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 September 30, 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.)
3075 Veterans Memorial Highway (631-648-2600)
Ronkonkoma, New York 11779
(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 November 14, 2002, the issuer had outstanding a total of
10,868,993 shares of common stock.
Transitional Small Business Format (check one) Yes |_| No |X|
DRIVERSHIELD CORP.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
CONTENTS
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of September 30, 2002 (Unaudited) 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Operations
(Unaudited) for the Nine Months ended
September 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months ended
September 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis 12
Item 3. Controls and Procedures 16
Part II. OTHER INFORMATION 17
Item 6. Exhibits and Reports on Form 8-K 17
THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.
Item 1. Financial Statements
DRIVERSHIELD CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,606,477
Accounts receivable, trade 288,225
Investments 1,973,412
Prepaid expenses and other current assets 251,378
------------
Total current assets 5,119,492
Investments 2,499,571
Property and equipment, net of accumulated depreciation 733,472
Restricted certificate of deposit 300,000
Security deposits 42,336
------------
Total assets $ 8,694,871
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 342,320
Accrued expenses and other current liabilities 837,764
Current portion of capital lease obligation 31,047
Deferred tax credit 349,694
------------
Total current liabilities 1,560,825
------------
Obligations under capital lease, net of current portion 28,762
------------
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 10,815,195
Accumulated other comprehensive loss, unrealized holding
gain on investment securities 6,043
Deficit (2,187,687)
------------
8,809,766
Less common stock held in treasury, at cost,
877,918 shares 1,704,482
------------
Total shareholders' equity 7,105,284
------------
Total liabilities and shareholders' equity $ 8,694,871
============
See notes to condensed consolidated financial statements.
3
DRIVERSHIELD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended,
September 30 September 30
2002 2001
----------- -----------
Revenue:
Collision repairs and fees $ 927,830 $ --
Automobile affinity services 255,643 419,105
----------- -----------
Total revenues 1,183,473 419,105
----------- -----------
Operating expenses:
Collision repair expenses 806,225 --
Sales and marketing 389,857 142,356
General and administrative 999,768 609,781
Non-cash compensation (Note 5) (33,767) (56,320)
Depreciation and amortization 99,955 89,985
----------- -----------
Total operating expenses 2,262,038 785,802
----------- -----------
(1,078,565) (366,697)
Investment and other income 57,510 35,878
----------- -----------
Loss from continuing operations before provision for income taxes (1,021,055) (330,819)
Provision for income (tax) benefit (Note 9) 633,583 (4,621)
----------- -----------
Loss from continuing operations (387,472) (335,440)
----------- -----------
Discontinued operations (Note 3 and Note 9):
Disposal of subsidiary - additional tax expense due to change
in estimate of effective tax rate (486,589) --
Income from discontinued operations, (additional tax expense
due to change in estimate of effective tax rate in 2002) (3,498) 199,363
----------- -----------
Income (loss) from discontinued operations (490,087) 199,363
----------- -----------
Net loss $ (877,559) $ (136,077)
=========== ===========
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.04) $ (0.03)
Discontinued operations (0.04) 0.02
----------- -----------
Net loss $ (0.08) $ (0.01)
=========== ===========
Weighted average number of common shares outstanding 10,890,458 10,768,727
Effect of dilutive securities, stock options and warrants -- --
----------- -----------
Weighted average diluted common shares outstanding 10,890,458 10,768,727
=========== ===========
See notes to condensed consolidated financial statements.
4
DRIVERSHIELD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended,
September 30 September 30
2002 2001
----------- -----------
Revenue:
Collision repairs and fees $ 2,019,763 $ --
Automobile affinity services 913,867 1,297,088
----------- -----------
Total revenues 2,933,630 1,297,088
----------- -----------
Operating expenses:
Collision repair expenses 1,739,225 --
Sales and marketing 888,881 505,801
General and administrative 2,446,823 1,619,373
Non-cash compensation (Note 5) (129,200) 189,801
Depreciation and amortization 284,787 258,710
----------- -----------
Total operating expenses 5,230,516 2,573,685
----------- -----------
(2,296,886) (1,276,597)
----------- -----------
Investment and other income 261,144 162,407
Other expenses (shares issued for restriction agreement) (Note 7) -- (77,438)
----------- -----------
Investment and other income 261,144 84,969
----------- -----------
Loss from continuing operations before provision for income taxes (2,035,742) (1,191,628)
Provision for income (tax) benefit (Note 9) 1,103,306 (4,663)
----------- -----------
Loss from continuing operations (932,436) (1,196,291)
----------- -----------
Discontinued operations (Note 3 and Note 9):
Gain on disposal of subsidiary, (net of income taxes
of $3,345,302) 2,737,066 --
Income from discontinued operations (net of income taxes
of $24,048 in 2002) 19,677 849,738
----------- -----------
Income from discontinued operations 2,756,743 849,738
----------- -----------
Net income (loss) $ 1,824,307 $ (346,553)
=========== ===========
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.09) $ (0.11)
Discontinued operations 0.26 0.08
----------- -----------
Net earnings (loss) $ 0.17 $ (0.03)
=========== ===========
Weighted average number of common shares outstanding 10,910,839 10,679,497
Effect of dilutive securities, stock options and warrants -- --
----------- -----------
Weighted average diluted common shares outstanding 10,910,839 10,679,497
=========== ===========
See notes to condensed consolidated financial statements.
5
DRIVERSHIELD CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30 September 30
2002 2001
------------ ------------
Cash flows provided by (used in) operating activities:
Net income (loss) $ 1,824,307 $ (346,553)
------------ ------------
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization (including bond premium
amortization) 361,927 258,710
Shares issued for restriction agreement -- 77,438
Shares issued for consulting services -- 150,000
Non-cash compensation (129,200) 189,801
Gain on sale of subsidiary (6,082,368) --
Gain on sale of assets -- (3,198)
Options granted for services 26,865 40,082
Changes in assets and liabilities:
Accounts receivable (151,775) 622,978
Prepaid expenses and other assets (98,550) (78,698)
Deferred tax asset 1,900,000 --
Investment in net assets of discontinued operations (60,022) --
Accounts payable 186,990 (264,685)
Accrued expenses and taxes payable 753,660 (94,601)
------------ ------------
Total adjustments (3,292,473) 897,827
------------ ------------
Net cash provided by (used in) operating activities (1,468,166) 551,274
------------ ------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (340,393) (195,449)
Proceeds from sale of subsidiary, net 6,174,389 --
Proceeds from bond redemption 4,929,000 --
Purchase of restricted certificate of deposit (300,000) --
Purchase of investments (7,558,638) (1,108,188)
Proceeds from sale of assets -- 15,600
------------ ------------
Net cash provided by (used in) investing activities 2,904,358 (1,288,037)
------------ ------------
Cash flows provided by (used in) financing activities:
Repayment of note payable -- (14,644)
Payments under capital lease (2,427) --
Proceeds from issuance of preferrred stock 1,000,000
Purchase of treasury stock (92,696) --
------------ ------------
Net cash provided by (used in) financing activities 904,877 (14,644)
------------ ------------
See notes to condensed consolidated financial statements.
6
DRIVERSHIELD CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
September 30 September 30
2002 2001
------------ ------------
Net increase (decrease) in cash and cash equivalents $ 2,341,069 $ (751,407)
Cash and cash equivalents at beginning of period 265,408 1,039,866
------------ ------------
Cash and cash equivalents at end of period $ 2,606,477 $ 288,459
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 16,353 $ 4,663
------------ ------------
See notes to condensed consolidated financial statements.
7
DRIVERSHIELD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
1. BASIS OF PRESENTATION
The information contained in the condensed consolidated financial
statements for the three and nine-month periods ended September 30, 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
3). 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 that 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 and nine month periods ending September 30, 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 its inception in 1983. Until the recent
divestiture of its original business (Note 3), it provided collision repair and
fleet management services primarily for numerous Fortune 500 companies. It now
provides similar 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. 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
approximately 2,000 providers, management of time for completion of repair,
selection or approval of part specifications, and obtaining third party
appraisals if required. The Company assumes the risks and
8
responsibilities of 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.
The Company also generates revenue by providing similar auto repair
benefits for individuals through affinity memberships that are offered by
financial institutions.
Two of the Company's customers currently account for approximately 75% of
its revenues.
3. 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.
Of the gross proceeds paid by PHH, $175,000 was remitted into an escrow
account, in the event indemnification obligations arise, and is to be released
twelve months from the date of the closing of the transaction, February 2003.
Operating results of the discontinued fleet services operations for the
period January 1, 2002 through February 7, 2002, its date of sale, and for the
nine months ended September 30, 2001, are as follows:
2002 2001
----------- -----------
Revenues $ 1,087,658 $ 9,751,209
Cost of sales (878,776) (7,930,567)
Selling, general and administrative (165,157) (970,904)
----------- -----------
Income from discontinued operations, pre-tax $ 43,725 $ 849,738
In accordance with the Transition Services Agreement with PHH, the Company
managed FS operations from the date of its sale through June 30, 2002, and
received fees associated with those activities, which were paid in full.
9
4. 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 reflect the potential dilution that could occur if
common stock equivalents, such as stock options and warrants, were exercised.
For the three and nine month periods ended September 30, 2002 and 2001,
respectively, approximately 5,200,000 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.
5. NON-CASH COMPENSATION 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). In addition,
in September 2002 the Company granted a five-year extension to the life of
certain fully vested options that had expired. 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, for the nine months ended September
30, 2002 the Company recorded a non-cash credit of $129,000 for compensation
costs, including a non-cash credit of $34,000 for the three months ended
September 30, 2002, which resulted from a decrease in the price per common
share. The comparable amount for the three months ended September 30, 2001 was a
credit of $56,000 and for the nine months ended September 30, 2001 was an
expense of $190,000.
6. INVESTMENTS
Investments consist of the following at September 30, 2002:
Available-for-sale investments $1,973,413
Held-to-maturity investments 2,499,570
----------
$4,472,983
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
10
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 nine months ended September 30, 2001.
8. PROFORMA INFORMATION
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 that resulted in a deferred tax asset of $1,900,000,
net of valuation allowance. In the quarter ended September 30, 2002, as a result
of its operating losses, the Company increased its estimate of its effective tax
rate to 55%, from 47%, for the nine months ended September 30, 2002, for both
continuing and discontinued operations. The Company had previously increased its
effective tax rate through June 30, 2002 to 47% from 40%. Accordingly, the
results for the three months ended September 30, 2002 reflect additional amounts
in the tax provision associated with the net gain on the sale, as well as the
results for the operations through the date of the sale of the fleet business to
reflect this higher rate. The calculation revisions had no cash impact. For the
nine months ended September 30, 2002, the Company has recorded income tax
expense of approximately $2,266,000 and a deferred tax credit of $350,000.
10. FLORIDA OFFICE LEASE AND RELATED PARTY TRANSACTION
In May 2002 the Company signed a five and a half year lease to occupy a
7,300 square foot building in Coral Springs, Florida. This property is owned and
operated by B & B Lakeview Realty Corp., whose three shareholders, Barry Siegel,
Barry Spiegel and Ken Friedman, are members of the Company's board of directors.
The terms of the lease require rent payments of approximately $125,000 in the
initial year increasing to $176,000 in the final year, plus certain operating
expenses. The commencement of the lease term occurred in October 2002. The
Company and the property owners are, each, expending approximately $140,000 to
complete the interior space ($110,000 expended by the Company to date). In
addition, during July 2002, the Company established a $300,000 certificate of
deposit with a Florida Bank, (the mortgage lender to B & B Lakeview Realty Corp)
as security of its future rental commitments. The certificate of deposit
declines to $200,000 after the 36th month, $100,000 after the 48th month, and to
zero after 60 months, as the balance of the rent commitment declines.
11. CLOSURE OF NEW YORK OFFICE
In conjunction with opening its Florida office during the fourth quarter
of 2002, the Company announced that it expects to close its Long Island, New
York office by December 31, 2002. Accordingly, the Company has accrued $175,000
relating to one-time employee termination benefits, and $82,000 for certain
relocation costs. Such amounts are included in general administrative expenses
in the consolidated statement of operations.
11
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 September 30, 2002 (the "2002 Quarter") Compared to Three
Months ended September 30, 2001 (the "2001 Quarter").
The 2002 Quarter reflected a net loss of $878,000 compared to a net loss
of $136,000 in the 2001 Quarter. Loss from continuing operations was $387,000
versus a loss of $335,000 in the 2001 Quarter. Basic and diluted loss per share
from continuing operations was $(.04) and $(.03) per share in the 2002 and 2001
Quarter, respectively. Basic and diluted earnings per share, from discontinued
operations, were $.02 in the 2001 Quarter and a $(.04) loss per share in the
2002 quarter. The 2002 loss reflects increased tax expense resulting from
revisions of the Company's estimated effective tax rate for the year.
Revenues from Continuing Operations
Revenues were $1,183,000 in the 2002 Quarter, versus $419,000 in the 2001
Quarter, representing an increase of 764,000 or 182%. The Company's revenues
increased by $928,000 from its insurance industry clients. Customer contracts
were signed late in fiscal 2001 and installation and implementation occurred
during 2002. In the 2002 Quarter, Affinity Services sales decreased $163,000 or
39%, to $256,000, as compared to $419,000 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.
Operating Income and Expenses from Continuing Operations
Pretax loss from continuing operations was $1,021,000 in the 2002 Quarter
compared to a loss of $331,000 in the 2001 Quarter, an increase in losses of
$690,000. The comparative amounts are described below.
Collision repair and claim fee revenues from insurance carriers, net of
collision repair costs, were $122,000. There were no comparable amounts in the
2001 Quarter. Affinity Services revenues decreased by $163,000, as noted above.
12
Selling expenses increased by $248,000 (175%), to $390,000 in the 2002
Quarter, from $142,000 in the 2001 Quarter. This was the result of increased
costs for marketing, personnel and related travel activities of DriverShield
CRM, the Company's insurance industry business.
General and administrative expenses increased by $390,000 (64%), from
$610,000 in the 2001 Quarter to $1,000,000 in the 2002 Quarter resulting
primarily from non-recurring costs relating to the expected closure of the New
York office, including estimated severance expenses and relocation costs for
moving its office in New York to a temporary location, as well as the relocation
of the corporate headquarters to Florida. The non-cash charges associated with
recording the impact of variable stock option grants resulted in a credit of
$34,000 in the 2002 Quarter versus a credit of $56,000 in the 2001 Quarter, an
income reduction of $22,000.
Depreciation expense increased $10,000, to $100,000 in the 2002 Quarter
from $90,000 in the 2001 Quarter, primarily as a result of additional capital
expenditures supporting the Company's technology systems.
Investment and other income increased $22,000, from $36,000 in the 2001
Quarter to $58,000 in the 2002 Quarter. The increase resulted primarily from
increased interest income.
Discontinued Operations
Income from discontinued operations in the 2001 Quarter of $199,000
reflects the operations of the fleet business that was sold in February 2002. In
the 2002 Quarter, while there were no business activities of the fleet business,
the Company recorded $490,000 of additional tax expense resulting from a change
in the Company's estimated effective tax rate.
Nine Months ended September 30, 2002 (the "2002 Period") Compared to Nine Months
ended September 30, 2001 (the "2001 Period").
The 2002 Period reflected net income of $1,824,000 compared to a net loss
of $347,000 in the 2001 Period. Loss from continuing operations was $932,000 in
the 2002 Period versus a loss of $1,196,000 in the 2001 Period. Income from
discontinued operations was $2,757,000 in the 2002 Period versus income of
$850,000 in the 2001 Period. 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 $2,737,000. Basic and diluted loss per share from
continuing operations was $(.09) and $(.11) per share in the 2002 and 2001
Period, respectively. Basic and diluted earnings per share, from discontinued
operations, were $.26 in the 2002 Period, versus $.08 in the 2001 Period.
13
Revenues from Continuing Operations
Revenues were $2,934,000 in the 2002 Period, versus $1,297,000 in the 2001
Period, representing an increase of $1,637,000 or 126%. The Company's revenues
increased by $2,020,000 from its insurance industry clients. Customer contracts
were signed late in fiscal 2001 and installation and implementation occurred
during the 2002 Period. In the 2002 Period, Affinity Services sales decreased
$383,000 or 30%, to $914,000, as compared to $1,297,000 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.
Operating Income and Expenses from Continuing Operations
Pretax loss from continuing operations was $2,036,000 in the 2002 Period
compared to a loss of $1,192,000 in the 2001 Period, an increase in losses of
$844,000. The comparative amounts are described below.
Collision repair and claim fee revenues from insurance carriers, net of
collision repair costs, were $281,000. There were no comparable amounts in the
2001 Quarter. Affinity Services revenues decreased by $383,000, as noted above.
Selling expenses increased by $383,000 (76%), to $889,000 in the 2002
Period, from $506,000 in the 2001 Period. 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 $828,000 (51%), from
$1,619,000 in the 2001 Period to $2,447,000 in the 2002 Period resulting
primarily from a one-time bonus of $250,000 to the CEO that was provided for the
consummation of the sale of FS, from increases in consulting expenses, the
non-recurring costs of relocating the office to a new location in New York as
well as Florida, and estimated severance costs relating to expected closure of
the New York office. The non-cash impact associated with recording variable
stock options resulted in a credit of $129,000 in the 2002 Period versus a
charge to operations of $190,000 in the 2001 Quarter, an expense reduction of
$319,000.This reduction resulted from a decrease in the Company's price per
share of its common stock.
Depreciation expense increased $26,000, from $259,000 in the 2001 Period
to $285,000 in the 2002 Period, primarily as a result of additional capital
expenditures supporting the Company's technology systems.
Investment and other income increased $99,000, from $162,000 in the 2001
Period to $261,000 in the 2002 Period. The increase resulted primarily from
increased interest income and fees earned from the Transition Services Agreement
with PHH.
The Company incurred a charge in the 2001 Period, in the amount of
$77,000, for shares issued in connection with a restriction agreement; no such
amount was incurred in the 2002 Period.
14
Discontinued Operations
Income from discontinued operations reflects the net after-tax gain on the
sale of FS of $2,737,000, as well as income from discontinued activities of
$20,000 in the 2002 Period versus $850,000 in the 2001 Period. The results in
the 2002 Period reflect only five weeks of discontinued activity immediately
preceding the sale of FS on February 7, 2002, versus activity during the entire
2001 Period.
Liquidity and Capital Resources
As of September 30, 2002, the Company had cash and cash equivalents of
$2,606,000. The Company also holds 200,754 shares of highly liquid, Salomon
Smith Barney Adjustable Rate Government Income Fund valued at $1,973,000, and
also holds liquid notes, expected to be held to maturity, in the amount of
$2,500,000, for a total of $7,080,000 of cash and liquid investments. In
addition $175,000 of restricted funds, resulting from the sale of the fleet
business, is expected to be released in February 2003. Working capital of the
Company as of September 30, 2002, was $3,558,000 and its working capital ratio
at September 30, 2002 was 3:1.
In connection with the Company's rental of office space in Florida, in
July 2002, the Company established a $300,000 certificate of deposit with a
Florida bank for the five and a half year term of the lease, as a guarantee of
its future rental commitments. Such amounts were excluded from liquidity and
working capital, described above, and presented as restricted cash. The
certificate of deposit declines as the remaining rental commitment declines, as
follows; the balance of the certificate will be $200,000 after the 36th month,
$100,000 after the 48th months, and zero after 60 months. In addition, the
Company expects to expend approximately $140,000 by December 31, 2002 ($110,000
to date) in connection with the build-out of the space.
The Company's Board of Directors approved a stock repurchase program
whereby the Company may purchase up to 500,000 shares of its common shares
traded on the Nasdaq SmallCap Market. Since the repurchase program was approved,
during the third quarter of 2002, the Company acquired 93,000 shares at a cost
of $93,000.
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.
15
Item 3. Controls and Procedures.
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act)
as of a date (the Evaluation Date) within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective in timely alerting them to the material
information relating to us (or our consolidated subsidiaries) required to be
included in our periodic SEC filings.
Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report, or to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
None
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: November 14, 2002 By: Barry Siegel
---------------------------------
Chairman of the Board, Secretary and
Chief Executive Officer
Date: November 14, 2002 By: Philip B. Kart
--------------------------------
Senior Vice President and Chief
Financial Officer
17
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO REGULATION ss.240.15D-14 AS PROMULAGATED
BY THE SECURITIES AND EXCHANGE COMMISSION
In connection with the Quarterly Report of DriverShield Corp. (the "Company") on
Form 10-QSB for the period ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Barry
Siegel, Chairman of the Board, Secretary and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 pursuant to Regulation
ss.240.15d-14 as promulgated by the Securities and Exchange Commission, that:
(1) I have reviewed the Report being filed;
(2) Based on my knowledge, the Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in the Report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (as such term
is defined in paragraph (c) of this section) for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to them by others within those entities,
particularly during the period in which the periodic Reports are being
prepared;
(ii) Evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
Report ("Evaluation Date"); and
(iii) Presented in the Report their conclusions about the effectiveness of
the disclosure controls and procedures based on their evaluation as of the
Evaluation Date;
(5) I and the other certifying officers have disclosed, based on their most
recent evaluation, to the issuer's auditors and the audit committee of the board
of directors (or persons fulfilling the equivalent function):
18
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record,
process, summarize and Report financial data and have identified for the
issuer's auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls;
and
(6) The registrant's other certifying officers and I have indicated in the
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By /s/ Barry Siegel
------------------------------------
Barry Siegel
Chairman of the Board, Secretary and
Chief Executive Officer
19
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO REGULATION ss.240.15D-14 AS PROMULAGATED
BY THE SECURITIES AND EXCHANGE COMMISSION
In connection with the Quarterly Report of DriverShield Corp. (the "Company") on
Form 10-QSB for the period ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Philip
Kart, Senior Vice President, Treasurer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 pursuant to Regulation
ss.240.15d-14 as promulgated by the Securities and Exchange Commission, that:
(1) I have reviewed the Report being filed;
(2) Based on my knowledge, the Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in the Report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (as such term
is defined in paragraph (c) of this section) for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to them by others within those entities,
particularly during the period in which the periodic Reports are being
prepared;
(ii) Evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
Report ("Evaluation Date"); and
(iii) Presented in the Report their conclusions about the effectiveness of
the disclosure controls and procedures based on their evaluation as of the
Evaluation Date;
(5) I and the other certifying officers have disclosed, based on their most
recent evaluation, to the issuer's auditors and the audit committee of the board
of directors (or persons fulfilling the equivalent function):
20
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record,
process, summarize and Report financial data and have identified for the
issuer's auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls;
and
(6) The registrant's other certifying officers and I have indicated in the
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By /s/ Philip Kart
----------------------------------
Philip Kart
Senior Vice President,
Treasurer and Chief Financial Officer
21
INDEX OF EXHIBITS
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
22