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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from _______ to _______
Commission File No. 0-13084
WARRANTECH CORPORATION
______________________________________________________________________________
(Exact name of registrant as specified in its charter)
_____Delaware____ ___13-3178732____
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
300 Atlantic Street, Stamford, Connecticut ___06901___
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (203) 975-1100
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each Exchange on which registered
Common Stock $.007 par value 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
15,222,861 as of August 2, 1999.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $14,459,639 as of August 2, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Index to Exhibits is on page 29
Document contains 61 pages
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PART I
Warrantech Corporation ("Warrantech" or the "Company") maintains executive
offices at 300 Atlantic Street, Stamford, Connecticut 06901, operating
facilities at 150 Westpark Way and 1441 West Airport Freeway, Euless, Texas
76040, as well as other Texas locations. The telephone number of the executive
offices is (203) 975-1100.
Item 1. Business
Warrantech Corporation, through its wholly owned subsidiaries, markets and
administers service contracts and extended warranties. The Company is a third
party administrator for a variety of dealer/clients in selected industries and
offers call center and technical computer services. The Company assists
dealer/clients in obtaining insurance policies from highly rated independent
insurance companies for all contracts and programs offered. The insurance
company is then responsible for the cost of repairs or replacements for the
contracts administered by Warrantech.
The Company operates under three major business segments: Automotive,
Consumer Products and International. The Automotive segment markets and
administers extended warranties on automobiles, light trucks, recreational
vehicles and automotive components. These products are sold principally by
franchised and independent automobile dealers, leasing companies, repair
facilities, retail stores and financial institutions. The Consumer Products
segment markets and administers extended warranties on household appliances,
electronics and homes. These products include home appliances, consumer
electronics, televisions, computers, home office equipment and homes. These
products are sold principally by retailers, distributors, manufacturers, utility
companies and financial institutions. Warrantech also direct markets these
products to the ultimate consumer through telemarketing and direct mail
campaigns. The International segment markets and administers outside the United
States predominately the same products and services of the other business
segments. The International segment is currently operating in the United
Kingdom, Central and South America, Puerto Rico and the Caribbean.
The predominant terms of the service contracts and extended warranties
range from twelve (12) to eighty-four (84) months. The Company acts as a third
party administrator on behalf of the dealer/clients and insurance companies. The
actual repairs and replacements required under the service contract agreements
are performed by independent third party authorized repair facilities. While the
dealer/retailer, and, in some instances, a Company subsidiary, are the sellers
of the service contract, the cost of these repairs is borne by the insurance
companies which have the ultimate responsibility for the claims. The insurance
policy indemnifies the dealer/clients and the Company's subsidiary against
losses resulting from service contract claims and protects the consumer by
ensuring their claims will be paid.
The Company's service contract programs benefit consumers with expanded
and/or extensions of product coverage for a specified period of time (and/or
mileage in the case of automobiles and recreational vehicles), similar to that
provided by manufacturers under the terms of their product warranties. Such
coverage generally provides for the repair or replacement of the product, or a
component thereof, in the event of its failure. The Company's service contract
programs benefit the dealer/clients by providing enhanced value to the goods and
services they offer. It also provides the opportunity for increased revenue and
income while outsourcing the costs and responsibilities of operating an extended
warranty program.
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Warrantech Automotive Segment
The Company's Automotive segment markets and administers vehicle service
contract ("VSC") programs, credit life and other related automotive after-sale
products, all of which enhance the profitability of the sale of automobiles,
light trucks, recreational vehicles and automotive components. These products
are sold principally by franchised and independent automobile dealers, leasing
companies, repair facilities, retail stores, and financial institutions.
Additionally, Warrantech Automotive has expanded its efforts in the
automotive field to provide administrative expertise and secure the placement of
insurance coverage to other parties requiring such services on either VSC's or
similar products.
The VSC is a contract between the dealer/lessor (and in some states
Warrantech Automotive) and the vehicle purchaser/lessee that offers coverage
which runs from twelve (12) to eighty-four (84) months and/or 1,000 to 100,000
miles. Coverage is afforded in the event of the failure of a broad range of
mechanical components that occurs during the term of the VSC, exclusive of
failures covered by a manufacturers warranty.
The programs marketed and administered by Warrantech Automotive require
that the dealer enter into an agreement whereby Warrantech Automotive is the
provider of services to the dealer. Among these services is the development and
distribution of marketing materials, processing of dealer produced VSC's, and
the administration and payment of claims filed by contract holders under the
terms of their VSC.
Warrantech Automotive utilizes the services of independent agents to call
on dealers to solicit their use of the VSC programs. At this time, Warrantech
Automotive is represented by more than 90 agents in 46 states as well as Canada.
With respect to the VSC programs which Warrantech Automotive markets and
administers, liability is borne by insurers who have issued insurance policies
to assume this risk in exchange for the payment of agreed upon premiums and
fees. The Company recently reached an agreement with Reliance Insurance Group
(Reliance) pursuant to which Reliance will insure effective January 1, 1999, all
of the Warrantech Automotive VSC programs. Effective from March 1, 1993,
insurance for the Warrantech Automotive VSC programs was provided by the New
Hampshire Insurance Company and other American International Group, Inc. ("AIG")
member companies.
Essential to the success of Warrantech Automotive is its ability to
capture, maintain, track and analyze all relevant data regarding a VSC. To
support this function, the Company operates proprietary software developed
internally that consists of custom designed relational databases with
interactive capabilities. This configuration provides ample capacity and
processing speed for current requirements as well as the ability to support
significant future growth in this area.
Warrantech Consumer Products Segment
The Company's Consumer Product segment develops, markets and administers
consumer product extended warranties on household appliances, electronics and
homes and offers call center and technical computer services. These products
include home appliances, consumer electronics, televisions, computers, home
office equipment and homes. These products are sold principally through
retailers, distributors, manufacturers, utility companies and financial
institutions. Warrantech also direct markets these products to the ultimate
consumer through telemarketing and direct mail campaigns.
The Warrantech Consumer Product segment has developed a niche market by
specializing in the personal computer industry. This segment has expanded to
include some of the premier retailers and distributors of computer and computer
related products. The call center is staffed by technical services
representatives with extensive training in computers and peripherals.
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The Consumer Products segment has one significant customer, CompUSA, which
accounted for approximately 48% of revenue of this business segment. The Company
has notified CompUSA of premium increases imposed by CIGNA Insurance Company. On
June 24, 1999, CompUSA publicly announced as part of a major corporate
restructuring their intentions to leverage their internal call center
capabilities by taking over customer contact regarding extended warranty repair
calls. On June 28, 1999, Warrantech received formal notification of termination
from CompUSA effective July 28, 1999.
The Warrantech Consumer Product segment also develops, markets and
administers service contract programs in the United States covering mechanical
breakdowns of the working systems and components in homes. The core program
protects homeowners against the cost of repairs in case of a breakdown of one or
more of the major home systems including heating and air conditioning, plumbing,
electrical, and built-in appliances. The Warrantech Home Service warranty is one
of the first of its kind. It offers greater protection than what has been
available until now and it provides this security at a lower cost.
The programs marketed and administered by Warrantech Consumer Products
require that the selling dealer, distributor or manufacturer enter into an
agreement with Warrantech that outlines the duties of each party. Those duties
specifically assumed by Warrantech Consumer Products include the development and
distribution of marketing materials, sales and motivational training, processing
of service contracts, operating a call center and the adjustment and payment of
claims. Warrantech has also entered into service center agreements with
independent third party authorized repair facilities located throughout North
America.
In exchange for agreed upon premiums and fees, the liability for claims
incurred by service contracts issued by a dealer, distributor or manufacturer
have been assumed by CIGNA Insurance Company (CIGNA). At the present time, in
addition to CIGNA, certain programs offered by Warrantech Consumer Products are
being insured by Tokio Marine & Fire Insurance Company, Zurich American
Insurance and certain AIG member companies.
It is essential to the success of Warrantech Consumer Products that it be
able to capture, maintain, and analyze all relevant information about its
service contracts. To support this function, Warrantech has internally developed
application programs that allow the tracking of a database for millions of
service contracts. This also allows for the development of current and
historical statistical data, which is used to monitor its service, contract
program's performance, and will also support significant growth of Warrantech's
Consumer Product business.
Warrantech International Segment
In July 1995, Warrantech International, Inc. (WII) acquired Home Guarantee
Corporation plc (subsequently renamed Warrantech Europe Plc.), a British company
which markets home warranty products in the United Kingdom covering mechanical
breakdowns of the working systems and components in homes (e.g., furnaces,
electrical and plumbing systems, and major appliances). In addition to home
warranty products, Warrantech Europe's business has expanded to include extended
warranties on a wide range of products including automobiles, business
equipment, office and home computers, mobile telephones, and major appliances as
well as credit card enhancement programs similar to those marketed in the United
States. This subsidiary also provides database management, marketing, training,
brokerage services, and customer care service for clients in the automotive,
financial, manufacturing, retail and service sectors, including other segments
of the Company.
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WII also conducts its efforts on a direct basis and has developed
relationships with retailers and distributors throughout Puerto Rico, Central
and South America. The Company is currently doing business in Mexico, Chile and
Guatemala.
Sales and Marketing
The sales and marketing activities of Warrantech are managed by each
segment's own sales and marketing personnel. In certain circumstances, the
business segments have entered into marketing agreements with independent
organizations that solicit dealers at their own expense, and receive a
commission on all service contracts sold by such dealers.
The Warrantech business segments foster awareness of their respective
programs through cooperative advertising programs, which may be jointly funded
by Warrantech and the client/dealer or independent agent.
Sales training and motivational programs are a primary form of specialized
assistance provided by the Company to retailers/dealers, distributors and
manufacturers, to assist them in increasing the effectiveness and profitability
of their service contract program sales efforts. The Company develops materials
and conducts educational seminars. These seminars are conducted either at the
client's place of business, an offsite facility or at the Company's
state-of-the-art training facility at its Euless, Texas administrative offices.
This facility features the latest in audio/video technology that enhances the
training and learning experience.
Warrantech also direct markets to the ultimate consumer through
telemarketing and direct mail campaigns. The direct marketing campaigns generate
sales through renewals of expiring contracts and second-effort sales to
customers who did not buy at the time of purchase.
Significant Customers
The Company has one significant customer, CompUSA, which accounted for
approximately 24%, 24% and 23%, respectively, of consolidated gross revenues for
the years ended March 31, 1999, 1998 and 1997. The Company has notified CompUSA
of premium increases imposed by CIGNA Insurance Company. On June 24, 1999,
CompUSA publicly announced as part of a major corporate restructuring their
intentions to leverage their internal call center capabilities by taking over
customer contact regarding extended warranty repair calls. On June 28, 1999,
Warrantech received formal notification of termination from CompUSA effective
July 28, 1999. The loss of CompUSA will have a significant impact on future
revenues. However, the Company believes that this customer has not contributed
significantly to net income and therefore will not be material to operating
results.
Competition
Warrantech competes with a number of independent administrators, divisions
of distributors and manufacturers, financial institutions and insurance
companies. While the Company believes that it occupies a preeminent position
among competitors in its field, it may not be the largest marketer and
administrator of service contracts and limited warranties, and some competitors
may have greater operating experience, more employees and/or greater financial
resources. Further, many manufacturers, particularly those producing motor
vehicles, market and administer their own service contract programs for and
through their dealers.
Insurance Coverage
Liability for performance under the terms of service contracts and limited
warranties issued by clients/dealers, retailers, distributors, utility companies
or manufacturers is assumed by the insurer in return for the payment of the
agreed-upon premium for the assumption of the risk from the insured. This
coverage provides indemnification against loss resulting from service contract
claims and protects the consumer by ensuring that their claim will be paid.
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The insurance protection is provided by highly rated independent insurance
companies. This includes Reliance Insurance Group and CIGNA Insurance Company
which are rated A - (Excellent) by A.M. Best Company. Other programs are insured
by New Hampshire Insurance Company, and other AIG member companies and Tokio
Marine & Fire Insurance Company. These companies are all rated A++ (Superior) by
the A.M. Best Company. Zurich American Insurance Company is an A+ (Superior)
rated carrier by A.M. Best Company. Warrantech is currently in the process of
exploring strategic relations with other highly rated insurance companies
regarding the Consumer Products Services business segment.
In accordance with the insurance arrangements with these insurers, a fixed
amount is remitted for each service contract or limited warranty sold. The
amount is based upon actuarial analysis of data collected and maintained for
each type of coverage and contract term. The insured or the Company are not
obligated to the insurer if claims exceed the premium remitted.
Additionally, agreements between the Company and the insurers may contain
profit-sharing features that permit the Company to share in underwriting profits
earned by the service contract programs. The amounts to be received, if any, are
determined in accordance with certain specified formulas by the type of program
and by policy year. Certain of these agreements require interim calculations and
distributions for various programs, with final calculations being made as
contracts expire by term. The Company did not accrue or receive any profit
sharing amounts during the 1999, 1998 or 1997 fiscal years.
Federal and State Regulation
The service contract programs developed and marketed by the Company's
subsidiaries and their related operations with regard to service contracts and
limited warranties, are regulated by federal law and the statutes of a
significant number of states. The Company continually reviews all existing and
proposed statutes and regulations to ascertain their applicability to its
existing operations, as well as new programs that are developed by the Company.
Generally speaking, these statutes concern the scope of service contract
coverage and content of the service contract or limited warranty document. In
such instances, the state statute will require that specific wording be included
in the service contract or limited warranty expressly stating the consumer's
rights in the event of a claim, how the service contract may be canceled and
identification of the insurance company that indemnifies the dealers,
distributors or manufacturers against loss for performance under the terms of
the service contract.
Insurance departments in some states have sought to interpret the consumer
product service contract, or certain items covered under the contract as a form
of insurance, requiring that the issuer be a duly licensed and chartered
insurance company. The Company and its subsidiaries do not believe that they are
insurers and have no intention of filing the documents and meeting the capital
and surplus requirements that are necessary to obtain such a license.
There are instances where the applicability of statutes and regulations to
programs marketed and administered by the Company and compliance therewith,
involve issues of interpretation. The Company uses its best efforts to comply
with applicable statutes and regulations but it cannot assure that its
interpretations, if challenged, would be upheld by a court or regulatory body.
In any situation in which the Company has been specifically notified by any
regulatory bodies that its methods of doing business were not in compliance with
state regulation, the Company has taken the steps necessary to comply.
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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 750
individuals, an increase of approximately 50 over the preceding fiscal year. The
increase is partly attributable to the conversion of temporary employees as of
March 31, 1999 versus the prior year and to the expansion of customer service
and claims representatives to meet the needs of the Company's expanding
business. None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
Item 2. Properties
The Company's executive offices are located in leased premises at 300
Atlantic Street, Stamford, Connecticut. The premises, which are leased pursuant
to a lease agreement (the "Lease"), consists of approximately 14,317 square feet
for space A and 6,683 square feet for space B. The Lease, which was renewed
effective on April 1, 1998 and expires on March 31, 2005, provide for remaining
annual base rent payments ranging from $207,173 to $472,461 respectively.
The operating facilities are located in leased premises at 150 Westpark
Way, Euless, Texas. The premises, consisting of approximately 25,505 square
feet, are leased pursuant to a lease agreement (the "Texas Lease") which was
favorably renegotiated effective on March 1, 1993 and amended effective on March
1, 1996 to add an additional 1,448 square feet to the original 24,057. The Texas
Lease expires on July 31, 2003 and provides for remaining annual base rent
payments ranging from $323,063 to $352,819.
Effective April 15, 1996, the Company leased an additional 36,814 square
feet at 1441 West Airport Freeway, Euless, Texas to accommodate the expanding
operations of the Company. These premises are being leased pursuant to a lease
agreement that expires March 31, 2004. The lease provides for annual base rent
payments ranging from $404,954 to $441,768 during the term of the lease.
Additional facilities that support the direct marketing operation are
located at 2701/2705 Brown Trail, Bedford, Texas (4,915 square feet). These
premises are leased under the terms of leases (the "Other Leases") that were
effective on December 1, 1994, March 1, 1996 and December 1, 1997 respectively
expiring March 31, 2004, February 28, 2001 and November 30, 1998 respectively.
The Other Leases provide for annual base rent payments ranging from $255,651 to
$177,162. The lease which expired November 30,1998 is currently being utilized
on a month to month basis.
The operating facilities of Warrantech Europe, plc are located in leased
premises at 248A Marylebone Road, London. These premises are leased pursuant to
a lease agreement which expires June 23, 2010 and provides for remaining annual
base rent payments ranging from lb.94,050 to lb.108,450.
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Warrantech International's Puerto Rico operations are located in leased
premises at 1225 Ponce de Leon Avenue, Santurce, Puerto Rico pursuant to a lease
agreement which expires March 31, 2003. The remaining annual base rent payments
range from $52,353 to $54,928.
Item 3. Legal Proceedings
The Oak Agency, Inc. and The Oak Financial Services, Inc. (collectively,
"Oak") v. Warrantech Dealer Based Services, Inc. ("WDBS").
Final judgment in this matter was entered on November 12, 1997. WDBS was
directed to pay Oak (i) $1,243,359 which represents commissions earned
by Oak for the period July 1, 1991 through May 31, 1997, (ii) $28,500
which represents costs of the action recoverable by Oak, and (iii)
future commissions earned on vehicle service contracts sold on or after
June 1, 1997 by a specified group of automobile dealers. Furthermore,
Oak was directed to pay Warrantech Corporation $7,500 which represents
Warrantech's recoverable costs of a separate action which previously had
been dismissed by the Court with prejudice.
WDBS has made all payments described in clauses (i) and (ii) above and
continues to make those periodic payments described in clause (iii). No
further legal action is anticipated and WDBS considers this matter
closed.
Proteva, Inc. v. Warrantech Help Desk, Inc. v. William Lynch, Civil
Action No. 499CV162BE (U.S. District Court, Northern District of Texas).
This matter arose out of an Agreement, effective as of December 9, 1997,
between Proteva, Inc. ("Proteva") and Warrantech Help Desk, Inc.
("Warrantech") pursuant to which Warrantech was to provide
administration services for the warranties on certain personal computers
manufactured by Proteva. In December 1998, Warrantech determined that
Proteva had failed to report a material number of computers subject to
the Agreement and remit the corresponding fees. Therefore, Warrantech
notified Proteva in January 1999 that it was terminating the Agreement.
Proteva sought injunctive relief in the Illinois state courts and
commenced a lawsuit against Warrantech alleging failure to provide
service in accordance with the requirements of the Agreement and failure
to remit certain payments. Warrantech had the litigation removed to
Federal District Court in Chicago and it was subsequently transferred to
the Northern District of Texas. Following that transfer, Warrantech
counterclaimed against Proteva and its Chairman, William Lynch, alleging
fraud and breach of the Agreement arising out of the under-reporting of
computer sales and the failure to remit corresponding fees. The parties
have reached agreement on a Settlement Agreement and Mutual Release
which will result in a final dismissal of this action. Warrantech will
receive financial and other considerations as part of the settlement
although specific details are subject to a confidentiality agreement
among the parties.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders,
through the solicitation of proxies or otherwise, during the fourth
quarter of the Company's fiscal year ended March 31, 1999.
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PART II
EXPLANATORY STATEMENT
As reported in Form 8-K dated July 30, 1999, the Company announced on July
15, 1999 that it is reviewing its accounting policy with respect to revenue
recognition. For the past eight years, the Company has recognized revenue
immediately in direct proportion to costs incurred. The review was undertaken
after the Company's independent auditor, Ernst & Young, raised the issue
concerning the Company's revenue recognition policy shortly before the due date
for filing this Annual Report on Form 10-K for the Company's 1999 fiscal year.
Prior to adopting its revenue recognition policy in 1991, the Company had
its revenue recognition policy reviewed with the Financial Accounting Standards
Board ("FASB") and the Securities and Exchange Commission (the "SEC"). Both FASB
and the SEC concurred with the Company's revenue recognition policy and, as a
result of their affirmation, for the past eight years, the Company has
recognized revenue immediately in direct proportion to costs incurred.
Furthermore, the Company has consistently received unqualified opinions from its
independent auditors.
In view of the issues raised by Ernst & Young, the Company will shortly
again request the views of FASB with respect to the revenue recognition issue to
confirm that its current manner of presentation of its results is still in
conformity with generally accepted accounting principles. It should be
emphasized that the issue concerning the Company's revenue recognition policy
does not involve any accounting irregularities; it only involves a disagreement
with the Company's new auditors as to whether an accounting policy which the
Company has been following for the past eight years should continue to be
followed.
Because of the unresolved issues regarding the Company's financial
statements, the Company was unable to timely file this Report on Form 10-K. As a
consequence of the Company's inability to file this Form 10-K, the Company has
received notice from Nasdaq that the Company's common stock is subject to being
delisted from the Nasdaq Stock Market. The Company has informed Nasdaq that it
is appealing such delisting and a formal hearing with respect to such delisting
has been scheduled for August 27, 1999. Pending the outcome of this hearing, the
Company's common stock will continue to trade on the Nasdaq system under the
symbol "WTECE". In light of the Nasdaq action, and the recent weakness in the
Company's common stock, as well as to clarify any confusion regarding the
Company's financial condition and operations and to address rumors regarding
such financial condition and operations, the Company has decided to file this
Form 10-K, including all of the information required under Parts I, III and IV
plus Item 5 of Part II, but excluding the information required to be provided
under Part II with respect to the Company's financial statements and
management's discussion and analysis of results of operations and financial
condition, which will be promptly filed by amendment following the resolution of
the issue regarding revenue recognition and the completion of the audit of the
Company's financial statements.
The Company's Revenue Recognition Policy
Ernst & Young has informed the Company that it believes that the Company's
revenue recognition policy should be changed because in recent years the
Company's subsidiaries have been classified as the obligors for a portion of the
service contracts which they administer, and as a result, the Company should be
required to straight line its revenues over the duration of the service
contracts, as opposed to the current method, in which the Company recognizes
revenues in direct proportion to the cost incurred.
The Company's management believes that Ernst & Young is not correct because
100% of the risk related to the payment of claims under the service contracts is
and has been covered by an unaffiliated insurance company and the Company and
its subsidiaries are not exposed to any risk of payment for claims. All the
insurance companies used by the Company to cover the claims made by consumers
under the service contracts are rated not less than Excellent by A.M. Best &
Company.
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The Company, through its wholly owned subsidiaries, designs and provides
administration for, Extended Service Contract (ESC) Programs, which are sold
through retailers, utility companies and financial institutions in conjunction
with their sale of consumer products such as televisions, VCR's, computers, home
office equipment, stereo equipment, refrigerators and other electronic and
household appliances, and dealers in automotive products such as automobiles,
trucks and recreational vehicles. In addition, the Company offers its program
development and administrative expertise and services to manufacturers and
insurance companies as an administrator of warranty programs. The International
segment provides these same services outside the United States predominately in
the United Kingdom, Central and South America, Puerto Rico and the Caribbean.
An ESC program provides the retailer's customer with an extension, for a
specified period of time (or mileage, in the case of automotive related
programs), of coverage similar to that provided by the manufacturer under the
terms of their product warranty(s). This coverage generally provides an
insurance arrangement for the repair or replacement of the product, or a
component thereof, in the event of a failure in workmanship or parts. Except for
a small deductible paid by the consumer, in some of the programs, the repair or
replacement will be provided by the insurance company at no cost to the consumer
during the term of the contract.
The extended service contract is a transaction consummated by the retailer
with the consumer. Some of the transactions occur with the business being
"Dealer Obligor", while other transactions occur as "Administrator Obligor". In
both cases, the obligation is assumed in total by the insurer. The length of
term of the ESC ranges from one year to seven years, with an average of four
years.
The payments made by the consumer for the ESC and claims made by the
consumer under the ESC are handled in the same manner regardless of whether the
Company or the retailer is classified as the obligor under the ESC. In either
instance, the Company acts as intermediary between the customer who receives the
service contract and the insurance company which pays the claims under the
service contract. The retailer receives payment from the consumer and, after
deducting a commission, forwards the balance to the Company as trustee for the
insurance company. The Company, in turn, retains a fee for its Program
Development, Marketing and Sales, Regulatory Compliance and Data Acquisition
efforts required in the installation of the ESC program and deposits the balance
of the amount received from the retailer or dealer into a trust account for the
benefit of the insurance company. The Company is designated as the Administrator
or Managing General Agent of the insurance carrier which covers claims under the
vehicle service contracts administered by the Company. Certain of the Company's
subsidiaries are licensed as insurance agents or brokers in most states. The
monies deposited into the trust account are deemed to be premiums under the
agent/administrator agreements between the Company and the insurance company.
When a claim for repair is made by a consumer under the ESC, the consumer
calls the Company. The Company evaluates the claim and, if it is covered, the
Company refers the consumer to an independent repair facility to make the
repair. The Company itself does not make the repair. After the repair is made,
the Company causes a check to be drawn from the insurance carrier's trust
account and arranges for payment to the repair facility.
Whether the Company or the retailer is the seller/obligor under the ESC,
the risk of loss is borne 100% by the insurance company under a Contractual
Liability Insurance policy in which the Company and retailer or dealer are named
insureds. All of the ESC's marketed under the ESC program contain a provision
which gives the consumer the express right to assert a claim against the
insurance carrier directly for the cost of the repair. Some states have statutes
or regulations which give the consumer this "pass through" right as a matter of
law. If the payments for claims under the ESC's exceed the premium reserves
maintained by the insurance company, the insurance company incurs the loss and
no portion of such loss may be charged to the Company.
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Prior Review of Revenue Recognition Policy
In 1991, the Company sought the views of FASB and the SEC staff regarding
the Company's application of the revenue recognition policy described above to
the Company's operations and, in particular, confirmation that FASB Technical
Bulletin 90-1 ("TB 90-1"), which would require revenue to be recognized on a
straight line basis rather than in direct proportion to costs incurred, was not
applicable to the Company. The Company's accountants received an informal
opinion from FASB that TB 90-1 is not appropriate if an ESC obligor transfers
risk of loss through the purchase of insurance. In such case, the full cost of
insurance would have to be known and fixed and all risk of loss must be
transferred to the carrier. Based on such informal opinion, the Company
requested a determination from the SEC staff that TB 90-1 would not be
applicable and that the Company was permitted to continue to use the
proportional method of revenue recognition. In a letter dated November 15, 1991,
the Company was informed that the staff would not object to the conclusions of
the Company and its independent accountants that TB 90-1 is not applicable and
that proportional revenue recognition is appropriate.
Anticipated Impact of any Required Change in Revenue Recognition Policy
The Company believes that the revenue recognition policy which it has
followed over the past eight years correctly reflects the economic reality of
its business because it enables the Company to match revenues with expenses.
Under its present accounting policy, the Company includes in the revenue which
it recognizes the premiums which it receives from the dealers and retailers
because, pursuant to its agreements with the insurance companies, the Company is
required immediately to deposit those premiums into the insurance companies'
trust accounts for the payment of claims. Under the accounting policy proposed
by Ernst & Young, the Company would be required to defer a substantial portion
of the premium revenues over the life of the service contracts even though the
Company is not required to expend any of its own assets for claims which are
made.
Because the Company is seeking review of its revenue recognition policy, it
has not reported and filed its financial results for the fourth quarter and
fiscal year ended March 31, 1999. Under the revenue recognition policy which the
Company has been following, the Company would have reported a net loss of
$709,000 for the fourth fiscal quarter of 1999 and a net loss of $1.1 million
for the fiscal year ended March 31, 1999. These are unaudited results and they
are subject to change in the event that it is determined, following FASB review,
that the Company is required to recognize revenue in accordance with TB 90-1. If
the Company is required to utilize TB 90-1, assuming that the results of prior
years are restated in conformity with such Technical Bulletin, it is likely that
shareholders' equity would be substantially adversely impacted. However, the
Company does not believe that the accounting change would have a material effect
on the Company's operation or cash flow. The Company is in the process of
completing its analysis of what its financial results would be under TB 90-1 for
the fiscal year ended March 31, 1999 and prior years. Depending upon the
magnitude of the restatement, it is possible that the Company would fail to
satisfy certain Nasdaq listing criteria, which could be an additional basis for
termination of the Company's Nasdaq listing.
As a practical matter, if the Company were required to change its revenue
recognition policy to that required under TB 90-1, the effect would be to
substantially distort the results of operations and the Company's financial
condition because of the significant delay in recognizing revenues as an offset
to recognized expenses. The Company further believes that such a presentation
would result in a gross distortion of the Company's operations which would be
materially misleading to shareholders and others with which the Company does
business.
Under such presentation, the Company's prior period revenues could be
significantly reduced with a corresponding increase in revenues in future
periods. Earnings for current and prior periods could be reduced or eliminated
entirely and losses increased. However, there could be a corresponding increase
in earnings in future periods.
11
<PAGE>
The Company believes that its revenue recognition policy is an industry
standard followed by public companies in the service contract administration
business. It is the Company's understanding that other publicly held service
contract administrators which are subject to SEC reporting requirements
recognize revenue in the same manner as the Company. The Company believes that
this industry practice is correct in that its present revenue recognition policy
provides the most realistic and faithful representation of the Company's
operating results - and it is far more meaningful to investors, shareholders,
customers and vendors than that which would result from recognition of revenue
under the TB 90-1 guidelines.
The Company's Immediate Plans
As previously indicated, the Company is proceeding to request a review of
its revenue recognition policy by FASB, which it expects to submit to FASB
shortly. The Company will submit written materials in support of its appeal of
the Nasdaq delisting action no later than Wednesday, August 4, 1999 and will
proceed with its appeal of such Nasdaq action. The Company also will continue to
consider alternatives to its present operating model which might have the effect
of minimizing or eliminating the TB 90-1 issue so that its impact, if the result
of FASB inquiry is unfavorable, can be minimized. There can be no assurance that
any such alternative structure will be available to the Company.
Safe Harbor Statement made pursuant to the Private Securities Litigation
Reform Act of 1995
The foregoing Explanatory Statement may contain statements which are
forward looking in nature. It should be understood that, at this time, the
correct accounting policy to apply or the potential impact of the accounting
policy which is ultimately adopted has not conclusively been determined. While
management believes that the revenue recognition policy which the Company has
followed is the proper policy, no assurance can be made that FASB or the SEC
will continue to concur with the Company's position. Many accounting policies
are subject to different interpretations by accountants and governing
organizations.
12
<PAGE>
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock has been reported in the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), and currently is
reported on NASDAQ's National Market System ("NMS"), under the trading symbol
"WTEC".
As of August 2, 1999 there were 15,222,861 Common Shares outstanding. On
that date, the closing bid price for the Company's common stock, as reported by
NASDAQ was $1.75.
Following is a summary of the price range of the Company's Common Stock
during its 1999 and 1998 fiscal years and the first quarter of fiscal year 2000:
<TABLE>
<S> <C> <C>
Common Stock
High & Low Bid
Quarter of Fiscal 2000
First $ 3.81 $ 2.44
Quarter of Fiscal 1999
First $ 7.44 $ 3.94
Second $ 4.31 $ 2.44
Third $ 4.25 $ 2.44
Fourth $ 5.00 $ 2.72
Quarter of Fiscal 1998
First $12.38 $ 8.88
Second $12.81 $ 9.25
Third $13.25 $ 7.88
Fourth $10.69 $ 5.19
</TABLE>
The number of shareholders of record of the Company's Common Stock as of
August 2, 1999 was 983.
Dividends
No cash dividends have been paid to holders of Common Stock since inception
of the Company. The Company anticipates that, in the foreseeable future,
earnings, if any, will be retained for use in the business or for other
corporate purposes and it is not anticipated that cash dividends will be paid.
Item 6 - Selected Financial Data
TO BE FILED BY AMENDMENT
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
TO BE FILED BY AMENDMENT
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
TO BE FILED BY AMENDMENT
13
<PAGE>
Item 8. Financial Statements and Supplementary Data
TO BE FILED BY AMENDMENT
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
N/A
14
<PAGE>
PART III
Item 10. Directors And Executive Officers Of The Registrant
The Company's Board of Directors consists of five directors. All directors
hold office until the next annual meeting and until their successors are duly
elected and qualified.
<TABLE>
<S> <C> <C> <C>
Director
Name Age Positions with Company Since
Joel San Antonio 46 Chairman of the Board, Chief Executive Officer
and Director 1983
William Tweed 59 Director 1983
Jeff J. White 48 Director 1983
Lawrence Richenstein 46 Director 1993
Gordon A. Paris 46 Director 1998
</TABLE>
No family relationships exist among any of the Company's executive officers
or directors, except that Randall San Antonio, President of Warrantech Direct,
Inc., a subsidiary of the Company, is the brother of Joel San Antonio.
The business experience of each of the Company's directors is as follows:
Joel San Antonio, 46, one of the Company's founders, was a director, Chief
Executive Officer and President of the Company from incorporation through
February 1988. Since February 1988 Mr. San Antonio has been a director, Chief
Executive Officer and Chairman of the Board of Directors and since October 1989,
he has also been Chairman and Chief Executive Officer of the Company's principal
operating subsidiaries. In 1975, Mr. San Antonio founded and, thereafter through
August 1982, served as President of Little Lorraine, Ltd., a company engaged in
the manufacturing of women's apparel. Mr. San Antonio is currently a member of
the Southwestern Connecticut Area Commerce & Industry Association, the World
Forum, the Connecticut Business and Industry Association, the Metropolitan
Museum of Art, and the Young Presidents' Organization, Inc. Mr. San Antonio has
been a director of Corniche Group Incorporated, a company in insurance and/or
insurance-related businesses based in Euless, Texas, since May 1998.
William Tweed, 59, one of the Company's founders, was a director, Vice
President and Secretary of the Company from incorporation through February 1988.
From February 1988 until April 1996, Mr. Tweed was a director and President of
the Company. From April 1996 to March 1998, Mr. Tweed was Executive Vice
President of European Operations and director for the Company. Mr. Tweed
relinquished his title of Vice President on April 1, 1998. From July 1976
through August 1982, he was Vice President of Little Lorraine, Ltd. Mr. Tweed
served as a director of Nationwide Extended Warranty Service, Inc. from on or
about October 1981 through on or about January 1983.
Jeff J. White, 48, one of the Company's founders, has been a director of
the Company from its inception. Mr. White was Vice President of the Company from
its inception until June 1988 and Treasurer of the Company from its inception
until October 1990. In September 1982, Mr. White, with two partners, established
Marchon Eyewear, Inc. a leading international distributor and manufacturer of
eyewear and sunwear, including such worldwide well-known collections as Calvin
Klein, Fendi, Disney, and Flexon, their patented frames utilizing a
state-of-the-art metal with a "memory". He is Co-President of Marchon (along
with his two partners) and is responsible for internal operations, information
systems, and interfacing with counsel on patent, trademark, and general legal
matters. Mr. White also serves as an associate trustee of the North Shore
University Hospital Health System.
15
<PAGE>
Lawrence Richenstein, 46, has been a director of the Company since 1993. In
early 1997, Mr. Richenstein formed Laral Group LLC. Laral Group manufacturers a
line of wireless audio/video and computer accessories under its Unwired brand.
It is also an OEM supplier of wireless multimedia products to the automotive
market. Mr. Richenstein has been President and Chief Executive Officer of Peak
Ventures, Inc., since May 1996. Peak Ventures, Inc., located in Farmingdale, New
York, provides services to the consumer electronics industry. Mr. Richenstein
also has been a managing member of Long Hall Technologies, L.L.C. since 1994.
Long Hall Technologies, L.L.C. is a consumer electronics company located in
Farmingdale, New York. Long Hall Technologies manufactures products under the
Nickelodeon brand under license from MTV Networks. From 1985 until July 1996,
Mr. Richenstein was President and Chief Executive Officer of Lonestar
Technologies, Ltd., a consumer electronics company located in Hicksville, New
York. Lonestar Technologies, Ltd. filed for Chapter 11 bankruptcy protection on
January 22, 1996. The proceeding was subsequently converted to a Chapter 7
bankruptcy liquidation effective July 2, 1996. In addition to having sales and
marketing experience, Mr. Richenstein is involved in product development. Mr.
Richenstein is an attorney admitted to practice in New York and has, in the
past, served as a director of two public companies, both of which were involved
in the electronics industry.
Gordon A. Paris, 46, has been a director of the Company since April 1998.
Mr. Paris is Managing Director and Group Head of High Yield Origination and
Capital Markets and Mergers and Acquisitions at TD Securities (USA) Inc., a
subsidiary of The Toronto-Dominion Bank since March 1996. From June 1994 to
March 1996, Mr. Paris was a Managing Director in the Leveraged Finance Group
with CS First Boston. From March 1991 to June 1994, Mr. Paris was a Managing
Director at Lehman Brothers in charge of the High Yield and Restructuring Group.
Other Executive Officers and Key Employees
Michael A. Basone, 41, has been Vice President and Chief Information
Officer since joining the Company in August 1994 and Chief Operating Officer
since January 1997 and Executive Vice President since April 1998. From 1986 to
1994, Mr. Basone held various management positions with Pepsi-Cola
International, ultimately serving as Director of Management Information Systems.
Desiree Kim Caban, 34, has been Secretary of the Company since July 1993
and Senior Vice President of Human Resources since April 1998. From October 1996
to March 1998, Ms. Caban was the Vice President of Human Resources. Prior to
October 1996 and since 1989, Ms. Caban served as the Executive Assistant to the
Chairman and the Office Services Manager for the Company. She has been employed
by the Company since May 1986. Ms. Caban is currently a member of the National
Association for Female Executives and a member of the Society for Human Resource
Professionals.
Jeanine Folz, 34, has been the Senior Vice President of Insurance Services
since April 1998 and has been Assistant Secretary of the Company since January
1995. From October 1995 to March 1998 Ms. Folz was the Vice President of
Insurance Services. Ms. Folz joined the Company in 1987. From 1987 to 1995, Ms.
Folz held various positions including Director of Insurance Services and other
customer service and project analyst positions. She is currently a member of the
Risk and Insurance Management Society and the National Association for Female
Executives.
Christopher Ford, 51, has been President of Warrantech Automotive Inc., a
wholly owned subsidiary of the Company, since May 1999. From 1994 until 1999,
Mr. Ford held various executive positions with American International Group
(AIG) in Japan and Australia. From 1968 until 1979 Mr. Ford held various
management positions with The Ford Motor Company and American Motors Jeep
Corporation. From 1989 to 1994 he held several key marketing and management
positions within the vehicle service contract industry.
Richard F. Gavino, 52, has been Executive Vice President, Chief Financial
Officer, Chief Accounting Officer and Treasurer since April 1998. From 1995 to
March 1998, Mr. Gavino was Chief Financial Officer at Maxon Auto Group, one of
the largest automobile retailers in New Jersey. From 1993 to 1995, Mr. Gavino
was a turnaround consultant. From 1984 to 1993, Mr. Gavino was Senior Vice
President and Chief Financial Officer of Tops Appliance City, a publicly traded
consumer electronics and appliance superstore chain.
Ronald Glime, 54, has been President of U.S. and Canadian Operations since
March 1999. From October 1992 to March 1999 Mr. Glime was President of
Warrantech Automotive, Inc., a wholly owned subsidiary of the Company. Prior
thereto he was Regional Sales Manager for Warrantech Automotive, Inc. (then
known as Warrantech Dealer Based Services, Inc.) from February 1991 through
October 1992. From 1983 through February 1991, Mr. Glime was an independent
insurance agent for various insurance companies. From 1978 through 1982, Mr.
Glime was employed by American Warranty Corp., a company in the warranty
administration business. He resigned as its President in 1982. Mr. Glime has
been a director of Corniche Group Incorporated, a company in the insurance
and/or insurance-related businesses based in Euless, Texas, since May 1998.
16
<PAGE>
Sean Hicks, 32, has been Chief Operating Officer for Warrantech Consumer
Product Services, Inc. and Warrantech Help Desk Inc. since May 1999 and
President of Warrantech Home Service Company since January 1999. Mr. Hicks
joined Warrantech Home Service Company in 1997 as Vice President Operations and
was later appointed to Senior Vice President, Marketing and has served in that
capacity until January 1999. With over 10 years experience in the service
industry, Mr. Hicks previously was Director of Product Services at Montgomery
Ward and held various positions with Sears, Roebuck & Co., Inc.
Andrew Impavido, 57, has been Senior Vice President of Warrantech
Motivation, a Corporate Division which consists of Training and Development,
Multimedia Services, and Corporate Communications since April 1998. Mr. Impavido
joined the Company in 1991 as Director of Training and has held the position of
Vice President of Training and Development prior to his present position. Prior
thereto, Mr. Impavido had spent over 25 years in the retail industry and has
held various management and training positions, with industry leaders such as
Sears, Montgomery Ward, and the 350 store Belk Chain.
James F. Morganteen, 49, has been General Counsel for the Company since
April 1997 and Senior Vice President since February 1998. Mr. Morganteen most
recently served as a Vice President for Bankers Trust of New York with
responsibility for counseling its OTC risk management operations. From 1987
through 1994, Mr. Morganteen served as Senior Counsel to Xerox Corporation
managing the legal function of Xerox Credit Corporation, the financial services
unit of Xerox Corporation.
Richard Rodriguez, 45, has been President of Warrantech International,
Inc., a wholly owned subsidiary of the Company, since May 1999. From April 1998
until May 1999, Mr. Rodriguez was President of Warrantech Consumer Product
Services, Inc., a wholly owned subsidiary of the Company. From December 1996
until March 1998, Mr. Rodriguez has been Vice President and Managing Director of
Warrantech International, Inc. From February 1992 until December 1996, Mr.
Rodriguez served as Chief Operating Officer of the Company's Texas operating
facilities. From 1987 until 1992, Mr. Rodriguez served in various executive
positions with the Company. Prior to 1987, Mr. Rodriguez served as an executive
and/or consultant to retailers and manufacturers of consumer electronic
products.
Randall San Antonio, 45, has been President of Warrantech Direct, Inc., a
wholly owned subsidiary of the Company, since June 1996 and from May 1994 to
June 1996 served as that subsidiary's Vice President and General Manager. Prior
thereto he was Vice President of Finance of Castle Hill Productions Inc. from
June 1984.
Judith M. Thomas, 45, has been President of Warrantech Help Desk, Inc., a
wholly owned subsidiary of the Company, since April 1997. Ms. Thomas has been
President of Unlimited Business Services, Inc., a consulting company that
specializes in the improvement of operational, financial and revenue streams of
major retailers, including the development and implementation of service
contract programs since 1993. From 1970 until 1993 Ms. Thomas was employed by
Highland Superstores, holding various positions during her tenure, ending her
employment with that Company as Corporate Vice President-Operations.
Information Concerning Meetings of the Board of Directors
During the fiscal year ended March 31, 1999, the Board of Directors held
seven meetings. All such meetings were fully attended. The Company has an Audit
Committee consisting of Messrs. Paris, Richenstein and White. Such committee met
three times during the 1999 fiscal year. The Company has a Compensation
Committee consisting of Messrs. Paris, Richenstein and White. This committee met
once during the 1999 fiscal year.
17
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table provides information for the years ended March 31,
1999, 1998 and 1997, concerning the annual and long-term compensation of the
Chief Executive Officer and the next four highest paid executive officers of the
Company for the fiscal year ended March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards (1)
--------------------------------------------- --------------------------
Other Annual Restricted Stock Stock Option All Other
Name of Principal Positions Year Salary Bonus Compensation (2) (Shares) Awards (Shares) Compensation
Awards (3)
Joel San Antonio 1999 $590,430 $1,600 $29,750 $ - 400,000 $2,245
Chairman of the Board 1998 557,865 211,941 28,104 - - 1,070
and Chief Executive Officer 1997 507,150 193,089 26,525 - - -
Ronald Glime 1999 $200,000 $52,951 $9,523 $ - 70,816 $1,547
President of U.S. and Canadian 1998 160,385 110,903 7,837 - - 1,972
Operations 1997 137,404 60,500 4,034 - 24,749 -
Richard F. Gavino 1999 $182,308 $25,000 $9,587 $25,000 92,308 $ -
Executive Vice President, Chief 1998 - - - - - -
Financial Officer and Treasurer 1997 - - - - - -
Judith M. Thomas 1999 $171,154 $2,999 $15,985 $50,000 24,490 $ 702
President of Warrantech Help 1998 150,000 45,050 30,230 - - 455
Desk, Inc. 1997 - - - - - -
Michael A. Basone 1999 $193,269 $400 $12,677 $ - 32,653 $1,106
Executive Vice President, Chief 1998 158,939 43,277 12,318 - - 2,341
Information Officer and 1997 159,940 25,100 15,343 - 11,600 -
Chief Operating Officer
</TABLE>
The 1998 Stock Option Plan is the Company's only long-term incentive
plan.
(2) Included in Other Annual Compensation are auto allowances given to
each officer in fiscal 1997, 1998 and 1999, life insurance premiums
for the years 1997, 1998 and 1999, and relocation expenses paid Mr.
Basone in fiscal 1997 and Ms. Thomas in fiscal 1998.
(3) Represents amounts contributed by the Company in accordance with the
Company's 401(K) Plan.
18
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to options
to purchase Common Stock granted during the fiscal year ended March 31, 1999 to
each of the named executive officers.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Potential Realizable Value
At Assumed Annual Rates
Of Stock Price Appreciation
_________________________Individual Grants__________________________ ___For Option Term_(1)_
Number of % of Total
Securities Options/SARs
Underlying granted to Exercise or
Options/SARs Employee in Fiscal Base Price Expiration
Granted Year Per Share Date 5% ($) 10% ($)
Joel San Antonio 400,000 43.2% 3.370 08/24/03 1,627,514 2,053,722
Ronald Glime 40,816 4.4% 6.125 04/26/08 211,954 337,501
30,000 3.2% 3.500 03/14/09 155,787 248,066
Richard F. Gavino 92,308 10.0% 3.250 04/26/08 479,348 763,281
Judith M. Thomas 24,490 2.6% 6.125 04/26/08 127,175 202,504
Michael A. Basone 32,653 3.5% 6.125 04/26/08 169,564 270,003
</TABLE>
(1) Based upon the Company's price per share of $3.188, as reported on NASDAQ
National Market System on March 31, 1999.
19
<PAGE>
Options Exercised and Holdings
The following table sets forth information with respect to the individuals
listed in the Summary Compensation Table above, concerning options exercised
during, and unexercised options held as of the end of, the 1999 fiscal year.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Shares Acquired Number of Unexercised Options at Value of Unexercised In-the-Money
Name On Exercise Value Realized Fiscal Year-End(#) Options at Fiscal Year-End ($)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------
Joel San Antonio 1,204,080 $ 4,515,300 - 400,000 $ - $ -
Ronald Glime - - 24,749 70,816 - -
Richard F. Gavino - - - 92,308 - -
Judith M. Thomas - - - 24,490 - -
Michael A. Basone - - 14,458 34,557 - -
</TABLE>
(1) Based upon the Company's price per share of 3.188, as reported on the
NASDAQ National Market System on March 31, 1999.
20
<PAGE>
Employment Agreements
On August 25, 1998, the Company entered into a five year employment
agreement, effective April 1, 1998, with Joel San Antonio. Under the terms of
the agreement, Mr. San Antonio's initial base compensation is $585,000 per
annum, subject to an increase of 5% per annum beginning January 1, 1999 through
the term of the agreement. Mr. San Antonio is entitled to be reimbursed for all
ordinary, reasonable and necessary expenses incurred by him in the performance
of his duties, including an automobile allowance of $12,000 per annum. The
Company provides Mr. San Antonio with a comprehensive medical dental insurance
policy as well as disability coverage and a life insurance death benefit policy
in excess of $1,000,000. Mr. San Antonio is entitled to an incentive bonus equal
to 2% of the net after tax profits of the Company. In connection with his
entering into such agreement, the Board awarded Mr. San Antonio options to
purchase an aggregate of 400,000 shares of the Company's common stock at an
exercise price of $3.37 (fair market value on the date of grant plus 10%) per
share, all of which options vest contingent upon the Company achieving certain
specified performance goals. The employment agreement continues in full force
and effect for additional one year periods unless either party terminates by
giving 90 days written notice prior to the end of any term or renewal term. Mr.
San Antonio also entered into an agreement not to compete for two years with the
Company which may be exercised by the Company upon the expiration or earlier
termination of the employment agreement by delivery to Mr. San Antonio of an
aggregate of 100,000 shares of the Company's common stock.
Effective January 1, 1998 the Company entered into an employment agreement
with Michael Basone to serve as the Company's Executive Vice President, Chief
Information Officer and Chief Operating Officer. Under the terms of such
Agreement, Mr. Basone's current salary is $200,000, subject to automatic
increases of 5% after the first fifteen months and annually thereafter during
the term of the Agreement. Mr. Basone was granted stock options in April 1998,
pursuant to the Agreement, to purchase $200,000 of the Company's stock which
vest equally over a three year period. In addition he will be entitled to
receive cash bonuses based upon the Company and its subsidiaries achieving
certain revenue and operating goals. The Company provides Mr. Basone with
medical and dental insurance, an automobile allowance of $6,000 per annum and
life insurance benefits similar to that provided by the Company to certain of
its other executives.
Effective January 1, 1998 Warrantech Automotive, Inc. entered into a
five-year employment agreement with Ronald Glime, its President. Under the terms
of such Agreement Mr. Glime is entitled to an initial annual base salary of
$200,000 subject to automatic increases of 5% after the first fifteen months and
annually thereafter during the term of the Agreement. Effective April 1, 1999,
Mr. Glime's annual base salary, in conjunction with his new role as President of
U.S. and Canadian Operations, was changed to $275,000. Mr. Glime was granted
stock options in April 1998, pursuant to the Agreement, to purchase $250,000 of
the Company's stock which vest equally over a five year period. Mr. Glime is
entitled to receive a cash bonus based upon a percentage of Warrantech
Automotive, Inc.'s operating performance. The Company provides Mr. Glime with
medical and dental insurance, an automobile allowance of $6,000 per annum and
life insurance benefits similar to that provided by the Company to certain of
its other executives.
Effective April 16, 1998, the Company entered into a three year employment
agreement with Mr. Richard F. Gavino to serve as the Company's Executive Vice
President, Chief Financial Officer and Treasurer. Under the terms of such
Agreement, Mr. Gavino is entitled to an initial annual base salary of $200,000
subject to annual increases of 5%. Mr. Gavino received a $25,000 bonus upon
signing of the employment agreement. Mr. Gavino was granted stock options,
pursuant to the Agreement, to purchase $25,000 of the Company's stock which vest
at the end of the first year and to purchase $300,000 of the Company's stock
which vest equally over a three year period. Mr. Gavino is entitled to receive a
cash bonus based upon a percentage of Company's operating performance. The
Company provides Mr. Gavino with medical and dental insurance, an automobile
allowance of $6,000 per annum and life insurance benefits similar to that
provided by the Company to certain of its other executives.
21
<PAGE>
Effective April 1, 1997, the Company and Warrantech Help Desk, Inc. entered
into a five year employment agreement with Judith Thomas, its President. Under
the terms of such Agreement Ms. Thomas is entitled to an initial annual base
salary of $150,000 subject to automatic increases of 5% annually. Effective
April 1, 1998, Ms Thomas' annual base salary was adjusted to $175,000. Ms.
Thomas received a $50,000 stock bonus upon signing of the employment agreement.
The stock was granted in April 1998. Ms. Thomas is entitled to receive a cash
bonus equal to a percentage of her current base salary upon the attainment of
certain operating goals established for Warrantech Help Desk, Inc. The Company
provides Ms. Thomas with medical and dental insurance, relocation benefits, an
automobile allowance of $6,000 per annum and life insurance benefits similar to
that provided by the Company to certain of its other executives.
Other Incentives and Compensation
The Company has provided executives equity-based long-term incentives
through its 1998 Employee Incentive Stock Option Plan, which was designed to
award key management personnel and other employees of the Company with bonuses
and stock options based on the Company's and the employee's performance.
The Company provides executive officers with an incentive bonus plan, which
provides cash and/or stock bonuses upon meeting certain performance criteria.
The Company provides an incentive bonus plan for all employees for the
referral of potential new employees for employment by the Company who are
subsequently hired by the Company. The amount of the bonus is predicated on the
skill and professional level of the new employee.
Additionally, the Company provides an incentive bonus to existing employees
who are claims adjusters for obtaining and maintaining certification as
professionals in their field.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and directors and persons who own more than 10% of
a registered class of the Company's equity securities file reports of ownership
and changes in ownership with the Securities and Exchange Commission (the
"Commission"). Officers, directors and greater than 10% 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, 1999, all Section 16 filing requirements applicable
to its officers, directors and greater than 10% beneficial owners were complied
with.
Non-Management Directors' Compensation
Effective January 1, 1998, each non-employee director is entitled to
receive compensation of $2,500 plus 250 shares of Company stock per calendar
quarter of board service. Committee service is compensated at $500 plus 62.5
shares of Company stock per calendar quarter. During fiscal 1999, the following
cash amounts were paid:
William Tweed $10,000
Jeff J. White 14,000
Lawrence Richenstein 14,000
Gordon A. Paris 12,000
No directors' fees are payable to employees of the Company who serve as
directors.
22
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of June 30, 1999 concerning
shares of Common Stock, par value $.007 per share, the Company's only voting
securities, owned beneficially by each of the Company's directors by each person
who is known by the Company to own beneficially more than 5% of the outstanding
voting securities of the Company and by the Company's executive officers and
directors as a group.
<TABLE>
<S> <C> <C>
Name and Address of Beneficial Owner Amount and Nature of Percent
Beneficial Ownership of Class
Joel San Antonio 3,201,648 shares(1) 21.03%
300 Atlantic Street
Stamford, Connecticut 06901
William Tweed 1,841,236 shares(2) 12.10%
300 Atlantic Street
Stamford, Connecticut 06901
Jeff J. White 1,591,910 shares(3) 10.46%
35 Hub Drive
Melville, New York 11747
Lawrence Richenstein 12,750 shares .08%
500 Eastern Parkway
Farmingdale, New York 11735
Gordon A. Paris 1,625 shares -
31 West 52nd Street, 22nd floor
New York, New York 10019-6101
All directors and executive officers
as a group (17 persons)
6,960,210 shares(1,2,3,4) 45.09%
</TABLE>
__________________
(1) Includes 5,000 shares held by Mr. San Antonio as custodian for two minor
children. Includes 10,800 shares owned by Mr. San Antonio's wife as to
which he disclaims beneficial ownership. Does not include 13,354 shares
owned by Mr. San Antonio's brother and sister-in-law and 5,000 shares
owned by his mother as to which he disclaims any beneficial interest.
Includes an aggregate of 200,000 shares held in trusts for his children,
of which Mr. San Antonio's wife is a trustee as to which Mr. San Antonio
disclaims beneficial ownership.
(2) Includes 23,000 shares held by Mr. Tweed as custodian for one child.
Does not include an aggregate of 7,500 shares held by Mr. Tweed's mother
and sister. Includes 1,500 shares held by Mr. Tweed's wife, and 25,000
shares held in trust for the benefit of Mr. Tweed's granddaughter, of
which Mr. Tweed's wife is the trustee, as to which he disclaims any
beneficial interest.
(3) Does not include an aggregate of 90,000 shares owned by Mr. White's
mother and sister as to which he disclaims any beneficial interest.
(4) Includes options held by executive officers of the Company to purchase
an aggregate of 214,706 shares, which are presently exercisable.
Item 13. Certain Relationships and Related Transactions
On April 1, 1996 Michael Salpeter, former President and Director of the
Company, and William Tweed, former President and Director of the Company,
entered into an Agreement whereby Mr. Tweed granted to Mr. Salpeter an option to
purchase 487,000 shares of common stock owned by Mr. Tweed. Such options were
exercisable at various prices in whole or in part, and expire on October 22,
2000. In May 1998, such Agreement was modified, pursuant to which Mr. Salpeter
relinquished his rights with respect to 125,000 shares, leaving an option
exercisable for 362,000 shares. In March 1999, 62,000 shares were purchased
under the Agreement leaving an option exercisable for 300,000 shares.
23
<PAGE>
On July 6, 1998 Joel San Antonio, Chairman and Chief Executive Officer, and
William Tweed and Jeff J. White, members of the Board of Directors, exercised
3,000,000 of their vested options to purchase Warrantech Corporation common
stock. Promissory Notes totaling $8,091,430 were signed with interest payable
over three years at an annual interest rate of 6%. The promissory notes, which
are with recourse and secured by the stock certificates issued, mature July 5,
2001. An additional promissory note was signed by Joel San Antonio for $595,634
on March 22, 1999 which represents the amounts funded by the Company with
respect to his payroll taxes for the exercise of these options. On March 25,
1999, Messrs. Jeff J. White and William Tweed sold 155,000 and 100,000 shares
respectively of Warrantech Corporation common stock to the Company at $3.25
(closing price per share on 3/25/99 less $.25) per share to satisfy tax
liabilities related to the exercise of their options.
Warrantech Consumer Product Services, Inc. and Warrantech Direct, Inc. have
made commission payments to Unlimited Business Services, Inc. totaling $328,690
for the fiscal year 1999 pursuant to Representative Agreements. Judith Thomas,
President of Warrantech Help Desk, Inc. is the President of Unlimited Business
Services, Inc.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. and 2. Financial Statements and Financial Statement Schedule: see
accompanying Index to Financial Statements and Financial Statement
Schedule, page 21.
(b) Reports on Form 8-K during the last quarter: None.
(c) Exhibits
3(a) - Certificate of Incorporation filed June 22, 1983. Incorporated by
reference to the Company's Registration Statement on Form S-18,
filed on November 23, 1983, Registration No. 2-88097-NY.
(b) - Certificate of Amendment of Certificate of Incorporation filed
October 24, 1983. Incorporated by reference to the Company's
Registration Statement on Form S-18, filed on November 23, 1983,
Registration No. 2-88097-NY.
(c) - Certificate of Amendment of Certificate of Incorporation dated
June 29, 1987. Incorporated by reference to the Company's Form 8
Amendment to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1987, file no. 0-13084.
(d) - Certificate of Designation of the Company with respect to the
Preferred Stock as filed with the Secretary of State of Delaware on
October 12, 1993. Incorporated by reference to the Company's Report
on Form 10-K for the fiscal year ended March 31, 1994.
(e) - By-laws of the Company, as amended. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 10, 1988, file no. 0-13084.
10(a) - Form of Sales Distributor Agreement. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985, file no. 0-13084.
(b) - Form of Service Center Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1985, file no. 0-13084.
(c) - Form of Dealer Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1985, file no. 0-13084.
(d) - Form of Sales Agent Agreement. Incorporated by reference to the
Company's Registration Statement on Form S-1, filed on September 5,
1986, Registration No. 3-8517.
(e) - 1998 Employee Incentive Stock Option Plan of the Company.
(f) - Employment Agreement dated April 1, 1998 between the Company and
Joel San Antonio.
25
<PAGE>
(g) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by Inacom
Corporation. Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 1992, file no.
0-13084.
(h) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by Damark Inc.
Incorporated by reference to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1992, file no. 0-13084.
(i) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts written in all states except
Florida.
(j) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by CompUSA.
(k) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,
Inc. (excluding Inacom Corporation).
(l) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,
Inc. through CompUSA.
(m) - Settlement and Runoff Agreement between the Company, its wholly
owned subsidiaries Warrantech Dealer Based Services, Inc. and
Warrantech Consumer Product Services, Inc. and American Hardware
Mutual Insurance Company ("AHM") regarding termination of insurance
coverage by AHM. (This document has been omitted and accorded
confidential treatment by the Securities and Exchange Commission
pursuant to an Order Granting Application Pursuant to Rule 24b-2
Under the Securities Exchange Act of 1934, As Amended, Respecting
Confidential Treatment of Exhibits 10(v) and 10(w) Contained in
Registrant's Form 10-K for the fiscal year ended March 31, 1992,
issued by the Division of Corporation Finance.)
(n) - Revolving Loan Agreement between the Company and Peoples Bank.
(o) - Administrator Agreement - Consumer Products, between Houston
General Insurance Company and Warrantech Consumer Product Services,
Inc. (This document has been omitted and has been filed separately
with the Securities and Exchange Commission pursuant to a
Confidential Treatment Request.)
(p) - General Agency Agreement between American International Group,
Inc. and Warrantech Automotive, Inc. (This document has been omitted
and has been filed separately with the Securities and Exchange
Commission pursuant to a Confidential Treatment Request.)
(q) - Master Agreement between American International Group, Inc. and
the Company (Section 1.6 of this document has been omitted and has
been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Request.)
26
<PAGE>
21. - Subsidiaries of the Company.
27. - Financial Data Schedule.
28. - Stipulation and Consent Order of Illinois. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 1988, file no. 0-13084.
99(a) - Complaint in Action entitled David Robertson v. Warrantech
Corporation and Warrantech Automotive Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1993, file no. 0-13084.
(b) - Amended Complaint in Action entitled The Oak Agency, Inc. and The
Oak Financial Services, Inc. vs. Warrantech Dealer Based Services,
Inc., Case No. 91 C 6677, filed in the United States District Court
for the Northern District of Illinois. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997, file 0-13084.
(c) - Complaint in Action entitled The Oak Agency, Inc., et al. v.
Warrantech, Inc., et al., Case No. 96 C 1106, filed in the United
States District Court for the Northern District of Illinois.
Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997, file 0-13084.
27
<PAGE>
SIGNATURES
Pursuantto 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: August 3, 1999 By: /s/ Joel San Antonio
___________________
Joel San Antonio
Chairman of the Board and
Chief Executive Officer
Dated: August 3, 1999 By: /s/ Richard F. Gavino
_____________________
Richard F. Gavino,
Chief Financial Officer
and Chief Accounting
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.
<TABLE>
<S> <C>
Signature Title Date
Chief Executive Officer,
Chairman of the Board
and Director August 3, 1999
/s/ Joel San Antonio
- --------------------------------------------------
(Joel San Antonio)
Director August 3, 1999
- --------------------------------------------------
(William Tweed)
/s/ Gordon Paris Director August 3, 1999
- --------------------------------------------------
(Gordon Paris)
/s/ Jeffrey J. White Director August 3, 1999
- --------------------------------------------------
(Jeffrey J. White)
/s/ Lawrence Richenstein Director August 3, 1999
- --------------------------------------------------
(Lawrence Richenstein)
</TABLE>
28
<PAGE>
Exhibit List
3(a) - Certificate of Incorporation filed June 22, 1983. Incorporated by
reference to the Company's Registration Statement on Form S-18,
filed on November 23, 1983, Registration No. 2-88097-NY.
(b) - Certificate of Amendment of Certificate of Incorporation filed
October 24,1983. Incorporated by reference to the Company's
Registration Statement on Form S-18, filed on November 23, 1983,
Registration No. 2-88097-NY.
(c) - Certificate of Amendment of Certificate of Incorporation dated
June 29, 1987. Incorporated by reference to the Company's Form 8
Amendment to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1987, file no. 0-13084.
(d) - Certificate of Designation of the Company with respect to the
Preferred Stock as filed with the Secretary of State of Delaware on
October 12, 1993. Incorporated by reference to the Company's Report
on Form 10-K for the fiscal year ended March 31, 1994.
(e) - By-laws of the Company, as amended. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 10, 1988, file no. 0-13084.
10(a) - Form of Sales Distributor Agreement. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1985, file no. 0-13084.
(b) - Form of Service Center Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1985, file no. 0-13084.
(c) - Form of Dealer Agreement. Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1985, file no. 0-13084.
(d) - Form of Sales Agent Agreement. Incorporated by reference to the
Company's Registration Statement on Form S-1, filed on September 5,
1986, Registration No. 3-8517.
(e) - 1998 Employee Incentive Stock Option Plan of the Company.
(f) - Employment Agreement dated April 1, 1998 between the Company and
Joel San Antonio.
29
<PAGE>
(g) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by Inacom
Corporation. Incorporated by reference to the Company's Report on
Form 10-K for the fiscal year ended March 31, 1992, file no.
0-13084.
(h) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by Damark Inc.
Incorporated by reference to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1992, file no. 0-13084
(i) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts written in all states except
Florida.
(j) - Insurance policy between the Company and Houston General Insurance
Company pertaining to service contracts issued by CompUSA.
(k) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,
Inc. (excluding Inacom Corporation).
(l) - Insurance policy between the Company and Houston General Insurance
company pertaining to service contracts written by WCPS of Florida,
Inc. through CompUSA.
(m) - Settlement and Runoff Agreement between the Company, its wholly
owned subsidiaries Warrantech Dealer Based Services, Inc. and
Warrantech Consumer Product Services, Inc. and American Hardware
Mutual Insurance Company ("AHM") regarding termination of insurance
coverage by AHM. (This document has been omitted and accorded
confidential treatment by the Securities and Exchange Commission
pursuant to an Order Granting Application Pursuant to Rule 24b-2
Under the Securities Exchange Act of 1934, As Amended, Respecting
Confidential Treatment of Exhibits 10(v) and 10(w) Contained in
Registrant's Form 10-K for the fiscal year ended March 31, 1992,
issued by the Division of Corporation Finance.)
(n) - Revolving Loan Agreement between the Company and Peoples Bank.
(o) - Administrator Agreement - Consumer Products, between Houston
General Insurance Company and Warrantech Consumer Product Services,
Inc. (This document has been omitted and has been filed separately
with the Securities and Exchange Commission pursuant to a
confidential Treatment Request.)
(p) - General Agency Agreement between American International Group,
Inc. and Warrantech Automotive, Inc. (This document has been omitted
and has been filed separately with the Securities and Exchange
Commission pursuant to a Confidential Treatment Request.)
30
<PAGE>
(q) - Master Agreement between American International Group, Inc. and
the Company (Section 1.6 of this document has been omitted and has
been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Request.)
21. - Subsidiaries of the Company.
27. - Financial Data Schedule.
28. - Stipulation and Consent Order of Illinois. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 1988, file no. 0-13084.
99(a) - Complaint in Action entitled David Robertson v. Warrantech
Corporation and Warrantech Automotive Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1993, file no. 0-13084.
(b) - Amended Complaint in Action entitled The Oak Agency, Inc. and The
Oak Financial Services, Inc. vs. Warrantech Dealer Based Services,
Inc., Case No. 91 C 6677, filed in the United States District Court
for The Northern District of Illinois. Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997, file 0-13084.
(c) - Complaint in Action entitled The Oak Agency, Inc., et al. v.
Warrantech, Inc., et al., Case No. 96 C 1106, filed in the United
States District Court for the Northern District of Illinois.
Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997, file 0-13084.
31
<PAGE>
EXHIBIT 10(e)
WARRANTECH CORPORATION
1998 STOCK PLAN
1. Purpose. The purpose of the Warrantech Corporation 1998 Stock Plan (the
"Plan") is to encourage key employees of Warrantech Corporation (the "Company")
and of any present or future parent or subsidiary of the Company (each a
"Related Corporation" and collectively, "Related Corporations") and other
individuals who render services to the Company or any Related Corporation, by
providing opportunities to participate in the ownership of the Company and its
future growth through (a) the grant of options which qualify as "incentive stock
options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"); (b) the grant of options which do not qualify as ISOs
("Non-Qualified Options"); (c) awards of stock in the Company ("Awards"); and
(d) opportunities to make direct purchases of stock in the Company
("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter
individually as an "Option" and collectively as "Options." Options, Awards and
authorizations to make Purchases are referred to hereafter collectively as
"Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent
corporation" and "subsidiary corporation," respectively, as those terms are
defined in Section 424 of the Code.
2. Administration of the Plan.
(a) Board or Committee Administration. The Plan shall be administered by a
committee (the "Committee") of the Board of Directors of the Company (the
"Board"). The Committee, to the extent required by applicable regulations under
Section 162(m) of the Code, shall be comprised of two or more outside directors
(as defined in applicable regulations thereunder) who, to the extent required by
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, or
any successor provision ("Rule 16b-3"), shall be disinterested administrators
within the meaning of Rule 16b-3. All references in this Plan to the Committee
shall mean the Board if no Committee has been appointed. Subject to ratification
of the grant or authorization of each Stock Right by the Board (if so required
by applicable state law), and subject to the terms of the Plan, the Committee
shall have the authority to (i) determine to whom (from among the class of
employees eligible under paragraph 3 to receive ISOs) ISOs shall be granted, and
to whom (from among the class of individuals and entities eligible under
paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases)
Non-Qualified Options, Awards and authorizations to make Purchases may be
granted; (ii) determine the time or times at which Options or Awards shall be
granted or Purchases made; (iii) determine the purchase price of shares subject
to each Option or Purchase, which prices shall not be less than the Minimum
Price specified in paragraph 6; (iv) determine whether each Option granted shall
be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the
time or times when each Option shall become exercisable and the duration of the
exercise period; (vi) extend the period during which outstanding Options may be
exercised; (vii) determine whether restrictions are to be imposed on shares
subject to Options, Awards and Purchases and the nature of such restrictions, if
any, and (viii) interpret the Plan and prescribe and rescind rules and
regulations relating to it. If the Committee determines to issue a Non-Qualified
-1-
<PAGE>
Option, it shall take whatever actions it deems necessary, under Section 422 of
the Code and the regulations promulgated thereunder, to ensure that such Option
is not treated as an ISO. The interpretation and construction by the Committee
of any provisions of the Plan or of any Stock Right granted under it shall be
final unless otherwise determined by the Board. The Committee may from time to
time adopt such rules and regulations for carrying out the Plan as it may deem
advisable.
(b) Committee Actions. The Committee may select one of its members as its
chairman, and shall hold meetings at such time and places as it may determine. A
majority of the Committee shall constitute a quorum and acts of a majority of
the members of the Committee at a meeting at which a quorum is present, or acts
reduced to or approved in writing by all the members of the Committee (if
consistent with applicable state law), shall be the valid acts of the Committee.
From time to time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies however caused, or remove
all members of the Committee and thereafter directly administer the Plan.
(c) Grant of Stock Rights to Board Members. Subject to the provisions of
paragraph 3 below, if applicable, Stock Rights may be granted to members of the
Board. All grants of Stock Rights to members of the Board shall in all other
respects be made in accordance with the provisions of this Plan applicable to
other eligible persons. Consistent with the provisions of paragraph 3 below,
members of the Board who either (i) are eligible to receive grants of Stock
Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on
any matters affecting the administration of the Plan or the grant of any Stock
Rights pursuant to the Plan, except that no such member shall act upon the
granting to himself or herself of Stock Rights, but any such member may be
counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting to such member of
Stock Rights.
(d) Exculpation. No member of the Board or the Committee shall be
personally liable for any action taken or any failure to take any action in
connection with the Plan or the granting of Stock Rights under the Plan,
provided that this subparagraph 2(d) shall not apply to (i) any breach of such
member's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) acts or omissions that would result in liability under
Section 174 of the General Corporation Law of the State of Delaware, as amended,
and (iv) any transaction from which the member derived an improper personal
benefit.
(e) Indemnification. Service on the Committee shall constitute service as a
member of the Board. Each member of the Committee shall be entitled without
further act on his or her part to indemnity from the Company to the fullest
extent provided by applicable law and the Company's Certificate of Incorporation
and/or By-laws in connection with or arising out of any action, suit or
proceeding with respect to the administration of the Plan or the granting of
Stock Rights thereunder in which he or she may be involved by reason of his or
her being or having been a member of the Committee, whether or not he or she
continues to be a member of the Committee at the time of the action, suit or
proceeding.
-2-
<PAGE>
3. Eligible Employees and Others. ISOs may be granted only to employees of
the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right. The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.
4. Stock Rights.
(a) Number of Shares Subject to Rights. The stock subject to Stock Rights
shall be authorized but unissued shares of Common Stock of the Company, par
value $0.007 per share (the "Common Stock"), or shares of Common Stock
reacquired by the Company in any manner. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall initially not exceed
1,041,987 shares. Such authorized share reserve is comprised of (i) the number
of shares which remained available for issuance, as of the Plan Effective Date,
under the Warrantech Corporation 1988 Employee Incentive Stock Option Plan
(amended as of July, 1996) (the "Predecessor Plan"), including the shares
subject to the outstanding options incorporated into the Plan and any other
shares which would have been available for future option grants under the
Predecessor Plan, plus (ii) an additional 600,000 shares, subject to stockholder
approval. The aggregate number of shares which may be issued pursuant to the
Plan is subject to adjustment as provided in paragraph 13. If any Stock Right
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part, the shares of Common Stock subject to such Stock Right shall again
be available for grants of Stock Rights under the Plan.
(b) Nature of Awards. In addition to ISOs and Non-Qualified Options, the
Committee may grant or award the following Stock Rights. Participants may be
granted the right to purchase Common Stock, subject to such restrictions as may
be specified by the Committee ("Restricted Shares"). Such restrictions may
include, but are not limited to, the requirement of continued employment with
the Company or a Related Corporation and achievement of performance objectives.
The Committee shall determine the purchase price of the Restricted Shares, the
nature of the restrictions and the performance objectives, all of which shall be
set forth in the agreement relating to each right awarded to purchase Restricted
Shares. The performance objectives shall consist of (A) one or more in business
criteria, and (B) a target level or levels of performance with respect to such
criteria. The performance objectives shall be objective and shall otherwise meet
the requirements of Section 162(m)(4)(C) of the Code. In addition to the
foregoing, awards of Common Stock may be made to participants as bonuses or as
additional compensation, as may be determined by the Committee.
-3-
<PAGE>
5. Granting of Stock Rights. Stock Rights may be granted under the Plan at
any time on or after August 25, 1998 and prior to August 24, 2008. The date of
grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant. Options granted under the Plan are intended to qualify as performance
based compensation to the extent required under proposed Treasury Regulation
Section 1.162-27.
6. Minimum Option Price; ISO Limitations.
(a) Price for Non-Qualified Options, Awards and Purchases. The exercise
price per share specified in the agreement relating to each Non-Qualified Option
granted, and the purchase price per share of stock granted in any Award or
authorized as a Purchase, under the Plan shall in no event be less than the
minimum legal consideration required therefor under the laws of any jurisdiction
in which the Company or its successors in interest may be organized.
Non-Qualified Options granted under the Plan, with an exercise price less than
the fair market value per share of Common Stock on the date of grant, are
intended to qualify as performance-based compensation under Section 1652(m) of
the Code and any applicable regulations thereunder. Any such Non-Qualified
Options granted under the Plan shall be exercisable only upon the attainment of
a pre-established, objective performance goal established by the Committee.
(b) Price for ISOs. The exercise price per share specified in the agreement
relating to each ISO granted under the Plan shall not be less than the fair
market value per share of Common Stock on the date of such grant. In the case of
an ISO to be granted to an employee owning stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any Related Corporation, the price per share specified in the
agreement relating to such ISO shall not be less than one hundred ten percent
(110%) of the fair market value per share of Common Stock on the date of grant.
For purposes of determining stock ownership under this paragraph, the rules of
Section 424(d) of the Code shall apply.
(c) $100,000 Annual Limitation on ISO Vesting. Each eligible employee may
be granted Options treated as ISOs only to the extent that, in the aggregate
under this Plan and all incentive stock option plans of the company and any
related Corporation, ISOs do not become exercisable for the first time by such
employee during any calendar year with respect to stock having a fair market
value (determined at the time the ISOs were granted) in excess of $100,000. The
Company intends to designate any Options granted in excess of such limitation as
Non-Qualified Options.
(d) Determination of Fair Market Value. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the date of grant or, if the prices or
quotes discussed in this sentence are unavailable for such date, the last
business day for which such prices or quotes are available prior to the date of
grant and shall mean (i) the average (on that date) of the high and low prices
of the Common Stock on the principal national securities exchange on which the
-4-
<PAGE>
Common Stock is traded, if the Common Stock is then traded on a national
securities exchange; or (ii) the closing bid price (or average of bid prices)
last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on a national
securities exchange. If the Common Stock is not publicly traded at the time an
Option is granted under the Plan, "fair market value" shall mean the fair value
of the Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
7. Option Duration. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally, and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(b). Subject to earlier termination as provided in paragraphs 9
and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO.
8. Exercise of Option and Transfer of Shares Upon Exercise. Subject to the
provisions of paragraphs 9 through 12, each Option granted under the Plan shall
be exercisable as follows:
(a) Vesting. The Option shall either be fully exercisable on the date of
grant or shall become exercisable thereafter in such installments as the
Committee may specify.
(b) Full Vesting of Installments. Once an installment becomes exercisable,
it shall remain exercisable until expiration or termination of the Option,
unless otherwise specified by the Committee.
(c) Partial Exercise. Each Option or installment may be exercised at any
time or from time to time, in whole or in part, for up to the total number of
shares with respect to which it is then exercisable.
(d) Acceleration of Vesting. The Committee shall have the right to
accelerate the date that any installment of any Option becomes exercisable;
provided that the Committee shall not, without the consent of an optionee,
accelerate the permitted exercise date of any installment of any Option granted
to any employee as an ISO if such acceleration would violate the annual vesting
limitation contained in Section 422(d) of the Code, as described in paragraph
6(c).
(e) Transfer of Shares Upon Exercise of the Non-Qualified Options. In the
event that the shares received upon the exercise of the Non-Qualified Options
are registered under the Securities Act of 1933, as amended, the Optionee may
not sell more than 50% of such shares within the first year following such
exercise, and shall be permitted to sell all of such shares thereafter. The
certificate(s) issued reflecting any such shares shall bear a legend
substantially as follows:
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"No more than 50% of the shares represented by this certificate may be
sold within one year following the date of original issue thereof. All
of such shares may be sold thereafter."
9. Termination of Employment. Unless otherwise specified in the agreements
relating to such ISOs, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability or as
otherwise specified in paragraph 10, no further installments of his or her ISOs
shall become exercisable, and his or her ISOs shall terminate on the earlier of
(a) ninety (90) days after the date of termination of his or her employment, or
(b) their specified expiration dates. For purposes of this paragraph 9,
employment shall be considered as continuing uninterrupted during any bona fide
leave of absence (such as those attributable to illness, military obligations or
governmental service) provided that the period of such leave does not exceed 90
days or, if longer, any period during which such optionee's right to
reemployment is guaranteed by statute. A bona fide leave of absence with the
written approval of the Committee shall not be considered an interruption of
employment under this paragraph 9, provided that such written approval
contractually obligates the Company or any Related Corporation to continue the
employment of the optionee after the approved period of absence. ISOs granted
under the Plan shall not be affected by a change of employment within or among
the Company and Related Corporations, so long as the optionee continues to be an
employee of the Company or any Related Corporation. Nothing in the Plan shall be
deemed to give any grantee of any Stock Right the right to be retained in
employment or other service by the Company or any Related Corporation for any
period of time.
10. Death; Disability; Voluntary Termination; Breach.
(a) Death. If an ISO optionee ceases to be employed by the Company and all
Related Corporations by reason of his or her death, any ISO owned by such
optionee may be exercised, to the extent otherwise exercisable on the date of
death, by the estate, personal representative or beneficiary who has acquired
the ISO by will or by the laws of descent and distribution, until the earlier of
(i) the specified expiration date of the ISO or (ii) one (1) year from the date
of the optionee's death.
(b) Disability. If an ISO optionee ceases to be employed by the Company and
all Related Corporations by reason of his or her disability, such optionee shall
have the right to exercise any ISO held by him or her on the date of termination
of employment, for the number of shares for which he or she could have exercised
it on that date, until the earlier of (i) the specified expiration date of the
ISO or (ii) one (1) year from the date of the termination of the optionee's
employment. For the purposes of the Plan, the term "disability" shall mean
"permanent and total disability" as defined in Section 22(e)(3) of the Code or
any successor statute.
(c) Voluntary Termination; Breach. If an ISO optionee voluntarily leaves
the employ of the Company and all Related Corporations or ceases to be employed
by the Company and all Related Corporations, then, in either such event, in
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addition to immediate termination of the Option, the ISO optionee shall
automatically forfeit all shares for which the Company has not yet delivered
share certificates upon refund by the Company of the exercise price of such
Option. Notwithstanding anything herein to the contrary, the Company may
withhold delivery of share certificates pending the resolution of any inquiry
that could lead to a finding resulting in a forfeiture.
11. Assignability. No Stock Right shall be assignable or transferable by
the grantee except by will, by the laws of descent and distribution or, in the
case of Non-Qualified Options only, pursuant to a valid domestic relations
order. Except as set forth in the previous sentence, during the lifetime of a
grantee each Stock Right shall be exercisable only by such grantee.
12. Terms and Conditions of Options. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. Adjustments. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company related
to such Option:
(a) Stock Dividends and Stock Splits. If the shares of Common Stock shall
be subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.
(b) Consolidations or Mergers. If the Company is to be consolidated with or
acquired by another entity in a merger, sale of all or substantially all of the
Company's assets or otherwise (an "Acquisition"), the Committee or the board of
directors of any entity assuming the obligations of the Company hereunder (the
"Successor Board"), shall, as to outstanding Options, either (i) make
appropriate provision for the continuation of such Options by substituting on a
equitable basis for the shares then subject to such Options either (A) the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition, (B) shares of stock of the surviving
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corporation or (C) such other securities as the Successor Board deems
appropriate, the fair market value of which shall approximate the fair market
value of the shares of Common Stock subject to such Options immediately
preceding the Acquisition; or (ii) upon written notice to the optionees, provide
that all Options must be exercised, to the extent then exercisable, within a
specified number of days of the date of such notice, at the end of which period
the Options shall terminate; or (iii) terminate all Options in exchange for a
cash payment equal to the excess of the fair market value of the shares subject
to such Options (to the extent then exercisable) over the exercise price
thereof.
(c) Recapitalization or Reorganization. In the event of a recapitalization
or reorganization of the Company (other than a transaction described in
subparagraph (b) above) pursuant to which securities of the Company or of
another corporation are issued with respect to the outstanding shares of Common
Stock, an optionee upon exercising an Option shall be entitled to receive for
the purchase price paid upon such exercise the securities he or she would have
received if he or she had exercised such Option prior to such recapitalization
or reorganization.
(d) Modification of ISO's. Notwithstanding the foregoing, any adjustments
made pursuant to subparagraphs (a), (b) or (c) with respect to ISOs shall be
made only after the Committee, after consulting with counsel for the Company,
determines whether such adjustments would constitute a "modification" of such
ISOs (as that term is defined in Section 424 of the Code) or would cause any
adverse tax consequences for the holders of such ISOs. If the Committee
determines that such adjustments made with respect to ISOs would constitute a
modification of such ISOs or would cause adverse tax consequences to the
holders, it may refrain from making such adjustments.
(e) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, each Option will terminate immediately prior to the
consummation of such proposed action or at such other time and subject to such
other conditions as shall be determined by the Committee.
(f) Issuances of Securities. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to Options. No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.
(g) Fractional Shares. No fractional shares shall be issued under the Plan
and the optionee shall receive from the Company cash in lieu of such fractional
shares.
(h) Adjustments. Upon the happening of any of the events described in
subparagraphs (a), (b) or (c) above, the class and aggregate number of shares
set forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
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The Committee or the Successor Board shall determine the specific adjustments to
be made under this paragraph 13 and, subject to paragraph 2, its determination
shall be conclusive.
14. Means of Exercising Options. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify the
number of shares as to which such Option is being exercised, accompanied by full
payment of the purchase price thereof either (a) in United States dollars in
cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of the
Committee, by delivery of the grantee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion
of the Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
If the Committee exercises its discretion to permit payment of the exercise
price of an ISO by means of the methods set forth in clauses (b), (c), (d) or
(e) of the preceding sentence, such discretion shall be exercised in writing at
the time of the grant of the ISO in question. The holder of an Option shall not
have the rights of a shareholder with respect to the shares covered by such
Option until the date of issuance of a stock certificate to such holder for such
shares. Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall be made for
dividends or similar rights for which the record date is before the date such
stock certificate is issued. In the absence of an effective registration
statement covering the shares issuable upon exercise of any Stock Rights, such
notice may, at the option of the Committee, also include a statement that the
person exercising the Stock Rights is purchasing the Common Stock as an
investment and not with a view to the sale or distribution of any of such Common
Stock, and the holder's agreement not to sell any Common Stock received upon the
exercise of the Stock Rights except either (i) in compliance with the Securities
Act of 1933, as amended (provided that the Company shall be under no obligation
to register either the Plan, or any securities obtained by the Optionee pursuant
thereto, with the Securities and Exchange Commission), or (ii) with the prior
written approval of the Company.
15. Term and Amendment of Plan. This Plan was adopted by the Board on
August 25, 1998, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders, or in lieu thereof, by written consent. If the approval
of stockholders is not obtained on or prior to August 24, 1999, any grants of
ISOs under the Plan made prior to that date will be rescinded. The Plan shall
expire at the end of the day on August 24, 2008, (except as to Options
outstanding on that date). Subject to the provisions of paragraph 5 above,
Options may be granted under the Plan prior to the date of stockholder approval
of the Plan. The Board may terminate or amend the Plan in any respect at any
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time, except that, without the approval of the stockholders obtained within 12
months before or after the Board adopts a resolution authorizing any of the
following actions: (a) the total number of shares that may be issued under the
Plan may not be increased (except as provided in paragraph 4(a) or by adjustment
pursuant to paragraph 13); (b) the benefits accruing to participants under the
Plan may not be materially increased; (c) the requirements as to eligibility for
participation in the Plan may not be materially modified; (d) the provisions of
paragraph 3 regarding eligibility for grants of ISOs may not be modified; (e)
the provisions of paragraph 6(b) regarding the exercise price at which shares
may be offered pursuant to ISOs may not be modified (except by adjustment
pursuant to paragraph 13); (f) the expiration date of the Plan may not be
extended; and (g) the Board may not take any action which would cause the Plan
to fail to comply with Rule 16b-3. Except as otherwise provided in this
paragraph 15, in no event may action of the Board or stockholders alter or
impair the rights of a grantee, without such grantee's consent, under any Option
previously granted to such grantee.
16. Application of Funds. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
17. Notice to Company of Disqualifying Disposition. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
18. Withholding of Additional Income Taxes. Upon the exercise of a
Non-Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 17), the vesting or transfer of restricted
stock or securities acquired on the exercise of an Option hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold taxes in respect of amounts that constitute
compensation includable in gross income. The Committee in its discretion may
condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the
making of a Purchase of Common Stock for less than its fair market value, or
(iv) the vesting or transferability of restricted stock or securities acquired
by exercising an Option, on the grantee's making satisfactory arrangement for
such withholding. Such arrangement may include payment by the grantee in cash or
by check of the amount of the withholding taxes or, at the discretion of the
Committee, by the grantee's delivery of previously held shares of Common Stock
or the withholding from the shares of Common Stock otherwise deliverable upon
exercise of a Option shares having an aggregate fair market value equal to the
amount of such withholding taxes.
19. Governmental Regulation. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
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or sale of such shares. Government regulations may impose reporting or other
obligations on the Company with respect to the Plan. For example, the Company
may be required to send tax information statements to employees and former
employees that exercise ISOs under the Plan, and the Company may be required to
file tax information returns reporting the income received by grantees of
Options in connection with the Plan.
20. Governing Law. The validity and construction of the Plan and the
instruments evidencing Stock Rights shall be governed by the laws of Delaware.
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EXHIBIT 10(f)
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
1st day of April, 1998, by and between WARRANTECH CORPORATION, a corporation
organized under the laws of the State of Delaware (the "Company"), and JOEL SAN
ANTONIO (the "Executive")
W I T N E S S E T H:
WHEREAS, the Executive has been instrumental in the development of the
Company since its inception and the Company desires to continue the services of
the Executive; and
WHEREAS, the parties are desirous of entering into this Agreement in order
to ensure the Company of the valuable services of the Executive pursuant to the
terms and conditions contained herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby mutually acknowledged, the parties hereby agree
as follows:
1. EMPLOYMENT CONDITIONS
(a) Effective upon the commencement of the Term hereof (as defined in
Section 2), the Company hereby employs the Executive as its Chairman and Chief
Executive Officer and the Executive hereby accepts such employment, on the terms
and conditions hereinafter set forth. As Chairman and Chief Executive Officer,
the Executive shall report only to the Board of Directors of the Company. In
addition, for as long as the Executive shall be employed by the Company, the
Executive shall be nominated for election to the Board of Directors of the
Company, and the Company shall use its best efforts to cause the election of the
Executive as Director. Each of the parties hereto agrees that the failure of the
Executive to be duly and validly elected as a Director (for any reason other
than refusal of the Executive to stand for election or re-election) or any
removal of the Executive as a Director, shall constitute a material breach of
this Agreement by the Company.
<PAGE>
2. TERM
The initial Term of the Executive's engagement hereunder (the "Initial
Term") shall commence as of April 1, 1998 (the "Commencement Date") and shall
terminate on March 31, 2003. Upon the expiration of the Initial Term, this
Agreement shall automatically renew for successive periods of one-year (each, a
"Renewal Term" and collectively with the Initial Term, the "Term") unless either
party shall give the other written notice of non-renewal not less than 90 days
prior to the expiration of the Initial Term or any Renewal Term. The Executive's
base salary under any Renewal Term shall be not less than the final base salary
in effect at the end of the prior term
3. DUTIES OF EXECUTIVE
(a) The Executive shall be the Chief Executive Officer of the Company (and
any and all of its subsidiaries) and shall perform the services and duties
attendant to such position and attendant to the office of Chairman as set forth
in this Agreement or in the By-Laws of the Company, subject to the direction and
supervision of the Board of Directors of the Company. As Chairman and Chief
Executive Officer of the Company, the Executive shall report only to the Board
of Directors of the Company, and shall have powers and authority superior to
those of any officer or employee of the Company or any subsidiary thereof.
(b) Anything contained in Section 3(a) hereof or in any other provision of
this Agreement to the contrary notwithstanding, nothing shall be construed to
limit the ability of the Executive to serve on the Boards of Directors or as
Chairman of such other corporations, trade associations, charitable
organizations or other entities as the Executive shall from time-to-time deem
appropriate, and to engage in such other activities as the Executive shall deem
not to be in conflict with his duties to the Company.
4. COMPENSATION
(a) Base Annual Salary. Subject to any other provision of this Agreement,
the Executive shall receive a base annual salary in the amount of $585,000 per
annum (which amount shall be payable effective as of April 1, 1998), subject to
adjustment as hereinafter provided (the "Base Salary Amount"), payable in equal
bi-weekly payments (less applicable withholding taxes) in accordance with the
usual payroll practices of the Company. The Base Salary Amount shall be
increased, effective as of January 1 of each year, by an amount to be determined
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by the Board of Directors, which percentage increase shall in any event be at
least equal to five percent (5%).
(b) Cash Incentive Bonus. The Executive shall be entitled to a cash
incentive bonus in an amount equal to two percent (2%) of the after-tax net
income of the Company, determined in accordance with generally accepted
accounting principles ("GAAP"). The calculation and distribution of such
incentive bonus amount shall be made quarterly, within forty-five (45) days
after the conclusion of each calendar quarter. Such calculations and
distributions shall be cumulative within each fiscal year of the Company, such
that if at the conclusion of any fiscal year it is determined that the bonus
award previously distributed hereunder exceeds (or falls short of) the amount to
which the Executive shall be entitled, the Company shall promptly notify the
Executive of the amount of such excess (or arrearage) . The amount of any such
arrearage shall be paid by the Company to the Executive in a lump sum, within
ten (10) days following the computation of such amount. The amount of such
excess payment, if any, shall be refunded by the Executive to the Company,
provided, however, that such repayment shall be accomplished by reducing each of
the four quarterly incentive bonus payments in the succeeding year by an amount
equal to twenty-five (25%) percent of such overpayment. Notwithstanding anything
contained herein to the contrary, in any year during or after which a Change in
Control (as hereinafter defined) shall have occurred, the amount of the cash
incentive bonus payable pursuant to this paragraph 4(b) shall not be less than
the amount of the cash incentive bonus paid during the immediately preceding
year.
5. EMPLOYEE BENEFITS
(a) In addition to the compensation and other benefits provided for
elsewhere in this Agreement, the Executive shall be entitled to eight (8) weeks
of paid vacation during each year, as well as to health, life insurance,
pension, supplemental pension, savings, stock award, stock option and other
employment benefits which are provided to other executive officers and employees
of the Company, to be reimbursed by the Company for ordinary and necessary
business expenses incurred by the Executive and to participate in all employee
benefit plans of the Company as in effect on the date hereof and/or as adopted
or modified from time-to-time after the date hereof. The Company shall not
terminate any such employee benefits or employee benefit plans which are in
effect on the date hereof.
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(b) In addition to any other life insurance maintained pursuant to
paragraph 5(a) above, the Company shall continue to maintain in full force and
effect for the benefit of the Executive, the "split dollar" life insurance
arrangement presently in effect with respect to the two policies insuring the
Executive having policy numbers 1042887 and 1026492.
(c) In addition to any other insurance maintained pursuant to paragraph
5(a) above, the Company shall maintain, in full and effect, for the benefit of
the Executive, long term disability insurance, on terms reasonably satisfactory
to the Executive.
(d) The Company shall provide the Executive with an automobile expense
allowance of not less than $12,000 per year.
(e) Promptly following the execution of this Agreement, the Company and the
Executive shall enter into an option agreement memorializing the previous grant
by the Company to Executive of options to purchase 400,000 shares of the
Company's common stock, par value .007 per share (the "Common Stock") at an
exercise price of $3.37 per share, as more fully described in the resolution
adopted by the Board of Directors of the Company on August 28, 1998.
Notwithstanding anything contained herein to the contrary (including, without
limitation, pursuant to paragraph 9 hereof) all of such options and any other
options granted to the Executive pursuant to any other Agreement or benefit plan
shall become 100% vested without any further action on the part of the Executive
upon the occurrence of any Change in Control (as hereinafter defined) of the
Company.
6. COUNSEL FEES AND INDEMNIFICATION
The Company shall pay, or reimburse to the Executive, the fees and expenses
of personal counsel for their professional services rendered to the Executive in
connection with this Employment Agreement and any other agreement or benefit
plan entered into or adopted in connection herewith and matters related hereto
and thereto, including in connection with any enforcement hereof and thereof.
Without limiting the foregoing, in the event that (i) the Company terminates, or
seeks to terminate this Agreement, alleging as justification for such
termination "good cause" as specified in Section 8(b) hereof and the Executive
disputes such termination or attempted termination, or (ii) the Executive elects
to terminate this Agreement pursuant to Section 8(c) hereof and the Company
disputes its obligations pursuant to Section 8 or any other provision of this
Agreement; the Company shall pay, or reimburse to the Executive, all reasonable
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costs incurred by the Executive in such dispute, including attorneys' fees and
costs.
7. REPRESENTATIONS. WARRANTIES AND AGREEMENTS OF THE COMPANY
(a) The Company hereby represents and warrants to, and agrees with, the
Executive as follows
(i) the Executive is and shall continue to be covered and insured up to the
maximum limits provided by all insurance which the Company maintains to
indemnify its directors and officers (and to indemnify the Company for any
obligations which it incurs as a result of its undertaking to indemnify its
officers and directors);
(ii) that the Company will continue to maintain in full force and effect
such insurance, at not less than its present limits, in effect throughout
the Term of this Agreement (or any renewal or continuation hereof);
(iii) this Agreement, and each of the terms and provisions hereof,
including, without limitation the undertakings with respect to payment,
indemnification and maintenance of insurance set forth in Sections 6 and 7
hereof, do not violate or conflict with any provisions of the Certificate
of Incorporation and Bylaws of the Company, (B) any agreement by which the
Company is bound, or (C) any federal, state or local law, rule, regulation
or judicial order; this Agreement has been duly and validly authorized,
executed and delivered by the Company, and is a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms;
(iv) the Company has all power and authority necessary to enter into this
Agreement in accordance with its terms;
(v) this Agreement, and the employment of the Executive by the Company have
been duly approved by the Board of Directors of the Company;
(vi) during the Term hereof, the Company will not change the corporate
title of the Executive or alter or diminish the powers, duties and
authority of the Executive in his position as Chairman and Chief Executive
Officer of the Company (or any subsidiary of the Company), nor will the
Company change by more than twenty-five (25) miles the location of the
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offices in which Executive's services are to be performed (i.e., Stamford,
Connecticut), or take any other action which would constitute "Good Reason"
as defined in Section 8(c) hereof if such action were to occur following a
"Change in Control" as defined in Section 8(c) hereof;
(vii) the Company shall indemnify and hold harmless the Executive to the
fullest extent permitted by applicable law. To the extent that the
Company's Certificate of Incorporation, By-laws, resolutions of Company's
Board of Directors or stockholders, or other corporate acts, agreements or
instruments of the Company, each as in effect on the date hereof, confer
additional or specific rights relating to indemnification, advancement of
expenses of directors and officers, agents or others, the Executive shall
continue to be entitled to such rights, which rights may not be diminished
by subsequent modification or amendment; and
(viii) each of the persons executing this Agreement hereby acknowledges and
agrees that, in entering into this Agreement, the Executive has relied on
each of the representations and warranties and agreements of the Company
contained herein and failure of the Company to comply with or perform any
of such representations, warranties or agreements shall constitute the
material breach by the Company of this Agreement.
8. TERMINATION
This Agreement may be terminated only as follows:
(a) Termination by the Company Other than for Good Cause. If the Company
shall terminate the employment of the Executive during the Term other than for
"good cause", as defined herein, then the Executive shall be entitled to receive
the following:
(i) payment of cash in an amount equal to the greater of (A) the Base
Salary Amount (as in effect on the date of such termination) for the
remainder of the Term or (B) three year's Base Salary Amount (as in effect
on the date of such termination);
(ii) the bonus amount payable pursuant to Section 4(b) hereof, which amount
shall be pro rated in the case of any partial period; and
(iii)any and all unvested stock options, restricted stock awards or similar
items subject to future vesting shall immediately become 100% vested
without any further action on the part of the Executive.
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(b) Termination by the Company for Good Cause. Except as provided in
Section 8(d) below, this Agreement may only be terminated by the Company, upon
written notice to the Executive, for "good cause" as hereinafter defined. For
purposes of this Section 8(b) "good cause" shall mean the willful and continued
failure of the Executive to perform his duties or the willful engaging by the
Executive in illegal conduct or gross misconduct materially injurious to the
Company. If the Company desires to terminate the employment of the Executive
pursuant to this Section 8(b) the Company shall first send notice to the
Executive describing the action constituting the act of breach or default and on
receipt thereof the Executive shall have thirty (30) days in which to cure such
breach or default. Upon termination in accordance with the provisions of this
Section 8(b) the Company shall be obligated to pay to the Executive the
annualized Base Salary Amount only through the period ending on the last day of
the month in which such termination occurs, plus such other amounts as are
payable to the Executive pursuant to this Agreement and which have accrued as of
the last day of the month in which such termination occurs (including the
pro-rating of amounts in respect of any partial period)
(c) Termination by the Executive by Resignation upon Breach or Change in
Control. (i) This Agreement may be terminated by the Executive, upon written
notice to the Company,
(A) for breach by the Company of any of the terms or provisions hereof or
any other agreement or benefit plan entered into or adopted in connection
herewith,
(B) during the "Window Period" (as hereinafter defined) following a "Change
in Control" of the Company as hereinafter defined, or
(C) upon the occurrence of "Good Reason" (as hereinafter defined) following
a "Change in Control" of the Company as hereinafter defined.
Upon any such termination in accordance with this Section 8 (c), the Executive
shall be entitled to receive payments in the same amounts and acceleration of
vesting or other benefit as would be payable or would occur upon termination of
the Executive by the Company other than for "good cause" as provided in Section
8(a) hereof.
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(ii) For purposes of this Agreement, a "Change in Control" of the Company
shall mean any of the following events:
(A) An acquisition (whether directly from the Company or otherwise) of any
voting securities of the Company (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13 (d) or 14(d) of the
Securities and Exchange Act of 1934, as amended (the "1934 Act")) (other
than the Executive or an entity controlled by the Executive), immediately
after which such Person has "Beneficial Ownership" (within the meaning of
Rule 13d-3 promulgated under the 1934 Act) of forty percent (40%) or more
of the combined voting power of the Company's then outstanding Voting
Securities.
(B) The individuals who, as of the date hereof, are members of the Board
(the "Incumbent Board"), cease for any reason to constitute at least sixty
percent (60%) of the Board; provided, however, that if the election, or
nomination for election by the Company's stockholders, of any new director
was approved by a vote of at least sixty percent (60%) of the Incumbent
Board, such new director shall, for purposes of this Agreement, be
considered as a member of the Incumbent Board; provided, further, however,
that no individual shall be considered a member of the Incumbent Board if
such individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-ll promulgated
under the 1934 Act) or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement intended to avoid or settle
any Election Contest or Proxy Contest; or
(C) Approval by the Board of Directors or stockholders of the Company, or
execution by the Company of any agreement with respect to, or the
consummation of:
(1) A merger, consolidation or reorganization involving the Company;
(2) A liquidation or dissolution of or appointment of a receiver,
rehabilitator, conservator or similar person for, the Company;
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or
(3) An agreement for the sale or other disposition of all or substantially
all of the assets of the Company to any Person (other than a transfer to a
Subsidiary).
(D) Any other change in "control" of the Company. For purposes of the
immediately preceding sentence, the term "control" shall have the meaning
ascribed thereto pursuant to Rule 405 of the Rules and Regulations of the
Securities and Exchange Commission promulgated pursuant to the Securities
Act of 1933, as amended.
(iii) Notwithstanding anything contained in this Agreement to the contrary,
if the Executive's employment is terminated prior to a Change in Control and the
Executive reasonably demonstrates that such termination (i) was at the request
of a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control and who effectuates a Change in Control
(a "Third Party") or (ii) otherwise occurred in connection with, or in
anticipation of, a Change in Control which actually occurs, then for all
purposes of this Agreement, the date of a Change in Control with respect to the
Executive shall mean the date immediately prior to the date of such termination
of the Executive's employment
(iv) In order to provide the Executive with an incentive to remain with the
Company for an appropriate period of transition following a Change in Control of
the Company, for purposes of this Agreement the "Window Period" shall be the
ninety (90) day period beginning on the date which is six (6) months after the
date of any Change in Control of the Company; provided, however, that if any
such Change in Control shall occur within the last six (6) months of the Term of
this Agreement, the Window Period shall be the last forty-five (45) days of the
Term hereof (or such lesser period as shall remain in the Term hereof following
such Change in Control); and provided, further, that if any such Change in
Control shall occur during the last six (6) months of the Term of this
Agreement, unless the Executive shall have given written notice to the contrary,
the Executive shall without further action automatically be deemed to have given
the written notice specified in Section 8(c) (i) hereof on the last day of the
Term hereof (unless such notice shall have been previously given) and shall be
entitled to receive the payments specified in such Section 8(c) (i)
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(v) For purposes of this Agreement, "Good Reason" shall mean the occurrence
after a Change in Control of any of the events or conditions described in
subsections (A) through (G) hereof:
(A) a change in the Executive's status, title, position or responsibilities
(including reporting responsibilities) which, in the Executive's reasonable
judgment, represents an adverse change from his status, title, position or
responsibilities as in effect at any time within ninety (90) days preceding
the date of a Change in Control or at any time thereafter; the assignment
to the Executive of any duties or responsibilities which, in the
Executive's reasonable judgment, are inconsistent with his status, title,
position or responsibilities as in effect at any time within ninety (90)
days preceding the date of a Change in Control or at any time thereafter;
or any removal of the Executive from or failure to reappoint or reelect him
to any of such offices or positions;
(B) any failure to award the Executive bonus payments and/or increases in
Base Annual Salary in a manner consistent with the practice of the Company
prior to any such Change in Control;
(C) the Company's requiring the Executive to be based at any place outside
a 25-mile radius from Stamford, Connecticut, except for reasonably required
travel on the Company's business (including such travel to Euless, Texas)
which is not materially greater than such travel requirements prior to the
Change in Control;
(D) the failure by the Company to (a) continue in effect (without reduction
in benefit level, and/or reward opportunities) any material compensation or
employee benefit plan in which the Executive was participating at any time
within ninety (90) days preceding the date of a Change in Control or at any
time thereafter, or (b) provide the Executive with compensation and
benefits, in the aggregate, at least equal (in terms of benefit levels
and/or reward opportunities) to those provided for under each other
employee benefit plan, program and practice in which the Executive was
participating at any time within ninety (90) days preceding the date of a
Change in Control or at any time thereafter;
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(E) the insolvency or the filing (by any party, including the Company) of a
petition for bankruptcy or similar insolvency of the Company, which
petition is not dismissed within sixty (60) days;
(F) any material breach by the Company of any provision of this Agreement;
(G) any purported termination of the Executive's employment for "good
cause" by the Company which does not comply with the terms of Section 8(b)
hereof.
(d) Termination by the Company upon Disability of the Executive. This
Agreement may, at the option of the Company, be terminated by the Company, upon
thirty (30) day's prior written notice to the Executive (or his personal
representative) , upon the Disability of the Executive as hereinafter defined.
For purposes of this Section 8(d) "Disability" shall mean if the Executive shall
become physically or mentally disabled, whether totally or partially, so that he
is unable to perform substantially all of his services hereunder for a period of
twelve (12) consecutive months. Upon any such termination in accordance with
this Section 8 (d), the Executive shall be entitled to receive payments of Base
Salary Amount (as in effect on the date of such termination), together with such
increases as would be applicable pursuant to Section 4(a) hereof for a period of
twelve (12) months from the effective date of such termination. In addition, the
Executive shall be entitled to such other benefits as would be available upon
termination of the Executive by the Company other than for "good cause" as
provided in subsections (ii) and (iii) of Section 8(a) hereof. Notwithstanding
anything contained herein to the contrary, the cash payment pursuant to which
the Executive shall be entitled pursuant to this Section 8(d) during the
twelve-month period following any such termination shall be reduced,
dollar-for-dollar by the amount of any disability insurance payment received by
the Executive during such period pursuant to any disability insurance policy,
the entire premium of which was paid for by the Company.
(e) Termination by the Company upon Death of the Executive. This Agreement
shall terminate upon death of the Executive. Upon any such termination in
accordance with this Section 8 (e) , the Executive (or his personal
representative) shall be entitled to receive payment of cash in an amount equal
to one year's Base Salary Amount (as in effect upon the date of such
termination) plus the pro rata portion of any bonus payable pursuant to
paragraph 4(b) hereof through the date of such termination.
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(f) Payment Terms. Payment of any amounts to which the Executive shall be
entitled pursuant to the provisions of this Section 8 shall be made no later
than ten (10) days following receipt of notice of termination or the event
giving rise to such termination. Any amounts payable pursuant to this Section 8
which are not made within the period specified in this Section 8(f) shall bear
interest at a rate equal to the lesser of (i) the maximum interest rate
allowable pursuant to applicable law or (ii) five points above the "prime rate"
of interest as published from time-to-time in the Eastern Edition of the Wall
Street Journal.
(g) Benefits. In the event the Executive's employment with the Company is
terminated for any reason prior to the end of the Term, the Executive and his
dependents, if any, will continue to participate in any group health plan
sponsored by the Company in which the Executive was participating on the date of
such termination, at no cost to the Executive or his dependents, for the
remainder of the Term. Thereafter, the Executive and his dependents, if any,
shall be entitled to elect continuation health coverage under Section 4980B of
the Internal Revenue Code of 1986, as amended, or any successor provisions
thereto, to the extent permitted by applicable law. In addition to any payments
to which the Executive may be entitled upon termination of his Employment
pursuant to any provision of this Agreement, the Executive shall be entitled to
any benefits under any life insurance, pension, supplemental pension, savings,
or other employee benefit plan in which the Executive was participating on the
date of any such termination.
9. LIMITATION ON PAYMENTS
(a) In the event that Deloitte & Touche, LLP, or any successor tax
accountants to the Company (the "Auditors") determine that any payment or
distribution by the Company to or for the benefit of the Executive, whether paid
or payable (or distributed or distributable) pursuant to the terms of this
Agreement or otherwise (a "Payment"), would be nondeductible by the Company for
federal income tax purposes because of section 280G of the Internal Revenue Code
of 1986, as amended (the "Code"), then the aggregate present value of the
amounts payable or distributable to or for the benefit of the Executive pursuant
to this Agreement (the "Agreement Payments") shall be reduced (but not below
zero) to the Reduced Amount. For purposes of this Section 9, the "Reduced Amount
shall be an amount expressed in present value which maximizes the aggregate
present value of Agreement Payments without causing any Payment to be
nondeductible by the Company because of section 280G of the Code.
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(b) If the Auditors determine that any Payment would be nondeductible by
the Company because of section 280G of the Code, then the Company shall promptly
give the Executive notice to that effect and a copy of the detailed calculation
thereof and of the Reduced Amount, and the Executive may then elect, in his sole
discretion, which and how much of the Agreement Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
Agreement Payments equals the Reduced Amount) and shall advise the Company in
writing of his election within 10 days of his receipt of notice. If no such
election is made by the Executive within such 10-day period, then the Company
may elect which and how much of the Agreement Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
Agreement Payments equals the Reduced Amount) and shall notify the Employee
promptly of such election. For purposes of this Section 9, present value shall
be determined in accordance with section 280G(d) (4) of the Code. All
determinations made by the Auditors under this Section 9 shall be binding upon
the Company and the Executive and shall be made within 60 days of the
Executive's termination of employment. As promptly as practicable following such
determination and the elections hereunder, the Company shall pay to or
distribute to or for the benefit of the Executive such amounts as are then due
to him under this Agreement and shall promptly pay to or distribute for the
benefit of the Executive in the future such amounts as become due to him under
this Agreement.
(c) As a result of the uncertainty in the application of section 280G of the
Code at the time of the initial determination by the Auditors hereunder, it is
possible that Agreement Payments will have been made by the Company which should
not have been made (an "Overpayment") or that additional Agreement Payments
which will not have been made by the Company could have been made (an
"Underpayment"), consistent in each case with the calculation of the Reduced
Amount hereunder. In the event that the Auditors, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or the Executive
which the Auditors believe has a high probability of success, determine that an
Overpayment has been made, such Overpayment shall be treated for all purposes as
a loan to the Executive which he shall repay to the Company, together with
interest at the applicable federal rate provided for in section 7872 (f) (2) of
the Code; provided, however, that no amount shall be payable by the Executive to
the Company if and to the extent that such payment. would not reduce the amount
which is subject to taxation under section 4999 of the Code. In the event that
the Auditors, based upon controlling precedent, determine that an Underpayment
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has occurred, such Underpayment shall promptly be paid by the Company to or for
the benefit of the Executive, together with interest at the applicable federal
rate provided for in section 7872(f) (2) (A) of the Code.
10. WAIVER
No waiver of any provision of this Agreement shall be effective and
enforceable unless set forth in a written instrument executed by the parties
hereto. No waiver of any provision of this Agreement shall affect the validity
or enforceability, or constitute a waiver of future enforcement, of such
provision or of any other provision of this Agreement
11. GOVERNING LAW
This Agreement shall in all respects be subject to, governed by and
construed in accordance with the laws of the State of Connecticut
12. SEVERABILITY
The invalidity or unenforceability of any provision of this Agreement shall
not in any manner whatsoever affect the validity or enforceability of any other
provision hereof. Whenever possible, this Agreement shall be construed to permit
the full enforcement of each provision hereof, and any declaration of invalidity
or unenforceability with regard to any provision hereof shall be construed to
minimize the effect of such declaration.
13. NOTICES
All notices required or permitted hereunder shall be in writing and shall
be sufficiently given if: (a) hand delivered (in which case the notice shall be
effective upon delivery) ; (b) telecopied, provided that in such case a copy of
such notice shall be concurrently sent by registered or certified mail, return
receipt requested, postage prepaid (in which case the notice shall be effective
one day following dispatch); (c) delivered by Express Mail, Federal Express or
other nationally recognized overnight courier service (in which case the notice
shall be effective one business day following dispatch); or (d) delivered or
mailed by registered or certified mail, return receipt requested, postage
prepaid (in which case the notice shall be effective three days following
dispatch), to the parties at the following addresses and/or telecopier numbers,
or to such other address or number as a party shall specify by written notice to
the others in accordance with this Section.
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If to the Company:
Warrantech Corporation
300 Atlantic Street
Stamford, Connecticut 06901
Attn: President
Telecopier No.:203-327-1587
with a copy to:
Ralph A. Siciliano, Esq.
Newman, Tannenbaum, Helpern,
Syracuse & Hirschtritt, LLP
900 Third Avenue
New York, New York 10022
Telecopier No.: 212-371-1084
If to Executive:
Joel San Antonio
56 North Stanwich Road
Greenwich, Connecticut 06831
with a copy to:
Kenneth E. Thompson, Esq.
McCarter & English, LLP
Four Gateway Center
100 Mulberry Street
Newark, NJ 07102
Telecopier No. :973-624-7070
14. DEATH OR DISABILITY
In the event of the death or disability of the Executive, the Executive,
his estate or his designated beneficiaries shall be entitled to the same
compensation, rights and benefits as are referred to in Sections 8 and 9 hereof.
15. BINDING EFFECT
This Agreement together with any written amendments hereto, shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors, assigns, heirs and personal representatives. Except as
otherwise provided in Section 14 hereof, this Agreement is not intended to
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confer any rights or remedies upon any person or entity other than the Executive
and the Company
16. NO MITIGATION OF DAMAGES: NO SET-OFF
In the event of any termination of this Agreement by either the Company or
the Executive for any reason, the Executive shall not be required to seek
comparable employment so as to minimize any obligation of the Company to
compensate the Executive for any damages that he may suffer by reason of such
termination or for any severance or other payment. No salary or other
compensation received by the Executive in connection with any employment of the
Executive after termination of the Executive's employment with the Company will
reduce any amounts payable under this Agreement or any agreement entered into in
connection herewith. There shall be no right of set-off or counterclaim on
behalf of the Company, in respect of any claim, debt or obligation, against any
payments to the Executive, his dependents, beneficiaries or estate provided for
in this Agreement
17. AMENDMENTS
No provision of this Agreement may be modified, altered or amended except
by written agreement executed by all of the parties hereto.
18. ENTIRE AGREEMENT
This Agreement and any benefit plans of the Company are intended by the
parties as the final expression of their agreement and intended to be a complete
and exclusive statement of the agreements and understandings of the parties
hereto in respect of the subject matter contained herein or in such letter
agreements. There are no restrictions, promises, warranties or undertakings,
other than those set forth or referred to herein or therein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to the subject matter hereof.
19. HEADINGS
The various headings set forth in this Agreement are inserted for reference
purposes only and shall in no way effect the meaning or intent of any provision
hereof.
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20. INTERPRETATION
It is expressly agreed by the parties that the authorship of this Agreement
will have no bearing upon its interpretation. Each of the parties hereto
acknowledges and agrees that the terms and provisions of this Agreement are fair
and reasonable and that no such term or provision shall in any event be deemed a
penalty.
21. COUNTERPARTS
This Agreement may be executed in counterparts each of which shall be
deemed an original but all of which together shall constitute a single
instrument.
22. DISPUTE RESOLUTION
At the sole election of the Executive, any dispute arising pursuant to this
Agreement may be resolved pursuant to an arbitration proceeding conducted by a
panel of three neutral arbitrators in accordance with the commercial arbitration
rules of the American Arbitration Association. Any such proceedings will be held
in Stamford, Connecticut. Notwithstanding anything contained herein to the
contrary all costs associated with such proceeding shall borne by the Company.
23. COVENANT NOT TO COMPETE UPON ELECTION OF COMPANY
(a) During the period of 30 days following the termination of the
employment of the Executive during the Term (other than termination pursuant to
Section 8 (c) (A) or Section 8 (c) (C)), the Company shall have the option, but
not the obligation, to deliver to the Executive a written notice of the election
of the Company to invoke the covenant not to compete contained in Section 23 (b)
hereof
(b) Upon timely receipt by the Executive of a notice specified in Paragraph
23(a) hereof, the Executive shall not, for a period of two years, engage in the
business of (i) the offering of service contracts to consumers through
retailers, dealers, distributors and manufacturers, or (ii) administering
service contracts offered by others to consumers through retailers, dealers,
distributors and manufacturers. Nothing herein shall impair the ability of the
Executive to engage in any other activity not specified in the immediately
preceding sentence, including, without limitation, offering service contracts or
administering service contracts offered to consumers other than through
retailers, dealers, distributors and manufacturers.
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(c) Upon the election of the Company to invoke the provisions of this
Section 23, and simultaneously with the submission of the notice specified in
paragraph 23 (a), the Company shall issue to the Executive One Hundred Thousand
(100,000) shares of Common Stock.
(d) The obligations of the Executive under this Section 23 shall terminate
upon the breach by the Company of any obligation to the Executive pursuant to
this Agreement or any other agreement.
IN WITNESS WHEREOF, the Company and Executive have duly executed this
Agreement as of the day and year first written above.
WARRANTECH CORPORATION
By: /s/ Richard Gavino
--------------------
Richard Gavino
Financial Officer
/s/ Joel San Antonio
------------------------
Joel San Antonio
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EXHIBIT 21
LIST OF SUBSIDIARIES OF WARRANTECH CORPORATION
WARRANTECH CONSUMER PRODUCT SERVICES, INC.
a Connecticut corporation
WCPS OF FLORIDA, INC.
a Florida corporation
WARRANTECH AUTOMOTIVE, INC.
a Connecticut corporation
WARRANTECH AUTOMOTIVE OF CALIFORNIA, INC.
a California corporation
WARRANTECH AUTOMOTIVE RISK PURCHASING GROUP, INC.
a Michigan corporation
WARRANTECH AUTOMOTIVE OF FLORIDA, INC.
a Florida corporation
WARRANTECH DIRECT, INC.
a Texas corporation
WARRANTECH (UK) LIMITED
a company incorporated in England
WARRANTECH INTERNATIONAL, INC.
a Delaware corporation
WCPS OF CANADA, INC.
a Connecticut corporation
WARRANTECH AUTOMOTIVE OF CANADA, INC.
a Connecticut corporation
WARRANTECH EUROPE PLC
a company incorporated in England
WARRANTECH ADDITIVE, INC.
a Texas corporation
WARRANTECH HOME SERVICE COMPANY
a Connecticut corporation
WARRANTECH CARIBBEAN LTD
a company incorporated in the Cayman Islands
WARRANTECH HOME ASSURANCE COMPANY
a Florida corporation
WARRANTECH HELP DESK, INC.
a Delaware corporation
WCPS DIRECT, INC.
a Texas corporation
WHSC DIRECT, INC.
a Texas corporation
WARRANTECH HOME ASSURANCE COMPANY
a Connecticut corporation
WARRANTECH INTERNATIONAL de CHILE
a Chile corporation
VEMECO, INC.
a Connecticut corporation
