U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 0-21467
DRIVERSHIELD CORP.
(Formerly driversshield.com Corp and previously First Priority Group, Inc.)
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(Name of small business issuer in its charter)
NEW YORK 11-2750412
- -------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
51 East Bethpage Road
Plainview, New York 11803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (516) 694-1010
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value $.015 per share
Preferred Stock Purchase Rights par value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. |_|
State the issuer's revenues for its most recent fiscal year $1,697,000
The aggregate market value of the issuer's voting stock held by
non-affiliates of the issuer as of March 27, 2002, based upon the closing price
on the date thereof is $11,191,000.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 27, 2002, the issuer had outstanding a total of 10,796,988
shares.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
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Part I
Item 1. DESCRIPTION OF BUSINESS
General
On November 23, 1983, driversshield.com FS Corp. ("FS"), formerly known as
National Fleet Service, Inc., a New York corporation was formed and commenced
operations as an automotive fleet administrator. Thereafter, DriverShield Corp.,
(previously driversshield.com Corp, and formerly First Priority Group, Inc.) a
New York corporation, was formed on June 28, 1985, and was engaged in automotive
fleet management and administration of automotive repairs for businesses,
insurance companies and members of affinity groups; it became the parent company
to driversshield.com FS Corp. On February 7, 2002, all of the outstanding shares
of driversshield.com FS Corp. were sold (see Recent Developments) and
DriverShield is no longer engaged in fleet management; however, it continues to
provide collision repair management services for its insurance industry clients
through its subsidiary DriverShield CRM Corp., and automobile services offered
to affinity groups through our wholly owned subsidiary, DriverShield ADS Corp.
("ADS").
In February 2002 the Company modified its name to DriverShield Corp. from
driversshield.com Corp.
The Company's office is located at 51 East Bethpage Road, Plainview, New
York 11803 and its telephone number is (516) 694-1010.
Nature of Services
The services offered by the Company consist of administration of vehicle
repair management, including collision and general repair programs, estimating,
and auditing services, and vehicle rentals for insurance companies and affinity
group members. The Company acts as a third party administrator for its insurance
clients, it assumes the risks and responsibilities for the vehicle repair
process from commencement to completion. Our insurance industry clients use the
Internet to access our collision management system to record a claim, which then
initiates our activities to proceed with vehicle repairs. During our nineteen
years of experience in vehicular repair management, we have established
relationships with 2,000 high-quality shops that we engage in the repair. We
control and negotiate the cost of every repair, the use of certain parts, and
guarantee the quality of the repairs.
The Company through its wholly-owned subsidiary, DriverShield CRM Corp.
("CRM") conducts the Company's collision administration services for insurance
carriers, and through its wholly-owned subsidiary DriverShield ADS Corp.
("ADS"), provides the various auto-affinity programs for all types of
businesses.
Fleet Management. Effective February 7, 2002, the Company sold all of the
outstanding shares of FS to PHH Vehicle Management Services LLC ("PHH"). [See
"Recent Developments" below.]
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Insurance Carrier Market. In April 1999 the Company established an
Internet enterprise, now known as DriverShield CRM Corp. ("CRM"), as a wholly
owned subsidiary. This subsidiary was an extension of the Company's
nineteen-year experience in the fleet business in that it provides similar
collision repair and administrative services, but does so through the use of a
website on the internet. CRM is designed to serve insurance companies by
offering a complete customer relationship management solution and collision
repair management services in an Internet based environment.
This new business focuses on controlling, and reducing, the auto physical
damage costs of vehicle repairs incurred by insurance carriers, and providing
superior customer services for our clients auto repair needs. The interactive
website facilitates information gathering and distribution to launch the repair
process. The website enables insurance carriers to utilize the Company's website
to directly enter the initial vehicle claim information, find and select the
most accessible automobile collision repair shop from the Company's network of
over 2,000 shops throughout the United States, and enable the insurance carrier
and the insured to track the repairs of the vehicle until completion. Our
software also allows us, and our clients, to view digitized images of the
damaged vehicle. This network of automobile repair shops can handle, on a per
incident basis, any repair that the clients' drivers may encounter. Because the
Company has many long-term relationships with a large number of repair shops,
whenever a repair to a client's vehicle is needed, the chances are excellent
that a local repair shop will be available to perform the required repair work.
Because of the volume of work we provide, we are able to obtain significantly
lower repair costs, and expedited turnaround time, for our clients.
Once the client initiates the claims management system, we are
automatically notified to commence activities. We coordinate activities with the
shop, use our audit and estimating staff to negotiate the lowest price for every
claim, monitor the use of certain types of parts, track the work and timeliness
of the repair process which can be viewed by our clients, on our website, to
judge our efforts, obtain independent appraisals when requested, and, finally,
guarantee the repairs for as long as the driver owns the vehicle. We issue
DriverShield warranty certificates for every repair done within our network and
are responsible to our clients if the repairs are not done appropriately. We
have managed our warranty risk by monitoring the quality and consistency of our
network repair facilities and quickly eliminating those shops that do not
maintain proper standards. We pay the independent repair shops directly upon
completion of their work, and invoice our insurance clients separately. The
website we have developed is fully functional and has been in use by a number of
insurance carriers who have recently signed multi-year contracts with CRM.
Revenues commenced in December 2001.The website address is:
www.drivershield.com.
Affinity Group Programs. Through our wholly owned subsidiary, DriverShield
ADS Corp., we offer these programs as a series of comprehensive vehicle-related
services for consumers sold through affinity groups, financial institutions,
corporations and organizations. These programs may be used as re-enrollment
incentives and/or membership premiums, or resold at a profit, and may be sold
individually, or a variety of services can be bundled together as a high-value
package.
Driver's Shield(R). - This is the premium program consisting of
components, which may be sold individually. This package consists of the
Collision Damage Repair Program, Driver Discount Program and the Auto Service
Hotline, as well an auto buying service, legal defense reimbursement, and custom
trip routing services.
4
Collision Damage Repair Program (CDR). - This is the corporate collision
program modified to suit consumer needs. Drivers participating in this program
may utilize the Company's proprietary network of collision body repair shops.
Additionally, the Company's customer service department will supervise the
entire process from expediting estimates and repairs, to troubleshooting any
problems or difficulties that may occur.
Driver Discount Program (DDP). This program offers drivers discounts of up
to forty percent off automotive-related services through thousands of premium
auto chain facilities throughout the nation. It applies these discounts to
virtually all-routine maintenance including oil changes, brakes, transmissions,
mufflers, shocks, tires and glass. An option to this program also provides
24-hour emergency roadside assistance for drivers anywhere in the U.S.
Auto Service Hotline (ASH). This program provides drivers with their own
repair specialist who will help the driver determine a course of action to
repair the vehicle, and if necessary, provide a referral to one of thousands of
independently owned auto repair facilities. Drivers will receive a ten percent
discount off repairs and an enhanced nationwide warranty when utilizing the shop
to which they were referred. Additionally, drivers will be offered rental
replacement cars at preferred rates that are delivered to and picked up from the
driver's home or office.
Recent Developments
In October 2001 the Company entered into a Stock Purchase Agreement ("the
Purchase Agreement") to sell all of the outstanding shares of its wholly-owned
subsidiary, drivershhield.com FS Corp, its collision repair and fleet services
business, to PHH Vehicle Management Services, LLC ("PHH"), a subsidiary of
Cendant Corporation (NYSE, symbol CD) for $6.3 million in cash, and pursuant to
the Preferred Stock Purchases Agreement, agreed to sell $1.0 million of the
Company's convertible preferred stock to PHH. The Purchase Agreement was
approved by a vote of the Company's shareholders on February 4, 2002, and the
transaction was consummated on February 7, 2002. Under the terms of the
Transition Services Agreement, PHH contracted with the Company to continue to
operate FS on behalf of PHH until the business can be transitioned into the PHH
operations, but in no event later than June 30, 2002.
Sales and Marketing
The Company's clients for the CRM program are property and casualty
insurance companies. The Company's clients for its affinity programs are
financial institutions, organizations and affinity groups that resell the
programs to individuals. Sales activities for CRM and ADS are performed by the
Company's own personnel. Sales are made through referrals, cold canvassing of
appropriate prospects and direct mailings. The Company also attends trade shows
in order to increase its identity awareness and client base, and intends to
support its brand name and products through advertising and trade journals.
In 2001, one customer accounted for 87% of the Company's revenues, and in
2000, this same customer accounted for 94% of the Company's revenues. These
figures exclude the discontinued
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operating results of the fleet services business that was sold in February 2002.
See "Recent Developments", above.
Employees
At year-end, the Company employed 42 full-time employees and one part time
employee. The Company anticipates that this number will decrease substantially
at the termination of the Transition Services Agreement with PHH. None of the
Company's employees are governed by a union contract and the Company believes
that its employee relationships are satisfactory.
Competition
Affinity Group Programs. Although there are several companies providing
various types of auto club programs the Company believes that there is only one
other company that offers a program providing similar services offered by the
Company's ADS subsidiary.
Insurance Carriers. The Company is aware of four other companies that
offer some aspect of automotive collision repair services to insurance
companies. One of these competitors is primarily offering a comparable product
as that of the Company. Two of the companies are in the fleet management
business, while the other is in the vehicle software valuation business. The
Company believes that its services for insurance companies are superior to those
offered by such other companies.
Item 2. DESCRIPTION OF PROPERTY
In December 1996, the Company entered into a lease for new office space at
51 East Bethpage Road, Plainview, New York 11803. The space consists of
approximately 12,000 square feet of office space. The Company relocated to this
new space during April 1997. The amended lease is for five years and expires on
June 30, 2002. At that time, the Company may obtain temporary office space on
Long Island, New York for certain employees, but expects to relocate its
executive headquarters to Florida. It is currently evaluating lease
arrangements.
A portion of the premise is subleased under a lease expiring June 2002.
Item 3. LEGAL PROCEEDINGS
In November 1999 CRM entered into an agreement whereby Electronic Data Systems
Corporation ("EDS") was to develop and host the Company's website through
December 31, 2003. Additionally, EDS was to assist the Company in marketing the
Internet based automobile collision managed care program to EDS' customers that
provide auto insurance to its insureds. CRM was to pay EDS no more than
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$350,000 for the initial development costs of the website, and thereafter, the
parties would participate in a revenue sharing arrangement. Throughout the term
of this Agreement, EDS was to host and maintain the website, and perform other
operational and administrative services at no additional cost. DriverShield
Corp. guaranteed performance of this Agreement of its wholly owned subsidiary.
The Company expensed $169,000 during 1999 and capitalized an additional $300,000
in 2000. It had not accrued additional invoices totaling $108,000.
In November, 2000 the Company filed a $1 million Demand for Arbitration with the
American Arbitration Association, relating to its agreement with EDS for its
website development, contending, among other matters, excessive fees and failure
to meet the performance conditions of the agreement. EDS filed a counterclaim
denying the allegations and seeking payment of $226,000. It also unilaterally
shut down the Company's website. In November 2001, these matters were settled by
mutual releases for all existing claims. No payments were required by either
party relating to the outstanding balances. The Company redesigned its website
which is now used by its insurance industry clients.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
7
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are traded on The Nasdaq SmallCap market. The
following table shows the high and low closing prices for the periods indicated.
Sale Price($)
High Low
---- ---
2001
- ----
First Quarter $1.06 $ .38
Second Quarter $1.51 $ .56
Third Quarter $1.84 $ .87
Fourth Quarter $1.72 $1.00
2000
- ----
First Quarter $6.13 $2.75
Second Quarter $4.25 $1.25
Third Quarter $2.00 $1.38
Fourth Quarter $1.38 $ .31
The number of record holders of the Company's common shares as of March
15, 2002 was 335.
The Company has never paid dividends on its common stock and is not
expected to do so in the foreseeable future. Payment of dividends is within the
discretion of the Company's Board of Directors and would depend on, among other
factors, the earnings, capital requirements and operating and financial
condition of the Company.
8
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and the notes appearing elsewhere in this
report as Item 7, and Forward-Looking Statements-Cautionary Factors, below. This
discussion and analysis may contain statements that constitute forward-looking
statements within the meaning of the private Securities Litigation Reform Act of
1995.The Company cautions that forward-looking statements are not guarantees of
performance and actual results may differ materially from those in the
forward-looking statements.
Year ended December 31, 2001 (the "2001 Period") Compared to year ended December
31, 2000(the "2000 Period")
The 2001 Period reflected net income of $1,169,000 versus income of $248,000 in
the 2000 Period. Income from continuing operations was $259,000 in 2001 versus a
loss of $774,000 in the 2000 Period. This increase resulted predominantly from
the recognition of deferred tax assets; income from discontinued operations was
$780,000 in the 2001 Period versus $1,022,000 in the 2000 Period; and in the
2001 Period there was income from an extraordinary item of $130,000. Basic and
diluted earnings per share, from net income, were $.11 in the 2001 Period versus
$.02 per share in the 2000 Period.
Revenues
Revenues were $1,697,000 in the 2001 Period, compared to $1,840,000 in the
2000 Period, representing a decrease of $143,000, or 8%. These figures exclude
the fleet services business that was sold in February 2002, and is reflected in
the Company's financial statements as discontinued operations. The decrease in
revenues is the result of affinity members that did not renew their memberships
in 2001; this came after a major marketing effort in the 2000 Period had
increased membership revenues by 138%.
Income and Expenses from Continuing Operations
Income from continuing operations increased by $1,033,000, to $259,000 in
the 2001 Period, from a loss of $774,000 in the 2000 Period. The increase is
primarily related to the recognition of deferred tax benefits in the amount of
$1,900,000, offset by increased selling expenses of $484,000, non-cash
compensation charges of $240,000 and reduced affinity service sales of $143,000.
Selling expenses increased by $484,000, from $208,000 in the 2000 Period
to $692,000 in the 2001 Period, or 233%, as the Company increased its investment
in sales and marketing personnel and their related activities in its CRM
business. General and administrative expenses were relatively comparable at
$2,276,000 in the 2001 Period versus $2,282,000 in the 2000 Period. The Company
recorded $240,000 in non-cash compensation expense in the 2001 Period as a
result of re-pricing certain stock options during 1999. There was no comparable
charge in the 2000 Period. Depreciation increased by $68,000 resulting from an
increase in capital expenditures to support the Company's technology systems,
predominantly for its CRM business.
9
Investment and other income increased to $197,000 in the 2001 Period,
compared to $141,000 in the 2000 Period despite significant declines in interest
rates. This was the result of improved working capital and treasury management,
as well as income from certain termination fees of $25,000.
The Company also recorded a non-recurring, non-cash charge in the 2001
Period of $77,000 for the issuance of certain restricted shares to an existing
shareholder. There was no comparable amount in the 2000 Period.
The 2001 tax provision in the income statement reflects a tax benefit of
$1,893,000 in the 2001 Period, for the recognition of deferred tax benefits
resulting from net operating loss carry forwards. Of that amount $1,780,000 was
attributable to a prior years net operating loss carry forward that had been
subject to a full valuation allowance. It is expected that the Company will be
able to utilize substantially all of these tax benefits in 2002, as a result of
the gain on the sale of the fleet services business, and no longer requires a
valuation allowance for the full amount of the benefits. In the 2000 Period, it
remained unlikely that the Company could utilize these benefits and an allowance
for the entire tax benefit had been established.
Discontinued Operations
Income from discontinued operations of the fleet services business
decreased by $242,000, from $1,022,000 in the 2000 Period to $780,000 in the
2001 Period. While sales increased, resulting in an increase in gross profit of
$157,000, this was offset by $285,000 in increased expenses in customer service
and support personnel and shop database management, and an increase in income
taxes of $114,000.
Extraordinary Item
In the 2001 Period, extraordinary income, in the amount of $130,000, was
realized upon the settlement of a legal and arbitration matter with EDS. This
amount had been accrued by the Company in a prior period, but settlement of
these matters released the Company from payment of any indebtedness. There was
no comparable amount in the 2000 Period.
Liquidity and Capital Resources
At December 31, 2001, the Company had cash and cash equivalents of
$265,000, and also held 195,204 shares of Salomon Smith Barney Adjustable Rate
Government Income Fund securities valued at $1,915,000, providing a total of
$2,180,000 in available liquidity, versus a total of $1,692,000 at December 31,
2000. The Company's operating activities provided $707,000 of cash in the 2001
Period versus $488,000 in the 2000 Period. In addition, the sale of the FS
business after expenses and taxes, coupled with the sale of preferred stock to
PHH in February 2002, should provide cash of approximately $6.5 million. The
Company believes that its present financial condition, combined with the funds
it received from the sale of FS, will enable it to continue to support its
operations for the next twelve months, and for some period thereafter depending
on its activities and use of funds in developing existing or new businesses.
10
During November 2000 a registration statement with the Securities and
Exchange Commission became effective that provided up to $10 million in equity
financings, over a one-year period from the effective date of the registration.
No funding occurred under this agreement upon its expiration in November 2001
since the company was able to finance all of its needs through internally
generated cash flow. The financing source was granted warrants to purchase
68,970 shares of the Company's common stock at a price per share of $2.17.
Deferred Income taxes
The Company has a net operating loss carry forward of approximately $5.0
million that is available to offset future taxable income at December 31, 2001.
The Company expects that it will utilize substantially all of these benefits in
calendar 2002 upon the recording of the gain on the sale of the FS business.
Accordingly, at December 31, 2001, it has recorded nearly all of the tax
benefits in the accompanying financial statements.
Forward Looking Statements - Cautionary Factors
Certain statements in this report on Form 10-KSB contain "forward-looking
statements" within the meaning of the Private Securities Litigation Act of 1995.
These statements are typically identified by their inclusion of phrases such as
"the Company anticipates", or "the Company believes", or other phrases of
similar meaning. These forward-looking statements involve risks and
uncertainties and other factors that may cause the actual results, performance
or achievements to differ from any future results, performance or achievements
expressed or implied by such forward-looking statements. Except for the
historical information and statements contained in this Report, the matters and
items set forth in this Report are forward looking statements that involve
uncertainties and risks some of which are discussed at appropriate points in the
Report and are also summarized as follows:
1. As the Company has embarked on an Internet strategy whereby it offers auto
collision managed care services on its website, there will be new and
additional risks that may influence the business of the Company. These
risks are:
o The Company's website offers auto collision managed care services on
the Internet, and we are not sure our business model will be
successful or that we can generate sufficient revenue from this
activity.
o As is typical for any new, rapidly evolving market, demand and
market acceptance for recently introduced products and services are
subject to a high level of uncertainty and risk. It is also
difficult to predict the market's future growth rate, if any. If the
market fails to develop, develops more slowly than expected or
becomes saturated with competitors, or our services do not achieve
or sustain market acceptance, our business, results of operations
and financial condition could be materially and adversely affected.
o We also depend on establishing and maintaining a number of
commercial relationships with other companies. Our business could be
adversely affected if we do not maintain our existing commercial
relationships on terms as favorable as currently in effect,
11
if we do not establish additional commercial relationships on
commercially reasonable terms or if our commercial relationships do
not result in the expected increased use of our Website.
o We cannot assure you that we will be able to establish new
agreements or maintain existing agreements on commercially
acceptable terms. We also may not be able to maintain relationships
with third parties that supply us with software or products that are
crucial to our success, and the vendors of these software or
products may not be able to sustain any third- party claims or
rights against their use. Furthermore, we cannot assure you that the
software, services or products of those companies that provide
access or links to our services or products will achieve market
acceptance or commercial success.
o To remain competitive we must continue to enhance and improve the
ease of use, responsiveness, functionality and features of our
website and develop new services in addition to continuing to
improve the customer experience. These efforts may require the
development or licensing of increasingly complex technologies. We
may not be successful in developing or introducing new features,
functions and services, and these features, functions and services
may not achieve market acceptance.
o Our future success and revenue growth depends substantially upon
continued growth in the use of the Internet. Businesses will likely
widely accept and adopt the Internet for conducting business and
exchanging information only if the Internet provides these
businesses with greater efficiencies and improvements in commerce
and communication. In addition, e-commerce generally, and the
purchase of automotive related products and services on the Internet
in particular, must become widespread. The Internet may prove not to
be a viable commercial marketplace generally, or, in particular, for
vehicle related products and services. If use of the Internet does
not continue to increase, our business, results of operations and
financial condition would be materially and adversely affected.
o We are dependent on certain key personnel. Our future success is
substantially dependent on our senior management and key technical
personnel. If one or more of our key employees decided to leave us,
join a competitor or otherwise compete directly or indirectly with
us, this could have a material adverse effect on our business,
results of operations and financial condition. Competition for such
personnel is intense, and we may not be able to attract, assimilate
or retain such personnel in the future. The inability to attract and
retain the necessary managerial, technical, sales and marketing
personnel could have a material adverse effect on our business,
results of operations and financial condition.
o The Internet insurance market is a new business in a new industry
and we will need to manage our growth and our entry into new
business areas in order to avoid increased expenses without
corresponding revenues. The growth of our operations requires us to
increase expenditures before we generate revenues. Our inability to
generate satisfactory revenues from such expanded services to offset
costs could have a material adverse effect on our business,
financial condition and results of operations. We believe
establishing industry leadership also requires us to: - test,
introduce and develop new services and products, including enhancing
our website, - expand the breadth of and services offered, - expand
our market presence through relationships with third parties, and -
acquire new or
12
complementary businesses, products or technologies. We cannot assure
you that we can successfully manage these tasks.
o Our success is dependent on keeping pace with advances in
technology. If we are unable to keep pace with advances in
technology, businesses may stop using our services and our revenues
will decrease. The Internet and electronic commerce markets are
characterized by rapid technological change, changes in user and
customer requirements, frequent new service and product
introductions embodying new technologies and the emergence of new
industry standards and practices that could render our existing
Website and technology obsolete. If we are unable to adapt to
changing technologies, our business, results of operations and
financial condition could be materially and adversely affected. Our
performance will depend, in part, on our ability to continue to
enhance our existing services, develop new technology that addresses
the increasingly sophisticated and varied needs of our prospective
customers, license leading technologies and respond to technological
advances and emerging industry standards and practices on a timely
and cost-effective basis.
o We are uncertain of our ability to obtain additional financing for
our future capital needs. If we are unable to obtain additional
financing, we may not be able to continue to operate our business or
create the growth we wish. We currently anticipate that our cash,
cash equivalents and short-term investments will be sufficient to
meet our anticipated needs for working capital and other cash
requirements at least for the next 12 months, and beyond. However we
may need to raise additional funds, in order to fund more rapid
expansion, for acquisitions, to develop new or enhance existing
services or products, to respond to competitive pressures or to
acquire complementary products, businesses or technologies.
o There can be no assurance that additional financing will be
available on terms favorable to us, or at all. If adequate funds are
not available or are not available on acceptable terms, our ability
to fund our expansion, take advantage of potential acquisition
opportunities, develop or enhance services or products or respond to
competitive pressures would be significantly limited. Such
limitation could have a material adverse effect on our business,
results of operations, financial condition and prospects.
o The Company's business involves the repair of motor vehicles through
a contracted network of automobile collision repair shops. These
shops are obligated to maintain certain minimum limits of liability
insurance, indemnify the Company from any and all claims and
expenses related to the shop's negligent acts or from the breach of
the agreement between the Company and the shop, and name the Company
as an additional insured under the shop's liability policy. However,
the repair shop and/or the Company's general liability insurance may
not cover all potential claims to which we are exposed and may not
be adequate to indemnify us for all liability that may be imposed.
Any imposition of liability that is not covered by insurance or is
in excess of insurance coverage could have a material adverse effect
on our business, results of operations and financial condition.
13
2. As the Company's proprietary programs gain more success, it is possible
that the competition will attempt to copy these programs and incorporate
them into their programs. This could lead to increased competitive
pressures on those programs that are the most successful. The competition
could result in decreased profit margins and/or the loss of certain
customers.
3. The Company, under the CRM, or the ADS, has clients that either
individually control a large number of insureds, or a large number of
participants in programs such as Driver's Shield(R). The loss of any one
insurance company, or affinity group, terminating its relationship with
the Company, could have an adverse impact on the continued growth of that
business. The Company has addressed the issue of customer retention by
implementing a policy of entering into long-term contracts with its
customers.
4. The Company has been able to assemble a network of independently owned and
operated repair shops throughout the United States. These collision repair
shops must maintain the high quality repairs standard that has enabled the
Company to continue to retain and attract new clients. The Company's
inability to retain these quality repair shops and maintain their
individually high repair standards could have a material adverse impact
upon all of the Company's vehicle collision repair programs.
5. Certain senior management personnel may be able to exercise voting
control. Barry Siegel, our Chairman of the Board and Chief Executive
Officer, beneficially owns and controls the vote of approximately 16 % of
the outstanding shares of our common stock. In addition, Barry J. Spiegel,
a director and the President of ADS, beneficially owns and controls the
vote of approximately 13% of the outstanding shares of our common stock.
This concentration of ownership, which is not subject to any voting
restrictions, could limit the price that investors might be willing to pay
for common stock. In addition, Mr. Siegel and Mr. Spiegel are in a
position to impede transactions that may be desirable for other
shareholders.
6. Our articles of incorporation and by-laws contain certain provisions that
could make it more difficult for shareholders to effect certain corporate
actions, and could make it more difficult for anyone to acquire control of
us without negotiating with our board of directors. These provisions could
limit the price that investors might be willing to pay in the future for
our common stock.
Item 7. FINANCIAL STATEMENTS
The Company's financial statements and schedules appear at the end of this
Report after Item 13
14
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Each member of our board of directors serves for staggered three-year
terms and until his or her successor is duly elected and qualified. Our
executive officers and directors are as follows:
Name Age Position
- ---- --- --------
Barry Siegel........................... 50 Chairman of the Board,
Secretary, Chief Executive Officer
Barry J. Spiegel*...................... 53 Director, President of
Affinity Services Division
Gerald M. Zutler....................... 63 President and Chief Operating Officer
Philip B. Kart......................... 52 Sr. Vice President and Chief Financial Officer
Kenneth J. Friedman*................... 48 Director
John M. McIntyre*...................... 47 Director
R. Frank Mena*......................... 44 Director
* Member of the Audit Committee
Barry Siegel has served as one of our directors and our Secretary since we
were incorporated. He has served as our Treasurer since January 1998, as our
Chief Executive Officer and Chairman of the Board since November 1997.
Previously, he served as our Chairman of the Board, Co-Chief Executive Officer,
Treasurer, and Secretary from August 1997 through November 1997. From October
1987 through August 1997, he served as our Co-Chairman of the Board, Co-Chief
Executive Officer, Treasurer, and Secretary. He also served for more than five
years as Treasurer and Secretary of driversshield.com FS Corp., one of our
wholly owned subsidiaries.
Barry J. Spiegel has served as President of our Affinity Services Division
since September 1996. He served as President of American International Insurance
Associates, Inc. from January 1996 through August 1996. For more than five years
prior to August 1996, Mr. Spiegel served as Senior Vice President at American
Bankers Insurance Group, Inc.
Gerald M. Zutler has served as our President and Chief Operating Officer
since March 1998. Between 1997 and 1998, Mr. Zutler was a private consultant.
From 1993 through 1996, Mr. Zutler was President of Lockheed Martin Canada.
15
Philip Kart has served as Chief Financial Officer since October 2000. From
February 1998 through September 2000, he was Vice President and Chief Financial
Officer of Forward Industries, Inc., a Nasdaq SmallCap listed company, and prior
to that, from March 1993 to December 1997, Chief Financial Officer of Ongard
Systems, Inc. Mr. Kart has also held financial management positions with
Agrigenetics Corporation, Union Carbide and was with the accounting firm Price
Waterhouse Coopers. Mr. Kart is a CPA.
Kenneth J. Friedman has served as our director since October 1998. Mr.
Friedman has for more than five years served as President of the Primary Group,
Inc., an executive search consultant.
John M. McIntyre, 47, was elected to our board of directors on December 4,
2001. He has spent the last 20 years working in the auto repair industry. In
1981, he founded Apple Auto Body Incorporated, a privately owned,
multiple-location group of auto repair shops based in Massachusetts, and since
1981 has acted as its president. In 1989 he founded Trust Group Inc., a
privately held property and casualty insurer based in Massachusetts. Since 2000,
Mr. McIntyre has also been a member of Barefoot Properties of Hilton Head, LLC,
a rental-property broker based in Hilton Head, South Carolina. Since 1977, he
has also served as a financial consultant to TeleSouth a division of RHS
Communications. Mr. McIntyre holds a Bachelor of Science in Public
Administration From Bentley College, Waltham, MA.
R. Frank Mena, 44, R. Frank Mena was elected to the Board of Directors on
May 13, 1999. Mr. Mena is both a technologist and developer by background. He
was a founder and Executive Vice President and Chief Technology Officer of
Cheyenne Software. Presently, he acts as a consultant in the computer systems
industry. Mr. Mena did not stand for re-election at the 2001 Annual Shareholders
Meeting.
Compensation of Directors
We do not pay our directors for serving on our board. Our 1995 Incentive Stock
Plan (the "Plan") does, however, provide that when they are elected to the board
and every anniversary thereafter as long as they serve, our non-employee
directors are granted a non-statutory stock option to purchase up to 15,000
shares of our common stock. Effective February 4, 2002, the Board of Directors
amended the Plan increasing 50,000 shares the annual stock option grant to
non-employee directors.
Section 16(a) Beneficial Ownership Reporting Compliance.
We are not aware of any officer or director that did not comply with
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year
ended December 31, 2001.
Item 10. Executive Compensation
Summary Compensation
The following table summarizes the compensation we paid or compensation
accrued for services rendered for the years ended December 31, 1999, 2000 and
2001, for our Chief Executive
16
Officer and each of the other most highly compensated executive officers who
earned more than $100,000 in salary (there were no bonus payments during these
years) for the year ended December 31, 2001:
SUMMARY COMPENSATION TABLE
Securities
Underlying
Name and Position(s) Year Salary ($) Options (#)
- -------------------- ---- ---------- -----------
Barry Siegel
Chairman of the Board of 2001 285,000 0
Directors, Secretary and Chief 2000 276,492 200,000
Executive Officer 1999 215,385 1,100,000
Gerald Zutler 2001 149,525 0
President and Chief Operating 2000 145,540 150,000
Officer 1999 137,211 415,000
Barry J. Spiegel 2001 129,525 0
President, DriverShield ADS 2000 122,154 150,000
Corp. 1999 104,249 330,000
Philip B. Kart
Sr. Vice President and Chief 2001 139,093 0
Financial Officer 2000 32,000 225,000
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
We are party to an employment agreement with Barry Siegel that commenced
on January 1, 2002, and expires on December 31, 2004. Mr. Siegel's annual salary
is $300,000, and he has been granted stock options, under the Company's 1995
Incentive Stock Option Plan ("the Plan"), providing the right to purchase
300,000 shares of the Company's common stock. His employment agreement provides
that following a change of control (as defined in the agreement), we will be
required to pay Mr. Siegel (1) a severance payment of 300% of his average annual
salary for the past five years, less $100, (2) the cash value of his outstanding
but unexercised stock options, and (3) other perquisites should he be terminated
for various reasons specified in the agreement. The agreement specifies that in
no event will any severance payments exceed the amount we may deduct under the
provisions of the Internal Revenue Code. In recognition of the sale of the fleet
services business, Mr. Siegel was also awarded a $250,000 bonus, which was paid
in February 2002, and an additional grant of 250,000 options.
We are party to an employment agreement with Gerald M. Zutler that
commenced on January 1, 2002, and expires on December 31, 2004. Mr. Zutler's
annual salary is $190,000, and he has been granted stock options, under the
Company's 1995 Incentive Stock Option Plan ("the Plan"), providing the right to
purchase 200,000 shares of the Company's common stock. His employment agreement
contains
17
a change in control provision that mirrors that in Mr. Siegel's employment
agreement, except that the applicable percentage for severance payment purposes
is 100%. Mr. Zutler also participates in our Corporate Compensation Program.
We are party to an employment agreement with Barry J. Spiegel that
commenced on January 1, 2002, and expires on December 31, 2004. Mr. Spiegel's
annual salary is $175,000 per annum and he has been granted stock options, under
the Company's 1995 Incentive Stock Option Plan ("the Plan"), providing the right
to purchase 250,000 shares of the Company's common stock, and the applicable
percentage for severance payment purposes is 100%. Mr. Spiegel also participates
in our Corporate Compensation Program. His employment agreement provides that
following a change in control (as defined in the agreement), all stock options
previously granted to him will immediately become fully exercisable.
We are party to an employment agreement with Philip B. Kart that commenced
on January 1, 2002, and expires on December 31, 2003. Mr. Kart's annual salary
is $155,000 per annum and he has been granted stock options, under the Company's
1995 Incentive Stock Option Plan ("the Plan"), providing the right to purchase
150,000 shares of the Company's common stock and the applicable percentage for
severance payment purposes is 100%. Mr. Kart also participates in our Corporate
Compensation Program. His employment agreement provides that following a change
in control (as defined in the agreement), all stock options previously granted
to him will immediately become fully exercisable.
In early 1999, Mr. Siegel, Mr. Spiegel and Mr. Zutler voluntarily agreed
to a reduction in his annual salary, with the other terms of his employment
agreement remaining unaffected. Mr. Siegel's salary was reduced by $100,000, Mr.
Zutler's by $15,000, and Mr. Spiegel's by $30,000. In consideration for these
salary reductions, we granted Mr. Siegel, Mr. Zutler, and Mr. Spiegel options to
purchase 100,000, 15,000, and 30,000 shares of our common stock, respectively.
In 2000 the salaries of the above-mentioned executives were returned to their
original levels.
Stock Options
We did not make any awards of stock options during the last fiscal year to
the executive officers named in the summary compensation table.
18
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE TABLE
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Value Options/SARs at FY-End Options/SARs at FY-End
on Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisabl)
--------------- -------- --------------------------- --------------------------
Name (#) ($) (#) ($)
- ---- --- --- ---
Barry Siegel None 0 500,000/0 $314,500/ 0
Gerald M. Zutler None 0 565,000/0 $304,150/ 0
Barry J. Spiegel None 0 316,666/0 $227,500/ 0
Philip B. Kart None 0 91,667/133,333 $87,054/126,666
Item 11. Security Ownership Of Certain Beneficial Owners and Management and
Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
Shares to be issued
upon exercise of Weighted average Number of Securities
outstanding options, exercise Available for Future
warrants or stock price Issuance
Plan Category rights(#) ($) (#)
- ------------- --------------------- ---------------- --------------------
Approved by Shareholders:
Stock Option Plan 3,223,667 $ .88 3,776,333
Underwriters Warrants 68,970 $2.17 0
Not Approved by Shareholders:
Consultant's Warrants 125,000 $ .60 0
Private Placement Warrants 581,250 $5.75 0
The following tables provide information about the beneficial ownership of
our common stock as of March 20, 2002. We have listed each person who
beneficially owns more than 5% of our outstanding common stock, each of our
directors and executive officers identified in the summary compensation table,
and all directors and executive officers as a group. Unless otherwise indicated,
each of the listed shareholders has sole voting and investment power with
respect to the shares beneficially owned.
19
SECURITY OWNERSHIP OF MANAGEMENT
Name and Address of Amount and Nature of Percentage of
Title of Class Beneficial Owner Beneficial Owner Common Stock(1)
- --------------- ------------------- -------------------- ---------------
Common stock Barry Siegel 2,272,697 (2)(3)(4) 20.0%
c/o DriverShield Corp.
51 East Bethpage Road
Plainview, NY 11803
Common stock Lisa Siegel 2,272,697 (2)(3)(4) 20.0%
c/o Barry Siegel
DriverShield Corp.
51 East Bethpage Road
Plainview, NY 11803
Common stock Gerald M. Zutler 766,000 (5) 6.7%
c/o DriverShield Corp.
51 East Bethpage Road
Plainview, NY 11803
Common stock Barry J. Spiegel 1,747,627 (6) 15.7%
c/o DriverShield Corp
51 East Bethpage Road
Plainview, NY 11803
Common stock Philip B. Kart 91,667 (7) .8%
c/o DriverShield Corp
51 East Bethpage Road
Plainview, NY 11803
Common stock Kenneth J. Friedman 184,999 (8) 1.7%
c/o DriverShield Corp.
51 East Bethpage Road
Plainview, NY 11803
Common stock John M. McIntyre 41,500 (9) .4%
c/o DriverShield Corp.
51 East Bethpage Road
Plainview, NY 11803
Common stock All directors & officers 5,104,490 41.1%
as a group
(1) The percentages have been calculated in accordance with Instruction 3 to
Item 403 of Regulation S-B. Percentage of beneficial ownership is
calculated assuming 10,796,988 shares of common stock were outstanding on
March 28, 2002.
(2) Includes 3,334 shares held by Barry Siegel as custodian for two nephews
and 67 shares held directly by Barry Siegel's wife, Lisa Siegel. Both
Barry and Lisa Siegel disclaim beneficial ownership of shares held by the
other.
(3) Includes options held by Barry Siegel to purchase 500,000 shares of common
stock exercisable within 60 days of March 28, 2002.
(4) Includes options held by Lisa Siegel to purchase 68,334 shares of common
stock exercisable within 60 days of March 28, 2002.
(5) Includes options to purchase 565,000 shares of common stock exercisable
within 60 days of March 28, 2002.
(6) Includes options to purchase 316,666 shares of common stock exercisable
within 60 days of March 28, 2002.
(7) Includes options to purchase 91,667 shares of common stock exercisable
within 60 days of March 28, 2002.
20
(8) Includes options to purchase 60,000 shares of common stock exercisable
within 60 days of March 28, 2002.
(9) Includes option to purchase 15,000 shares of common stock exercisable
within 60 days of March 28, 2002.
21
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3.1 Restated and Amended Certificate of Incorporation filed herein.
3.2 Amended and restated By-laws of the Company, incorporated by reference to
Exhibit 4 to the Company's Current Report on Form 8-K dated December 28,
1998.
4.0 Shareholders Rights Agreement, dated as of December 28, 1998, between
First Priority Group, Inc. and North American Transfer Co., as Rights
Agent, together with Exhibits A, B and C attached thereto incorporated by
reference to the Registrant's Registration Statement on Form 8-A filed on
December 31, 1998.
10.1 The Company's 1995 Incentive Stock Plan incorporated by reference to
Exhibit 10.1 of the Company's Form 10-QSB for the period ended September
30, 1996.
10.2 Lease Agreement dated December 6, 1996 between the Company and 51 East
Bethpage Holding Corporation for lease of the Company's facilities in
Plainview, New York incorporated by reference to Exhibit 10.3 of the
Company's Form 10-QSB for the period ended June 30, 1997.
10.3 First Amendment to Lease Agreement dated July 14, 1997 amending the lease
dated December 6, 1996 between the Company and 51 East Bethpage Holding
Corporation incorporated by reference to Exhibit 10.4 of the Company's
Form 10-QSB for the period ended June 30, 1997.
10.4 Severance Agreement dated August 17, 1998 between the Company and
Michael Karpoff incorporated by reference to Exhibit 10.21 of the
Company's Form 10-KSB for the year ended December 31, 1998.
10.5 Service Agreement dated November 29, 1999 between the Company,
driversshield.com Corp., Electronic Systems Corporation and EDS
Information Services L.L.C incorporated by reference and previously
filed with the Commission.
10.6 Stock Purchase Agreement dated October 29, 2001 by and among PHH
Vehicle Management Services, LLC, and driversshield.com Corp., and
driversshield.com FS Corp incorporate by reference as Exhibit 10.1
to the Form 10-QSB for the period ended September 30, 2002.
13.1 Form 10-QSB for the quarter ending March 31,2001 incorporated by
reference and previously filed with the Commission.
13.2 Form 10-QSB for the quarter ending June 30, 2001 incorporated by reference
and previously filed with the Commission.
22
13.3 Form 10-QSB for the quarter ending September 30, 2001 incorporated by
reference and previously filed with the Commission.
21 List of subsidiaries filed herein.
(b) Reports on Form 8-K
None
23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DriverShield Corp
By: /s/ Barry Siegel
-----------------------------------
Barry Siegel
Chairman of the Board of Directors,
Treasurer, Secretary,
Chief Executive Officer,
Date: April 1, 2002
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Barry Siegel Date: April 1, 2002
-----------------------------------
Barry Siegel
Chairman of the Board of Directors,
Treasurer, Secretary,
Chief Executive Officer,
By: /s/ Barry Siegel Date: April 1, 2002
-----------------------------------
Barry Siegel
President
Driversshield.com ADS Corp.
Director
By: /s/ Philip Kart Date: April 1, 2002
-----------------------------------
Philip Kart
Chief Financial Officer
By: /s/ Kenneth J. Friedman Date: April 1, 2002
-----------------------------------
Kenneth J. Friedman
Director
By: /s/ John M. McIntyre Date: April 1, 2002
-----------------------------------
John M. McIntyre
Director
24
INDEX OF EXHIBITS
(a) List of Exhibits
3.1 Restated and Amended Certificate of Incorporation filed herein.
3.2. Amended and restated By-laws of the Company, incorporated by reference to
Exhibit 4 to the Company's Current Report on Form 8-K dated December 28,
1998.
4.0 Shareholders Rights Agreement, dated as of December 28, 1998, between
First Priority Group, Inc. and North American Transfer Co., as Rights
Agent, together with Exhibits A, B and C attached thereto incorporated by
reference to the Registrant's Registration Statement on Form 8-A filed on
December 31, 1998.
10.1 The Company's 1995 Incentive Stock Plan incorporated by reference to
Exhibit 10.1 of the Company's Form 10-QSB for the period ended September
30, 1996.
10.2 Lease Agreement dated December 6, 1996 between the Company and 51 East
Bethpage Holding Corporation for lease of the Company's facilities in
Plainview, New York incorporated by reference to Exhibit 10.3 of the
Company's Form 10-QSB for the period ended June 30, 1997.
10.3 First Amendment to Lease Agreement dated July 14, 1997 amending the lease
dated December 6, 1996 between the Company and 51 East Bethpage Holding
Corporation incorporated by reference to Exhibit 10.4 of the Company's
Form 10-QSB for the period ended June 30, 1997.
10.4 Severance Agreement dated August 17, 1998 between the Company
and Michael Karpoff incorporated by reference to Exhibit 10.21
of the Company's Form 10-KSB for the year ended December 31,
1998.
10.5 Service Agreement dated November 29, 1999 between the Company,
driversshield.com Corp., Electronic Systems Corporation and
EDS Information Services L.L.C incorporated by reference and
previously filed with the Commission.
10.6 Stock Purchase Agreement dated October 29, 2001 by and among
PHH Vehicle Management Services, LLC, and driversshield.com
Corp., and driversshield.com FS Corp incorporate by reference
as Exhibit 10.1 to the Form 10-QSB for the period ended
September 30, 2002.
13.1 Form 10-QSB for the quarter ending March 31,2001 incorporated
by reference and previously filed with the Commission.
13.2 Form 10-QSB for the quarter ending June 30, 2001 incorporated
by reference and previously filed with the Commission.
25
13.3 Form 10-QSB for the quarter ending September 30, 2001 incorporated by
reference and previously filed with the Commission.
21 List of subsidiaries filed herein.
2
DRIVERSHIELD CORP. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2001 AND 2000
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Certified Public Accountants
Board of Directors
DriverShield Corp.
Plainview, New York
We have audited the accompanying consolidated balance sheets of DriverShield
Corp. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of DriverShield Corp. and subsidiaries as of December 31,
2001 and 2000, and the consolidated results of their operations and cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
Melville, New York NUSSBAUM YATES & WOLPOW, P.C.
March 1, 2002
F-1
DRIVERSHIELD CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS
2001 2000
----------- -----------
Current assets:
Cash and cash equivalents $ 265,408 $ 902,378
Accounts receivable 136,450 268,511
Investment securities 1,915,121 789,505
Prepaid expenses and other current assets 167,601 99,074
Investment in net assets of discontinued
operations (Note 3) 32,000 331,580
Deferred tax assets 1,900,000 --
----------- -----------
Total current assets 4,416,580 2,391,048
Property and equipment, net 615,630 820,404
Security deposits and other assets 27,563 27,738
----------- -----------
Total assets $ 5,059,773 $ 3,239,190
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 155,330 $ 277,633
Accrued expenses and other current liabilities 433,796 163,358
Notes payable -- 14,644
----------- -----------
Total current liabilities 589,126 455,635
----------- -----------
Shareholders' equity:
Common stock, $.015 par value, authorized
30,000,000 shares; issued 11,516,655 shares
in 2001 and 11,241,655 shares in 2000 172,750 168,625
Preferred stock all series, $.01 par value, authorized
1,000,000 shares; none issued or outstanding -- --
Additional paid-in capital 9,792,244 9,275,656
Accumulated other comprehensive income,
unrealized holding gain on investment securities 680 3,570
Deficit (4,011,993) (5,181,262)
----------- -----------
5,953,681 4,266,589
Less common stock held in treasury, at cost,
719,667 shares in 2001 and 2000 1,483,034 1,483,034
----------- -----------
Total shareholders' equity 4,470,647 2,783,555
----------- -----------
Total liabilities and shareholders' equity $ 5,059,773 $ 3,239,190
----------- -----------
See notes to consolidated financial statements.
F-2
DRIVERSHIELD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
Revenues (principally automobile affinity services) $ 1,696,856 $ 1,840,155
----------- -----------
Operating expenses:
Sales and marketing 692,116 207,768
General and administrative 2,276,196 2,282,297
Non-cash compensation (Note 9) 240,236 --
Depreciation and amortization 350,032 282,051
Asset impairment (Note 6) 58,719 --
----------- -----------
Total operating expenses 3,617,299 2,772,116
----------- -----------
(1,920,443) (931,961)
----------- -----------
Other income (expense):
Realized loss on investment -- (1,518)
Investment and other income 196,997 141,231
Interest expense (1,500) (4,500)
Other expenses (shares issued for
restriction agreement (Note 10)) (77,438) --
----------- -----------
Total other income 118,059 135,213
----------- -----------
Loss from continuing operations before income tax benefit (1,802,384) (796,748)
Income tax benefit (Note 14) (2,061,703) (22,728)
----------- -----------
Income (loss) from continuing operations 259,319 (774,020)
Income from discontinued operations (net of income
taxes of $144,454 and $30,003 in 2001 and 2000)
(Note 3) 779,788 1,021,772
----------- -----------
Income before extraordinary item 1,039,107 247,752
Extraordinary gain from release of indebtedness (net
of taxes of $24,113) (Note 4) 130,162 --
----------- -----------
Net income $ 1,169,269 $ 247,752
----------- -----------
Basic earnings (loss) per common share:
Continuing operations $ .02 ($ .08)
Discontinued operations .08 .10
Extraordinary gain .01 --
----------- -----------
Total $ .11 $ .02
----------- -----------
Diluted earnings (loss) per common share:
Continuing operations $ .02 ($ .08)
Discontinued operations .08 .10
Extraordinary gain .01 --
----------- -----------
Total $ .11 $ .02
----------- -----------
Weighted average number of common shares outstanding:
Basic 10,709,111 9,956,892
----------- -----------
Diluted 11,109,418 9,956,892
----------- -----------
See notes to consolidated financial statements.
F-3
DRIVERSHIELD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2001 AND 2000
Accumu-
lated
Other
Compre- Total
Common Stock Additional hensive Treasury Stock Share-
--------------------- Paid-in Income --------------------- holders'
Shares Amount Capital (Loss) Deficit Shares Amount Equity
---------- -------- ----------- -------- ----------- ------- ----------- ----------
Balance, January 1, 2000 8,598,467 $128,977 $ 7,823,916 ($4,095) ($5,429,014) 296,667 ($ 119,162) $2,400,622
----------
Net income -- -- -- -- 247,752 -- -- 247,752
Uunrealized holding gain
arising during period -- -- -- 7,665 -- -- -- 7,665
----------
Comprehensive income 255,417
Exercise of options
in exchange for
tendered common shares 1,866,333 27,995 1,335,877 -- -- 423,000 (1,363,872) --
Exercise of underwriter
warrants 776,855 11,653 (2,653) -- -- -- -- 9,000
Options granted for services -- -- 59,421 -- -- -- -- 59,421
Registration costs -- -- (16,002) -- -- -- -- (16,002)
Short-swing profits
reimbursed to Company -- -- 75,097 -- -- -- -- 75,097
---------- -------- ----------- ------- ---------- ------- ----------- ----------
Balance, December 31, 2000 11,241,655 168,625 9,275,656 3,570 (5,181,262) 719,667 (1,483,034) 2,783,555
----------
Net income -- -- -- -- 1,169,269 -- -- 1,169,269
Unrealized holding loss
arising during period -- -- -- (2,890) -- -- -- (2,890)
----------
Comprehensive income 1,166,379
Shares issued in
exchange for restriction
agreement 175,000 2,625 74,813 -- -- -- -- 77,438
Shares issued for services 100,000 1,500 148,500 -- -- -- -- 150,000
Non-cash compensation
recorded for variable
priced options -- -- 240,236 -- -- -- -- 240,236
Options and warrants
granted for services -- -- 53,039 -- -- -- -- 53,039
---------- -------- ----------- ------- ----------- ------- ----------- ----------
Balance, December 31, 2001 11,516,655 $172,750 $ 9,792,244 $ 680 ($4,011,993) 719,667 ($1,483,034) $4,470,647
========== ======== =========== ======= =========== ======= =========== ==========
See notes to consolidated financial statements.
F-4
DRIVERSHIELD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
Cash flows provided by operating activities:
Net income $ 1,169,269 $ 247,752
----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization, and asset impairment 408,751 282,051
Shares issued for restriction agreement 77,438 --
Shares issued for consulting services 150,000 --
Non-cash compensation 240,236 --
Options and warrants granted for services 53,039 59,421
Gain on sale of property and equipment (3,198) --
Deferred tax benefit (1,900,000) --
Realized loss on investment -- 1,518
Changes in assets and liabilities:
Accounts receivable 132,061 1,526,229
Prepaid expenses and other current assets (68,527) (59,698)
Investment in net assets of discontinued operations 299,580 (331,580)
Security deposit and other assets 175 7,550
Accounts payable (122,303) (660,785)
Accrued expenses and other current liabilities 270,438 (584,209)
----------- -----------
Total adjustments (462,310) 240,497
----------- -----------
Net cash provided by operating activities 706,959 488,249
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment (216,379) (413,361)
Purchase of investment securities (1,128,506) (47,095)
Proceeds from sale of investment securities -- 300,000
Proceeds from sale of property and equipment 15,600 --
----------- -----------
Net cash used in investing activities (1,329,285) (160,456)
----------- -----------
Cash flows provided by (used in) financing activities:
Repayment of notes payable (14,644) (35,869)
Proceeds from short-swing profits -- 75,097
Registration costs -- (16,002)
Proceeds from exercise of warrants -- 9,000
----------- -----------
Net cash provided by (used in) financing activities (14,644) 32,226
----------- -----------
Net increase (decrease) in cash and cash equivalents (636,970) 360,019
Cash and cash equivalents at beginning of year 902,378 542,359
----------- -----------
Cash and cash equivalents at end of year $ 265,408 $ 902,378
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 6,864 $ 7,275
----------- -----------
Cash paid during the year for interest $ 1,500 $ 4,500
----------- -----------
See notes to consolidated financial statements.
F-5
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
DriverShield Corp. (formerly known as driversshield.com Corp.) and its
wholly-owned subsidiaries (collectively referred to as the "Company"). All
material intercompany balances and transactions have been eliminated.
Discontinued Operations
On February 7, 2002, the Company sold its fleet services business (see
Note 3). The Company's consolidated balance sheets and statements of cash
flows and the consolidated statements of income for the years ended
December 31, 2001 and 2000 reflect the results of this business as
Discontinued Operations. Accordingly, the 2000 financial statements have
been reclassified. Prior to 2001, the fleet service business comprised the
vast majority of the Company's business (86% of revenue in 2000). Although
the Company only reported as one business segment, the Company operated as
distinct businesses with separate major lines of businesses and classes of
customers. Accordingly, upon the sale of the fleet services business, the
Company determined that the fleet business should be reported as a
discontinued operation.
Property and Equipment
Property and equipment are stated at cost. The Company provides
depreciation for machinery and equipment and for furniture and fixtures by
the straight-line method over the estimated useful lives of the assets,
principally five years. Leasehold improvements are amortized over the
estimated useful lives or the remaining term of the lease, whichever is
less. Website development costs are amortized over the estimated useful
life of three years on a straight-line basis.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Investment Securities
Investments consist of securities available for sale and are carried at
fair value with unrealized gains or losses reported in a separate
component of shareholders' equity. Realized gains or losses are determined
based on the specific identification method.
F-6
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
1. Summary of Significant Accounting Policies (Continued)
Revenue Recognition
The Company recognizes revenue for its collision repairs at the time of
customer approval and completion of repair services. The Company warrants
such services for varying periods ranging up to the period that the driver
owns or operates the vehicle. Such warranty expense is borne by both the
Company and the repair facilities; resulting from its management of the
repair process, and the selection of facilities, warranty expense and has
not been material to the Company. In accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), the
Company has determined that the portion of its business representing
automobile affinity services should be displayed in the financial
statements on a net basis and recognized as such services are rendered.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
o Cash and Cash Equivalents
The carrying amounts approximate fair value due to the short maturity of
the instruments.
o Investments
Investments are stated at fair value as measured by quoted market prices.
o Notes Payable
The carrying amount of the Company's notes payable approximates fair
value.
F-7
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
1. Summary of Significant Accounting Policies (Continued)
Advertising Expense
Advertising expense, which is expensed as incurred, amounted to
approximately $96,000 and $86,000 in 2001 and 2000.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single
accounting model for impairment of long-lived assets.
The Company does not believe that this pronouncement will have a
significant effect on the Company's financial position or results of
operations.
2. Description of Business and Concentrations
The Company, through its fleet services subsidiary, had been, since its
inception, engaged in automotive fleet management and administration of
automotive repairs for major, nationally recognized corporate clients
throughout the United States. It offered its clients a cost-effective
method for repairing their vehicles by arranging for repair of the
vehicles through its nationwide network of independently owned contracted
facilities, and it also offered subrogation, salvage and appraisal
services. This business was sold in 2002 (see Note 3).
The Company now offers similar collision repair management services for
the insurance industry nationwide through a website on the Internet.
Revenues for such services commenced in December 2001. In addition, the
Company provides automobile affinity services for individuals which, to
date, have been sold through large financial institutions. The Company
believes that it operates in one operating business segment.
The Company is subject to credit risk through trade receivables. The
Company does not obtain collateral or other security for its receivables.
Such risk is minimized through contractual arrangements with its
customers, as well as the size and financial strength of its customers.
Based upon the Company's continuing operations, one customer accounted for
87% of the Company's sales in 2001 and 90% of its receivables at December
31, 2001, and 94% of its sales in 2000 and 98% of its receivables at
December 31, 2000. The Company has no financial instruments with
significant off-balance-sheet risk or concentration of credit risk.
F-8
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
3. Discontinued Operations
On February 4, 2002, the Company's shareholders approved the sale of all
the outstanding shares of a wholly-owned subsidiary, driversshield.com FS
Corp. ("FS"), its collision repair and fleet services business, to PHH
Vehicle Management Services, LLC d/b/a PHH Arval ("PHH"), a subsidiary of
the Cendant Corporation (NYSE symbol "CD") for $6.3 million in cash, in
accordance with a Stock Purchase Agreement (the "Purchase Agreement")
dated October 29, 2001 and, pursuant to the Preferred Stock Purchase
Agreement of the same date, approved the sale of $1.0 million of the
Company's convertible preferred stock to PHH. These transactions were
consummated on February 7, 2002. The Company expects to record a pre-tax
gain of approximately $5.8 million in its first fiscal quarter of 2002
(see Note 14).
Pursuant to the Preferred Stock Purchase Agreement, PHH invested $1.0
million to acquire 1,000 shares of the Company's Series A Convertible
Preferred Stock, par value of $.01 per share (the "Preferred Shares"). The
Preferred Shares can be converted, at the holder's discretion, into
500,000 shares of the Company's common stock (subject to adjustments for
stock splits, re-capitalization and anti-dilution provisions). Other key
terms of the Preferred Shares include: voting rights, together with the
common shareholders, on all matters, and separately on certain specified
matters; a liquidation preference equal to 125% of their initial
investment paid only in the event of dissolution of the Company; the
nomination of one board member; certain pre-emptive rights and
registration rights; and the approval of Preferred Shares for certain
corporate actions.
The accompanying consolidated statements of operations and the
consolidated balance sheets have been presented to reflect the sale of the
fleet business as discontinued operations. Operating results of the
discontinued fleet services operations for the years ended December 31,
2001 and 2000 are summarized as follows:
2001 2000
------------ ------------
Revenues $ 14,358,976 $ 12,610,948
Cost of sales (11,959,279) (10,368,412)
Selling, general and administrative (1,475,455) (1,190,761)
------------ ------------
Income from discontinued operations, pre-tax $ 924,242 $ 1,051,775
============ ============
F-9
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
3. Discontinued Operations: Sale of Collision Repair and Fleet Services
Business (Continued)
The investment in the net assets of discontinued operations, reflected in
the accompanying consolidated balance sheets at December 31, 2001 and
2000, consisted of the following:
2001 2000
----------- -----------
Cash $ 155,261 $ 137,488
Accounts receivable, net 1,141,654 1,545,236
Prepaid expenses 2,450 --
Accounts payable and accrued expenses (1,267,365) (1,351,144)
----------- -----------
Net assets of discontinued operations $ 32,000 $ 331,580
=========== ===========
4. Extraordinary Gain from Release of Indebtedness
In November 2001, the Company reached an agreement with Electronic Data
Systems Corp. Both parties released each other from any and all existing
claims, and terminated the arbitration and legal proceedings related to a
dispute over website design. Accordingly, the Company recognized $154,275
of extraordinary pre-tax gain related to indebtedness that had been
previously recorded.
5. Investment Securities
Unrealized
Cost Fair Value Holding Gain
-------------- ------------ --------------
At December 31, 2001:
Available for sale, 195,204 shares of
Salomon Smith Barney Adjustable
Rate Government Income Fund $1,914,441 $1,915,121 $ 680
---------- ---------- -------
At December 31, 2000:
Available for sale, 80,624 shares of
Salomon Smith Barney Adjustable
Rate Government Income Fund $ 785,935 $ 789,505 $3,570
----------- ----------- ------
F-10
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
6. Property and Equipment and Asset Impairment
Property and Equipment
2001 2000
---------- ----------
Machinery and equipment $ 901,017 $1,038,510
Furniture and fixtures 204,423 288,107
Leasehold improvements 22,485 19,886
Website development costs 539,416 353,438
---------- ----------
1,667,341 1,699,941
Less accumulated depreciation
and amortization 1,051,711 879,537
---------- ----------
$ 615,630 $ 820,404
========== ==========
Asset Impairment
Pursuant to SFAS 121, "Accounting for the Impairment of Long Lived Assets
and Long Lived Assets to Be Disposed of," the Company recorded impairment
charges of $58,719 at December 31, 2001 in the accompanying consolidated
statement of income.
7. Notes Payable
In August 1998, the Company agreed to pay severance to its former
Co-Chairman and President in the amount of $100,000 including imputed
interest of 8.5% in quarterly installments of $12,500 commencing March 31,
1999. Amounts remaining on the note were paid in 2001.
8. Earnings Per Share
Basic earnings per share are computed by dividing the earnings by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could
occur if common stock equivalents, such as stock options and warrants,
were exercised. The computation of diluted earnings per common share in
2001 and 2000 excludes the effect of the assumed exercise of approximately
1,275,000 and 730,000 stock options and warrants that were outstanding as
of December 31, 2001 and 2000 because the effect would be anti-dilutive.
F-11
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
8. Earnings Per Share (Continued)
The reconciliations between basic and diluted earnings per common share
are as follows:
2001 2000
------------------------------------------- -------------------------------------------
Net Income Shares Per-Share Net Income Shares Per-Share
--------------- --------- ---------- ------------- ------ -----------
Basic earnings per
common share $1,169,269 10,709,111 $.11 $247,752 9,956,892 $.02
Effect of dilutive securities,
stock options and warrants -- 400,307 -- -- -- --
---------- ---------- ---- -------- --------- ----
Diluted earnings per
common share $1,169,269 11,109,418 $.11 $247,752 9,956,892 $.02
========== ========== ==== ======== ========= ====
9. Stock Options
Stock Compensation Plan
The Company accounts for its stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
expense is recognized. In 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
(SFAS No. 123) for disclosure purposes; accordingly, no compensation
expense has been recognized in the results of operations for its stock
option plans as required by APB Opinion No. 25. The Company has two fixed
option plans, the 1995 Stock Incentive Plan, and the 1987 Incentive Stock
Option Plan. Under the plans, in the aggregate, the Company may grant
options to its employees, directors and consultants for up to 7,000,000
shares of common stock. Under both plans, incentive stock options may be
granted at no less than the fair market value of the Company's stock on
the date of grant, and in the case of an optionee who owns directly or
indirectly more than 10% of the outstanding voting stock ("an Affiliate"),
110% of the market price on the date of grant. The maximum term of an
option is ten years, except in regard to incentive stock options granted
to an Affiliate, in which case the maximum term is five years.
F-12
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
9. Stock Options (Continued)
Stock Compensation Plan (Continued)
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted in 2001 and 2000, respectively: annual dividends of $-0-
for both years, expected volatility of 139% and 134%, risk-free interest
rate of 4.18% and 6.24%, and expected life of five years for all grants.
The weighted-average fair value of stock options granted in 2001 and 2000
was $1.15 and $.49, respectively.
Under the above model, the total value of stock options granted in 2001
and 2000 was $51,824 and $661,822, respectively, which would be amortized
ratably on a pro forma basis over the related vesting periods, which range
from immediate vesting to five years (not including performance-based
stock options granted in 2001 and 2000, see below). Had compensation cost
been determined based upon the fair value of the stock options at grant
date consistent with the method of SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
2001 2000
------------- -------------
Net income (loss):
As reported $1,169,269 $ 247,752
Pro forma $ 337,965 ($ 1,402,539)
Basic earnings (loss) per share:
As reported $ .11 $ .02
Pro forma $ .03 ($ .14)
Diluted earnings (loss) per share:
As reported $ .11 $ .02
Pro forma $ .03 ($ .14)
F-13
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
9. Stock Options (Continued)
Variable-Priced Options
In October 1999, the Company repriced certain options granted to employees
and third parties, representing the right to purchase 2,200,000 shares of
common stock. The grants gave the holders the right to purchase common
stock at prices ranging from $1.00 to $1.24 per share. The options were
repriced at prices ranging from $.75 to $.83 per share. At the date of the
repricing, the new exercise price was equal to the fair market value of
the shares (110% of the fair market value in the case of an affiliate).
Pursuant to FASB interpretation No. 44, the Company accounts for these
modified option awards as variable from the date of the modification to
the date the awards are exercised, forfeited, or expire unexercised. For
the year ended December 31, 2001, $240,236 in non-cash compensation
charges were recorded. No compensation was recorded through December 31,
2000.
Non-Incentive Stock Option Agreements
The Company has non-incentive stock option agreements with five of its
directors and/or officers.
Summary
Stock options transactions (other than performance-based stock options)
are summarized as follows:
Weighted
Number Exercise Average
of Price Exercise
Shares Range Price
--------- ------------ --------
Options outstanding, January 1, 2000 3,960,000 $.12 - $3.75 $ .91
Options granted 1,340,000 $.31 - $2.38 $ .60
Options canceled (140,000) $.75 - $2.16 $ 1.18
Options exercised (1,866,333) $.14 - $1.50 $ .73
---------
Options outstanding, December 31, 2000 3,293,667 $.31 - $3.75 $ .87
Options granted 45,000 $1.10 - $1.49 $ 1.27
Options canceled (115,000) $.75 - $1.56 $ 1.11
---------
Options outstanding, December 31, 2001 3,223,667 $.31 - $3.75 $ .88
---------
Options exercisable, December 31, 2000 2,090,000 $.31 - $3.75 $ .93
---------
Options exercisable, December 31, 2001 2,716,670 $.31 - $3.75 $ .90
---------
F-14
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
9. Stock Options (Continued)
Summary (Continued)
The following table summarizes information about the options outstanding
at December 31, 2001 other than performance-based stock options:
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
----------------- ----------- ------------ ------------- ----------- -------------
$ .31 - $1.00 2,568,667 2.63 $ .59 2,158,336 $ .62
$1.10 - $2.00 350,000 2.59 $1.50 350,000 $1.50
$2.13 - $3.75 305,000 2.13 $2.60 208,334 $2.81
10. Common Stock and Stock Warrants
In March 2001, the Company issued 175,000 shares of its common stock to an
individual shareholder in consideration for the lock-up of certain shares
owned by this individual, and the right to purchase the individual's
shares under the same terms and conditions as previously granted to
another group. The new shares were issued with a restrictive legend
precluding their transferability for twelve months from the date of issue.
Additionally, restrictions were placed upon the transfer of other shares
held by this individual through December 31, 2001. The Company recorded
the cost of this transaction as a non-operating, non-cash expense of
$77,438 in 2001.
In July 2001, the Company issued 100,000 shares of its common stock to an
individual in consideration of a consulting agreement covering a one-year
period ending June 30, 2002. The Company recorded the cost of the services
based on the price per share of its common stock at the date of their
issuance, aggregating $150,000, and is amortizing the cost over the term
of the contract.
During 2001, the Company granted warrants to acquire 100,000 of its common
stock, at $.53, and an additional 25,000 warrants to acquire 25,000 shares
of its common stock at $.87 per share (the fair market values at the dates
of the grants) in consideration for certain consulting services. The
Company recorded consulting expense in the amount of $9,000, which was
equal to the value of the services provided.
F-15
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
10. Common Stock and Stock Warrants (Continued)
In December 1997, the Company raised $2,330,813 through the private
placement issuance of 581,250 units at $4.01 per unit. Each unit consisted
of one share of common stock and a redeemable common stock purchase
warrant at $5.75 per share for a period of five years. Should the price of
the Company's stock exceed $11.50 per share for 20 consecutive trading
days, the Company may request redemption of the warrants at a price of
$.01 per share. The warrant holders would then have 30 days in which to
either exercise the warrant or accept the redemption offer.
In connection with the 1995 issuance of 1,000,000 shares of its common
stock, the Company issued underwriter warrants to purchase 850,000 shares
of its common stock at prices ranging from $.125 to $.50 per share. In
2000, all of these warrants were exercised.
On October 2, 2000, the shareholders of the Company approved an increase
in the number of authorized shares of common stock from 20,000,000 to
30,000,000.
A $10 million equity funding commitment, which provided the Company the
option of drawing equity financing against an available line, expired in
November 2001, and was unused during its twelve- month duration. The
financing source was provided warrants to purchase 68,970 of the Company's
common stock, at $2.17 per share, in exchange for providing this line.
11. Preferred Stock Purchase Rights
On December 28, 1998, the Board of Directors authorized the issuance of up
to 200,000 shares of non-redeemable Junior Participating Preferred Stock
("JPPS"). The JPPS shall rank junior to all other series of preferred
stock (but senior to the common stock) with respect to payment of
dividends and any other distributions. Among other rights, the holders of
the JPPS shall be entitled to receive, when and if declared, quarterly
dividends per share equal to the greater of (a) $100 or (b) the sum of
1,000 (subject to adjustment) times the aggregate per share of all cash
and non cash dividends (other than dividends payable in common stock of
the Company and other defined distributions). Each share of JPPS shall
entitle the holders to voting rights equal to 1,000 votes per share. The
holders of JPPS shall vote together with the common stockholders. No
shares of JPPS have been issued.
F-16
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
11. Preferred Stock Purchase Rights (Continued)
On December 28, 1998, the Board of Directors also adopted a Rights
Agreement ("the Agreement"). Under the Agreement, each share of the
Company's common stock carries with it one preferred share purchase right
("Rights"). The Rights themselves will at no time have voting power or pay
dividends. The Rights become exercisable (1) when a person or group
acquires 20% or more of the Company's common stock (10% in the case of an
Adverse Person as defined) and an additional 1% or more in the case of
acquisitions by any shareholder with beneficial ownership of 20% or more
on the record date (10% in the case of an Adverse Person as defined) or
(2) on the tenth business day after a person or group announces a tender
offer to acquire 20% or more of the Company's common stock (10% in the
case of an Adverse Person as defined). When exercisable, each Right
entitles the holder to purchase 1/1000 of a share of the JPPS at an
exercise price of $27.50 per 1/1000 of a share, subject to adjustment.
12. Employee Benefit Plan
The Company has a 401(k) profit sharing plan for the benefit of all
eligible employees as defined in the plan documents. The plan provides for
voluntary employee salary contributions from 1% to 15% not to exceed the
statutory limitation provided by the Internal Revenue Code. The Company
may, at its discretion, match within prescribed limits, the contributions
of the employees. Employer contributions to the plan amounted to
approximately $16,800 in 2001 and $12,300 in 2000.
13. Commitments and Contingencies
Leases
The Company leases its executive office in Plainview, New York under a
noncancelable operating lease, expiring June 30, 2002, which requires
minimum annual rentals and certain other expenses including real estate
taxes. A portion of the premise is subleased under a lease expiring June
2002. Sublease income was approximately $51,000 and $59,000 for the years
ended December 31, 2001 and 2000, respectively. Rent expense including
real estate taxes for the years ended December 31, 2001 and 2000
aggregated approximately $199,000 and $190,000, respectively.
At December 31, 2001, the Company's future minimum rental commitments, net
of sublease income of $19,000 in 2002, is $79,000.
F-17
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
13. Commitments and Contingencies (Continued)
Employment Contracts
The Company has employment contracts with its four principal officers,
three of which expire on December 31, 2004, and one expires on December
31, 2003. The agreements provide minimum annual salaries of $300,000 to
the Chief Executive Office ("CEO"), $190,000 to the President, $175,000 to
the President of the ADS subsidiary, and $155,000 to the Chief Financial
Officer ("CFO"). The CEO's contract also specifies a one-time bonus award
of $250,000 plus additional stock options in recognition of the sale of
the fleet business in February 2002. Another employment contract with a
sales executive, which expires in 2002, provides for a base salary of
$110,000 plus incentive compensation for various levels of increased
revenue, gross profit or claims processed. In connection with these
employment contracts, 1,150,000 options were granted in February 2002.
The CEO's employment contract provides that, in the event of termination
of the employment within three years after a change in control of the
Company, then the Company would be liable to pay a lump-sum severance
payment of three years' salary (average of last five years), less $100, in
addition to the cash value of any outstanding but unexercised stock
options. The other employment contracts of the principal officers provide
that, in the event of termination of the employment of the officer within
one year after a change in control of the Company, then the Company would
be liable to pay a lump sum severance payment of one year's salary, as
determined on the date of termination or the date on which a change in
control occurs, whichever is greater. In no event would the maximum amount
payable exceed the amount deductible by the Company under the provisions
of the Internal Revenue Code.
14. Income Taxes
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards (SFAS) 109, "Accounting for
Income Taxes." Under the liability method specified by SFAS 109, deferred
tax assets and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse.
F-18
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
14. Income Taxes (Continued)
At December 31, 2001, the Company has an operating loss carryforward of
approximately $5,000,000, which is available to offset future taxable
income. The Company expects to utilize most of the tax benefits from the
loss carryforwards during 2002 as a result of the sale of its fleet
services business (Note 3). At December 31, 2001, a valuation allowance of
$200,000 was recognized to offset the full amount of the net deferred tax
assets arising from other sources plus $100,000 related to the utilization
of the loss carryforwards due to the uncertainty of realizing these assets
in the future. At December 31, 2000, a valuation allowance was established
to offset the full amount of the deferred tax asset of approximately
$1,780,000 since, at that date, it was more likely than not that the
Company would not realize the benefit of the loss carryforwards.
In accordance with generally accepted accounting principles, the effect of
the change in the beginning-of-the year balance of the valuation allowance
($1,780,000) that resulted from a change in judgment about the realization
of the deferred tax asset has been included in the tax benefit
attributable to continuing operations.
At December 31, 2001, the Company's net operating loss carryforwards are
scheduled to expire as follows:
Year ended December 31,
2005 $ 38,000
2008 36,000
2012 1,685,000
2018 1,975,000
2019 950,000
2021 316,000
----------
$5,000,000
----------
F-19
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
14. Income Taxes (Continued)
Income tax expense (benefit) was allocated as follows:
2001 2000
----------- --------
Loss from continuing operations:
Beginning of the year valuation allowance ($1,780,000) $ --
Current year continuing operations (281,703) (22,728)
----------- --------
(2,061,703) (22,728)
Income from discontinued operations 144,454 30,003
Extraordinary gain 24,113 --
----------- --------
($1,893,136) $ 7,275
----------- --------
Income tax expense (benefit) from continuing operations was comprised of the
following:
2001 2000
----------- --------
Current tax expense (benefit):
Federal $ -- $ --
State and local 6,864 7,275
----------- --------
6,864 7,275
----------- --------
Deferred tax expense (benefit):
Federal (1,758,282) (25,503)
State and local (310,285) (4,500)
----------- --------
(2,068,567) (30,003)
----------- --------
Income tax expense (benefit) ($2,061,703) ($22,728)
=========== ========
F-20
DRIVERSHIELD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
14. Income Taxes (Continued)
A reconciliation of U.S. statutory federal income tax expense (benefit) to
income tax expense (benefit) on earnings (loss) from continuing operations
is as follows:
2001 2000
------------------------- ---------------------------
Amount % Amount %
----------- ----------- ----------- ------------
Expected tax (benefit) at U.S.
statutory rate ($ 612,811) (34.0%) ($ 270,895) (34.0%)
State taxes, net of federal effect (18,024) (1.0) (23,392) (2.9)
Losses for which no tax benefit
has been recognized 349,132 19.4 271,559 34.0
Increase (decrease) in valuation
allowance (1,780,000) (98.8) -- --
----------- ----------- ----------- ------------
Income tax expense (benefit) ($2,061,703) (114.4%) ($ 22,728) (2.9%)
=========== ====== =========== ====
Deferred tax assets and liabilities consist of the following:
2001 2000
----------- ------------
Deferred tax assets:
Net operating loss carryforwards $ 2,000,000 $ 1,780,000
Deferred compensation 96,000 --
Other 39,000 --
----------- ------------
2,135,000 1,780,000
Deferred tax liability, other (35,000) --
----------- ------------
2,100,000 1,780,000
Valuation allowance (200,000) (1,780,000)
----------- ------------
Deferred tax asset $ 1,900,000 $ --
=========== ============
F-21