of the employment agreement. Mr. Gavino was granted stock options,
pursuant to the Agreement, to purchase $25,000 of the Company's stock which vest
at the end of the first year and to purchase $300,000 of the Company's stock
which vest equally over a three year period. Mr. Gavino is entitled to receive a
cash bonus based upon a percentage of Company's operating performance. The
Company provides Mr. Gavino with medical and dental insurance, an automobile
allowance of $6,000 per annum and life insurance benefits similar to that
provided by the Company to certain of its other executives.
Effective April 1, 1997, the Company entered into a five year employment
agreement with Judith Thomas, its President. Under the terms of such Agreement
Ms. Thomas is entitled to an initial annual base salary of $150,000 subject to
automatic increases of 5% annually. Effective April 1, 1998, Ms Thomas' annual
base salary was adjusted to $175,000. Ms. Thomas received a $50,000 stock bonus
upon signing of the employment agreement. The stock was granted in April 1998.
Ms. Thomas is entitled to receive a cash bonus equal to a percentage of her
current base salary upon the attainment of certain operating goals established
for Warrantech Help Desk, Inc. The Company provides Ms. Thomas with medical and
dental insurance, relocation benefits, an automobile allowance of $6,000 per
annum and life insurance benefits similar to that provided by the Company to
certain of its other executives. Ms. Thomas resigned from the Company in
November 1999.
52
<PAGE>
Other Incentives and Compensation
The Company has provided executives equity-based long-term incentives
through its 1998 Employee Incentive Stock Option Plan, which was designed to
award key management personnel and other employees of the Company with bonuses
and stock options based on the Company's and the employee's performance.
The Company provides executive officers with an incentive bonus plan, which
provides cash and/or stock bonuses upon meeting certain performance criteria.
The Company provides an incentive bonus plan for all employees for the
referral of potential new employees for employment by the Company who are
subsequently hired by the Company. The amount of the bonus is predicated on the
skill and professional level of the new employee.
Additionally, the Company provides an incentive bonus to existing employees
who are claims adjusters for obtaining and maintaining certification as
professionals in their field.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and directors and persons who own more than 10% of
a registered class of the Company's equity securities file reports of ownership
and changes in ownership with the Securities and Exchange Commission (the
"Commission"). Officers, directors and greater than 10% stockholders are
required by Commission regulation to furnish the Company with copies of all
Section 16(a) forms they file. Based on a review of the reports, during the
fiscal year ended March 31, 1999, all Section 16 filing requirements applicable
to its officers, directors and greater than 10% beneficial owners were complied
with.
Non-Management Directors' Compensation
Effective January 1, 1998, each non-employee director is entitled to
receive compensation of $2,500 plus 250 shares of Company stock per calendar
quarter of board service. Committee service is compensated at $500 plus 62.5
shares of Company stock per calendar quarter. During fiscal 1999, the following
cash amounts were paid:
William Tweed $10,000
Jeff J. White 14,000
Lawrence Richenstein 14,000
Gordon A. Paris 12,000
No directors' fees are payable to employees of the Company who serve as
directors.
53
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of July 6, 1999 concerning
shares of Common Stock, par value $.007 per share, the Company's only voting
securities, owned beneficially by each of the Company's directors and nominees
for the Board of Directors, by each person who is known by the Company to own
beneficially more than 5% of the outstanding voting securities of the Company
and by the Company's executive officers and directors as a group.
<TABLE>
<S> <C> <C>
Amount and Nature of Percent
Name and Addess of Beneficial Owner Beneficial Ownership of Class
Joel San Antonio 3,201,648 shares(1) 21.03%
300 Atlantic Street
Stamford, Connecticut 06901
William Tweed 1,841,236 shares(2) 12.10%
300 Atlantic Street
Stamford, Connecticut 06901
Jeff J. White 1,591,910 shares(3) 10.46%
35 Hub Drive
Melville, New York 11747
Lawrence Richenstein 12,750 shares .08%
500 Eastern Parkway
Farmingdale, New York 11735
Gordon A. Paris 1,625 shares -
31 West 52nd Street, 22nd floor
New York, New York 10019-6101
All directors and executive officers
as a group (17 persons)
6,960,210 shares(1,2,3,4) 45.09%
</TABLE>
__________________
(1) Includes 5,000 shares held by Mr. San Antonio as custodian for two minor
children. Includes 10,800 shares owned by Mr.San Antonio's wife as to
which he disclaims beneficial ownership. Does not include 13,354 shares
owned by Mr. San Antonio's brother and sister-in-law and 5,000 shares owned
by his mother as to which he disclaims any beneficial interest. Includes an
aggregate of 200,000 shares held in trusts for his children, of which Mr.
San Antonio's wife is a trustee as to which Mr. San Antonio disclaims
beneficial ownership.
(2) Includes 23,000 shares held by Mr.Tweed as custodian for one child. Does
not include an aggregate of 7,500 shares held by Mr.Tweed's mother and
sister. Includes 1,500 shares held by Mr. Tweed's wife, and 25,000 shares
held in trust for the benefit of Mr. Tweed's granddaughter, of which Mr.
Tweed's wife is the trustee, as to which he disclaims any beneficial
interest.
(3) Does not include an aggregate of 90,000 shares owned by Mr.White's mother
and sister as to which he disclaims any beneficial interest.
(4) Includes options held by executive officers of the Company to purchase an
aggregate of 214,706 shares, which are presently exercisable.
54
<PAGE>
Item 13. Certain Relationships and Related Transactions
Certain Relationships and Related Transactions
On April 1, 1996 Michael Salpeter, former President and Director of the
Company, and William Tweed, former President of the Company entered into an
Agreement whereby Mr. Tweed granted to Mr. Salpeter an option to purchase
487,000 shares of common stock owned by Mr. Tweed. The options are exercisable
at various prices in whole or in part, and expire on October 22, 2000. In May
1998, such Agreement was modified, pursuant to which Mr. Salpeter relinquished
his rights with respect to 125,000 shares, leaving an option exercisable for
362,000 shares. In March 1999, 62,000 shares were purchased under the Agreement
leaving an option exercisable for 300,000 shares.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of the
Warrantech's Board of Directors, exercised 3,000,000 of their vested options to
purchase Warrantech common stock. Promissory notes totaling $8,062,500 were
signed with interest payable over three years at an annual interest rate of 6%.
The promissory notes, which are with recourse and secured by the stock
certificates issued, mature July 5, 2001. An additional promissory note was
signed by Joel San Antonio for $595,634 on March 22, 1999 which represents the
amounts funded by the Company with respect to his payroll taxes for the exercise
of these options. The exercise of these stock options and the anticipated tax
benefit from this transaction total approximately $10 million. These amounts
have been recorded as a contra-equity account, which is a reduction of
stockholders' equity. The Company is currently in discussions with the Messrs.
San Antonio, Tweed and White to renegotiate the payment terms of the notes. The
payment of interest, which was due July 6, 1999, has been deferred until January
6, 2000.
Warrantech Consumer Product Services, Inc. and Warrantech Direct, Inc. have
made commission payments to Unlimited Business Services, Inc. totaling $328,690
for the fiscal year 1999 pursuant to Representative Agreements. Judith Thomas,
President of Warrantech Help Desk, Inc. is the President of Unlimited Business
Services, Inc.
55
<PAGE>
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) - 1998 Employee Incentive Stock Option Plan of the Company.
(f) - Employment Agreement dated April 1, 1995 between the Company and Joel
San Antonio.
56
<PAGE>
(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.)
57
<PAGE>
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.
58
<PAGE>
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: December 23, 1999 By: /s/ Joel San Antonio
_________________________
Joel San Antonio
Chairman of the Board and
Chief Executive Officer
Dated: December 23, 1999 By: /s/ Richard F. Gavino
___________________________
Richard F. Gavino,
Chief Financial Officer
59
<PAGE>
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) - 1998 Employee Incentive Stock Option Plan of the Company.
(f) - Employment Agreement dated April 1, 1995 between the Company and Joel
San Antonio.
(g) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by Inacom Corporation.
Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1992, file no. 0-13084.
(h) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by Damark Inc.
Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1992, file no. 0-13084
60
<PAGE>
(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.)
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.
61
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,032,473
<SECURITIES> 2,961,602
<RECEIVABLES> 39,275,404
<ALLOWANCES> 3,033,541
<INVENTORY> 0
<CURRENT-ASSETS> 67,298,622
<PP&E> 29,253,102
<DEPRECIATION> 12,975,629
<TOTAL-ASSETS> 186,910,270
<CURRENT-LIABILITIES> 55,114,847
<BONDS> 0
<COMMON> 115,513
0
0
<OTHER-SE> 10,284,489
<TOTAL-LIABILITY-AND-EQUITY> 186,910,270
<SALES> 0
<TOTAL-REVENUES> 118,228,321
<CGS> 0
<TOTAL-COSTS> 130,460,445
<OTHER-EXPENSES> (1,501,799)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 458,598
<INCOME-PRETAX> (11,188,923)
<INCOME-TAX> (3,549,198)
<INCOME-CONTINUING> (7,639,725)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,639,725)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
