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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from _______ to _______
Commission File No. 0-13084
WARRANTECH CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3178732
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
2220 HIGHWAY 121, SUITE 100 BEDFORD, TEXAS 76021
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (800) 544-9510
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock $.007 par value None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.007 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
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|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of September 30, 2002, based upon the
closing price of the registrant's common stock on September 30, 2002 was
$13,784,270 (For purposes of calculating the preceding amount only, all
directors and executive officers of the registrant are assumed to be
affiliates.)
The number of shares outstanding of the registrant's common stock as of May
30, 2003 was 15,280,634.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2003 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 63.
Document contains 78 pages.
WARRANTECH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business.............................................................................. 1
General.......................................................................... 1
Sales and Marketing.............................................................. 5
Significant Customers............................................................ 5
Competition...................................................................... 6
Contract Obligors................................................................ 6
Insurance Coverage............................................................... 6
Federal and State Regulation..................................................... 7
Intellectual Property............................................................ 8
Employees........................................................................ 8
Item 2. Properties............................................................................ 9
Item 3. Legal Proceedings..................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................................... 9
PART II
Item 5. Market of the Registrant's Common Equity and Related Stockholder Matters ............. 10
Item 6. Selected Financial Data............................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of ...........
Operations............................................................................ 11
General........................................................................... 11
Results of Operations............................................................. 13
Insurer in Liquidation............................................................ 17
Agreements........................................................................ 18
Liquidity and Capital Resources................................................... 20
Loans to Directors................................................................ 21
Outlook........................................................................... 22
Critical Accounting Policies...................................................... 22
Item 7A. Qualitative and Quantitative Disclosures About Market Risk............................ 23
Item 8. Financial Statements and Supplementary Data........................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures........................................................................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant ................................... 53
Item 11. Executive Compensation................................................................ 53
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 53
Item 13. Certain Relationships and Related Transactions........................................ 53
Item 14. Controls and Procedures................................................................ 53
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 54
Signatures ................................................................................. 58
Certifications of the CEO and CFO................................................................ 60-62
Index to Consolidated Financial Statements....................................................... 25
Financial Statement Schedules.................................................................... 26
PART I
ITEM 1. BUSINESS
GENERAL
Warrantech Corporation, a Delaware corporation, and its subsidiaries
(collectively, "Warrantech" or the "Company") maintains executive offices and
operating facilities at 2200 Highway 121 Suite 100 Bedford, Texas 76021, where
the telephone number is (800) 544-9510.
Warrantech, through its wholly owned subsidiaries, markets and administers
service contracts, extended warranties and replacement plans. The Company is a
third party administrator for a variety of dealer/clients in selected industries
and offers call center and technical computer services. The Company assists
dealer/clients in obtaining insurance policies from highly rated independent
insurance companies for all contracts and programs offered. The insurance
company is then responsible for the cost of repairs or replacements for the
contracts administered by Warrantech.
The Company's service contract programs benefit consumers by providing them
with expanded and/or extended product coverage for a specified period of time
(and/or mileage in the case of automobiles and recreational vehicles), similar
to that provided by manufacturers under the terms of their product warranties.
Coverage generally provides for the repair or replacement of the product, or a
component thereof, in the event of its failure. The Company's service contract
programs benefit the dealer/clients by providing enhanced value to the goods and
services they offer and by providing them with the opportunity for increased
revenue and income without the costs and responsibilities of operating an
extended warranty program.
The service contracts, extended warranties and replacement contracts
generally have terms ranging from three (3) to one hundred twenty (120) months.
Since the Company acts solely as a third party administrator on behalf of the
dealer/clients and insurance companies, the actual repairs and/or replacements
required under the agreements are performed by independent third party
authorized repair facilities or dealers. The cost of repairs is generally paid
for by the insurance companies which have the ultimate responsibility for the
claims or, where insurance coverage is unavailable, by Butler Financial
Solutions, LLC ("Butler"), if Reliance Insurance Company ("Reliance") or the
Company is the obligor. The insurance policy indemnifies the dealer/clients
against losses resulting from service contract claims and protects consumers by
ensuring their claims will be paid. See "Contract Obligors" and "Insurance"
below.
Essential to the Company's success is its ability to capture, maintain, track
and analyze all relevant information regarding its service contracts. The
Company internally developed and operates proprietary software that allows the
tracking for millions of service contracts and consists of custom designed
relational databases with interactive capabilities, which provides ample
capacity and processing speed for its current and future requirements.
Additionally, Warrantech's web-enabled applications such as VSCOnline(R) and
WCPSOnline(R) facilitate information exchange with outside businesses such as
dealers and service centers. These optimize the data acquisition and service
processing functions. The software programs allow for the analysis of current
and historical statistical data which the Company uses to monitor the Company's
service contract program performance and to support future growth.
2
The Company operates in three major business segments: Automotive, Consumer
Products and International, discussed below.
WARRANTECH AUTOMOTIVE SEGMENT
The Company's Automotive segment markets and administers vehicle service
contract ("VSC") programs, GAP insurance and other related automotive after-sale
products, all of which enhance the profitability of the sale of automobiles,
light trucks, motorcycles, recreational vehicles and automotive components.
These products are sold principally by franchised and independent automobile and
motorcycle dealers, leasing companies, repair facilities, retail stores,
financial institutions and other specialty marketers.
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 these services on either VSC's or similar products.
Warrantech Automotive employs sales personnel and utilizes the services of
independent agents to call on dealers to solicit their use of the VSC programs.
At this time, Warrantech Automotive is represented by more than 100 agents and
sub-agents in 46 states and provinces in the United States and in Canada.
The VSC is a contract between the dealer/lessor or third party obligor and
the vehicle purchaser/lessee (and, for the State of Florida only, Warrantech
Automotive) that offers coverage for a term ranging from three (3) to one
hundred twenty (120) months and/or 3,000 to 100,000 miles. Coverage is available
in the event of the failure of a broad range of mechanical components occurring
during the term of the VSC, other than failures covered by a manufacturer's
warranty.
Warrantech Automotive's continuing success and ability to outdistance its
competitors, relies on its high quality products, exceptional service, fair
product pricing along with its ability to immediately react to client needs and
its ability to seize new market opportunities as they arise. Under the programs
marketed and administered by Warrantech Automotive, it provides services to the
dealer, such as development and distribution of marketing materials, processing
dealer produced VSC's and administering and paying of claims filed by contract
holders under the terms of their VSC.
Under the Warrantech Automotive VSC programs, liability is borne by
insurers who have issued insurance policies assuming this risk in exchange for
premiums and fees. Currently, Great American Insurance Company ("GAIC") insures
the Warrantech Automotive's VSC programs. The Company also has an agreement with
Heritage Insurance Risk Retention Group ("Heritage") and is reinsured by one of
North America's largest reinsurance companies on reinsurance programs offered to
large automobile dealerships. Previously, a portion of the Warrantech VSC
programs were insured by either Reliance (see "Management's Discussion and
Analysis - Insurer in Liquidation" below), the New Hampshire Insurance Company
or other American International Group, Inc. companies.
In 2003, 2002 and 2001 the Automotive segment received $2 million, $1.8
million and $1.5 million, respectively in net earned administrative fees from
one significant customer/agent, which accounted for 10%, 9% and 9% of the
Automotive segment's total net earned administrative fees, respectively.
WARRANTECH CONSUMER PRODUCTS SEGMENT
The Company's Consumer Products segment develops, markets and administers
extended warranties and product replacement plans on household appliances,
consumer electronics, televisions, computers and home office equipment, which
are sold principally through retailers, distributors, manufacturers, utility
companies, financial institutions and other specialty marketers. Warrantech also
3
markets these warranties and plans directly to the ultimate consumer on behalf
of the retailer/dealer and/or the manufacturer through telemarketing and direct
mail campaigns. It also offers call center and technical computer services. The
extended warranties and product replacement plans administered by Warrantech
Consumer Products are service contracts between the purchaser and the
retailer/dealer and/or the insurance company that typically offers coverage
ranging from twelve (12) to sixty (60) months.
The Consumer Products segment also develops, markets and administers
service contract programs in the United States and Canada covering mechanical
breakdowns of the working systems and components in homes. These programs
protect 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 programs marketed and administered by Warrantech Consumer Products
require that the selling dealer, distributor or manufacturer enter into an
agreement outlining 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. It
has also entered into service center agreements with independent third party,
authorized repair facilities located throughout the United States and Canada.
These service center agreements identify the amount of reimbursement the repair
facility will receive from a repair claim.
Effective February 12, 2000, the Company entered into an agreement with
GAIC pursuant to which GAIC insures any new service contracts issued in North
America or Puerto Rico. Insurance for service contracts issued between August 1,
1997 until February 12, 2000 are covered by Cigna Insurance Company.
In 2003, 2002 and 2001 the Consumer Products segment received $2.1 million,
$2.1 million and $2.4 million, respectively, in net earned administrative fees
from a significant customer which accounted for 24%, 19% and 9% of the segment's
net earned administrative fees, respectively. Additionally, in 2003, 2002 and
2001 the Consumer Products segment received from a second customer net earned
administrative fees of $2.7 million, $4.2 million and $4.5 million,
respectively, which accounted for 30%, 37% and 16% of the Consumer Products
segment's total net earned administrative fees, respectively. Finally, in 2003,
2002 and 2001 the Consumer Products segment received net earned administrative
fees of $1.8 million, $2.2 million and $2.7 million, respectively, from a third
significant customer, which accounted for 21%, 19% and 10% of the segment's
total net earned administrative fees, respectively. The Company has extended its
contracts with its three significant customers through 2005, and 2006. In 2003,
2002 and 2001 net earned administrative fees from Staples were $0, $0 and $12.0
million, respectively, which accounted for 0%, 0% and 44% of the Consumer
Products segments total net earned administrative fees, respectively. Because
Warrantech could not reach an agreement with Staples to extend its agreement on
terms which would not erode the profitability of the program, the program
expired on February 26, 2001.
WARRANTECH INTERNATIONAL SEGMENT
Warrantech International markets and administers the same products and
services outside the United States that Warrantech Automotive and Warrantech
Consumer Products market and administer in the United States and Canada.
Warrantech International conducts its efforts on a direct basis and has
developed relationships with retailers and distributors throughout the Caribbean
and Central and South America. It is currently doing business in Puerto Rico,
Guatemala, Chile and Peru. The Company believes its expansion in South American
markets will be facilitated by its strategic alliance with Atento, a
multi-national call center owned by Spain's Grupo Telefonica, which should allow
4
Warrantech International to readily enter markets in Latin America where Atento
has existing call center operations.
In 2003, 2002 and 2001 the International segment received $0.6 million,
$0.3 million and $0.4 million, respectively in net earned administrative fees
from a significant customer, which accounted for 20%, 14% and 22% of the
International segment total in net earned administrative fees, respectively.
Additionally, in 2003, 2002 and 2001 the International segment received $0.2
million, $0.3 million and $0.1 million, respectively, net earned administrative
fees from another significant customer, which accounted for 6%, 13% and 7% of
the International segment total net earned administrative fees, respectively.
Additionally, in 2003 and 2002 the International segment received $0.3 million
and $0.1 million, respectively, net earned administrative fees from another
significant customer, which accounted for 10% and 4% of the International
segment total net earned administrative fees, respectively. Finally, in 2003,
2002 and 2001 the International segment received $0 million, $0.2 million and
$0.5 million, respectively, in net earned administrative fees from another
significant customer which accounted for 0%, 7% and 29% of the International
segment total net earned administrative fees, respectively.
SALES AND MARKETING
Warrantech's sales and marketing activities are managed by each segment's
own sales and marketing personnel. In certain circumstances, the business
segments have entered into marketing agreements with independent organizations
that solicit dealers at their own expense, and receive a commission on all
service contracts sold by such dealers.
The Warrantech business segments foster awareness of their respective
programs through cooperative advertising programs, which may be jointly funded
by Warrantech and the client/dealer or independent agent.
Sales training and motivational programs are a primary form of the
specialized assistance provided by the Company to retailers/dealers,
distributors and manufacturers to assist them in increasing the effectiveness
and profitability of their service contract program sales efforts. The Company
also develops materials and provides educational seminars. These seminars are
conducted either at the client's place of business, an offsite facility or at
the Company's state-of-the-art training facility at its Bedford, Texas
administrative offices. This facility features the latest in audio/video
technology designed to enhance the training and learning experience.
Warrantech also markets directly to the ultimate consumer on behalf of the
retailer/dealer and for manufacturer's programs through telemarketing and direct
mail campaigns. These direct marketing campaigns generate sales through renewals
of expiring contracts and second-effort sales to customers who did not buy an
extended service contract at the time of purchase.
SIGNIFICANT CUSTOMERS
During the fiscal year ended March 31, 2003, the Company did not have any
customers which accounted for more than 10% of the Company's consolidated net
earned administrative fees. In 2003, 2002 and 2001 net earned administrative
fees from a significant customer were $2.7 million, $4.2 million and $4.5
million, respectively, which accounted for 7%, 11% and 9% of the Company's total
net earned administrative fees, respectively. In 2003, 2002 and 2001 net earned
administrative fees from another significant customer were $0, $0 and $12.0
million, respectively, which accounted for 0%, 0% and 25% of the Company's total
net earned administrative fees, respectively. Because Warrantech could not reach
an agreement with this customer to extend its agreement on terms which would not
erode the profitability of the program, the program expired on February 26,
2001.
5
COMPETITION
Warrantech competes with a number of independent administrators and
divisions of distributors and manufacturers, as well as financial institutions
and insurance companies. The Company is not one of the largest marketers and
administrator of service contracts and limited warranties, and some competitors
may have greater operating experience, more employees and/or greater financial
resources. Further, many manufacturers, particularly those producing motor
vehicles, market and administer their own service contract programs for and
through their dealers. However, the Company believes that it occupies a
preeminent position among competitors in its field.
CONTRACT OBLIGORS
There is, under each service contract, a party which is ultimately
responsible as obligor, for the payment for repairs if the insurance company is
unable to. At times, in the past, the Company and its dealers was the obligor
under some of the agreements. Since April 1, 2000, Butler, a company unrelated
to Warrantech, serves as the obligor under all service contracts administered by
the Company, in exchange for a fee payable by the dealers.
In addition, Butler has agreed to assume the obligation under agreements as
to which the Company and its obligors were formerly the obligor. Whether Butler,
the Company, or its dealers is or was the obligor, insurance is secured for each
agreement with a reputable insurer which, in exchange for a premium, agrees to
underwrite the cost of any claims. Thus, if the insurer honors its obligations,
it will pay all claims and neither the Company nor Butler will have any
responsibility to make any payments. If, however, the insurer fails to make a
payment, the ultimate obligor will be responsible to do so. The insurance policy
indemnifies the dealer/clients against losses resulting from service contract
claims and protects the consumers by ensuring their claims will be paid.
Some of the service contracts under which Butler is the obligor were
insured by Reliance, and the liquidation of Reliance has eliminated the
insurance coverage to Butler under those contracts. Funding to Butler is
provided by a special surcharge, which is payable on all vehicle service
contracts administered by the Company sold after November 19, 2001. The
surcharge will be paid by dealer/agents through which Reliance-insured service
contracts were sold. Butler will use these funds to pay the claims previously
insured by Reliance and to repay its loans from Warrantech.
Additionally, in order to assist Butler in addressing its potential
obligations under the service contracts previously insured by Reliance for which
Butler is, or the dealer, or Warrantech was, the obligor, Warrantech Automotive
has made loans to Butler, as necessary, for claims obligations in excess of
Butler's fee revenues. Subject to the terms of the agreement between the Company
and Butler, the Company has and will make further loans to Butler, as necessary,
for claims obligations in excess of Butler's fee revenues. All of Warrantech's
loans to Butler bear interest at the rate of prime plus 2% per annum and will
begin to be paid down once Butler's fee revenues exceed the claims obligations.
INSURANCE COVERAGE
Liability for performance under the terms of service contracts and limited
warranties administered by Warrantech is assumed by an insurance company in
return for agreed upon premiums. This coverage provides the Company with
indemnification against loss resulting from service contract claims and also
protects the consumers by ensuring that their claims will be paid.
Currently, GAIC primarily insures Warrantech Automotive's VSC programs. The
Company also has an agreement with Heritage which is reinsured by one of North
America's largest reinsurance companies on reinsurance programs offered to large
automobile dealerships. Previously, a portion of the Warrantech VSC programs
were insured by either Reliance, the New Hampshire Insurance Company or other
American International Group, Inc. ("AIG") member companies (see "Item 7. -
Management's Discussion and Analysis - Significant Insurer in Liquidation"
below).
6
GAIC also insures service contracts issued by Warrantech Consumer Products
after February 12, 2000. Insurance for service contracts issued between August
1, 1997 and February 12, 2000 is provided by CIGNA Insurance Company.
The current insurance protection is provided by highly rated independent
insurance companies. As noted above, in the United States and Canada, providers
include GAIC which is rated A - (Excellent) and Heritage and reinsurance is
provided by one of the largest reinsurance companies in North America, which is
an A rated carrier. Other programs have been or are currently insured by New
Hampshire Insurance Company, other AIG member companies and Tokio Marine & Fire
Insurance Company each of which is rated A++ (Superior) and CIGNA Insurance
Company owned by (ACE) which is rated A - (Excellent). Internationally,
insurance protection is provided by Cruz del Sur in Chile, La Positiva in Peru,
and Universal Insurance Company in Puerto Rico, which is rated A - (Excellent).
All ratings for the United States, Canada and Puerto Rico are made by A.M. Best
Company.
For each service contract or limited warranty sold, a contractually fixed
amount is remitted by the retailer/dealer to Warrantech and premium portion is
passed on to the insurance company. The amount is based upon the insurance
company's actuarial analysis of claims data collected and maintained for each
type of coverage and contract term. Neither the customer nor the Company is
obligated to the insurer if claims under a policy exceed the premiums remitted
for it.
Additionally, agreements between the Company and the insurers may contain
profit-sharing features that permit the Company to share in underwriting profits
earned by the service contract programs. The amounts to be received, if any, are
determined in accordance with certain specified formulae by the type of program
and by policy year. Certain of these agreements require interim calculations and
distributions for various programs, with final calculations being made as
contracts expire by term. The Company recognized $71,784 in profit sharing
through its International segment in the fiscal year ended March 31, 2003. No
profit sharing was recognized for the fiscal years ended March 31, 2002 or 2001.
FEDERAL AND STATE REGULATION
The service contract and limited warranty programs developed and marketed
by the Company's subsidiaries and their related operations are regulated by
federal law and the statutes of a significant number of states. The Company
continually reviews all existing and proposed statutes and regulations to
ascertain their applicability to its existing operations, as well as to new
programs that the Company is developing.
Generally, these statutes apply to the scope of service contract coverage
and content of the service contract or limited warranty document. Statutes
typically require that specific wording expressly stating the consumer's rights
in the event of a claim, how the service contract may be canceled and
identification of the insurance company that indemnifies the dealers,
distributors or manufacturers against loss for performance under the terms of
the service contract.
Insurance departments in some states have sought to interpret the consumer
product service contract, or certain items covered under the contract, as a form
of insurance requiring that the issuer be a duly licensed and chartered
insurance company. The Company does not believe that it or any of its
subsidiaries is an insurer and has no intention of filing the documents and
meeting the capital and surplus requirements that are necessary to obtain a
license as an insurance company.
7
There are instances where the applicability of statutes and regulations to
programs marketed and administered by the Company and compliance therewith,
involve issues of interpretation. The Company uses its best efforts to comply
with applicable statutes and regulations but it cannot assure that its
interpretations, if challenged, would be upheld by a court or regulatory body.
In any situation in which the Company has been specifically notified by a
regulatory body that its methods of doing business were not in compliance with
state regulations, the Company has taken the steps necessary to comply.
If the Company's right to operate in a state is challenged successfully,
the Company may be required to cease operations there and the state might also
impose financial sanctions against the Company. These actions, should they
occur, could have an adverse consequence on the Company's operations. However,
within the framework of currently known statutes, the Company does not believe
that this is a present concern.
The Company has begun a reorganization of its subsidiaries structure, in
order to reduce its state franchise tax obligation, involving the transfer of
some of the Company's operations from corporate entities to limited
partnerships. The only effect of this reorganization should be a reduction of
the Company's franchise tax obligation.
INTELLECTUAL PROPERTY
The Company holds numerous registered United States trademarks, the most
important of which are the "Warrantech" and its stylized "W" logo service marks.
Additional service marks are registered covering subsidiary names and product
names and descriptions, such as "Repairmaster(R)," "RepairGuard(R)," "Xchange
Card(R)" and "VSCOnline(R)." The Company has kept, and intends to keep the
registration for all service marks current.
The Company developed proprietary software that consists of custom designed
relational databases with interactive capabilities. Essential to the success of
Warrantech Automotive and Warrantech Consumer Products is their ability to
capture, maintain, track and analyze all relevant data regarding the contracts
they administer. Development costs associated with this proprietary software
have been capitalized and are being amortized over the expected useful life of
the software.
EMPLOYEES
As of March 31, 2003 the Company and its subsidiaries had approximately 372
employees, a decrease of approximately nine employees from the preceding fiscal
year. As of May 30, 2003, the Company had approximately 382 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.
8
ITEM 2. PROPERTIES
The Company's executive office is located at 121 Airport Centre II,
Bedford, Texas. The premises, consisting of approximately 56,696 square feet, is
leased pursuant to a lease agreement expiring February 28, 2012, which provides
for an annual base rent of $1 million. These premises also accommodate the
Company's Automotive, Consumer Products, International and Direct Marketing
operations.
Additionally, the Company leases 48,053 square feet at 1441 West
Airport Freeway, Euless, Texas for a base rent of $570,185. This lease expires
March 31, 2004. The Company's lease for an additional 29,531 square feet at 150
Westpark Way, Euless, Texas expires July 31, 2003. Base rent for the remaining
term of the lease is $143,598.
Warrantech International's Puerto Rico operations are located in leased
premises at 1225 Ponce de Leon Avenue, Santurce, Puerto Rico pursuant to a lease
that expired March 31, 2003 and continues on a monthly basis. The lease provides
for annual base rent of $54,928 for 3,433 square feet.
Warrantech International's Chile operations are located in leased premises
at Avenida 11 de Septembre No. 1881 Officia No. 1619 Providencia, Santiago,
Chile. This office supports the operations in Chile, and is Warrantech
International's flagship operation to pursue and help implement the Company's
international expansion strategies throughout South America. The lease provides
for annaul base rent payments of $54,000 for 145 square meters.
Warrantech International's Peru operations are located in leased premises
at Avenida Paseo de la Republica #3691 Officina No 501 San Isidro Peru. This
office supports the operations in Peru. The lease provides for annual base rent
payments of $4,920.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is set forth in Note 13 in the
Notes to Consolidated Financial Statements set forth in `Item 8. - Consolidated
Financial Statements and Supplementary Data" under the subheading "Litigation,"
which is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A 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, 2003.
9
PART II
ITEM 5. MARKET FOR WARRANTECH'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, $.007 par value per share (the "Common Stock")
trades under the symbol "WTEC." Trades are reported on the Over-The-Counter
("OTC") electronic quotation service of the National Association of Securities
Dealers Market Makers.
As of May 30, 2003, there were 15,280,634 shares of outstanding Common
Stock and approximately 883 stockholders of record. On that date, the closing
bid price for the Common Stock, as reported on the OTC was $1.35.
Following is a summary of the price range of the Company's Common Stock
during fiscal years 2003 and 2002:
FISCAL 2003 FISCAL 2002
----------- ------------
QUARTER HIGH & LOW BID HIGH & LOW BID
------- --------------- --------------
First $ 0.77 $ 0.42 $ 0.89 $ 0.50
Second $ 1.29 $ 0.59 $ 0.69 $ 0.32
Third $ 1.65 $ 0.75 $ 0.91 $ 0.32
Fourth $ 1.50 $ 1.05 $ 0.85 $ 0.57
No cash dividends have been paid to holders of Common Stock since inception
of the Company. The Company anticipates that, 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 in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with the
consolidated financial statements and related notes as of and for the years
ended March 31, 2003, 2002 and 2001. The Selected Financial Data for fiscal
2002, 2001 and 2000 has been restated. See Note 3 to the notes to the
consolidated financial statements.
FOR THE YEARS ENDED MARCH 31,
------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------- --------------- ---------------- --------------- -------------
Net earned administrative fee $38,155,914 $38,000,275 $47,316,042 $47,648,109 $50,727,313
================ =============== ================ =============== =============
Profit (loss) from operations $3,027,476 $3,575,825 $78,590 ($7,545,959) ($12,232,124)
================ =============== ================ =============== =============
Net income (loss) $2,861,279 $2,694,682 $312,388 ($5,368,872) ($7,639,725)
================ =============== ================ =============== =============
Basic earnings (loss) per common share $0.19 $0.18 $0.02 ($0.35) ($0.51)
================ =============== ================ =============== =============
Diluted earnings (loss) per common share $0.19 $0.18 $0.02 ($0.35) ($0.51)
================ =============== ================ =============== =============
Cash dividend declared None None None None None
---------------- --------------- ---------------- --------------- -------------
Total assets $74,856,128 $76,656,018 $96,456,522 $145,430,137 $186,910,270
================ =============== ================ =============== =============
Long-term debt and capital lease obligations $1,218,670 $957,159 $1,209,853 $1,668,478 $2,420,967
================ =============== ================ =============== =============
Common stockholders' equity $9,534,616 $7,164,431 $4,700,719 $4,715,953 $10,400,002
================ =============== ================ =============== =============
10
WARRANTECH CORPORATION AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
Except for the historical information contained herein, the matters
discussed below or elsewhere in this Annual Report on Form 10-K may contain
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those contemplated by the
forward-looking statements. The Company makes such forward-looking statements
under the provisions of the "safe harbor" section of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements reflect the Company's
views and assumptions, based on information currently available to management.
Such views and assumptions are based on, among other things, the Company's
operating and financial performance over recent years and its expectations about
its business for the current and future fiscal years. When used in this Annual
Report on Form 10-K, the words "believes," "estimates," "plans," "expects," and
"anticipates" and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it can give no assurance that its
expectations will prove to be correct. These statements are subject to certain
risks, uncertainties and assumptions, including, but not limited to, (a)
prevailing economic conditions which may significantly deteriorate, thereby
reducing the demand for the Company's products and services, (b) availability of
technical support personnel or increases in the rate of turnover of such
personnel, resulting from increased demand for such qualified personnel, (c)
changes in the terms or availability of insurance coverage for the Company's
programs, (d) regulatory or legal changes affecting the Company's business, (e)
loss of business from, or significant change in relationships with, any major
customer, (f) the ability to successfully identify and contract new business
opportunities, both domestically and internationally, (g) the ability to secure
necessary capital for general operating or expansion purposes,(h) the adverse
outcomes of litigation,(i) the non-payment of notes due from an officer and two
directors of the Company in 2007, (j) the inability of any of the insurance
companies which insure the service contracts marketed and administered by the
Company to pay the claims under the service contracts, (k) the inability of
Butler to pay the claims previously insured by Reliance, (l) the termination of
extended credit terms being provided by the Company's current insurance company,
(m) the inability of the Company to collect the "Other Receivables" in the
amount of $8,612,678 by the end of the Company's fiscal year and (n) the outcome
of the review currently being conducted by the staff of the Securities and
Exchange Commission ("SEC") of the Company's financial statements and related
disclosures. Should one or more of these or any other risks or uncertainties
materialize or develop in a manner adverse to the Company, or should the
Company's underlying assumptions prove incorrect, actual results of operations,
cash flows or the Company's financial condition may vary materially from those
anticipated, estimated or expected and there could be a materially adverse
effect on the Company's business.
GENERAL
Warrantech, through its wholly owned subsidiaries, markets and administers
service contracts, extended warranties and replacement plans. 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
11
insurance companies for all contracts and programs offered. The insurance
company is then responsible for the cost of repairs or replacements for the
contracts administered by Warrantech.
The Company operates in three major business segments: Automotive, Consumer
Products and International. The Automotive segment markets and administers
extended warranties on automobiles, light trucks, motorcycles, recreational
vehicles and automotive components. These warranties are sold principally by
franchised and independent automobile and motorcycle dealers, leasing companies,
repair facilities, retail stores, financial institutions and other specialty
marketers. The Consumer Products segment develops, markets and administers
extended warranties and product replacement plans on home appliances, consumer
electronics, televisions, computers, home office equipment and homes which are
sold principally by retailers, distributors, manufacturers, utility companies
and financial institutions. Warrantech also markets these warranties and plans
directly to the ultimate consumer on behalf of retailers/dealers and for
manufacturing programs through telemarketing and direct mail campaigns. The
International segment markets and administers outside the United States and
Canada predominately the same products and services of the other business
segments. The International segment is currently operating in Central and South
America, Puerto Rico and the Caribbean.
The Company's service contract programs benefit consumers by providing them
with expanded and/or extended product coverage for a specified period of time
(and/or mileage in the case of automobiles and recreational vehicles), similar
to that provided by manufacturers under the terms of their product warranties.
Coverage generally provides for the repair or replacement of the product, or a
component thereof, in the event of its failure. The Company's service contract
programs benefit the dealer/clients by providing enhanced value to the goods and
services they offer and by providing them with the opportunity for increased
revenue and income without the costs and responsibilities of operating an
extended warranty program.
The service contracts, extended warranties and replacement contracts
generally have terms ranging from three (3) to one hundred twenty (120) months.
Since the Company acts solely as a third party administrator on behalf of the
dealer/clients and insurance companies, the actual repairs and/or replacements
required under the agreements are performed by independent third party
authorized repair facilities or dealers. There is, under each service contract,
a party who is ultimately responsible, as obligor, for the payment of amounts
necessary to pay for repairs, if the insurance company is unable to. At times,
in the past, the Company was the obligor under some of the agreements. Since
April 1, 2000, Butler, a company unrelated to Warrantech, serves as the obligor
under all service contracts administered by the Company, in exchange for a fee
payable by the dealers.
In addition, Butler has agreed to assume the obligation under those
agreements as to which the Company and its dealers were formerly the obligor.
Whether Butler, the Company, or its dealers is or was the obligor, insurance is
secured for each agreement with a reputable insurer, which, in exchange for a
premium, agrees to underwrite the cost of any claims. Thus, if the insurer
honors its obligations, it will pay all claims and neither the Company nor
Butler will have any responsibility to make any payments. If, however, the
insurer fails to make a payment, the ultimate obligor will be responsible to do
so. The insurance policy indemnifies the dealer/clients against losses resulting
from service contract claims and protects consumers by ensuring their claims
will be paid.
Some of the service contracts under which Butler is the obligor were
insured by Reliance, and the liquidation of Reliance has eliminated the
insurance coverage to Butler under those contracts.
12
Funding to Butler will be provided by a special surcharge, payable on all
vehicle service contracts administered by the Company sold after November 19,
2001. The surcharge will be paid by dealer/agents through which Reliance insured
service contracts were sold. Butler will use these funds to pay the claims
previously insured by Reliance and to repay Butler's loans from Warrantech.
Additionally, in order to assist Butler in addressing its potential
obligations under the service contracts previously insured by Reliance for which
Butler or the dealer is or Warrantech was the obligor, Warrantech Automotive has
made loans to Butler, as necessary, for claim obligations in excess of Butler's
fee revenues. Subject to the terms of the agreement between the Company and
Butler, the Company will make further loans to Butler, as required, for claim
obligations in excess of Butler's fee revenues. All of Warrantech's loans to
Butler bear interest at the rate of prime plus 2% per annum and will begin to be
paid down once Butler's fee revenues exceed the claims obligations.
Revenue for administrative obligor contracts is recognized in
accordance with, Staff Accounting Bulletin 101 ("SAB 101"). Under SAB 101, the
Company recognizes revenue when the revenue is realizable and earned. The
Company considers revenue realized and earned when a definitively discrete
earnings event has occurred. The Company, primarily, has two discrete events (1)
for marketing and administration of service contracts and (2) for servicing
fees. The marketing and administrative fee is paid by the retailer of the
service contract. This revenue is recognized at the time of the sale by the
retailer, as the Company will have substantially completed the services it has
agreed to provide the retailer in connection with the sale of the service
contract to the consumer. The second discrete earnings event occurs over the
life of the contract as claims administrative obligations are being satisfied.
As such, Warrrantech recognizes and realizes the revenue over the contract life.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
information contained in the Consolidated Financial Statements and the Notes
thereto included in "Item 8 - Financial Statements and Supplementary Data" of
this Annual Report.
SEC REVIEW OF THE COMPANY'S FILINGS
The Staff of the Division of Corporation Finance of the SEC recently
selected the Company's periodic reports for review. The reports reviewed by the
SEC staff included the Annual Report on Form 10-K for the fiscal year ended
March 31, 2002 and the Quarterly Reports on Form 10-Q for the periods ended June
30, 2002, September 30, 2002 and December 31, 2002. The SEC staff informed the
Company that the purpose of the review is to assist the Company in its
compliance with applicable disclosure requirements and to enhance the overall
disclosure in the Company's reports. In the course of its review, the SEC staff
requested clarification of certain of the Company's disclosures and items in its
financial statements. As a result of the communications with the SEC staff
during its review, the Company agreed to amend certain of its disclosures on a
going-forward basis and these disclosures are reflected in this Annual Report on
Form 10-K. Additionally, the Company agreed to amend its Annual Report on Form
10-K for the period ended March 31, 2002. The Company intends to file the
amended Annual Report on Form 10-K after the SEC staff's review process is
completed. The SEC staff's most recent set of questions, to which the Company
has responded, pertained primarily to the Company's accounting treatment of the
obligations assumed by Butler under the service contracts administered by the
Company and related financial disclosures. The Company is awaiting further
comments from the SEC staff on the Company's response.
13
GROSS REVENUES
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------
2003 2002 2001
------------------ ----------------- -----------------
Gross revenues $150,344,194 $121,118,698 $135,859,446
============= ============= =============
Gross revenues for the year ended March 31, 2003 increased $29,225,496 or
24% over 2002. The Automotive and International segments reported increased
gross revenues of 38%, and 21% respectively, in the year ended March 31, 2003
over 2002, while the Consumer Products segment reported a slight 4% decrease in
gross revenues during the same period. Gross revenues for the year ended March
31, 2002 decreased $14,740,748 or 11% from the year ended March 31, 2001. The
Automotive segment reported increased gross revenues of 14%, in the year ended
March 31, 2002 compared to 2001, while the Consumer Products and International
segments reported decreased gross revenues of 43% and 14%, respectively. The
loss of the Staples contract, which represented 10% of the Company's
consolidated gross revenues and 23% of the Consumer Products segment gross
revenues during fiscal year 2001, had an adverse impact on both the Company and
its Consumer Products segment's during the year ended March 31, 2002 and 2001.
NET EARNED ADMINISTRATIVE FEES
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------
2003 2002 2001
------------------ ----------------- -----------------
Automotive segment $18,517,389 $19,346,137 $15,989,590
Consumer Products segment 13,765,514 16,711,092 29,872,227
International segment 3,181,849 2,353,491 1,815,700
Other 2,691,162 (410,445) (361,475)
------------------ ----------------- -----------------
Total earned administrative fee $38,155,914 $38,000,275 $47,316,042
================== ================= =================
Net earned administrative fees are gross revenues less directs costs, the
combined sum of net premiums, commissions and sales allowances and deferred
revenue. Net earned administrative fees for the year ended March 31, 2003
increased $155,639 or less than 1% over 2002. A 38% increase in the Automotive
segment gross revenue more than offset lower net deferred revenues from prior
periods recognized in fiscal year ended March 31, 2003 versus the same period in
fiscal 2002. As the Company's older obligor contracts, which make up the
majority of its deferred revenue, continue to decline, there is less deferred
revenue to record in the current period. Net earned administrative fees for the
year ended March 31, 2002 decreased $9,315,767 or 20% compared to 2001. The
change was primarily due to the loss of Staples as a customer in February 2001
and decreased net deferred revenue from prior periods recognized this year
versus last year. Excluding the loss of Staples, the Company experienced an
appreciable increase in net earned administrative fees from its existing and new
dealers.
The Automotive segment net earned administrative fees decreased $828,748 or
4% during the fiscal year ended March 31, 2003 compared to 2002. The Automotive
segment reflected a 50% increase in the number of contracts sold, generating an
increase of $1,050,751 in net earned administrative fees from its customers. The
increased gross revenue was partially offset by higher premium cost, lower net
14
margin for contracts sold and lower net deferred revenues from prior periods
recognized in the year ended March 31, 2003 versus 2002. During the year ended
March 31, 2003, the Automotive segment recorded $3,647,123 in net deferred
revenue compared to $5,526,623 in 2002, a decrease of $1,879,500. The Automotive
segment's net earned administrative fees increased $3,356,547 or 21% for the
fiscal year end March 31, 2002 compared to 2001, primarily resulting from higher
sales volumes from new customers and a $1,386,853 increase in net deferred
revenue from prior periods recognized in 2002. The increase in net deferred
revenue from prior periods increased due to a reduction associated from deferred
direct premium costs on administrative obligor contracts.
The Consumer Products segment net earned administrative fees decreased
$2,945,578 or 18% during the fiscal year ended March 31, 2003 compared to 2002.
The change was primarily attributed to lower net earned administrative fees due
to higher variable costs associated with a major customer and premium fees
associated with the products sold to the customer, which cut into the net earned
administrative fee margin. The Consumer Products segment net earned
administrative fees decreased $13,161,135 or 44% during 2002 compared to 2001.
The change was primarily attributable to decreased sales volumes related to the
loss of Staples as a customer and a decrease in deferred revenue from prior
periods recognized in 2002 versus 2001 of $5,698,128. The decrease in net
deferred revenue from prior periods decreased due to higher associated deferred
direct premium costs on administrative obligor contracts.
The International segment net earned administrative fees increased $828,358
or 35% during 2003 compared to 2002. Increased market penetration from existing
customers in South America and Puerto Rico offset the loss of a large customer
in Chile. The International segment net earned administrative fees increased
$537,791 or 30% for the fiscal year ended March 31, 2002 compared to 2001. The
South American market contributed higher volumes from new customers in Peru and
Chile and increased market penetration from existing customers in Chile.
SG&A
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------
2003 2002 2001
------------------ ----------------- -----------------
Legal settlement - ($824,332) -
Service, selling and general administrative $31,092,940 $30,768,340 $ 39,775,539
Service, selling and general and administrative ("SG&A") for 2003 increased
$1,148,932 or 4% compared to 2002, including an $824,332 legal settlement the
Company received in 2002. Legal expenses increased $1,656,377 for the year ended
March 31, 2003 compared to 2002, primarily due to litigation expenses related to
several lawsuits that were settled during fiscal year 2003 which were offset by
lower employee costs and telephone costs during 2003. Reflecting the Company's
continued cost containment measures, employee costs were down $632,413 or 3%
from $18,589,220 in the year ended March 31, 2002 to $17,956,807, while
telephone expenses were reduced 39% or $951,446 from $2,418,892 in the year
ended March 31, 2002 as compared to $1,467,446 in the year ended March 31, 2003.
Rent expense increased from $1,389,764 for the year ended March 31, 2002 to
$1,837,314 for the year ended March 31, 2003, reflecting the Company's move to
its new corporate headquarters in Bedford, Texas.
SG&A expenses for 2002, including the legal settlement, were reduced by
$9,831,531 or 25% compared to 2001. The decrease reflected the Company's
improved call center technologies, cost containment measures and the closing of
the United Kingdom operations. Total employee and payroll related expenses were
down $3,767,040 or 17% from $22,356,260 for the fiscal year ended March 31, 2001
15
to $18,589,220 for the fiscal year ended March 31, 2002. Additionally, the
decrease in SG&A expenses reflected the reimbursement by AIG of $824,332 in
August 2001 for legal fees associated with its lawsuit against the Company.
Outside services, including consulting and legal fees were down $3,639,514 or
56% from $6,479,217 in the fiscal year ended March 31, 2001 to $2,839,703 in the
fiscal year ended March 31, 2002, primarily due to the settlement with AIG and a
reduction in computer system development. Rent expense for the fiscal year ended
March 31, 2002 decreased $1,013,725 from the same period last year, primarily as
result of the Company's relocation of its headquarters to Texas and to a lesser
degree, the closing of the United Kingdom offices.
LOSS ON ABANDONMENT OF ASSETS
Effective September 30, 2000, the Company ceased operations in the United
Kingdom as a result of unprofitable operations and recorded a loss on its
operations. Loss on abandonment of assets was $1,029,731 for the fiscal year
ended March 31, 2001.
DEPRECIATION AND AMORTIZATION
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------
2003 2002 2001
------------------ ----------------- -----------------
Depreciation and amortization $3,885,054 $4,480,442 $6,417,115
========== =========== ===========
Depreciation and amortization expenses were reduced by $595,388 or 13%
during 2003 compared to 2002. The decrease in depreciation and amortization is
the result of the Company's assets maturing and continued reduction of capital
expenditures for the past few years. Depreciation and amortization expenses were
reduced by $1,936,673 or 30% during 2002 compared to 2001. The decrease was
partially the result of the early adoption of SFAS 142, which allowed the
Company to elect not to amortize its remaining goodwill and the maturing of the
Company's net property and equipment. Amortization of $919,466 in goodwill was
charged to operations in 2001 with no amortization in subsequent periods.
Additionally, depreciation was lower in during 2002 versus 2001, as a result of
closing its United Kingdom operations.
OTHER INCOME
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------
2003 2002 2001
------------------ ----------------- -----------------
Interest and dividend income $933,944 $855,877 $1,292,335
Interest expense (275,185) (217,072) (234,102)
Gain (loss) on sale of assets (70,463) (45,018) (23,258)
Credit card usage rebate 453,760 147,735 -
Miscellaneous income 18,790 115,944 (12,463)
Total other income $1,060,846 $857,466 $1,022,512
================== ================= =================
Other income for 2003 increased $203,381 or 24% compared to 2002, primarily
due to an increase in the amount of rebates the Company received from a credit
card company. Other income decreased $165,046 or 16% during 2002, primarily as a
result of lower interest and dividend income as the Company decreased its amount
of investments in marketable securities during 2002 from 2001.
16
INCOME TAX EXPENSE
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------
2003 2002 2001
------------------ ----------------- -----------------
Income taxes expense $1,227,043 $1,738,609 $788,714
================== ================= =================
The net deferred tax asset as of March 31, 2003, 2002 and 2001 contains a
benefit of $205,470, $594,599 and $280,625, respectively, related to foreign
losses. Management expects to realize a portion of this tax benefit, which has
an indefinite carry-forward period, against future foreign income. Management
has reserved the amount of this benefit, which it presently believes is not more
likely than not to be realized.
COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31,
---------------------------------------------------------
2003 2002 2001
---------------- ------------------- -----------------
Net income $2,861,279 $2,694,682 $312,388
Other Comprehensive Income, net of tax
Unrealized gain (loss) on investments 13,713 (8,936) 30,001
Foreign currency translation adjustments (158,719) (11,143) 82,182
---------------- ------------------- -----------------
Comprehensive Income $2,716,273 $2,674,604 $424,571
================ =================== =================
Net income per share $0.19 $0.18 $0.02
================ =================== =================
Comprehensive income per share: $0.19 $0.18 $0.02
================ =================== =================
Losses from foreign currency translation adjustments for the year ended
March 31, 2003 increased $147,576 compared to 2002 primarily due increased to
Peru and Chile foreign currency translation losses. Losses from foreign currency
translation adjustments for the year ended March 31, 2002 were $ 11,143 as
compared to a gain of $93,325 in 2001 primarily due to increased Peru and Chile
foreign currency translation losses.
INSURER IN LIQUIDATION
During the second fiscal quarter of 2002, the Pennsylvania Insurance
Commissioner informed the Company that Reliance would be liquidated and cease
making payments on claims. The Pennsylvania Insurance Commissioner determined
that Reliance was not likely to be able to satisfy all of the claims that would
be submitted to it due to the circumstances arising out of the September 11,
2001 terrorist attacks on the World Trade Center. Reliance underwrote
approximately 48% of the automotive service contracts that were sold by
Warrantech Automotive during approximately one and one-half years ending in
November 2001. Approximately 52% of the automotive service contracts sold by
Warrantech Automotive during that period are not affected by the Reliance
liquidation. Service contracts sold before and after that period are not
affected because they are underwritten by other insurance companies.
Warrantech Automotive was the obligor, as well as the administrator, under
some of the vehicle service contracts that were insured by Reliance. As the
obligor, Warrantech Automotive would ultimately be responsible for paying for
the repairs under these service contracts. Prior to Reliance's liquidation,
Reliance covered the cost of the repairs under the insurance policies it
provided. Because of the liquidation of Reliance, insurance coverage for the
Company's obligations under those service contracts was no longer available. If
Warrantech Automotive were to be required to begin paying claims under these
contracts, there could be a material adverse impact on the Company's liquidity
and earnings. Presently, management does not believe that it will have to make
any payments under these contracts. The Company, one of its insurers and Butler
took steps, described below, to arrange for coverage of the cost of the claims
which were previously covered by Reliance (see "Agreements" below).
17
Additionally, the Company is attempting to ascertain if any recovery is
available from the Pennsylvania Insurance Department Insurance Funds and any
other state guaranty funds or if any Federal subsidies to the insurance industry
in general or Reliance specifically, will be made available as a result of the
terrorist attacks to pay vehicle service contract claims. If such subsidies are
available, it could take years before recovery, if any, is obtained.
The Company is aware that significant financial pressures were placed on
insurance companies, due to the terrorist attacks on the World Trade Center on
September 11, 2001; however, the Company is not aware that Great American
Insurance Company, which insures most of the obligations under the other service
contracts marketed and administered by the Company, is under any such financial
pressures. If for any reason, an insurance company is not able to cover claims
under the service contracts marketed and administered by the Company due to its
financial insolvency or other reasons, there could be a material adverse effect
on the Company's future business.
AGREEMENTS
Butler serves as the ultimate obligor under all service contracts
administered by the Company in exchange for a fee. Some of the service contracts
under which Butler is the obligor were insured by Reliance, and the liquidation
of Reliance has eliminated this insurance coverage.
In order to assist Butler in addressing its potential obligations under the
service contracts previously insured by Reliance for which Butler is or
Warrantech was the obligor, Warrantech Automotive made an initial $1 million
loan to Butler and further loans through March 31, 2003 of $13,009,059. On
October 9, 2002, the Company executed an agreement with GAIC that will provide
it with extended payment terms and a $3 million line of credit ("GAIC
Agreement"). Warrantech is currently discussing with Reliance Warranty Company
("RWC") the possibility of obtaining the RWC proceeds (as discussed below)
directly from RWC without the participation of GAIC. Under that arrangement,
GAIC would not assume the claims obligations of RWC and would not receive an
assumption fee. All of the Company's obligations to GAIC pursuant to the GAIC
Agreement are secured by all of the Company's accounts receivable.
The funds being loaned by the Company to Butler cover Butler's obligations
to pay claims under service contracts insured by Reliance. As explained above,
Reliance is in liquidation. RWC, an affiliate of Reliance, that is not in
liquidation, is currently holding premiums paid by Warrantech on certain service
contracts that had been insured by Reliance and its affiliates. Of the
$14,009,059 that Warrantech has loaned to Butler as of March 31, 2003,
approximately $8,612,678, represents the payment of claims under service
contracts covered by the insurance premiums being held by RWC, and the balance,
totaling $5,396,381 represents the payment on claims under service contracts
covered by insurance premiums that were retained by Reliance and that are
expected to be repaid from the surcharge been paid by the dealers.
At the request of Warrantech as set forth in the GAIC Agreement, providing
for the extended credit terms to the Company, GAIC began negotiating with the
representatives of RWC to arrange for GAIC's assumption of the obligation to pay
the claims under the service contracts which were covered by the premiums being
held by RWC in exchange for the release of the RWC funds to GAIC. GAIC would
then reimburse Warrantech for any monies loaned to Butler to cover claims under
the service contracts covered by the RWC funds and GAIC would thereafter pay all
claims pertaining to such service contracts. GAIC's willingness to undertake
these new obligations was premised on payment of a fee from the premiums held by
RWC and the receipt of a full indemnity from Warrantech. As the negotiations
progressed over time, however, GAIC added certain conditions to the consummation
of the obligation assumption. In light of GAIC's request for these additional
conditions Warrantech approached RWC about the possibility of obtaining the RWC
proceeds directly from RWC without the participation of GAIC. Under this
proposed arrangement, GAIC would not assume the claims obligations of RWC and
18
therefore, would receive no fee for its services. Management currently
anticipates that the negotiations concerning the RWC proceeds will be concluded,
either with GAIC and RWC or with RWC directly at which time the RWC proceeds
will be released by the third quarter of fiscal 2004.
At the years ended March 31, 2003 and 2002, Warrantech had loaned Butler
$14,009,059 and $5,435,646, respectively. RWC, which is not part of the Reliance
liquidation, is obligated to pay Butler $8,612,678 and $2,754,691, respectively,
of that amount. The Company expects Butler to collect the $8,612,678 from RWC
during the third quarter of fiscal 2004 and simultaneously the Company will
collect this amount from Butler. The receivable is reflected as "Other
Receivables" on the Consolidated Balance Sheet set forth in "Item 8. - Financial
Statements and Supplementary Data." The remaining amount representing the loans
due from Butler of $5,396,381 and $2,680,955, at fiscal years ended March 31,
2003 and 2002, respectively, are classified as "Notes Receivable" on the
Consolidated Balance Sheet. The Company anticipates the cumulative notes to
Butler to increase by $2.6 million, including interest, during the next fiscal
year.
Funding is provided by a special surcharge payable on all vehicle service
contracts administered by the Company sold after November 21, 2001. The
surcharge is paid by agents through whom the Reliance insured service contracts
were sold. Butler will use these funds to pay the claims previously insured by
Reliance to repay Butler's loans from Warrantech
Additionally, the Company will make further loans to Butler, as required,
for claim obligations in excess of Butler's fee revenues. The note from Butler
bears interest at the rate of prime plus 2% per annum and will begin to be paid
down once Butler's fee revenues exceed the claims payments.
The following table sets forth the carrying amounts and fair values of the
Company's notes receivable and other receivables at March 31, 2003.
EXPECTED MATURITY DATE
2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ------ ----------
Note Receivable - Butler
Equals 2% above prime - $2,563,129 $2,833,252 - - - $5,396,381 $5,396,381
Note Receivable - other $ 15,272 - - - - - 15,272 15,272
Loan Receivable - Butler ;
0% interest 8,612,678 - - - - - 8,612,678 8,612,678
Other Receivable - 0%
interest 5,299,887 - - - - - 5,299,887 5,299,887
19
The following table sets forth the carrying amounts and fair values of the
Company's notes receivable at March 31, 2002.
EXPECTED MATURITY DATE
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ------ ----------
Note Receivable -
Butler
Equals 2% above
prime - - $ 2,563,129 $ 117,826 - - $2,680,955 $2,680,955
Note Receivable - $ 137,684 - - - - - 137,684 137,684
other
Loan Receivable - 2,754,691 - - - - - 2,754,691 2,754,691
Butler; 0% interest
Other Receivable - 0% 2,149,667
interest - - - - - 2,149,667 2,149,667
The Company will provide further loans to Butler if the claims obligations
paid by Butler exceed the fees it receives from the dealers. Warrantech will
provide these loans from the additional terms and credit line provided by GAIC
and its cash flow from operations. These loans will be reflected as long-term
obligations until the fees exceed the claims obligations. The amount which will
be collected within one year will then be treated as a current asset.
The Company believes that the arrangements with Butler and GAIC described
above provide a mechanism to cover the claims under all of the service contracts
in which the Company, Butler, or its dealers were the obligor and will also
provide Butler with funds necessary to repay its loan from the Company. If,
however, Butler, for any reason, becomes unable to pay any such claims, which
were previously insured by Reliance, or if GAIC ceases to provide credit to the
Company in order to fund any shortfalls required by Butler, Warrantech
Automotive may ultimately be required to honor the claims under those contracts
in which it was the obligor. The total amount of the Company's potential
obligations with respect to such claims is not known since it is subject to a
number of uncertainties. However, it is unlikely that the Company would be able
to honor such claims without finding other sources of capital. There is also no
assurance that Butler will have the funds to repay its loan from the Company.
Management believes that Butler will be able to cover all of such claims and
repay all of the amounts loaned by the Company to cover such claims based upon
the revenue stream from the surcharge paid and to be paid by the dealers to
Butler. Consequently, management believes that the possibility of Warrantech
having to pay such claims is remote and that a valuation allowance or reserve
for collectability of the receivable due from Butler is not currently necessary.
As part of the GAIC agreement, GAIC received options to purchase up to
1,650,000 shares of Warrantech's common stock at an exercise price of $2.00 per
share subject to certain adjustments. In the event that GAIC exercises all of
these options, it would own approximately 10.8% of the Company's outstanding
shares.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, total cash and short-term investments totaled
$6,322,075, a decrease of $1,666,026 or 21% from $7,988,101 at March 31, 2002.
During the fiscal year ended March 31, 2003, the Company's operations provided
$9,558,420 of net cash compared to cash from operations of $10,077,578 for the
fiscal year ended March 31, 2002. The change in net cash from operations,
relates to unfavorable changes in its working capital from negative $1,656,179
at March 31, 2002 to a negative $2,985,930 at March 31, 2003. The change in
working capital resulted primarily from advances made by the Company to the
claims payment fund described in the "Agreements" above. During fiscal year
2003, the Company increased its other accounts receivables by $3.6 million
resulting from extended terms on a portion of its new automotive business. The
Company offset the use of those funds with an increase in its insurance premium
payable of $9.6 million, primarily due to extended terms from its insurer,
thereby generating a source of cash for the fiscal year. The Company also
generated a source of cash with a reduction in the income tax receivable.
20
The Company believes that internally generated funds, reimbursement of
claims paid for RWC obligations and the $3 million line of credit from GAIC,
will be sufficient to finance its current operations for at least the next
twelve months. The Company is aggressively pursuing new business both
domestically and internationally to fund future working capital. The Company
plans to continue to contain its SG&A costs and utilize technologies for
operational efficiencies to further enhance both its operating income and cash
flows from operating activities.
During the fiscal year ended March 31, 2003, the Company used $10,114,225
in cash in investing activities compared to the use of $5,484,977 in investing
activities in the prior year. This increase in use of funds of $4,629,258 is
primarily due to an increase in the amount of funds loaned to Butler under its
notes receivable arrangement. During the current fiscal year, the Company spent
less on computer development but more on property and equipment purchases than
in the prior year, as the Company increased spending to furnish its new
headquarters. 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, 2003 amounted to $1,120,273
compared to $594,797 during the fiscal year ended March 31, 2002. At fiscal year
end 2003, the Company had $2,020,740 in debt from capital lease obligations
compared to $1,758,793 at fiscal year-end 2002.
During the fiscal year ended March 31, 2003, the Company used $999,548 in
cash from financing activities compared to $561,087 in fiscal year 2002. The
variance was primarily due an increase in the Company's capital leases and the
purchase of treasury stock.
During the fiscal year ended March 31, 2003, the Company repurchased
259,753 shares of its common stock for treasury purposes for an aggregate amount
of $155,774. During the fiscal year ended March 31, 2002, the Company did not
repurchase any of its stock.
LOANS TO DIRECTORS
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of Warrantech's
Board of Directors, exercised an aggregate of 3,000,000 of their vested options
to purchase Warrantech common stock. Promissory notes totaling $8,062,500 were
signed with interest payable over three years at an annual rate of 6%. The
promissory notes, which were with recourse and secured by the stock certificates
issued, matured July 5, 2001. On March 22, 1999, Joel San Antonio delivered an
additional promissory note for $595,634, payable to the Company, representing
the amounts funded by the Company for the payroll taxes payable by him upon for
the exercise of these options. The exercise of these stock options and the
anticipated tax benefit from this transaction represented approximately $10
million. These amounts are recorded as a contra-equity account, which is a
reduction of stockholders' equity.
In February 2000, the Company agreed to restructure the loans to Mr. Tweed
and Mr. White by capitalizing the interest due and extending the loan maturity
from July 5, 2001 until January 31, 2005. Interest on the restructured loans
accrued annually at the applicable federal rate of 6.2%. Under the
restructuring, interest first became payable on the third anniversary of the
restructuring and was payable annually thereafter. In July 2002, the Company
extended the loan maturity dates until February 1, 2007 ( the "loan extension").
The interest, which accrued on the notes up to the time of the loan extension,
was added to the principal of the notes. The new principal amount of Mr. Tweed's
note is $3,189,675 and of Mr. White's note is $2,912,430. The applicable federal
interest rate on the notes following the loan extension is 4.6%. Under the loan
extension, interest on the notes will accrue until February 1, 2005 and, at that
time, the accrued interest will be added to the principal of the notes. Interest
on the new principal amounts thereafter become payable annually until maturity.
21
In February 2000, the Company also agreed to restructure the two existing
loans to Mr. San Antonio (as restructured, the "Combined Loan"). The Combined
Loan, finalized in March 2001, was due on January 31, 2005 and accrued interest
annually at 5.2%. In July 2002, the Company extended the loan maturity date
until February 1, 2007 and the interest rate was changed to the then applicable
federal rate of 4.6%. The principal amount of Mr. San Antonio's note is
$4,165,062. Interest will be forgiven as long as Mr. San Antonio continues to be
employed by the Company. The $200,506 and $330,631 of interest which accrued on
the note during fiscal years 2003 and 2002 has been forgiven. The interest was
charged to operations as additional compensation in the respective fiscal years
the interest income was accrued.
The total amount of the restructured loans to Mr. Tweed, Mr. White and Mr.
San Antonio, including the capitalized interest of $194,827, is $10,462,094.
OUTLOOK
The effect of inflation has not been significant to the Company.
The Company continued to improve customer service and technology with the
introduction in fiscal 2002 of its innovative web-based platform for its
Consumer Products segment. WCPS Online provides real-time capabilities that meet
the needs of dealers, service providers and consumers. It is designed to reduce
paperwork and cut the time and costs of administering warranties for dealers and
service providers, while providing a better experience and faster service for
their customers. The future profitability of this segment of the Company is
dependent on its ability to provide technology and customer service and to
acquire new business. The Company is currently negotiating with prospective new
customers which are projected to begin programs in fiscal year 2003. Based on
these events developing, the segment should not incur losses this fiscal year
During the previous fiscal year, the Company signed an agreement with MARTA
Cooperative of America, one of the largest member-owned retail buying
cooperative in the U.S. consumer electronics and appliance. In April 2003 the
Company announced that it had signed agreements with more than 10% of the buying
cooperatives consumer electronics and appliance retailers.
The Company announced in fiscal 2002 that an agreement had been reached
with AIG " Automotive Investment Group" to provide marketing services for
reinsurance programs for large automobile dealerships. The terms of the contract
allowed Warrantech Automotive to begin marketing a new reinsurance program to
the nation's larger automobile dealerships on January 1, 2002. This program
along with other new programs in the Automotive segment should allow the Company
to experience an increase in automotive contracts sold continuing into fiscal
year 2004.
The Company was notified that its major insurer will implement an average
15% increase in premium. This increase will be passed onto the dealers and
agents. As a result, gross revenues and gross premium expense will be higher,
but the premium increase is expected to have a minimal effect on the Company's
net earned administrative fee amount.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Note 1 to the Company's Consolidated Financial
Statements set forth in the "Item 8. - Financial Statements and Supplementary
Data," describes the significant accounting policies and methods used in the
22
preparation of the Consolidated Financial Statements. The following lists some
of the Company's critical accounting policies affected by judgments, assumptions
and estimates.
REVENUE RECOGNITION
Under SAB 101, the Company recognizes revenue when the revenue is
realizable and earned. The Company considers revenue realized and earned when a
definitively discrete earnings event has occurred. The Company has two discrete
earnings events (1) for marketing and administration of service contracts and
(2) for servicing fees. The marketing and administrative fee is paid by the
retailer of the service contract. This revenue is recognized at the time of the
sale to the retailer as the Company will have substantially completed the
services it has agreed to provide in connection with the sale of the service
contract to the consumer.
The second discrete earnings event occurs over the life of the contract. As
such, Warrrantech recognizes and realizes the revenue over the contract life.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses potential impairment of its long-lived assets, which
include its property and equipment and its identifiable intangibles such as
software development costs, goodwill and deferred charges under the guidance of
SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Once
annually or as events or circumstances indicate that an asset may be impaired,
the Company assesses potential impairment of its long-lived assets. The Company
determines impairment by measuring the undiscounted future cash flow generated
by the assets, comparing the result to the assets carrying value and adjusting
the asset to the lower of its carrying value or fair value and charging current
operations for the measured impairment. At year ended March 31, 2003 and 2002,
the Company found no impairment to its property and equipment or its other
identifiable intangibles.
INCOME TAXES
Deferred tax assets and liabilities are determined using enacted tax rates
for the effects of net operating losses and temporary differences between the
book and tax bases of assets and liabilities. The Company records a valuation
allowance on deferred tax assets when appropriate to reflect the expected future
tax benefits to be realized. In determining the appropriate valuation allowance,
certain judgments are made relating to recoverability of deferred tax assets,
use of tax loss carryforwards, level of expected future taxable income and
available tax planning strategies. These judgments are routinely reviewed by
management. At March 31, 2003, the Company had deferred tax assets of
$2,898,577, net of a valuation allowance of $256,434.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2003, the Company did not have any derivatives, debt or
hedges outstanding. Therefore, the Company was not subject to interest rate
risk. In addition, the risk of foreign currency fluctuation was and is not
material to the Company's financial position or results of operations.
Short-term marketable securities and long-term investments are comprised of
municipal bonds which bear interest at fixed rates. Interest income from these
securities is generally affected by changes in the U.S. interest rates. The
following tables provide information about the Company's financial instruments
that are sensitive to changes in interest rates. The tables present principal
cash flows and weighted-average interest rates by expected maturity dates. All
of the 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.
23
Principal amounts by expected maturity as of March 31, 2003 of marketable
securities are as follows:
EXPECTED MATURITY DATE
-------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL COST FAIR VALUE
---- ---- ---- ---- ---- ---------- ---------- ----------
Available for sale
securities $1,765,588 $360,533 -- - $37,550 $2,199,711 $2,199,243
Interest rate 4.93% 4.96% 4.96% - 5.50%
Principal amounts by expected maturity as of March 31, 2002 of marketable
securities are as follows:
EXPECTED MATURITY DATE
----------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL COST FAIR VALUE
---- ---- ---- ---- ---- ---------- ---------- ----------
Available for sale securities $1,592,220 $398,907 $318,228 - - - $2,309,455 $2,331,272
Interest rate 4.21% 5.25% 4.98% 5.38% - -
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page No.
Report of Independent Auditors.......................................................... 26
Consolidated Financial Statements:
Statements of Operations and Comprehensive Income
For the Fiscal Years Ended March 31, 2003, 2002 and 2001........................ 27
Balance Sheets as of March 31, 2003 and 2001................................... 28-29
Statements of Common Stockholders' Equity
For the Fiscal Years Ended March 31, 2003, 2002 and 2001....................... 30
Statements of Cash Flows
For the Fiscal Years Ended March 31, 2003, 2002 and 2001....................... 31
Notes to Consolidated Financial Statements.............................................. 32
Consolidated Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts....................................... 52
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.
25
[WSL LOGO]
WEINICK
- -------
SANDERS 1375 BROADWAY
LEVENTHAL & CO. LLP NEW YORK, N.Y. 10018-7010
- -------------------------------------------------------------------------------
CERTIFIED PUBLIC
ACCOUNTANTS 212-869-3333
FAX: 212-764-3060
WWW.WSLCO.COM
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Warrantech Corporation
We have audited the accompanying consolidated balance sheets of
Warrantech Corporation and Subsidiaries as of March 31, 2003 and 2002 and its
related consolidated statements of operations and comprehensive income, common
stockholders' equity and cash flows for the fiscal years ended March 31, 2003,
2002 and 2001. Our audits also included the financial statement schedules listed
in the index. These consolidated financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Warrantech Corporation and Subsidiaries at March 31, 2003 and 2002 and the
consolidated results of their operations and comprehensive income and their cash
flows for the years ended March 31, 2003, 2002 and 2001, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related consolidated financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 3, the Company has restated its consolidated
financial statements for the years ended March 31, 2002 and 2001.
/s/ Weinick Sanders Leventhal & Co., LLP
New York, NY
June 13, 2003
26
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended March 31,
-----------------------------------------------------------
2003 2002 * 2001 *
----------------- ----------------- ------------------
Earned administrative fee (net of amortization of $38,155,914 $38,000,275 $47,316,042
deferred costs)
----------------- ----------------- ------------------
Costs and expenses
Service, selling, and general and administrative 31,092,940 30,768,340 39,775,539
Legal settlement - (824,332) -
Provision for bad debt expense 150,444 - 15,067
Depreciation and amortization 3,885,054 4,480,442 6,417,115
Loss on abandonment of assets - - 1,029,731
----------------- ----------------- ------------------
Total costs and expenses 35,128,438 34,424,450 47,237,452
----------------- ----------------- ------------------
Income from operations 3,027,476 3,575,825 78,590
Other income 1,060,846 857,466 1,022,512
----------------- ----------------- ------------------
Income before provision for income taxes 4,088,322 4,433,291 1,101,102
Provision for income taxes 1,227,043 1,738,609 788,714
----------------- ----------------- ------------------
Net income $2,861,279 $2,694,682 $312,388
================= ================= ==================
Earnings per share:
Basic $0.19 $0.18 $0.02
================= ================= ==================
Diluted $0.19 $0.18 $0.02
================= ================= ==================
Weighted average number of shares outstanding:
Basic 15,317,881 15,259,437 15,265,114
================= ================= ==================
Diluted 15,398,910 15,261,444 15,271,218
================= ================= ==================
FOR THE YEARS ENDED MARCH 31,
---------------------------------------------------------
2003 2002 * 2001 *
---------------- ------------------- -----------------
Net income $2,861,279 $2,694,682 $312,388
Other Comprehensive Income, net of tax
Unrealized gain (loss) on investments 13,713 (8,936) 30,001
Foreign currency translation adjustments (158,659) (11,143) 82,182
---------------- ------------------- -----------------
Comprehensive Income $2,716,333 $2,674,603 $424,571
================ =================== =================
Comprehensive income per share: $0.18 $0.18 $0.03
================ =================== =================
* Restated to reflect the correction of net earned administrative fees - See
Note 3.
See report of independent auditors and accompanying notes to consolidated
financial statements.
27
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
2003 2002 *
-------------- -------------
A S S E T S
Current assets:
Cash and cash equivalents $5,478,095 $7,033,448
Investments in marketable securities 843,980 954,653
Accounts receivable, (net of allowances of
$230,064 and $256,019, respectively) 22,008,608 18,442,135
Loan receivable - Butler Financial Solutions, Inc. 8,612,678 2,754,691
Other receivables, net 5,299,887 2,149,667
Income tax receivable - 1,129,076
Deferred income taxes 2,098,171 2,653,000
Employee receivables 73,833 27,391
Prepaid expenses and other current assets 1,218,392 600,944
-------------- -------------
Total current assets 45,633,644 35,745,005
-------------- -------------
Property and equipment, net 8,296,313 9,299,713
-------------- ---------------
Other assets:
Excess of cost over fair value of assets acquired
(net of accumulated amortization of $5,825,405) 1,637,290 1,637,290
Deferred income taxes 800,406 1,434,104
Deferred direct costs 9,972,309 22,570,930
Investments in marketable securities 1,355,263 1,376,619
Restricted cash 825,000 825,000
Split dollar life insurance policies 877,126 904,172
Notes receivable 5,411,653 2,818,639
Other assets 47,124 44,546
-------------- -------------
Total other assets 20,926,171 31,611,300
-------------- -------------
Total Assets $74,856,128 $76,656,018
============== =============
* Restated to reflect the correction of net earned administrative fees - See
Note 3.
See report of independent auditors and accompanying notes to consolidated
financial statements.
28
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
2003 2002 *
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease $802,070 $801,788
obligations
Insurance premiums payable 36,070,992 26,470,265
Income taxes payable 81,236 -
Accounts and commissions payable 8,118,371 6,960,465
Accrued expenses and other current liabilities 3,534,106 3,168,666
-------------- --------------
Total current liabilities 48,606,757 37,401,184
-------------- --------------
Deferred revenues 15,065,547 30,942,984
Long-term debt and capital lease obligations 1,218,670 957,159
Deferred rent payable 417,720 190,260
-------------- --------------
Total liabilities 65,308,718 69,491,587
-------------- --------------
Commitments and contingencies
- -
Stockholders' equity:
Preferred stock - $.0007 par value authorized - 15,000,000
Shares issued - none at March 31, 2003 and March 31, 2002 - -
Common stock - $.007 par value authorized - 30,000,000 Shares
issued -16,530,324 shares at March 31, 2003 and
16,525,324 shares at March 31, 2002 115,714 115,679
Additional paid-in capital 23,760,809 23,745,944
Loans to directors and officers (10,462,094) (10,163,875)
Accumulated other comprehensive income, net of taxes (196,974) (52,028)
Retained earnings (Accumulated Deficit) 604,631 (2,256,648)
-------------- --------------
13,822,086 11,389,072
Treasury stock - at cost, 1,249,690 shares at March 31, 2003
and 1,212,159 shares at March 31, 2002 (4,274,670) (4,224,641)
-------------- --------------
Total Stockholders' Equity 9,547,416 7,164,431
-------------- --------------
-------------- --------------
Total Liabilities and Stockholders' Equity $74,856,128 $76,656,018
============== ==============
* Restated to reflect the correction of net earned administrative fees - See
Note 3.
See report of independent auditors and accompanying notes to consolidated
financial statements.
29
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------
2003 2002 * 2001 *
---------------- ---------------- -----------------
Common Stock Outstanding (shares)
Balance, beginning of year 16,525,324 16,514,228 16,505,911
Exercise of common stock options 5,000 - -
Issuance of common stock - 11,096 8,317
---------------- ---------------- -----------------
Balance, end of year 16,530,324 16,525,324 16,514,228
================ ================ =================
Common Stock
Balance, beginning of year $115,679 $115,580 $115,541
Exercise of common stock options 35 - -
Issuance of common stock - 99 39
---------------- ---------------- -----------------
Balance, end of year $115,714 $115,679 $115,580
================ ================ =================
Additional paid-in capital
Balance, beginning of year $23,745,944 $23,742,868 $23,737,835
Exercise of common stock options 2,065 - -
Compensatory element of common stock options 12,800 - -
Issuance of common stock - 3,076 5,033
---------------- ---------------- -----------------
Balance, end of year $23,760,809 $23,745,944 $23,742,868
================ ================ =================
Loans to directors and officers
Balance, beginning of year ($10,163,875) ($9,833,244) ($9,505,406)
Loans for exercise of stock of stock options (298,219) (330,631) (327,838)
---------------- ---------------- -----------------
Balance, end of year ($10,462,094) ($10,163,875) ($9,833,244)
================ ================ =================
Accumulated other comprehensive income
Balance, beginning of year ($52,028) ($31,949) ($144,132)
Foreign currency translation adjustments (158,659) (11,143) 82,182
Unrealized gain (loss) on investments 13,713 (8,936) 30,001
---------------- ---------------- -----------------
Balance, end of year ($196,974) ($52,028) ($31,949)
================ ================ =================
Retained Earnings (Accumulated Deficit)
Balance, beginning of year ($2,256,648) ($4,951,330) ($8,101,029)
Effect of restatement (note 3) - - 2,837,311
Net income 2,861,279 2,694,682 312,388
---------------- ---------------- -----------------
Balance, end of year $604,631 ($2,256,648) ($4,951,330)
================ ================ =================
Common stock in treasury (shares)
Balance, beginning of year (1,212,159) (1,415,171) (1,211,024)
Purchase of treasury shares (259,753) - (450,000)
Issuance of treasury shares 222,222 203,012 245,853
---------------- ---------------- -----------------
Balance, end of year (1,249,690) (1,212,159) (1,415,171)
================ ================ =================
Common stock in treasury (amount)
Balance, beginning of year ($4,224,641) ($4,341,206) ($4,224,167)
Purchase of treasury shares (155,774) - (308,920)
Issuance of treasury shares 105,745 116,565
191,881
---------------- ---------------- -----------------
Balance, end of year ($4,274,670) ($4,224,641) ($4,341,206)
================ ================ =================
---------------- ---------------- -----------------
Total Stockholders' Equity $9,547,416 $7,165,431 $4,700,719
================ ================ =================
* Restated to reflect the correction of net earned administrative fees - See
Note 3.
See report of independent auditors and accompanying notes to consolidated
financial statements.
30
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------------
2003 2002 * 2001 (A)*
----------------- ---------------- -----------------
Cash flows from operating activities:
Net income $2,861,279 $2,694,682 $312,388
----------------- ---------------- -----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,885,054 4,480,442 6,417,115
Compensatory element of stock options 12,800 - -
Provision for bad debt expense 150,444 - 15,067
Deferred revenues (15,877,437) (27,171,294) (42,585,819)
Deferred direct costs 12,598,621 23,688,041 34,538,228
Deferred income taxes 1,188,527 (1,452,477) 6,741,052
Deferred rent payable 227,460 (103,033) (91,208)
Other (513,004) (357,828) 125,431
Increase (decrease) in cash flows as a result of
changes in asset and liability balances:
Accounts receivable (3,566,473) (6,289,620) (293,862)
Other receivables (3,150,220) 4,888,473 (4,649,283)
Income taxes receivable 1,210,312 4,249,572 (1,343,302)
Prepaid expenses and other current assets (617,448) 363,985 273,122
Split dollar life insurance policies 27,046 (195,910) 119,000
Other assets (2,577) 20,263 311,846
Insurance premiums payable 9,600,727 7,370,101 938,807
Accounts and commissions payable 1,157,906 613,593 (2,510,684)
Accrued expenses and other current liabilities 365,403 (2,721,412) (3,601,097)
----------------- ---------------- -----------------
Total adjustments 6,697,141 7,382,896 (8,810,855)
----------------- ---------------- -----------------
Net cash provided by (used in) by operating activities 9,558,420 10,077,578 (6,943,931)
----------------- ---------------- -----------------
Cash flows from investing activities:
Property and equipment purchased-net of retirements (1,818,224) (1,496,747) (1,930,448)
Purchase of marketable securities (790,000) (430,000) (715,000)
(Increase) decrease in loans and notes receivable (8,451,001) (4,973,524) 567,929
Proceeds from sales of marketable securities 945,000 1,415,304 3,600,000
----------------- ---------------- -----------------
Net cash provided by (used in) investing activities (10,114,225) (5,484,967) 1,522,481
----------------- ---------------- -----------------
Cash flows from financing activities:
Exercise of common stock options and stock grants 2,100 - 5,072
Purchase treasury stock (155,774) - (308,920)
Repayments of notes and capital leases (845,874) (561,087) (1,307,781)
----------------- ---------------- -----------------
Net cash (used in) financing activities (999,548) (561,087) (1,611,629)
----------------- ---------------- -----------------
Net (decrease) in cash and cash equivalents (1,555,353) 4,031,524 (7,033,079)
Cash and cash equivalents at beginning of year 7,033,448 3,001,924 10,035,003
----------------- ---------------- -----------------
Cash and cash equivalents at end of year $5,478,095 $7,033,448 $3,001,924
----------------- ---------------- -----------------
Supplemental Cash Flow Information:
Cash payments made (recovered) during the year for:
Interest $275,185 $217,072 $234,102
----------------- ---------------- -----------------
Income taxes ($1,218,916) ($1,107,494) $259,224
----------------- ---------------- -----------------
Non-Cash Investing and financing activities:
Property and equipment financed through capital leases $1,120,273 $443,232 $519,369
Increase in loans to officers and directors (298,219) (330,631) (327,838)
Issuance of treasury stock 105,745 116,565 191,881
Capital leases refinanced - 151,565 -
(a) Reclassified for comparability.
* Restated to reflect the correction of net earned administrative fees -
See Note 3.
See report of independent auditors and accompanying notes to consolidated
financial statements.
31
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, extended warranties and
replacement plans. The Company is a third party administrator for a
variety of dealer/clients in selected industries and offers call center
and technical computer services. The Company assists dealer/clients in
obtaining insurance policies from highly rated independent insurance
companies for all contracts and programs offered. The insurance company
is then responsible for the cost of repairs or replacements for the
contracts administered by Warrantech.
The Company's service contract programs benefit consumers by providing
them with expanded and/or extended product coverage for a specified
period of time (and/or mileage in the case of automobiles and
recreational vehicles), similar to that provided by manufacturers under
the terms of their product warranties. Coverage generally provides for
the repair or replacement of the product, or a component thereof, in the
event of its failure. The Company's service contract programs benefit the
dealer/clients by providing enhanced value to the goods and services they
offer and by providing them with the opportunity for increased revenue
and income without the costs and responsibilities of operating an
extended warranty program.
The service contracts, extended warranties and replacement contracts
generally have terms ranging from three (3) to one hundred twenty (120)
months. Since the Company acts solely as a third party administrator on
behalf of the dealer/clients and insurance companies, the actual repairs
and/or replacements required under the agreements are performed by
independent third party authorized repair facilities or dealers. The cost
of repairs is generally paid for by the insurance companies which have
the ultimate responsibility for the claims or, where insurance coverage
is unavailable, by Butler Financial Solutions, LLC ("Butler"), if
Reliance Insurance Company ("Reliance") or the Company is the obligor.
The insurance policy indemnifies the dealer/clients against losses
resulting from service contract claims and protects consumers by ensuring
their claims will be paid.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). These consolidated financial statements include the accounts
of Warrantech Corporation and its subsidiaries, all of which are wholly
owned. All intercompany accounts and transactions have been eliminated
in consolidation.
RISKS AND UNCERTAINTIES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
which affect the reporting of assets and liabilities as of the dates of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from these estimates.
REVENUE RECOGNITION POLICY - Revenue for administrative obligor
contracts is recognized in accordance with, Staff Accounting Bulletin
101 ("SAB 101"). Under SAB 101, the Company recognizes revenue when the
revenue is realizable and earned. The Company considers revenue realized
and earned when a definitively discrete earnings event has occurred. The
Company, primarily, has two discrete events (1) for marketing and
administration of service contracts and (2) for servicing fees. The
marketing and administrative fee is paid by the retailer of the service
contract. This revenue is recognized at the time of the sale to the
retailer, as the Company will have substantially completed the services
it has agreed to provide the retailer in connection with the sale of the
service contract to the consumer. The second discrete earnings event
occurs over the life of the contract as claims administrative
obligations are being satisfied. As such, Warrrantech recognizes and
realizes the revenue over the contract life.
32
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 recognized $71,784 in profit sharing on its International
business in the fiscal year ended March 31, 2003 with no profit sharing
recognized for fiscal years ended March 31, 2002 or 2001.
PROVISION FOR BAD DEBT EXPENSE - The Company's policy is to establish an
allowance for doubtful accounts when receivables are determined to be
uncollectible.
EARNINGS PER SHARE - The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", which modified the
calculation of earnings per share ("EPS".) This Statement replaced the
previous presentation of primary and fully diluted EPS to basic and
diluted EPS. Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS includes the dilution of common
stock equivalents, and is computed similarly to fully diluted EPS
pursuant to Accounting Principle Board ("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, 2003 and 2002.
At March 31, 2003 and 2002, respectively, the Company had cash on
deposit in excess of federally insured limits of $4,535,328 and
$6,659,178.
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 related assets ranging between 3 and 7
years.
CAPITALIZATION POLICY - In accordance with Statement of Position 98-1,
the Company capitalizes purchased software or software development and
implementation costs incurred internally or through independent
consultants related to the Company's state of the art proprietary
relational database and interactive operating software for warranty
tracking and sales. These systems are only available for internal uses
and are not available for purchase by outside parties. All direct
implementation costs and purchase software costs are capitalized and
amortized using the straight-line method over their estimated useful
lives not to exceed a five-year period. Of the $4,427,891 and $6,172,570
of net software development costs at March 31, 2003 and March 31, 2002,
respectively, the Company capitalized $779,665 and $954,657.
33
Once annually or as events or circumstances indicate that an asset may
be impaired, the Company assesses potential impairment of its long-lived
assets, which include its property and equipment and its identifiable
intangibles such as software development costs, goodwill and deferred
charges. The Company determines such impairment by measuring the
undiscounted future cash flow generated by the assets, comparing the
result to the assets carrying value and adjusting the asset to the lower
of its carrying value or fair value and charging current operations for
the measured impairment. At years ended March 31, 2003 and 2002, the
Company found no impairment to its property and equipment or its other
identifiable intangibles.
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED - The excess of cost
over fair value of the assets acquired ("Goodwill") is a result of the
purchases of Dealer Based Services, Inc. in 1989, Home Guarantee
Corporation, PLC in July 1995, and certain assets of Distributors &
Dealers Service Co., Inc. in October 1997. Prior to the early adoption
of Statement of Financial standards No. 142 "Goodwill and Intangible
Assets" on April 1, 2001, the excess of cost over fair value of assets
acquired was being amortized on a straight-line basis over 15, 10 and
4.5 years, respectively. As a result of the Company closing its offices
in Europe during 2001, the excess of Cost over Fair Value of Assets
acquired from Home Guarantee Corporation, PLC was charged to operations
at that time.
Impairment of Long-lived Assets - The Company assesses potential
impairment of its long-lived assets, which include its property and
equipment and its identifiable intangibles such as software development
costs, goodwill and deferred charges under the guidance of SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". Once
annually or as events or circumstances indicate that an asset may be
impaired, the Company assesses potential impairment of its long-lived
assets, which include its property and equipment and its identifiable
intangibles such as software development costs, goodwill and deferred
charges. The Company determines such impairment by measuring the
undiscounted future cash flow generated by the assets, comparing the
result to the assets carrying value and adjusting the asset to the lower
of its carrying value or fair value and charging current operations for
the measured impairment.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
Advertising expenses for the years ended March 31, 2003, 2002 and 2001
were $261,182, $388,085 and $473,553, respectively.
STOCK BASED COMPENSATION - The Company applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and related interpretations in accounting for its stock-based
compensation plans. Under APB 25, compensation expense for stock option
and award plans is recognized as the difference between the fair values
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. This 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 tax assets and liabilities 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 United States dollars in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
52 "Foreign Currency Translation". The functional currency for the
Company's United Kingdom operations was the British pound. The
functional currency for the Company's Chilean and Peruvian operations
are their respective local currencies. Transaction gains and losses are
reflected in operations, while translation gains and losses are
reflected as a separate component of accumulated other comprehensive
income, net of tax.
34
COMPREHENSIVE INCOME - The Company has adopted SFAS No. 130 "Reporting
Comprehensive Income". SFAS No. 130 establishes rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had minimal impact on the Company's net
income or stockholders' equity. SFAS No. 130 requires unrealized gains
or losses to be recorded on the Company's available for sale securities
and foreign currency translation adjustments, which prior to the
adoption were reported separately in stockholders' equity, to be
included in other comprehensive income.
CONTINGENT LIABILITY POLICY - In accordance with SFAS 5 and Financial
Accounting Standards Interpretation ("FIN") 14, the Company may have
certain contingent liabilities with respect to material existing or
potential claims, lawsuits and other proceedings. The Company accrues
liabilities when it is probable that future costs will be incurred and
such costs can be reasonably estimated and measured.
2. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) approved
for issuance SFAS No. 142, "Goodwill and Intangible Assets," which is
effective for fiscal years beginning after March 15, 2001. SFAS 142
provides that goodwill and intangible assets with indefinite lives not
be amortized, and instead, be tested for impairment annually and
whenever there is an impairment indicator. Early adoption of SFAS 142 is
permitted for companies with fiscal years beginning after March 15, 2001
but only if they had not issued their first quarter financial statements
prior to adoption. The Company adopted SFAS 142 effective April 1, 2001
and ceased amortization of its goodwill. The following table discloses
goodwill amortization expense (net of tax effects) and net income for
the fiscal years ended March 31, 2003, 2002 and 2001.
FOR THE FISCAL YEARS ENDED MARCH 31,
2003 2002 2001
---- ---- ----
Goodwill amortization - - ($919,466)
---------- ----------- ---------
Net income $2,861,279 $2,694,682 $1,231,854
---------- ----------- ----------
Earnings per share: Basic $0.19 $0.18 $0.08
===== ===== =====
Earnings per share: Diluted $0.19 $0.18 $0.08
===== ===== =====
Goodwill at March 31, 2003 and 2002 is as follows:
YEAR ENDED MARCH 31,
2003 2002
---- ----
Goodwill $7,462,695 $7,462,695
Accumulated Goodwill Amortization (5,825,405) (5,825,405)
----------- -----------
Total $1,637,290 $1,637,290
========== ==========
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement
amends SFAS 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. The Company has elected not to adopt the provisions of
SFAS No. However, the Company will provide all newly required
disclosures under SFAS No.123.
3. RESTATEMENT
The Company's financial statements have been restated to reflect a
change in accounting treatment in calculating net earned administrative
fees for the years ended March 31, 2002 and 2003. For certain contracts,
the Company previously had deferred a portion of the revenue and would
recognize such deferred revenue at the cancellation or end of the
contract's term. The Company is now recognizing this revenue over the
life of the contract's term.
35
The effect of this restatement for the years ended March 31, 2002 and
2001 is as follows:
MARCH 31, 2002 MARCH 31, 2001
--------------- --------------
AS AS
PREVIOUSLY AS RESTATED PREVIOUSLY AS RESTATED
REPORTED REPORTED
Statement of Operations:
Earned administrative fee (net of amortization of deferred costs) $37,327,306 $38,000,275 $49,700,944 $47,316,042
Income from operations 2,902,856 3,575,825 2,463,492 78,590
Income before provision for income taxes 3,760,322 4,433,291 3,486,004 1,011,102
Provision for income taxes 1,504,049 1,738,609 1,619,080 788,714
Net income $2,256,373 $2,694,682 $1,866,924 $312,388
Earnings per share:
Basic $0.15 $0.18 $0.12 $0.02
===== ===== ===== =====
Diluted $0.15 $0.18 $0.12 $0.02
===== ===== ===== =====
Balance Sheet:
Deferred income tax asset $4,982,315 $4,087,104 $3,295,278 $2,434,627
Deferred revenues 33,559,379 30,942,984 60,057,704 58,114,278
Retained earnings (deficit) (3,977,832) (2,256,648) (6,234,105) (4,951,330)
4. LOSS ON ABANDONMENT OF ASSETS
Effective September 30, 2000, the Company ceased operations in the
United Kingdom because of unprofitable operations. As a result of the
closing and abandonment of the United Kingdom operations, the Company
wrote down its investment in the assets of the United Kingdom operations
and recorded a $1,029,731 loss on the abandonment of these assets.
5. RESTRICTED CASH
At March 31, 2003 and 2002 cash in the amount of $825,000 was on deposit
with Florida and Ohio regulatory agencies to comply with their state
insurance laws.
6. INVESTMENTS IN MARKETABLE SECURITIES
Short-term marketable securities and long-term investments are comprised
of municipal bonds which bear interest at fixed rates. Interest income
from these securities is generally affected by changes in the U.S.
interest rates. The following tables provide information about the
Company's financial instruments that are sensitive to changes in
interest rates. The tables present principal cash flows and
weighted-average interest rates by expected maturity dates. All of the
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.
Principal amounts by expected maturity as of March 31, 2003 of marketable
securities are as follows:
EXPECTED MATURITY DATE
-----------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL COSTS FAIR VALUE
---- ---- ---- ---- ---- ---------- ----------- ----------
Available for sale
securities $1,765,588 $360,573 $ - $ - $ - $37,550 $2,163,711 $2,199,243
Interest rate 4.93% 4.96% - - - 5.50%
36
Principal amounts by expected maturity as of March 31, 2002 of marketable
securities are as follows:
EXPECTED MATURITY DATE
---------------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL COSTS FAIR VALUE
---- ---- ---- ---- ---- ---------- ----------- ----------
Available for sale
securities $1,592,220 $398,907 $318,328 $ - $ - $ - $2,309,455 $2,331,272
Interest rate 4.21% 5.25% 4.98% - - -
7. OTHER RECEIVABLES
The nature and amounts of Other Receivables - Butler as of March 31, 2003
and 2002 are as follows:
MARCH 31,
-----------------------------------
2003 2002
---------------- ---------------
Loan receivable from Butler Financial $8,612,678 $2,754,691
Solutions, LLC (see note 11) ========== ==========
Other receivables, net
Due from insurance companies $4,429,450 $1,407,549
Due from dealers 348,229 388,423
Agent advances 157,527 306,808
Other 364,681 46,887
---------------- ---------------
5,299,887 2,149,667
Allowance for doubtful accounts - -
---------------- ---------------
Total other receivables, net $5,299,887 $2,149,667
================ ===============
During the current fiscal year, the Company advanced money to Butler to pay
claims for which Reliance Warranty Corporation ("RWC") is obligated to pay.
As of the end of the fiscal years ended March 31, 2003 and 2002, $8,612,678
and $2,754,691, respectively, had been paid. The Company expects to receive
funds from RWC during fiscal year 2004, which would reimburse the Company
for claims that Butler paid out for which RWC was responsible to pay.
The following table sets forth the carrying amounts and fair values of the
Company's loan and other receivables at March 31, 2003.
EXPECTED MATURITY DATE
----------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ------ ----------
Other receivable - Butler $8,612,678 - - - - - $8,612,678 $8,612,678
Other receivable, net 5,299,887 - - - - - 5,299,887 5,299,887
The following table sets forth the carrying amounts and fair values of the
Company's loan and other receivables at March 31, 2002.
EXPECTED MATURITY DATE
--------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ------ ----------
Loan receivable -
Butler $2,754,691 - - - - - $2,754,691 $2,754,691
Other receivable, net 2,149,667 - - - - - 2,149,667 2,149,667
37
8. PROPERTY AND EQUIPMENT
MARCH 31,
------------------------------------
2003 2002
---------------- ----------------
Automobiles $ 67,701 $ 61,280
Equipment, furniture and fixtures 10,486,659 9,981,999
Leasehold improvements 2,135,007 1,384,322
Software development costs 15,226,184 14,665,867
---------------- ----------------
27,915,551 26,093,468
Less: Accumulated depreciation and amortization 21,556,526 18,392,289
---------------- ----------------
6,359,025 7,701,179
---------------- ----------------
Assets under capital leases:
Cost 9,624,745 9,010,339
Less: Accumulated amortization 7,687,457 7,411,805
---------------- ----------------
1,937,288 1,598,534
---------------- ----------------
---------------- ----------------
Total Property and Equipment, net $ 8,296,313 $ 9,299,713
================ ================
Amortization expense on assets under capital leases for the years ended
March 31, 2003, 2002 and 2001 was $662,715, $1,053,797 and $1,399,860,
respectively. Depreciation expense on property and equipment other than
under capital leases for the years ended March 31, 2003, 2002 and 2001
was $3,222,339, $3,426,645 and $4,046,873, respectively.
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following:
MARCH 31,
----------------------------
2003 2002
------------ ------------
Capital lease obligations - for property and
equipment payable monthly with interest
rates ranging from 4.92% to 19.98% through 2008 $2,020,740 $1,726,793
Sundry - 32,154
Less: Current maturities 802,070 801,788
------------ ------------
Long-term portion $1,218,670 $957,159
============ ============
The aggregate amounts of maturities at March 31, 2003 were as follows:
MINIMUM FUTURE
FISCAL YEAR LEASE PAYMENTS
----------------------------
2004 $910,082
2005 635,744
2006 366,080
2007 244,834
2008 168,625
2009 and thereafter -
-------------
2,325,365
Less amount representing interest 304,624
-------------
Net $2,020,740
=============
The capital lease obligations are collateralized by the capitalized
property and equipment related to the underlying leases.
10. SPLIT DOLLAR LIFE INSURANCE POLICIES
Through April 2003, the Company made payments on split dollar insurance
policies on the lives of six and seven officers of the Company,
respectively. The Company has suspended payment of premiums under these
policies until the permissability of making such payments under the
Sabarnes-Oxley Act of 2002 is clarified. The cash surrender value of
these policies is $877,126 and $904,172 as of March 31, 2003 and 2002,
respectively. The Company is the beneficiary of any proceeds from the
policies up to the amount of premiums paid.
38
11. NOTES RECEIVABLE
Butler serves as the ultimate obligor under all service contracts
administered by the Company in exchange for a fee. Some of the service
contracts under which Butler is the obligor were insured by Reliance, and
the liquidation of Reliance has eliminated the insurance coverage to
Butler.
Funding to Butler is provided by a special surcharge, payable on all
vehicle service contracts administered by the Company sold after November
19, 2001. The surcharge will be paid by agents through whom
Reliance-insured service contracts were sold. Butler will use these funds
to pay the claims previously insured by Reliance and to repay its loans
from Warrantech.
Additionally, in order to assist Butler in addressing its potential
obligations under the service contracts previously insured by Reliance
for which Butler is, or the dealer, or Warrantech was, the obligor,
Warrantech Automotive has made loans to Butler, as necessary, for claims
obligations in excess of Butler's fee revenues. Subject to the terms of
the agreement between the Company and Butler, the Company has and will
make further loans to Butler, as necessary, for claims obligations in
excess of Butler's fee revenues. All of Warrantech's loans to Butler bear
interest at the rate of prime plus 2% per annum and will begin to be paid
down once Butler's fee revenues exceed the claims obligations.
At March 31, 2003 and 2002, Warrantech had loaned Butler $14,009,059 and
$5,435,646, respectively. RWC, which is not part of the Reliance
liquidation, is obligated to pay Butler $8,612,678 and $2,754,691,
respectively, of that amount. The Company expects Butler to collect the
$8,612,678 from RWC during the third quarter of fiscal 2004 and
simultaneously the Company will collect this amount from Butler. The
portion of the Butler receivables, which RWC is legally responsible for
payments, is reflected as "Other Receivables" on the Consolidated Balance
Sheet. The remaining amount representing the loans due from Butler of
$5,396,381 and $2,680,955, at fiscal year ended March 31, 2003 and 2002,
respectively, are classified as "Notes Receivable" on the Consolidated
Balance Sheet.
The following table sets forth the carrying amounts and fair values of
the Company's notes and receivables at March 31, 2003.
EXPECTED MATURITY DATE
------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ------ ----------
Note Receivable - Butler
Equals 2% above prime - - $2,563,129 $2,833,252 - - $5,396,381 $5,396,381
Note Receivable - other 15,272 - - - - - 15,272 15,272
The following table sets forth the carrying amounts and fair values of
the Company's notes and other receivables at March 31, 2002.
EXPECTED MATURITY DATE
--------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ------ ----------
Note Receivable - Butler
Equals 2% above prime - - - $2,563,129 $117,826 - $2,680,955 $2,680,955
Note Receivable - other 137,684 - - - - - 137,684 137,684
12. INCOME TAXES
A reconciliation of the income tax provision to the amount computed using
the federal statutory rate is as follows:
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------------------------------
2003 2002 2001
------------------------- ---------------------- -------------------------
Income before income taxes $4,088,322 $4,433,291 $1,101,102
Federal statutory rate 1,390,029 34.0% $1,507,319 34.0% $374,375 34.0%
State tax effect (106,553) (2.6)% 92,839 2.6% 280,942 25.5%
Goodwill - - - - 281,370 25.5%
Non-deductible items 34,657 0.8% 34,179 1.15% - -
Other (91,090) (2.2)% 104,272 1.5% (147,973) (13.4)%
------------------------- ---------------------- -------------------------
Provision for income taxes $1,227,043 30.0% $1,738,609 39.2% $788,714 71.6%
========================= ====================== =========================
PROVISION
FOR THE YEAR ENDED MARCH 31, 2003 CURRENT DEFERRED (BENEFIT)
---------------- --------------- -------------------
Federal $32,791 $1,200,694 $1,233,485
State (104,423) (57,021) (161,444)
Foreign 110,148 44,854 155,002
---------------- --------------- -------------------
Total $38,516 $1,188,527 $1,227,043
================ =============== ===================
FOR THE YEAR ENDED MARCH 31, 2002
Federal $3,025,722 ($1,492,341) $1,533,381
State 176,629 (35,964) 140,665
Foreign 100,573 (36,010) 64,563
---------------- --------------- -------------------
Total $3,302,924 ($1,564,315) $1,738,609
================ =============== ===================
FOR THE YEAR ENDED MARCH 31, 2001
Federal ($4,207,054) $3,167,458 $(1,039,596)
State 92,579 (13,041) 79,538
Foreign (109,440) 1,858,212 1,748,772
---------------- --------------- -------------------
Total ($4,223,915) $5,012,629 $788,714
================ =============== ===================
39
Deferred 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 net deferred tax asset are as
follows:
MARCH 31,
----------------------------------
2003 2002
---------------- ---------------
Deferred Tax Assets:
Deferred revenue $5,086,343 $10,864,923
Deferred rent 142,025 68,151
Provision for doubtful accounts 78,222 88,152
Accrued bonus 149,447 260,123
Foreign loss benefit 205,470 594,599
Net operating loss 1,682,365 2,310,365
Net state benefit 168,813 27,318
Tax vs. book depreciation 39,046 14,024
Other 113,284 3,588
---------------- ---------------
Total assets 7,665,015 14,231,243
Deferred Tax Liabilities:
Deferred direct costs (3,390,585) (7,932,968)
Tax vs. book depreciation - -
Section 174 expense (1,119,419) (1,633,366)
---------------- ---------------
Total liabilities (4,510,004) (9,566,334)
---------------- ---------------
3,155,011 4,664,909
Less: Valuation Allowance (256,434) (577,805)
---------------- ---------------
Net deferred tax asset $2,898,577 $4,087,104
================ ===============
As of March 31, 2003 the Company had a United States net operating loss
carryforward of approximately $4.95 million, which is available to reduce
future regular federal taxable income. If not used, the entire carryover
will expire in the year 2020. As of March 31, 2003, the Company also had
a foreign net operating loss carryforward of approximately $1.26 million.
Due to the uncertainty of the realization of these foreign tax
carryforwards, the Company has established a valuation allowance against
these carryforward benefits of approximately $256,434 and $577,805 at
March 31, 2003 and 2002, respectively.
Section 174 expense represents research and experimental expenses related
to the development of a proprietary relational database and interactive
software.
40
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS - The Company leases office and warehouse
space under noncancellable operating leases expiring through 2012. These
leases include scheduled rent increases over their respective terms. The
accompanying consolidated statements of operations reflect rent expense
on a straight-line basis over the lease terms, which differ from the cash
payments required. Rent expense, net of sub-lease income, charged to
operations for the years ended March 31, 2003, 2002 and 2001 was
$1,837,314, $1,389,764 and $2,403,489, respectively.
Future minimum commitments under these leases that have initial or
remaining lease terms in excess of one year at March 31, 2003, are as
follows:
FISCAL YEAR
-----------
2004 $1,883,303
2005 1,153,777
2006 1,108,065
2007 1,087,189
2008 1,061,189
Thereafter through 2012 5,499,512
---------------
Total future minimum lease payments $11,793,035
===============
EMPLOYMENT CONTRACTS - The Company has employment contracts with its
officers and certain key employees. These employment contracts, expiring
on various dates through 2004, provide for aggregate minimum annual base
compensation of $2,224,837. Certain agreements also call for (i) annual
increases, (ii) cost of living increases, (iii) automobile allowances and
(iv) additional compensation if certain defined performance levels are
attained. This additional compensation is to be paid in the form of cash
and/or Company common stock. The Company also agreed to forgive interest
which has accrued annually on a note between the Company and its CEO, for
as long as the CEO remains in the Company's employ.
LINE OF CREDIT - The Company executed an agreement with Great American
Insurance Company ("GAIC") on October 9, 2002, whereby, GAIC agreed to
provide funding by extending a favorable change of its credit terms to
the Company.
GAIC also agreed to extend a separate line of credit for an amount up to
$3 million to the Company, subject to certain adjustments, to fund
unanticipated working capital requirements. Interest is charged on monies
advanced from the line of credit at an annual rate of prime plus 2%. No
amounts have been drawn on the line of credit since its inception.
EQUIPMENT FINANCING - The Company has ongoing relationships with
equipment financing companies and intends to continue financing certain
future equipment needs through leasing transactions. The total amount
financed through leasing transactions during the fiscal year ended March
31, 2003 amounted to $1,120,273 compared to $594,797 during the fiscal
year ended March 31, 2002. At fiscal year end 2003, the Company had
$2,020,740 in debt from capital lease obligations compared to $1,758,947
at fiscal year-end 2002.
LITIGATION - The Company is from time to time involved in litigation
incidental to the conduct of its business.
STAPLES THE OFFICE SUPERSTORE, INC.
Staples the Office Superstore, Inc. ("Staples") v. ACE Property and
Casualty Insurance Company, Warrantech Consumer Product Services, Inc.
and Warrantech Help Desk, Inc., No. 2001-02277, District Court of Harris
County, Texas.
41
In accordance with a Service Contract Administration Agreement,
Warrantech administered a service contract program for Staples. For a
period of time, that program was underwritten by ACE Property and
Casualty Insurance Company (f/k/a CIGNA Property and Casualty Insurance
Company). In March 2001, ACE informed Warrantech that it was implementing
changes in the process pursuant to which claims underwritten by ACE were
to be adjusted and paid. Although Warrantech would continue to take
inbound calls and validate coverage, ACE would now confirm diagnoses,
dispatch service and pay servicer invoices. Shortly after implementation
of these changes, Staples reported that it had witnessed a material
increase in complaints from customers holding service contracts
underwritten by ACE. These complaints were primarily focused on
inordinate delays in service delivery. Although Staples discussed these
problems with Warrantech, ACE continued to operate under the new claims
handling procedures. In an effort to satisfy customer complaints, Staples
stated that it had spent a substantial amount of its own funds to repair
or replace covered products.
This action had two distinct components. Initially, Staples sought a
Temporary Injunction against ACE and Warrantech. The motion, as filed,
asked that (i) Staples be given control of the toll free telephone lines
on which customers call for service and (ii) ACE be required to
re-institute those claims handling procedures that were in place prior to
March 2001. That motion was denied but the parties entered into an Agreed
Order that governs the administration of the Staples portfolio of service
contracts.
Staples also pursued an action for damages against both ACE and
Warrantech. It sought to recover the amounts it spent to satisfy its
customers and certain unspecified amounts representing loss of business
and damage to its reputation. It claimed entitlement to these amounts was
based on a variety of theories including breach of contract, fraud and
tortuous interference with business. Warrantech believed the claims as
asserted against it were without merit. Warrantech also believed it had
meritorious claims against ACE arising out of these allegations which
claims may be asserted in this litigation or in the arbitration referred
to below. Settlement discussions were concluded and all parties to the
litigation executed a settlement agreement on June 11, 2002, which the
Court approved and subsequently dismissed the case.
Simultaneously with the settlement of the litigation with Staples, the
Company granted Staples options to purchase one (1) million shares of
Warrantech's common stock at an exercise price of $2.00 per share (the
"Staples Options"). If Staples exercises all of the options, it would
hold an equity position in Warrantech of approximately 6.5% of the
Company's outstanding shares. Under the guidance of SFAS 123, the Company
utilized the Black-Scholes option pricing model to estimate the fair
value of the options granted under the settlement agreement. As it had no
value under the Black-Scholes option pricing model, no compensation
expense was recorded in the Company's results of operations.
ACE PROPERTY AND CASUALTY INSURANCE COMPANY
In the Matter of the Arbitration between ACE Property and Casualty
Insurance Company f/k/a CIGNA Property and Casualty Insurance Company v.
Warrantech Corporation, Warrantech Consumer Product Services, Inc., WCPS
of Florida, Inc. and Warrantech Help Desk, Inc.
In accordance with an Administrative Agreement between the various named
Warrantech entities and CIGNA, ACE made a demand for arbitration of a
variety of claims that ACE asserted against Warrantech. These claims can
be divided into two general categories. The first arose out of
Warrantech's administration of its service contract program with CompUSA
prior to and immediately following the termination of the relationship
between Warrantech and CompUSA. The remaining claims related to
Warrantech's general claims handling procedures. Although all claims were
not set forth with specificity, it was evident that ACE was seeking to
recover damages in an amount in excess of twenty million dollars
($20,000,000).
In March 2003, the parties entered into a Final Settlement Agreement and
Release ("Settlement"). Pursuant to this Settlement, ACE released the
Warrantech entities from any and all claims it now has or may acquire at
any time in the future and the Warrantech entities gave ACE a comparable
release. In accordance with this general release, the arbitration was
dismissed. In addition, the parties agreed upon a methodology to satisfy
all outstanding invoices from the various service centers that provided
repair services during the time that ACE was the insurer.
42
Neither ACE nor any of the Warrantech entities incurred any financial
liability as a direct result of obtaining this Settlement. The parties
will incur certain costs with respect to satisfying the service center
invoices but the amounts, in the opinion of management, will not have a
material effect on the Company's results of operations, financial
condition or cash flows.
Warrantech Consumer Product Services, Inc. et al. ("Warrantech") v. ACE
Property and Casualty Insurance Company and Does 1-10, inclusive ("ACE"),
Superior Court of the State of California, County of Los Angeles.
In November 2002, Warrantech filed suit against ACE for (i) insurance bad
faith (aka breach of the implied covenant of good faith and fair dealing)
and (ii) breach of contract. This complaint arose out of ACE's alleged
unreasonable delay in paying, or failure to pay, claims submitted by
service providers under service contracts underwritten by ACE. In a
number of instances, this delay and/or failure had resulted in the
service provider filing suit against Warrantech to recover the relevant
payments. Warrantech sought compensatory and punitive damages although no
specific amount was specified.
This litigation was included in the Settlement described above and the
matter has been dismissed with prejudice.
MICHAEL A. BASONE
Mr. Basone is a former Executive Vice President and Chief Operating
Officer of Warrantech, having resigned in February 2000. Several months
after resigning, Mr. Basone contacted the Company through his attorney
and claimed that the Company's conduct was such that he was forced to
resign. For this alleged "constructive termination" without cause, Mr.
Basone sought an amount equal to what he would have received had he
completed the term of his employment agreement. The Company believes this
assertion is completely without merit and has rejected Mr. Basone's
demand for payment. Mr. Basone has filed a Demand for Arbitration with
the American Arbitration Association that seeks damages in the amount of
$300,000. An arbitration hearing was held on May 13 & 14, 2002 and, on
July 31, 2002, the arbitrator issued his decision. The arbitrator has
denied Mr. Basone's claim and has held that wages withheld by Warrantech
shall be applied to offset amounts owed to Warrantech by Mr. Basone
pursuant to a promissory note. Each party is responsible for its own
attorney's fees and for one-half of the costs of the arbitrator.
MARKET WEST COMPUTER GROUP
M.W.C.G., Inc., d/b/a/ Market West Computer Group, on behalf of itself
and all others similarly situated v. ACE Property and Casualty Insurance
Company, Warranty Corporation of America ("WaCA"), Warrantech Corporation
and Warrantech Consumer Product Services, Inc. ("WCPS"), United States
District Court, Central District of California (Western Division).
Market West is one of many service providers used by WCPS to repair
computer-related equipment pursuant to its service contract program. When
the administration of service contracts underwritten by ACE was
transferred from WCPS to WaCA, many service providers like Market West
complained of material changes in claim adjustment procedures and
unreasonable delays in claim payment. Market West filed suit in state
court in California against the named parties to recover monies it claims
to be owed as a result of the repair work it has performed.
The amount sought by Market West under its initial claim was
approximately $225,000. Warrantech believed that if the claim were
successful, substantially all of the amount that is awarded to Market
West would be owed by the insurers that underwrote the liability.
Following removal of the lawsuit to federal court, Market West attempted
to have a national class of plaintiffs certified. The class certification
petition was denied by the court and Market West was directed to proceed
with its individual claim. A settlement agreement was executed on October
28, 2002, under which Warrantech's ultimate liability was substantially
less than the amount originally sought. All outstanding claims have been
processed, resulting in a $62,533 charge to operations during fiscal year
ended March 31, 2003, and the matter has been concluded.
43
LLOYD'S UNDERWRITERS
Certain Underwriters at Lloyd's, London and Other Reinsurers Subscribing
to Reinsurance Agreements F96/2992/00 and No. F97/2992/00 v. Warrantech
Corporation, Warrantech Consumer Product Services, Inc. and Warrantech
Help Desk, Inc., District Court of Tarrant County, Texas, 17th Judicial
District.
During the period that Houston General was the underwriter of certain of
Warrantech's programs, it reinsured certain of the underwritten risks
with one or more Lloyd's insurance syndicates. At some point thereafter,
Houston General commenced an arbitration against the Lloyd's syndicates
seeking to recover approximately $46,000,000 under the reinsurance
treaties with respect to claims previously paid by Houston General on
warranty claims submitted by customers under Warrantech programs. The
Warrantech entities were not parties in the arbitration but were the
subject of extensive discovery by each of Houston General and the Lloyd's
syndicates. The arbitration concluded in August 2002 with an award of
approximately $39,000,000 in favor of Houston General.
The award supports the assertions of Houston General with respect to the
validity of the claims that it paid. Warrantech was not involved in the
selection of these re-insurers, has no contractual relationship with
them, and has had no reporting or other obligation to them. Despite these
facts, the Lloyd's syndicates now seek to recover some portion of the
arbitration award from the Warrantech entities on two theories of
liability. The first is that, at the time certain claims were presented
to Houston General for payment, the Warrantech entities either
fraudulently or negligently represented to Houston General that such
claims were valid. The second is that the Warrantech entities
intentionally failed to comply with their legal obligations to cooperate
with the parties during the discovery process for the arbitration. No
specific demand for damages is contained in the complaint. The parties
are presently engaged in extensive document discovery and, in particular,
the review of electronic files and databases.
Management believes that this case is without merit; however, it is not
able to predict the outcome of this litigation. The Company is unable at
this time to determine the Company's potential liability, if any, and as
such, the accompanying financial statements do not reflect any estimate
for losses.
American Home Assurance Co., et al, v. Warrantech Automotive, Inc., 99
Civ. 12040 (BSG)
Service Guard Insurance Agency, Inc. v. Warrantech Automotive, Inc., New
Hampshire Insurance Company, Ronald Glime and Christopher Ford, Cause No.
99-12650, 126th Judicial District Court of Travis County, Texas
National Union Fire Insurance Company of Pittsburgh, PA v. Warrantech
Corporation and Warrantech Automotive, Inc., United States District Court
(S.D.N.Y.)
Each of the matters set forth above was settled pursuant to a certain
Settlement Agreement and Release of Claims, effective as of July 25, 2001
(the "Agreement"). As referenced in the title of the Agreement, each
party released all other relevant parties from all claims asserted in any
of the litigations and all claims that could have been asserted in any of
said litigations. Furthermore, releases were granted with respect to all
potential future claims arising out of the subject matter of any of the
litigations. As a result of the settlement, in August 2001, AIG
reimbursed the Company for its legal fees associated with its lawsuit;
$824,332 of which is reflected in the financial statements ended March
31, 2002 as a legal settlement.
44
Additionally, AIG was granted 2,000,000 options to purchase the Company's
common stock at $2.00 per share, expiring in five years. The fair market
value of the option, according to the Black-Scholes option pricing model,
after tax, was zero.
INSURANCE LIABILITY - As a consequence of the September 11, 2001
tragedies, one of the Company's former insurance carriers, Reliance,
incurred potential claim losses that were greatly in excess of its
ability to pay them. Consequently, the Pennsylvania Insurance
Commissioner placed Reliance in receivership in October 2001. Reliance
had been an insurer of the Company's automotive contracts until August
2000. The Company was the obligor under approximately 20% of the
outstanding Reliance-insured contracts. As disclosed in Note 11 above,
Butler assumed the obligations of the Company. The Company agreed to make
loans to Butler to fund the required claims payments it assumed. The
Company believes that the arrangements with Butler and GAIC provide a
mechanism to cover the claims under all of the service contracts in which
the Company was the obligor. If, however, Butler, for any reason, becomes
unable to pay such claims, which were previously insured by Reliance, or
if GAIC ceases to provide credit to the Company in order to fund any
shortfalls required by Butler, the Company may ultimately be required to
honor the claims, if any, under those contracts for which it was the
obligor. Management is not presently able to determine the Company's
potential claims liability, if any, and believes the likelihood that the
Company will have to honor any obligor claims is remote. As such, the
accompanying financial statements do not reflect any estimate for claims
losses.
14. STOCK OPTION AND OTHER BENEFIT PLANS
STOCK INCENTIVE PLANS - Under the Company's 1998 Employee Incentive Stock
Option Plan, as amended (the "1998 amended Plan"), 1,041,987 shares of
the Company's common stock are reserved for issuance to employees
(including officers) upon exercise of options granted under the 1998
amended plan. Options are to be granted at an exercise price not less
than 100% of the fair market value of the Company's common stock at date
of grant. The number of shares granted, terms of exercise, and expiration
dates are to be decided at the date of grant of each option by the
Company's Board of Directors. The 1998 Amended Plan will terminate in
August 2008 unless sooner terminated by the Board of Directors.
STOCK AWARDS - Restricted common stock of the Company may be awarded to
officers, key employees, non-employee directors and certain other
non-employees. Shares granted are subject to certain restrictions on
ownership and transferability. Such restrictions on current restricted
stock awards typically lapse one to three years after the award. The
deferred compensation expense related to restricted stock grants is
amortized to expense on a straight-line basis over the period of time of
the restrictions are in place. Restricted common stock awards to
employees reduce stock options otherwise available for future grants. The
common stock awards are valued based on the opening price of the
Company's stock on the date the award is approved by the Board of
Directors. During the year end March 31, 2003, 134,722 restricted shares
were awarded to directors and employees and 87,500 restricted shares were
awarded to non-employees. Common stock awards totaling 155,912 shares
were granted to directors and employees and 51,225 restricted shares were
awarded to non-employees during the fiscal year ended March 31, 2002.
The Company recognized costs of $126,505, $75,416 and $0 for the years
ended March 31, 2003, 2002 and 2001, respectively, for stock-based
compensation to employees and directors. The Company recognized costs of
$74,688, $49,997 and $118,717 for the years ended March 31, 2003, 2002
and 2001, respectively, for stock-based compensation to non-employees.
45
STOCK OPTION PLANS - At March 31, 2003, the Company had one stock option
plan, which is described above. SFAS No. 123, "Accounting for Stock-based
Compensation," defines a fair value method of accounting for an employee
stock option. SFAS No. 123 allows a company to continue to measure
compensation costs for theses plans using APB No. 25 and related
interpretations. The Company has elected to continue using APB No. 25 for
accounting for its employee stock compensation plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. If
Warrantech had determined compensation cost for its stock option plan
based on the fair value at the grant dates for awards under the plan,
consistent with the method prescribed by SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts as follows:
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------
2003 2002 2001
-------------- --------------- -------------
Net income as reported $2,861,279 $2,694,682 $312,388
Net income (loss) pro forma $2,793,993 $2,453,280 ($510,396)
Shares - Basic 15,317,881 15,259,437 15,265,114
Basic earnings per share as reported $0.19 $0.18 $0.02
Basic earnings per share pro forma $0.18 $0.16 ($0.05)
Presented below is a summary of the status of the stock options in the
plan and the related transactions for the years ended March 31, 2003,
2002 and 2001.
2003 2002 2001
---------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------------------------------------------------------------------------------
Options outstanding at beginning of year 1,416,283 $1.54 1,185,748 $2.18 582,090 $3.51
Granted 664,048 0.73 361,253 0.89 671,301 1.23
Canceled/Surrendered (687,284) (2.13) (70,108) (1.32) - -
Exercised (5,000) (0.42) - - - -
Forfeited (81,667) (0.92) (60,610) (1.35) (67,643) (4.24)
---------------------------------------------------------------------------------
Options outstanding at end of year 1,306,380 $1.10 1,416,283 $1.93 1,185,748 $2.18
=================================================================================
---------------------------------------------------------------------------------
Options exercisable at end of year 662,097 $1.33 531,261 $1.54 164,912 $2.18
=================================================================================
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, 2003, 2002 and 2001 was $0.48, $1.22 and $0.84,
respectively.
The following table summarizes the status of all Warrantech's stock
options outstanding and exercisable at March 31, 2003.
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
--------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YRS) PRICE SHARES PRICE
------------------------ --------------------------------------------------------------------
$0.67 to $0.87 909,082 7.90 $0.74 227,019 $0.72
$1.3125 to $1.50 436,008 5.63 $1.33 380,713 $1.33
$2.00 4,650,000 3.51 $2.00 3,000,000 $2.00
$3.25 to $3.375 101,290 1.62 $3.35 101,290 $3.27
--------------------------------------------------------------------
Total at March 31, 2003 6,096,380 4.52 $1.78 3,709,022 $1.89
====================================================================
Total at March 31, 2002 3,416,283 5.02 $1.97 2,531,257 $1.90
====================================================================
Total at March 31, 2001 1,185,748 6.64 $2.18 264,912 $2.18
====================================================================
OTHER STOCK OPTIONS - The Company may issue options to purchase its
common stock to officers, non-employees, non-employee directors or others
as part of settlements in disputes and/or incentives to perform services
for the Company. The Company accounts for stock options issued to vendors
and non-employees of the Company under SFAS No. 123 "Accounting for
Stock-based Compensation." In addition to the options described below,
during the year ended March 31, 2003, the Company issued options to
purchase 30,000 shares of common stock to vendors at a weighted average
exercise price of $0.73 per share and options to purchase 10,000 shares
of common stock to non-employee vendors at an exercise price of $0.675
per share during the fiscal year ended March 31, 2002. The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with weighted average assumptions
identical to those used for options granted to employees.
46
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 the years ended March 31, 2003, 2002 and
2001, respectively: expected dividend yield of 0%; expected volatility of
30% - 50%; a risk free interest rate of 4.5% - 5.0%; and expected option
life of 3 to 5 years.
On October 1, 2002, as part of the Agreement between the Company and
GAIC to provide extended credit terms, GAIC received options to
purchase up to 1,650,000 shares of common stock at an exercise price
of $2.00 per share (the "GAIC Options"). If GAIC exercises all of
these options, it would own approximately 10.8% of the Company's
outstanding shares. As the options had no value under the
Black-Scholes option pricing model, no compensation expense was
recorded in the Company's results of operations for the fiscal year
ended March 31, 2003.
On June 11, 2002, simultaneously with the settlement of the litigation
with Staples, the Company granted Staples options to purchase 1,000,000
shares of common stock at an exercise price of $2.00 per share (the
"Staples Options"). If Staples exercises all of the options, it would
hold an equity position in Warrantech of approximately 6.5% of the
Company's outstanding shares.
On August 24, 2001, simultaneously with the settlement of the litigation
among Service Guard Insurance Agency, Inc., AIG and related entities, the
Company granted AIG options to purchase 2,000,000 shares of common stock
at an exercise price of $2.00 per share (the "AIG Options"). If AIG
exercises all of the options, it would own approximately 12% of the
Company's outstanding common shares. The fair value of the above options,
as determined under the Black-Scholes option pricing model, of $21,000 in
fiscal 2003 and $0 in fiscal 2002 was charged to operation.
The GAIC, Staples and AIG Options are each exercisable for a period of
five years. Warrantech has the right to redeem these options at any time
if its shares trade at a price of $3.00 per share or more on any five
consecutive trading days. The redemption price is $.001 per share.
However, if Warrantech elects to redeem the options, GAIC, Staples and
AIG will have the right to exercise their respective options immediately
prior to the redemption.
The GAIC options are exercisable no earlier than January 1, 2006 nor
later than December 31, 2006. In the event that Warrantech's stock does
not trade above $2 per share for ten consecutive trading days prior to
January 1, 2004, the exercise price of the option is automatically
reduced to $1 per share.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of
Warrantech's Board of Directors, exercised an aggregate of 3,000,000 of
their vested options to purchase Warrantech common stock. Promissory
notes totaling $8,062,500 were signed with interest payable over three
years at an annual rate of 6%. The promissory notes, which were with
recourse and secured by the stock certificates issued, matured July 5,
2001. On March 22, 1999, Joel San Antonio delivered an additional
promissory note for $595,634, payable to the Company, representing the
amounts funded by the Company for the payroll taxes payable by him upon
for the exercise of these options. The exercise of these stock options
and the anticipated tax benefit from this transaction represented
approximately $10 million. These amounts are recorded as a contra-equity
account, which is a reduction of stockholders' equity.
47
In February 2000, the Company agreed to restructure the loans to Mr.
Tweed and Mr. White by capitalizing the interest due and extending the
loan maturity from July 5, 2001 until January 31, 2005. Interest on the
restructured loans accrued annually at the applicable federal rate of
6.2%. Under the restructuring, interest first became payable on the third
anniversary of the restructuring and was payable annually thereafter. In
July 2002, the Company extended the loan maturity dates until February 1,
2007 (the "loan extension"). The interest, which accrued on the notes up
to the time of the loan extension, was added to the principal of the
notes. The new principal amount of Mr. Tweed's note is $3,189,675 and of
Mr. White's note is $2,912,430. The applicable federal interest rate on
the notes following the loan extension is 4.6%. Under the loan extension,
interest on the notes will accrue until February 1, 2005 and, at that
time, the accrued interest will be added to the principal of the notes.
Interest on the new principal amounts thereafter become payable annually
until maturity.
In February 2000, the Company also agreed to restructure the two existing
loans to Mr. San Antonio (as restructured, the "Combined Loan"). The
Combined Loan, finalized in March 2001, was due on January 31, 2005 and
accrued interest annually at 5.2%. In July 2002, the Company extended the
loan maturity date until February 1, 2007 and the interest rate was
changed to the then applicable federal rate of 4.6%. The principal amount
of Mr. San Antonio's note is $4,165,062. Interest will be forgiven as
long as Mr. San Antonio continues to be employed by the Company. The
$200,506, $330,631 and $230,460 of interest which accrued on the note
during fiscal years 2003, 2002 and 2001, respectively has been forgiven.
The interest was charged to operations as additional compensation in the
respective fiscal years the interest income was accrued.
The total amount of the restructured loans to Mr. Tweed, Mr. White and
Mr. San Antonio, including the capitalized interest, is $10,462,094.
SAVINGS AND RETIREMENT PLAN
The Company and its qualified employees also participate in a Savings and
Retirement Plan also known as the 401(k) Plan (the "Plan"). All of the
Company's domestic employees who have completed one year of service with
the Company are eligible to participate in the Plan. The Company
contributed 33% of an eligible employee's contribution to the Plan, with
a maximum up to 4% of the employee's compensation or $4,000. The
Company's contribution for the benefit of the employee, vests after an
employee has been employed by the Company for three years. The Company
contributed $95,819 and $88,762 to the Plan during the fiscal years ended
March 31, 2003 and 2002, respectively. Beginning in fiscal year 2004, the
Company will begin contributing 66% of an eligible employee's
contribution to the Plan, with a maximum up to 4% of the employee's
compensation or $4,000.
15. OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------
2003 2002 2001
---- ---- ----
Interest and dividend income $933,944 $855,877 $1,292,335
Interest expense (275,185) (217,072) (234,102)
Gain (loss) on sale of assets (70,463) (45,018) (23,258)
Credit card usage rebate 453,760 147,735 -
Miscellaneous income (expense) 18,790 115,944 (12,463)
-----------------------------------------------------
Total Other Income (expense) $1,060,846 $857,466 $1,022,512
=====================================================
16. SIGNIFICANT CUSTOMERS
During the fiscal year ended March 31, 2003, the Company did not have
any customers which accounted for more than 10% of the Company's
consolidated net earned administrative fees. In 2003, 2002 and 2001 net
earned administrative fees from a significant customer were $2.7
million, $4.2 million and $4.5 million, respectively, which accounted
for 7%, 11% and 9% of the Company's total net earned administrative
fees, respectively. In 2003, 2002 and 2001 net earned administrative
fees from another customer were $0 million, $0 million and $12.0
million, respectively, which accounted for 0%, 0% and 25% of the
Company's total net earned administrative fees, respectively. Because
Warrantech could not reach an agreement with this customer to extend
its agreement on terms which would not erode the profitability of the
program, the program expired on February 26, 2001.
48
17. EARNINGS PER SHARE
The computations of earnings per share for the years ended March 31,
2003, 2002 and 2001 are as follows:
FOR THE YEARS ENDED MARCH 31,
-------------------------------------------------------
2003 2002 2001
----------------- --------------- ----------------
Numerator:
Net income applicable to common stock $2,861,279 $2,694,682 $312,388
================= =============== ================
Denominator:
Average outstanding shares used in the
computation of per share earnings:
Common Stock issued-Basic shares 15,317,881 15,259,437 15,265,114
Stock Options (treasury method) 81,029 2,007 6,104
----------------- --------------- ----------------
Diluted shares 15,398,910 15,261,444 15,271,218
================= =============== ================
Earnings Per Common Share:
Basic $0.19 $0.18 $0.02
================= =============== ================
Diluted $0.19 $0.18 $0.02
================= =============== ================
18. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of related
tax, for the years ended March 31, 2003, 2002 and 2001 are as follows:
FOR THE YEARS ENDED MARCH 31,
-------------------------------------------------------
2003 2002 2001
---------------- --------------- ---------------
Unrealized gain/(loss) on investments $18,046 $4,333 $13,269
Accumulated translation adjustments (215,020) (56,361) (45,218)
---------------- --------------- ---------------
Accumulated other comprehensive income ($196,974) ($52,028) ($31,949)
================ =============== ===============
19. SEGMENT INFORMATION
The Company operates in three major business segments: Automotive,
Consumer Products and International. The Automotive segment markets and
administers extended warranties on automobiles, light trucks,
motorcycles, recreational vehicles and automotive components, which are
sold principally by franchised and independent automobile and motorcycle
dealers, leasing companies, repair facilities, retail stores, financial
institutions and other specialty marketers. The Consumer Products segment
develops, markets and administers extended warranties and product
replacement plans on household appliances, consumer electronics,
televisions, computers, home office equipment and homes and which are
sold principally through retailers, distributors, manufacturers, utility
companies, financial institutions and other specialty marketers.
Warrantech also markets these warranties and plans directly to the
ultimate consumer on behalf of the retailer/dealer and/or the
manufacturer through telemarketing and direct mail campaigns. The
International segment markets and administers outside the United States
and Canada, predominately the same products and services of the other
business segments. The International segment is currently operating in
Central and South America, Puerto Rico and the Caribbean. Other includes
intersegment eliminations of revenues and receivables and net unallocated
Corporate expenses.
49
CONSUMER REPORTABLE
YEAR ENDED AUTOMOTIVE PRODUCTS INTERNATIONAL SEGMENTS OTHER TOTAL
- ------------------------------ --------------- ------------- -------------- ------------- ----------- --------------
MARCH 31, 2003
Earned administrative fee $18,517,389 $13,765,514 $3,181,849 $35,464,752 $2,691,162 $38,155,914
Profit (loss) from operations 10,608,684 (182,128) 94,101 10,520,657 (7,493,181) 3,027,476
Pretax income (loss) 4,368,822 (1,222,451) 88,121 3,234,492 313,131 4,088,322
Net interest income (expense) (47,769) 1,935 8,680 (37,154) 695,913 658,759
Depreciation/amortization 382,361 1,688,070 86,885 2,157,316 1,727,738 3,885,054
Total assets 41,323,629 20,618,836 2,914,806 64,857,271 9,998,857 74,856,128
MARCH 31, 2002
Earned administrative fee $19,346,137 $16,711,092 $2,353,491 38,410,720 (410,445) $38,000,275
Profit (loss) from operations 12,510,319 (1,184,711) (578,137) 10,747,471 (7,171,646) 3,575,825
Pretax income (loss) 8,055,756 (3,357,851) (907,600) 3,790,305 642,986 4,433,291
Net interest income 95,080 55,526 26,477 177,083 461,722 638,805
Depreciation/amortization 398,229 1,674,238 79,999 2,152,466 2,327,976 4,480,442
Total assets 38,883,561 28,185,333 3,418,178 70,487,072 6,168,946 76,656,018
MARCH 31, 2001
Earned administrative fee $15,989,590 $29,872,227 $1,815,700 47,677,517 (361,475) $47,316,042
Profit (loss) from operations 8,373,347 9,304,313 (2,106,859) 15,570,801 (15,492,211) 78,590
Pretax income (loss) 4,260,439 1,559,033 1,392,294 7,211,766 (6,110,664) 1,101,102
Loss on abandonment of assets 1,029,731 1,029,731 (1,029,731) -
- -
Net interest income 68,219 52,383 (16,851) 103,751 954,482 1,058,233
Depreciation/amortization 831,016 1,871,897 768,762 3,471,675 2,945,440 6,417,115
Total assets 44,955,804 41,218,599 2,879,066 89,053,469 7,403,053 96,456,522
50
WARRANTECH CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
(UNAUDITED)
The following fiscal 2003 and 2002 quarterly financial information for
each of the three month periods ended June 30, September 30, December
31, 2002 and 2001 and March 31, 2003 and 2002 is unaudited. However, in
the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of
operations for such periods have been made for a fair presentation of
the results shown.
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
2002 2001 2002 2001 2002 2001 2003 2002
Net earned administrative fees $9,034,136 $9,395,865 $9,938,266 $9,434,205 $9,342,901 $8,718,197 $9,840,611 $10,452,008
Income from operations 808,674 95,876 1,021,851, 1,008,683 1,102,852 586,419 94,098 1,884,848
Income before provision for
income taxes 1,038,631 288,865 1,358,403 1,156,689 1,331,753 924,045 359,535 2,063,691
Net income $712,359 $240,825 $890,524 $657,849 $1,024,330 $600,806 $234,066 $1,195,202
Earnings per share
Basic $0.05 $0.02 $0.06 $0.04 $0.07 $0.04 $0.01 $0.08
Fully Diluted $0.05 $0.02 $0.06 $0.04 $0.07 $0.04 $0.01 $0.08
51
WARRANTECH CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------------------------------------------------------
Column Column Column Column Column
A B C D E
- -------------------------------------------------------------------------------------------------------------------------------
Balance at Additions Deductions- Balance at
Description Beginning Charged to Costs Charged to Other End of
of Year and Expense Accounts-Describe Describe (a) Year
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2003
Allowance for doubtful accounts:
Trade A/R $256,019 $150,444 $176,399 $230,064
Other A/R - - - -
Year Ended March 31, 2002
Allowance for doubtful accounts:
Trade A/R $1,079,946 - 823,927 $256,019
Other A/R 45,500 - 45,500 -
Year Ended March 31, 2001
Allowance for doubtful accounts:
Trade A/R $1,164,125 15,067 99,246 $1,079,946
Other A/R 1,168,891 - 1,123,391 45,500
(a) Amount of receivables charged to the allowance during the year.
See independent auditor's report and accompanying notes to consolidated
financial statements
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Security Ownership of Certain Beneficial Owners and Management, which is
incorporated herein by reference to the Company's Definitive Proxy Statement for
its 2003 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A
promulgated under the Securities and Exchange Act of 1934, as amended (the
"Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
See Compliance with Section 16(a) of the Securities Exchange Act of 1934 in the
Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Security Ownership of Certain Beneficial Owners and Management in the Proxy
Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Certain Relationships and Related Transactions in the Proxy Statement, which
is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
are primarily responsible for the accuracy of the financial information that is
presented in this Annual Report on Form 10-K. Each of them has, within 90 days
of the filing date of this report, evaluated the Company's disclosure controls
and procedures, as defined in the rules of the SEC and have determined that such
controls and procedures were effective in ensuring that material information
relating to the Company and its consolidated subsidiaries was made known to them
during the period covered by this Annual Report.
INTERNAL CONTROLS
To meet their responsibility for financial reporting, the CEO and CFO have
established internal controls and procedures, which they believe, are adequate
to provide reasonable assurance that the Company's assets are protected from
loss. These internal controls are reviewed by the independent accountants to
support their audit work. In addition, the Company's Audit Committee, which is
composed entirely of outside directors, meets regularly with management and the
independent accountants to review accounting, auditing and financial matters.
This Committee and the independent accountants have free access to each other,
with or without management being present.
THERE WERE NO SIGNIFICANT CHANGES IN COMPANY'S INTERNAL CONTROLS OR IN OTHER
FACTORS THAT COULD SIGNIFICANTLY AFFECT INTERNAL CONTROLS SUBSEQUENT TO THE DATE
OF THE CEO'S AND CFO'S MOST RECENT EVALUATION.
53
ITEM 15. 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 25.
(b) Reports on Form 8-K during the last quarter:
None.
(c) Exhibits
Exhibits not incorporated herein by reference to a prior filing are designated
by an asterisk (*) and are filed herewith; all exhibits not so designated are
incorporated herein by reference as indicated. Management contracts or
compensatory plans, contracts or arrangements with directors and executive
officers of the Company appear in Exhibits 10(p) through 10(z).
EXHIBIT DESCRIPTION
- ------- -----------
3(a) Certificate of Incorporation filed June 22, 1983. Incorporated by reference
to the Company's Registration Statement on Form S-18, filed on November 23,
1983, Registration No. 2-88097-NY.
3(b) Certificate of Amendment of Certificate of Incorporation filed October 24,
1983. Incorporated by reference to the Company's Registration Statement on
Form S-18, filed on November 23, 1983, Registration No. 2-88097-NY.
3(c) Certificate of Amendment of Certificate of Incorporation dated June 29,
1987. Incorporated by reference to the Company's Form 8 Amendment to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1987, file no. 0-13084.
3(d) Certificate of Designation of Warrantech Corporation with respect to the
Preferred Stock as filed with the Secretary of State of Delaware on October
12, 1993. Incorporated by reference to the Company's Report on Form 10-K
for the fiscal year ended March 31, 1994, file no. 0-13084.
3(e) By-laws of Warrantech Corporation, as amended. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 10, 1988, file no. 0-13084.
10(a) Form of Sales Distributor Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1985, file no. 0-13084.
10(b) Form of Service Center Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1985, file no. 0-13084.
54
EXHIBIT DESCRIPTION
- ------- -----------
10(c) Form of Dealer Agreement. Incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1985, file no.
0-13084.
10(d) Form of Sales Agent Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-1, filed on September 5, 1986, Registration
No. 3-8517.
10(e) General Agency Agreement between American International Group, Inc. and
Warrantech Automotive, Inc. Incorporated by reference to Exhibit 10(o) to
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1996, file no. 0-13084.
10(f) Master Agreement between American International Group, Inc. and Warrantech
Corporation. Incorporated by reference to Exhibit 10(q) to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996, file
no. 0-13084.
10(g) Insurance policy among Warrantech Consumer Product Services, Inc. and
Warrantech Carribean LTD and Great American Insurance Company pertaining to
Service Plan Agreement. Incorporated by reference to Exhibit 10(u) to the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
2001, file no. 0-13084.
10(h) Schedule 10(g) identifying contracts that are substantially similar to
Exhibit 10(h), the Insurance policy among Warrantech Consumer Product
Services, Inc. and Warrantech Carribean LTD and Great American Insurance
Company pertaining to Service Plan Agreement, in all material respects
except as to the parties thereto, the dates of execution, or other details.
Incorporated by reference to Exhibit 10(v) to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 2001, file no. 0-13084.
10(i) Obligor Agreement between Butler Financial Solutions, LLC and Warrantech
Corporation dated April 1, 2000. Incorporated by reference to Exhibit 10(u)
to the Company's Annual Report on Form 10-K, file no. 0-13084.
10(j) Master Agreement between Butler Financial Solutions, LLC and Warrantech
Corporation dated November 21, 2001. Incorporated by reference to Exhibit
10(v) to the Company's Annual Report on Form 10-K, file no. 0-13084.
10(k) Security Agreement between Warrantech Corporation and Great American
Insurance Company dated October 1, 2002. Incorporated by reference to
Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, file no. 0-13084.
55
EXHIBIT DESCRIPTION
- ------- -----------
10(l) Support Agreement between Warrantech Corporation and Great American
Insurance Company dated October 1, 2002. Incorporated by reference to
Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, file no. 0-13084.
10(m) Summary of building lease dated July 10, 2002 between Warrantech Corporation
and 121 Airport Centre II, LP. Incorporated by reference to Exhibit 10(d)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, file no. 0-13084.
10(n) Option Agreement dated August 22, 2001, by and among Warrantech Corporation,
American International Group, Inc. and others. Incorporated by reference
to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2001, file no. 0-13084.
10(o) Stock Option Agreement dated June 4, 2002, by and between Warrantech
Corporation and Staples, Inc. Incorporated by reference to Exhibit 10(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, file no. 0-13084.
10(p) Warrantech Corporation 1998 Employee Incentive Stock Option Plan, as
amended and restated, effective September 25, 2001. Incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, file no. 0-13084.
10(q) Amendment No. 2, dated October 8, 2002, to the Warrantech Corporation
1998 Employee Incentive Stock Option Plan, as amended and restated,
effective September 25, 2001. Incorporated by reference to Exhibit 4(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, file no. 0-13084.
10(r) Employment Agreement dated April 1, 1998 between Warrantech Corporation and
Joel San Antonio. Incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1999, file no. 0-13084.
10(s) Employment Agreement dated April 16, 1998, as amended April 6, 2002, between
Warrantech Corporation and Richard F. Gavino. Incorporated by reference to
Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2001, file no. 0-13084.
10(t) Employment Agreement between Warrantech Corporation and James F. Morganteen
dated January 1, 2002. Incorporated by reference to Exhibit 10(g) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2002, file no. 0-13084.
10(u) Schedule 10(u) identifying contracts that are substantially similar to
Exhibit 10(t), the Employment Agreement between Warrantech Corporation and
James F. Morganteen, in all material respects except as to the parties
thereto, the dates of execution, or other details, incorporated by reference
to Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2002, file no. 0-13084.
56
EXHIBIT DESCRIPTION
- ------- -----------
10(v) Employment Agreement dated April 1, 2000 between Warrantech Corporation
and Richard Rodriguez. Incorporated by reference to Exhibit 10(w) to the
Company's Annual Report on Form 10-K for the year ended March 31, 2002, file
no. 0-13084.
10(w) Employment Agreement dated April 1, 2003 between Warrantech Corporation and
Randall San Antonio.
10(x) Promissory Note and Pledge Agreement, as amended July 24, 2002, between
Warrantech Corporation and William Tweed, incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2002, file no. 0-13084.
10(y) Promissory Note and Pledge Agreement, as amended, July 24, 2002, between
Warrantech Corporation and Joel San Antonio, incorporated by reference to
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2002, file no. 0-13084.
10(z) Promissory Note and Pledge Agreement, as amended July 24, 2002, between
Warrantech Corporation and Jeff J. White. Incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2002, file no. 0-13084.
*21 Subsidiaries of the Company.
*99.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
57
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 23, 2003
By: Joel San Antonio
/s/ Joel San Antonio
---------------------------
Joel San Antonio,
Chairman of the Board and
Chief Executive Officer
Dated: June 23, 2003 By: Richard F. Gavino
----------------------------
/s/ Richard F. Gavino
Richard F. Gavino,
Executive Vice President and
Chief Financial Officer
58
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON JUNE 23, 2003.
/s/ Joel San Antonio Chairman, Chief Executive Officer and Director
- ---------------------------- (Principal Executive Officer)
Joel San Antonio
/s/ Richard F. Gavino Executive Vice President and Chief Financial Officer
- ---------------------------- (Principal Accounting and Financial Officer)
Richard F. Gavino
/s/ William Tweed Vice Chairman and Director
- ----------------------------
William Tweed
/s/ Lawrence Richenstein Director
- ----------------------------
Lawrence Richenstein
/s/ Gordon Paris Director
- ----------------------------
Gordon Paris
/s/ Jeff J. White Director
- ----------------------------
Jeff J. White
/s/ Ronald Glime Director
- ----------------------------
Ronald Glime
/S/ Richard Rodriguez Director
- ----------------------------
Richard Rodriguez
59
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joel San Antonio, certify that:
I have reviewed the annual report on Form 10-K of Warrantech Corporation (the
"Registrant") for the period ended March 31, 2003 (the "Annual Report").
Based on my knowledge, this Annual Report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this Annual Report.
Based on my knowledge, the financial statements, and other financial information
included in this Annual Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this Annual Report.
The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this AnnualReport is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
(c) Presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
60
The Registrant's other certifying officers and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 23, 2003 /s/ Joel San Antonio
--------------------------------------
Joel San Antonio
Chairman, Chief Executive Officer and
Director
61
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard Gavino, certify that:
I have reviewed the annual report on Form 10-K of Warrantech Corporation (the
"Registrant") for the period ended March 31, 2003 (the "Annual Report").
Based on my knowledge, this Annual Report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this Annual Report.
Based on my knowledge, the financial statements, and other financial information
included in this Annual Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this quarterly report.
The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this AnnualReport is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
(c) Presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls.
The Registrant's other certifying officers and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 23, 2003 /s/ Richard Gavino
-------------------------------
Richard Gavino
Executive Vice President,
Chief Financial Officer,
Chief Accounting Officer, and
Treasurer
62
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3(a) Certificate of Incorporation filed June 22, 1983. Incorporated by reference
to the Company's Registration Statement on Form S-18, filed on November 23,
1983, Registration No. 2-88097-NY.
3(b) Certificate of Amendment of Certificate of Incorporation filed October 24,
1983. Incorporated by reference to the Company's Registration Statement on
Form S-18, filed on November 23, 1983, Registration No. 2-88097-NY.
3(c) Certificate of Amendment of Certificate of Incorporation dated June 29,
1987. Incorporated by reference to the Company's Form 8 Amendment to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1987, file no. 0-13084.
3(d) Certificate of Designation of Warrantech Corporation with respect to the
Preferred Stock as filed with the Secretary of State of Delaware on October
12, 1993. Incorporated by reference to the Company's Report on Form 10-K
for the fiscal year ended March 31, 1994, file no. 0-13084.
3(e) By-laws of Warrantech Corporation, as amended. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 10, 1988, file no. 0-13084.
10(a) Form of Sales Distributor Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1985, file no. 0-13084.
10(b) Form of Service Center Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1985, file no. 0-13084.
63
EXHIBIT DESCRIPTION
- ------- -----------
10(c) Form of Dealer Agreement. Incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1985, file no.
0-13084.
10(d) Form of Sales Agent Agreement. Incorporated by reference to the Company's
Registration Statement on Form S-1, filed on September 5, 1986, Registration
No. 3-8517.
10(e) General Agency Agreement between American International Group, Inc. and
Warrantech Automotive, Inc. Incorporated by reference to Exhibit 10(o) to
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1996, file no. 0-13084.
10(f) Master Agreement between American International Group, Inc. and Warrantech
Corporation. Incorporated by reference to Exhibit 10(q) to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996, file
no. 0-13084.
10(g) Insurance policy among Warrantech Consumer Product Services, Inc. and
Warrantech Carribean LTD and Great American Insurance Company pertaining to
Service Plan Agreement. Incorporated by reference to Exhibit 10(u) to the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
2001, file no. 0-13084.
10(h) Schedule 10(h) identifying contracts that are substantially similar to
Exhibit 10(g), the Insurance policy among Warrantech Consumer Product
Services, Inc. and Warrantech Carribean LTD and Great American Insurance
Company pertaining to Service Plan Agreement, in all material respects
except as to the parties thereto, the dates of execution, or other details.
Incorporated by reference to Exhibit 10(v) to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 2001, file no. 0-13084.
10(i) Obligor Agreement between Butler Financial Solutions, LLC and Warrantech
Corporation dated April 1, 2000. Incorporated by reference to Exhibit 10(u)
to the Company's Annual Report on Form 10-K, file no. 0-13084.
10(j) Master Agreement between Butler Financial Solutions, LLC and Warrantech
Corporation dated November 21, 2001. Incorporated by reference to Exhibit
10(v) to the Company's Annual Report on Form 10-K, file no. 0-13084.
10(k) Security Agreement between Warrantech Corporation and Great American
Insurance Company dated October 1, 2002. Incorporated by reference to
Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, file no. 0-13084.
10(l) Support Agreement between Warrantech Corporation and Great American
Insurance Company dated October 1, 2002. Incorporated by reference to
Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, file no. 0-13084.
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EXHIBIT DESCRIPTION
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10(m) Summary of building lease dated July 10, 2002 between Warrantech Corporation
and 121 Airport Centre II, LP. Incorporated by reference to Exhibit 10(d)
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, file no. 0-13084.
10(n) Option Agreement dated August 22, 2001, by and among Warrantech Corporation,
American International Group, Inc. and others. Incorporated by reference
to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2001, file no. 0-13084.
10(o) Stock Option Agreement dated June 4, 2002, by and between Warrantech
Corporation and Staples, Inc. Incorporated by reference to Exhibit 10(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, file no. 0-13084.
10(p) Warrantech Corporation 1998 Employee Incentive Stock Option Plan, as amended
and restated, effective September 25, 2001. Incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001, file no. 0-13084.
10(q) Amendment No. 2, dated October 8, 2002, to the Warrantech Corporation 1998
Employee Incentive Stock Option Plan, as amended and restated, effective
September 25, 2001. Incorporated by reference to Exhibit 4(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2002, file no. 0-13084.
10(r) Employment Agreement dated April 1, 1998 between Warrantech Corporation and
Joel San Antonio. Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1999, file no. 0-13084.
10(s) Employment Agreement dated April 16, 1998, as amended April 6, 2002, between
Warrantech Corporation and Richard F. Gavino. Incorporated by reference to
Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2001, file no. 0-13084.
10(t) Employment Agreement between Warrantech Corporation and James F. Morganteen
dated January 1, 2002. Incorporated by reference to Exhibit 10(g) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2002, file no. 0-13084.
10(u) Schedule 10(u) identifying contracts that are substantially similar to
Exhibit 10(t), the Employment Agreement between Warrantech Corporation and
James F. Morganteen, in all material respects except as to the parties
thereto, the dates of execution, or other details, incorporated by reference
to Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2002, file no. 0-13084.
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EXHIBIT DESCRIPTION
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10(v) Employment Agreement dated April 1, 2000 between Warrantech Corporation
and Richard Rodriguez. Incorporated by reference to Exhibit 10(w) to the
Company's Annual Report on Form 10-K for the year ended March 31, 2002, file
no. 0-13084.
*10(w) Employment Agreement dated April 1, 2003 between Warrantech Corporation and
Randall San Antonio.
10(x) Promissory Note and Pledge Agreement, as amended July 24, 2002, between
Warrantech Corporation and William Tweed, incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2002, file no. 0-13084.
10(y) Promissory Note and Pledge Agreement, as amended, July 24, 2002, between
Warrantech Corporation and Joel San Antonio, incorporated by reference to
Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2002, file no. 0-13084.
10(z) Promissory Note and Pledge Agreement, as amended July 24, 2002, between
Warrantech Corporation and Jeff J. White. Incorporated by reference to
Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2002, file no. 0-13084.
*21 Subsidiaries of the Company.
*99.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
66