UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 2000
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 [X].
The number of shares outstanding of the Registrant's common stock is
15,304,579 as of June 21, 2000.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $8,032,088 as of June 21, 2000.
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 43
Document contains 48 pages
1
<PAGE>
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.
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.
2
<PAGE>
The VSC is a contract between the dealer/lessor or Warrantech Automotive
and the vehicle purchaser/lessee that offers coverages, 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 that 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 has 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 minor reinsurance
contracts), 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 coverages, which run
predominantly from twelve (12) to sixty (60) months.
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. Technical service representatives with extensive training in
computers and related peripherals staff the call center.
The Consumer Products segment had one significant customer, CompUSA Inc.
("CompUSA"), which accounted for approximately 58% of revenue of this business
segment for fiscal year ended March 31, 1999 and prior. 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 had an adverse impact on current operating results.
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
3
<PAGE>
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.
The Company entered into an agreement with Great American Insurance Company
(GAIC) pursuant to which GAIC insures, effective February 12, 2000, any new
service contracts issued. Effective from August 1, 1997 until February 12, 2000,
insurance for these service contracts was previously covered by Cigna Insurance
Company.
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 the support of 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. In light of Warrantech Europe's recent results, the United
Kingdom operation is under review.
Warrantech International also conducts its efforts on a direct basis and
has developed relationships with retailers and distributors throughout the
Caribbean, Central and South America. The Company is currently doing business in
Puerto Rico, Guatemala, Chile and Peru.
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
4
<PAGE>
effectiveness and profitability of their service contract program sales efforts.
The Company also 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 has one significant customer, Staples, which accounted for
approximately 10%, 6% and 3%, respectively, of consolidated gross revenues for
the years ended March 31, 2000, 1999 and 1998. CompUSA accounted for
approximately 34% and 34%, respectively, of consolidated gross revenues for the
years ended March 31, 1999 and 1998. 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 had an adverse impact
on current operating results.
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.
The insurance protection is provided by highly rated independent insurance
companies. This includes Great American Insurance Company which is rated A -
(Excellent), CIGNA Insurance Company which is rated A - (Excellent) by A.M. Best
Company and Reliance Insurance Group which is currently rated B++ (Very Good)
but has secured a reinsurance agreement with a subsidiary insurance company
which is 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.
In accordance with the 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 formulae by the type of program
and by policy year. Certain of these agreements require interim calculations and
5
<PAGE>
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 2000, 1999 or 1998 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 apply to 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 material adverse consequences and could affect the Company's
ability to continue operating. However, within the framework of currently known
statutes, the Company does not feel that this is a present concern.
Trademarks
The Company holds numerous registered United States trademarks, the most
important of which are the "Warrantech" and its stylized "W" logo service marks.
The Company and its trademark counsel keep the registration for all service
marks current. Additional service marks are registered covering subsidiary names
and product names and descriptions.
Employees
The Company and its subsidiaries employed approximately 575 individuals as
of March 31, 2000, a decrease of approximately 175 over the preceding fiscal
year. The decrease is attributable to the consolidation and cost reduction
initiatives instituted by the Company. As of May 26, 2000 the Company had
approximately 507 employees. None of the Company's employees are covered by a
collective bargaining agreement. The Company considers its relations with its
employees to be good.
6
<PAGE>
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"), consist of approximately 13,729 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 $437,751 to $453,057.
The original 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 $381,340 to $426,544.
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 was to expire June
23, 2010 and provided for remaining annual base rent payments ranging from
(pound) 94,050 to (pound) 108,450 (approximately $150,480 to $173,520) through
June 2000. Effective June 2000, this lease was to adjust to fair market value,
which the Company estimated at approximately (pound) 200,000 (approximately
$320,000) 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 (pound) 300,995 (approximately $481,592) through December 31, 2009. The
Company has sublet a portion of the new premises for approximately (pound)
100,000 (approximately $160,000) per year. The approximate exchange rate is
(pound) 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 that expires March 31, 2003. The remaining annual base rent payments
range from $52,353 to $54,928.
7
<PAGE>
Item 3.Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business.
On December 9, 1999, a complaint and order to show cause were filed against
Warrantech Automotive, Inc. in the Supreme Court of the State of New York by
American Home Assurance Company, Illinois National Insurance Company, National
Union Insurance Company of Louisiana and the New Hampshire Insurance Company
(collectively, "AIG") in which AIG sought to inspect and copy certain books and
records kept by Warrantech in the course of the business it conducted under a
General Agency Agreement ("GAA") with AIG. On December 14, 1999, this action was
removed by Warrantech to the United States District Court for the Southern
District of New York. The action is entitled "American Home Assurance Co., et
al, v. Warrantech Automotive, Inc., 99 Civ. 12040 (BSG)." At a December 16, 1999
hearing, Warrantech agreed to make the books and records at issue available to
AIG for copying. On January 24, 2000 AIG made a motion (the "Motion to Amend")
to amend its complaint to add claims for replevin and a declaratory judgment
seeking possession of the originals of the books and records and to add claims
for breach of contract, breach of fiduciary duty, negligence and gross
negligence based on allegations that Warrantech mishandled claims under the GAA.
AIG seeks damages in excess of $20 million. AIG also moved for summary judgment
(the "Motion for Summary Judgment") on its claims seeking possession of the
books and records. Warrantech believes all of these claims are without merit and
intends to defend them vigorously. On February 7, 2000, Warrantech filed papers
opposing AIG's motion to amend its complaint insofar as it seeks to add a claim
for replevin and a declaratory judgment and opposing the motion for summary
judgment. Warrantech believes the claims in AIG's proposed amended pleading are
entirely without merit and intends to vigorously defend against such claims if
the Court grants AIG's motion to amend. The Motion to Amend and the Motion for
Summary Judgment are currently pending and the parties are awaiting the Court's
decision on the motions.
Service Guard Insurance Agency, Inc. ("Service Guard") v. Warrantech
Automotive, Inc., New Hampshire Insurance Company, Ronald Glime and Christopher
Ford, Cause No. 99-12650, pending in the 126th Judicial District Court of Travis
County, Texas. Service Guard filed suit against Warrantech Automotive and New
Hampshire Insurance Company on October 28, 1999, seeking an injunction to
transfer claims-handling administration over automobile warranty claims to a
third-party, and seeking an unspecified amount of damages attributed to alleged
improper claims handling and tortious interference with contract. Service Guard
never pursued its original request for injunctive relief. On January 27, 2000,
Service Guard amended its petition to add AIG Warranty Services as a defendant,
again seeking to recover an unspecified amount of damages from all defendants.
On February 2, 2000, Service Guard filed an application for a temporary
restraining order against New Hampshire Insurance Company and AIG Warranty
Services to mediate within twenty-one days the disputes that form the basis for
the requested injunctive relief. Warrantech, Ford and Glime believe Service
Guard's claims against them are wholly without merit and intend to vigorously
defend against those claims.
Service Guard has amended its Complaint to limit its claims against
Warrantech Automotive, Inc. Warrantech Automotive, Inc. has filed an answer
denying Service Guard's allegations and has also filed a cross-claim against New
Hampshire Insurance Company and AIG Warranty Services of Florida, Inc.
Warrantech has filed a claim for coverage of the above mentioned claims
under an errors and omissions policy issued by National Union fire Insurance
Company of Pittsburgh, PA., a member of the AIG family of insurance companies
("National Union"). On June 7, 2000, National Union filed a complaint in the
supreme court of the State of New York, County of New York, against Warrantech
Automotive, Inc. and Warrantech Corporation. The complaint seeks a declaration
from the court that National Union has no obligation under the policy to pay any
of the claims submitted. Warrantech believes National Union's position is
without merit and intends to contest the action vigorously.
8
<PAGE>
Warrantech is not able to estimate its potential liability in either of the
above actions although Warrantech believes that these cases are without merit,
and accordingly, no reserves for potential liabilities have been provided for
either of these actions.
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, 2000.
9
<PAGE>
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 ( "OTC "), 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 June 21, 2000, there were 15,304,579 Common Shares outstanding. On that
date, the closing bid price for the Company's common stock, as reported on the
OTC was $.94.
Following is a summary of the price range of the Company's Common Stock during
the current and 1999 fiscal years:
Common Stock
Quarter of Fiscal 2000
High & Low Bid
--------------
First $ 3.81 $ 2.13
Second $ 2.75 $ .63
Third $ 1.97 $ .59
Fourth $ 2.13 $ .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
The number of stockholders of record of the Company's Common Stock as of June
21, 2000 was 929.
Dividends
No cash dividends have been paid to holders of Common Stock since inception
of the Company. The Company anticipates that, in the foreseeable future,
earnings, if any, will be retained for use in the business or for other
corporate purposes and it is not anticipated that cash dividends will be paid.
10
<PAGE>
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, 2000, 1999
and 1998.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross revenues $101,174,843 $148,868,791 $132,797,006 $106,775,745 $70,830,766
Net (increase) in deferred revenue 13,469,139 (30,640,470) (21,447,327) (20,501,768) (13,885,618)
------------- ------------- ------------- ------------- ------------
Net revenues 114,643,982 118,228,321 111,349,679 86,273,977 56,945,148
------------- ------------- ------------- ------------- ------------
Net income (loss) ($8,206,183) ($7,639,725) $5,619,823 $2,284,867 $396,606
============= ============= ============= ============= ============
Basic earnings (loss) per common share ($0.54) ($0.51) $0.42 $0.18 $0.03
============= ============= ============= ============= ============
Diluted earnings (loss) per common share ($0.54) ($0.51) $0.36 $0.15 $0.02
============= ============= ============= ============= ============
Cash dividend declared NONE NONE NONE NONE NONE
============= ============= ============= ============= ============
Total assets $146,921,154 $186,910,270 $152,811,266 $117,120,031 $91,072,027
============= ============= ============= ============= ============
Long-term debt and
capital lease obligations $1,668,478 $2,420,967 $2,153,286 $2,491,786 $1,124,015
============= ============= ============= ============= ============
Convertible exchangeable
preferred stock -- -- -- -- $6,420,363
============= ============= ============= ============= ============
Common stockholders' equity $1,878,642 $10,400,002 $21,533,883 $14,692,083 $11,576,921
============= ============= ============= ============= ============
Working capital ($2,812,611) $12,183,775 $16,329,259 $13,342,706 $13,003,624
============= ============= ============= ============= ============
</TABLE>
The financial information for the fiscal years ended March 31, 1998, 1997 and
1996 has been restated to effect the change in accounting policy adopted in the
fiscal year ended March 31, 1999 for the recognition of revenue on service
contracts.
11
<PAGE>
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
12
<PAGE>
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.
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 year ended March 31, 1998 was
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 year ended March
31, 1998. Net income for the fiscal year ended March 31, 1998 was restated from
$5,261,037 as previously reported to $5,619,823. The aggregate cumulative
reduction in net income of $10,948,664 through March 31, 1999, represents
deferred revenues net of deferred direct costs that will be reflected in future
operating results.
Results of Operations
Fiscal Year Ended March 31, 2000 Compared to the Fiscal Year Ended March 31,
1999
Gross revenues for the fiscal year ended March 31, 2000 were $101,174,843,
a decrease of 32% or $47,693,948 as compared to $148,868,791 for the fiscal year
ended March 31, 1999. This decrease is directly attributable to the termination
of the Company's relationship with its most significant customer, CompUSA,
effective July 28, 1999. CompUSA accounted for approximately 34% of consolidated
gross revenues for the year ended March 31, 1999. Gross revenues in the Consumer
Products business segment decreased $43,368,064 to $47,255,904 from $90,623,968
for the comparable periods and is directly attributable to the termination of
the Company's relationship with its most significant customer, CompUSA.
Automotive gross revenues decreased $4,502,222 from $47,298,852 to $42,796,630
and was primarily the result of a sales mix change created by a decline in the
Company's private label business resulting from the termination of a high
volume/low margin account. Gross revenues in the International business segment
decreased 34.8% or $6,183,737 to $11,562,947 from $17,746,685 for the comparable
periods. This is primarily the result of the loss of laptop computer business
attributable to the
13
<PAGE>
termination of the Company's relationship with its most significant customer,
CompUSA and the Company's decision to consolidate its' brokerage and insurance
services with US operations.
The net decrease in deferred revenues for the fiscal year ended March 31,
2000 amounted to $13,469,139 as compared with a net increase of $30,640,470 for
the fiscal year ended March 31, 1999. The decrease is directly attributable to
prior period deferred revenues being recognized in the current year being
greater than the amount being deferred to future periods from the current period
revenue.
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, 2000 were $71,324,201 as compared with
$67,501,008 for the fiscal year ended March 31, 1999. The increases in direct
costs as a percentage of gross revenues to 70.5% from 45.3% compared to last
year are primarily the result of the amortization of previously deferred direct
costs being recognized in the current year.
Service, selling and general and administrative expenses ("SG&A") for the
fiscal year ended March 31, 2000 were $49,164,944 as compared to $55,522,487 for
the fiscal year ended March 31, 1999. This decrease is primarily related to
decreases in the number of employees and payroll related costs. SG&A as a
percentage of gross revenues increased to 48.6% from 37.3% for the comparable
periods as a result of the year to year decline in gross revenues.
Provision for bad debt expense decreased to $31,476 for the fiscal year
ended March 31, 2000 as compared to $2,288,580 for the fiscal year ended March
31, 1999. This decrease was caused primarily by increased collection efforts to
reduce the amount of estimated uncollectible accounts.
Depreciation and amortization amounted to $5,997,648 for the fiscal year
ended March 31, 2000 as compared to $5,148,370 for the fiscal year ended March
31, 1999. 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. The 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 efficiency of operations.
Other income decreased to $906,288 for the fiscal year ended March 31, 2000
as compared to $1,043,201 for the fiscal year ended March 31, 1999. Other income
primarily reflects net interest. This is primarily the result of the interest
earned on overnight investments, investments in marketable securities and the
promissory notes reflecting the obligations resulting from the exercise of stock
options by the Company's Chairman of the Board / Chief Executive Officer and two
members of Warrantech's Board of Directors.
The Automotive segment's pretax operating profit in fiscal 2000 was
$1,017,789 lower than the prior year. This was as a result of lower gross margin
dollars in the current fiscal year caused by a sales mix change from an increase
in dealer obligor business and a decline in the Company's private label
business. The Consumer Product segment's pretax operating profit in fiscal 2000
was $9,685,452 higher than the prior year. This increase is the combined result
of (a) a greater amount of amortization of prior period net deferred revenue
being recognized in the current period versus the amortization recognized in the
prior year (b) substantially lower SG&A resulting primarily from decreases in
the number of employees and payroll related costs and (c) lower bad debts in the
current period caused primarily from increased collection efforts. The
International segment's change from an operating profit of $692,245 last year
versus an operating loss of ($5,719,376) this year was primarily caused by its
UK operation. This decline was caused by lower revenues as a result of the loss
of its laptop computer business attributable to the termination of the Company's
relationship with CompUSA and the Company's decision to consolidate its UK
brokerage and insurance services into its US operations. In light of Warrantech
Europe's recent results the Company is reviewing it's operations in the United
Kingdom.
14
<PAGE>
The Company's pretax net income (loss) for the fiscal year ended March 31,
2000 for the Automotive, Consumer Products, International reportable segments
and Other, which includes corporate, was ($2,235,798), ($2,057,869),
($7,066,903) and $392,571 respectively.
The income tax provisions for the fiscal years ended March 31, 2000 and
1999 differ 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, 2000 and 1999 contains a benefit of $2,097,349 and $136,662,
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, 2000 was ($8,206,183) or
($0.54) per basic share as compared to net (loss) of ($7,639,725) or ($0.51) per
basic share for the fiscal year ended March 31, 1999. This change in net (loss)
is the result of the factors listed above.
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.
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 that 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
15
<PAGE>
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.
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.
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, 2000 amounted to $876,446. 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 June 30, 2000. 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 that
date, no assurances can be given that this will be accomplished.
16
<PAGE>
During the fiscal year ended March 31, 2000 the Company repurchased 100,000
shares of Warrantech Corporation common stock for treasury purposes. The
aggregate amount of these purchases totaled $74,383. 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 recently agreed to restructure these loans by capitalizing the
interest due on the loans and making the loans payable over five (5) years, with
respect to Mr. Tweed and Mr. White, and over one (1) year with respect to Mr.
San Antonio. Interest on the new loans to Messrs. Tweed and White will accrue
annually at the applicable federal rate (approximately 6.2%) but will first
become payable on the third anniversary of the new loans and be payable annually
thereafter. The new loan to Mr. San Antonio, which is payable in one year, is
without interest. The specific terms of this new note agreement with Mr. San
Antonio are still being negotiated. The total amount of the new loans, including
the capitalized interest, which accrued on the prior loans through March 31,
2000, is $9,505,406.
While working capital at March 31, 2000, was ($2,812,611), the Company
believes that internally generated funds will be sufficient to finance its
current operations for at least the next twelve months. The Company is
continuing its' 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 service,
selling, general and administrative expenses.
The effect of inflation has not been significant to the Company.
Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 121
("SFAS No 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". The statement requires that the Company
recognizes and measures impairment losses of long-lived assets, certain
identifiable intangibles, value long -lived assets to be disposed of and
long-term liabilities. At March 31, 2000 and 1999, the carrying value of the
Company's other assets and liabilities approximate their estimated fair value.
Effective April 1, 1999, the Company adopted 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:
o Definition of computer software costs
o Accounting for various stages of development o Accounting for internal
and external costs
o Need to assess impairment under SFAS 121
o 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.
17
<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 had a
material impact on its results of operations, financial condition or liquidity.
Common European Currency
On January 1, 1999, certain of the member nations of the European Economic
and Monetary Union ("EMU") 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, 2000, 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.
18
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page No
Report of Independent Auditors ........................................... 20
Consolidated Financial Statements:
Balance Sheets as of March 31, 2000 and 1999 ...................... 21
Statements of Operations and Comprehensive Income
For the Fiscal Years Ended March 31, 2000, 1999 and 1998 .......... 22
Statements of Common Stockholders' Equity
For the Fiscal Years Ended March 31, 2000, 1999 and 1998 .......... 23
Statements of Cash Flows
For the Fiscal Years Ended March 31, 2000, 1999 and 1998 .......... 24
Notes to Consolidated Financial Statements ............................... 25-39
Consolidated Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts ............ 40
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.
19
<PAGE>
[LETTERHEAD]
WEINICK SANDERS LEVENTHAL & CO., LLP
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Warrantech Corporation
We have audited the accompanying consolidated balance sheets of Warrantech
Corporation and Subsidiaries as of March 31, 2000 and 1999 and its related
consolidated statements of operations and comprehensive income, common
stockholders' equity and cash flows for the fiscal years ended March 31, 2000,
1999 and 1998. Our audits also included the financial statement schedules listed
in the index. These consolidated financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with 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, 2000 and 1999 and the
consolidated results of their operations and comprehensive income and their cash
flows for the years ended March 31, 2000, 1999 and 1998, 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.
Weinick Sanders Leventhal & Co., LLP
New York, NY
June 21, 2000
20
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
March 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,035,003 $ 15,032,473
Investments in marketable securities 4,638,875 2,961,602
Accounts receivable, (net of allowances of
$1,164,125 and $1,115,285, respectively) 11,858,653 39,275,404
Other receivables, net 2,416,248 5,924,332
Income tax receivable 4,035,346 1,147,324
Deferred income taxes 926,321 1,419,854
Prepaid expenses and other current assets 1,238,051 1,537,633
------------- -------------
Total current assets 35,148,497 67,298,622
------------- -------------
Property and equipment, net 15,417,255 16,277,473
Other assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of $5,550,861
and $4,882,009, respectively) 2,607,671 3,276,524
Deferred income taxes 8,279,643 9,603,277
Deferred direct costs 80,797,199 86,107,696
Investments in marketable securities 1,499,247 1,321,019
Restricted cash 800,000 800,000
Split dollar life insurance policies 827,262 1,370,010
Notes receivable 1,167,725 477,767
Collateral security fund 199,389 199,389
Other assets 177,266 178,493
------------- -------------
Total other assets 96,355,402 103,334,175
------------- -------------
Total Assets $ 146,921,154 $ 186,910,270
============= =============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 1,451,020 $ 1,558,447
Insurance premiums payable 18,161,357 36,585,920
Accounts and commissions payable 8,857,556 8,524,040
Legal settlements payable -- 100,000
Accrued expenses and other current liabilities 9,491,175 8,346,440
------------- -------------
Total current liabilities 37,961,108 55,114,847
------------- -------------
Deferred revenues 105,028,425 118,497,564
Long-term debt and capital lease obligations 1,668,478 2,420,967
Deferred rent payable 384,501 476,890
------------- -------------
Total liabilities 145,042,512 176,510,268
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000 shares
issued - none at March 31, 2000 and March 31, 1999 -- --
Common stock - $.007 par value authorized - 30,000,000 shares
issued - 16,505,911 shares at March 31, 2000 and
16,501,786 shares at March 31, 1999 115,541 115,513
Additional paid-in capital 23,737,835 23,728,881
Loans to directors and officers (9,505,406) (9,006,699)
Accumulated other comprehensive income, net of taxes (144,132) (93,534)
Retained earnings (deficit) (8,101,029) 105,154
------------- -------------
6,102,809 14,849,315
Treasury stock - at cost, 1,211,024 shares at March 31, 2000
and 1,280,300 shares at March 31, 1999 (4,224,167) (4,449,313)
------------- -------------
Total Stockholders' Equity 1,878,642 10,400,002
------------- -------------
Total Liabilities and Stockholders' Equity $ 146,921,154 $ 186,910,270
============= =============
</TABLE>
See independent auditors' report and accompanying notes to consolidated
financial statements.
21
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------------------------
2000 1999 1998
----------------------------------------------------------
<S> <C> <C> <C>
Gross revenues $ 101,174,843 $ 148,868,791 $ 132,797,006
Net (increase) decrease in deferred revenues 13,469,139 (30,640,470) (21,447,327)
------------- ------------- -------------
Net revenues 114,643,982 118,228,321 111,349,679
Costs and expenses:
Direct costs 71,324,201 67,501,008 48,663,577
Service, selling, and general and administrative 49,164,944 55,522,487 49,504,178
Provision for bad debt expense 31,476 2,288,580 910,675
Depreciation and amortization 5,997,648 5,148,370 3,758,213
------------- ------------- -------------
Total costs and expenses 126,518,269 130,460,445 102,836,643
------------- ------------- -------------
Income (loss) from operations (11,874,287) (12,232,124) 8,513,036
Other income-net 906,288 1,043,201 819,732
------------- ------------- -------------
Income (loss) before provision for income taxes (10,967,999) (11,188,923) 9,332,768
Provision (benefit) for income taxes (2,761,816) (3,549,198) 3,712,945
------------- ------------- -------------
Net income (loss) ($ 8,206,183) ($ 7,639,725) $ 5,619,823
============= ============= =============
Earnings per share:
Basic ($ 0.54) ($ 0.51) $ 0.42
============= ============= =============
Diluted ($ 0.54) ($ 0.51) $ 0.36
============= ============= =============
Weighted average number of shares outstanding:
Basic 15,231,146 15,098,242 13,259,964
============= ============= =============
Diluted 15,231,146 15,098,242 15,617,350
============= ============= =============
<CAPTION>
For the Years Ended March 31,
----------------------------------------------------------
Comprehensive Income 2000 1999 1998
----------------------------------------------------------
Net income (loss) ($ 8,206,183) ($ 7,639,725) $ 5,619,823
Other Comprehensive Income, net of tax:
Foreign currency translation adjustments (26,414) (179,539) 62,009
Unrealized gain (loss) on investments (24,184) 397 8,618
------------- ------------- -------------
Comprehensive Income ($ 8,256,781) ($ 7,818,867) $ 5,690,450
============= ============= =============
</TABLE>
See independent auditors' report and accompanying notes to consolidated
financial statements.
22
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Common Stock Outstanding (shares)
Balance, beginning of year 16,501,786 13,449,382 13,261,636
Exercise of common stock options -- 3,010,000 142,262
Issuance of common stock 4,125 42,404 45,484
------------- ------------- -------------
Balance, end of year 16,505,911 16,501,786 13,449,382
============= ============= =============
Common Stock
Balance, beginning of year $ 115,513 $ 94,146 $ 90,911
Exercise of unrestricted common stock options -- 70 996
Exercise of restricted stock options -- 21,000 --
Issuance of common stock 28 297 2,239
------------- ------------- -------------
Balance, end of year $ 115,541 $ 115,513 $ 94,146
============= ============= =============
Additional paid-in capital
Balance, beginning of year $ 23,728,881 $ 14,124,700 $ 13,033,185
Exercise of unrestricted common stock options -- 49,930 697,355
Exercise of restricted common stock options -- 9,314,588 --
Issuance of common stock 8,954 239,663 394,160
------------- ------------- -------------
Balance, end of year $ 23,737,835 $ 23,728,881 $ 14,124,700
============= ============= =============
Loans to directors and officers
Balance, beginning of year ($ 9,006,699) $ 0 $ 0
Loans for exercise of restricted common stock
options and accrued interest (498,707) (9,006,699) --
------------- ------------- -------------
Balance, end of year ($ 9,505,406) ($ 9,006,699) $ 0
============= ============= =============
Accumulated other comprehensive income
Balance, beginning of year ($ 93,534) $ 85,608 $ 14,981
Foreign currency translation adjustments (26,414) (179,539) 62,009
Unrealized gain (loss) on investments (24,184) 397 8,618
------------- ------------- -------------
Balance, end of year ($ 144,132) ($ 93,534) $ 85,608
============= ============= =============
Retained earnings (deficit)
Balance, beginning of year $ 105,154 $ 7,744,879 $ 2,125,056
Net income (loss) (8,206,183) (7,639,725) 5,619,823
------------- ------------- -------------
Balance, end of year ($ 8,101,029) $ 105,154 $ 7,744,879
============= ============= =============
Deferred compensation
Balance, beginning of year $ 0 ($ 21,631) ($ 78,231)
Amortization of deferred compensation -- 21,631 56,600
------------- ------------- -------------
Balance, end of year $ 0 $ 0 ($ 21,631)
============= ============= =============
Common stock in treasury (shares)
Balance, beginning of year (1,280,300) (100,000) (100,000)
Purchase of treasury shares (100,000) (1,180,300) --
Issuance of treasury shares 169,276 -- --
------------- ------------- -------------
Balance, end of year (1,211,024) (1,280,300) (100,000)
============= ============= =============
Common stock in treasury (amount)
Balance, beginning of year ($ 4,449,313) ($ 493,819) ($ 493,819)
Purchase of treasury shares (74,383) (3,955,494) --
Issuance of treasury shares 299,529 -- --
------------- ------------- -------------
Balance, end of year ($ 4,224,167) ($ 4,449,313) ($ 493,819)
============= ============= =============
------------- ------------- -------------
Total Stockholders' Equity $ 1,878,642 $ 10,400,002 $ 21,533,883
============= ============= =============
</TABLE>
See independent auditors' report and accompanying notes to consolidated
financial statements.
23
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 8,206,183) ($ 7,639,725) $ 5,619,823
------------- ------------- -------------
Adjustments to reconcile net income (loss) to net cash
provided by operating
activities:
Depreciation and amortization 5,997,648 5,148,370 3,758,213
Provision for bad debt expense 31,476 2,288,580 910,675
Deferred revenues (13,469,139) 30,640,470 21,447,327
Deferred income taxes 1,817,167 (2,398,183) (657,828)
Deferred rent payable (92,389) (131,846) (93,497)
Other 274,986 14,074 81,900
Increase (decrease) in cash flows as a result of
changes in asset and liability balances:
Deferred direct costs 5,310,497 (20,753,355) (20,198,990)
Accounts receivable 27,416,751 (11,767,393) (5,511,145)
Other receivables 3,508,084 (5,645,183) 1,677,046
Income taxes (2,888,022) (3,220,608) 1,928,886
Prepaid expenses and other current assets 299,582 237,683 (141,617)
Split dollar life insurance policies 542,748 (315,965) (188,503)
Other assets 1,227 (58,365) 52,312
Insurance premiums payable (18,424,563) 14,316,331 2,667,299
Accounts and commissions payable 333,516 825,092 2,437,081
Legal settlements payable (100,000) (100,000) (1,435,000)
Accrued expenses and other current liabilities 1,144,735 2,334,868 1,879,459
------------- ------------- -------------
Total adjustments 11,704,304 11,414,570 8,613,618
------------- ------------- -------------
Net cash provided by operating activities 3,498,121 3,774,845 14,233,441
------------- ------------- -------------
Cash flows from investing activities:
Property and equipment purchased-net of retirements (4,133,870) (4,870,260) (4,609,623)
Net cash paid for acquired business -- -- (888,541)
Purchase of marketable securities (5,805,000) (3,307,886) (360,324)
Proceeds from sales of marketable securities 3,935,000 1,542,586 184,225
------------- ------------- -------------
Net cash (used in) investing activities (6,003,870) (6,635,560) (5,674,263)
Cash flows from financing activities:
(Increase) decrease in notes receivable (689,958) 176,301 (611,992)
Exercise of common stock options and stock grants 8,982 289,960 1,094,750
Purchase treasury stock (74,383) (3,955,494) --
Repayments, notes and capital leases (1,736,362) (2,679,631) (2,011,809)
------------- ------------- -------------
Net cash (used in) financing activities (2,491,721) (6,168,864) (1,529,051)
Net increase (decrease) in cash and cash equivalents (4,997,470) (9,029,579) 7,030,127
Cash and cash equivalents at beginning of year 15,032,473 24,062,052 17,031,925
------------- ------------- -------------
Cash and cash equivalents at end of year $ 10,035,003 $ 15,032,473 $ 24,062,052
============= ============= =============
Supplemental Cash Flow Information:
Cash payments for:
Interest $ 344,969 $ 458,598 $ 378,812
============= ============= =============
Income taxes $ 93,638 $ 1,109,616 $ 2,428,590
============= ============= =============
Non-Cash Investing and financing activities:
Property and equipment financed through capital leases $ 537,293 $ 2,134,097 $ 2,047,136
Exercise of restricted common stock options -- 9,335,588 --
Increase in loans to officers and directors (498,707) (9,006,699) --
Issuance of treasury stock 299,529
Capital leases refinanced 339,153 -- --
</TABLE>
See independent auditors' report and accompanying notes to consolidated
financial statements.
24
<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 that 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.
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
25
<PAGE>
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.
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,
2000, 1999 or 1998.
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,
2000 and 1999.
The Company had on deposit $10,292,980 and $12,521,188 of cash in excess of
federally insured limits at March 31, 2000 and 1999, 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.
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, 2000, 1999 and 1998 were
$463,937, $790,070 and $780,945, respectively.
26
<PAGE>
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, 2000, 1999 and 1998 amounted to $668,852, $669,053
and $594,364, 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 minimal 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.
Accounting Pronouncements - The Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS No 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The statement requires that the Company recognizes and measures
impairment losses of long-lived assets, certain identifiable intangibles,
value long -lived assets to be disposed of and long-term liabilities. At
March 31, 2000 and 1999, the carrying value of the Company's other assets
and liabilities approximate their estimated fair value.
Effective April 1, 1999, the Company adopted 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:
o Definition of computer software costs
o Accounting for various stages of development
o Accounting for internal and external costs
o Need to assess impairment under SFAS 121
o 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
had a material impact on its results of operations, financial condition or
liquidity.
27
<PAGE>
Reclassification - Certain amounts from the prior years have been
reclassified to conform to 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 year ended March 31, 1998 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 previously given retroactive effect to this new accounting
policy by restating previously reported financial statements for the fiscal
year ended March 31, 1998.
The impact of the restatement for the fiscal year ended March 31, 1998 is
as follows:
<TABLE>
<CAPTION>
------------- -------------
1998 1998
As Restated As Previously
Reported
------------- -------------
<S> <C> <C>
Gross revenues $ 132,797,006 $ 201,724,332
Net (increase) in deferred revenue (21,447,327) (1,985,798)
------------- -------------
Net revenues 111,349,679 199,738,534
------------- -------------
Net income $ 5,619,823 $ 5,261,037
============= =============
Basic earnings per common share $ 0.42 $ 0.40
============= =============
Diluted earnings per common share $ 0.36 $ 0.34
============= =============
Cash dividend declared NONE NONE
============= =============
Total assets $ 152,811,266 $ 81,917,288
============= =============
Long-term debt and
Capital lease obligations $ 2,153,286 $ 2,153,286
============= =============
Common stockholders' equity $ 21,533,883 $ 31,764,955
============= =============
Working capital $ 16,329,259 $ 16,551,543
============= =============
</TABLE>
3. RESTRICTED CASH
At March 31, 2000 and 1999 cash in the amount of $800,000 is on deposit
with a Florida regulatory agency to comply with its state insurance laws.
28
<PAGE>
4. INVESTMENTS IN MARKETABLE SECURITIES
At March 31, 2000, investments in marketable securities are comprised of
the following:
<TABLE>
<CAPTION>
Gross Unrealized Aggregate Carrying Amount
Amortized ---------------- Fair ---------------
Cost Gains (Losses) Value Short Term Long Term
---------- ---------------- ---------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds $6,164,459 $824 ($27,161) $6,138,122 $4,638,875 $1,499,247
---------- ---------------- ---------- ------------------------
Total Investments in
Marketable Securities $6,164,459 $824 ($27,161) $6,138,122 $4,638,875 $1,499,247
========== ================ ========== ========================
</TABLE>
At March 31, 1999, investments in marketable securities are comprised of
the following: Aggregate
<TABLE>
<CAPTION>
Gross Unrealized Aggregate Carrying Amount
Amortized ---------------- Fair ---------------
Cost Gains (Losses) Value Short Term Long Term
---------- ---------------- ---------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
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
========== ================ ========== ========================
</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, 2000, 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.
<TABLE>
<CAPTION>
Aggregate
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Investments available for sale:
Due in one year or less $4,643,428 $4,638,875
Due after one year through five years 1,521,031 1,499,247
---------- ----------
$6,164,459 $6,138,122
========== ==========
</TABLE>
5. OTHER RECEIVABLES, NET
The nature and amounts of other receivables, net as of March 31, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Due from Insurance companies/dealers 2,515,770 6,440,289
Employee/Agent Advances 352,062 530,910
Other 717,307 871,389
----------- -----------
3,585,139 7,842,588
Allowance for doubtful accounts (1,168,891) (1,918,256)
----------- -----------
$ 2,416,248 $ 5,924,332
=========== ===========
</TABLE>
29
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Automobiles $ 172,118 $ 277,304
Equipment, furniture and fixtures 9,021,170 7,423,893
Leasehold improvements 1,368,827 1,290,543
Software development costs 13,739,653 11,281,344
----------- -----------
24,301,768 20,273,084
Less: Accumulated depreciation and Amortization 12,113,425 8,474,162
----------- -----------
12,188,343 11,798,922
----------- -----------
Assets under capital leases:
Cost 8,785,251 8,980,018
Less: Accumulated amortization 5,556,339 4,501,467
----------- -----------
3,228,912 4,478,551
----------- -----------
Total Property and Equipment, net $15,417,255 $16,277,473
=========== ===========
</TABLE>
Amortization expense on assets under capital leases for the years ended
March 31, 2000, 1999 and 1998 was $1,616,808, $1,573,695 and $1,188,173,
respectively. Depreciation expense on property and equipment other than
under capital leases for the years ended March 31, 2000, 1999 and 1998 was
$3,711,988, $2,883,991, and $1,939,858, respectively.
The Company capitalized $2,458,309 and $3,676,904 for the fiscal years
ended March 31, 2000 and 1999, 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.
7. COLLATERAL SECURITY FUND
At March 31, 2000 and 1999 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
Through March 31, 2000 and 1999, the Company made payments on split dollar
insurance policies on the lives of eleven and ten officers of the Company,
respectively. The cash surrender value of these policies is $827,262 and
$1,370,010 as of March 31, 2000 and 1999, 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>
<CAPTION>
March 31,
---------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Capital lease obligations - for property and
equipment payable monthly with interest
rates ranging from 6.9% to 15.3% through 2006 $3,119,498 $3,979,414
Less: Current maturities 1,451,020 1,558,447
---------- ----------
Long-term portion $1,668,478 $2,420,967
========== ==========
</TABLE>
30
<PAGE>
The aggregate amounts of maturities at March 31, 2000 are as follows:
Minimum
Future
Lease Payments
Fiscal Year --------------
2001 1,632,864
2002 912,204
2003 473,818
2004 300,130
2005 154,087
2006 and thereafter 62,370
-------------
3,535,473
Less amount representing interest 415,975
-------------
Net $3,119,498
=============
The capital lease obligations are collateralized by the property and
equipment related to the underlying leases.
10. INCOME TAXES
A reconciliation of the income tax provision to the amount computed using
the federal statutory rate is as follows:
<TABLE>
<CAPTION>
For the years ended March 31,
2000 1999 1998
----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate ($3,729,118) (34.0%) ($3,804,232) (34.0%) $ 3,212,327 34.0%
State tax effect 111,381 1.0% (88,135) (0.8%) 83,597 0.9%
Goodwill 178,850 1.6% 178,919 1.6% 147,186 1.6%
Other 677,071 6.2% 164,250 1.5% 269,835 3.3%
----------------------- ----------------------- ----------------------
Provision for income taxes ($2,761,816) (25.2%) ($3,549,198) (31.7%) $ 3,712,945 39.8%
======================= ======================= ======================
</TABLE>
The components of income tax expense
are as follows:
<TABLE>
<CAPTION>
Provision
For the Year Ended March 31, 2000: Current Deferred (Benefit)
---------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Federal ($4,714,450) $ 3,247,050 ($1,467,400)
State 120,773 418,144 538,917
Foreign 14,694 (1,848,027) (1,833,333)
----------- ----------- -----------
Total ($4,578,893) $ 1,817,167 ($2,761,816)
=========== =========== ===========
<CAPTION>
Provision
For the Year Ended March 31, 2000: Current Deferred (Benefit)
---------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
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)
=========== =========== ===========
<CAPTION>
Provision
For the Year Ended March 31, 2000: Current Deferred (Benefit)
---------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
31
<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:
For the Years Ended March 31,
-----------------------------
2000 1999
------------ ------------
Deferred Tax Assets
Deferred revenue $ 36,724,247 $ 41,912,394
Deferred rent 134,799 166,525
Provision for doubtful accounts 817,312 1,076,093
Reserve for customer refunds -- 99,435
Accrued bonus 109,009 194,796
Litigation Reserve -- 39,940
Foreign loss benefit 2,097,349 136,662
Net state benefit 132,949 332,367
Other 84,165 42,642
------------ ------------
Total assets 40,099,830 44,000,854
Deferred Tax Liabilities
Deferred Direct Costs (28,200,113) (30,465,376)
Tax vs. book depreciation (613,327) (415,302)
Section 174 expense (1,886,158) (1,892,630)
------------ ------------
Total liabilities (30,699,598) (32,773,308)
------------ ------------
9,400,232 11,227,546
Less: Valuation Allowance (194,268) (204,415)
------------ ------------
Net deferred tax asset $ 9,205,964 $ 11,023,131
============ ============
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, 2000, 1999 and 1998 was $2,758,830, $2,305,598, and $2,187,174,
respectively.
Future minimum lease commitments as at March 31, 2000 are as follows:
Fiscal Year
-----------
2001 $2,044,436
2002 1,995,825
2003 2,006,612
2004 1,683,417
2005 949,699
2006 and thereafter 1,986,567
-------------
$10,666,556
=============
Employment Contracts - Employment contracts exist between the Company and
its officers and certain key employees, which provide for annual base
compensation of $2,707,530. 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 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, 2000
amounted to $876,446. In addition, the
32
<PAGE>
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 June 30, 2000. 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 that date, no assurances can be
given that this will be accomplished.
Litigation -
The Company is from time to time involved in litigation incidental to
the conduct of its business.
On December 9, 1999, a complaint and order to show cause were filed
against Warrantech Automotive, Inc. in the Supreme Court of the State of
New York by American Home Assurance Company, Illinois National Insurance
Company, National Union Insurance Company of Louisiana and the New
Hampshire Insurance Company (collectively, "AIG") in which AIG sought to
inspect and copy certain books and records kept by Warrantech in the course
of the business it conducted under a General Agency Agreement ("GAA") with
AIG. On December 14, 1999, this action was removed by Warrantech to the
United States District Court for the Southern District of New York. The
action is entitled "American Home Assurance Co., et al, v. Warrantech
Automotive, Inc., 99 Civ. 12040 (BSG)." At a December 16, 1999 hearing,
Warrantech agreed to make the books and records at issue available to AIG
for copying. On January 24, 2000 AIG made a motion (the "Motion to Amend")
to amend its complaint to add claims for replevin and a declaratory
judgment seeking possession of the originals of the books and records and
to add claims for breach of contract, breach of fiduciary duty, negligence
and gross negligence based on allegations that Warrantech mishandled claims
under the GAA. AIG seeks damages in excess of $20 million. AIG also moved
for summary judgment (the "Motion for Summary Judgment") on its claims
seeking possession of the books and records. Warrantech believes all of
these claims are without merit and intends to defend them vigorously. On
February 7, 2000, Warrantech filed papers opposing AIG's motion to amend
its complaint insofar as it seeks to add a claim for replevin and a
declaratory judgment and opposing the motion for summary judgment.
Warrantech believes the claims in AIG's proposed amended pleading are
entirely without merit and intends to vigorously defend against such claims
if the Court grants AIG's motion to amend. The Motion to Amend and the
Motion for Summary Judgment are currently pending and the parties are
awaiting the Court's decision on the motions.
Service Guard Insurance Agency, Inc. ("Service Guard") v. Warrantech
Automotive, Inc., New Hampshire Insurance Company, Ronald Glime and
Christopher Ford, Cause No. 99-12650, pending in the 126th Judicial
District Court of Travis County, Texas. Service Guard filed suit against
Warrantech Automotive and New Hampshire Insurance Company on October 28,
1999, seeking an injunction to transfer claims-handling administration over
automobile warranty claims to a third-party, and seeking an unspecified
amount of damages attributed to alleged improper claims handling and
tortious interference with contract. Service Guard never pursued its
original request for injunctive relief. On January 27, 2000, Service Guard
amended its petition to add AIG Warranty Services as a defendant, again
seeking to recover an unspecified amount of damages from all defendants. On
February 2, 2000, Service Guard filed an application for a temporary
restraining order against New Hampshire Insurance Company and AIG Warranty
Services to mediate within twenty-one days the disputes that form the basis
for the requested injunctive relief. Warrantech, Ford and Glime believe
Service Guard's claims against them are wholly without merit and intend to
vigorously defend against those claims.
Service Guard has amended its Complaint to limit its claims against
Warrantech Automotive, Inc. Warrantech Automotive, Inc. has filed an answer
denying Service Guard's allegations and has also filed a cross-claim
against New Hampshire Insurance Company and AIG Warranty Services of
Florida, Inc.
Warrantech has filed a claim for coverage of the above mentioned claims
under an errors and omissions policy issued by National Union fire
Insurance Company of Pittsburgh, PA., a member of the AIG family of
insurance companies ("National Union"). On June 7, 2000, National Union
filed a complaint in the supreme court of the State of New York, County of
New York, against Warrantech Automotive, Inc. and Warrantech Corporation.
The complaint seeks a declaration from the court that National Union has no
obligation under the policy to pay any of the claims submitted. Warrantech
believes National Union's position is without merit and intends to contest
the action vigorously.
Warrantech is not able to estimate its potential liability in either of the
above actions although Warrantech believes that these cases are without
merit, and accordingly, no reserves for potential liabilities have been
provided for either of these actions.
33
<PAGE>
12. STOCK OPTION PLAN
At March 31, 2000, 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 fiscal years ended March 31,
2000 and 1999, and $92,400 for fiscal 1998. 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 as follows:
<TABLE>
<CAPTION>
For the Years ended March 31,
2000 1999 1998
--------------------------------------------------
<S> <C> <C> <C>
Net Income (loss) as reported ($8,206,183) ($7,639,725) $5,619,823
Pro Forma net income (loss) (8,638,433) (8,663,980) 5,280,271
Basic Earnings Per Share as reported ($0.54) ($0.51) $0.42
Basic Pro Forma EPS ($0.57) ($0.57) $0.40
</TABLE>
The fair value of Warrantech stock options used to compute pro forma net
income and earnings per share disclosures is the estimated value at grant
date using the Black-Scholes option-pricing model with the following
weighted average assumptions for years ended March 31, 2000, 1999 and 1998
respectively: expected dividends of 0%; expected volatility of 50%; a risk
free interest rate of 5.0%; 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 recently agreed to restructure these loans by capitalizing the
interest due on the loans and making the loans payable over five (5) years,
with respect to Mr. Tweed and Mr. White, and over one (1) year with respect
to Mr. San Antonio. Interest on the new loans to Messrs. Tweed and White
will accrue annually at the applicable federal rate (approximately 6.2%)
but will first become payable on the third anniversary of the new loans and
be payable annually thereafter. The new loan to Mr. San Antonio, which is
payable in one year, is without interest. The specific terms of this new
note agreement with Mr. San Antonio are still being negotiated. The total
amount of the new loans, including the capitalized interest which accrued
on the prior loans through March 31,2000, is $9,505,406.
34
<PAGE>
Presented below is a summary of the status of the stock options and the
related transactions for the years ended March 31, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 1,014,225 $ 4.36 3,295,534 $ 2.95 3,484,553 $ 3.01
Granted -- -- 996,837 4.54 92,147 7.27
Canceled/Surrendered (432,135) 5.51 (197,615) (5.93) (138,904) (5.40)
Exercised -- -- (3,010,000) (2.70) (142,262) (4.91)
Forfeited -- -- (70,531) (7.59)
-----------------------------------------------------------------------------
Options outstanding at end of year 582,090 $ 3.51 1,014,225 $ 4.36 3,295,534 $ 2.95
=============================================================================
-----------------------------------------------------------------------------
Options exercisable at end of year 81,663 $ 4.47 114,587 $ 4.47 3,132,374 $ 2.84
=============================================================================
</TABLE>
The weighted average fair value of stock options at date of grant,
calculated using the Black-Scholes option-pricing model, granted during the
years ended March 31, 2000, 1999 and 1998 is $0, $2.82 and $3.08
respectively.
The Company recognized costs of $0, $21,631 and $56,599 for the years ended
March 31, 2000, 1999 and 1998, respectively, for stock-based compensation
to employees.
The following table summarizes the status of Warrantech's stock options
outstanding and exercisable at March 31, 2000.
<TABLE>
<CAPTION>
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
------------------------ ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.25 to $3.38 535,813 4.65 $3.35 35,386 $3.25
$4.31 to $6.50 46,277 7.22 5.40 46,277 5.40
------------------------------------------------------------------------------------
Total 582,090 4.85 $3.51 81,663 $4.47
====================================================================================
</TABLE>
35
<PAGE>
13. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income $ 1,325,638 $ 1,303,410 $ 1,120,702
Interest expense (344,969) (458,598) (378,812)
Gain (loss) on sale of assets (63,350) 103,988 --
Miscellaneous Income (expense) (11,031) 94,401 77,842
----------- ----------- -----------
$ 906,288 $ 1,043,201 $ 819,732
=========== =========== ===========
</TABLE>
14. ACQUISITIONS
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.
15. SIGNIFICANT CUSTOMERS
The Company has one significant customer, Staples, which accounted for
approximately 10%, 6% and 3%, respectively, of consolidated gross revenues
for the years ended March 31, 2000, 1999 and 1998. CompUSA, accounted for
approximately 34% and 34%, respectively, of consolidated gross revenues for
the years ended March 31, 1999 and 1998. 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 had an adverse impact on current operating results.
16. EARNINGS PER SHARE
The computations of earnings per share for the years ended March 31, 2000,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
For the Years Ended March 31,
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) applicable to common stock ($8,206,183) ($7,639,725) $5,619,823
============ =========== ===========
Denominator:
Average outstanding shares used in the computation of per
share earnings:
Common Stock issued-Basic shares 15,231,146 15,098,242 13,259,964
Stock Options (treasury method) 2,357,386
------------ ----------- -----------
Diluted shares 15,231,146 15,098,242 15,617,350
============ =========== ===========
Earnings Per Common Share:
Basic ($0.54) ($0.51) $0.42
============ =========== ===========
Diluted ($0.54) ($0.51) $0.36
============ =========== ===========
</TABLE>
36
<PAGE>
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of related
tax, for the years ended March 31, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
For the Years Ended
---------------------------------------------------
March 31,
---------------------------------------------------
2000 1999 1998
---------------------------------------------------
<S> <C> <C> <C>
Unrealized gain/(loss) on investments ($ 16,732) $ 7,452 $ 7,055
Accumulated translation adjustments (127,400) (100,986) 78,553
--------- --------- -------
Accumulated other comprehensive income ($144,132) ($ 93,534) $85,608
========= ========= =======
</TABLE>
37
<PAGE>
18. 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. Other includes intersegment eliminations of
revenues and receivables and net unallocated Corporate expenses.
<TABLE>
<CAPTION>
Consumer Reportable
Year ended Automotive Products International Segments Other Total
March 31,2000 ------------ ------------ ------------- ------------- ------------ -------------
-------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 42,796,630 $ 47,255,904 $ 11,562,947 $ 101,615,481 ($ 440,638) $ 101,174,843
Profit (loss) from operations 1,948,799 6,262,782 (5,719,376) 2,492,205 (14,366,492) (11,874,287)
Pretax Income (Loss) (2,235,798) (2,057,869) (7,066,903) (11,360,570) 392,571 (10,967,999)
Net Interest/ dividend income 50,146 66,104 4,093 120,343 860,326 980,669
Depreciation/Amortization 777,101 1,601,833 893,666 3,272,600 2,725,048 5,997,648
Total Assets 64,836,045 59,014,454 7,035,343 130,885,842 16,035,312 146,921,154
March 31,1999
Revenues $ 47,298,852 $ 90,623,968 $ 17,746,685 $ 155,669,505 ($ 6,800,714) $ 148,868,791
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/ dividend 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
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/ dividend 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
</TABLE>
38
<PAGE>
19. Quarterly Financial Data (Unaudited)
The following fiscal 2000 and 1999 quarterly financial information for each
of the three month periods ended June 30, September 30, December 31, 1999
and 1998 and March 31, 2000 and 1999 is unaudited. However, in the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the results of operations for such periods have
been made for a fair presentation of the results shown.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
June 30, September 30,
-------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $23,253,953 $24,134,146 $26,977,652 $31,529,664
(Loss) from operations (4,948,974) (3,943,437) (3,916,266) (1,331,354)
(Loss) before provision for income taxes (4,695,879) (3,773,477) (3,658,914) (984,093)
Net (loss) (3,432,264) (1,790,040) (2,584,073) (1,081,041)
(Loss) per Share
Basic ($0.23) ($0.13) ($0.17) ($0.07)
Fully Diluted ($0.23) ($0.13) ($0.17) ($0.07)
<CAPTION>
Quarter Ended Quarter Ended
December 31, March 31,
------------ ---------
1999 1998(1) 2000 1999
---- ------- ---- ----
<S> <C> <C> <C> <C>
Net revenues $30,744,850 $30,272,681 $33,667,527 $32,291,830
(Loss) from operations (2,100,073) (1,814,579) (908,974) (5,142,754)
(Loss) before provision for income taxes (1,824,331) (1,503,362) (788,875) (4,927,991)
Net (loss) (1,652,212) (1,239,524) (537,634) (3,529,120)
(Loss) per Share
Basic ($0.11) ($0.08) ($0.03) ($0.23)
Fully Diluted ($0.11) ($0.08) ($0.03) ($0.23)
</TABLE>
(1) 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 was a
reduction in earnings of $1,529,000 or $.10 per share.
39
<PAGE>
WARRANTECH CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Column Column Column Column Column
A B C D E
------------------------------------------------------------------------------------------------------------------------------------
Additions Deductions-
Balance at ----------------------------------- Balance at
Description Beginning Charged to Costs Charged to Other End of
of Year and Expense Accounts-Describe Describe (a) Year
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 2000
Allowance for doubtful accounts:
Trade A/R $1,115,285 $ 258,190 $209,350 $1,164,125
Other A/R 1,918,256 (226,714) 522,651 1,168,891
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
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
</TABLE>
(a) Amount of receivables charged to the allowance during the year.
See independent auditor's report and accompanying notes to consolidated
financial statements
40
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
N/A
41
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by Reference to the Company's Definitive Proxy Statement
for its 2000 Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A promulgated under the Securities and Exchange Act of
1934, as amended (the "Proxy Statement").
Item 11. Executive Compensation
Incorporated by Reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by Reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by Reference to the Proxy Statement.
42
<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.
(g) - Insurance policy between the Company and Houston General
43
<PAGE>
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).
44
<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.
45
<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: June 28, 2000 By: Joel San Antonio
------------------------------
Joel San Antonio
Chairman of the Board and
Chief Executive Officer
Dated: June 28, 2000 By: Richard F. Gavino
------------------------------
Richard F. Gavino
Chief Financial Officer and
Executive Vice President
46
<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
47
<PAGE>
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, it's 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.
48
