U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to
Commission file number 0-21467
DRIVERSHIELD CORP.
(Exact name of small business issuer as specified in its charter)
(Formerly DRIVERSSHIELD.COM CORP and previously FIRST PRIORITY GROUP, INC.)
New York 11-2750412
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
51 East Bethpage Road (516) 694-1010
Plainview, New York 11803
(Address of principal executive offices) (Issuer's telephone number)
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) has 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
|_|
As of May 14, 2002, the issuer had outstanding a total of 10,962,218
shares of common stock.
Transitional Small Business Format (check one) Yes |_| No |X|
DRIVERSHIELD CORP.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002
CONTENTS
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of March 31, 2002 (Unaudited) 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months ended
March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months ended
March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial 7
Statements
Item 2. Management's Discussion and Analysis 11
Part II. OTHER INFORMATION 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.
Item 1. Financial Statements
DRIVERSHIELD CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2002
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $1,598,541
Accounts receivable, trade 265,140
Accounts receivable, other 165,652
Available-for-sale investments 1,930,488
Held-to-maturity investments 4,991,512
Prepaid expenses and other current assets 133,814
------------
Total current assets 9,085,147
Property and equipment, net of accumulated depreciation 620,284
Security deposits 27,563
------------
Total assets $9,732,994
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $223,554
Accrued expenses and other current liabilities 494,565
Taxes payable 204,656
------------
Total current liabilities 922,775
------------
Shareholders' equity:
Common stock, $.015 par value, authorized 30,000,000
shares; issued 11,746,911 176,205
Preferred stock, $.01 par value, authorized 1,000,000
shares; 1,000 issued and outstanding; liquidation
preference of $1.25 million 10
Additional paid-in capital 11,107,977
Accumulated other comprehensive loss, unrealized holding
loss on investment securities (7,179)
Deficit (855,008)
------------
10,422,005
Less common stock held in treasury, at cost,
784,693 shares 1,611,786
------------
Total shareholders' equity 8,810,219
------------
Total liabilities and shareholders'
equity $9,732,994
============
See notes to condensed consolidated financial statements.
3
DRIVERSHIELD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended,
March 31, March 31,
2002 2001
------------ ------------
Revenue:
Collision repairs and claim fees $ 478,659 $ --
Automobile affinity services 354,524 474,246
------------ ------------
Total revenues 833,183 474,246
------------ ------------
Operating expenses:
Collision repair expenses 421,315 --
Sales and marketing 232,547 145,176
General and administrative 854,060 526,638
Non-cash compensation (Note 6) 181,502 --
Depreciation and amortization 89,021 82,647
------------ ------------
Total operating expenses 1,778,445 754,461
------------ ------------
(945,262) (280,215)
Investment and other income 80,810 44,615
Other expenses (shares issued for restriction agreement) (Note 7) -- (77,438)
------------ ------------
Loss from continuing operations before provision for income taxes (864,452) (313,038)
Provision for income (taxes) benefit 345,781 (44)
------------ ------------
Loss from continuing operations (518,671) (313,082)
------------ ------------
Discontinued operations (Note 4):
Gain on disposal of subsidiary, (net of income taxes
of $2,432,947) 3,649,421
Income from discontinued operations (net of income taxes
of $17,490 in 2002) 26,235 329,334
------------ ------------
Income from discontinued operations 3,675,656 329,334
------------ ------------
Net income $ 3,156,985 $ 16,252
============ ============
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.05) $ (0.03)
Discontinued operations 0.34 0.03
------------ ------------
Total $ 0.29 $ 0.00
============ ============
Weighted average number of common shares outstanding 10,879,643 10,570,599
Effect of dilutive securities, stock options and warrants -- --
------------ ------------
Weighted average diluted common shares outstanding 10,879,643 10,570,599
============ ============
See notes to condensed consolidated financial statements.
4
DRIVERSHIELD CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, March 31,
2002 2001
----------- ---------
Cash flows provided by (used in) operating activities:
Net income $ 3,156,985 $ 16,252
----------- ---------
Adjustments to reconcile net income to net cash Provided by (used in)
operating activities:
Depreciation and amortization (including bond premium
amortization) 103,486 82,647
Shares issued for restriction agreement -- 77,438
Non-cash compensation 181,502 --
Gain on sale of subsidiary (6,082,368) --
Gain on sale of assets -- (3,198)
Options granted for services 8,945 22,172
Changes in assets and liabilities:
Accounts receivable (294,342) (24,284)
Prepaid expenses and other current assets 33,787 30,660
Deferred tax asset 1,900,000 --
Investment in net assets of discontinued operations (60,022) --
Accounts payable 68,224 (273,353)
Accrued expenses, other current liabilities and taxes
payable 265,425 110,275
----------- ---------
Total adjustments (3,875,363) 22,357
----------- ---------
Net cash provided by (used in) operating activities (718,378) 38,609
----------- ---------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (93,675) (91,425)
Proceeds from sale of subsidiary, net 6,174,389 --
Purchase of investments (5,029,203) (712,676)
Proceeds from sale of assets -- 15,600
----------- ---------
Net cash provided by (used in) investing activities 1,051,511 (788,501)
----------- ---------
Cash flows provided by (used in) financing activities:
Repayment of note payable -- (6,832)
Proceeds from issuance of preferrred stock 1,000,000 --
----------- ---------
Net cash provided by (used in) financing activities 1,000,000 (6,832)
----------- ---------
See notes to condensed consolidated financial statements.
5
DRIVERSHIELD CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Net increase (decrease) in cash and cash equivalents 1,333,133 (756,724)
Cash and cash equivalents at beginning of period 265,408 1,039,866
----------- ---------
Cash and cash equivalents at end of period $ 1,598,541 $ 283,142
=========== =========
6
DRIVERSHIELD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002
(Unaudited)
1. BASIS OF PRESENTATION
The information contained in the condensed consolidated financial
statements for the three month periods ended March 31, 2002 and 2001 is
unaudited, but includes all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and the results of operations for these periods.
The financial statements and notes are presented in accordance with the
requirements of Form 10-QSB, and do not contain certain information included in
the Company's annual statements and notes. These financial statements should be
read in conjunction with the Company's annual financial statements as reported
in its most recent annual report on Form 10-KSB.
On February 7, 2002 the Company sold its fleet services business (see Note
4). The accompanying financial statements reflect the results of this business
as Discontinued Operations. Accordingly, certain prior period amounts have been
reclassified.
This report may contain forward-looking statements which involve certain
risks and uncertainties. Factors may arise, including those identified in the
Company's Form 10-KSB for the year ended December 31, 2001, which could cause
the Company's operating results to differ materially from those contained in any
forward-looking statement.
For the three month periods ending March 31, 2002 and 2001, there were no
significant non-owner sources of income or expense. Accordingly, separate
statements of comprehensive income have not been presented.
2. BUSINESS OF THE COMPANY
The Company, a New York corporation, has been engaged in automotive repair
and collision management since 1983. Until its recent divestiture of a
subsidiary (Note 4), it provided collision repair and fleet management services
primarily for numerous Fortune 500 companies. It now provides collision and
general repair programs and appraisal services, for the insurance industry and
insurance carriers. The Company facilitates the repair process for insurance
carriers by installing its internet-based software at customer sites, which
permits them to enter new claims and to monitor the Company's activities on
their behalf. Once a claim is initiated on the website, the Company commences
its efforts. This includes the audit of repair estimates, negotiation of the
repair price with one of its suppliers selected from its network of 2,000
providers, management of time for completion
7
of repair, selection or approval of part specifications, and obtaining third
party appraisals if required. The Company assumes the risks and responsibilities
for the vehicle repair process, from commencement to completion, for its
insurance clients. It warrants all repairs, completed through its network of
repair facilities, for periods up to as long as the driver owns the vehicles and
issues warranty certificates for claims processed through its supplier network.
The Company records revenues gross in these circumstances, having acted as the
principal in the transaction. When it is not the principal, and another supplier
incurs the risks and responsibilities of the arrangement, it records revenues on
a net basis. A number of multi-year contracts with insurance carriers have been
signed which generated revenues in the first quarter, but one customer began the
implementation earlier and provided the majority of those revenues.
The Company also provides similar benefits for individuals through
affinity memberships that are offered by financial institutions.
3. RESULTS OF OPERATIONS
The unaudited results of operations for the three months ended March 31,
2002, are not necessarily indicative of the results to be expected for the full
year. Specifically, the Company signed a number of multi-year contracts with
insurance carriers in late fiscal 2001. Thereafter, software was installed and
the training and implementation process began. Accordingly, revenues from the
Company's insurance business have recently commenced.
4. DISCONTINUED OPERATIONS AND PREFERRED STOCK SALE
On February 7,2002, following shareholder approval of the Stock Purchase
Agreement ("the Purchase Agreement"), the Company sold all of the outstanding
shares of its former wholly-owned subsidiary, driversshield.com FS Corp. ("FS"),
that operated the 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 and, pursuant to the
Preferred Stock Purchase Agreement, received $1.0 million for the sale of 1000
shares of the Company's Series A Convertible Preferred Stock (the "Preferred
Shares") to PHH. 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).
The Preferred Shares have a liquidation preference of 125% of its original
investment value as provided in the Company's Certificate of Incorporation.
The Company recorded a pretax gain on the sale of FS of $6.1 million. The
sale of FS impacted the Company's consolidated balance sheet by reducing
accounts receivable and accounts payable and other accrued liabilities. Certain
cash balances were also transferred to PHH representing primarily customer
deposits, prepayments, or funds received by the Company pending repayments to
its customers.
Operating results of the discontinued fleet services operations for the
period January
8
1, 2002 through February 7, 2002, its date of sale, and the quarter ended March
31, 2001 are as follows:
2002 2001
---- ----
Revenues $1,087,658 $3,951,875
Cost of sales (878,776) (3,256,905)
Selling, general and administrative (165,157) (365,636)
---------- ----------
Income from discontinued operations, pre-tax $43,725 $329,334
In accordance with the Transition Services Agreement with PHH, whereby the
Company is managing FS operations until June 30, 2002, PHH was indebted to the
Company for $133,000 at March 31, 2002 in connection with these activities. Such
amounts are included in accounts receivable-other, in the accompanying condensed
consolidated balance sheet.
5. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing earnings (loss) 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.
For the three month periods ended March 31, 2002 and 2001, respectively,
approximately 5,400,000 and 3,900,000 of stock options, warrants and convertible
preferred stock were excluded from the earnings per share calculations as their
inclusion would have been anti-dilutive. These options, warrants and preferred
shares could be dilutive in the future.
6. NON-CASH CHARGE FOR VARIABLE PRICED OPTIONS
In October 1999 the Company repriced certain options previously granted to
employees and third parties. The original grants gave holders the right to
purchase common shares at prices ranging from $1.00 to $1.24; these were
repriced to 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 Interpetation No. 44, the Company accounts for these as variable from the
date of the modification until they are exercised, forfeited or expired, and
records the intrinsic value of such grants. Accordingly, the Company recorded a
non-cash charge for compensation costs totaling $182,000, in the accompanying
financial statements, for the three months ended March 31, 2002.
9
7. SHARES ISSUED IN EXCHANGE FOR RESTRICTION AGREEMENT AND OTHER CONSIDERATIONS
DURING 2001
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 this 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 this transaction, in the accompanying financial
statements, as a non-operating, non-cash expense of $77,000 during the quarter
ended March 31, 2001.
8. PROFORMA INFORMATION
The proforma information, assuming that the disposal of FS occurred at the
beginning of the earliest quarterly period presented, has not been presented
since the disposal of FS has been accounted for as discontinued operations and
such amounts have been reclassified from continuing operations.
9. INCOME TAXES
As of December 31, 2001, the Company had operating loss carry forwards of
approximately $5,000,000 which resulted in a deferred tax asset of $1,900,000,
net of valuation allowance. During the three months ended March 31, 2002, the
Company recorded income tax expense of approximately $2,100,000 of which
$1,900,000 will not be payable due to the anticipated full utilization of the
loss carry forwards.
10
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements - Cautionary Factors
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and the notes hereto appearing elsewhere in
this report. This report contains forward-looking statements within the meaning
of the Private Securities Litigation Act of 1995. The Company cautions that
forward-looking statements are not guarantees of future performance and involve
certain risks and uncertainties (including those identified in "Risk Factors" in
the Company's Form 10-KSB for the year ended December 31, 2001) and that actual
results may differ materially from those in the forward-looking statements as a
result of various factors. Except for the historical information and statements
contained in this Report, the matters and items set forth in this Report are
forward looking statements.
Three Months ended March 31,2002 (the "2002 Quarter") Compared to Three Months
ended March 31,2001 (the "2001 Quarter").
The 2002 Quarter reflected net income of $3,157,000 compared to net income
of $16,000 in the 2001 Quarter. Loss from continuing operations was $519,000
versus a loss of $313,000 in the 2001 Quarter. Income from discontinued
operations was $3,676,000 versus income of $329,000 in the 2001 Quarter. This
increase in net income in the aggregate, and from discontinued operations,
resulted predominantly from the net gain on the sale of FS to PHH of $3,649,000.
Basic and fully diluted loss per share from continuing operations was $(.05) and
$(.03) per share in the 2002 and 2001 Quarter, respectively. Basic and fully
diluted earnings per share, from discontinued operations, were $.34 in the 2002
Quarter, versus a loss of $(.03) in the 2001 Quarter.
Revenues from Continuing Operations
Revenues were $833,000 in the 2002 Quarter, versus $474,000 in the 2001
Quarter, representing an increase of $359,000 or 76%. The Company's revenues
increased by $479,000 from its insurance industry clients. Customer contracts
were signed late in fiscal 2001 and installation and implementation occurred
during the 2002 Quarter. In the 2002 Quarter, Affinity Services sales decreased
$120,000 or 25%, to $354,000, as compared to $474,000 for the same period in
2001, reflecting a percentage of members that did not renew their memberships
after the significant increases in memberships that resulted from marketing
efforts during fiscal year 2000.
11
Operating Income and Expenses from Continuing Operations
Pretax loss from continuing operations was $864,000 in the 2002 Quarter
compared to a loss of $313,000 in the 2001 Quarter, an increase in losses of
$551,000. Excluding the 2002 Quarter charge of $182,000 in non-cash
compensation, for variable priced options dating from 1999, and the non-cash
charge in the 2001 Quarter of $77,000 for a stock restriction agreement, the
increase in losses was $446,000.
Collision repair and claim fee revenues from insurance carriers, net of
collision repair costs, were $58,000. There were no comparable amounts in the
2001 Quarter. Affinity service revenues decreased by $120,000, as noted above.
Selling expenses increased by $88,000 (61%), to $233,000 in the 2002
Quarter, from $145,000 in the 2001 Quarter. This was the result of increased
costs for personnel and related travel activities of DriverShield CRM, the
Company's insurance industry business.
General and administrative expenses increased by $327,000 (62%), from
$527,000 in the 2001 Quarter to $854,000 in the 2002 Quarter resulting primarily
from a one-time bonus of $250,000, which was directly associated with the
consummation of the sale of FS, and from increases in consulting expenses, proxy
costs and filing fees.
Depreciation expense increased $6,000, from $83,000 in the 2001 Quarter to
$89,000 in the 2002 Quarter, primarily as a result of additional capital
expenditures supporting the Company's technology systems.
Investment and other income increased $36,000, from $45,000 in the 2001
Quarter to $81,000 in the 2002 Quarter. The increase resulted primarily from
increased interest income of $15,000 and fees earned from the Transition
Services Agreement with PHH.
Discontinued Operations
Income from discontinued operations reflects the net after-tax gain on the
sale of FS of $3,649,000, as well as income from discontinued activities of
$26,000 in the 2002 Quarter versus $329,000 in the 2001 Quarter. The results in
the 2002 Quarter reflect only five weeks of discontinued activity immediately
preceding the sale of FS on February 7, 2002, versus the entire quarter in the
2001 Quarter.
Liquidity and Capital Resources
As of March 31, 2002, the Company had cash and cash equivalents of
$1,599,000. The Company also holds 196,904 shares of highly liquid, Salomon
Smith Barney Adjustable Rate Government Income Fund valued at $1,930,000, and
also holds short-term liquid notes in the amount of $4,992,000 for a total of
$8,521,000 of cash and liquid
12
investments. The comparable amount at December 31, 2001 was $2,180,000,
resulting in an increase of $6,341,000 through March 31, 2002. Working capital
of the Company as of March 31, 2002, was $8,162,000 versus $3,828,000 at
December 31, 2001, and its working capital ratio at March 31, 2002 was 10:1.
The Company believes that its present cash position will enable the
Company to continue to support its operations for the next twelve months and for
an extended period thereafter depending on the extent of its use of funds to
build its existing businesses and possible use of funds to develop or acquire
new businesses.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on February 4, 2002.
The following matters were voted upon at the meeting:
1. Sale of driversshield.com FS Corp., and sale of Series A Preferred
Stock to PHH.
For Against Abstain
--- ------- -------
6,123,234 5,133 0
2. Name change to DriverShield Corp.
For Against Abstain
--- ------- -------
6,120,500 2,867 0
3. Amendment to Certificate of Incorporation to reduce the shareholder
vote necessary to approve certain extraordinary transactions
For Against Abstain
--- ------- -------
6,007,127 117,840 3,400
4. Election of J. McIntrye as a Director
For Against Abstain
--- ------- -------
6,085,291 0 43,076
5. Ratify the selection of Nussbaum Yates& Wolpow, P.C. as auditors
For Against Abstain
--- ------- -------
6,119,001 4,366 5,000
13
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
February 6, 2002 - Disposition of Assets: Consummation of sale of capital
stock of driversshield.com FS Corp. and sale of Series A Convertible
Preferred Stock.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
DriverShield Corp.
Date: May 15, 2002 By: Barry Siegel
-------------------------------------
Chairman of the Board, Secretary and
Chief Executive Officer
Date: May 15, 2002 By: Philip B. Kart
-------------------------------------
Senior Vice President and Chief Financial Officer
14