WTEC Research Note

Warrantech Corporation (WTEC)
By: Richard W. West, CFA

WARRANTECH ANNOUNCES SETTLEMENT OF ALL PENDING DISPUTES WITH STAPLES

Warrantech announced on June 12, 2002 the settlement of all pending disputes with Staples (Nasdaq: SPLS) that arose out of a Service Contract Administration Agreement, under which Warrantech administered a service contract program for Staples. For a period of time, that program was underwritten by ACE Property and Casualty Insurance Company (f/k/a CIGNA Property and Casualty Insurance Company). Problems evidently arose after Ace implemented changes in the process pursuant to which claims underwritten by ACE were to be adjusted and paid. Although Warrantech continued to take inbound calls and validate coverage, ACE confirmed diagnoses, dispatched service and pay servicer invoices. Shortly after implementation of these changes, Staples reported that it had witnessed a material increase in complaints from customers holding service contracts underwritten by ACE. These complaints were primarily focused on inordinate delays in service delivery. Although Staples discussed these problems with Warrantech, ACE continued to operate under the new claims handling procedures. In an effort to satisfy customer complaints, Staples stated that it had spent a substantial amount of its own funds to repair or replace covered products.

Staples pursued an action for damages against both ACE and Warrantech and sought to recover the amounts it had spent to satisfy its customers and certain unspecified amounts representing loss of business and damage to its reputation. Today's settlement ended this case with a positive result and with no adverse financial impact to Warrantech. While the settlement is confidential, as part of the settlement, Warrantech stockholders are entitled to know the particulars. For the settlement, Staples accepted five-year options to purchase up to one million shares or Warrantech common stock at an exercise price of $2.00 per share. The options contain a call provision exercisable by Warrantech should the stock trade at $3.00 or above for five consecutive days.

SUMMARY

We view this as a most positive event for Warrantech. To rid the Company of this overhanging liability by the issuance of the $2.00 stock options to Staples is an acknowledgment by an outside corporation that Warrantech does indeed have great value arising from its ongoing business. Staples now has a strong continuing interest as do all stockholders in Warrantech.

At its current price of $0.60 per share, and based on our estimated EPS of $0.11 for the year ended 3/31/02 and estimated EPS of $0.29 for the year ended 3/31/03, the stock is now trading at a 5.4 price/earnings ratio for the year ended 3/31/02 and 2.0 price/earnings ratio for year ended 3/31/03. We are cognizant of the drawbacks of the general market weakness and Warrantech's listing on the Bulletin Board, however, we can not state strongly enough that we believe that at current levels Warrantech is a compelling BUY that offers investors an excellent opportunity for long-term capital appreciation with minimum downside risk. We reiterate our strong Speculative Buy on Warrantech Corporation and our price target of $1.75 for a 12 to 18-month timeframe.

J.M. Dutton & Associates, LLC. John M. Dutton, President and Supervisory Analyst, 1129 Manning Drive, Suite 310, El Dorado Hills, CA 95762 Phone (916) 941-4985, Fax (978) 418-6422 Email: [email protected] Web site: www.JMDutton.com

Information, opinions or recommendations contained in this research note are submitted solely for advisory and information purposes. The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Such information and the opinions expressed are subject to change without notice. This research note is not intended as an offering or a solicitation of an offer to buy or sell the securities mentioned or discussed. Neither the Firm, its principals, nor the assigned analysts own or trade shares of any company covered. The Firm does not accept any equity compensation. Anyone may enroll a company for research coverage, which costs US $25,000 prepaid for one-year. Reports are performed on behalf of the public, and are not a service to any company. The analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests and insure independence. Please read full disclosure and other reports and notes on the Company at www.JMDutton.com.