SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, For Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[_] Definitive Additional Materials by Rule 14a-6(e)(2))
[_] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
WARRANTECH CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
________________________________________________________________________________
1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
________________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
________________________________________________________________________________
5) Total fee paid:
[_] Fee paid previously with preliminary materials:
________________________________________________________________________________
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of
WARRANTECH CORPORATION:
The annual meeting of stockholders of Warrantech Corporation (the
"Company") will be held at the offices of the Company located at 150 Westpark
Way, Suite 200, Euless, Texas on Wednesday, October 4, 2000 at 10:00 A.M.
Central Time, for the following purposes:
1. To elect six directors to serve until the next annual meeting and
until their successors are duly elected and qualified.
2. To transact such other business as may properly be brought before
the meeting or any adjournments thereof.
Only stockholders of record at the close of business on August 11, 2000 are
entitled to notice of and to vote at the annual meeting or any adjournments
thereof.
Your attention is called to the Proxy Statement on the following pages.
Please review it carefully. We hope that you will attend the meeting. If you do
not plan to attend, please sign, date and mail the enclosed proxy in the
enclosed envelope, which requires no postage if mailed in the United States.
By order of the Board of Directors,
Joel San Antonio
Chief Executive Officer
August 17, 2000
<PAGE>
WARRANTECH CORPORATION
300 Atlantic Street
Stamford, Connecticut 06901
-------------------------------------------
PROXY STATEMENT
-------------------------------------------
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Warrantech Corporation (the "Company") of proxies in
the enclosed form for use at the annual meeting of stockholders to be held on
October 4, 2000 and at any adjournments thereof. Any proxy given pursuant to
such solicitation and received in time for the meeting will be noted with
respect to all shares represented by it and will be voted in accordance with the
instructions, if any, given in such proxy. If no instructions are specified,
proxies will be voted FOR the election of the nominees named in the table on the
following page. Any proxy may be revoked by written notice received by the
Secretary of the Company at any time prior to the voting. The affirmative vote
of the majority of the votes cast by stockholders present in person or
represented by proxy at the meeting and entitled to vote is required in order to
elect each of the director nominees.
Only stockholders of record at the close of business on August 11, 2000
will be entitled to notice of and to vote at the annual meeting. On August 11,
2000 the Company had outstanding 15,305,954 shares of Common Stock. Each share
of Common Stock entitles the record holder thereof to one vote.
1
<PAGE>
ELECTION OF DIRECTORS (Item 1 on Proxy Card)
A Board of Directors consisting of six directors is to be elected by the
stockholders, to hold office until the next annual meeting and until their
successors are duly elected and qualified. The nominees are listed in the table
below. While the Board of Directors has no reason to believe that any of those
named will not be available as a candidate, should such a situation arise, the
proxy may be voted for the election of other persons as directors.
Director
Name Age Positions with Company Since
------------------- --- ----------------------- -----
Joel San Antonio 47 Chairman of the Board, Chief 1983
Executive Officer and Director
William Tweed 60 Director 1983
Jeff J. White 49 Director 1983
Lawrence Richenstein 47 Director 1993
Gordon A. Paris 47 Director 1998
Ronald Glime 55 President of U.S. and Canadian 2000
Operations
No family relationships exist among any of the Company's executive officers
or directors, except that Randall San Antonio, President of Warrantech Direct,
Inc., a subsidiary of the Company, is the brother of Joel San Antonio.
The business experience of each of the Company's directors and nominees for
election to the Board of Directors is as follows:
Joel San Antonio, 47, one of the Company's founders, was a director, Chief
Executive Officer and President of the Company from incorporation through
February 1988. Since February 1988 Mr. San Antonio has been a director, Chief
Executive Officer and Chairman of the Board of Directors and since October 1989,
he has also been Chairman and Chief Executive Officer of the Company's principal
operating subsidiaries. In 1975, Mr. San Antonio founded and, thereafter through
August 1982, served as President of Little Lorraine, Ltd., a company engaged in
the manufacturing of women's apparel. Mr. San Antonio is currently a member of
the Southwestern Connecticut Area Commerce & Industry Association, the World
Forum, the Connecticut Business and Industry Association, the Metropolitan
Museum of Art, and the Young Presidents' Organization, Inc. Mr. San Antonio was
a director of Corniche Group Incorporated, a company in the insurance and/or
insurance-related businesses based in Euless, Texas, from May 1998 until
September 1999.
2
<PAGE>
William Tweed, 60, 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, 49, 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.
Lawrence Richenstein, 47, 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 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, 47, 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.
3
<PAGE>
Ronald Glime, 55, has been President of U.S. and Canadian Operations of the
Company 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 Corporation, a company in the
warranty administration business. He resigned as its President in 1982. Mr.
Glime was a director of Corniche Group Incorporated, a company in the insurance
and/or insurance-related businesses based in Euless, Texas, from May 1998 until
September 1999.
Other Executive Officers And Key Employees
Jeanine Folz, 35, 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, 52, has been President of Warrantech Automotive Inc., a
wholly owned subsidiary of the Company, since May 1999. From December 1996 until
April 1999, Mr. Ford was the Legal Representative/Managing Director of Techmark
Japan, an AIG related business in Japan. From February 1994 to December 1996,
Mr. Ford was Regional Vice President for Warranty Products Division of AIU, an
AIG related Company in Australia. From 1989 to 1994, he held several key
marketing and management positions within the vehicle service contract industry.
Prior to 1989, Mr. Ford held various management positions in the automotive
industry.
Richard F. Gavino, 53, has been Executive Vice President, Chief Financial
Officer and Treasurer since April 1998. From 1995 to March 1998, Mr. Gavino was
Chief Financial Officer at Maxon Auto Group, one of the largest automobile
retailers in New Jersey. From 1993 to 1995, Mr. Gavino was a turnaround
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.
Andrew Impavido, 58, 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.
4
<PAGE>
James F. Morganteen, 50, 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.
Gayle Pomerantz, 38, has been President of Warrantech Home Service Company
since May 2000. From March 1994 to April 2000, Ms. Pomerantz was the CEO of
Visby Marketing Group, Inc., a business development and consulting services
firm. From August 1993 to October 1996, Ms. Pomerantz was the President/Owner of
One Stop Creative Services, Inc., a creative marketing and consulting services
firm. From December 1986 to August 1993, Ms. Pomerantz was Special Projects
Director, Publisher and Editor of Homeowners Marketing Services, Inc., a
national marketing company serving the real estate industry.
Richard Rodriguez, 46, 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, 46, 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.
Information Concerning Meetings of the Board of Directors
During the fiscal year ended March 31, 2000, the Board of Directors held
eight meetings. All such meetings were fully attended. The Company has an Audit
Committee consisting of Messrs. Paris, Richenstein and White. Such committee met
seven times during the 2000 fiscal year. The Company has a Compensation
Committee consisting of Messrs. Paris, Richenstein and White. This committee did
not meet during the 2000 fiscal year.
5
<PAGE>
Security Ownership Of Certain Beneficial Owners and Management
The following table sets forth information as of July 28, 2000 concerning
shares of Common Stock, par value $.007 per share, the Company's only voting
securities, owned beneficially by each of the Company's directors and nominees
for the Board of Directors, by each person who is known by the Company to own
beneficially more than 5% of the outstanding voting securities of the Company
and by the Company's executive officers and directors as a group.
Name and Address of Beneficial Owner Amount and Nature of Percent
------------------------------------ Beneficial Ownership of Class
-------------------- --------
Joel San Antonio 3,203,991 shares(1) 20.89%
300 Atlantic Street
Stamford, Connecticut 06901
William Tweed 1,842,475 shares(2) 12.01%
300 Atlantic Street
Stamford, Connecticut 06901
Jeff J. White 1,593,654 shares(3) 10.39%
35 Hub Drive
Melville, New York 11747
Lawrence Richenstein 14,625 shares *(7)
500 Eastern Parkway
Farmingdale, New York 11735
Gordon A. Paris 3,500 shares *(7)
31 West 52nd Street, 22nd floor
New York, New York 10019-6101
Ronald Glime 79,134 shares(6) *(7)
150 Westpark Way
Euless, Texas 76040
All directors and executive officers
As a group (14 persons) 6,809,183 shares(1,2,3,4) 44.40%
Dimensional Fund Advisors Inc.
1299 Ocean Avenue, 11th floor 1,132,700 shares(5) 7.39%
Santa Monica, California 90401
------------------
(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. Does not include options to purchase 400,000 shares
which become exercisable commencing August 25, 2001 based on the operating
performance of the Company.
6
<PAGE>
(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 30,770 shares, which are presently exercisable.
(5) According to a Schedule 13G filed with the Securities and Exchange
Commission (the "SEC") on February 3, 2000 by Dimensional Fund Advisors
Inc., such entity beneficially owned 1,132,700 shares of the Company's
common stock as of December 31, 1999, of which such entity had sole power
to vote or direct the vote and had sole power to dispose or direct the
disposition of all such shares. By the same filing, Dimensional Fund
Advisors Inc. has disclaimed beneficial ownership of all such shares.
(6) Does not include options to purchase 95,500 shares which become exercisable
based on the operating performance of the Company and per terms of
employment agreement.
(7) Less than 1% of the outstanding shares of Common Stock.
7
<PAGE>
Certain Relationships and Related Transactions
On April 1, 1996, Michael Salpeter, former President and Director of the
Company, and William Tweed, former President of the Company entered into an
Agreement whereby Mr. Tweed granted to Mr. Salpeter an option to purchase
487,000 shares of common stock owned by Mr. Tweed. The options are exercisable
at various prices in whole or in part, and expire on October 22, 2000. In May
1998, such Agreement was modified, pursuant to which Mr. Salpeter relinquished
his rights with respect to 125,000 shares, leaving an option exercisable for
362,000 shares. In March 1999, 62,000 shares were purchased under the Agreement
leaving an option exercisable for 300,000 shares.
On July 6, 1998, Joel San Antonio, Warrantech's Chairman and Chief
Executive Officer, and William Tweed and Jeff J. White, members of Warrantech's
Board of Directors, exercised 3,000,000 of their vested options to purchase
Warrantech common stock. Promissory notes totaling $8,062,500 were signed with
interest payable over three years at an annual interest rate of 6%. The
promissory notes, which are with recourse and secured by the stock certificates
issued, mature July 5, 2001. An additional promissory note was signed by Joel
San Antonio for $595,634 on March 22, 1999, which represents the amounts funded
by the Company with respect to his payroll taxes for the exercise of these
options. The exercise of these stock options and the anticipated tax benefit
from this transaction total approximately $10 million. These amounts have been
recorded as a contra-equity account, which is a reduction of stockholders'
equity.
The Company recently agreed to restructure these loans by capitalizing the
interest due on the loans and making the loans payable over five (5) years, with
respect to Mr. Tweed and Mr. White, and over one (1) year with respect to Mr.
San Antonio. Interest on the new loans to Messrs. Tweed and White accrues
annually at the applicable federal rate (currently approximately 6.2%) but will
first become payable on the third anniversary of the new loans and will be
payable annually thereafter. The new loan to Mr. San Antonio, which is payable
in one year, is without interest. The specific terms of this new loan agreement
with Mr. San Antonio are still being negotiated. The total amount of the new
loans, including the capitalized interest, which accrued on the prior loans
through June 30, 2000, is $9,582,582.
Warrantech Consumer Product Services, Inc. and Warrantech Direct, Inc. have
made commission payments to Unlimited Business Services, Inc. totaling $152,316
for the fiscal year 2000 pursuant to Representative Agreements. Judith Thomas,
who was President of Warrantech Help Desk, Inc., is the President of Unlimited
Business Services, Inc.
8
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information for the years ended March 31,
2000, 1999 and 1998, 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, 2000.
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------
Other Annual
Name of Principal Positions Year Salary Bonus Compensation (2)
<S> <C> <C> <C> <C>
Joel San Antonio 2000 $627,725 $1,600 $101,366
Chairman of the Board 1999 590,430 1,600 29,750
and Chief Executive Officer 1998 557,865 211,941 28,104
Ronald Glime 2000 $289,738 $800 $30,977
President of U.S. and Canadian Operations 1999 200,000 52,951 9,523
1998 160,385 110,903 7,837
Richard F. Gavino 2000 $217,608 $50 $18,587
Executive Vice President, Chief Financial 1999 182,308 25,000 9,587
Officer and Treasurer 1998 -- -- --
Michael A. Basone 2000 $212,449 $10,500 $12,970
Former Executive Vice President, Chief 1999 193,269 400 12,677
Information Officer and Chief Operating Officer 1998 158,939 43,277 12,318
Christopher Ford 2000 $150,173 $45,625 $13,716
President of Warrantech Automotive, Inc. 1999 -- -- --
1998 -- -- --
Richard Rodriguez 2000 $166,444 $1,200 $19,541
President and Executive Vice President 1999 149,038 26,100 14,169
of Warrantech International, Inc. 1998 121,102 1,000 6,285
<CAPTION>
Long Term Compensation
Awards (1)
----------------------------
Restricted Stock Option All Other
Stock
Name of Principal Positions Year (Shares)Awards (Shares)Awards Compensation (3)
<S> <C> <C> <C> <C>
Joel San Antonio 2000 $-- $-- $2,425
Chairman of the Board 1999 -- 400,000 2,245
and Chief Executive Officer 1998 -- -- 1,070
Ronald Glime 2000 $-- -- $1,713
President of U.S. and Canadian Operations 1999 -- 70,816 1,547
1998 -- -- 1,972
Richard F. Gavino 2000 $-- $-- $1,645
Executive Vice President, Chief Financial 1999 25,000 92,308 --
Officer and Treasurer 1998 -- -- --
Michael A. Basone 2000 $-- -- $1,366
Former Executive Vice President, Chief 1999 -- 32,653 1,106
Information Officer and Chief Operating Officer 1998 -- -- 2,341
Christopher Ford 2000 $-- -- $--
President of Warrantech Automotive, Inc. 1999 -- -- --
1998 -- -- --
Richard Rodriguez 2000 $-- -- $1,110
President and Executive Vice President 1999 -- -- 1,262
of Warrantech International, Inc. 1998 -- 7,742 1,648
</TABLE>
(1) The 1998 Stock Option Plan is the Company's only long-term incentive plan.
(2) Included in Other Annual Compensation are auto allowances given to each
officer in fiscal 1998, 1999, and 2000; life insurance premiums for the
years 1998, 1999, and 2000; vacation accrual exchange payouts to Messrs.
San Antonio, Glime, Gavino, and Rodriguez in fiscal 2000; and relocation
expenses paid Mr. Basone in fiscal 1997 and Mr. Ford in fiscal 2000.
(3) Represents amounts contributed by the Company in accordance with the
Company's 401(K) Plan.
9
<PAGE>
Option Grants In Last Fiscal Year
No stock options were granted to any individuals listed in the Summary
Compensation Table during the fiscal year ended March 31, 2000.
Options Exercised and Holdings
The following table sets forth information with respect to the individuals
listed in the Summary Compensation Table above, concerning unexercised options
held as of the end of the 2000 fiscal year.
<TABLE>
<CAPTION>
Shares Acquired Number of Unexercised Options at Value of Unexercised In-the-Money
Name On Exercise Value Realized Fiscal Year-End(#) Options at Fiscal Year-End ($)(1)
--------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joel San Antonio - - - 400,000 $ - $ -
Ronald Glime - - - 30,000 - -
Richard F. Gavino - - 30,770 61,538 - -
Michael A. Basone - - - - - -
Christopher Ford - - - - - -
Richard Rodriguez - - - - - -
</TABLE>
(1) Based upon the Company's price per share of $1.594, as reported on the
NASDAQ National Market System on March 31, 2000.
10
<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 forfeited his 5% increase effective
November 8, 1999 and January 1, 2000. Effective April 10, 2000, Mr. San Antonio
received a meritorious increase of $10,000. 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. However, all such options vest
immediately in the event of a change of control of the Company. 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 April 1, 1999, the Company entered into a four-year employment
agreement with Ronald Glime, in conjunction with his new role as President of
U.S. and Canadian Operations. Under the terms of such agreement, Mr. Glime is
entitled to an initial annual base salary of $275,000 subject to automatic
minimum annual increases of 5%. Effective November 8, 1999, Mr. Glime received a
meritorious increase of $20,000. Mr. Glime was granted stock options, pursuant
to the agreement, to purchase 30,000 shares of the Company's common stock, which
vest over a four-year period contingent upon the Company achieving certain
specified performance goals. Mr. Glime was granted stock options in August 1999
to purchase an aggregate of 50,000 shares of the Company's common stock, which
vest over a three-year period. Mr. Glime is entitled to receive a cash bonus
based upon a percentage of the after tax net income of the Company. 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.
11
<PAGE>
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 pre-tax income. The Company
provides Mr. Gavino with medical and dental insurance, an automobile allowance
of $6,000 per annum and life insurance benefits similar to that provided by the
Company to certain of its other executives.
Effective May 3, 1999, Warrantech Automotive, Inc. entered into a five-year
employment agreement with Mr. Christopher Ford to serve as President. Under the
terms of such Agreement, Mr. Ford is entitled to an initial annual base salary
of $165,000 subject to annual increases of 5%. Mr. Ford received a $25,000 bonus
upon signing of the employment agreement and relocating to Texas. Mr. Ford is
entitled to receive annual bonuses equal to 50% of his base salary if certain
operating goals for Warrantech Automotive, Inc. are attained. The Company
provides Mr. Ford 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.
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.
12
<PAGE>
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, 2000, all Section 16 filing requirements applicable
to its officers, directors and greater than 10% beneficial owners were complied
with except that Sean Hicks did not file a Form 5.
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 2000, the following
cash amounts were paid:
William Tweed $10,000
Jeff J. White 14,000
Lawrence Richenstein 14,000
Gordon A. Paris 14,000
No directors' fees are payable to employees of the Company who serve as
directors.
13
<PAGE>
Performance Graph
The following graph and table tracks an assumed investment of $100 on March 31,
1995 in the Common Stock of the Company, The Russell 2000 Index and a peer group
comprised of two companies whose principal operations are similar to those of
the Company, assuming full reinvestment of dividends and no payment of brokerage
or other commissions or fees. Past performance is not necessarily indicative of
future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG WARRANTECH CORPORATION, THE RUSSELL 2000 INDEX
AND A PEER GROUP
[THE FOLLOWING TABLE WAS ALSO REPRESENTED AS A LINE GRAPH
IN THE PRINTED MATERIAL]
--------------------------------------------------------------------------------
Cumulative Total Return
--------------------------------------------------------------------------------
3/95 3/96 3/97 3/98 3/99 3/00
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WARRANTECH CORPORATION 100 80 178 140 63 31
--------------------------------------------------------------------------------
PEER GROUP 100 125 133 152 110 274
--------------------------------------------------------------------------------
RUSSELL 2000 100 127 148 211 165 187
--------------------------------------------------------------------------------
The peer group consists of Unico American Corp., and Harris & Harris Group, Inc.
All amounts rounded to the nearest dollar.
14
<PAGE>
Report of Compensation Committee on Executive Compensation
The Compensation Committee of the Board of Directors of the Company (the
"Committee") was formed in February 1994. The Committee is responsible for
setting and administering the compensation policies, which govern annual
compensation, long-term compensation, and stock option and ownership programs
for the Company's executive officers as well as the other employees of the
Company and its subsidiaries. The Committee, which did not meet during fiscal
2000, consisted of three outside directors, Jeff J. White, Lawrence Richenstein
and Gordon A. Paris.
The policies and decisions of the committee are designed to achieve the
following goals:
o Reflect a pay-for-performance relationship where a portion of total
compensation is at risk.
o Attract and retain key management personnel critical to the Company's
long-term success.
The Committee met extensively during fiscal 1996 and solicited and
evaluated information from independent sources to review the reasonableness of
compensation paid to senior executive officers of the Company, by comparison to
compensation paid by competing companies, companies of similar size, and the
Company's performance, taking into account activities that have special value to
the Company but have no immediate impact on operating results and the increased
level of revenues and income of the Company.
As a result of these deliberations, the Committee made detailed and
comprehensive recommendations to the Board of Directors to change the senior
executive compensation agreements to reflect an increase in base compensation,
terminate the Senior Executive Bonus Plan, and set in lieu of such Plan a
reduced incentive bonus equal to 4% of the after tax profits of the Company for
the Chief Executive Officer. Having duly considered the recommendations of the
Committee, the Board of Directors approved these changes at its November 14,
1995 meeting. Effective with the employment agreement dated August 25, 1998, Mr.
San Antonio's incentive bonus was further reduced to 2% of the after tax profits
of the Company.
In addition, the Committee evaluated the Company's bonus incentive plans,
which are designed to reward other key executive officers of the Company with
bonuses based on the Company's attaining certain operating goals. Under these
plans, each eligible participant becomes entitled to an incentive bonus payment
equal to an agreed upon percentage of his then current salary base adjusted
proportionately if net operating revenues and operating income goals are met.
15
<PAGE>
During the 2000 fiscal year, all decisions regarding the Company's Stock
Option Plan (the "Plan"), including the granting of options thereunder, were
made by the full Board of Directors. As of March 31, 2000, options to purchase
an aggregate of 322,090 shares of Common Stock were issued under the Plan, of
which none were granted during the fiscal year ended March 31, 2000. On April 5,
2000, the full Board of Directors granted options to purchase an aggregate of
471,259 shares of Common Stock to 27 executives and employees under the Plan.
The Committee is of the opinion that the Plan has been extremely effective in
attracting and retaining key executives and employees of the Company and its
subsidiaries and motivating them to improve the Company's financial performance.
Section 162(m) of the Internal Revenue Code (the "Code"), enacted in 1993
and effective for taxable years beginning after January 1, 1994, generally
limits to $1 million per individual per year the federal income tax deduction
for compensation paid by a publicly held company to the Company's chief
executive officer and its other four highest paid executive officers.
Compensation that qualifies as performance-based compensation for purposes of
Section 162(m) is not subject to the $1 million deduction limitation. The
Committee currently does not anticipate that any executive officer will be paid
compensation from the Company in excess of $1 million in any year (including
amounts that do not qualify as performance-based compensation under the Code),
and accordingly, the Committee anticipates that all amounts paid as executive
compensation will be deductible by the Company for federal income tax purposes.
Summary of Chief Executive Officer Compensation
During the fiscal year ended March 31, 2000, Mr. San Antonio received
$627,725 in base salary and $1,600 in bonuses. Mr. San Antonio's total
compensation during the 2000 fiscal year and the terms of his employment
agreement were designed to reward Mr. San Antonio for his diligent efforts in
implementation of cost-cutting measures and general restructuring of the
Company's business, overseeing the Company's development of new markets,
technological improvements, introduction of a range of new programs and pursuit
of major new customers, each of which impacts current results for the long-term
benefit of the Company.
COMPENSATION COMMITTEE
Jeff J. White
Lawrence Richenstein
Gordon A. Paris
16
<PAGE>
OTHER INFORMATION FURNISHED PURSUANT TO REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION
Independent Accountants
On August 25, 1999, the Board of Directors selected Weinick Sanders
Leventhal & Co., LLP ("Weinick") to be the Company's independent public
accountants for the fiscal year ended March 31, 1999. It is expected that a
representative of such firm will be present at the annual meeting, with the
opportunity to make a statement if he or she desires to do so, and will be
available to respond to appropriate questions.
The Company has not consulted with Weinick Sanders Leventhal & Co., LLP on
(A) applications of accounting principles to a specified transaction, either
completed or proposed, (B) the type of auditing opinion that might be rendered
on the Company's financial statements, and neither a written report was provided
to the Company nor oral advice was provided that Weinick Sanders Leventhal &
Co., LLP concluded was an important factor considered by the Company in reaching
a decision as to the accounting, auditing or financial reporting issue or (C)
any matter that was either the subject of a disagreement or a Reportable Event
as such term is defined herein.
On August 27, 1999, the Company filed a report on Form 8-K with the SEC
relating to the dismissal of Ernst & Young LLP, which was subsequently amended
by the filing of a Form 8-K/A on September 14, 1999. The Company requested that
Ernst & Young furnish it with a letter addressed to the Securities and Exchange
Commission (the "SEC") stating whether or not it agreed with the statements
contained therein. A copy of Ernst & Young's letter dated September 24, 1999 is
filed as an exhibit to the Company's Form 8-K/A filed September 28, 1999. In
connection with the March 31, 1999 proxy statement, the Company offered Ernst &
Young with an opportunity to make a brief statement of its views and Ernst &
Young chose not to do so.
Disagreement with Ernst & Young over the Company's Revenue Recognition Policy
Ernst & Young, which was retained in September 1998 to audit the Company's
financial statements for the Fiscal year ending March 31, 1999, had informed the
Company shortly before the anticipated filing of the Company's Annual Report on
Form 10-K with the SEC that it believed that the revenue recognition policy the
Company had followed since 1991 was not correct, and that the Company should be
following the straight line revenue recognition method provided for in Technical
Bulletin No. 90-1 ("TB 90-1") of the Financial Accounting Standards Board
("FASB"). Due to the shortness of time available before the Fiscal 1999 Form
10-K was due and because the Company disagreed with Ernst & Young's view that TB
90-1 applied, the Company was not able to file its 1999 Form 10-K with certified
financial statements by the July 14, 1999 filing deadline.
17
<PAGE>
Background
The Company had originally requested the views of FASB and the SEC with
respect to the applicability of TB 90-1 in 1991. On August 23, 1991, Weinick,
which then was the Company's independent accountant, had a telephone
conversation with a former staff member of FASB, Mr. John Griffin, in which Mr.
Griffin stated that FASB had reached an informal opinion approximately one month
earlier that TB 90-1 was not applicable to entities that transfer their obligor
risk under extended service contracts ("ESC"), if an ESC obligor transfers risk
of loss through the purchase of insurance. Mr. Griffin explained that this
opinion was premised on the facts that the full cost of the insurance must be
known and fixed and all risk of loss must be transferred to the carrier. Mr.
Griffin further expressed the opinion that entities that transfer their risk to
insurance carriers in such a manner should follow the revenue recognition
guidelines in the American Institute of Certified Public Accountants' Exposure
Draft Proposed Industry Accounting Guide for Insurance Agents and Brokers (the
"Exposure Draft"). In a separate telephone conversation between Weinick and Mr.
Wayne Kauth, of the SEC and one of the authors of the Exposure Draft, Mr. Kauth
stated that one of the major determining factors in the applicability of the
Exposure Draft was the transfer of risk of loss. Based on Messrs. Griffin's and
Kauth's verbal opinions, the Company requested a determination from the Division
of Corporate Finance ("DCF") of the SEC. The Company requested the agreement of
the Staff of the DCF that TB 90-1 is not applicable and its concurrence with the
Company's proportional method of revenue recognition as prescribed under the
guidelines of the Exposure Draft. In a letter dated November 15, 1991, the
Company was informed that the Staff at the DCF would not object to the
conclusion of the Company and its independent accountant that TB 90-1 is not
applicable and that the revenue recognition policy in the Exposure Draft is
appropriate.
Despite the evidence provided to Ernst & Young concerning the
non-applicability of TB 90-1 and the previous approvals provided by the SEC and
FASB, Ernst & Young did not alter their position. Furthermore, it was the
Company's understanding that Ernst & Young had several other clients with
similar issues as to which Ernst & Young did not take the view that TB 90-1 was
applicable.
In light of the apparent inconsistency between different offices within
Ernst & Young itself with respect to the applicability of TB 90-1, Ernst &
Young's unwillingness to consider changing its view in light of this apparent
inconsistency and its unwillingness to even further discuss the issue with the
Company, the Audit Committee and the Board of Directors of the Company concluded
that the independence of Ernst & Young had been compromised, that an effective
working relationship with Ernst & Young was no longer possible and that, as a
result, its engagement as the Company's independent accountant should be
terminated. On August 25, 1999, the Board of Directors of the Company authorized
the dismissal of Ernst & Young as its independent accountant.
18
<PAGE>
Ernst & Young's View
Ernst & Young had informed the Company that it believed 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 in accordance with TB 90-1, as opposed to the current method, in which
the Company recognizes revenues in direct proportion to the costs incurred. The
Company's management believed that Ernst & Young was not correct because 100% of
the risk related to the payment of claims under the service contracts is, and
since 1991 has been, covered by an unaffiliated insurance company and, because
of this transfer of risk, the Company and its subsidiaries are not exposed to
any risk of payment for claims. This was the basis of the opinions expressed by
the FASB member and by the DCF Staff. All of the insurance companies used by the
Company to cover any claims made by consumers under the service contracts are
rated not less than "Excellent" by A.M. Best & Company.
Fiscal 1999 was the first year in which the Company engaged Ernst & Young
to audit its financial statements. The previous auditing firms, each of which
have certified the Company's financial statements since 1991, issued unqualified
opinions with respect to the Company's financial statements, and the Company did
not follow TB 90-1 with respect to its revenue recognition policy during any of
those years.
Conclusion
Due to the disagreement with Ernst & Young concerning the Company's Revenue
Recognition Policy, the Company requested guidance directly from the Chief
Accountant's Office of the SEC, the authority which had previously issued a
letter concurring with the Company's Revenue Recognition Policy in 1991. After
several months of written and verbal communication with the SEC, the Company
received a letter dated November 18, 1999 from the DCF stating that it did not
object to the Company's revenue recognition policy as it is applied to its
dealer-obligor contracts. The DCF did state that the Company should exclude from
its gross revenue that portion of the dealer-obligor service contract payments
it receives which pertains to the premium that is paid to the insurance
companies. As a result, with respect to dealer-obligor contracts, which
represent approximately 63% of the Company's business, the Company will continue
to follow the accounting policy that it has applied over the past eight (8)
years by recognizing a substantial portion of its administrative fee income in
the year in which the service contracts are sold. Furthermore, the Company will
continue to defer only that portion of the administrative fee income that
pertains to administration of claims over the life of the contracts.
With respect to service contracts in which the Company is the obligor, the
DCF informed the Company that the Company should change its revenue recognition
policy to comply with Financial Accounting Standards Board Technical Bulletin
90-1. Based on the communication from the DCF, PricewaterhouseCoopers LLP, the
Company's previous
19
<PAGE>
independent accountants, rescinded their opinion certifying the financial
statements of the Company for the fiscal years ending March 31, 1998, 1997, 1996
and 1995.
Based on the final conclusions reached by the DCF, the Company prepared its
financial statements for the fiscal year ending March 31, 1999 according to the
revenue recognition policy guidance provided by the DCF and restated the
financial statements accordingly for prior years.
Reportable Events
During an Audit Committee meeting held on July 26, 1999 (the "July 1999
Meeting"), Ernst & Young advised the Audit Committee that a "reportable
condition" existed in that significant accounting adjustments to amounts
recorded by management in connection with the Audit involving, among other
items, allowances made for accounts receivable, insurance company claim
receivables and dealer related receivables, in the amount of $5 million were
necessary in order to bring these allowance balances to what Ernst & Young
viewed as acceptable amounts (the "Audit Adjustments").
The Audit Adjustments described by Ernst & Young, including a description
of the amounts and the reasons therefor, are set forth in Schedule A attached as
an Exhibit to the Company's Form 8-K/A filed September 10, 1999. Although all of
the Audit Adjustments were recorded prior to the filing of the Company's Form
8-K, $5,027,014 of the Audit Adjustments were not recorded prior to the Audit.
As explained in such Schedule A, $3,539,679 of the Audit Adjustments were not
recorded prior to the Audit, primarily because of the termination of contracts
with significant customers, which terminations neither occurred nor were known
to the Company until after the financial closing of the Company's year end. Also
as explained in such Schedule A, of the remaining $1,487,335 of the Audit
Adjustments, $1,173,969 were judgmental differences providing for an increase in
the allowance for doubtful accounts. The remaining $313,366 of the Audit
Adjustments were made as a result of the audit process.
The Company disagrees with Ernst & Young's conclusion that a material
weakness in internal controls may exist as a result of the Audit Adjustments
because only $313,366 of the Audit Adjustments were made during the audit
process. Management does not view a $313,366 Audit Adjustment to be an amount
that is material in relation to the financial statements being audited or to
constitute an error. As noted, the majority of the Audit Adjustments, i.e.
$3,539,679, resulted from subsequent events, whereas $1,173,969 resulted from
judgmental differences.
It should be noted that Ernst & Young's report is the first instance in the
fifteen-year history of the Company in which material weaknesses in internal
controls were reported by its independent accountant to the Audit Committee.
The Company believes that the matters reported by Ernst &Young concerning
allowances made for accounts receivable involved judgments by management, which
are
20
<PAGE>
accounting estimate issues and do not represent material weaknesses in internal
control issues. The accounting estimate nature of these matters is evidenced by
the fact that during the course of the Audit, Ernst & Young proposed that the
allowance of doubtful accounts be increased by $170,000 against an uncollected
receivable of $680,000. The Company concurred with this proposal and adjusted
its books accordingly. As of the date hereof, approximately $500,000 of this
$680,000 receivable has been either collected or is in the process of being
paid, and, management is currently taking actions necessary to obtain all
relevant underlying documentation from third parties necessary to collect the
remainder thereof.
Nonetheless, the Company and the Audit Committee have undertaken steps to
determine if Ernst & Young's allegations of the existence of material weaknesses
in the Company's internal controls based on the Audit Adjustments are valid, or,
if any other material weaknesses in internal controls exist and what corrective
actions should be instituted. The Company and the Audit Committee also have
instructed Weinick to review the Audit Adjustments and the Company's accounting
policies and systems in their entirety in order to determine whether there are
any material weaknesses in internal controls. Weinick conducted the requested
review of the Audit Adjustments and reported to the Company that nothing has
come to Weinick's attention that would lead it to believe that there are
material weaknesses in the Company's internal controls.
During the July 1999 Meeting, Ernst & Young also communicated to the Audit
Committee a specific incident in which it asserted that an assistant controller
of the Company had told representatives of Ernst & Young during the Audit that
certain adjustments were made in connection with the closing of the Company's
4th Quarter of Fiscal 1999 (the "4th Quarter") with which the assistant
controller did not agree and that the assistant controller suggested to the
auditors that they should review the 4th Quarter closing adjustments.
Ernst & Young further reported to the Audit Committee that when Ernst &
Young reviewed the 4th Quarter closing adjustments, it reversed a substantial
number of adjustments and that management consented to these reversals. Ernst &
Young further reported to the Audit Committee that when it first told management
of the information reported by the assistant controller, the Company's senior
management asked the assistant controller, in a meeting at which representatives
of Ernst & Young were present, whether he had in fact conveyed such information
to Ernst & Young and the assistant controller vehemently denied that he had made
any such statements to Ernst & Young. Ernst & Young has not, either during the
July 1999 Meetings or at any time thereafter, provided any documentary support
for its statement. The Audit Committee was informed by the Chief Financial
Officer of the Company that there were no reversals of 4th Quarter closing
adjustments recommended by Ernst & Young, and that the only adjustments
recommended by Ernst & Young were the $5 million in Audit Adjustments discussed
above.
Ernst & Young has failed to provide management with an explanation or
evidence as to exactly which 4th Quarter closing adjustments it allegedly
reversed. Therefore the
21
<PAGE>
reasons for the discrepancy between Ernst & Young's statement and the Company's
Chief Financial Officer is unknown to management at this time. It is, however,
the view of the Company's Chief Financial Officer that there is no basis for
that statement made by Ernst & Young. Management provided to Ernst & Young, at
the beginning of the Audit, the Company's financial statements reflecting Income
before Taxes of $4,440,904. The Company's Chief Financial Officer maintains that
there were no reversals of 4th Quarter adjustments made to change those
financials. The only adjustments recorded were those set forth in Schedule A,
totaling $5,027,014, and $555,545 of adjustments that the Company provided to
Ernst & Young at the beginning of the audit. This adjustment of $555,545 was
calculated by the Company subsequent to its closing process and it was provided
to Ernst & Young to be included as part of their post closing adjustments.
While the Company believes that Ernst & Young's allegation relating to the
reversals of 4th Quarter closing adjustments are without substance, Management
and the Audit Committee authorized an investigation of the facts and
circumstances relating to the communications between Ernst & Young and the
assistant controller.
The investigation was conducted by the law firm of Paul, Weiss, Rifkind,
Wharton & Garrison. The report on the investigation (hereinafter referred to as
the "Paul Weiss Report") was completed on January 22, 2000. The Paul Weiss
Report stated that, during interviews with Ernst & Young in the course of the
investigation, Ernst & Young denied having told the Audit Committee that it had
reversed closing adjustments made by the Company's management. The Paul Weiss
Report concluded that: (a) management had not directed adjustments to be made to
the books at the time of the closing of the 4th Quarter; and (b) consequently,
Ernst & Young had not reversed any adjustments directed by management; and (c)
while the assistant controller raised questions during the audit concerning
certain items in the Company's financial statements, Ernst & Young's
recollection of the statements made, as reported to the management of the
Company and later to the Audit Committee, was not accurate; but, at this stage,
it is not possible to determine the exact nature of the statements that were
made.
* * *
On August 28, 1998, the Company, as authorized by its Board, engaged Ernst
& Young, LLP as its new independent accountants for the fiscal year ended March
31, 1999, replacing PricewaterhouseCoopers.
The reports of PricewaterhouseCoopers on the financial statements of the
Company for the fiscal years ended March 31, 1998 and 1997 as originally issued
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with its audits for the two most recent fiscal years and through August 28,
1998, there had been no disagreements with PricewaterhouseCoopers on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers would have caused them to make reference
thereto in their report on the financial statements for such years.
22
<PAGE>
Upon filing a report on Form 8-K with the SEC relating to the dismissal of
PricewaterhouseCoopers, the Company requested that PricewaterhouseCoopers
furnish it with a letter addressed to the Securities and Exchange Commission
(the "Commission") stating whether or not it agreed with the statements
contained therein. A copy of PricewaterhouseCoopers' letter, dated August 31,
1998, is filed as an exhibit to the amendment filed September 4, 1998 to the
Company's report on Form 8-K dated August 28, 1998. In connection with the March
31, 1999 proxy statement, the Company offered PricewaterhouseCoopers an
opportunity to make a brief statement of its views and PricewaterhouseCoopers
chose not to do so.
At the time of its engagement, the Company had not consulted with Ernst &
Young, LLP on (A) applications of accounting principles to a specified
transaction, either completed or proposed, (B) the type of auditing opinion that
might be rendered on the Company's financial statements, and neither a written
report was provided to the Company nor oral advice was provided that Ernst &
Young concluded was an important factor considered by the Company in reaching a
decision as to the accounting, auditing or financial reporting issue or (C) any
matter that was either the subject of a disagreement or a Reportable Event as
such term is defined herein.
Stockholder Proposals for 2001 Meeting
Proposals of stockholders to be included in the Company's proxy material
for the 2001 annual meeting must be received in writing by the Company at its
executive offices not later than June 30, 2001 in order to be included in the
Company's proxy material relating to that meeting.
Other Matters
The solicitation of proxies in the accompanying form will be made at the
Company's expense, primarily by mail and through brokerage and banking
institutions. Those institutions will be requested to forward soliciting
materials to the beneficial owners of the stock held of record by them and will
be reimbursed for their reasonable forwarding expenses.
The Board of Directors is not aware of any other matters that are to be
presented to stockholders for formal action at the meeting. If, however, any
other matter properly comes before the meeting or any adjournments thereof, it
is the intention of the persons named in the enclosed form of proxy to vote
those proxies in accordance with their judgment on such matter.
By order of the Board of Directors,
Joel San Antonio
Chief Executive Officer
23
<PAGE>
WARRANTECH CORPORATION
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints JOEL SAN ANTONIO, WILLIAM TWEED, JEFF J.
WHITE, and each or any of them with full power of substitution, proxies to vote
at the Annual Meeting of Stockholders of WARRANTECH CORPORATION (the "Company")
to be held on October 4, 2000, at 10:00 a.m. Central Time and at any adjournment
or adjournments thereof, hereby revoking any proxies heretofore given, at the
offices of the Company located at 150 Westpark Way, Suite 200, Euless, Texas for
the purposes shown on the reverse side of this proxy card
(To be Signed on Reverse Side.)
--------------------------------------------------------------------------------
/X/ Please mark your vote as per this example.
VOTE FOR all nominees listed WITHHOLD AUTHORITY
1. Election of [ ] below (except as marked to [ ] for all nominees listed
Directors contrary below) below:
Nominees: JOEL SAN ANTONIO WILLIAM TWEED GORDON A. PARIS
JEFF J. WHITE RONALD GLIME LAWRENCE RICHENSTEIN
** To withhold authority to vote for any individual nominee, write that name on
the line below**
FOR AGNST ABST _______________________________________________________________
[ ] [ ] [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting. This Proxy, when properly
executed, will be voted in the manner directed by the undersigned stockholder.
If no direction is made this proxy will be voted FOR proposal 1.
Signature _______________________________ Date ______________
Signature _______________________________ Date ______________
NOTE: (Please sign exactly as name appears stenciled on this Proxy. When signing
as attorney, executor, administrator, trustee or guardian, please set forth your
full title.)
24
