WTEC Research Note

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

WARRANTECH REPRORTS STRONG 4TH QUARTER
STRONG FY2002 RESULTS - EXPENSES DOWN SIGNIFICANTLY
FY 2002 EPS UP 25%

STRONG BUY RECOMMENDATION REITEREATED

Warrantech Corporation reported its eighth consecutive quarter of profitability. For the 4th quarter FY2002, revenues were $10.3 million down from $12.6million in 4th quarter 2001; however, for the 4th quarter FY2002, net income increased dramatically to $1.0 million or fully diluted EPS of $0.07 as compared to net income of only $24,014 or approximately breakeven EPS for the 4th quarter FY2001. The results for the 4th quarter were stronger than our estimated fully diluted EPS of $0.05, as was the year-end figures. For FY2002, revenues were $37.2 million as compared to $49.7 million in FY2001. (both the quarter and year numbers reflect the loss of the Staples account. (NNM:SPLS - $19.64) However, due to significantly lower expenses, net income for FY2002 rose dramatically to $2.2 million or fully diluted EPS of $0.15 (our estimated fully diluted EPS for FY2002 was $0.11) as compared to $1.8 million or fully diluted EPS of $0.12

Revenues for both the 4th quarter and FY2002 reflected the loss of the Staples account and lower deferred revenue from prior periods being recognized in the quarter and present year. It must be noted that excluding the lost revenues from the Staples account, the Company experienced an increase in net administrative fees from the existing and new dealer client base. The dramatic increase in net income for the year was positively affected by the legal settlement from the American International Group, Inc. In addition, lower SG&A expenses and lower depreciation and amortization greatly benefited the net earnings.

Automotive Revenues up 50% for the quarter - up 19% for the year:
For the 4th quarter FY2002, net earned administrative fees for the automotive segment increased 50% to $6.5 million as compared to $4.3 million for the 4th quarter FY2001. For FY2002 net earned administrative fees increased 19% to $19.0 million from $16.0 million in FY2001. The increase was due to higher sales volume and a $1.0 million rise in deferred revenue from prior periods.

Consumer Strong - ex the decrease from lost Staples business:
For the 4th quarter FY2002, net earned administrative fees for the Consumer Products area were $3.4 million as compared to $7.8 million. For FY2002 earned administrative fees decreased to $16.3 million as compared to $32.2 million in FY2001. The lower fees reflected the loss of the Staples account.

International fees up 30% - from new contracts and penetration of Latin America market:
For the 4th quarter FY2002, net earned administrative fees for the International segment was $188,646 as compared to $570,771 for last year-s 4th quarter (reflects the closing of the UK operations last year). For FY2002, net earned administrative fees increased 30% to $2.3 million as compared to $1.8 million in FY2001. Strong business in Peru and Chile were the primary reason for the increase in the revenues for the year.

Service, Selling General and Administrative expenses down 30% for the 4th quarter and 25% for FY2002:
For the 4th quarter FY2002, SG&A declined 30% to $7.5 million from $10.7 million. For FY2002, SG&A expenses declined 25% to $29.4 million as compared to $39.8 million in FY2001. The decline in expenses reflected management-s continuing commitment to cost cutting and the closure of the UK operations. For 4th quarter FY2002, employee and payroll, expenses decreased 13% to $4.2 million from $5.5 million in 4th quarter FY2001. For FY2002 employee and payroll expenses declined 17% to $18.6 million as compared to $22.4 million in FY2001.

Service Expenses Down for the 4th quarter and FY2002:
For the 4th quarter FY2002 service related expenses and legal fees were $739,777 as compared to $1.6 million for 4th quarter FY2001. For FY2002 service expenses decreased 56% to $2.8 million from $6.4 million in FY2001, reflecting the settlement with AIG and a reduction in computer system development.

For the quarter FY2002, rent decreased 44% to $634,72 4th quarter FY2002. For FY2002 rent expenses decreased approximately $1.0 million due to the closing of the UK offices and the relocation of the corporate offices from Connecticut to Texas.

For the 4th quarter FY2002, income from operations increased 371% to $1.7 million from $364,339 in 4th quarter FY2001. For FY2002 income from operations increased 18% to $2.9 million from $2.4 million in FY2001. The increase in income from operations for FY2002 was the result of lower depreciation and amortization; the reduction of losses from the closing of the UK operations and the benefit of the AIG settlement, which was partially offset by the decrease in revenues from the discontinued Staples account.

SUMMARY:

Revenues up strongly, expenses down significantly - the net result is a most positive 4th quarter and FY2002 for Warrantech Corporation. In addition, the legal problems that were hanging over Warrantech were resolved in FY2002. A settlement of close to $900,000 from AIG and a resolution of all pending disputes with Staples benefited Warrantech financially and has left management free to concentrate on growing its business. From the additional contracts both domestically and internationally, it is apparent that business is growing and Warrantech is in a strong position to continue the revenue and earnings growth that began last year.

At its present prices, we continue to believe Warrantech is a compelling buy and we reiterate our STRONG SPECULATIVE BUY recommendation. Based on our estimated EPS of $0.29 for FY2003, the stock trades only at a 2.1 price earnings ratio. We cannot stress enough our belief that Warrantech-s current price is impacted by the following: (1) the fact that the common stock is listed on the Bulletin Board; (2) the general market malaise; and (3) the fact that the stock sells for less than $1.00. At these levels the fundamentals are apparently being ignored and it is our firm opinion that investors who take this opportunity to purchase Warrantech Corporation are purchasing a stock in a Company with minimum downside risk and major upside rewards. We reiterate our Strong Speculative Buy on Warrantech Corporation and out price target of $1.75 for a twelve to eighteen-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.