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, 2000
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
DRIVERSSHIELD.COM CORP.
(Formerly First Priority Group, Inc.)
-------------------------------------
(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
-------------------------
(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 $14,451,103
The aggregate market value of the issuer's voting stock held by
non-affiliates of the issuer as of March 29, 2001, based upon the closing price
on the date thereof is $5,500,320.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 30, 2001, the issuer had outstanding a total of 10,696,988
shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-KSB is hereby incorporated by reference to the
Definitive Proxy or Definitive Information Statement issued by the Company for
the Notice of the Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
2
Part I
Item 1. DESCRIPTION OF BUSINESS
On November 23, 1983, driversshield.com FS Corp., formerly known as
National Fleet Service, Inc., a New York corporation was formed and commenced
operations as an automotive fleet administrator. Thereafter, driversshield.com
Corp., formerly First Priority Group, Inc., a New York corporation, was formed
on June 28, 1985, and is 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.
In October 2000, the Company changed its name to driversshield.com Corp
and its stock trading symbol on the Nasdaq SmallCap Market to DRVR.
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 vehicle maintenance and
repair management, including collision and general repair programs, appraisal
services, subrogation services, vehicle salvage and vehicle rentals; and the
administration of automotive collision repair referral services for self insured
fleets, insurance companies and affinity group members.
The Company through its wholly-owned subsidiary, driversshield.com FS
Corp. ("FS"), conducts the Company's fleet management businessand through its
wholly-owned subsidiary driversshield.com ADS Corp. ("ADS"), provides the
various affinity programs for all types of businesses.
Fleet Management. The Company has entered into contractual arrangements
with over 2,000 independently owned and operated repair shops throughout the
United States, as well as with national chains of automobile repair shops, to
provide repair services for the Company's fleet management clients' vehicles.
This network of automobile repair shops can handle, on a per incident basis, any
repair that the Company's fleet management clients' drivers may encounter.
Because the Company has made arrangements 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.
The repairs provided consist primarily of collision and glass replacement
repairs although general repairs can also be provided. In the event that a
repair is needed, the driver need only call the Company's toll free telephone
number. Through the development of a comprehensive proprietary management system
and customized computer software, upon receipt of the call, the driver is
directed to a local repair shop to which the driver may take the vehicle for the
needed repairs. The Company's staff tightly manages all the activity surrounding
the repair process. Upon completion of the repair, the bill is forwarded to the
Company, which in turn, bills the client. There is no need for independent
negotiations between the repair shop and the client or the driver. As part of
its fleet management services, the Company also offers its clients computerized
appraisal services, salvage and subrogation services, and offers vehicle rentals
to permit clients to avoid driver down-time while a client's vehicle is being
repaired. Additionally,
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the Company has created a complete line of customized reports with features that
allow risk managers to thoroughly assess all variables concerning the collision
activity expense of their fleet. These unique systems were primarily
attributable to the Company winning in 1995 the prestigious award from Inc.
Magazine and MCI, as one of the nations best-run service companies.
Affinity Group Programs. These programs are 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.
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 April 1999 the Company established a new Internet enterprise, now known
as driversshield.com CRM Corp. ("CRM"), as a wholly owned subsidiary. CRM is
designed to serve insurance companies by offering a complete customer
relationship management solution by combining its Affinity Group programs and
collision repair management services into an Internet based strategy. This new
business focuses on capturing a significant share of the North American market
for managed automotive care. The first thrust into the marketplace is the
introduction of a website for efficient management of collision repairs. The
interactive website facilitates information gathering and distribution to launch
the repair process. The website will enable insurance carriers to utilize the
Company's website to directly enter the initial vehicle claim information,
permit the insured to select an automobile collision repair shop from the
Company's network of over 2,400 shops across the country, and enable the
insurance carrier and the insured to track the repairs of the vehicle until
completion. Two insurance carriers have begun initial use of the system, on a
limited basis. The website address is: .www.driversshield.com. The Company had
4
developed a functional website for this business with Electronic Data Systems
("EDS"); it is now re-designing and enhancing its website, apart from EDS, and
will host the site as well. In January 2001 the Company announced that its
relationship with EDS had terminated. The Company's enhanced website became
functional at the end of the first calendar quarter of 2001. [See
Forward-Looking Statements and Cautionary Factors and Legal Proceedings]
Sales and Marketing
The Company's fleet management clients generally consist of self-insured
companies having a large number of vehicles on the road over a broad
geographical area. The Company's clients for its affinity programs are financial
institutions, organizations and affinity groups that resell the programs to
individuals. The Company's clients for the CRM program are property and casualty
insurance companies.
Sales activities are performed by the Company's own personnel and
contracted agencies outside the Company. Sales are made through referrals, cold
canvassing of appropriate prospects and direct mailings. The Company also
attends trade shows in order to increase its client base.
Since the Company deals with a large number of independently owned repair
facilities, it is often able to offer to its fleet management clients a custom
tailored program to suit their needs for vehicle repairs. The Company believes
that this flexibility is important in its marketing activities and in increasing
its client base.
In 2000, two customers accounted for 11% each, and a third customer for
12% of the Company's revenues, and in 1999 one of those customers accounted for
approximately 10% of the Company's revenue.
Employees
At year-end, the Company employed 42 full-time employees and three part
time employees. None of the Company's employees are governed by a union contract
and the Company believes that its employee relationships are satisfactory.
Competition
Fleet Management. Some leasing companies offer fleet management
services, but most offer such services only to fleets leased by them. The
Company is aware of three other companies that, like the Company, offer fleet
management services independent of a fleet leasing arrangement.
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 Affinity Group division.
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Insurance Carriers. The Company is aware of three other companies
that offer automotive collision repair services to insurance companies. Two of
such companies are, like the Company, 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.
A portion of the premise is subleased under a lease expiring June 2002.
Item 3. LEGAL PROCEEDINGS
During 1998 the Company was served with a summons and complaint filed by Philip
M. Panzera, the Company's former Chief Financial Officer, in United States
District Court (Eastern District, NY) alleging that the Company wrongfully
terminated his employment and converted Mr. Panzera's personal property. Mr.
Panzera sought monetary damages in excess of $1 million. The Company answered
this complaint and denied all of Mr. Panzera's allegations. Additionally, the
Company filed a counterclaim against Mr. Panzera alleging, among other things,
that Mr. Panzera fraudulently induced the Company to enter into the Employment
Agreement by making false representations. During fiscal year 2000, this matter
was settled by mutual release of claims; no funds were paid or received by
either party.
In November 1999 CRM had 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 $350,000 for the initial development costs of the website. Once the
website was operational, CRM was to receive all fees until it recovered the
development costs paid to EDS, and thereafter, EDS was to recover its
development costs in excess of $350,000, if any, up to $80,000. In the
subsequent years, a revenue sharing arrangement provided EDS with thirty percent
(30%) to forty-two percent (42%), of the Net Revenue. Throughout the term of
this Agreement, EDS was to host and maintain the website, process all
transactions, maintain, secure and update all database functions, design,
develop and build a repair management call center, secure all transmissions over
the website, upgrade the site for additional functionality, handle all
accounting functions, fulfill customer material and introduce electronic data
interchange throughout the repair facility network at no additional cost.
driversshield.com Corp. had guaranteed performance of this Agreement by its
wholly owned subsidiary. The Company expensed $169,000 during 1999 and
capitalized an additional $300,000 in 2000. It has not accrued invoices totaling
an additional $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 has filed
6
a counterclaim denying the allegations and seeking payment of $226,000. It also,
unilaterally shut down the Company's website. The matter is now pending
arbitration. The Company intends to vigorously defend the counterclaim filed by
EDS.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of Stockholders on October 2, 2000. The
following matters were voted upon at the Annual Meeting of Shareholders:
For Against Abstain
--- ------- -------
1. Election of a Board of Directors.
Nominee
Barry Siegel 4,910,263 0 882,159
Barry J. Spiegel 4,909,913 0 882,509
Kenneth Friedman 4,910,313 0 882,109
R. Frank Mena 4,910,313 0 882,109
2. Amendment to the By-Laws of the Corporation.
4,905,065 893,826 3,666
3. Amend certificate of incorporation for change of corporate name.
5,535,115 266,776 666
4. Ratification of $10 million common stock purchase agreement.
4,902,624 888,217 11,716
5. Increase in the number of authorized common shares to 30 million.
5,162,025 635,866 4,666
6. Ratification of Nussbaum, Yates & Wolpow , P.C. as the independent
auditors.
5,786,125 12,666 4,166
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Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are traded on The Nasdaq SmallCap market. The
following table shows the high and low closing prices for the periods indicated.
Sale Price($)
High Low
---- ---
2000
First Quarter $6.13 $2.75
Second Quarter $4.25 $1.25
Third Quarter $2.00 $1.38
Fourth Quarter $1.38 $ .31
1999
First Quarter $3.50 $1.13
Second Quarter $2.06 $1.38
Third Quarter $1.83 $ .75
Fourth Quarter $3.00 $ .75
The number of record holders of the Company's common shares as of March
20, 2001 was 345.
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.
On March 28, 2001, the Company received a Nasdaq Staff Determination
indicating that the Company failed to comply with the Minimum Bid Price
requirement for continued listing on the Nasdaq SmallCap Market pursuant to
Marketplace Rule 4310(c)(8)(B). The Company intends to appeal this
8
Determination to the Nasdaq Listing Qualifications Panel (the "Panel"). Until
the Company's appeal is heard before the Panel, there will be a stay of any
delisting action.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Year ended December 31, 2000 (the "2000 Period") Compared to year ended December
31, 1999 (the "1999 Period")
The 2000 Period reflected net income of $ 248,000 versus a loss of $966,000 in
the 1999 Period. Basic earnings per share were $.02 versus a net loss of $.12
per share in the 1999 Period. Diluted earnings per share in the 2000 Period were
$.02; options and warrants were anti-dilutive in the 1999 Period.
Revenues
Revenues were $14,451,000 in the 2000 Period, compared to $12,136,000 in
the 1999 Period, representing an increase of $2,315,000, or 19%. This increase
reflects expansion in both the fleet management and collision repair business,
which accounted for $1,248,000 of the increase, as well as affinity services
revenues, which increased $1,067,000. The fleet management business increase
reflects expansion in the client base that began in the second calendar quarter
of the 2000 Period. The increase in affinity services revenues is the result of
marketing efforts that broadened participation in the Company's membership
programs.
Operating Income and Expenses
Consolidated net income increased by $1,214,000, to $248,000 in the 2000
Period, from a loss of $966,000 in the 1999 Period. The increase in revenue
growth described above, resulted in an increase in gross profit of $1,286,000,
from $2,797,000 in the 1999 period to $4,083,000, and was the primary reason for
the increase in net income. In addition, the gross profit percentage increased
to 28% from 23%, largely due to the increase in affinity services, which
represent a greater proportion of the Company's sales mix in the 2000 Period.
Accordingly, cost of revenues, principally charges incurred at repair
facilities, decreased from 77% of sales in the 1999 Period to 72% of sales in
the 2000 Period, despite increasing in absolute dollars by $1,030,000 from
$9,338,000 in the 1999 Period to $10,368,000 in the 2000 period.
Selling expenses increased by $131,000, from $1,049,000 in the 1999 Period
to $1,180,000 in the 2000 Period, or 12%, as the Company began increasing its
investment in sales and marketing personnel and their related activities.
General and administrative expenses decreased by nearly the same dollar amount,
$136,000 offsetting the increase in selling expenses, from $2,637,000 in the
1999 Period to $2,501,000 in the 2000 Period. This resulted primarily from a
reduction in expenses for website development from the 1999 period. Depreciation
increased by $81,000 resulting from an increase in capital expenditures.
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Investment and other income was $141,000 in the 2000 Period, compared to
$153,000 in the 1999 Period, representing a decrease of $12,000, primarily due
to lower average cash balances available.
Liquidity and Capital Resources
At December 31, 2000, the Company had cash and cash equivalents of
$1,040,000, and also held 80,624 shares of Salomon Smith Barney Adjustable Rate
Government Income Fund securities valued at $789,000, providing a total of
$1,829,000 in available liquidity. Working capital at December 31, 2000 was
$1,935,000 compared to $1,676,000 at December 31, 1999. The Company's operating
activities provided $626,000 of cash in the 2000 Period versus a use of $899,000
in the 1999 Period, when the Company's cash was impacted by losses from
operations. The Company believes that its present financial condition will
enable it to continue to support its operations for the next twelve months
During November 2000 a registration statement with the Securities and
Exchange Commission became effective that provides up to $10 million in equity
financings, over a one year period from the effective date of the registration.
The facility permits the Company to draw down funds against the $10 million
equity commitment, as needed, with a monthly minimum of $1 million. The number
of shares to be issued with each draw down is computed based upon the average
trading price of the prior 22 trading days, less a 10% discount for the
financing source. The financing source was also granted warrants to purchase
68,970 shares of the company's common stock at a price per share of $2.17. No
funding has occurred to date under the agreement. Should the Company's common
stock be delisted from trading on the Nasdaq SmallCap Market, the investor
funding this equity facility has the option to terminate this facility.
Deferred Income taxes
The Company has a net operating loss carry forward of approximately $4.7
million that is available to offset future taxable income. Since the Company has
determined that it is more likely than not that it may not recover these carry
forward benefits a valuation allowance has been established for the full amount
of the deferred tax benefit; and accordingly no deferred income tax asset has
been reflected in the Company's financial statements. To the extent that the
Company is profitable in future periods, such carry forward benefits are
available to offset taxable earnings. However, if the Company is not profitable,
it will not be able to realize this benefit.
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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. 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.
2. The Company, under the DARP, or NFS, under its fleet management business,
or the Affinity Division, has clients that either individually control a
large number of insureds, control large fleets, or a large number of
participants in FPG programs such as Driver's Shield(R). Three customers
accounted for 34% of the Company's revenues in the 2000 Period. The loss
of any one insurance company, large fleet operator, or affinity group,
terminating its relationship with the Company or NFS, could have an
adverse impact on the continued growth of that business. The Company and
NFS have addressed the issue of customer retention by implementing a
policy of entering into long-term contracts with its customers. In the
past several years, this has materially improved the customer retention
rate.
3. 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.
4. As the Company has embarked on an Internet strategy whereby it will offer
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 will offer auto collision managed care
services on the Internet, and we are not sure our business model
will be successful or that we can generate revenue from this
activity.
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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, 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.
12
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 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.
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. We also have a $10 million equity commitment
that expires in November 2001. Once that expires, we may need to
raise additional funds, however, in order to fund more rapid
expansion, to develop new or enhance existing services or products,
to respond to competitive pressures or to acquire complementary
products, businesses or technologies. Should the Company's common
stock be delisted from trading on the Nasdaq SmallCap Market, the
investor in this financing facility has the option to terminate this
facility.
o There can be no assurance that additional financing will be
available on terms favorable to us, or at all. The potential that
the Company's common stock may be delisted from trading on the
Nasdaq SmallCap Market may make it more difficult for the Company to
obtain additional financing on favorable terms. 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.
13
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.
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 19 % of
the outstanding shares of our common stock. In addition, Barry J. Spiegel,
a director and the President of our Affinity Group Services Division,
beneficially owns and controls the vote of approximately 7% 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. The market price of our common stock could be adversely affected by future
sales of substantial amounts of common stock. Michael Karpoff, a former
director and employee of the Company, owns individually and jointly with
Patricia Rothbardt, 694,119 shares of our common stock. Sale of 594,119
shares is subject to a lock-up agreement, which expires in December 2001,
after which time, Mr. Karpoff and Ms. Rothbardt will be free to sell all
their shares. Mr. Karpoff also holds options to purchase 100,000 shares of
our common stock, which options are fully exercisable at $3.025.
7. The potential issuance of shares under a $10 million financing would have
the effect of diluting the equity interest of our existing stockholders
and could have an adverse effect on the market price for our common stock,
if these are ever issued. To date the Company has not needed this funding,
but a maximum of 6,896,146 shares of common stock are reserved for
possible future issuance upon, other things, the issuance of common stock
under our common stock purchase agreement with Suerez Enterprises Limited
and the conversion of outstanding warrants.
8. 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.
14
Item 7. FINANCIAL STATEMENTS
The Company's financial statements and schedules appear at the end of this
Report after Item 13.
15
Part III
Items 9 through 12 have been incorporated by reference from the Company's
definitive proxy statement .
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3.1 Certificate of Incorporation of the Company, as amended, incorporated by
reference to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1991.
3.2 Amendment to the Certificate of Incorporation incorporated by reference to
Exhibit 3.1 of the Company's Form 10-QSB for the period ended September
30, 1996.
3.3. 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 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.
16
10.4 Employment Agreement dated March 23, 1998 between the Company and Gerald
M. Zutler incorporated by reference to Exhibit 10.1 of the Company's Form
10-QSB for the period ended March 31, 1998.
10.5 Employment Agreement dated October 8, 1998 between the Company and Barry
Siegel incorporated by reference to Exhibit 10.17 of the Company's Form
10-KSB for the year ended December 31, 1998.
10.6 Employment Agreement dated October 2, 1998 between the Company and Barry
J. Spiegel incorporated by reference to Exhibit 10.18 of the Company's
Form 10-KSB for the year ended December 31, 1998.
10.7 Employment Agreement dated December 14, 1998 between the Company and Lisa
Siegel incorporated by reference to Exhibit 10.19 of the Company's Form
10-KSB for the year ended December 31, 1998.
10.8 Employment Agreement dated October 8, 1998 between the Company and Gerald
M. Zutler incorporated by reference to Exhibit 10.20 of the Company's Form
10-KSB for the year ended December 31, 1998.
10.9 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.
10.10 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.
10.11 driversshield.com Corp. 1999 Stock Option Plan incorporated by reference
and previously filed with the Commission.
13.1 Form 10-QSB for the quarter ending March 31,1999 incorporated by reference
and previously filed with the Commission.
13.2 Form 10-QSB for the quarter ending June 30, 1999 incorporated by reference
and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 1999 incorporated by
reference and previously filed with the Commission.
17
21 List of subsidiaries incorporated by reference and previously filed with
the Commission.
(b) Reports on Form 8-K
None
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.
driversshield.com Corp
By: s/ Barry Siegel
-----------------------------------
Barry Siegel
Chairman of the Board of Directors,
Treasurer, Secretary,
Chief Executive Officer,
Date: March 30, 2001
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: March 30, 2001
-----------------------------------
Barry Siegel
Chairman of the Board of Directors,
Treasurer, Secretary,
Chief Executive Officer,
By: s/Barry J. Spiegel Date: March 30, 2001
-----------------------------------
Barry J. Spiegel
President
Driversshield.com ADS Corp.
Director
By: s/Philip Kart Date: March 30, 2001
-----------------------------------
Philip Kart
Chief Financial Officer
18
By: s/Kenneth J. Friedman Date: March 30, 2001
-----------------------------------
Kenneth J. Friedman
Director
By: Date: March 30, 2001
-----------------------------------
R. Frank Mena
Director
19
INDEX OF EXHIBITS
3.1 Certificate of Incorporation of the Company, as amended, incorporated by
reference to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1991.
3.2 Amendment to the Certificate of Incorporation incorporated by reference to
Exhibit 3.1 of the Company's Form 10-QSB for the period ended September
30, 1996.
3.3. 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 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 Employment Agreement dated March 23, 1998 between the Company and Gerald
M. Zutler incorporated by reference to Exhibit 10.1 of the Company's Form
10-QSB for the period ended March 31, 1998.
10.5 Employment Agreement dated October 8, 1998 between the Company and Barry
Siegel incorporated by reference to Exhibit 10.17 of the Company's Form
10-KSB for the year ended December 31, 1998.
20
10.6 Employment Agreement dated October 2, 1998 between the Company and Barry
J. Spiegel incorporated by reference to Exhibit 10.18 of the Company's
Form 10-KSB for the year ended December 31, 1998.
10.7 Employment Agreement dated December 14, 1998 between the Company and Lisa
Siegel incorporated by reference to Exhibit 10.19 of the Company's Form
10-KSB for the year ended December 31, 1998.
10.8 Employment Agreement dated October 8, 1998 between the Company and Gerald
M. Zutler incorporated by reference to Exhibit 10.20 of the Company's Form
10-KSB for the year ended December 31, 1998.
10.9 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.
10.10 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.
10.11 driversshield.com Corp. 1999 Stock Option Plan incorporated by reference
and previously filed with the Commission.
13.1 Form 10-QSB for the quarter ending March 31,1999 incorporated by reference
and previously filed with the Commission.
13.2 Form 10-QSB for the quarter ending June 30, 1999 incorporated by reference
and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 1999 incorporated by
reference and previously filed with the Commission.
21 List of subsidiaries incorporated by reference and previously filed with
the Commission.
21
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2000 AND 1999
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Certified Public Accountants
Board of Directors
driversshield.com Corp.
Plainview, New York
We have audited the accompanying consolidated balance sheets of
driversshield.com Corp. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, 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 driversshield.com Corp. and subsidiaries as of December
31, 2000 and 1999, 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 9, 2001
March 28, 2001 as to the last paragraph of Note 8
F-1
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
----------- -----------
Current assets:
Cash and cash equivalents $ 1,039,866 $ 542,359
Accounts receivable, less allowance for doubtful
accounts of $28,233 in 2000 and 1999 1,813,747 1,794,740
Investment securities 789,505 1,036,263
Prepaid expenses and other current assets 99,074 39,376
----------- -----------
Total current assets 3,742,192 3,412,738
Property and equipment, net 820,404 689,094
Security deposits and other assets 27,738 35,288
----------- -----------
Total assets $ 4,590,334 $ 4,137,120
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,153,972 $ 938,418
Accrued expenses and other current liabilities 638,163 747,567
Notes payable 14,644 50,513
----------- -----------
Total current liabilities 1,806,779 1,736,498
----------- -----------
Shareholders' equity:
Common stock, $.015 par value, authorized
30,000,000 shares; issued 11,241,655 shares
in 2000 and 8,598,467 in 1999 168,625 128,977
Preferred stock, $.01 par value, authorized
1,000,000 shares; none issued or outstanding -- --
Additional paid-in capital 9,275,656 7,823,916
Accumulated other comprehensive income (loss),
unrealized holding gain (loss) on investment
securities 3,570 (4,095)
Deficit (5,181,262) (5,429,014)
----------- -----------
4,266,589 2,519,784
Less common stock held in treasury, at cost,
719,667 shares in 2000 and 296,667 shares in 1999 1,483,034 119,162
----------- -----------
Total shareholders' equity 2,783,555 2,400,622
----------- -----------
Total liabilities and shareholders' equity $ 4,590,334 $ 4,137,120
=========== ===========
See notes to consolidated financial statements.
F-2
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
Revenue:
Collision repairs and fleet management services $ 12,139,992 $ 10,954,912
Subrogation and salvage service commissions 470,956 407,260
Automobile affinity services 1,840,155 773,406
------------ ------------
Total revenues 14,451,103 12,135,578
Cost of revenue (principally charges incurred at
repair facilities for services) 10,368,412 9,338,271
------------ ------------
Gross profit 4,082,691 2,797,307
------------ ------------
Operating expenses:
Selling 1,180,102 1,048,681
General and administrative 2,500,724 2,636,929
Depreciation and amortization 282,051 201,289
------------ ------------
Total operating expenses 3,962,877 3,886,899
------------ ------------
119,814 (1,089,592)
------------ ------------
Other income (expense):
Realized loss on investment (1,518) (3,096)
Investment and other income 141,231 152,976
Interest expense (4,500) (6,784)
------------ ------------
Total other income 135,213 143,096
------------ ------------
Income (loss) from operations before
income taxes 255,027 (946,496)
Income taxes, all current 7,275 19,136
------------ ------------
Net income (loss) $ 247,752 ($ 965,632)
============ ============
Basic earnings (loss) per common share $ .02 ($ .12)
============ ============
Diluted earnings (loss) per common share $ .02 ($ .12)
============ ============
Weighted average number of common shares outstanding
Basic 9,956,892 8,324,649
============ ============
Diluted 11,577,216 8,324,649
============ ============
See notes to consolidated financial statements.
F-3
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2000 AND 1999
Accumulated
Common Stock Additional Other
------------------------- Paid-in Comprehensive
Shares Amount Capital Income (Loss) Deficit
----------- ----------- ----------- ------------- -----------
Balance, January 1, 1999 8,598,467 $ 128,977 $ 7,762,350 -- ($4,463,382)
Net loss -- -- -- -- (965,632)
Other comprehensive loss,
unrealized holding loss
arising during period -- -- -- (4,095) --
Comprehensive loss -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Options granted for services -- -- 61,566 -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 8,598,467 128,977 7,823,916 (4,095) (5,429,014)
Net income -- -- -- -- 247,752
Other comprehensive income,
unrealized holding gain
arising during period -- -- -- 7,665 --
Comprehensive income
Exercise of options in exchange
for tendered common shares 1,866,333 27,995 1,335,877 -- --
Exercise of underwriter warrants 776,855 11,653 (2,653) -- --
Options granted for services -- -- 59,421 -- --
Registration costs -- -- (16,002) -- --
Short-swing profits reimbursed
to Company -- -- 75,097 -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 11,241,655 $ 168,625 $ 9,275,656 $ 3,570 ($5,181,262)
=========== =========== =========== =========== ===========
Total
Treasury Stock Share-
------------------------- holders'
Shares Amount Equity
----------- ----------- -----------
Balance, January 1, 1999 266,667 ($ 90,000) $ 3,337,945
-----------
Net loss -- -- (965,632)
Other comprehensive loss,
unrealized holding loss
arising during period -- -- (4,095)
-----------
Comprehensive loss -- -- (969,727)
Purchase of treasury stock 30,000 (29,162) (29,162)
Options granted for services -- -- 61,566
----------- ----------- -----------
Balance, December 31, 1999 296,667 (119,162) 2,400,622
-----------
Net income -- -- 247,752
Other comprehensive income,
unrealized holding gain
arising during period -- -- 7,665
-----------
Comprehensive income 255,417
Exercise of options in exchange
for tendered common shares 423,000 (1,363,872) --
Exercise of underwriter warrants -- -- 9,000
Options granted for services -- -- 59,421
Registration costs -- -- (16,002)
Short-swing profits reimbursed
to Company -- -- 75,097
----------- ----------- -----------
Balance, December 31, 2000 719,667 ($1,483,034) $ 2,783,555
=========== =========== ===========
See notes to consolidated financial statements.
F-4
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
Cash flows provided by (used in) operating activities:
Net income (loss) $ 247,752 ($ 965,632)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 282,051 201,289
Gain on sale of property and equipment -- (2,500)
Realized loss on investment 1,518 3,096
Options granted for services 59,421 61,566
Changes in assets and liabilities:
Accounts receivable (19,007) (622,855)
Prepaid expenses and other current assets (59,698) 26,831
Security deposit and other assets 7,550 8,009
Accounts payable 215,554 240,088
Accrued expenses and other current liabilities (109,404) 150,772
----------- -----------
Total adjustments 377,985 66,296
----------- -----------
Net cash provided by (used in) operating activities 625,737 (899,336)
----------- -----------
Cash flows used in investing activities:
Proceeds from sale of property and equipment -- 2,500
Purchase of property and equipment (413,361) (224,284)
Purchase of investments, available for sale (47,095) (1,543,454)
Proceeds from sale of investments, available for sale 300,000 500,000
----------- -----------
Net cash used in investing activities (160,456) (1,265,238)
----------- -----------
Cash flows provided by (used in) financing activities:
Repayment of notes payable (35,869) (46,085)
Purchase of treasury stock -- (29,162)
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 32,226 (75,247)
----------- -----------
Net increase (decrease) in cash and cash equivalents 497,507 (2,239,821)
Cash and cash equivalents at beginning of year 542,359 2,782,180
----------- -----------
Cash and cash equivalents at end of year $ 1,039,866 $ 542,359
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 7,275 $ 20,204
=========== ===========
Cash paid during the year for interest $ 4,500 $ 9,175
=========== ===========
See notes to consolidated financial statements.
F-5
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
driversshield.com Corp. (formerly known as First Priority Group, Inc.) and
its wholly-owned subsidiaries (collectively referred to as the "Company").
All material intercompany balances and transactions have been eliminated.
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.
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.
Revenue Recognition
The Company recognizes revenue for its collision repairs and fleet
management at the time of customer approval and completion of repair
services. The Company warrants such services for varying periods ranging
up to twelve months. Such warranty expense is borne by the repair
facilities and has not been material to the Company. The Company
recognizes commissions for its subrogation and salvage services upon
completion of the services. 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 commission
revenues from its subrogation and salvage services should be displayed in
the financial statements on a net basis. Automobile affinity services are
recognized as such services are rendered.
F-6
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
1. Summary of Significant Accounting Policies (Continued)
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, 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.
Reclassification
Certain 1999 amounts have been reclassified to conform with the 2000
presentation.
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.
Advertising Expense
Advertising expense, which is expensed as incurred, amounted to
approximately $86,000 and $96,000 in 2000 and 1999.
F-7
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
2. Description of Business and Concentration of Credit Risk
The Company is engaged in automotive fleet management and administration
of automotive repairs for major, nationally recognized corporate clients
throughout the United States. It offers computerized collision estimates
and provides its clients with a cost-effective method for repairing their
vehicle by arranging for repair of the vehicles through a nationwide
network of independently owned contracted facilities. The Company also
offers a variety of other related services, including subrogation, salvage
and appraisals. 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 offers collision repair management services for the insurance
industry nationwide through a website on the Internet. No revenues for
such services have been derived to date.
The Company is subject to credit risk through trade receivables. The
Company does not obtain collateral for its receivables. Such risk is
minimized through contractual arrangements with its customers, as well as
the size and financial strength of its customers. Three customers
accounted for 34% of the Company's sales in 2000 (two at 11% and one at
12%), and 36% of its receivables at December 31, 2000. One of these
customers accounted for 10% of its revenues in 1999. The Company has no
financial instruments with significant off-balance-sheet risk or
concentration of credit risk.
3. Investment Securities
Unrealized
Holding Gain
Cost Fair Value (Loss)
---------- ---------- ------------
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
========== ========== ==========
At December 31, 1999:
Available for sale, 106,721 shares of
Salomon Smith Barney Adjustable
Rate Government Income Fund $1,040,358 $1,036,263 ($ 4,095)
========== ========== ==========
F-8
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
4. Property and Equipment
2000 1999
---------- ----------
Machinery and equipment $1,038,510 $ 980,894
Furniture and fixtures 288,107 285,800
Leasehold improvements 19,886 19,886
Website development costs 353,438 --
---------- ----------
1,699,941 1,286,580
Less accumulated depreciation
and amortization 879,537 597,486
---------- ----------
$ 820,404 $ 689,094
========== ==========
5. 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.
6. Earnings Per Share
Basic earnings or loss per share are computed by dividing the earnings or
loss per share 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. In 1999, conversion of common stock
equivalents would have been anti-dilutive and, as a result, basic and
diluted per share results were the same.
The reconciliations between basic and diluted earnings (loss) per common
share are as follows:
2000 1999
------------------------------------ -------------------------------------
Income Shares Per-Share (Loss) Shares Per-Share
---------- --------- --------- ---------- --------- ---------
Basic earnings (loss) per
common share $ 247,752 9,956,892 $.02 ($ 965,632) 8,324,469 ($.12)
Effect of dilutive securities,
stock options and warrants -- 1,620,324 -- -- -- --
---------- --------- ---- ---------- --------- -----
Diluted earnings (loss) per
common share $ 247,752 11,577,216 $.02 ($ 965,632) 8,324,469 ($.12)
========== ========== ==== ========== ========== =====
F-9
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
7. 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.
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 2000 and 1999, respectively: annual dividends of $-0-
for both years, expected volatility of 134% and 174%, risk-free interest
rate of 6.24% and 5.90%, and expected life of five years for all grants.
The weighted-average fair value of stock options granted in 2000 and 1999
was $.49 and $1.08, respectively.
Under the above model, the total value of stock options granted in 2000
and 1999 was $661,822 and $801,945, 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 2000 and 1999, 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 income (loss) per share would have been reduced to the pro
forma amounts indicated below:
F-10
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
7. Stock Options (Continued)
Stock Compensation Plan (Continued)
2000 1999
------------- -------------
Income (loss):
As reported $ 247,752 ($ 965,632)
Pro forma ($ 1,402,539) ($ 3,293,360)
Basic income ( loss) per share:
As reported $ .02 ($ .12)
Pro forma ($ .14) ($ .40)
Diluted income ( loss) per share:
As reported $ .02 ($ .12)
Pro forma ($ .12) ($ .40)
In March 1999, the Company repriced certain options granted to employees
and third parties in previous years, representing the right to purchase
1,665,000 shares of common stock. The original grants gave the holders the
right to purchase common stock at prices ranging from $1.25 to $5.00 per
share. The options were repriced at prices ranging from $1.13 to $3.00 per
share. The Company also granted options to employees, representing the
right to purchase 630,000 shares of common stock at prices ranging from
$1.13 to $1.24 per share. In addition, in October 1999, the Company
repriced certain options granted to employees and third parties,
representing the right to purchase 2,330,000 shares of common stock, of
which 2,235,000 were part of the March 1999 grant. The original 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 modified option awards shall be accounted for as variable from
the date of the modification to the date the awards are exercised,
forfeited, or expire unexercised. No compensation has been recorded
through December 31, 2000 for the modified awards.
The SFAS No. 123 method of accounting does not apply to options granted
prior to January 1, 1995, and accordingly, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
F-11
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
7. Stock Options (Continued)
Performance-Based Stock Options
Under its 1995 Stock Incentive Plan, the Company had granted options to
certain key executives whose vesting was entirely contingent upon the
future profits (as defined) for the division or subsidiary or commissions
earned under the management of the related key executive. As of January 1,
1998, there were 1,100,000 of such options outstanding. During 1998, the
Company terminated and cancelled 950,000 of such options. During 1999, the
Company terminated the remainder of the options.
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, 1999 3,277,500 .12 - 5.00 1.57
Options granted 5,035,000 .75 - 3.00 1.02
Options canceled (4,352,500) 1.00 - 5.00 1.54
---------
Options outstanding, December 31, 1999 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 exercisable, December 31, 1999 2,712,914 .12 - 3.75 .92
=========
Options exercisable, December 31, 2000 2,090,000 .31 - 3.75 .93
=========
F-12
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
7. Stock Options (Continued)
Summary (Continued)
The following table summarizes information about the options outstanding
at December 31, 2000 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 2,643,667 3.54 $ .59 1,600,000 $ .60
$1.25 - $2.00 330,000 3.08 $ 1.53 330,000 $ 1.53
$2.16 - $3.75 320,000 3.18 $ 2.59 160,000 $ 3.02
driversshield.com CRM
During 1999, the Company's subsidiary, driversshield.com CRM established
the "driversshield.com Corp. 1999 Stock Option Plan." Under this plan,
options may be granted to employees of driversshield.com Corp or the
Parent or other subsidiaries of the Company, and outside directors for up
to 2,000,000 shares of common stock. Under this plan, incentive stock
options may be granted at no less than fair market value of the
driversshield.com Corp. stock at the date of grant, and in the case of an
optionee who owns directly or indirectly more than 10% of the outstanding
voting stock, 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. No options have been granted as of December 31, 2000.
8. Common Stock, Stock Warrants and NASDAQ Delisting Notification
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.
F-13
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
8. Common Stock, Stock Warrants and NASDAQ Delisting Notification (Continued)
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.
In November 2000, the Company's registration statement that provides for
up to $10 million of equity-based financings became effective. The
financing facility permits the Company to draw against a $10 million
equity commitment, on a monthly basis, over twelve months after the
effective date of the registration. Each drawdown has a minimum and
maximum amount, with a $1 million monthly minimum less a 10% discount for
the financing source. The financing source was also granted warrants to
purchase 68,970 shares of common stock, at $2.17 per share. All drawdowns
are subject to placement fees ranging from 6% to 10%.
On March 28, 2001, the Company received notification from NASDAQ that its
shares will be delisted on April 5, 2001. The aforementioned equity line
can be terminated if the Company's shares are delisted. The Company has
the right to appeal the delisting.
9. 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-14
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
9. 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.
10. 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 $12,300 in 2000 and $8,700 in 1999.
11. 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 $59,000 and $40,000 for the years
ended December 31, 2000 and 1999, respectively. Rent expense including
real estate taxes for the years ended December 31, 2000 and 1999
aggregated approximately $190,000 and $178,000, respectively.
As of December 31, 2000, the Company's future minimum rental commitments,
net of sublease income of $38,000 in 2001 and $19,000 in 2002, are
approximately as follows:
2001 $152,000
2002 78,000
F-15
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
11. Commitments and Contingencies (Continued)
Employment Contracts
The Company has employment contracts with its two principal officers
expiring during 2001. The agreements provide minimum annual salaries of
$300,000 to the Chief Executive Office ("CEO") and $150,000 to the
President. A third 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 March 1999, in consideration for several senior executives who
volunteered to temporarily reduce their salaries (without changing the
terms of employment contracts), the Company granted stock options
representing the right to purchase 145,000 shares of the Company's common
stock at prices ranging from $1.13 to $1.24. These options were
subsequently repriced in October 1999 (see Note 7). All grants were at no
less than the fair market value at date of grant or repricing. Such
temporary salary reduction amounted to approximately $145,000 on an
annualized basis, of which $100,000 is attributable to the CEO. Such
salary reductions can be terminated by the executives at any time without
forfeiture of the options. During the year ended December 31, 1999, salary
reductions were approximately $123,000. There were no salary reductions
during the year ended December 31, 2000.
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 President's employment contract provides 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 two years' 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.
F-16
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
11. Commitments and Contingencies (Continued)
Litigation
In September 1999, the Company entered into an agreement with Electronic
Data Systems Corp. ("EDS") for the design, development and operational
services for an Internet website which would address the insurance carrier
marketplace. The Company was to pay EDS the lesser of $350,000 or the
actual rate determined by the number of hours accumulated on the project
as defined for the design and development services. The operational
services required the Company to compensate EDS with 30% of any net
revenue during the first contract year, provided, however, that the
Company was entitled to recoup the amount paid for the design and
development services first, and then EDS was to recoup its cost, up to a
specified amount. During the remainder of the contract, which was to
expire December 31, 2003, EDS was to be paid 35% to 42% of any net revenue
generated from the website. Through December 31, 1999, the Company had
expensed $169,000 for the preliminary project stage of the website and,
during the year ended December 31, 2000, the Company capitalized
approximately $300,000 during the development stage. During fiscal 2000,
the Company and EDS became engaged in a dispute over fees and related
performance, which resulted in the Company filing a $1,000,000 claim
against the vendor for, among other reasons, failure to meet the
performance conditions of the contract, and for invoice disputes. EDS
filed a claim denying allegations and seeking to collect its unpaid
invoices totaling $226,000, of which $108,000 has not been recorded by the
Company. The matter is currently pending with the American Arbitration
Association. In January 2001, the vendor precluded access to the website,
and the Company has designed an alternative site, with both matching and
enhanced functionality.
12. 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-17
DRIVERSSHIELD.COM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2000 AND 1999
12. Income Taxes (Continued)
At December 31, 2000, the Company has an operating loss carryforward of
approximately $4,680,000 which is available to offset future taxable
income. A valuation allowance has been recognized to offset the full
amount of the related deferred tax asset of approximately $1,780,000 and
$1,880,000 at December 31, 2000 and 1999 since it is more likely than not
that the Company will not realize the benefit of the loss carryforwards.
At December 31, 2000, 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 946,000
----------
$4,680,000
==========
The Company's effective income tax rate differs from the Federal statutory
rate as follows:
2000 1999
---- ----
Federal statutory rate 34.0% (34.0%)
Valuation allowance (34.0%) 34.0
State income taxes 3.0 2.0
---- ----
3.0% 2.0%
==== ====
F-18