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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from _______ to _______
Commission File No. 0-13084
WARRANTECH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3178732
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
300 ATLANTIC STREET, STAMFORD, CONNECTICUT 06901
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (203) 975-1100
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock $.007 par value NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.007 par value
(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X__ No_______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K [ ].
_______________________________
The number of shares outstanding of the Registrant's common stock is
13,054,286 (as of June 16, 1995).
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant is $43,778,380 (as of June 16, 1995).
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Index to Exhibits is on page 57.
PART I
Warrantech Corporation ("Warrantech" or the "Company") maintains
executive offices at 300 Atlantic Street, Stamford, Connecticut 06901,
operating facilities at 150 Westpark Way and 1441 West Airport Freeway,
Euless, Texas 76040, and 7630-7632 Pebble Drive, Fort Worth, Texas
76118. The telephone number of the executive offices is (203) 975-1100.
Item 1. BUSINESS
Warrantech, through its wholly-owned subsidiaries, Warrantech
Automotive, Inc. (formerly Warrantech Dealer Based Services, Inc.),
Warrantech Consumer Product Services, Inc., Warrantech Direct, Inc., and
Warrantech International, Inc. provides marketing and administrative
services to over 3,000 retailers, distributors and manufacturers of
automobiles, recreational vehicles, automotive components, home
appliances, home entertainment products, computers and peripherals, and
office and communications equipment worldwide. The Company's
administrative services pertain primarily to extended service contracts
and limited warranties issued by retailers, distributors or manufacturers
to the purchasers and lessees of consumer products. Additionally, the
Company provides administrative services to insurance companies and
financial institutions for other types of insurance products such as
credit card enhancement programs including, but not limited to, credit
life, "purchase protection" and unemployment coverages.
Extended service programs benefit consumers with extensions of
product coverage for a specified period of time (or mileage in the case
of automobiles and recreational vehicles), similar to that provided by
the manufacturer under the terms of their product warranty(ies). Such
coverage generally provides for the repair or replacement of the product,
or a component thereof, in the event of its failure.
From a marketing perspective, the Company's products and services
enhance the perceived value of the retailers', distributors',
manufacturers' or financial institutions' products.
WARRANTECH AUTOMOTIVE, INC.
Warrantech Automotive, Inc. ("WAI"), formerly known as Warrantech
Dealer Based Services, Inc. ("WDBS), has operated as a wholly-owned
subsidiary since November 1989. Through this subsidiary, the Company
markets and administers vehicle service contract ("VSC") programs, credit
life and other related automotive after-sale products, all of which
enhance the profitability of the sale of automobiles, recreational
vehicles and automotive components. These products are sold by
franchised and independent automobile dealers, leasing companies, repair
facilities and retail stores.
2
Additionally, WAI has expanded its efforts in the automotive field
to provide administrative expertise and secure the placement of insurance
coverage to other parties requiring such services on either VSCs or
similar products.
The VSC is a contract between the dealer/lessor (and in some states
WAI) and the vehicle purchaser/lessee that offers coverage that runs from
one to eighty-four months and 1,000 to 100,000 miles. Coverage is
afforded in the event of the failure of a broad range of mechanical
components that occurs during the term of the VSC.
The programs marketed and administered by WAI require that the
dealer enter into an agreement whereby WAI is the provider of services to
the dealer. Among these services is the development and distribution of
marketing materials, processing of dealer produced VSC's, and the
administration and payment of claims filed by contract holders under the
terms of their VSC.
WAI utilizes the services of independent agents to call on dealers
to solicit their use of the VSC programs. At this time, WAI is
represented by more than 60 agents in 46 states as well as Puerto Rico
and Canada.
With respect to the VSC programs which Warrantech and WAI market and
administer, liability is borne by insurers who have issued insurance
policies to assume this risk in exchange for the payment of agreed upon
premiums and fees. Effective March 1, 1993, insurance for new WAI VSC
programs is provided by the New Hampshire Insurance Company and other AIG
member companies.
Essential to the success of WAI is its ability to capture, maintain,
track and analyze all relevant data regarding a VSC. To support this
function, this subsidiary operates proprietary software developed
internally and consists of custom designed relational databases with
interactive capabilities. This configuration provides ample capacity and
processing speed for current requirements as well as the ability to
support significant future growth in this area.
WARRANTECH CONSUMER PRODUCT SERVICES, INC.
Warrantech Consumer Product Services, Inc. ("WCPS"), a wholly-owned
subsidiary, was formed in 1990 and, at that time, assumed the parent
Company's efforts to develop, market and administer consumer product
extended service contract programs.
The programs marketed and administered by WCPS require that the
selling dealer, distributor or manufacturer enter into an agreement with
WCPS that outlines the duties of each party. Those duties specifically
assumed by WCPS include the development and distribution of marketing
materials, sales and motivational training, processing of service
contracts, and adjustment and payment of claims. WCPS has also entered
into service center
3
agreements with consumer product repair centers
located throughout North America, South America, Mexico and the
Caribbean.
In exchange for agreed upon premiums and fees from the insured,
liability for claims incurred by service contracts issued by a dealer,
distributor or manufacturer is assumed by Houston General Insurance
Company, a wholly-owned subsidiary of Tokyo Marine & Fire Insurance
Company, one of Japan's and the world's largest insurance organizations
and Virginia Surety Company, Inc., a wholly owned subsidiary of AON.
It is also essential to the success of WCPS that it be able to
capture, maintain, and analyze all relevant information about its service
contracts. To support this function, WCPS has internally developed
application programs that allow the tracking of a database of in excess
of three (3) million service contracts. This also allows for the
development of current and historical statistical data which is used to
monitor its service contract program's performance, and also will support
significant growth of WCPS's business.
During the fiscal year ended March 31, 1995, WCPS enhanced its
products and services to solidify its position in the industry and
broaden its market base. This is a continuing effort that seeks to
identify opportunities, weigh their potential and develop programs and/or
services to meet the needs of these new venues. In recent years this
effort has resulted in the upgrading of existing service contract
programs including the RepairMaster Service contract program. Special
attention was given to the office products category with the emphasis on
the personal computer segment of the industry which is rapidly expanding.
WCPS has one significant customer that accounted for approximately
10%, 11% and 11% of consolidated gross revenues for the years ended March
31, 1995, 1994, and 1993.
WARRANTECH DIRECT, INC.
Warrantech Direct, Inc. ("WDI") is uniquely positioned to integrate
the customer, service and product resources of Warrantech, its
subsidiaries and their retail dealers and manufacturers, in order to
fully exploit new business opportunities in merchandising through data-
base marketing to the end-user consumer.
This subsidiary, which was formed in 1992, utilizes state-of-the-art
telemarketing and direct mail equipment and techniques to obtain second
effort sales and renewals of service contracts.
WDI's efforts are conducted on behalf of (i) the dealer/retailers,
distributors and manufacturers who utilize the service contract programs
marketed and administered by WAI and WCPS, and (ii) a growing list of
other vendors who wish to utilize WDI resources to enhance their own
service contract sales efforts. Second effort marketing consists of
contacting product purchasers who did not buy a service contract and
offering
4
them this opportunity prior to the expiration of the
manufacturer warranty. Renewal marketing consists of the effort to renew
service contracts on eligible products upon the expiration of their
current service contract coverage.
WARRANTECH INTERNATIONAL, INC.
In July 1993, the Company, through its wholly-owned subsidiary
Warrantech International, Inc., and American International Group Inc.
("AIG") formed a joint venture, Techmark Services Ltd. ("Techmark" or the
"Joint Venture"), owned fifty-one percent (51%) by AIG and forty-nine
percent (49%) by the Company. AIG is one of the world's largest
insurance and financial services companies. Their United States
domiciled insurance companies hold A.M. Best's highest rating, A++
(Superior). It is contemplated that the Joint Venture will provide
program development, marketing and administrative services for insurance
programs pertaining to consumer, automobile and credit card enhancement
products underwritten throughout the world, excluding the United States
and Canada. The Joint Venture has a right of first refusal to provide
such services for certain consumer product and automotive programs
underwritten by AIG subsidiaries outside the United States and Canada.
In conjunction with the foregoing alliance, in October 1993, AIG
purchased, for a price of $6,430,000, a special issue of preferred stock
which is convertible into an issue of new shares of common stock which,
subsequent to its issuance, will be equivalent to twenty percent (20%) of
the Company's then issued and outstanding common stock. Under the terms
of the purchase agreement, AIG has the right to purchase an increased
interest in the Company, to a maximum of thirty percent (30%) of the
Company's then issued and outstanding common stock, if gross combined
revenues of the Company and Techmark during any consecutive twelve (12)
month period exceed $400 million, such period commencing on the date
which is two (2) years from the date the purchase was completed and
ending on the date which is five (5) years from such date. The purchase
agreement also provides that the Company will have a right of first
refusal to provide program development, marketing and administrative
services for certain consumer product and automobile programs
underwritten by AIG subsidiaries in the United States and Canada.
On March 29, 1995, Warrantech International, Inc., signed a letter
of intent for the acquisition of Home Guarantee Corporation PLC, a
British company, which markets home warranty products in the United
Kingdom. Upon completion of the transaction, which is anticipated
shortly, this acquisition will expand the current products offered by the
Company to include warranty products which cover mechanical breakdowns of
the working systems and components in homes (e.g., furnaces, electrical
and plumbing systems, and major appliances).
5
SALES AND MARKETING
The sales and marketing activities of the Warrantech subsidiary
companies are managed by each subsidiary's own sales and marketing
personnel. In certain circumstances, the subsidiaries have entered into
marketing agreements with independent organizations that solicit dealers
at their own expense, receiving a commission on all service contracts
sold by such dealers.
The Warrantech subsidiary companies foster awareness of their
respective programs through cooperative advertising programs, which may
be jointly funded by the subsidiary and the dealer or independent agent.
Sales training and motivational programs are a primary form of
specialized assistance provided by WAI and WCPS to retailers/dealers,
distributors and manufacturers, to assist them in increasing the
effectiveness and profitability of their service contract program sales
efforts. The Company develops materials and conducts educational
seminars. These seminars are conducted either at the client's place of
business or at the Company's state-of-the-art training facility at its
Euless, Texas administrative offices. This new facility features the
latest in audio/video technology that enhances the training and learning
experience.
COMPETITION
The Warrantech subsidiary companies compete with a number of
independent administrators, divisions of distributors and manufacturers,
financial institutions and insurance companies. While the Company
believes that it occupies a preeminent position among its competitors in
its field, it may not be the largest marketer and administrator of
service contracts and limited warranties, and some competitors may have
greater operating experience, more employees and/or greater financial
resources. Further, many manufacturers, particularly those producing
motor vehicles, market and administer their own service contract program
for and through their dealers.
INSURANCE COVERAGE
Liability for performance under the terms of service contracts and
limited warranties issued by dealers/retailers, distributors or
manufacturers is assumed by the insurer in return for the payment of the
agreed-upon premium for the assumption of the risk from the insured.
This coverage provides indemnification against loss resulting from
service contract claims and protects the consumer by ensuring that their
claim will be paid.
The insurance protection is provided for the automotive programs by
the New Hampshire Insurance Company and other AIG member companies.
These companies are all rated A++ (Superior) by A.M. Best Company. WCPS
and its clients are protected by insurance afforded by Houston General
Insurance Company, a member of the Tokyo
6
Marine & Fire Insurance Company
and Virginia Surety Company, Inc. a wholly-owned subsidiary of AON.
Houston General is rated Excellent and Virginia Surety is rated
Superior by A.M. Best Company, respectively.
In accordance with the terms of agreements with these insurers, a
fixed amount is remitted for each service contract or limited warranty
sold. The amount is based upon actuarial analysis of data collected and
maintained for each type of coverage and contract term. In no event is
the insured, the Company or its subsidiaries obligated to the insurer if
claims exceed the premium remitted.
Additionally, agreements between the Company and the insurers
contain profit-sharing features that permit the Company to share in the
underwriting profits and investment income earned by the service contract
programs. The amounts to be received, if any, are determined in
accordance with certain specified formulas by the type of program and
by policy year. These agreements require interim calculations and
distributions for various programs, with final calculations being made as
contracts expire by term.
During the 1995 fiscal year, the Company recognized profit sharing
in the amount of $2,676,001.
FEDERAL AND STATE REGULATION
The service contract programs developed and marketed by the
Company's subsidiaries, and their related operations with regard to
service contracts and limited warranties, are regulated by federal law
and the statutes of a significant number of states. The Company
continually reviews all existing and proposed statutes and regulations to
ascertain their applicability to its existing operations, as well as new
programs that are developed by the Company.
Generally speaking, these statutes concern the scope of service
contract coverage and content of the service contract or limited warranty
document. In such instances, the state statute will require that
specific wording be included in the service contract or limited warranty
expressly stating the consumer's rights in the event of a claim, how the
service contract may be canceled and identification of the insurance
company that indemnifies the dealers, distributors or manufacturers
against loss for performance under the terms of the service contract.
Statutes in some states have sought to interpret the consumer
product service contract, or certain items covered under the contract as
a form of insurance, requiring that the issuer be a duly licensed and
chartered insurance company. The Company and its subsidiaries do not
believe that they are insurers and have no intention of filing the
documents or meeting the capital and surplus requirements that are
necessary to obtain such a license.
7
In many instances, 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
advised that its methods of doing business were not in compliance with
state regulation, the Company has taken the steps necessary to comply.
If the Company's right to operate in any state is challenged
successfully, the Company may be required to cease operations in the
state and the state might also impose financial sanctions against the
Company. These actions, should they occur, could have materially adverse
consequences and could affect the Company's ability to continue
operating. However, within the framework of currently known statutes,
the Company does not feel that this is a present concern.
TRADEMARKS
The Company holds numerous registered United States trademarks, the
most important of which are the "WARRANTECH" and its stylized "W" logo
service marks. The registration for all service marks are kept current
by the Company and its trademark counsel. Additional service marks are
registered covering subsidiary names and product names and descriptions.
EMPLOYEES
The Company and its subsidiaries currently employ approximately 265
individuals, an increase of approximately 25 over the preceding fiscal
year. The increase is directly attributable to the expansion of
customer service and claims representatives to meet the needs of our
expanding business. None of the Company's employees are covered by a
collective bargaining agreement. The Company considers its relations
with its employees to be good.
Item 2. PROPERTIES
The Company's executive offices are located in leased premises at
300 Atlantic Street, Stamford, Connecticut. These premises, consisting
of approximately 18,000 square feet are leased pursuant to a lease
agreement (the "Lease") which became effective on November 30, 1988 and
expires on February 28, 1999. The annual base rent ranges from $322,368
to $458,630 during the term of the Lease.
The operating facilities of WAI and WCPS are located in leased
premises at 150 Westpark Way, Euless, Texas. The premises, consisting of
approximately 24,000 square feet, are leased pursuant to a lease
agreement (the "Texas Lease") which was favorably renegotiated effective
on April 1, 1993 and expires on March 31, 2003. The Texas Lease
8
provides for annual base rent payments ranging from $204,485 to $336,798
during the term of the Texas Lease.
Additional facilities that support the operations of WAI and WCPS,
as well as, those that house WDI, are located at 1441 West Airport
Freeway, Euless, Texas (approximately 13,000 square feet) and 7630-7632
Pebble Drive, Building #28, (approximately 6,000 square feet), Fort
Worth, Texas. These premises are leased under the terms of leases (the
"Other Leases") that were effective on November 1, 1994 and September 1,
1990, respectively and expire February 2004 and February 1996,
respectively. The Other Leases provide for annual base rent payments
ranging from $135,460 and $148,361, respectively.
Item 3. LEGAL PROCEEDINGS
A. THE OAK AGENCY, INC. AND THE OAK FINANCIAL SERVICES, INC. VS.
WARRANTECH DEALER BASED SERVICES, INC. (WDBS)
This is a suit brought in the U.S. District Court, Northern
District of Illinois, by the Oak companies against WDBS (now known as
Warrantech Automotive, Inc.). Oak, a former agent of WDBS, alleges
breach of contract between the parties. The suit alleges that WDBS
contracted to pay agent commissions unconditionally and indefinitely
even after the contract was terminated. Oak seeks a declaratory
judgment and monetary damages from WDBS arising from the termination
of the agency agreement with Oak.
Oak's complaint does not specify the dollar amount of its
alleged damages, but Oak has retained an expert witness who now
estimates that Oak's damages exceed $10 million. WDBS has vigorously
defended the case, and has retained its own economic expert, who will
directly refute the opinions of Oak's financial expert regarding the
magnitude of Oak's alleged damages. WDBS's principal defenses in the
case concern Oak's conduct as a sales agent. WDBS contends, in part,
that Oak performed poorly and breached its duty of loyalty as an
agent of WDBS. However, the district court recently granted a
partial summary judgment to Oak that will preclude WDBS from
presenting evidence at the non-jury trial of Oak's breach of its duty
of loyalty owed to WDBS. No trial date has been set as yet and
discovery is continuing.
B. DAVID ROBERTSON V. WARRENTECH CORPORATION AND WARRENTECH
AUTOMOTIVE [spelling as in original], District Court of Tarrant
County, Texas, 141st Judicial District (case No. 141-151240-93).
David Robertson, who is a former officer and director of the
Company, commenced this action on or about December 10, 1993.
Robertson has alleged in the action that the Company wrongfully
terminated an employment agreement between
9
Robertson and WDBS, and that the Company engaged
in tortuous interference and fraud. Robertson
has requested damages in excess of $5 million in the Texas
action. The employment agreement in question provides for
arbitration in the State of Connecticut in the event of a dispute.
The Company requested the Texas court to enforce this provision and
require Robertson to submit his claim to arbitration in Connecticut.
The Texas Court ruled, in an Order dated June 14, 1994, that the
Texas action should be abated and that the claims in the action
should be submitted to arbitration in Connecticut pursuant to the
arbitration agreement between the parties. On May 31, 1995, the
Texas trial court dismissed the case pending in the 141st District
Court for want of prosecution, but the arbitration proceeding with
Robertson in Connecticut is still pending.
C. WARRANTECH CORPORATION V. DAVID ROBERTSON, Superior Court,
Judicial District of Stamford/Norwalk.
In a separate action to collect on a promissory note, on March
21, 1995, a judgment was entered in favor of Warrantech Corporation and
Warrantech Automotive, Inc. against David Robertson in the amount of
$195,050.48 plus interest at the rate of 14% per annum from July 1, 1991.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's
shareholders, through the solicitation of proxies or otherwise,
during the fourth quarter of the Company's fiscal year ended March
31, 1995.
10
PART II
Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been reported in the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"),
and currently is reported on NASDAQ's National Market System ("NMS"),
under the trading symbol "WTEC".
As of June 16, 1995, there were 13,054,286 Common Shares outstanding.
On that date, the closing bid price for the Company's common stock, as
reported by NASDAQ was $5.00.
Following is a summary of the price range of the Company's Common Stock
during its 1995 and 1994 fiscal years:
COMMON STOCK
Quarter of Fiscal 1995 HIGH & LOW BID
First $5.13 $3.88
Second $6.25 $3.63
Third $6.13 $5.00
Fourth $5.38 $4.63
Quarter of Fiscal 1994 HIGH & LOW BID
First $4.13 $2.94
Second $5.19 $3.25
Third $8.13 $4.88
Fourth $7.63 $4.25
The number of shareholders of record of the Company's Common Stock, as of
June 16, 1995 was 1,404.
DIVIDENDS
No cash dividends have been paid to holders of Common Stock since
inception of the Company. The Company anticipates that, in the
foreseeable future, earnings, if any, will be retained for use in the
business or for other corporate purposes and it is not anticipated that
cash dividends will be paid.
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Item 6 - SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this filing.
FOR THE YEARS ENDED MARCH 31,
1995 1994 1993 1992 1991
Gross revenue $71,239,070 $ 46,970,763 $ 43,841,017 $ 50,692,389 $ 56,463,017
Net (increase) decrease
in deferred revenue(a) (699,745) (316,290) 314,931 822,856 (29,874,905)
____________ ______________ ____________ _____________ ______________
Net revenue (a) 70,539,325 46,654,473 44,155,948 51,515,245 26,588,112
____________ ______________ ____________ _____________ ______________
Income before
cumulative effect of
change in accounting
principle 2,895,788 703,591 1,061,471 1,336,968 (138,128)
Accounting change - - - (117,581) -
___________ _____________ ___________ ____________ ______________
Net income (loss) $ 2,895,788 $ 703,591 $ 1,061,471 $ 1,219,387 $ (138,128)
=========== ============= =========== ============ ==============
Earning (loss) per
common share:
Income before
cumulative effect of
change in accounting
principle $0.19 $0.05 $0.08 $0.11 $(0.01)
Accounting change (a) - - - (0.01) -
____________ _____________ ____________ _____________ ______________
Net income (loss) $0.19 $0.05 $0.08 $0.10 ($0.01)
============ ============= ============ ============= ==============
Cash dividend declared NONE NONE NONE NONE NONE
============ ============= ============ ============= ==============
Total assets (a) $ 41,858,546 $ 33,828,572 $ 24,646,791 $ 25,548,186 $ 79,894,140
============ ============= ============ ============= ==============
Long-term debt and
capital lease
obligations $ 293,648 $ 476,875 $ 853,101 $ 315,697 $ 3,273,496
============ ============= ============ ============== ==============
Convertible
exchangeable
preferred stock $ 6,396,795 $ 6,343,614 - - -
============ ============= ============ ============== ==============
Common stockholders'
equity $ 17,443,763 $ 14,300,322 $ 13,427,311 $ 12,161,683 $ 10,475,161
============ ============= ============ ============== ==============
Working capital $ 11,067,983 $ 9,768,580 $ 4,982,608 $ 4,355,183 $ 5,179,885
============ ============= ============ ============== ==============
a) The Company changed its revenue recognition policy, effective April
1, 1991, to the "proportional performance method" which recognizes
revenues in direct proportion to the costs incurred in providing the
service contract programs to its clients. Only revenues in an amount
sufficient to meet future administrative costs and reasonable gross
profit thereon are deferred. The new method of recognizing revenues
more accurately conforms to the Company's operations and properly
matches the incurring of costs with revenues.
This change in revenue recognition policy as of April 1, 1991,
resulted in a one time cumulative effect charge to operations, net
of taxes, in the amount of $117,581.
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Item 6 - SELECTED FINANCIAL DATA (CONTINUED) (a)
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company, through its WCPS, WAI, Warrantech Direct and Warrantech
International subsidiaries, provides marketing and administrative
services to over 3,000 retailers, distributors and manufacturers of
automobiles, recreational vehicles, automotive components, home
appliances, home entertainment products, computers and peripherals,
office and communications equipment worldwide. The Company's
administrative services pertain primarily to extended service contracts
and limited warranties, issued by the retailer, distributor or
manufacturer to the purchaser/lessee of the consumer product.
Additionally, the Company maintains administrative facilities for, and
provides administrative services to, insurance companies and financial
institutions for other types of insurance products such as credit card
enhancement programs like "purchase protection" and "unemployment"
coverages.
RESULTS OF OPERATIONS
GROSS REVENUES
Gross revenues for the fiscal years ended March 31, 1995 and 1994
were $71,239,070 and $46,970,763, respectively. For the fiscal year
ended March 31, 1995, gross revenues increased by 52%, as compared to
fiscal year ended March 31, 1994. The gross revenues attributable to
consumer product programs reflect increases of approximately $6.6 million
from increased volume with existing customers and approximately $6.2
million related to new business. Automotive related program revenues
reflect increases of approximately $4.7 million related to new business
and approximately $5.2 million related to volume increases. The balance
of the increase was attributable to the Company's direct marketing
operations.
For the fiscal year ended March 31, 1994, gross revenues increased
by 7.1% as compared to fiscal year ended March 31, 1993. The gross
revenues attributable to consumer product programs reflect increases in
market share and penetration increasing by 21.7%. This increase was
offset by a decline in automotive program related revenues of 6.6%.
For the three month periods ended March 31, 1995 and 1994,
respectively, the gross revenues were $19,544,126 and $11,234,120, an
increase of 74%. The principal reason for the increase was continued
growth in the consumer product related revenues and to a lesser degree an
increase in automotive related revenues.
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For the three month periods ended March 31, 1994 and 1993,
respectively, the gross revenues were $11,417,813 and $10,280,520, an
increase of 11.1%. The principal reason for the increase was continued
growth in consumer product related revenues.
NET (INCREASE) DECREASE IN DEFERRED REVENUES
The net (increase) decrease in deferred revenues totaled $(699,745),
$(316,290) and $314,931 for the fiscal years ended March 31, 1995, 1994
and 1993, respectively. The Company recognizes revenues in direct
proportion to the costs incurred in providing the service contract
programs to its clients. Revenues in an amount sufficient to meet future
administrative costs and a reasonable gross profit thereon are deferred.
The increase in deferred revenues at March 31, 1995 as compared with
fiscal 1994 is attributable to an increase in the number of service
contracts outstanding with a service period greater than one year.
Deferred revenues earned during the fiscal years ended March 31,
1995, 1994 and 1993 include amounts earned of $319,465, $528,483, and
$1,331,088, respectively, from the runoff of the American Hardware Mutual
Insurance Company business which was completed in 1994.
The amounts of gross revenues deferred and earned from period to
period are affected by (i) the mix of automotive and consumer product
revenues, (ii) the relationship of gross contract revenues generated by
shorter term extended service contracts to total gross revenues, and
(iii) administration contract revenues which are recognized over a
short-term period.
DIRECT COSTS AND SELLING, SERVICE,
GENERAL AND ADMINISTRATIVE EXPENSES
DIRECT COSTS
Direct costs are those costs directly related to the production and
acquisition of service contracts. Those costs are net insurance and
commission expenses. Net insurance expense is the insurance premiums
accrued to the insurer, less any profit sharing accrued from the insurer.
Direct costs for the fiscal years ended March 31, 1995, 1994, and
1993 are reflected net of profit sharing accrued in the amount of
$2,676,001, $1,364,089 and $424,905, respectively.
14
Direct costs for the fiscal year ended March 31, 1995 were
$43,464,547 as compared to $28,986,633 and $28,029,019 for the fiscal
years ended March 31, 1994 and 1993, respectively. Direct costs for the
three months ended March 31, 1995 were $10,249,724, as compared to
$6,516,238 and $5,924,403 for the three months ended March 31, 1994 and
1993, respectively. The increase in direct costs for both the year and
the quarter ended March 31, 1995 as compared with the comparable periods
for the preceding year is primarily attributable to increased insurance
premiums and commissions expense resulting from the volume increase
during the year offset by increased profit sharing income. The increase
in direct costs for the period ended March 31, 1994 as compared with the
same period ended March 31, 1993 is primarily attributable to (i) an
increase in insurance premium expense and (ii) a variation in the mix of
business as between consumer products and automotive related products,
and within automotive products, between the ratio of new VSC's to used
VSC's.
SERVICE, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Service, Selling, General and Administrative Expenses expenses for
the fiscal year ended March 31, 1995 were $20,716,655, as compared to
$14,674,158 and $12,613,574 for the fiscal years ended March 31, 1994 and
1993, respectively. The increase for the fiscal year 1995 as compared to
fiscal year 1994 reflects an increase in expenses attributable to
increases in sales related costs, payroll and payroll related costs
arising from an increase in headcount to meet volume increases, increased
levels of commission, and incentive compensation. The increase for the
fiscal year 1994 as compared to fiscal year 1993 reflects an increase in
expenses related to increasing the market share of the Company's consumer
products subsidiary. Service, Selling, General and Administrative
expenses as a percentage of net revenues has remained relatively
consistent for the three fiscal years.
PROVISION FOR BAD DEBT EXPENSE
The provision for bad debt expense resulted from the write off of
accounts considered uncollectible, including those related to the
settlement of litigation during fiscal 1995.
DEPRECIATION AND AMORTIZATION
As part of an Internal Revenue Service agent review of the Company's
prior years tax returns, certain adjustments have been identified, the
most significant of which relates to revenues originally recorded as
deferred revenues as part of the acquisition in 1989 of Dealer Based
Services, Inc, which should not have been included in taxable income
during the years subsequent to the acquisition. As a result, a portion
of the estimated tax refund in the amount of $1,310,575 that results from
the adjustments reflected on the Revenue Agent's Report has been recorded
as a reduction of the remaining goodwill that arose as part of this asset
acquisition.
15
EQUITY IN OPERATIONS OF JOINT VENTURE
The joint venture, Techmark, during fiscal 1995 eliminated a non-
profitable portion of its UK operation's business with a major customer.
This action is expected to result in reduced revenues, but improved
margins. The customer reimbursed the UK operations for certain costs
incurred relating to such business which improved Techmark's
profitability. Offsetting this are approximately $580,000 of expenses
related to the start-up of Techmark operations in Japan.
INCOME TAXES
The income tax provision for fiscal year 1995 differs from the
statutory rate of 35 percent due primarily to the nondeductability, for
federal and state tax purposes, of the equity loss of the Company's
Techmark joint venture and the impact of state taxes.
NET INCOME
Net income for the fiscal years ended March 31, 1995, 1994 and 1993
was $2,895,788, $703,591 and $1,061,471, respectively. The increase in
net income for the fiscal year 1995 is attributable to the volume
increases experienced by the Company, an increase in profit sharing, and
a decrease in the losses of the joint venture. The fiscal 1994 decrease
over the fiscal year ended March 31, 1993 was primarily attributable to
initial start-up losses from the Company's Techmark joint venture and
investment in expenses related to increasing market share substantially
offset by the tax treatment of intangible assets related to prior
acquisitions and increased profit sharing.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity during the current year were cash
generated by operations and proceeds from the maturity of marketable
securities.
Funds were utilized for (i) working capital requirements, (ii)
additional funding of $2,123,440 for the Techmark joint venture including
an advance for the funding of the start up of the Japanese operations,
(iii) repayment of short-term borrowings of $333,613 and (iii) purchase
of property and equipment in the amount of $1,539,093.
The significant increase in capital spending this year relates to
the Company's decision to upgrade its information systems. This is an
ongoing project which the Company anticipates will be completed during
fiscal 1996. Additional capital requirements related to this project are
expected to be approximately $1,400,000.
The Company believes that internally generated funds will be
sufficient to finance its current operations for at least the next twelve
months. The Company anticipates that any expansion into other
worldwide markets would be financed from joint venture operations and/or
additional investments.
16
The Company has a revolving credit agreement with a bank which
provides for a maximum aggregate borrowing up to $1,000,000 with interest
at the bank's prime rate. As of March 31, 1995, the Company had no
outstanding borrowings under this agreement.
The effect of inflation has not been significant to the Company
since its formation.
17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE NO.
Report of Independent
Accountants..................................................... 19-21
Consolidated Balance Sheet
As at March 31, 1995 and 1994.............................. 22
Consolidated Statement of Operations
For the Years Ended March 31, 1995, 1994, and 1993......... 23
Consolidated Statement of Common Stockholders' Equity
For the Years Ended March 31, 1995, 1994, and 1993......... 24
Consolidated Statement of Cash Flows
For the Years Ended March 31, 1995, 1994, and 1993......... 25-26
Notes to Consolidated Financial Statements...................... 27-42
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
for the years ended March 31, 1995, 1994 and 1993..... 43
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Warrantech Corporation:
We have audited the consolidated financial statements and the
financial statement schedule of Warrantech Corporation and subsidiaries
(the "Company") as of March 31, 1995 and for the year then ended as
listed in the accompanying index on page 18. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the 1995
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
the Company as of March 31, 1995, and the consolidated results of its
operations and its cash flows for the year ended March 31, 1995 in
conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule as of and for the year
ended March 31, 1995, when considered in relation to the basic 1995
financial statements taken as a whole, present fairly, in all material
respects the information required to be included therein.
As discussed in Note 9 to the consolidated financial statements, the
Company is a defendant in certain litigation. The ultimate outcome of
this litigation cannot presently be determined. Accordingly, no
provision for any loss that may result upon resolution of these matters
has been made in the accompanying consolidated financial statements.
COOPERS & LYBRAND L.L.P.
Stamford, Connecticut
June 23, 1995
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Warrantech Corporation
We have audited the accompanying consolidated balance sheet of
Warrantech Corporation (the "Company") and subsidiaries as of March 31,
1994, and the related consolidated statements of operations, common
stockholders' equity, and cash flows for the year then ended. Our audit
also included the financial statement schedule for the year ended
March 31, 1994 as listed in the Index on page 18.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the 1994 financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Company
as of March 31, 1994, and the results of its operations and its cash
flows for the year ended March 31, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedule for the year ended March 31, 1994, when considered in
relation to the basic 1994 consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 9 to the consolidated financial statements, the
Company is a defendant in certain litigation. The ultimate outcome of
this litigation cannot presently be determined. Accordingly, no
provision for any loss that may result upon resolution of these matters
has been made in the accompanying financial statements.
As discussed in Note 8 to the consolidated financial
statements, the Company changed its method of accounting for income taxes
to conform with Statement of Financial Accounting Standards No. 109 in
1994.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
June 29, 1994
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Warrantech Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity, cash flows, and the consolidated financial
statement schedules of Warrantech corporation and subsidiaries for the
year ended March 31, 1993, as listed in the accompanying index on page
18. These consolidated financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements and schedules are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements and schedules. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and schedules
referred to above present fairly, in all material respects, the financial
position of Warrantech Corporation and subsidiaries as at March 31, 1993,
and the results of its consolidated operations and cash flows for the
year ended March 31, 1993 in conformity with generally accepted
accounting principles.
A Subsidiary of the Company is a defendant in a lawsuit seeking damages
and the rescission of the net asset acquisition by the Company. The
Company has filed a counterclaim for profit sharing distributions in
excess of $1,000,000. The ultimate outcome of the litigation cannot
presently be determined. Accordingly, no provision for any liability
that may result upon adjudication has been made in the accompanying
financial statements.
WEINICK SANDERS & CO. L.L.P.
New York, N.Y.
June 17, 1993
21
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS S E T S
March 31,
1995 1994
Current Assets:
Cash and cash equivalents $ 3,039,361 $ 5,024,282
Cash - certificates of deposits - 27,000
Investment in marketable securities 472,344 500,000
Accounts receivable, net 12,705,664 7,960,690
Other receivables 8,599,198 5,208,110
Prepaid expenses, prepaid income taxes
and other current assets 1,065,062 1,622,105
___________ ___________
Total Current Assets 25,881,629 20,342,187
___________ ___________
Property and Equipment - Net 2,865,910 2,179,525
___________ ___________
Other Assets:
Excess of cost over fair value of
assets acquired - net of accumulated
amortization of $2,723,429 and
$2,321,614, respectively 3,850,724 5,563,114
Investment in and advances to
joint venture 2,880,921 1,000,215
Deferred income taxes 1,029,083 732,482
Investments in marketable securities 2,671,507 2,133,000
Certificates of deposit and cash trust fund -
restricted 500,000 657,602
Split dollar life insurance policies 698,338 595,788
Receivable from insurance company - long term 505,606 -
Notes receivable - long-term 290,125 290,725
Insurance escrow fund - administrative costs 199,389 199,389
Other assets 485,314 134,545
___________ __________
Total Other Assets 13,111,007 11,306,860
___________ __________
Total Assets $41,858,546 $33,828,572
=========== ===========
See accompanying notes to consolidated
financial statements.
WARRANTECH CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
March 31,
1995 1994
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations $ 205,200 $ 355,585
Insurance premiums payable 9,230,377 7,113,274
Income taxes payable 1,010,878 -
Accounts and commissions payable 2,641,843 2,298,770
Accrued expenses and other current liabilities 1,725,348 805,978
____________ ____________
Total Current Liabilities 14,813,646 10,573,607
____________ ____________
Deferred Revenues 2,470,449 1,770,705
____________ ____________
Long-Term Debt and Capital Lease Obligations 293,648 476,875
____________ ____________
Deferred Rent Payable 440,245 363,449
____________ ____________
Commitments and Contingencies (See Notes)
Convertible Exchangeable
Preferred Stock - $.0007 par value
Authorized, issued and outstanding - 3,234,697 shares
(Redemption value - $6,430,000) 6,396,795 6,343,614
____________ _____________
Preferred Stock - $.0007 par value
Authorized - 11,765,303 shares
Issued and outstanding - none - -
Common Stockholders' Equity:
Common stock - $.007 par value
Authorized - 15,000,000 shares
Issued and outstanding - 13,045,302 shares
at March 31, 1995 and 12,965,302
shares at March 31, 1994 89,117 88,557
Additional paid in capital 12,097,507 11,752,754
Net unrealized loss on investments, net of income taxes
of $27,089 (42,370) -
Retained earnings 5,472,039 2,629,431
____________ _____________
17,616,293 14,470,742
Less: Deferred compensation (23,438) (21,328)
Treasury stock - at cost, 41,000 shares
at March 31, 1995 and 41,000 shares at
March 31, 1994 (149,092) (149,092)
____________ _____________
Total Common Stockholders' Equity 17,443,763 14,300,322
____________ _____________
Total Liabilities and Common Stockholders' Equity $ 41,858,546 $ 33,828,572
============ =============
See accompanying notes to consolidated financial statements.
22
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended March 31,
1995 1994 1993
Gross revenues $71,239,070 $46,970,763 $ 43,841,017
Net (increase) decrease in deferred revenue (699,745) (316,290) 314,931
___________ ___________ ____________
Net revenue 70,539,325 46,654,473 44,155,948
Costs and expenses:
Direct costs 43,464,547 28,986,633 28,029,019
Service, selling, and general and
administrative 20,716,655 14,674,158 12,613,574
Provision for bad debt expense 427,483 10,955 303,436
Depreciation and amortization 1,259,604 1,503,866 1,293,021
___________ ___________ ____________
Total costs and expenses 65,868,289 45,175,612 42,239,050
___________ ___________ ____________
Income from operations 4,671,036 1,478,861 1,916,898
___________ ___________ ____________
Equity in operations of joint venture (298,272) (538,385) -
Other income 431,560 62,771 207,375
___________ ___________ ____________
Income before provision for income taxes 4,804,324 1,003,247 2,124,273
Provision for income taxes 1,908,536 299,656 1,062,802
___________ ____________ ____________
Net Income $2,895,788 $ 703,591 $ 1,061,471
=========== =========== ============
Earnings per share:
Primary:
Net income $0.19 $0.05 $0.08
=========== =========== ============
Fully Diluted:
Net income $0.17 $0.04 -
=========== =========== ============
Weighted average number of shares outstanding:
Primary 15,588,145 14,569,479 12,871,718
=========== =========== ============
Fully Diluted 16,898,351 16,748,075 -
=========== =========== ============
See accompanying notes to consolidated financial statements.
23
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
Net Total
Additional Unrealized Common
Common Stock Paid-In Loss on Retained Deferred Treasury Stock Stockholders
Shares Par Value Capital Investments Earnings Compensation Shares Amount Equity
Balance
at April 1,
1992 12,834,502 $ 87,642 $11,471,399 $ 864,369 $(94,453) (46,000) $(167,274) $12,161,683
Issuance of
common
stock through
exercise of
common stock
warrants
and options 55,000 388 95,524 95,912
Issuance of
common stock 26,800 188 71,495 71,683
Amortization of
deferred compen-
sation 36,562 36,562
Net income 1,061,471 1,061,471
_________ _____ _______ _______ __________ _________ _______ ________ ___________
Balance at
March 31,
1993 12,916,802 88,218 11,638,418 1,925,840 (57,891) (46,000) (167,274) 13,427,311
Issuance of
common
stock through
exercise of
common stock
options 40,500 283 87,454 87,737
Issuance of common
stock 8,000 56 22,564 22,620
Issuance of
treasury
stock 4,318 5,000 18,182 22,500
Amortization of
deferred compen-
sation 36,563 36,563
Net income 703,591 703,591
__________ ______ __________ ____ _________ ________ ________ _________ __________
Balance at
March 31,
1994 12,965,302 88,557 11,752,754 2,629,431 (21,328) (41,000) (149,092) 14,300,322
Issuance of
common stock
through
exercise of
common stock
options 75,000 525 321,350 321,875
Issuance of
common stock 5,000 35 23,403 (23,438)
Net unrealized
loss on
investments (42,370) (42,370)
Amortization of
deferred compen-
sation 21,328 21,328
Imputed interest
on preferred stock (53,180) (53,180)
Net income 2,895,788 2,895,788
__________ _______ ___________ _________ _________ _________ ________ __________ ___________
Balance at
March 31,
1995 13,045,302 $89,117 $12,097,507 $(42,370) $ 5,472,039 $(23,438) (41,000) $(149,092) $17,443,763
========== ======= =========== ========= =========== ========= ======== ========= ===========
See accompanying notes to consolidated financial statements
24
.WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended March 31,
1995 1994 1993
Cash flows from operating activities:
Net income $2,895,788 $ 703,591 $ 1,061,471
__________ ___________ ___________
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,259,604 1,503,866 1,293,021
Deferred income taxes (296,601) (688,387) (44,095)
Increase (decrease) in deferred
rent payable 76,796 65,674 ( 96,402)
Loss from equity joint venture 298,272 538,385 -
Elimination of intercompany profits
with joint venture (28,038) 176,400 -
Other 116,150 57,301 303,436
(Decrease) increase in cash flows as a result of
changes in asset and liability balances:
Accounts receivable (4,744,974) (1,267,393) (524,288)
Other receivables (3,391,088) (3,802,436) 571,162
Prepaid expenses, prepaid income taxes and
other current assets 557,043 (530,854) (409,074)
Insurance escrow fund - administrative costs - (18,566) (165,612)
Split dollar life insurance policies (102,550) (142,779) (93,191)
Other assets 423,100 (48,995) (7,656)
Insurance premiums payable 2,117,103 2,249,239 (1,626,941)
Income taxes payable 1,010,878 (459,681) (367,373)
Accounts and commissions payable 343,073 104,112 (404,902)
Accrued expenses and other current
liabilities 919,370 154,356 (104,710)
Deferred revenues 699,744 316,291 (317,773)
__________ __________ ___________
Total adjustments (742,118) (1,793,467) (1,994,398)
__________ __________ ___________
Net cash provided by (used in) operating
activities 2,153,670 (1,089,876) (932,927)
Cash flows from investing activities:
Proceeds from sale of property and equipment 23,396 24,000 74,300
Purchase of property and equipment (1,539,093) (449,720) (382,568)
Proceeds from sale of certificates of
deposit 27,000 71,707 333,191
Purchase of investments in marketable
securities (1,038,543) (1,800,000) (1,250,000)
Certificates of deposit and cash trust
fund - restricted 157,602 (330,602) -
Proceeds from sales, redemptions and
maturities of marketable securities 500,000 - 2,275,000
Investment in and advances to joint venture (2,123,440) (1,715,000) -
Increase in other receivable - 30,750
__________ __________ _________
Net cash (used in) provided by investing
activities (3,993,078) (4,199,615) 1,080,673
__________ __________ _________
25
WARRANTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the years Ended March 31,
1995 1994 1993
Cash flows from financing activities:
Decrease in notes receivable $ 600 $ 34,394 $ 1,852
Proceeds from exercise of common
stock options 187,500 87,737 167,595
Proceeds from the sale of preferred stock,
net of underwriting costs - 6,343,614 -
Loan payable - officer - (118,383) 118,383
Proceeds from borrowings - 1,500,000 -
Repayments of borrowings (333,613) (1,846,458) (275,083)
_____________ ____________ ________
Net cash (used in) provided by financing
activities (145,513) 6,000,904 12,747
_____________ ____________ ________
Net (decrease) increase in cash and cash
equivalents ( 1,984,921) 711,413 160,493
Cash and cash equivalents at beginning of year 5,024,282 4,312,869 4,152,376
_____________ ____________ ____________
Cash and cash equivalents at end of year $ 3,039,361 $ 5,024,282 $ 4,312,869
============= =========== ============
Supplemental Cash Flows Information:
Cash payments for:
Interest $ 74,815 $ 137,702 $ 150,156
============= ============ ============
Income taxes $ 1,071,363 $ 1,506,739 $ 693,395
============= ============ ============
Non-Cash Investing Activities:
Property and equipment financed through
capital leases $ - $ - $ 907,778
============== ============ ============
See accompanying notes to consolidated financial statements
26
WARRANTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated
financial statements include the accounts of Warrantech
Corporation and its wholly-owned subsidiaries (the
"Company"), as well as the accounts of subsidiaries owned
directly or indirectly more than 50 percent. All
intercompany accounts and transactions have been eliminated
in consolidation.
Amounts representing the Company's percentage interest in
the underlying net assets of less than majority-owned
companies, in which a significant equity ownership interest
is held, are included in "investment and advances." The
Company's share of the net income (loss) of these companies
is included in the Consolidated Statement of Operations
caption "Equity in operations of joint venture."
REVENUE RECOGNITION POLICY - The Company's revenue
recognition policy is based on the proportional performance
method which recognizes revenues in direct proportion to
the costs incurred in providing the service contract
programs to the Company's clients. Revenues in an amount
sufficient to meet future administrative costs and a
reasonable gross profit thereon are deferred.
DIRECT COSTS - Direct costs are those costs directly
related to the production and acquisition of service
contracts. Those costs are net insurance and commission
expenses. Net insurance expense is the insurance premiums
accrued to the insurer, less any profit sharing accrued
and/or received from the insurer.
INVESTMENTS IN MARKETABLE SECURITIES - Effective April 1,
1994, the Company adopted Statement of Financial Accounting
Standard No. 115 (SFAS 115) "Accounting for Certain
Investments in Debt and Equity Securities". The Company
determined that all of its investments were "available for
sale" securities and as such the Company adjusted the
carrying value of marketable securities to market value
with the related unrealized appreciation or depreciation
reflected as an adjustment to stockholders' equity, net of
the related deferred income taxes.
PROPERTY AND EQUIPMENT - Property and equipment are stated
at cost. Depreciation is provided using a straight-line
method over the estimated useful lives of the assets
ranging from 3 to 10 years.
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED - The
excess of cost over fair value of the assets acquired is a
result of the purchase of Dealer Based Services, Inc., and
is being amortized on a straight-line basis over fifteen
years. As a result of
27
an Internal Revenue Service agent review of prior
years' tax returns, certain adjustments have been
identified, the most significant of which relates
to revenues originally recorded as deferred revenues as
part of the acquisition of which should not have been
included in taxable income during the years subsequent to
the acquisition. As a result, an estimated tax refund in
the amount of $1,669,911 that results from the adjustments
reflected on the Revenue Agent's Report has been recorded
as a reduction of the remaining goodwill that arose as part
of this asset acquisition. Amortization expense charged to
operations for the years ended March 31, 1995, 1994 and
1993 amounted to $401,815, $525,648 and $525,648,
respectively.
PROFIT SHARING ARRANGEMENT - Pursuant to agreements with
its insurers, the Company is eligible to share a portion of
the insurers profits on the Company's service contract
programs. The amounts to be received, if any, will be
determined by loss experience, by the type of program and
by policy year. The amounts recorded are based on earnings
formulas included in the agreements with the insurers.
These formulas reflect the earnings patterns utilized by
the insurers. Any adjustments to these earnings will be
reflected in income, when known.
For the fiscal years ended March 31, 1995, 1994 and 1993
the Company accrued for profit sharing in the amounts of
$2,676,001, $1,364,089, and $424,905, respectively. Such
amounts are included in the financial statements as a
reduction of "Direct Costs".
The accrued profit sharing due the Company as of March 31,
1995 and 1994 is $4,467,104, and $1,788,994, respectively
and such amounts are included in other receivables and
receivable from insurance companies long-term in the
financial statements.
DEFERRED COMPENSATION - In 1989, certain operating officers
were issued restricted shares of the Company's common stock
as part of their compensation under their employment
agreements. Such compensation was charged to operations
over five years, the term of the employment agreements. In
addition, in 1995 certain employees were issued restricted
shares of the Company's common stock as compensation. Such
compensation is amortized over the restriction period which
is generally two years.
EARNINGS PER SHARE - Earnings per share is calculated by
dividing net income by the weighted average number of
common shares and common share equivalents outstanding
during the period.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents for
the purpose of reporting cash flows for all periods
presented includes cash on deposit and highly liquid debt
instruments purchased with a maturity of three months or
less.
28
INCOME TAXES - Effective April 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes" which requires
recognition of deferred tax assets or liabilities for the
estimated future effects of temporary differences between
the financial reporting and tax basis of assets and
liabilities using presently enacted tax rates. The
principal book/tax differences are related to unrealized
gains and losses on investments and deferred revenues.
FOREIGN CURRENCY TRANSLATION -Financial statement accounts
expressed in foreign currencies are translated into U.S.
dollars in accordance with Statement of Financial
Accounting Standards No. 52 "Foreign Currency Translation".
The functional currency for Techmark Services, Ltd., the
Company's United Kingdom Joint Venture is the British
pound. The translation from the British pound to U.S.
dollars for the Company's share of earnings is performed
using average exchange rates.
RECLASSIFICATION - Certain prior years amounts have been
reclassified to conform with the current year's
presentation.
2. CERTIFICATES OF DEPOSIT AND CASH TRUST FUND - RESTRICTED
At March 31, 1995, $500,000 is on deposit with a Florida
regulatory agency to comply with its state insurance laws.
These funds are classified as noncurrent.
29
3. INVESTMENTS IN MARKETABLE SECURITIES
At March 31, 1995, investments in marketable securities are comprised
of the following:
Amortized Gross Unrealized Aggregate Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
Corporate Bonds $ 336,325 $ 962 $ (606) $ 336,681 $ 272,344 $ 64,337
Municipal Bonds 2,676,985 221 (70,036) 2,607,170 - 2,607,170
Callable Preferred
Stock 200,000 - - 200,000 200,000 -
_______________ _________ _________ ___________ ___________ __________
Total Investments
in Marketable
Securities $ 3,213,310 $ 1,183 $(70,642) $ 3,143,851 $ 472,344 $2,671,507
=============== ========= ========= =========== ============= ==========
At March 31, 1994, investments in marketable securities are comprised
of the following:
Amortized Gross Unrealized Aggregate Fair Carrying Amount
Cost Gains (Losses) Value Short Term Long Term
Corporate Bonds $ 333,000 $ 16,394 $ - $ 349,394 $ - $ 333,000
Municipal Bonds 2,300,000 41,878 (27,121) 2,314,757 500,000 1,800,000
Callable Preferred
Stock - - - - - -
__________ __________ __________ __________ __________ ___________
Total Investments
in Marketable
Securities $2,633,000 $ 58,272 $ (27,121) $2,664,151 $ 500,000 $ 2,133,000
========== ========== ========== ========== ============= ==============
The amortized cost and estimated market value of marketable securities,
by contractual maturity date, are listed below. Expected maturities may
differ from contracted maturities because borrowers may have the right to call
or prepay obligations with or without penalties.
Amortized Cost Aggregate
Fair Value
Investments available for sale:
Due in one year or less $ 471,382 $ 472,344
Due after one year through five years 2,047,514 1,981,982
Due after five years through ten years 694,414 689,525
Due after ten years - -
_______________ _______________
$ 3,213,310 $ 3,143,851
=============== ===============
All of the above investments are considered "available for sale".
The resultant differences between the cost and fair value, net of taxes, have
been reflected as components on Stockholders' Equity.
30
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
MARCH 31,
1995 1994
Automobiles $ 16,901 $ 16,901
Equipment, furniture and fixtures 4,725,444 3,281,152
Leasehold improvements 300,272 244,959
____________ _____________
5,042,617 3,543,012
Less: Accumulated depreciation
and amortization 2,639,234 2,131,038
____________ _____________
2,403,383 1,411,974
____________ _____________
Assets under capital leases:
Cost 1,657,220 1,786,400
Less: Accumulated amortization 1,194,693 1,018,849
____________ _____________
462,527 767,551
____________ _____________
$ 2,865,910 $ 2,179,525
============ =============
Amortization of assets under capital leases for the years
ended March 31, 1995, 1994 and 1993 was $289,765,
$357,370, and $171,752, respectively. Depreciation on
property and equipment other than under capital leases for
the years ended March 31, 1995, 1994 and 1993 was
$515,596, $584,285, and $559,059, respectively.
5. INSURANCE ESCROW FUNDS - ADMINISTRATIVE COSTS
At March 31, 1995 and 1994, the Company's insurance
carriers are holding $199,389, in escrow accounts to
reserve for future administrative costs in the event the
Company is not able to administer the claims on outstanding
contracts. Such amounts are returnable to the Company if
and when the insurance agreements are terminated or as the
contracts expire.
6. SPLIT DOLLAR LIFE INSURANCE POLICIES
As of March 31, 1995 and 1994, the Company made payments
from inception to date totaling $698,338 and $595,788,
respectively, on split dollar insurance policies on the
lives of five officers of the Company, which are included
in other non-current assets. The Company will receive a
refund of all split-dollar premiums advanced and has a
security interest in any proceeds of the policies up to the
amount of premiums paid and interest earned thereon.
31
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consists of the following:
March 31,
1995 1994
Capital lease obligations - for property and
equipment payable monthly with interest
rates ranging from 8.6% to 11.3% through 1999 $490,343 $819,892
Installment note - collateralized by equipment
with an undepreciated cost of $5,164 payable
in equal monthly installments of $393
including interest at 5.44% through
February, 1997. 8,505 12,568
________ ________
498,848 832,460
Less: Current maturities 205,200 355,585
________ ________
Long-term portion $293,648 $476,875
======== ========
The aggregate amounts of maturities at March 31,
1995 were as follows:
Fiscal Year Long-Term Minimum Future Lease
Debt Payments
1996 $ 4,315 $ 240,676
1997 4,190 186,791
1998 - 127,127
1999 - 3,884
2000 - -
_______________ _____________________
8,505 558,478
Less amount representing
interest - 68,135
_______________ _____________________
$ 8,505 $ 490,343
=============== =====================
32
8. INCOME TAXES
In accordance with SFAS 109, deferred income tax
assets and liabilities reflect the impact of
temporary differences between values recorded as
assets and liabilities for financial reporting
purposes and values utilized for remeasurement in
accordance with tax laws.
A reconciliation of the effective income tax rate
used to compute the income tax provision for the
three years ended March 31, 1995, 1994 and 1993
to the rate and amount computed using the federal
statutory rate on ordinary income before income
taxes is as follows:
MARCH 31,
1995 1994 1993
Federal statutory rate $ 1,681,513 35.0% $ 351,000 35.0 % $ 722,000 34.0%
State and local income
taxes net of federal
tax benefit including
1993 state tax accrual
for audit matters 101,141 2.1 70,000 6.9 133,000 6.2
Amortization of excess
cost over net assets
acquired 90,648 1.9 - - 178,000 8.4
Other (69,161) (1.5) 2,656 0.2 29,802 1.4
Benefit for recognition
of tax deductibility of
prior years' amortization of
acquired customer list - - (312,000) (31.0) - -
Loss of foreign joint
venture 104,395 2.2 188,000 18.7 - -
___________ _____ __________ _____ ___________ ____
Provision for income
taxes $ 1,908,536 39.7% $ 299,656 29.8 % $ 1,062,802 50.0%
============ ===== ========== ====== =========== =====
The components of tax expense are as follows:
FOR THE YEAR ENDED 3/31/95:
CURRENT DEFERRED PROVISION
Federal $ 2,076,907 $ (242,100) $ 1,834,807
State 101,141 (27,412) 73,729
______________ _____________ _____________
Total $ 2,178,048 $ (269,512) $ 1,908,536
============== ============= =============
33
FOR THE YEAR ENDED 3/31/94:
CURRENT DEFERRED PROVISION
Federal $ 527,656 $ (294,000) $ 233,656
State 99,000 (33,000) 66,000
_____________ _____________ ____________
Total $ 626,656 $ (327,000) $ 299,656
============= ============= ============
FOR THE YEAR ENDED 3/31/93:
CURRENT DEFERRED PROVISION
Federal $ 906,523 -- $ 906,523
State 156,279 -- 156,279
_____________ _____________ ___________
Total $ 1,062,802 -- $ 1,062,802
============== ============= ===========
The components of the net deferred assets are as
follows:
MARCH 31,
1995 1994
Deferred Tax Assets:
Deferred revenue $ 963,475 $ 690,400
Amortization of intangible asset - 590,000
Deferred rent 171,696 142,600
Unrealized loss on securities 27,089 -
Other 55,283 86,654
_____________ _____________
1,217,543 1,509,654
Valuation allowance - (590,000)
_____________ _____________
Total assets 1,217,543 919,654
_____________ _____________
Deferred Tax Liabilities
Excess of tax over book depreciation 102,659 58,172
Installment sales 85,801 129,000
_____________ _____________
Total liabilities 188,460 187,172
_____________ _____________
Net deferred tax assets $ 1,029,083 $ 732,482
============= =============
Management believes that it is more likely than not that the
defered tax assets will be realized and therefore no
valuation allowance is considered necessary. The
valuation allowance established at March 31, 1994 was for the
amortization of intangibles which the
34
Company believed at the time may not have been recoverable. Based
upon a Revenue Agent Review of prior years' tax returns, the Company
no longer believes that a valuation allowance is necessary.
As discussed in Note 1, the Company adopted SFAS No. 109,
"Accounting for Income Taxes" during the fiscal year ended
March 31, 1994. This adoption did not have a material impact
on the Company's financial position or results of
operations.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS - The Company leases office and
warehouse space under noncancellable operating leases.
These leases include scheduled rent increases over their
respective terms. The accompanying consolidated
statements of operations reflect rent expense on a straight-line
basis over the lease terms, which differ from the cash payments
required. Rent expense charged to operations for the years ended
March 31, 1995, 1994 and 1993 was $894,121, $730,917, and $501,496,
respectively.
Future minimum lease commitments as at March 31, 1995 are as
follows:
1996 $ 817,588
1997 771,205
1998 799,623
1999 789,492
2000 450,933
Thereafter through 2004 1,676,011
__________
$5,304,852
==========
EMPLOYMENT CONTRACTS - The Company entered into
employment agreements with its officers and certain
key employees which will provide for aggregate
annual salaries of approximately $1,203,416.
Certain agreements call for (i) annual increases
(ii) cost of living increases, and (iii)
additional compensation, but only if certain
defined performance levels are attained. This
additional compensation is to be paid in the form of
cash and or Company common stock.
BONUS INCENTIVE PLAN - The Company has a Bonus
Incentive Plan designed to reward key management
personnel with bonuses based on the Company's net
pre-tax operating income. There were bonuses of
$1,145,740, $46,669, and $236,092 under the Bonus
Incentive Plan for the years ended March 31,
1995, 1994 and 1993, respectively.
BANK LINE OF CREDIT - The Company has a revolving
credit agreement with a bank which provides for a
maximum aggregate borrowing up to $1,000,000
with interest at the bank's
35
prime rate. As of March 31, 1995 the Company had no
outstanding borrowings under this agreement.
LETTERS OF CREDIT - At March 31, 1995, the
Company was contingently liable for letters of
credit which are as follows:
(i) Standby letter of credit in the amount
of $42,623 issued to the landlord in lieu
of a rent security deposit.
(ii) Standby letter of credit in the amount
of $16,339 issued to a lessor on certain
equipment leased. The Company has pledged
funds in a certificate of deposit as
collateral for the letter of credit.
LITIGATION -
(i) In December 1993, a lawsuit was filed by a
former officer and director of the
Company against the Company and one of its
subsidiaries in a Texas Court. This
individual has alleged in the action that the
Company wrongfully terminated an employment agreement
between him and one of the Company's subsidiaries, and that
it engaged in tortuous interference and
fraud. The individual has requested damages
in excess of $5 million. The employment agreement
in question provides for arbitration in the
State of Connecticut in the event of a dispute. The Company
requested the Texas court to enforce this provision and require
its former employee to submit his claim to arbitration in
Connecticut. The Texas Court ruled, in an Order dated June
14, 1994, that this action should be abated and that the
claims in the action should be submitted to arbitration in
Connecticut pursuant to the arbitration agreement between the
parties. On May 31, 1995, the Texas trial court dismissed the
case pending in the District Court for want of prosecution,
but the arbitration proceeding in Connecticut is still
pending.
(ii) In 1989, a lawsuit was filed in an Illinois
court against a subsidiary of the Company by a former
agent alleging breach of contract. While the complaint does not
specify the dollar amount of its alleged damages, the plaintiff
has retained an expert witness who estimates the plaintiff's
damages in excess of $10 Million. The Company has retained
its own economic expert who will directly refute the
magnitude of the plaintiff's damages. The company intends to
vigorously defend this lawsuit. No trial date has been set and
discovery is continuing.
(iii) The Company is a defendant is several actions/lawsuits
regarding vehicle service claims, unpaid commissions and the
alleged rights to intangible information. The
management of the Company is of the opinion that these
lawsuits are without merit. Counsel for the Company stated
they cannot render an opinion on their
36
outcome. In the opinion of management the outcome of these
actions/lawsuits will not have a material effect on the financial
condition of the Company. In one of the actions/lawsuits the
plaintiff has offered to settle the litigation for
approximately $1,800,000, which the Company has rejected.
10. CAPITAL STOCK
STOCK OPTIONS AND STOCK OPTION PLAN - Under the Employee Incentive Stock
Option Plan (the "Plan"), there are 300,000 shares of the Company's
common stock reserved for issuance to employees (including
officers). The options are to be granted at an exercise price not less
than 100% of the fair market value of the Company's common stock at
date of grant. The number of shares granted, terms of
exercise, and expiration dates are to be decided at the date of grant
of each option by the Company's Board of Directors. The
Plan will terminate in November 1998 unless sooner terminated by the
Board of Directors.
On April 16, 1992 the Company's Board of Directors and subsequently
on October 22, 1992 the shareholders of the Company at the annual
meeting voted to approve stock options to three directors (two of
whom are officers and one is a former officer of the Company). The stock
options entitle the three Directors to purchase an aggregate of 3,000,000
shares of the Company's common stock at an exercise price of $2.6875
per share; the market price at the date of grant.
The term of the options is five (5) years from the date on which they
become exercisable or thirty days after termination of
employment, whichever occurs earlier. Of the total options granted,
fifty percent (50%) may be exercised beginning one year following
October 22, 1992 in increments of 10% per year for a five-year
period. The remaining fifty percent (50%) are exercisable on October 22,
1995.
37
Stock options granted during the years ended March 31 are as follows:
March 31,
1995 1994 1993
Options outstanding at beginning
of year - shares 3,237,833 3,214,500 256,000
Options granted 91,667 121,833 3,074,000
Options canceled (21,000) (58,000) (100,000)
Options exercised (75,000) (40,500) (15,500)
_________ _________ _________
Options outstanding
at end of year 3,233,500 3,237,833 3,214,500
========= ========= =========
Exercise price options outstanding $1.63-$6.38 $1.63-$6.38 $1.63-$6.10
=========== =========== ===========
Exercise price of options exercised $2.50 $1.63-$2.50 $1.63-$2.50
=========== =========== ===========
11. OTHER INCOME
Other income is comprised of the following:
March 31,
1995 1994 1993
Interest and dividend income $ 519,592 $ 209,301 $ 367,909
Interest expense (88,032) (146,530) (160,534)
__________ __________ __________
$431,560 $ (62,771) $ 207,375
========= ========== =========
38
12. JOINT VENTURE AGREEMENT
On July 22, 1993, the Company and American International
Group, Inc. ("AIG") entered into a joint venture agreement ("Joint
Venture Agreement"). Techmark Services, Ltd.
("Techmark"), was formed by execution of the Agreement
in the United Kingdom among AIG Europe (UK) Limited
("AIGE"), a wholly-owned subsidiary of AIG, the
Company and Warrantech (UK) Ltd. ("Warrantech UK") a
wholly-owned subsidiary of the Company.
Under the terms of the Joint Venture Agreement,
AIGE and Warrantech UK have agreed to purchase 51% and
49%, respectively, of the equity of Techmark for
$1,785,000 and $1,715,000, respectively. The Joint
Venture Agreement provides Techmark with a right of
first-refusal to administer all new insurance programs
which are proposed to be underwritten by AIGE, and
which will utilize a third-party administrator,
subject to certain exception, and provides
AIGE or its affiliates with a right of first-refusal to
issue insurance policies related to programs which
are proposed to be marketed or administered by
Techmark, subject to certain exceptions. The
Joint Venture Agreement also contains provisions
relating to rights of the parties upon defaults,
confidentiality and noncompetition covenants.
The Company has guaranteed Warrantech UK's obligations
under the Joint Venture Agreement.
In connection with the formation of Techmark, the
Company licensed to Techmark certain computer
software programs which are integral to Techmark's
operations and agreed to provide, at additional
cost, certain ongoing maintenance and support
services related thereto. Under the terms of such
license, the Company has recognized a fee of
$660,000 payable in twelve equal quarterly
installments commencing December 31, 1993. In
addition, the Company is to be reimbursed approximately
$513,000 for software conversion costs associated
with support services rendered to Techmark along
with other costs incurred by the Company on behalf of
Techmark. At March 31, 1995, amounts owing of
$829,042 are reflected in other receivables in the
financial statements.
39
Following is the summarized financial information for
this investment which is accounted for under the
equity method:
March 31,
1995 1994
Current assets $ 6,033,375 $ 2,059,000
Noncurrent assets 1,258,347 1,696,000
Current liabilities 3,045,517 1,586,000
Noncurrent liabilities and equity 4,246,605 2,169,000
Net revenues 47,148,168 7,073,000
Net loss $ (608,718) $ (1,099,000)
============ ============
Company's equity in net loss $ (298,272) $ (538,385)
Company's investment in and advances to
Joint Venture 3,300,055 1,715,000
Less: Elimination of intercompany
profits (120,862) (176,400)
____________ ____________
Investment in and advances to Joint Venture $ 2,880,921 $ 1,000,215
============ ============
The fiscal 1994 summarized information for Techmark
includes the results from July 1993 (commencement of
operations) through March 31, 1994.
The fiscal 1995 summarized information for Techmark
includes the results of Techmark Services Japan
from October 1994 (commencement of
operations) through March 31, 1995 which was a loss
of approximately $1,200,000.
The joint venture, Techmark, during fiscal 1995 eliminated a
non-profitable portion of its UK operation's business with a
major customer. This action is expected to result in reduced
revenues, but improved margins.
40
13. REDEEMABLE PREFERRED STOCK
As part of the Joint Venture Agreement with AIG,
Warrantech issued in a private placement on
October 18, 1993, 3,234,697 shares of Convertible
Redeemable Exchangeable Preferred Shares (the
"Preferred Shares"). The Preferred Shares are
convertible (a) at any time during the two years
commencing on the third anniversary date of
issuance and (b) in the event that the Joint
Venture Agreement is terminated prior to the
third anniversary of issuance, at any time
during the period commencing on the date of
such termination and ending on the fifth anniversary,
into an equivalent number of shares of Common Stock.
In the event that the joint venture is terminated prior
to the third anniversary of issuance, AIG has the right
to exchange the Preferred Shares at any time prior to
the fifth anniversary of the closing date for
$6,430,000 principal amount of 8% subordinated notes
("Notes") of the Company with a maturity date which
is ten years from the date of issuance of the Notes.
The holders of the Preferred Shares shall be
entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available
therefore, dividends as such dividends are paid to
holders of shares of Common Stock. The Preferred
Shares shall have a priority in liquidation
over the shares of Common Stock. Each share of
Preferred Stock shall have one vote. In addition, the
Company shall have no right to redeem the Preferred
Shares at any time.
Upon certain events of dilution the conversion
price of the Preferred Shares shall be subject to
adjustment.
14. SIGNIFICANT CUSTOMERS
The Company has one significant customer that
accounted for approximately 10%, 11%, and 11% of gross
revenues for the years ended March 31, 1995, 1994
and 1993, respectively.
15. RELATED PARTY TRANSACTIONS
During the year ended March 31, 1995, the Company
recognized net insurance expense of $15,893,173 for insurance
coverage provided by AIG for certain service contract programs.
At March 31, 1995 the Company had a receivable for accrued profit
sharing from AIG of $1,524,920.
41
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following fiscal quarterly financial
information for each of the three months ended
June 30, September 30, December 31, 1994 and 1993
and March 31, 1995 and 1994 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 30, MARCH 31,
1994 1993 1994 1993 1994 1993 1995 1994
Net revenues $13,939,184 $10,986,639 $17,018,432 $11,940,198 $20,202,935 $12,493,516 $19,378,774 $11,234,120
Income from
operations 857,090 397,350 611,490 260,741 1,019,879 678,390 2,182,577(1) 142,380
Income (loss)
before provision
for income
taxes 968,155 400,975 834,275 (81,021) 1,271,041 492,216 1,730,853 191,104
Net income (loss) $ 618,813 $ 219,932 $ 539,652 $ (204,906) $ 1,032,696 $ 79,671 $ 704,627 $ 608,894
Earnings per
share:
Primary $.04 $.02 $.04 ($.02) $.07 $.01 $.04 $.04
Fully Diluted $.04 - $.03 - $.06 - $.04 $.04
(1) As a result of reviews with its insurers of profit
sharing calculations, the Company increased its accrued profit
sharing income by approximately $700,000 in the fourth
quarter of fiscal 1995.
42
WARRANTECH CORPORATION AND
SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING
ACCOUNTS
Column Column Column Column Column
A B C D E
Balance at Additions Deductions- Balance at
Description Beginning Charged to Charged to Other End of
of Year Costs Accounts-Describe Describe of Year
Year Ended March 31, 1995:
Allowance for doubtful
accounts $ - $ 427,483 $ - $ 301,368(a) $ 126,115
Year Ended March 31, 1994:
Allowance for doubtful
acccounts 5,000 10,995 - 15,995(a) -
Year Ended March 31, 1993:
Allowance for doubtful
accounts $ 631,574 $ 303,436 $ - $ 930,010(a) $ 5,000
(a) Amount of write-offs during the year.
43
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
The Company's independent public accountants for the
fiscal year ended March 31, 1994 were Deloitte & Touche.
On August 11, 1994 the Company's Board of Directors
authorized the dismissal of Deloitte & Touche as its
independent accountants. The Board of Directors of the
Company and its audit committee participated in and
approved the decision to dismiss Deloitte & Touche as
independent accountants for the Company.
The report of Deloitte & Touche on the financial
statements of the Company for the fiscal year ended March
31, 1994 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles, except
that reference was made to certain litigation and to a
change in the Company's accounting for income taxes
to conform with Statement of Financial Accounting
Standards No. 109 in fiscal 1994.
The Company believes that in connection with its audit
of the fiscal year ended March 31, 1994 and through
August 11, 1994, there were no disagreements with
Deloitte & Touche on any matter of accounting
principles or practices, financial disclosure or
auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Deloitte & Touche would
have caused them to make reference thereto in their
report on the financial statements for the fiscal
year ended March 31, 1994. In discussions with Deloitte &
Touche in connection with the preparation of the Form 8-K,
announcing their dismissal as independent accountants,
Deloitte & Touche informed the Company that there were
three issues raised during the course of their audit of
the Company's financial statements for the fiscal
year ended March 31, 1994, which they believe constituted
disagreements. All of these issues were, however, resolved
to Deloitte & Touche's satisfaction in the presentation of the
financial statements. The issues raised by Deloitte &
Touche were as follows:
- Profit sharing recognition methodology, whereby Deloitte & Touche
evaluated the Company's methodology for the recognition ofprofit
sharing which is based on a calculation of profits as determined in
accordance with contractual agreements between the Company and
certain insurance companies, and concluded that the profit sharing
calculation methodology should instead be based on an estimate of
ultimate profit, if any, to be earned under the contractual agreements
(contractually stipulated maximum allowable losses less actuarial
estimate of ultimate losses) multiplied by the ratio of
losses paid to date to the actuarial estimate of ultimate losses to be
incurred under the contractual agreements.
- Restriction on auditing scope and procedures,
arising out of the Company's reluctance to
have Deloitte & Touche perform an actuarial study
of its profit sharing calculations, because the
Company did not believe that actuarial consultants, unfamiliar
with the Company's industry and business, could properly perform
such a study, taking into consideration all the factors necessary
to make an informed judgment in the time permitted. Nevertheless,
the Company acceded to Deloitte & Touche's request to have
such study performed and accepted the findings of the study as
presented to it by Deloitte & Touche.
44
- Capitalization of start- up costs with respect to
the Company's joint venture, Techmark Services Ltd., formed
in July 1993, whereby the Company inquired as to the
appropriateness of the deferral of certain start-
up costs of the joint venture. While there were several
discussions relating to the accounting for such costs, the
determination by Deloitte & Touche that deferral of
such costs would be inappropriate was agreed to by the Company
and no adjustment ever was proposed, insisted upon or
required by the Company.
- Consolidation of the Company's joint venture, Techmark Services
Ltd., whereby the Company requested Deloitte & Touche to consider the
appropriateness of consolidating this significant joint venture.
It should be noted that the Company's interest in such joint venture
has from inception and continues to be accounted for by the Company
under the equity method of accounting approved by Deloitte & Touche
and the Company's request to Deloitte & Touche was a theoretical one,
in contemplation of certain proposed changes in ownership of the joint
venture that have not occurred.
Management and Deloitte & Touche discussed these issues
during the course of the audit and the Board of Directors of the
Company was made aware of these discussions by management.
Deloitte & Touche informed the audit committee of its
position on these issues, and the audit committee determined that
all of the issues were resolved to the satisfaction of Deloitte &
Touche in the presentation of all matters included in the
financial statements as filed in the Company's Form 10-K
for the fiscal year ended March 31, 1994.
Upon filing a report on Form 8-K with the SEC relating to the
dismissal of Deloitte & Touche, the Company requested that
Deloitte & Touche furnish it with a letter addressed to
the Securities and Exchange Commission (the "Commission")
stating whether or not it agreed with the statements
contained therein. A copy of Deloitte & Touche's letter,
dated September 30, 1994, is filed as an exhibit to the
amendment filed October 4, 1994 to the Company's report
on Form 8-K dated August 18, 1994.
45
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Board of Directors is comprised of eight directors
elected by the stockholders, to hold office for a one year period.
The following persons were directors of the Company for
fiscal 1995 and are expected to continue to serve as such until
the next annual meeting of stockholders called in the year in
which their terms expire and until their respective successors are
duly elected and qualified.
Director
Name Age Positions with Company Since
Joel San Antonio 42 Chairman of the Board, Chief Executive 1983
Officer and Director
William Tweed 55 President and Director 1983
Jeff J. White 44 Director 1983
William Rueger 75 Director 1987
Michael J. Salpeter, D.M.D. 43 Director 1993
Kurt R. Schwamberger 48 Director 1993
Jo Ann Duarte 48 Director 1993
Lawrence Richenstein 42 Director 1993
No family relationships exist among any of the Company's
executive officers or directors.
The business experience of each of the Company's directors
and nominees for election to the Board of Directors is as follows:
JOEL SAN ANTONIO, 42, one of the Company's founders, was a
Director, Chief Executive Officer and President of the Company from
incorporation through February 1988. Since February 1988 Mr. San
Antonio has been a Director, Chief Executive Officer and Chairman of
the Board of Directors and since October 27, 1989, he has also been
Chairman and Chief Executive Officer of the Company's principal
operating subsidiaries, Warrantech Consumer Product Services, Inc.
("WCPS") and Warrantech Automotive, Inc. In 1975, Mr. San
Antonio founded and, thereafter through August, 1982, served as
President of Little Lorraine, Ltd., a company engaged in the
manufacturing of women's apparel. Mr. San Antonio is currently a
member of the Southwestern Connecticut Area Commerce & Industry
Association, the World Forum, the Connecticut Business
and Industry Association, the Metropolitan Museum of Art.
WILLIAM TWEED, 55, one of the Company's founders, was a
Director, Vice President and Secretary of the Company from
incorporation through February 1988. Since February 1988, Mr.
Tweed has been a Director and President. From July 1976 through
August 1982, he was Vice President of Little Lorraine, Ltd. Mr.
Tweed served as a Director of Nationwide Extended Warranty
Service, Inc. from in or about October 1981 through in or about
January 1983.
46
JEFF J. WHITE, 44, has been a Director of the Company from its
inception. Mr. White was Vice President of the Company from its
inception until June 1988 and Treasurer of the Company from its
inception until October 1990. In September 1982, Mr. White assisted
in the establishment of Marchon Eyewear, Inc., an importer of
eyeglass frames. He is a major shareholder of Marchon, and is
responsible for banking,investment and related financial
matters as well as interfacing ith counsel on patent, trademark
and general legal matters and formulating and implementing all
internal operations. From August 1973 through April 1982, Mr. White
served as General Manager and Director of Operations for Avant-
Garde Optics, Inc., an importer-distributor of eyeglass frames.
His responsibilities for such company were similar to his
responsibilities at Marchon.
WILLIAM RUEGER, 75, was a consultant to the Company from
1985 to 1987. Since November 1987, Mr. Rueger has been a
Director of the Company and was Secretary from February 1988 to
August 1990. Mr. Rueger was Senior Vice President, Corporate
Planning and Development, of GTE Corporation from 1982 to 1984 and
was employed by GTE Corporation, its subsidiary, GTE Products Corp.
(as Vice President and General Counsel) and predecessor companies,
including Sylvania Electric, from 1950 until his retirement in 1984.
Mr. Rueger is an attorney and serves as Village Judge in Old Westbury,
New York.
MICHAEL J. SALPETER, D.M.D., 43, co-founded Fulton Health
Associates, P.C. ("Fulton Group"), a full scope dental health center,
in July 1979. Since July 1979, in addition to establishing multiple
centers, Dr. Salpeter has served as the Fulton Group's Principal
Partner and has maintained a full-time practice in general dentistry.
Dr.Salpeter also serves as a management and marketing officer of Knowlton &
Associates, a consulting firm involved in health policy and
practice management. Dr. Salpeter also serves as the President and
Managing Officer of Lifetyme Care, Inc., a managed care dental
program.
KURT R. SCHWAMBERGER, 48, has been employed with American
International Group, Inc. ("AIG") since 1985. Mr. Schwamberger was
responsible for the formation and development of the Personal Lines
Division of American International Underwriters of which he is the
President. Mr. Schwamberger is also a Vice President of New
Hampshire Insurance Company, a Director of Landmark Insurance
Company (U.K.) and Chairman of Techmark Services Ltd. Mr.
Schwamberger's responsibilities include the worldwide development
of Warranty and Vehicle Service Contract Programs for AIG.
JO ANN DUARTE, 48, has been employed with AIG since June 1972,
when she was an Accounting Manager for Domestic Life Companies.
In May 1991, Ms. Duarte was elected Senior Vice President of Domestic
Life Companies. She is currently Senior Vice President and Chief
Financial Officer of AIG-Cost Containment Division.
LAWRENCE RICHENSTEIN, 42, has been President and Chairman of
the Board of Lonestar Technologies, Ltd., a consumer
electronics company located in Hicksville, New York, since 1985.
In addition to having sales and marketing experience, Mr.
Richenstein is involved in product development. Mr. Richenstein is
an attorney admitted to practice in New York who has, in the past,
served as a director of two public companies, both of which were
involved in the electronics industry.
47
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
BERNARD J. WHITE, 50, joined Warrantech in February, 1994 as
Vice President-Finance, Treasurer and Chief Financial Officer. From
1992 to February 1994, Mr. White was Executive Vice President of
Finance and Administration/Chief Financial Officer at ENTEX Information
Services, Inc., a reseller of computer hardware, LAN
and WAN designs and services. From 1972 to 1992, Mr. White was
employed by Smith Corona Corporation (SCM Corporation and
Hanson Industries, Inc. following its acquisition of SCM
Corporation) in various financial capacities, ultimately serving
from 1979 as Vice President Finance-Controller, overseeing
both domestic and international operations.
DESIREE KIM CABAN, 30, has been Secretary of the Company
since July 1993 and has been the Executive Assistant to the
Chairman and the Office Services Manager for the Company since
1989. She has been employed by the Company since May 1986. Prior
thereto, Ms. Caban was a personnel assistant for the St. Paul
Insurance Company's New York regional office. Ms. Caban is
currently a member of the National Association for Female Executives.
RONALD GLIME, 50, has been President of Warrantech
Automotive, Inc. since October 1992. Prior thereto he was
Regional Sales Manager for Warrantech Automotive, Inc. (then
known as Warrantech Dealer Based Services, Inc.) from February 1991
through October 1992. From 1983 through February 1991, Mr. Glime
was an independent insurance agent for various insurance companies.
Prior thereto, from 1978 through 1982, Mr. Glime served in various
capacities including President at American Warranty Corp., a company
in the warranty administration business. From 1977 through 1978,
Mr. Glime was an agent for Life Investors Insurance Co. of America,
a subsidiary of Life Investors, Inc. Prior thereto,
from 1966 until 1977, Mr. Glime was Vice President in charge of
the credit life accident and health division of Life Investors
Insurance Co. of America.
RICHARD RODRIGUEZ, 41, has been Chief Operating Officer of
the Company's Euless, Texas facilities since February 1992.
He has been with the Company since March 1987 and has held the
positions of National Service Manager, Vice President of
Operations and Senior Vice President of Operations for WCPS.
Mr. Rodriguez served as Secretary of WCPS from August 1991 through
July 1992. From December 1986 through March 1987 he was
Manufacturing/Production Manager for Crown, Cork & Seal. Mr.
Rodriguez was a service consultant from June 1984 through October
1986 specializing in the areas of warranty administration, quality
control and parts warehousing and distribution to manufacturers of
consumer electronic products.
KEVIN RUPKEY, 36, has been President of Warrantech Consumer
Product Services, Inc. since April 1994. Prior thereto, he was
Manager, National Accounts for GE Consumer Marketing from June 1990
where he was responsible for sales and marketing of GE's Service
Protection Plus Program. From August 1987 until June 1990 Mr.
Rupkey was District Sales Manager for GE Appliances. Prior thereto,
Mr. Rupkey held various sales and marketing positions with GE since
1980.
RANDALL SAN ANTONIO, 41, has been Vice President and General
Manager of Warrantech Direct, Inc. since May 1994. Prior thereto he
was Vice President of Finance of Castle Hill Production Inc. from
June 1984. Prior thereto, from May 1983 until June 1984, Mr. San
Antonio was the controller of the New York office of Smith Hotel
Associates, Inc., a hotel management corporation.
None of the Company's directors or executive officers is a director
of any other public company.
INFORMATION CONCERNING MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended March 31, 1995, the Board of
Directors held five meetings. All such meetings were fully attended
except three at which Jeffrey S. White was not present and two at
which Kurt R. Schwamberger was not present. The Company has an Audit
Committee, consisting of Messrs. Rueger and White and Ms. Duarte.
Such committee met twice during the 1995 fiscal year. The Company
has a Compensation Committee, formed in February 1994, consisting of
Messrs. Rueger, Salpeter and White. This committee met once during
the last fiscal year.
48
Item 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information for the years ended March
31, 1995, 1994 and 1993, concerning the annual and long-term compensation
of the chief executive officer and each executive officer whose total
annual salary plus bonuses exceeded $100,000 for the fiscal year ended
March 31, 1995.
Long Term Compensation
Annual Compensation Awards
Other Annual Restricted Stock Option All
Name and Principal Year Salary(2)(4) Bonus Compensation(2) Stock (Shares) Other
Positions Awards Awards Compensation
Joel San Antonio 1995 $269,398 $576,957 $7,432 - - -
Chairman of the Board 1994 216,580 20,408 7,353 - 1,204,080 -
and Executive Chief 1993 188,408 120,454 8,505 - - -
Officer
William Tweed 1995 265,721 577,773 7,927 - - -
President 1994 212,109 19,592 7,816 - 938,775 -
1993 204,601 115,638 8,906 - - -
Bernard J. White 1995 115,000 58,683 4,800 $12,760 - -
Vice President of 1994 11,058 - 800 - 25,000 -
Finance, Chief 1993 - - - - - -
Financial Officer
Richard Rodriguez 1995 79,688 55,524 14,793 - 14,000 -
Chief Operating 1994 75,861 12,230 14,793 - - -
Officer 1993 67,023 36,490 14,793 - - -
Ronald Glime 1995 129,132(5) 7,868 37,489 - - -
President of Warrantech 1994 108,234(5) - - - - -
Automotive, Inc. 1993 43,561 - - - - -
(1) Its 1988 Stock Option Plan is its only long-term
incentive plan.
(2) Included in Other Annual Compensation are auto
allowances given to each officer, life insurance
premiums for Messrs, San Antonio, Tweed, and
Rodriguez, and living expenses paid Ronald Glime
in fiscal 1995.
(3) All options reflect the 1-for-10 reverse stock
split of the Company's shares on August 1, 1990.
(4) In 1993, the Company paid (i) Mr. San Antonio and
Mr. Tweed $11,209 and $23,130, respectively, for
salary adjustments in 1993 and (ii) Mr. San
Antonio and Mr. Tweed $4,760 and $19,583,
respectively, for salary adjustments accrued in
1989 and 1990.
(5) Consisting of $76,668 in base salary and $52,464
of commissions in fiscal 1995 and $69,058 in base
salary and $39,176 of commissions in fiscal 1994.
49
STOCK OPTIONS
No stock options were granted to any individuals
named in the Summary Compensation Table during fiscal
1995 except Ronald Glime. Mr. Glime was granted
options to purchase 46,667 shares in June 1994 at an
exercise price of $4.563 per share. Such options
become exercisable only if certain performance
criteria are achieved. Such options represented
approximately 51% of all options granted to employees
during fiscal 1995. The potential realizable value of
such options during the option term is $86,661,
assuming a 5% annual rate of stock appreciation and
$197,728, assuming stock price appreciation at an
annual rate of 10%. The Company does not have any
outstanding stock appreciation rights.
OPTIONS EXERCISED AND HOLDINGS
The following table sets forth information with
respect to the individuals listed in the Summary
Compensation Table above, concerning unexercised
options held as of the end of the 1995 fiscal year.
Shares Acquired Value Number of Unexercised Options Value of Unexercised In-the-
Name on Exercise Realized at Fiscal Year-End(#) Money Options at Fiscal Year-End
($)
Exercisable Unexercisable Exercisable Unexercisable
Joel San Antonio - - 240,816 963,264 $556,887 $2,227,548
William Tweed - - 187,756 751,018 434,181 1,736,734
Bernard White - - 16,666 8,334 - -
Ronald Glime - - 25,546 77,454 51,092 29,333
Richard Rodriguez - - 10,250 3,750 - -
(1) Based on the closing price of common Stock as
reported on the NASDAQ National Market System for
March 31, 1995.
50
EMPLOYMENT AGREEMENTS
Effective on November 7, 1993, the
Company entered into five-year employment
agreements with each of Messrs. San
Antonio and Tweed. Messrs. San Antonio
and Tweed each devote substantially all
of their working time to the affairs of
the Company. The agreements provide for
annual base salaries initially at a rate
of $250,000, with annual increases of 10%
together with an adjustment based upon an
employment cost index published by the
Bureau of Labor Statistics.
Messrs. San Antonio and Tweed are
entitled under their employment
agreements to be reimbursed for all
ordinary, reasonable and necessary
expenses incurred by them in the
performance of their duties. The Company
provides each such executive with a
comprehensive medical-dental insurance
policy as well as disability coverage and
a life insurance-death benefit policy in
excess of $1,000,000. In the event that
one of such executives becomes
"disabled", the Company will pay the
disabled executive's salary for a period
not to exceed twelve months. However, it
is expected that the Company's
obligations will be partially offset by
proceeds from the disability insurance
policy, which shall be the equivalent of
approximately 80% of the salary and which
shall become payable after 90 days of
disability. In addition, Messrs. San
Antonio and Tweed each receive an
automobile expense allowance of $500 per
month.
Effective February 28, 1994, the
Company entered into an at will
employment agreement with Bernard J.
White, its Chief Financial Officer.
Pursuant to such agreement, Mr. White
receives a base salary initially at a
rate of $9,583 per month, subject to
review each year with a minimum cost of
living adjustment of 5% or an amount
equal to the increased cost of living for
the lower State of Connecticut as
measured by the appropriate index,
whichever is greater at the time of each
such review. Under the terms of such
agreement, Mr. White receives annual
bonuses equal to a share of 3% of the net
annual operating profit before taxes of
the Company. Mr. White receives an
automobile expense allowance comparable
to that provided the Company's other
executive officers but in no event less
than $400 per month. The Company also
provides Mr. White with comparable
medical/dental and other insurance
coverage to that provided to its other
executive officers. The Company also
reimburses all ordinary, reasonable and
necessary expenses incurred by Mr. White
in the performance of his duties. Mr.
White is entitled to participate in the
profit sharing, bonus, pension and other
employee benefit plans that the Company
has in effect from time to time.
Effective October 17, 1992, Warrantech
Automotive, Inc. entered into a five-year
employment agreement with Ronald Glime,
its President. Pursuant to such
agreement, Mr. Glime receives a base
salary of $6,389 per month. Under the
terms of such agreement, Mr. Glime
receives monthly bonuses based upon the
number of vehicle service contracts
processed by Warrantech Automotive, Inc.
In addition, under such agreement, Mr.
Glime was granted options to purchase an
aggregate of 100,000 shares of the
Company's common stock under its
Incentive Stock Option Plan.
51
Effective April 1, 1991, the Company
entered into a five-year employment
agreement with Richard Rodriguez, its
Chief Operating Officer. Such agreement
provides for a base salary initially at a
rate of $55,650, subject to review each
year with a minimum cost of living
adjustment of 5% at the time of each such
review. Under the terms of such
agreement, Mr. Rodriguez receives annual
bonuses equal to a share of 3% of the net
annual operating profit before taxes of
the Company. Mr. Rodriguez receives an
automobile expense allowance comparable
to that provided the Company's other
executive officers, but in no event less
than $400 per month. The Company also
provides Mr. Rodriguez with comprable
medical/dental and other insurance
coverage to that provided to its other
executive officers. The Company also
reimburses all ordinary, reasonable and
necessary expenses incurred by Mr.
Rodriguez in the performance of his
duties. Mr. Rodriguez is entitled to
participate in the profit sharing, bonus,
pension and other employee benefit plans
that the Company has in effect from time
to time.
The Company's directors and officers
receive no other forms of compensation
except for officers who receive
distributions under the Company's Bonus
Incentive Plan and except for directors
who are reimbursed for actual expenses
incurred by them in connection with the
Company's business.
LONG-TERM INCENTIVES
The Company provides executives
equity-based long-term incentives through
its 1988 Employee Incentive Stock Option
Plan, described elsewhere herein, and its
Bonus Incentive Plan, which are designed
to award key management personnel and
other employees of the Company, with
bonuses and stock options based on the
Company's and the employee's performance.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities
Exchange Act of 1934 requires that the
Company's executive officers and
directors and persons who own more than
10% of a registered class of the
Company's equity securities file reports
of ownership and changes in ownership
with the Securities and Exchange
Commission (the "Commission"). Officers,
directors and greater than 10%
shareholders are required by Commission
regulation to furnish the Company with
copies of all Section 16(a) forms they
file. Based on a review of the reports,
during the fiscal year ended March 31,
1995, all Section 16 filing requirements
applicable to its officers, directors and
greater than 10% beneficial owners were
complied with.
52
NON-MANAGEMENT DIRECTORS' COMPENSATION
Each non-employee director is entitled
to receive compensation of $1,000 for
each meeting attended in person and $250
for each meeting attended by telephone.
During fiscal 1995, the following fees
were paid:
Jeff J. White $2,750.00
William Rueger 2,250.00
Michael J. Salpeter 5,500.00
Kurt R. Schwamberger 3,000.00
JoAnn Duarte 6,250.00
Lawrence Richenstein 3,250.00
No directors' fees are payable to
employees of the Company who serve as
directors.
53
Item 12.SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership Of Certain Beneficial
Owners Of Management
The following table sets forth as
information concerning shares of Common
Stock, par value $.007 per share, the
Company's only voting securities, owned
beneficially by each of Company's
Directors and nominees for the Board of
Directors, by each person who is known by
the Company to own beneficially more than
5% of the outstanding voting securities
of the Company and by the Company's
executive officers and directors as a
group.
NAME AND ADDRESS OF BENEFICIAL OWNER Amount and Nature of Percent
BENEFICIAL OWNERSHIP OF CLASS
Joel San Antonio 2,933,656 shares(1) 21.1%
300 Atlantic Street
Stamford, Connecticut 06901
William Tweed 2,341,231 shares(2) 17.1%
300 Atlantic Street
Stamford, Connecticut 06901
Jeff J. White 1,582,148 shares(3) 11.6%
19 Foxwood Road
Kings Point, New York 11024
William Rueger 84,100 shares(4) .6%
4 Langley Lane
Old Westbury, New York 11568
Michael Salpeter 292,305 shares(5) 2.2%
7034 Highfield Drive
Fayetteville, New York 13066
Kurt R. Schwamberger 0 shares 0.0%
70 Pine Street
New York, New York 10270
Jo Ann Duarte 0 shares 0.0%
70 Pine Street
New York, New York 10270
Lawrence Richenstein 4,500 shares 0.0%
920 South Oyster Bay Road
Hicksville, New York 11801
All Directors and Officers
as a group (12 7,311,302 shares (1,2,3,4,5,6) 48.0%
__________________
(1)Includes 5,000 shares held by Mr. San
Antonio as custodian for two minor
children. Includes 10,800 shares
owned by Mr. San Antonio's wife as to
which he disclaims beneficial
ownership. Does not include 19,800
shares owned by Mr. San Antonio's
brother and sister-in-law and 3,400
shares owned by his mother as to which
he disclaims any beneficial interest.
Includes an aggregate of 200,000
shares held in trusts for his
children, of which Mr. San Antonio's
wife is a trustee as to which Mr. San
Antonio disclaims beneficial
ownership. Includes options to
purchase 120,408 shares which became
exercisable on October 22, 1993,
120,408 which became exercisable on
October 22, 1994 and options to
purchase an additional 602,040 shares
granted on October 22, 1992 which will
become exercisable on October 22,
1995. Does not include 120,408 shares
which become exercisable on October
22, 1995, 120,408 shares which become
exercisable on October 22, 1996 and
120,408 shares which become
exercisable on October 22, 1997.
54
(2)Includes 48,000 shares held by Mr.
Tweed as custodian for one child.
Does not include an aggregate of
12,500 shares held by Mr. Tweed's
mother and sister. Includes 1,500
shares held by Mr. Tweed's wife, and
25,000 held in trust for the benefit
of Mr. Tweed's granddaughter, of which
Mr. Tweed's wife is the trustee, as to
which he disclaims any beneficial
interest. Includes options to
purchase 93,878 shares which became
exercisable on October 22, 1993,
93,878 which became exercisable on
October 22, 1994 and options to
purchase an additional 469,387 shares
granted on October 22, 1992 which will
become exercisable on October 22,
1995. Does not include 93,878 shares
which become exercisable October 22,
1995, 93,878 shares which become
exercisable on October 22, 1996, and
93,875 shares which become exercisable
on October 22, 1997
(3)Does not include an aggregate of
90,000 shares owned by Mr. White's
parents and sister as to which he
disclaims any beneficial interest.
Includes options to purchase 85,715
shares which became exercisable on
October 22, 1993, 85,715 which became
exercisable on October 22, 1994 and
options to purchase 428,578 shares
granted on October 22, 1992 which will
become exercisable on October 22,
1995. Does not include 85,713 shares
which become exercisable on October
22, 1995, 85,713 shares which become
exercisable on October 22, 1996, and
85,713 shares which become exercisable
on October 22, 1997.
(4)Includes an option to purchase 25,000
shares at $2.50 per share which may be
exercised through November 30, 1995.
All of such options are presently
exercisable. Includes 100 shares owned
by Mr. Rueger's wife as to which he
disclaims beneficial ownership.
(5)Includes 7,800 shares held in an IRA
in the name of Dr. Salpeter, 7,100
shares held by Dr. Salpeter in trust
or as custodian for his daughters,
Nicole and Whitney, 20,000 shares held
in a company pension plan of which Dr.
Salpeter serves as a trustee, 200,000
shares held as trustee of trusts for
the benefit of Jonathan and Brandon
San Antonio. Includes 2,950 shares
held by Dr. Salpeter's wife as to
which he disclaims beneficial
ownership.
(6)Includes options held by officers of
the Company to purchase an aggregate
of 54,462 shares which are presently
exercisable.
.
Item 13.CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
In March 1994, the Company formed a
wholly-owned subsidiary, Warrantech
Additive, Inc., to market a proprietary
TEC-12 line of automotive additives and
lubricants. The Company guarantees the
performance of TEC-12 under a 12
month/12,000 mile limited warranty
covering the parts or components treated
by the product. Warrantech Additive,
Inc. has established a program with
Vehicle Information Network, Inc.
("VIN"), a California based corporation,
which provides a nationwide "electronic
classified network" for the sale of used
cars between private parties and dealers.
Under the program, VIN offers the TEC-12
product line, including the limited
warranty, to vehicle sellers and buyers.
In April 1994, Mr. William Tweed and
Mr. Joel San Antonio entered into an
agreement with VIN, pursuant to which
Messrs. Tweed and San Antonio loaned VIN
an aggregate of $250,000 at an interest
rate of 12% per annum. The term of the
loan was one hundred fifty days
55
from Closing with VIN having an option to
extend the maturity date until the first
anniversary of the Closing. Upon
Closing, Messrs. Tweed and San Antonio
received an option to purchase up to 2%
of the outstanding common stock of VIN
from Mark Brenner and Joel Hecht, two
principals of VIN. The exercise price of
these options is $125,000 per 1% of the
outstanding shares of VIN and these
options are exercisable for a period of
one year from the Closing. In the event
VIN exercises its option to extend the
maturity date, as described above,
Messrs. Tweed and San Antonio shall have
the option to purchase from Messrs.
Brenner and Hecht additional shares of
VIN common stock, totaling in the
aggregate five percent (5%) of VIN's
issued and outstanding shares of common
stock, at a purchase price of $.0025 per
share.
On November 4, 1987, the Company
granted to William Rueger an option to
purchase 100,000 shares of Common Stock
at an exercise price of $2.50 per share
(as adjusted to reflect the 1990 reverse
stock split). Mr. Rueger exercised said
option with respect to 10,000 shares on
February 22, 1989, with respect to an
additional 15,000 shares on November 3,
1992, with respect to an additional
25,000 shares on November 18, 1993 and
with respect to an additional 25,000
shares on November 22, 1994. See
"Compensation of Directors and Executive
Officers".
56
PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. Financial Statements
and Financial Statement
Schedule: see accompanying
Index to Consolidated Financial
Statements and Schedule, page.
18
(b) Reports on Form 8-K during the
last quarter: None.
(c) Exhibits
3(i) - 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.(P)
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.(P)
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.(P)
(ii) Certificate of Designation
of the Company with respect to
the Preferred Stock as filed
with the Secretary of State of
Delaware on October 12, 1993.
(P)
(iii) By-laws of the Company, as
amended. Incorporated by
reference to the Company's
Quarterly Report on Form 10-Q
for the fiscal quarter ended
September 10, 1988, file no. 0-
13084.(P)
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.(P)
(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.(P)
(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.(P)
57
(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.(P)
(e) - Asset Purchase Agreement
dated as of October 4, 1989, by
and among Dealer Based
Services, Inc., David
Robertson, Gary Traylor and the
Company (excluding
schedules).(P)
(f) - Bonus Incentive Plan of
the Company.(P)
(g) - 1988 Employee Incentive
Stock Option Plan of the
Company.(P)
(h) - Employment Agreement dated
October 30, 1989, between
Warrantech Dealer Based
Services, Inc, and Gary K.
Traylor.(P)
(i) - Insurance policy between
the Company and Houston General
Insurance Company pertaining to
service contracts issued by
Inacom Corporation.
Incorporated by reference to
the Company's Report on Form
10-K for the fiscal year ended
March 31, 1992, file no. 0-
13084.(P)
(j) - Insurance policy between
the Company and Houston General
Insurance Company pertaining to
service contracts issued by
Damark Inc. Incorporated by
reference to the Company's
Report on Form 10-K for the
fiscal year ended March 31,
1992, file no. 0-13084.(P)
______________________________________________
*Incorporated by reference to the
Company's Report on Form 10-K for the
fiscal year ended March 31, 1990,
file no. 0-13084.
58
(k) - Settlement and Runoff
Agreement between the Company,
its wholly owned subsidiaries Warrantech
Dealer Based Services, Inc. and
Warrantech Consumer Product
Services, Inc. and American
Hardware Mutual Insurance
Company ("AHM") regarding
termination of insurance
coverage by AHM. (This
document has been omitted and
accorded confidential treatment
by the Securities and Exchange
Commission pursuant to an Order
Granting Application Pursuant
to Rule 24b-2 Under the
Securities Exchange Act of
1934, As Amended, Respecting
Confidential Treatment of
Exhibits 10(v) and 10(w)
Contained in Registrant's Form
10-K for the fiscal year ended
March 31, 1992, issued by the
Division of Corporation
Finance.)(P)
(l) - Securities Purchase
Agreement dated July 19, 1993
among the Company, Joel San
Antonio, William Tweed, Jeff
J. White and AIG.(P)
(m) - Joint Venture Agreement
dated July 26, 1993 among
Techmark Services Limited, AIG
Europe (UK) Limited, Warrantech
(UK) Limited and the
Company.(P)
11. - Statements re: computation
of per share earnings.
21. - Subsidiaries of the
Company.
27. - Financial Data
Schedule.
28. - Stipulation and Consent
Order of Illinois.
Incorporated by reference to
the Company's Quarterly Report
on Form 10-Q for the fiscal
quarter ended December 31,
1988, file no. 0-13084.(P)
99(a)- Petition in Action
Entitled GULF INSURANCE COMPANY
VS. DEALER BASED SERVICES,
INC., ET AL. Incorporated by
reference to the Company's Form
8 Amendment No. 1, dated
December 28, 1989, to the
Company's Form 8-K dated
November 3, 1989, file no. 0-
13084.(P)
(b) - Original Answer and
Counterclaim of Dealer Based
Services, Inc., David
Robertson, Gary Traylor, and
Warrantech Dealer Based
Services, Inc. filed in the
Action Entitled Gulf Insurance
Company vs. Dealer Based
Services, Inc., et al.
Incorporated by reference to
Form 8 Amendment No. 2, dated
December 29, 1989, to the
Company's Form 8-K dated
November 3, 1989, file no. 0-
13084.(P)
59
(c) - Complaint in Action
entitled DAVID ROBERTSON V.
WARRANTECH CORPORATION AND
WARRANTECH AUTOMOTIVE
Incorporated by reference to
the Company's Quarterly Report
on Form 10-Q for the fiscal
quarter ended
December 31, 1993; file no. 0-
13084.(P)
(d) - Amended Original Petition
Entitled GULF INSURANCE CO.
VS. WARRANTECH DEALER BASED
SERVICES, INC. ET.AL.
Incorporated by reference to
the Company's Quarterly Report
or Form 10-Q for the fiscal
quarter ended September 30,
1994; file No. 0-13084.(P)
60
SIGNATURES
Pursuant to the requirements of Section
13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly
caused this report to be signed on its
behalf by the undersigned thereto duly
authorized.
WARRANTECH CORPORATION
Dated: JUNE 29, 1995 By:S/N/S JOEL SAN ANTONIO
Joel San Antonio
Chairman of The Board and
Principal Executive Officer
Dated: JUNE 29, 1995 By:S/N/S BERNARD J. WHITE
Bernard J. White, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the
Securities Exchange Act of 1934, this
report has been signed below by the
following persons on behalf of the
Registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
S/N/S Joel San Antonio Principal Executive Officer June 29, 1995
(Joel San Antonio) Chairman of the Board
and Director
S/N/S William Tweed President and Director June 29, 1995
(William Tweed)
S/N/S Desiree Kim Caban Secretary June 29, 1995
(Desiree Kim Caban)
S/N/S William Rueger Director June 29, 1995
(William Rueger)
S/N/S Jeffrey J. White Director June 29, 1995
(Jeffrey J. White)
S/N/S Kurt Schwamberger Director June 29, 1995
(Kurt Schwamberger)
61
S/N/S Joanne Duarte Director June 29, 1995
(Joanne Duarte)
S/N/S Michael Salpeter Director June 29, 1995
(Michael Salpeter)
S/N/S Lawrence Richenstein Director June 29, 1995
(Lawrence Richenstein)
62