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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 0-21419
clickNsettle.com, Inc.
(Name of small business issuer as specified in its charter)
Delaware 23-2753988
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
1010 NORTHERN BOULEVARD, SUITE 336
GREAT NECK, NEW YORK 11021
(Address of Principal Executive Offices)
(516) 829-4343
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock $.001 Par Value Over-the-Counter Bulletin Board
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock $.001 Par Value Boston Stock Exchange
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 files in response to Item 405 of
Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-KSB
or any amendments to this Form 10-KSB.|_|
State issuer's revenues for its most recent fiscal year. $3,759,372
The aggregate market value of the voting stock held by non-affiliates per the
closing stock price of September 7, 2004 is $704,088.
As of September 7, 2004, 8,449,056 shares of common stock of the issuer were
outstanding.
Transitional Small Business Disclosure Format Yes |_| No |X|
DOCUMENTS INCORPORATED BY REFERENCE
Part I. -- None Part II. -- None
Part III. -- None
2
PART I
From time to time, including in this annual report on Form 10-KSB,
clickNsettle.com, Inc. (formerly NAM Corporation) (the "Company" or "we") may
publish forward-looking statements relating to such matters as anticipated
financial performance, business prospects, future operations, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, we note that a
variety of factors could cause our actual results to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements. The risks and uncertainties that may affect the operations,
performance, development and results of our business include, without
limitation, the following: changes in the insurance and legal industries; our
inability to retain current or new hearing officers; changes in the public court
systems; and the degree and timing of the market's acceptance of our arbitration
and mediation programs and electronic oversight applications and other risks
that are set forth herein.
ITEM 1. DESCRIPTION OF BUSINESS
The Company
We operate in one business segment as a provider of arbitration and
mediation services, also known as alternative dispute resolution services, or
ADR services, and related electronic oversight applications, principally to
insurance companies, law firms, corporations and municipalities. An ADR
proceeding is an alternative forum to the public court system for resolving
civil disputes.
An ADR proceeding streamlines the traditional cumbersome public litigation
process. As compared to the public court system, an ADR proceeding generally
offers litigants a faster resolution, confidentiality, reduced expenses,
flexibility in procedures and solutions, and control over the process. With
respect to business-to-business disputes, ADR proceedings can also preserve
business relations among the parties because its nature is potentially less
adversarial and disputes may be resolved promptly.
In July 2004, our Board of Directors decided to explore strategic
alternatives for the Company in an effort to protect shareholder value. As a
result of the numerous scandals in recent years and the passing of the
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") to safeguard shareholders,
micro-cap companies such as ours are faced with mounting legal and audit fees to
meet the new compliance requirements now needed to remain as a publicly traded
entity. In addition to being expensive in terms of out-of-pocket expenditures,
these requirements are costly in that they are time-consuming and place a strain
on our limited personnel resources. While we remain optimistic about the need
for the Company's services, we believe that the unavoidability of these
escalating costs shortens the timeframe that the Company needs in order to
realize revenues from many of its sales and marketing initiatives. Further, we
believe our revenue has been adversely affected by the consolidation and turmoil
in the insurance industry, which represents a major portion of our clientele.
Additionally, insurance companies in general and some, in particular, have
changed their claims-settling philosophies. Currently, we perceive that many of
the larger insurance companies are taking a harder line with the plaintiff bar.
This results in a slow down in the number of cases being submitted to ADR, a
trend that continues into fiscal year 2005. This adversely affects the number of
cases referred to our forum. In a broader sense, we believe that lawsuits
continue to be commenced and that our services should prove to be vital to
insurers in their ability to address a growing caseload with reduced costs, but
the timing of such may be delayed.
During July and August 2004, the Board of Directors reviewed potential
alternatives, including merger candidates, as well as the purchase or
privatization of the existing business. Currently, the Board is negotiating the
terms of an asset purchase agreement with the present Chief Executive Officer of
the Company, Roy Israel, whereby he or companies owned by him, would assume the
assets and liabilities of the ADR business of the
3
Company and its future commitments. The Company would retain a minimum of
$200,000 in cash in order to effect a merger or a similar transaction with the
intent to acquire a different operating business. The cash that is to remain in
the Company would be reduced by costs directly associated with the asset
purchase including, but not limited to, legal costs, accounting fees, the cost
of obtaining a fairness opinion and proxy solicitation.
The completion of the transaction is subject to the execution of a
definitive asset purchase agreement, the receipt of an opinion from an unrelated
third party approved by the Board of Directors stating that the transaction is
fair, from a financial point of view, to the unaffiliated shareholders of the
Company and shareholder approval. There can be no assurances that the
transaction will occur.
As a result of continued losses, the use of significant cash in operations
and the uncertainty as to the ability to obtain approval for the asset purchase
agreement and to thereafter effect a merger or a similar transaction with the
intent to acquire a different operating business, there is substantial doubt
about the Company's ability to continue as a going concern. The Company's
independent auditors have included a going concern paragraph in their report on
the June 30, 2004 consolidated financial statements which have been prepared
assuming the Company will continue as a going concern. Accordingly, the
accompanying consolidated financial statements do not include any adjustments
that may result should the Company be unable to continue as a going concern.
If the asset purchase does not occur and the Board of Directors decides to
maintain the ADR operations of the Company, we intend to continue to provide
services and technology designed to enhance and streamline the traditional and
often time-consuming and expensive legal process. We offer highly qualified
hearing officers, premium services and innovative solutions designed to appeal
to a client base which has become more sophisticated with the continuing
acceptance and utilization of ADR. In July 2004, we received a patent in the
United States and in Australia on our inventions relating to dispute resolution
processing and oversight. This electronic invention, comprised of both a
management and a reckoning module, provides unique access to oversee arbitration
and mediation initiatives. The management module is configured to receive, sort
and store dispute resolution data and to provide internal continuous compilation
of such data and new data generated during non-judicial dispute resolution
procedures.
We believe that our marketing efforts going forward will best be directed
towards large-scale applications that benefit from our proprietary electronic
infrastructure. As such, our marketing emphasis will be driven by our unique
capabilities as an administrator. Additionally, the staff presently dedicated to
our existing client base will be charged with growing our business and
exploiting our inherent market advantages. Therefore, our plan is as follows:
(1) exploit potential revenue streams driven by our technological innovations in
software, systems and intellectual property such as (i) the administration of
high-volume, customized dispute resolution programs for large corporations,
governmental bodies, law firms and agencies and (ii) targeting revenue
opportunities related to our various technology-based solutions; (2) build brand
recognition of National Arbitration and Mediation (NAM) as the premier provider
of dispute resolution solutions through our advertising campaign; (3) continue
to attract and retain the services of highly talented, former top-tier judges
and attorneys to act as independent and impartial hearing officers; and (4)
broaden the type and complexity of the dispute resolution cases we administer.
In our current environment, corporate governance, integrity of process and
transparency have taken center stage in how corporations, municipalities and
other entities are to conduct operations. Our suite of services, particularly
those related to oversight applications, can enhance business practices by
enabling our clients to better manage their operations through data driven
features and, at the same time, produce cost savings given the tremendous
expense related to traditional litigation versus our quicker, more efficient
dispute resolution solutions.
4
The Company was formed on January 12, 1994 under the laws of the State of
Delaware. On October 31, 1994, we acquired all of the outstanding common stock
of National Arbitration & Mediation, Inc. ("NA&M"), a New York corporation,
formed on February 6, 1992, which was primarily owned by our Chief Executive
Officer and President. NA&M began operations in March 1992 as a provider of ADR
services. NA&M was merged into the Company as of the end of June 1999. In June
2000, shareholder approval was obtained to change the name of the Company from
NAM Corporation to clickNsettle.com, Inc.
Services Offered
Arbitration: Our arbitration procedure follows a format essentially
similar to a non-jury trial in the public court system. Parties are given a
forum in which to present their cases. Litigants utilize this process to save a
significant amount in fees relative to traditional court costs and are spared
the time delays and some of the cumbersome procedures commonly associated with
public court trials. Our hearings are generally governed by our rules of
procedure. The parties, however, may depart from these rules and proceed in the
fashion they deem desirable for the resolution of the case. The parties select a
panel member from approximately 1,800 hearing officers.
The hearings are private, thereby providing a level of confidentiality not
readily available in the public court system. Subject to the parties' agreement,
the proceedings may include discovery, examination of non-party witnesses, the
filing of post-hearing briefs and other matters that may arise in the conduct of
non-jury trials.
The arbitrations are usually one of the following: (i) a regular
arbitration, in which the hearing officer has authority to issue a ruling and/or
award a remedy without limitations; (ii) a "high/low" arbitration, where the
parties may choose to set the parameters of the award by pre-selecting the high
and low dollar limits that can be awarded by the hearing officer; and (iii) the
so-called "baseball" arbitration, which typically involves the submission by
each party of their last best figure and the reason why it should be accepted
with the hearing officer's binding recommendation being restricted to either one
figure or the other. These types of arbitration are not exclusive, and the
parties may fashion whatever parameters are mutually agreed upon.
Generally, arbitration decisions are binding in nature and, unless
otherwise stipulated by the parties, are appealable in only limited
circumstances in the public court system. We do not currently offer any type of
appeal procedure. Our arbitration decisions are generally enforceable in the
public court system by following prescribed filing procedures in the applicable
local jurisdiction.
Mediation (Settlement Conferencing): The mediation method used by us is
settlement conferencing, a non-binding process. Settlement conferencing provides
an opportunity for parties to reach an early, amicable resolution without undue
expense and time-consuming litigation. The voluntary process of settlement
conference mediation can be an effective tool for a wide variety of disputes,
including tort claims and commercial conflicts.
The parties and a hearing officer attend the settlement conference. Each
party may choose to submit a settlement conference memorandum setting forth a
brief summary of facts, indicating, for example, why each party has or does not
have liability and, if applicable, a statement of the party's damages. At the
settlement conference, each party is given an opportunity to describe the facts
of the case and explain its position. Thereafter, the hearing officer meets
privately with each side on an alternating basis to evaluate their respective
cases, and receives proposed concessions that each party might make, and
potential settlement figures that each party may offer, with a view toward
guiding the parties to the
5
settlement of their dispute. Settlement figures and possible concessions are
typically not discussed between a party and the hearing officer without the
other party's express consent to disclosing its position. In the majority of
instances, the settlement conference procedure results in the resolution of all
issues.
Other ADR Services: In addition to mediations and arbitrations, we offer,
among other services, ADR consulting and training, mock jury trials, specialized
ADR video conferencing and other custom dispute resolution services depending on
the sensitivities of our clients and their respective cases.
Electronic Oversight Applications: In combination with our existing
services, we offer oversight applications that provide a new and efficient
method to manage large-scale, high volume ADR programs, while affording parties
transparency and integrity of process.
Marketing and Sales
Our comprehensive suite of ADR offerings is designed to streamline and
administer non-judicial dispute resolution initiatives. Much of our marketing
effort has been concentrated on demonstrating our complete line of services to
our existing clientele, as we believe there exists great potential to expand
these relationships. We believe our web-based management "toolkit" enables our
clients to accurately assess the value of ADR and adds invaluable transparency
and metrics to ensure the integrity of ADR initiatives. Further, we have also
targeted our marketing efforts towards commercial and governmental entities,
which are well suited to benefit from our patented dispute resolution inventions
that provide organizational oversight over large-scale, multi-dimensional ADR
programs.
Our Account Executives are charged with the goal of pursuing new business
as well as increasing the volume of business with existing clients through
in-person meetings, presentations and educational seminars relating to ADR
services. Each is equipped with various tools and metrics enabling them to gauge
client activity and their own individual sales effectiveness. As of September
21, 2004, we employed 10 Account Executives to market our services. These
individuals are typically compensated based upon a draw against commissions
earned, which are based on total collected revenue from a representative's
clients. The remaining account executives are salaried employees who are
generally eligible for additional incentives based on the attainment of revenue
goals for specific targeted accounts.
Our President is active in working with our Account Executives. The
employment arrangement with the Regional Manager of our Massachusetts office
provides for additional compensation based on the profits of the manager's
operation.
The majority of our clients are insurance carriers, law firms and
corporations. In fiscal years 2004 and 2003, no customer exceeded 10% of net
revenues. We have a diversified customer base with our revenue distributed among
more than 1,750 clients in both fiscal years 2004 and 2003.
When appropriate, we seek contracts with our clients. Further, we continue
to enhance our efforts to obtain volume commitments from existing and new
clients.
Competition
The ADR business is highly competitive on an international, national and
regional level. We believe that barriers to entry in the private ADR business
are relatively low and new competitors can begin doing business relatively
quickly. We believe this because the agreement to use ADR services only requires
the consent of all parties to submit their dispute for resolution through a
proposed ADR provider. There are two types of competitors: not-for-profit and
for-profit entities. We believe the largest not-for-profit competitor is the
American Arbitration Association and that it has a significant market share in
6
complex commercial cases. The insurance industry has also continued its support
for Arbitration Forums, a not-for-profit organization created to serve primarily
the insurance subrogation market.
We believe that the domestic private ADR industry is, other than a few
national entities, generally fragmented into small ADR service providers. We
believe that Judicial Arbitration Mediation Services, Inc. ("JAMS") is the
largest for-profit ADR provider in the country. Our competitors include, among
others, JAMS, National Arbitration Forums and Island Arbitration and Mediation.
In addition, several public court systems, including the federal and certain
state courts in New York, our major market, have instituted court-coordinated
programs. To the extent that the public courts reduce case backlogs and provide
effective dispute resolution mechanisms, our business opportunities in such
markets may be reduced.
Increased competition could decrease the fees charged for our services,
and limit our ability to obtain experienced hearing officers. This could have a
materially adverse effect on our ability to be profitable in the future. In
addition, we compete with other ADR providers to retain the services of
qualified hearing officers.
As compared to the majority of our competitors, we believe that our total
solution, comprised of a superior roster of highly qualified hearing officers
and extensive case management tools, is unique. Further, we believe we have
certain advantages that enable us to better serve our clients. These advantages
include: (1) exclusive agreements with many of our most sought after hearing
officers, who are generally former judges and respected attorneys and (2) our
patented web-enabled dispute resolution case management and operational system,
which provides transparency and ensures integrity of process, while also
providing analysis of a client's entire ADR program on a regional, national or
global basis. We cannot assure you, however, that these perceived advantages
will enable us to compete successfully in the future.
Government Regulation
ADR services that are offered by private companies, like us, are not
presently subject to any form of local, state or federal regulation. ADR
services that are offered by the public courts are subject to the rules set
forth by each jurisdiction and the dictates of the individual judge assigned to
preside over the dispute.
Employees
As of September 21, 2004, we employed 23 persons, including one part-time
employee; of these, three were in executive positions, 11 were Sales Managers
and Account Executives and the remaining 9 employees support our operations with
respect to information technology, accounting, scheduling, confirming, billing
and other administrative duties. The Company also currently utilizes the service
of a temporary employee who is eligible for long-term employment.
Hearing Officers
As of September 21, 2004, we maintained relationships with approximately
1,800 hearing officers. We have exclusive agreements with respect to ADR
proceedings with a number of these hearing officers. Such hearing officers
accounted for approximately 67% of the number of in-person cases handled by us
for the year ended June 30, 2004. The remaining non-exclusive hearing officers
make their services available to us on a case-by-case basis. With the exception
of the exclusive hearing officers, the remainder of our roster of hearing
officers can provide their services to competing ADR providers. Compensation to
the
7
hearing officers is based on the number of proceedings conducted and the length
of time of such proceedings.
ITEM 2. DESCRIPTION OF PROPERTY
We maintain two leased facilities, which are located in office buildings.
Currently, we lease 9,080 square feet of space at 1010 Northern Boulevard, Great
Neck, New York for our corporate headquarters and for providing
hearing/conference facilities. The lease expires June 2005. During fiscal year
2003, we entered into a sub-lease agreement for 2,750 square feet at our Great
Neck facility for the period from March 2003 through June 2005. We also lease
1,320 square feet of space, on a month-to-month basis, for our North Easton,
Massachusetts office. Additionally, we have entered into an agreement to lease
approximately 1,346 square feet of office space in Brooklyn, New York to be
principally used for conference facilities. The lease is expected to commence on
or about December 1, 2004. We believe this space is adequate for our reasonably
anticipated future needs.
The aggregate rental expense, net of sublease income of $73,542 and
$24,536 respectively, for all of our offices was $189,941 and $238,647 during
the years ended June 30, 2004 and 2003, respectively.
ITEM 3. LEGAL PROCEEDINGS
We are a party to legal matters arising in the general conduct of
business. The ultimate outcome of such matters is not expected to have a
material adverse effect on the results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. Our Common Stock is quoted on the NASD's Over-the-Counter Bulletin Board
under the trading symbol "CLIK." Prior to March 5, 2003, our Common Stock was
quoted on The Nasdaq SmallCap Market ever since we commenced public trading on
November 18, 1996. Before November 18, 1996, there was no public market for our
securities. The following table sets forth the range of high and low closing
sales prices (based on transaction data as reported by The Nasdaq SmallCap
Market and the NASD's Over-the-Counter Bulletin Board) for each fiscal quarter
during the periods indicated.
Common Stock
High Low
-----------------
Fiscal Year 2004
First quarter (07/1/03-9/30/03) $0.23 $0.05
Second quarter (10/01/03-12/31/03) 0.38 0.25
Third quarter (01/01/04-03/31/04) 0.35 0.16
Fourth quarter (04/01/04-06/30/04) 0.20 0.06
Fiscal Year 2003
First quarter (07/1/02-9/30/02) $0.23 $0.13
Second quarter (10/01/02-12/31/02) 0.13 0.10
Third quarter (01/01/03-03/31/03) 0.12 0.04
Fourth quarter (04/01/03-06/30/03) 0.16 0.09
On December 22, 2003, we effectuated a 6-for-1 forward stock split of our
common stock. All common stock prices above have been restated to reflect the
forward stock split. On September 7, 2004, the closing bid price for our common
stock, as reported by the Over-the-Counter Bulletin Board, was $0.15.
As of September 14, 2004, there were approximately 590 holders of our
common stock.
We have not paid any dividends upon our common stock. The payment of
common stock dividends, if any, in the future rests within the discretion of our
board of directors and will depend, among other things, upon our earnings,
capital requirements and financial condition, as well as other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We provide alternative dispute resolution services, or ADR services, to
insurance companies, law firms, corporations and municipalities. We focus the
majority of our marketing efforts on developing and expanding relationships with
these entities, which we believe are some of the largest consumers of ADR
services. Furthermore, we believe that there is greater market acceptance of the
utilization of ADR services as opposed to the sole use of the traditional
litigation process. We believe that with our roster of qualified hearing
officers, administrative capabilities, electronic oversight applications,
knowledge of dispute resolution and reputation within the corporate and legal
communities, we are uniquely positioned to provide a comprehensive total
solution to disputing parties.
9
We opened for business in March 1992 in New York and currently operate
from locations in New York and Massachusetts.
We provide services and technology designed to enhance and streamline the
traditional and often time-consuming and expensive legal process. We offer
highly qualified hearing officers, premium services and innovative solutions
designed to appeal to a client base which has become more sophisticated with the
continuing acceptance and utilization of ADR. In July 2004, we received a patent
in the United States and in Australia on our inventions relating to dispute
resolution processing and oversight. This electronic invention, comprised of
both a management and a reckoning module, provides unique access to oversee
arbitration and mediation initiatives. The management module is configured to
receive, sort and store dispute resolution data and to provide internal
continuous compilation of such data and new data generated during non-judicial
dispute resolution procedures.
We believe that our marketing efforts going forward will best be directed
towards large-scale applications that benefit from our proprietary electronic
infrastructure. As such, our marketing emphasis will be driven by our unique
capabilities as an administrator. Additionally, the staff presently dedicated to
our existing client base will be charged with growing our business and
exploiting our inherent market advantages. Therefore, our plan is as follows:
(1) exploit potential revenue streams driven by our technological innovations in
software, systems and intellectual property such as (i) the administration of
high-volume, customized dispute resolution programs for large corporations,
governmental bodies, law firms and agencies and (ii) targeting revenue
opportunities related to our various technology-based solutions; (2) build brand
recognition of National Arbitration and Mediation (NAM) as the premier provider
of dispute resolution solutions through our advertising campaign; (3) continue
to attract and retain the services of highly talented, former top-tier judges
and attorneys to act as independent and impartial hearing officers; and (4)
broaden the type and complexity of the dispute resolution cases we administer.
Future Trends
In our current environment, corporate governance, integrity of process and
transparency have taken center stage in how corporations, municipalities and
other entities are to conduct operations. Our suite of services, particularly
those related to oversight applications, can enhance business practices by
enabling our clients to better manage their operations through data driven
features and, at the same time, produce cost savings given the tremendous
expense related to traditional litigation versus our quicker, more efficient
dispute resolution solutions.
We have and may continue to incur net losses in the future as a result of
(a) a possible decline in revenues due to the consolidation in the insurance
industry as well as perceived changes in their claims-settling philosophy which
effectively slows down the submission of cases for ADR; (b) continuing
enhancements and other costs associated with our investment in technology; (c)
the costs associated with having our common stock publicly traded and (d) our
advertising expenses. Our advertising campaign commenced in August 2000 when we
signed an agreement with American Lawyer Media, Inc., the nation's leading legal
journalism and information company, to provide $1,000,000 of advertising and
promotional opportunities in their national and regional publications over a
two-year period in exchange for 368,844 shares of our common stock (as adjusted
for the 1-for-3 reverse stock split effectuated on August 20, 2001 and as
adjusted for the 6-for-1 forward stock split effectuated on December 22, 2003).
At the time this advertising was contracted for, we were promoting our new
corporate name, clickNsettle.com, as well as continuing to promote our
established brand name, National Arbitration and Mediation (NAM). We believe
that National Arbitration and Mediation (NAM) is a proven and well-respected
brand in the ADR industry. As part of our agreement, as amended, with American
Lawyer Media, Inc., we agreed to purchase an additional $250,000 of advertising.
Such advertising is to be expended from May 2003 though December 2004. However,
we currently anticipate that, at the conclusion of our
10
present campaign, we will reduce our advertising expenses and we believe our
revenues will not be adversely impacted.
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
Results of Operations
Revenues. Revenues decreased 7.8% to $3,759,372 for the year ended June
30, 2004 from $4,078,119 for the year ended June 30, 2003. We believe our
revenue continues to be adversely affected by the consolidation and turmoil in
the insurance industry, which represents a major portion of our clientele.
Additionally, insurance companies in general and some, in particular, have
changed their claims-settling philosophies. Currently, we perceive that many of
the larger insurance companies are taking a harder line with the plaintiff bar.
This results in a slow down in the number of cases being submitted to ADR, a
trend that continues in fiscal year 2005. This adversely affects the number of
cases submitted to our forum. In a broader sense, we believe that lawsuits
continue to be commenced and that our services should prove to be vital to
insurers in their ability to address a growing caseload with reduced costs, but
the timing of such may be delayed.
Cost of Services. Cost of services decreased 14.5% to $860,325 for the
year ended June 30, 2004 from $1,006,562 for the year ended June 30, 2003. The
cost of services as a percentage of revenues declined from approximately 25% for
fiscal year 2003 to 23% for fiscal year 2004. The ratio of cost of services to
revenues will fluctuate based on the type of cases administered, the number of
hours per case and our ability (or inability) to take advantage of volume
arrangements with hearing officers which usually lower the cost per case.
Sales and Marketing. Sales and marketing costs increased 12.4% to
$1,278,207 for the year ended June 30, 2004 from $1,137,489 for the year ended
June 30, 2003. Sales and marketing costs as a percentage of revenues increased
to 34% in fiscal year 2004 from 28% in fiscal year 2003. Most of the increase
(approximately $98,400) relates to advertising costs. Our initial agreement with
American Lawyer Media, Inc., which provided us with $1,000,000 of advertising
and promotional opportunities in their national and regional publications over a
two-year period, ended in August 2002. The related non-cash amount expensed for
the years ended June 30, 2004 and 2003 was $0 and $18,285, respectively. As part
of our agreement, as further amended in fiscal year 2004, with American Lawyer
Media, Inc., we agreed to purchase an additional $250,000 of advertising whereby
such advertising is to be expended from May 2003 though December 2004. During
the years ended June 30, 2004 and 2003, we incurred approximately $151,300 and
$22,800, respectively, of advertising expense related to this commitment. The
remainder of the rise in sales and marketing costs was primarily for additional
entertainment, travel and promotions (an increase of approximately $38,000)
incurred to increase business with new and existing clients.
General and Administrative. General and administrative costs decreased
5.0% to $2,314,803 for the year ended June 30, 2004 from $2,437,805 for the year
ended June 30, 2003. A large portion of the decrease (approximately $144,800)
relates to employee costs and related items (including benefits, payroll taxes,
outside services and employee recruitment). Employee costs declined as, due to
our electronic case administration system, we required fewer personnel in our
information technology department and for other administrative functions. In
prior years, costs had increased in these areas to further develop the Company's
proprietary computer systems, for which a patent was granted in July 2004.
Additionally, rent-related expenses declined by approximately $65,000 as we
subleased a portion of our office space commencing in March 2003. The decline
includes the payment of a sublease commission in the prior year for the full
term of the sublease. Further, we incurred lower charges in the amount of
approximately $44,100 for depreciation, bad debts expense and fees paid to
regulatory authorities as our common stock is now traded via the
Over-the-Counter Bulletin Board as it is no longer listed on The Nasdaq SmallCap
Market as of March 2003. Offsetting these decreases was an increase of
approximately $130,200 primarily relating to higher legal and accounting fees
associated with being a publicly traded company,
11
taxes and automobile expenses. General and administrative costs as a percentage
of revenues increased to 62% for fiscal year 2004 from 60% for fiscal year 2003.
Loss on Impairment of Furniture and Equipment. As of June 30, 2004, we
recorded a loss on the impairment of furniture and equipment equal to its net
book value of $85,721 due to uncertainty as to the Company's ability to continue
as a going concern in light of the potential sale of its ADR business, the
Company's only operation, as well as other factors. See Liquidity and Capital
Resources below. No similar loss was recognized in the prior year.
Other Income. Other income increased by $32,754 to $56,980 for the year
ended June 30, 2004 from $24,226 for the year ended June 30, 2003. Other income
is composed primarily of investment income and realized gains (losses) generated
from investments. Realized gains (losses) (which includes write-downs for other
than temporary declines in the value of marketable securities) approximated
$43,100 in fiscal year 2004 versus ($12,400) in fiscal year 2003, an improvement
of $55,500. As an offset, net interest income generated primarily from
investments in money market funds and certificates of deposit declined by
approximately $14,700 from $25,858 in the prior year due to lower invested
balances and a decline in the prevailing interest rates between the two years.
Income Taxes. Tax benefits resulting from net losses incurred for the
years ended June 30, 2004 and 2003 were not recognized as we recorded a full
valuation allowance against the net operating loss carryforwards during the
periods. As of June 30, 2004, we had net operating carryforwards for Federal tax
purposes of approximately $7,594,000 and net capital loss carryforwards for
Federal tax purposes of approximately $319,400, both with full valuation
allowances.
Net Loss. For the year ended June 30, 2004, we had a net loss of $722,704
as compared to a net loss of $479,511 for the year ended June 30, 2003. The loss
rose due to a decline in revenue as the number of cases heard decreased between
the years, due to higher advertising expenses and due to the recognition of a
loss on impairment of furniture and equipment. Partially offsetting the above
was lower administrative costs and improved investment results.
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
Results of Operations
Revenues. Revenues increased 3.1% to $4,078,119 for the year ended June
30, 2003 from $3,957,069 for the comparable prior period. We believe our revenue
has been adversely affected by the consolidation and turmoil in the insurance
industry, which represents a major portion of our clientele. This affects the
number of cases heard. However, at the same time, the average dollars earned per
hearing has increased. In a broader sense, we believe that lawsuits continue to
be commenced and that our services should prove to be vital to insurers in their
ability to address a growing caseload with reduced costs and increased
efficiency. We believe our services will benefit clients as they seek to
optimize efficiencies in the litigation process in order to improve their own
financial outlook as, due to low interest rates, insurers cannot rely on
investment income to offset operational and indemnity expenses. Additionally,
plaintiffs benefit from a speedier resolution of their claims which is of
greater importance in difficult economic times.
As we continue to add to our exclusive pool of highly qualified hearing
officers, we believe our roster will enable us to attract a higher volume and
diversity of cases. As a result, we believe the average dollars earned per
hearing will continue to be favorably impacted.
12
Cost of Services. Cost of services increased 3.6% to $1,006,562 for the
year ended June 30, 2003 from $971,255 for the year ended June 30, 2002. The
cost of services as a percentage of revenues remained consistent between the
years at approximately 25% for both fiscal years 2003 and 2002. The ratio of
cost of services to revenues will fluctuate based on the type of cases
administered, the number of hours per case and our ability (or inability) to
take advantage of volume arrangements with hearing officers which usually lower
the cost per case.
Sales and Marketing. Sales and marketing costs decreased 31.0% to
$1,137,489 for the year ended June 30, 2003 from $1,649,643 for the year ended
June 30, 2002. Sales and marketing costs as a percentage of revenues decreased
to 28% in fiscal year 2003 from 42% in fiscal year 2002. Most of the decrease
(approximately $468,300) relates to advertising costs. Our initial agreement
with American Lawyer Media, Inc., which provided us with $1,000,000 of
advertising and promotional opportunities in their national and regional
publications over a two-year period, ended in August 2002. The related non-cash
amount expensed for the years ended June 30, 2003 and 2002 was $18,285 and
$461,318, respectively. As part of our agreement, as further amended in fiscal
year 2004, with American Lawyer Media, Inc., we agreed to purchase an additional
$250,000 of advertising whereby such advertising is to be expended from May 2003
though December 2004. During the year ended June 30, 2003, we incurred $22,835
of advertising expense related to this commitment. The remainder of the decrease
in sales and marketing costs pertained primarily to salaries and related costs
that declined by approximately $54,800.
General and Administrative. General and administrative costs decreased
2.0% to $2,437,805 for the year ended June 30, 2003 from $2,488,719 for the year
ended June 30, 2002. There was a large decrease (approximately $169,100) in
legal and professional fees which, in the prior year period, primarily related
to fees incurred to apply for international patents and trademarks for our
technology inventions and mergers and acquisitions activity that did not recur
in the current year. Additionally, we reduced expenditures by approximately
$78,900 with respect to autos, depreciation, telephones and taxes. Offsetting
these decreases was an increase of approximately $208,000 relating to employee
costs and related items (including benefits, payroll taxes, outside services and
employee recruitment), an allowance provided on notes receivable and the
increased cost of insurance. Employee costs rose due to the recruiting and
staffing of computer programmers in our information technology department and
for other administrative functions to further enhance and expand our
comprehensive suite of ADR offerings. General and administrative costs as a
percentage of revenues decreased to 60% for fiscal year 2003 from 63% for fiscal
year 2002.
Other Income (Expenses). Other income (expenses) changed by $99,160, from
other expenses of ($74,934) for the year ended June 30, 2002 to other income of
$24,226 for the year ended June 30, 2003. Other income (expenses) is composed
primarily of investment income and realized gains (losses) generated from
investments. Realized gains (losses) (which includes write-downs for other than
temporary declines in the value of marketable securities) approximated
($137,600) in fiscal year 2002 versus ($12,400) in fiscal year 2003, an
improvement of $125,200. As an offset, net interest income generated primarily
from investments in money market funds declined by approximately $23,225 from
$49,084 in the prior year due to lower invested balances and a decline in the
prevailing interest rates between the two years. At June 30, 2003, approximately
90% of cash equivalents and marketable securities were invested in money market
funds (whose rate of return will fluctuate based on prevailing interest rates).
Income Taxes. Tax benefits resulting from net losses incurred for the
years ended June 30, 2003 and 2002 were not recognized as we recorded a full
valuation allowance against the net operating loss carryforwards during the
periods. As of June 30, 2003, we had net operating carryforwards for Federal tax
purposes of approximately $6,833,000 and net capital loss carryforwards for
Federal tax purposes of approximately $282,000, both with full valuation
allowances.
13
Net Loss. For the year ended June 30, 2003, we had a net loss of $479,511
as compared to a net loss of $1,227,482 for the year ended June 30, 2002. The
loss declined as we secured higher fees for services rendered to our clients as
a result of an increase in the type and diversity of cases heard, and due to a
reduction in advertising expenses, enhanced operating efficiencies and improved
investment results.
Liquidity and Capital Resources
At June 30, 2004, the Company had a working capital surplus of $913,854 as
compared to $1,492,023 at June 30, 2003. The decrease in working capital
occurred primarily as a result of the net loss in fiscal year 2004.
Net cash used in operating activities was $749,416 for the fiscal year
ended June 30, 2004 versus $297,662 in the prior fiscal year. Cash used in
operating activities principally increased due to a rise in the loss from
operations and due to decreases in operating liabilities, offset by a decline in
accounts receivable.
Net cash used in investing activities was $318,501 for the year ended June
30, 2004 versus net cash provided by investing activities of $179,382 for the
year ended June 30, 2003. The change in cash from investing activities was
principally due to a higher level of net purchases of marketable securities and
certificates of deposit in fiscal year 2004 as compared to fiscal year 2003
where there was a higher level of net sales of marketable securities.
In accordance with the terms of our August 2000 advertising agreement, as
amended, with American Lawyer Media, Inc., we agreed to purchase an additional
$250,000 of advertising. During the year ended June 30, 2004 and 2003, we
incurred $151,311 and $22,835, respectively, of advertising expense related to
this commitment. The remaining commitment of $75,854 is to be expended by
December 31, 2004.
We have incurred net losses and had negative cash flow from operations in
each year in the eight-year period ended June 30, 2004. Cash and cash
equivalents arising principally from equity transactions have provided
sufficient working capital to fund losses incurred and capital expenditures, as
well as to provide cash to redeem preferred stock outstanding and to purchase
treasury stock. As of June 30, 2004, we had $1,268,060 in aggregate cash, cash
equivalents, certificates of deposit and marketable securities.
In July 2004, our Board of Directors decided to explore strategic
alternatives for the Company in an effort to protect shareholder value. As a
result of the numerous scandals in recent years and the passing of the
Sarbanes-Oxley Act to safeguard shareholders, micro-cap companies such as ours
are faced with mounting legal and audit fees to meet the new compliance
requirements now needed to remain as a publicly traded entity. In addition to
being expensive in terms of out-of-pocket expenditures, these requirements are
costly in that they are time-consuming and place a strain on our limited
personnel resources. While we remain optimistic about the need for the Company's
services, we believe that the unavoidability of these escalating costs shortens
the timeframe that the Company needs in order to realize revenues from many of
its sales and marketing initiatives. Further, we believe our revenue has been
and will continue to be adversely affected by the consolidation and turmoil in
the insurance industry, which represents a major portion of our clientele.
Additionally, insurance companies in general and some, in particular, have
changed their claims-settling philosophies. Currently, we perceive that many of
the larger insurance companies are taking a harder line with the plaintiff bar.
This results in a slow down in the number of cases being submitted to ADR, a
trend that continues into fiscal year 2005. This adversely affects the number of
cases referred to our forum. In a broader sense, we believe that lawsuits
continue to be commenced and that our services should prove to be vital to
insurers in their ability to address a growing caseload with reduced costs, but
the timing of such may be delayed.
14
During July and August 2004, the Board of Directors reviewed potential
alternatives, including merger candidates, as well as the purchase or
privatization of the existing business. Currently, the Board is negotiating the
terms of an asset purchase agreement with the present Chief Executive Officer of
the Company, Roy Israel, whereby he or companies owned by him, would assume the
assets and liabilities of the ADR business of the Company and its future
commitments. The Company would retain a minimum of $200,000 in cash in order to
effect a merger or a similar transaction with the intent to acquire a different
operating business. The cash that is to remain in the Company would be reduced
by costs directly associated with the asset purchase including, but not limited
to, legal costs, accounting fees, the cost of obtaining a fairness opinion and
proxy solicitation.
The completion of the transaction is subject to the execution of a
definitive asset purchase agreement, the receipt of an opinion from an unrelated
third party approved by the Board of Directors stating that the transaction is
fair, from a financial point of view, to the unaffiliated shareholders of the
Company and shareholder approval. There can be no assurances that the
transaction will occur. If the transaction does occur, the Company will have no
operating entity. Additionally, there can be no assurances that an operating
entity will be acquired. If the transaction does not occur, the Board may decide
to continue to operate the ADR business of the Company. If so, our near and
long-term operating strategies will focus on promoting our services and our
patented ADR management and oversight system to increase our revenue and cash
flow while better positioning the Company to compete under current market
conditions. The Company's capital requirements depend on several factors,
including the rate of market acceptance of our services, our ability to maintain
and expand our customer base and other factors.
As a result of continued losses, the use of significant cash in operations
and the uncertainty as to the ability to obtain approval for the asset purchase
agreement and to thereafter effect a merger or a similar transaction with the
intent to acquire a different operating business, there is substantial doubt
about the Company's ability to continue as a going concern. The Company's
independent auditors have included a going concern paragraph in their report on
the June 30, 2004 consolidated financial statements which have been prepared
assuming the Company will continue as a going concern. Accordingly, the
accompanying consolidated financial statements do not include any adjustments
that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies
The Securities and Exchange Commission released Financial Reporting
Release No. 60, which requires all companies to include a discussion of critical
accounting policies and methods used in the preparation of their financial
statements. The significant accounting policies and methods used in the
preparation of our consolidated financial statements are discussed in Note 2 of
the Notes to Consolidated Financial Statements. The following is a list of our
critical accounting policies and a brief discussion of each:
- Revenue recognition
- Allowance for doubtful accounts
- Income taxes and valuation allowance
Revenue recognition - We principally derive our revenue from fees charged for
arbitrations and mediations. Each party to a proceeding is charged an
administrative fee, which generally includes the first hour of
hearing/conference time. Additional fees are billed based on the total time
spent by the hearing officer. Hearing officer time includes, but is not limited
to, case review time, decision preparation time, telephone or verbal conference
time, as well as actual hearing/conference time expended. The Company generally
recognizes revenue when the arbitration or mediation occurs. Fees received prior
to such arbitration or mediation are reflected as deferred revenue.
15
Allowance for doubtful accounts - Our allowance for doubtful accounts relates to
trade accounts receivable. We perform ongoing evaluations of our customers and
we extend or limit credit based upon payment history and the customer's current
credit worthiness. The allowance for doubtful accounts is an estimate prepared
by management based on analyses of historical bad debts, receivable agings,
current economic trends and any specific customer collection issues that have
been identified. The allowance for doubtful accounts is reviewed periodically
and adjustments are recorded as deemed necessary.
Income taxes and valuation allowance - We are required to estimate our actual
current tax expense together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which would be included within
our consolidated balance sheet. We then assess the likelihood that the deferred
tax assets will be recovered from future taxable income and, to the extent we
believe recovery is not likely, a valuation allowance is recognized. We have
recorded a valuation allowance to the extent a portion or all of a deferred tax
asset may not be realizable.
Effect of Recently Issued Accounting Pronouncements
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition" (SAB No. 104),
which codifies, revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition," in order to make this interpretative guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 did not have a material impact on
the financial position and results of operations of the Company.
RISK FACTORS
Our business faces risks. These risks include those described below and
may include additional risks of which we are not currently aware or which we
currently do not believe are material. If any of the events or circumstances
described in the following risks actually occurs, our business, financial
condition or results of operations could be adversely affected. These risks
should be read in conjunction with the other information set forth in this
report.
We have Recent, and Anticipate Continuing, Losses and have Going Concern
Considerations
We have incurred operating losses each fiscal year of the eight-year
period ended June 30, 2004. Going forward, we may continue to incur operating
losses and make capital expenditures and, as a result, we will need to generate
higher revenues to achieve and maintain profitability and provide working
capital needed to fund losses. We cannot assure you that we can achieve or
sustain profitability in the future. If revenues continue to decline, or if
operating expenses exceed our current expectations and cannot be adjusted
accordingly, our business, the results of our operations, and our financial
condition may be materially and adversely affected.
The Company's independent auditors have included a going concern paragraph
in their report on the June 30, 2004 consolidated financial statements which
have been prepared assuming the Company will continue as a going concern. As a
result of continued losses, the use of significant cash in operations and the
uncertainty as to the ability to obtain approval for the asset purchase
agreement and to thereafter effect a merger or a similar transaction with the
intent to acquire a different operating business, there is substantial doubt
about the Company's ability to continue as a going concern.
Potential Transaction may not be Approved
Currently, the Board is negotiating the terms of an asset purchase
agreement with the present Chief Executive Officer of the Company, Roy Israel,
whereby he or companies owned by him, would assume the assets and liabilities of
the ADR business of the Company and its future commitments. The Company would
retain a
16
minimum of $200,000 in cash in order to effect a merger or a similar transaction
with the intent to acquire a different operating business. The cash that is to
remain in the Company would be reduced by costs directly associated with the
asset purchase including, but not limited to, legal costs, accounting fees, the
cost of obtaining a fairness opinion and proxy solicitation.
The completion of the transaction is subject to the execution of a
definitive asset purchase agreement, the receipt of an opinion from an unrelated
third party approved by the Board of Directors stating that the transaction is
fair, from a financial point of view, to the unaffiliated shareholders of the
Company and shareholder approval. There can be no assurances that the
transaction will occur. If the transaction does occur, the Company will have no
operating entity. Additionally, there can be no assurances that an operating
entity will be acquired.
We Depend On Insurance-Related Disputes
The majority of our ADR business involves claims that are usually covered
by insurance. We resolve many of these disputes in a matter of hours. Since our
revenues are derived primarily from certain administrative and hourly fees, a
high volume of these cases is required in order for us to generate revenues
sufficient to maintain our operations. Although catastrophic injury,
self-insured commercial and employment initiatives represent a growing
percentage of our revenues, there can be no assurance that we will be able to
continue to expand our insurance and non-insurance-related dispute business, or
maintain or increase our current level of cases. In addition, we cannot assure
you that changes in the insurance industry will not affect our business.
Possible Improvements in the Public Court System, Including Use of ADR Services,
May Affect Our Business
The ADR industry, in general, furnishes an alternative to public dispute
mechanisms, principally the local, state and federal court systems. Our
marketing efforts have been based on our belief that there exists a high degree
of dissatisfaction among litigants and their counsel with the public court
system. If the public courts, in the markets we are currently serving or seek to
serve, reduce case backlogs and provide effective settlement mechanisms at no,
or substantially reduced cost to litigants, our business opportunities in such
markets may be significantly reduced. Several public court systems, both on the
federal and state level, including certain federal and state courts located in
New York State, have instituted court coordinated ADR programs. Similar programs
are under consideration in a number of states and may be adopted at any time.
The success of such ADR programs could have a material adverse effect on our
business by diminishing the demand for private ADR services.
The Private ADR Services Business is Highly Competitive
The private ADR business is highly competitive, both on a national and
regional level. Barriers to entry in the ADR business are relatively low, and
new competitors can begin doing business relatively quickly. There are two types
of competitors, not-for-profit and for-profit entities:
o We believe that our largest not-for-profit competitor is the
American Arbitration Association which has significant market share
in complex commercial cases.
o We believe that our largest for-profit competitor is JAMS.
At this time, we believe that numerous other private ADR firms are
competing with us in the regions we currently serve. Increased competition could
decrease the fees we are able to charge for our services and limit our ability
to obtain qualified hearing officers. This could have a material adverse effect
on our ability to be profitable in the future. Certain competitors may have
greater financial or other
17
capabilities than us. Accordingly, there is no assurance that we can
successfully compete in the present or future marketplace for ADR services.
We Depend Upon Our Key Personnel
Our success will be largely dependent on the personal efforts of Roy
Israel, our Chief Executive Officer, President and Chairman of the Board of
Directors. Although we have entered into an employment agreement with Mr.
Israel, which expires in 2007, the loss of his services could have a material
adverse effect on our business and prospects. We have obtained "key-man" life
insurance on the life of Mr. Israel. We are the sole beneficiary in the amount
of $1 million. Our success is also dependent upon our ability to hire and retain
qualified marketing and other personnel in our offices. We may not be able to
hire or retain such necessary personnel.
We Do Not Have Written Contracts with the Majority of Our Clients
We currently rely on our marketing efforts and relationships with
insurance companies, law firms, corporations and municipalities to obtain cases.
We do not have written agreements with the majority of our clients, but we have
instituted the process of obtaining written agreements with our existing clients
and with new clients. We also rely on case referrals from our current clients.
We may not continue to receive our current level of, or an adequate level of,
referrals of cases. If we do not maintain such levels, there could be a material
adverse effect on our business.
We Depend Upon Qualified Hearing Officers
The market for our services depends on a perception by our clients that
our hearing officers are impartial, qualified and experienced. Our ability to
retain qualified hearing officers in the event that competition increases would
be uncertain. We have mitigated this risk by retaining exclusive hearing
officers. Of the total number of cases heard during the fiscal year ended June
30, 2004, approximately 67% were heard by exclusive hearing officers.
Accordingly, at any time, the remaining hearing officers who are not under
contract with us can refuse to continue to provide their services to us and are
free to render services independently or through competing ADR services. If
qualified hearing officers are unwilling or unable to continue to provide their
services through us for any reason, including possible agreements to provide
their services to our competitors on an exclusive basis, our business and
operations could be materially and adversely affected.
Our Current Stockholders Have the Ability to Exert Significant Control
Our executive officers, directors and their affiliates beneficially own
3,755,136 shares or approximately 44.4% of the common stock outstanding based on
8,449,056 shares of common stock outstanding as of June 30, 2004. Of that
number, Mr. Israel beneficially owns 2,410,278 shares or approximately 28.5% of
the common stock. As a result, these stockholders acting in concert may have
significant influence on votes to elect or remove any or all of our directors
and to control substantially all corporate activities in which we are involved,
including tender offers, mergers, proxy contests or other purchases of common
stock that could give our stockholders the opportunity to realize a premium over
the then prevailing market price for their shares of common stock.
We May Be Unable to Protect Our Proprietary Technology and We May Be Sued for
Infringing on the Rights of Others
Our success depends, in part, upon our ability to protect our proprietary
software technology and operate without infringing upon the rights of others. We
rely on a combination of methods to protect our proprietary intellectual
property, technology and know-how, such as:
18
o trade secret laws o copyright law
o trademark law o patent law
o contractual provisions o confidentiality agreements
o certain technology and security measures
The steps we have taken regarding our proprietary technology, however, may
be insufficient to deter misappropriation.
In the systems and software industries, it is common that companies
receive notices from time to time alleging infringement of patents, copyrights
or other intellectual property rights of others. We may from time to time be
notified of claims that we may be infringing upon patents, copyrights or other
intellectual property rights owned by third parties. Companies may pursue claims
against us with respect to the alleged infringement of patents, copyrights or
other intellectual property rights owned by third parties. Although we believe
we have not violated or infringed upon any intellectual property patents and
have taken measures to protect our own rights, there is no assurance that we
will avoid litigation. Litigation may be necessary to protect our intellectual
property rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against third party claims of
invalidity. Any litigation could result in substantial costs and diversion of
resources away from the day-to-day operation of our business.
Existing copyright, trademark, patent and trade secret laws afford only
limited protection. Existing laws, in combination with the steps we have taken
to protect our proprietary rights may be inadequate to prevent misappropriation
of our technology or other proprietary rights. Also, such protections do not
preclude competitors from independently developing products with functionality
or features similar or superior to our products and technologies.
Our Common Stock is No Longer Listed on The Nasdaq SmallCap Market
On March 5, 2003, The Nasdaq Listing Qualifications Panel delisted our
common stock from The Nasdaq SmallCap Market. Since that date, trading in our
securities has been conducted in the over-the-counter market in the NASD's OTC
Electronic Bulletin Board. As a result, an investor may find it more difficult
to purchase, dispose of and to obtain accurate quotations as to the value of our
securities.
In addition, as the trading price of our common stock has been less than
$5.00 per share, trading in our common stock is also subject to the requirements
of Rule 15g-9 under the Securities Exchange Act of 1934. Under that rule,
broker/dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including (a) a requirement that they make an
individualized written suitability determination for the purchaser and (b)
receive the purchaser's written consent prior to the transaction.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
also requires additional disclosure in connection with any trades involving a
stock defined as a penny stock (generally, any equity security not traded on an
exchange or quoted on The Nasdaq SmallCap Market that has a market price of less
than $5.00 per share), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of our securities and the ability of stockholders to sell their
securities in the secondary market.
19
ITEM 7. FINANCIAL STATEMENTS
Information in response to this item is set forth in the Financial
Statements, beginning on Page F-1 of this filing. On December 22, 2003, a
6-for-1 forward stock split of our outstanding common stock was effectuated. Our
shareholders previously approved this action in a meeting held on December 12,
2003.
All references to number of shares and per share data in the financial
statements and accompanying notes for all periods presented have been restated
to reflect the forward stock split.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that
material information relating to the Company are made known to our Chief
Executive Officer ("CEO"), Chief Financial Officer ("CFO") and others in the
Company involved in the preparation of this annual report, by others within the
Company. Our CEO and CFO have reviewed our disclosure controls and procedures
within 90 days prior to the filing of this annual report and have concluded that
they are effective. There were no significant changes in our internal controls
or other factors that could significantly affect our internal controls
subsequent to the last date they were reviewed by our CEO and CFO.
20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Loss F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-24
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
clickNsettle.com, Inc.
We have audited the accompanying consolidated balance sheets of
clickNsettle.com, Inc. and Subsidiaries (formerly known as NAM Corporation) (the
"Company") as of June 30, 2004 and 2003, and the related consolidated statements
of operations, changes in stockholders' equity and comprehensive loss, 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 of the Public
Company Accounting Oversight Board (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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of clickNsettle.com,
Inc. and Subsidiaries as of June 30, 2004 and 2003, and the consolidated results
of their operations and their consolidated cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Historically, the Company has
sustained significant losses and used substantial amounts of cash in operations.
The uncertainty as to the Company's ability to sustain profitable operations and
other factors described in Note 1 raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Melville, New York
August 30, 2004
F-2
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 2004 2003
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 730,869 $ 1,798,786
Certificates of deposit 300,000
Marketable securities 237,191 181,063
Accounts receivable (net of allowance for doubtful accounts
of $135,195 and $140,000 in 2004 and 2003, respectively) 327,937 435,667
Prepaid expenses and other current assets (net of allowance
for doubtful note receivable of $48,848 and $49,148 in 2004
and 2003, respectively) 60,303 39,825
------------ ------------
Total current assets 1,656,300 2,455,341
FURNITURE AND EQUIPMENT - AT COST, less accumulated depreciation 143,824
OTHER ASSETS 49,726 42,975
------------ ------------
$ 1,706,026 $ 2,642,140
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 242,070 $ 277,608
Accrued expenses and other liabilities 277,893 275,428
Accrued payroll and employee benefits 49,065 141,305
Deferred revenues 173,418 268,977
------------ ------------
Total current liabilities 742,446 963,318
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.001 par value; 25,000,000 shares authorized;
8,701,554 shares issued and outstanding in 2004 and 2003 8,702 8,702
Additional paid-in capital 10,104,325 10,104,325
Accumulated deficit (9,116,951) (8,394,247)
Accumulated other comprehensive income 51,422 43,960
Less common stock in treasury at cost, 252,498 shares in
2004 and 2003 (83,918) (83,918)
------------ ------------
Total stockholders' equity 963,580 1,678,822
------------ ------------
$ 1,706,026 $ 2,642,140
============ ============
The accompanying notes are an integral part of these statements.
F-3
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
2004 2003
----------- -----------
Net revenues $ 3,759,372 $ 4,078,119
----------- -----------
Operating costs and expenses
Cost of services 860,325 1,006,562
Sales and marketing expenses 1,278,207 1,137,489
General and administrative expenses 2,314,803 2,437,805
Loss on impairment of furniture and equipment 85,721 --
----------- -----------
4,539,056 4,581,856
----------- -----------
Loss from operations (779,684) (503,737)
Other income
Investment income 54,298 13,448
Other income 2,682 10,778
----------- -----------
56,980 24,226
----------- -----------
Loss before income taxes (722,704) (479,511)
Income taxes -- --
----------- -----------
NET LOSS $ (722,704) $ (479,511)
=========== ===========
Net loss per common share $ (.09) $ (.06)
=========== ===========
Weighted-average shares outstanding - basic and diluted 8,449,056 8,449,056
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
Years ended June 30, 2004 and 2003
Common stock Additional
----------------------------- paid-in Accumulated
Shares Amount capital deficit
------------ ------------ ------------ ------------
Balances at June 30, 2002 1,450,259 $ 1,450 $ 10,111,324 $ (7,914,736)
Compensation related to stock options 253
Net loss (479,511)
Change in unrealized gain (loss) on marketable
securities -- -- -- --
------------ ------------ ------------ ------------
Comprehensive loss
Balances at June 30, 2003 1,450,259 1,450 10,111,577 (8,394,247)
Six-for-one forward stock split effectuated on
December 22, 2003 7,251,295 7,252 (7,252) --
------------ ------------ ------------ ------------
8,701,554 8,702 10,104,325 (8,394,247)
Net loss (722,704)
Change in unrealized gain (loss) on marketable
securities -- -- -- --
------------ ------------ ------------ ------------
Comprehensive loss
Balances at June 30, 2004 8,701,554 $ 8,702 $ 10,104,325 $ (9,116,951)
============ ============ ============ ============
Accumulated
other
comprehensive Common Total
income stock in stockholders' Comprehensive
(loss) treasury equity loss
------------ ------------ ------------ ------------
Balances at June 30, 2002 $ (21,114) $ (83,918) $ 2,093,006
Compensation related to stock options 253
Net loss (479,511) $ (479,511)
Change in unrealized gain (loss) on marketable
securities 65,074 -- 65,074 65,074
------------ ------------ ------------ ------------
Comprehensive loss $ (414,437)
============
Balances at June 30, 2003 43,960 (83,918) 1,678,822
Six-for-one forward stock split effectuated on
December 22, 2003 -- -- --
------------ ------------ ------------
43,960 (83,918) 1,678,822
Net loss (722,704) $ (722,704)
Change in unrealized gain (loss) on marketable
securities 7,462 -- 7,462 7,462
------------ ------------ ------------ ------------
Comprehensive loss $ (715,242)
============
Balances at June 30, 2004 $ 51,422 $ (83,918) $ 963,580
============ ============ ============
The accompanying notes are an integral part of this statement.
F-5
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
2004 2003
----------- -----------
Cash flows from operating activities
Net loss $ (722,704) $ (479,511)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 71,080 84,933
Gain on sales of marketable securities (43,141) (46,322)
Write-down of marketable securities -- 58,733
Advertising in exchange for common stock -- 18,285
Compensation related to stock options -- 253
Loss on impairment of furniture and equipment 85,721 --
Provision for bad debts 29,705 --
(Recovery) provision for write-down of note receivable (300) 49,148
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable 78,025 (55,148)
(Increase) in prepaid expenses, other current assets and
other assets (26,930) (22,866)
(Decrease) increase in accounts payable, accrued expenses
and other liabilities (33,073) 24,189
(Decrease) increase in accrued payroll and employee benefits (92,240) 104,074
(Decrease) in deferred revenues (95,559) (33,430)
----------- -----------
Net cash used in operating activities (749,416) (297,662)
----------- -----------
Cash flows from investing activities
Purchases of marketable securities and certificates of deposit (1,486,432) (535,518)
Proceeds from sales of marketable securities 1,180,757 726,718
Purchases of furniture and equipment (12,826) (11,818)
----------- -----------
Net cash (used in) provided by investing activities (318,501) 179,382
----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (1,067,917) (118,280)
Cash and cash equivalents at beginning of year 1,798,786 1,917,066
----------- -----------
Cash and cash equivalents at end of year $ 730,869 $ 1,798,786
=========== ===========
The accompanying notes are an integral part of these statements.
F-6
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
NOTE 1 - ORGANIZATION, NATURE OF BUSINESS AND
BASIS OF PRESENTATION AND OPERATIONS
clickNsettle.com, Inc. ("CLIK") (formerly known as NAM Corporation)
provides a broad range of Alternative Dispute Resolution ("ADR") services,
primarily arbitrations and mediations, principally in the United States.
CLIK incorporated on January 12, 1994 and began operations on February 15,
1994. On October 31, 1994, National Arbitration & Mediation, Inc.
("NA&M"), which was primarily owned by CLIK's Chief Executive Officer, was
acquired by and became a wholly-owned subsidiary of CLIK. The transaction
was accounted for as a transfer of assets between companies under common
control, with the assets and liabilities of NA&M combined with those of
CLIK at their historical carrying values. NA&M also provided a broad range
of ADR services, including arbitrations and mediations. NA&M began
operations in March 1992.
The accompanying consolidated financial statements of clickNsettle.com,
Inc. and Subsidiaries include the accounts of its wholly-owned
subsidiaries, Michael Marketing LLC and clickNsettle.com LLC (collectively
referred to herein as the "Company"). The Company operates in one business
segment, ADR. All significant intercompany transactions and balances were
eliminated in consolidation.
The Company has incurred net losses and had negative cash flow from
operations in each year in the eight-year period ended June 30, 2004. Cash
and cash equivalents arising principally from equity transactions have
provided sufficient working capital to fund losses incurred and capital
expenditures, as well as to provide cash to redeem preferred stock
outstanding and to purchase treasury stock. As of June 30, 2004, the
Company had $1,268,060 in aggregate cash, cash equivalents, certificates
of deposit and marketable securities. The Company does not maintain a
credit facility with any financial institution. Management and the Board
of Directors have been evaluating strategic alternatives for the Company
in an effort to protect shareholder value, as a result of the continued
operational performance and the costs to remain a publicly-traded company
resulting from new compliance requirements of the Sarbanes-Oxley Act of
2002. During July and August 2004, the Board of Directors reviewed
potential alternatives, including merger candidates, as well as the
purchase or privatization of the existing business (see Note 14). As a
result of continued losses, the use of significant cash in operations and
the uncertainty as to the ability to obtain approval for the asset
purchase agreement and to thereafter effect a merger or a similar
transaction with the intent to acquire a different operating business,
there is substantial doubt about the Company's ability to continue as a
going concern. No adjustments have been made with respect to the
consolidated financial statements to record the results of the ultimate
outcome of this uncertainty.
F-7
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting and reporting policies applied on
a consistent basis which conform with accounting principles generally
accepted in the United States of America follows:
a. Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the revenues and expenses during the reporting
period. Actual results may differ from those estimates.
b. Revenue Recognition
The Company principally derives its revenues from fees charged for
arbitrations and mediations. Each party to a proceeding is charged
an administrative fee, which generally includes the first hour of
hearing/conference time. Additional fees are billed based on the
total time spent by the hearing officer. Hearing officer time
includes, but is not limited to, case review time, decision
preparation time, telephone or verbal conference time, as well as
actual hearing/conference time expended. The Company generally
recognizes revenue when the arbitration or mediation occurs. Fees
received prior to such arbitration or mediation are reflected as
deferred revenue.
In the event an arbitration or mediation is postponed, the
postponing party is billed an adjournment fee. The Company
recognizes adjournment fee revenue when the adjournment occurs.
In the event an arbitration or mediation is settled prior to the
hearing/conference date, each party is billed a settlement fee which
is recognized when the Company is informed of the settlement.
In the event an arbitration or mediation is canceled prior to the
hearing/conference date, the canceling party is billed a
cancellation fee which is recognized when the Company is informed of
the cancellation.
c. Allowance for Doubtful Accounts
The Company performs ongoing evaluations of its customers and
extends or limits credit based upon payment history and the
customer's current creditworthiness. The allowance for doubtful
accounts is an
F-8
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 2 (continued)
estimate prepared by the Company based on analyses of historical bad
debts, receivable agings, current economic trends and any specific
customer collection issues that have been identified. The allowance
for doubtful accounts is reviewed periodically and adjustments are
recorded as deemed necessary.
d. Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and money market
funds. The Company considers all unrestricted highly liquid
investments purchased with a maturity of less than three months to
be cash equivalents.
e. Certificates of Deposit
Certificates of deposit are recorded at cost.
f. Marketable Securities
Investments classified as marketable securities include equity
securities that are reported at their fair values. Unrealized gains
or losses on these securities are reported as a separate component
of accumulated other comprehensive income (loss), net of related tax
effects, within stockholders' equity. The Company categorizes all
equity securities as available-for-sale.
Investment income consists of interest, dividends and gains and
losses on marketable securities. Interest and dividends are
recognized when earned. Realized gains and losses on sales,
maturities or liquidation of investments in marketable securities
are determined on a specific identification basis. Fair values of
investments are based on quoted market prices.
g. Furniture and Equipment
Furniture and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line
method to allocate the cost of those assets over their expected
useful lives that range from two to ten years. Leasehold
improvements are amortized over the life of the remaining lease. On
an annual basis, Management reviews furniture and equipment for
events or changes in circumstances that could indicate that the
carrying amounts of the assets might not be recoverable.
F-9
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 2 (continued)
h. Product Development Costs
Product development costs include expenses incurred by the Company
to develop, enhance, manage and operate the Company's technology
platform and website. Costs incurred for internal use software in
the preliminary project stage and for application maintenance,
upgrades and enhancements are expensed. Costs incurred for
application development are capitalized. No development costs have
been capitalized since inception.
i. Income Taxes
The Company follows the asset and liability method of accounting for
income taxes by applying statutory tax rates in effect at the
balance sheet date to differences among the book and tax bases of
assets and liabilities. The resulting deferred tax liabilities or
assets are adjusted to reflect changes in tax laws or rates by means
of charges or credits to income tax expense. A valuation allowance
is recognized to the extent a portion or all of a deferred tax asset
may not be realizable.
j. Advertising Costs
The cost of advertising is expensed when the advertising takes
place. The Company incurred $169,184 and $70,745 for advertising and
external public relations costs in fiscal 2004 and 2003,
respectively. These amounts include $18,285 relating to non-cash
advertising charges in fiscal 2003 (see Note 7(e)).
k. Earnings (Loss) Per Common Share
Basic earnings per share are based on the weighted-average number of
common shares outstanding without consideration of potential common
stock. Diluted earnings per share are based on the weighted-average
number of common and potential common shares outstanding. The
calculation takes into account the shares that may be issued upon
exercise of stock options and warrants, reduced by the shares that
may be repurchased with the funds received from the exercise, based
on the average price during the period. Diluted earnings per share
is the same as basic earnings per share, as potential common shares
of 6,255,288 and 5,891,610, at June 30, 2004 and 2003, respectively,
would be antidilutive as the Company incurred net losses for the
years ended June 30, 2004 and 2003.
F-10
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 2 (continued)
l. Accounting for Stock Options
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS No. 148"). SFAS No. 148 encourages, but does not
require, companies to record compensation cost for stock-based
compensation plans at fair value. In addition, SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee
compensation and amends the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 148 requires disclosures in
the summary of significant accounting policies in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used
on reported results.
The Company elected to adopt, effective December 31, 2002, only the
disclosure provisions of SFAS No. 148 and to continue to account for
stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations (see Note 7(g)).
Accordingly, compensation expense is not recognized for options
granted to employees and to members of the board of directors when
such options are granted to board members in their capacity as
directors.
If the Company had elected to recognize compensation expense based
upon the fair value at the grant date for options granted to
employees and to members of the board of directors consistent with
the "fair value" methodology prescribed by SFAS No. 123, the
Company's net loss attributable to common stockholders and net loss
per share for the years ended June 30, 2004 and 2003 would be
increased to the pro forma amounts indicated below:
2004 2003
--------- ---------
Net loss attributable to common stockholders
As reported $(722,704) $(479,511)
Deduct: Total stock-based employee compensation
expense determined under fair value-based
method for all awards, net of related tax effects (129,525) (419,983)
--------- ---------
Pro forma net loss $(852,229) $(899,494)
========= =========
Net loss per common share
Basic and diluted - as reported $ (.09) $ (.06)
Basic and diluted - pro forma $ (.10) $ (.11)
F-11
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 2 (continued)
Compensation expense of $0 and $253 was recognized during the years
ended June 30, 2004 and 2003, respectively, for options granted to
consultants.
m. Effect of Recently Issued Accounting Pronouncements
In December 2003, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition," which codifies, revises and rescinds certain sections
of SAB No. 101, "Revenue Recognition," in order to make this
interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The
changes noted in SAB No. 104 did not have a material impact on the
financial position and results of operations of the Company.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive loss, net of tax effects, are as follows:
2004 2003
--------- ---------
Net loss $(722,704) $(479,511)
--------- ---------
Unrealized gain on marketable securities, net
of tax effects of $0 in 2004 and 2003, respectively
Unrealized gains arising in period 51,362 65,204
Reclassification adjustment - loss included in
net loss (43,900) (130)
--------- ---------
Net unrealized gain 7,462 65,074
--------- ---------
Comprehensive loss $(715,242) $(414,437)
========= =========
Accumulated other comprehensive income (loss) represents the unrealized
gain (loss) on marketable equity securities, net of tax effects of $0 in
fiscal 2004 and 2003, respectively.
F-12
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 4 - MARKETABLE SECURITIES
Marketable securities, accounted for as available-for-sale securities, are
carried at fair value. A summary of investments in marketable securities
and a reconciliation of amortized cost to the fair value follow:
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- --------
June 30, 2004
Equity securities $185,769 $ 51,422 $237,191
-------- -------- --------
Total marketable securities $185,769 $ 51,422 $237,191
======== ======== ========
June 30, 2003
Equity securities $137,103 $ 43,960 $181,063
-------- -------- --------
Total marketable securities $137,103 $ 43,960 $181,063
======== ======== ========
Proceeds on sales of securities were $1,180,757 and $726,718 for the years
ended June 30, 2004 and 2003, respectively. During fiscal 2004 and 2003,
gross gains of $87,767 and $69,736, respectively, and gross losses of
$44,626 and $23,414, respectively, were realized on these sales. During
2003, the Company evaluated the carrying value of its investments in
marketable equity securities and recorded write-downs for other than
temporary declines in the value of such securities in the amount of
$58,733. Such write-downs are included in investment income on the
accompanying statements of operations. Net unrealized gains (losses) on
marketable securities were $51,422 and $43,960 at June 30, 2004 and 2003,
respectively. During fiscal 2004 and 2003, no income taxes were provided
on the unrealized gains due to the Company's net operating loss.
F-13
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
June 30,
2004 2003
--------- ---------
Furniture $ 208,250 $ 234,020
Equipment 515,510 561,451
Leasehold improvements 20,488 21,993
--------- ---------
744,248 817,464
Less accumulated depreciation (744,248) (673,640)
--------- ---------
$ -- $ 143,824
========= =========
Depreciation expense for the years ended June 30, 2004 and 2003 was
$70,929 and $84,933, respectively. As of June 30, 2004, the Company
recorded a loss on the impairment of furniture and equipment equal to its
net book value of $85,721 as of that date due to the uncertainties
described in Note 1.
NOTE 6 - INCOME TAXES
Temporary differences which give rise to deferred taxes are summarized as
follows:
2004 2003
----------- -----------
Deferred tax assets
Net operating loss and other carryforwards $ 3,029,000 $ 2,770,000
Provision for bad debts and impairment of
furniture and equipment 108,000 76,000
Deferred compensation 300 38,000
Deferred rent and other 52,000 52,000
Depreciation 40,000 33,000
----------- -----------
Net deferred tax asset before
valuation allowance 3,229,300 2,969,000
Valuation allowance (3,229,300) (2,969,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The Company has recorded a full valuation allowance to reflect the
estimated amount of deferred tax assets which may not be realized.
F-14
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 6 (continued)
The Company's effective income tax rate differs from the statutory Federal
income tax rate as a result of the following:
2004 2003
--------- ---------
Benefit at statutory rate $(245,719) $(163,034)
State and local benefit, net of Federal tax (39,729) (26,148)
Nondeductible expenses - net 24,176 14,858
Increase in the valuation allowance 261,272 174,324
--------- ---------
$ -- $ --
========= =========
At June 30, 2004, the Company had a net operating loss carryforward for
Federal income tax reporting purposes amounting to approximately
$7,594,000, expiring from 2012 through 2024. Additionally, the Company has
a net capital loss carryforward for Federal income tax reporting purposes
at June 30, 2004 of approximately $319,400 which expires from 2006 through
2009. No income taxes were paid in the years ended June 30, 2004 and 2003.
Under current tax law, the utilization of net operating losses will be
restricted if significant changes in the Company's ownership were to
occur. In addition, their use is limited to future earnings of the
Company.
NOTE 7 - STOCKHOLDERS' EQUITY
a. Capitalization
On December 22, 2003, the Company effected a 6-for-1 forward stock
split. All references to number of shares and per share data in the
consolidated financial statements and accompanying notes have been
restated. The par value of the common stock remained unchanged at
$.001 per share.
b. Preferred Stock
The Company's board of directors has authorized 5,000,000 shares of
$.001 par value preferred stock.
F-15
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 7 (continued)
c. Series A Exchangeable Preferred Stock
On February 15, 2000, the Company issued 1,850 shares of its Series
A Exchangeable Preferred Stock for an aggregate purchase price of
$1,850,000. On April 5, 2001, pursuant to approval by the board of
directors, the Company redeemed all of its Series A Exchangeable
Preferred Stock at par value. There were 1,800 shares outstanding
before the redemption and the Company paid $1,800,000 to redeem
these shares.
In connection with the sale of the Series A Exchangeable Preferred
Stock, the Company issued warrants to the preferred holders to
purchase an aggregate of 112,500 shares of common stock at a price
per share of $5.26. The warrants expire on August 15, 2005.
d. Equity Line of Credit
On February 16, 2000, the Company entered into an Equity Line of
Credit Agreement (the "Agreement") with Moldbury Holdings Limited.
Under this Agreement, the Company had the right, until February 15,
2003, to require that Moldbury Holdings Limited purchase between
$500,000 and $7,000,000 of the Company's common stock subject to
certain limitations. The Company did not make any draw downs under
the Agreement.
In connection with the Agreement, the Company issued a warrant to
Moldbury Holdings Limited to purchase 90,000 shares of common stock
at a price per share of $4.67. The warrants expired on August 16,
2003.
e. Private Placements
On May 10, 2000, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") with ISO Investment Holdings, Inc.
("ISO"), whereby the Company issued 1,285,140 common shares, par
value $.001 per share, to ISO at a price of $3.1125 per share or
$4,000,000. In connection therewith, the Company issued a warrant to
ISO to purchase 360,000 common shares at an exercise price of $4.045
per share, exercisable on or after May 10, 2000 and expiring on
August 15, 2005. The exercise price and number of warrant shares are
subject to adjustment in certain circumstances (stock split,
dilutive issuances at less than market price, etc.).
F-16
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 7 (continued)
Pursuant to the Stock Purchase Agreement, ISO has the right to
designate one individual to be nominated as a member of the
Company's board of directors. Additionally, under certain
circumstances, ISO is entitled to purchase, upon the same terms,
such number of securities to enable it to retain its fully diluted
ownership position in the Company that it held immediately prior to
a proposed issuance, sale or exchange of the Company's equity
securities.
Pursuant to the Stock Purchase Agreement, ISO has one demand
registration right commencing May 10, 2002 and unlimited incidental
registration rights commencing immediately. In the case of a demand
for registration by ISO, the Company shall not be required to file
any such registration statement unless the anticipated aggregate
gross offering price is at least $2,000,000. The registration rights
granted under the Stock Purchase Agreement terminated on May 10,
2004.
On August 11, 2000, the Company entered into an advertising
agreement with American Lawyer Media, Inc. ("ALM"), whereby the
Company issued 368,844 fully vested, nonforfeitable common shares
with a market value of $770,000 to ALM in exchange for $1 million of
advertising and promotional opportunities over a two-year term. The
number of shares issued by the Company was calculated based on the
average per share closing price of the common stock for the five
trading days prior to August 11, 2000. The Company initially
recorded $770,000 as prepaid advertising. Such amount was expensed
as the advertising occurred. During the years ended June 30, 2004
and 2003, the Company expensed $0 and $18,285, respectively, of
advertising costs related to this transaction (see Note 9(c)).
f. Treasury Stock
On March 12, 2004, the Company extended its March 1998 purchase plan
(the "Purchase Plan"), pursuant to which the number of shares of
common stock of the Company eligible for purchase under the Purchase
Plan remained at an aggregate of 1,600,002 shares. The Purchase Plan
shall expire on the earlier of all of the shares being purchased or
March 12, 2005, provided, however, that the Purchase Plan may be
discontinued at any time by the Company. The Plan may also be
extended on a year-to-year basis. There were no purchases during the
years ended June 30, 2004 and 2003. As of June 30, 2004, the Company
had purchased an aggregate of 252,498 shares under the Purchase Plan
for a total cost of $83,918.
F-17
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 7 (continued)
g. Stock Option Plan
The Company has an Incentive and Nonqualified Stock Option Plan (the
"Plan") for employees, officers, directors, consultants and advisors
of the Company, pursuant to which the Company may grant options to
purchase up to 6,000,000 shares of the Company's common stock. On
December 12, 2003, the Plan was amended to increase the number of
shares of common stock available for grant to 7,500,000 shares. The
Plan is administered by the board of directors, which has the
authority to designate the number of shares to be covered by each
award and the vesting schedule of such award, among other terms. The
option period during which an option may be exercised shall not
exceed ten years from the date of grant and will be subject to such
other terms and conditions of the Plan. Unless the board of
directors provides otherwise, option awards terminate when a
participant's employment or services end, except that a participant
may exercise an option to the extent that it was exercisable on the
date of termination for a period of time thereafter. The Plan will
terminate automatically on April 1, 2006.
Directors who are not officers of the Company receive annually, on
the last trading day of June, stock options for 5,000 shares at an
exercise price equal to the fair market value of the stock on the
date of grant. In December 2002, the Plan was amended to increase
the number of options granted to each non-employee director from
options to purchase 5,000 shares to options to purchase 15,000
shares.
The Company's stock option awards granted to employees, directors
and consultants as of and for the years ended June 30, 2004 and 2003
are summarized as follows:
2004 2003
--------------------------- ---------------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
--------- ---------- --------- ----------
Outstanding at beginning of year 5,309,106 $ 0.56 3,825,126 $ 0.93
Awards granted 745,000 $ 0.11 2,175,000 $ 0.05
Awards exercised -- -- --
Awards canceled/forfeited (291,330) $ 0.91 (691,020) $ 0.94
--------- ---------
Outstanding at end of year 5,762,776 $ 0.49 5,309,106 $ 0.56
========= =========
Options exercisable at year-end 4,042,776 $ 0.66 2,549,106 $ 1.07
========= =========
Weighted-average fair value of options
granted during the year $ 0.08 $ 0.03
F-18
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 7 (continued)
The following information applies to options outstanding and
exercisable at June 30, 2004:
Outstanding Exercisable
--------------------------------------- --------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number life in exercise Number exercise
Range of exercise prices outstanding years price exercisable price
------------------------ ----------- --------- --------- ----------- ---------
$ 0.04 - $ 0.11 2,490,000 4.58 $ 0.05 1,200,000 $ 0.05
$ 0.14 - $ 0.23 1,009,990 7.52 $ 0.19 579,990 $ 0.23
$ 0.25 - $ 0.59 862,000 2.72 $ 0.28 862,000 $ 0.28
$ 0.69 - $ 0.81 689,798 4.19 $ 0.72 689,798 $ 0.72
$ 0.84 - $ 2.47 181,002 2.55 $ 1.24 181,002 $ 1.24
$ 2.50 - $ 5.00 529,986 4.12 $ 2.88 529,986 $ 2.88
--------- ---------
5,762,776 4,042,776
========= =========
Stock option awards are granted at prices equal to or above the
closing bid price on the date of grant. For the years ended June 30,
2004 and 2003, 230,000 and 100,000 options, respectively, were
granted at 10% above the closing bid prices of $0.14 and $0.04,
respectively, on the dates of grant. As of June 30, 2004, 1,665,224
shares were available for granting of options under the Plan.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for 2004 and 2003,
respectively: a dividend yield of zero for both years; a risk-free
interest rate of 2.82% in 2004 and 1.94% in 2003; an expected term
of 2.90 years in 2004 and 2.97 years in 2003; an expected stock
price volatility of 150.06% in 2004 and 125.27% in 2003; and a
forfeiture rate of 15% in 2004 and 2003, respectively.
h. Stock Warrants
In April 2000, the Company entered into an agreement with a
financial public relations firm whereby the Company granted warrants
to purchase 20,000 shares of the Company's common stock. The
warrants vested the earlier of six months from date of grant or upon
termination of the agreement and were issued at a 25% premium to the
market price of the common stock as of the date of grant. Once
vested, the warrants were immediately exercisable. The warrants
expire April 11, 2005. In August 2000, the Company terminated the
agreement and no additional warrants in excess of the 20,000
warrants were granted.
F-19
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 7 (continued)
i. Common Stock Reserved
At June 30, 2004, the Company has reserved for issuance 7,920,500
shares of its common stock issuable pursuant to the Company's stock
option plan and the exercise of warrants issued to consultants and
investors.
NOTE 8 - TRANSACTIONS WITH RELATED PARTIES
Certain members of the board of directors perform services as hearing
officers for the benefit of the Company. The related expenditures for
these services for the years ended June 30, 2004 and 2003 were $38,050 and
$37,525, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
a. Leases
As of June 30, 2004, the Company has lease agreements for equipment
and office space. The minimum lease payments under noncancelable
leases as of June 30, 2004, net of sublease rentals, are as follows:
2005 $236,000
2006 58,300
2007 51,800
2008 48,200
2009 49,600
Thereafter 12,500
--------
$456,400
========
During fiscal year 2003, the Company entered into a sublease
agreement for the period from March 2003 through June 2005 with
sublease rentals of approximately $73,900 per annum. Rent expense
amounted to $211,429 and $261,382 for the years ended June 30, 2004
and 2003, respectively, net of sublease income of $73,542 and
$24,536 for the years ended June 30, 2004 and 2003, respectively.
F-20
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 9 (continued)
During fiscal year 2004, the Company entered into an agreement to
lease principally conference room facilities in Brooklyn, New York.
The lease is to commence after leasehold improvements have been
completed which is estimated to be on or about December 1, 2004. The
Company is responsible to pay for a portion of the leasehold
improvements based on the space occupied. Such amount is estimated
to approximate $12,000.
b. Employment/Consulting Agreements
In March 2002, the Company entered into an employment agreement with
its Chief Executive Officer effective as of July 1, 2002 as the
prior agreement expired June 30, 2002. The agreement expires June
30, 2007 and provides for an annual base salary of $301,100, an
annual cost of living increase of the greater of 6% per annum or the
increase in the Urban Consumer Price Index and an annual bonus based
on the achievement of specified criteria with respect to Company
revenues, cash flow and/or pretax income (loss). If this agreement
is terminated other than for cause or as a result of a change in
duties of the executive, the officer will be entitled to the greater
of (i) his then current base salary and severance bonus for the
remainder of the employment term or (ii) three times his then
current base salary and severance bonus, to be paid over a one-year
period. The severance bonus is 115% of the bonus paid for the full
fiscal year immediately prior to termination. In addition, all
unvested options shall immediately vest. If this agreement is
terminated due to a change in control, the officer will be entitled
to the same severance package as previously described but to be paid
in one lump sum.
In January 1997, the Company entered into an employment agreement
with its Chief Financial Officer effective as of February 3, 1997.
The agreement automatically renews for one-year terms as of January
1 of each year unless terminated at least 45 days prior to the end
of an employment term by either party. If the agreement is
terminated without cause, the officer shall receive a payment of
severance of an amount equal to six months of the base salary in
effect at such time. If calculated as of June 30, 2004, the
severance would approximate $77,500.
F-21
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 9 (continued)
In August 2003, the Company hired an Executive Vice President of
Sales (the "EVP"). In connection therewith, the Company entered into
an employment agreement with the EVP effective as of September 8,
2003. The agreement provides for an annual base salary of $175,000,
an annual bonus based on the achievement of specified criteria with
respect to the Company's revenues and options to purchase 240,000
shares of common stock with an exercise price equal to the closing
bid price on the first day of employment. The options vest over two
years. If this agreement is terminated other than for cause on or
before September 7, 2004, the EVP will be entitled to the greater of
(i) base salary through September 7, 2004 or (ii) four weeks' base
salary. If this agreement is terminated other than for cause after
September 7, 2004, the EVP will be entitled to four weeks' base
salary.
The Company has also entered into an employment arrangement with a
regional office manager that provides for additional compensation
based on the profits of the manager's operation.
c. Advertising
In accordance with the terms of the August 2000 advertising
agreement, as amended, with ALM (see Note 7(e)), the Company will
purchase $250,000 of advertising subsequent to the initial two-year
term. During the years ended June 30, 2004 and 2003, the Company
incurred $151,311 and $22,835, respectively, of advertising expense
related to this commitment. The remaining commitment of $75,854 is
to be expended by December 31, 2004.
d. Litigation
The Company is a party to legal matters arising in the general
conduct of business. The ultimate outcome of such matters is not
expected to have a material adverse effect on the Company's results
of operations or financial position.
NOTE 10 - EMPLOYEE RETIREMENT PLAN
The Company has a 401(k) savings and retirement plan, whereby eligible
employees may contribute up to 98% of their salaries subject to the
maximum allowed under the Internal Revenue Code. Commencing in March 2004,
the Company contributed 25% of each employee's contribution up to a
maximum contribution by the employee of 12%, not to exceed 3% of the
employee's compensation. Such amount was $9,885 and $0 in fiscal years
2004 and 2003, respectively.
F-22
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 11 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 2004 and 2003, the Company's financial instruments included
cash and cash equivalents, certificates of deposit, marketable securities,
receivables and accounts payable. The fair values of cash and cash
equivalents, certificates of deposit, receivables and accounts payable
approximated carrying values because of the short-term nature of these
instruments. The estimated fair values of marketable securities are
determined based on quoted market prices.
NOTE 12 - CREDIT CONCENTRATIONS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, certificates of deposit, marketable securities and accounts
receivable.
The Company's cash and cash equivalents at North Fork Bank consist
primarily of demand deposits and a money market fund. At June 30, 2004,
the amount in excess of Federally insured limits was $60,381.
Additionally, the Company maintains other money market accounts,
certificates of deposit and its equity securities at Merrill Lynch,
Pierce, Fenner & Smith Inc. and Ameritrade Inc. Such institutions insure
these balances against their financial failure. Additionally, SIPC (The
Securities Investor Protection Corporation) protects securities in the
account up to $500,000.
The Company sells it services principally to insurance companies and law
firms. In fiscal years 2004 and 2003, no customer exceeded 10% of net
revenues. The Company monitors exposure to credit losses and maintains
allowances for anticipated losses considered necessary under the
circumstances.
NOTE 13 - NASDAQ LISTING
On September 25, 2002, the Company received a letter from The Nasdaq
SmallCap Market that its common stock had failed to maintain a minimum
market value of publicly held shares of $1,000,000. As a result, the
Company had been provided 90 calendar days, or until December 24, 2002, to
regain compliance. The Company was not able to regain compliance.
Additionally, on November 6, 2002, the Company received a letter from The
Nasdaq SmallCap Market that its common stock had failed to maintain a
minimum bid price of $1.00 over the previous 30 consecutive trading days.
As a result, the Company had been provided 180 calendar days, or until May
5, 2003, to regain compliance. Additionally, on December 23, 2002, the
Company received a Nasdaq Staff Determination indicating that the Company
failed to comply with the minimum $2,500,000 stockholders' equity
requirement for continued listing set forth in Marketplace Rule
4310(c)(2)(B), and that its securities were, therefore,
F-23
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2004 and 2003
NOTE 13 (continued)
subject to delisting from The Nasdaq SmallCap Market. The Company met with
The Nasdaq Listing Qualifications Panel on January 30, 2003 to consider
its request for continued listing of the Company's common stock on The
Nasdaq SmallCap Market. On March 5, 2003, The Nasdaq Listing
Qualifications Panel delisted the Company's securities from The Nasdaq
SmallCap Market. Since that date, the Company's common stock has been
listed on the OTC Bulletin Board.
NOTE 14 - SUBSEQUENT EVENT
The Board of Directors is negotiating the terms of an asset purchase
agreement with the present Chief Executive Officer of the Company, whereby
he, or companies owned by him, would assume the assets and liabilities of
the ADR business of the Company and its future commitments. The Company
would retain a minimum of $200,000 in cash in order to effect a merger or
a similar transaction with the intent to acquire a different operating
business. The cash that is to remain in the Company is to be reduced by
costs directly associated with the asset purchase including, but not
limited to, legal costs, accounting fees, the cost of obtaining a fairness
opinion and proxy solicitation. The completion of the transaction is
subject to the execution of a definitive asset purchase agreement, the
receipt of an opinion from an unrelated third party approved by the Board
of Directors stating that the transaction is fair, from a financial point
of view, to the unaffiliated shareholders of the Company, and shareholder
approval. There can be no assurance that the transaction will occur (see
Note 1).
F-24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of all
directors and executive officers. A summary of the background and experience of
each of these individuals is set forth after the table.
Name Age Position
---- --- --------
Roy Israel 44 Chief Executive Officer, President and
Chairman of the Board of Directors
Kenneth G. Geraghty 53 Director, Audit Committee Member
Randy Gerstenblatt 45 Director
Corey J. Gottlieb 41 Director, Audit Committee Member
Anthony J. Mercorella 77 Director, Compensation Committee Member
Robert M. Silverson, Jr. 61 Director, Audit Committee and Compensation
Committee Member
Willem F. Specht 43 Vice President, Director of Information
Technology and Director
Patricia Giuliani-Rheaume 46 Vice President, Chief Financial Officer and
Treasurer
ROY ISRAEL has been our Chairman of the Board of Directors, Chief
Executive Officer, and President since February 1994. Immediately prior to
holding such positions, Mr. Israel was President, Director, and founder of
National Arbitration & Mediation, Inc. ("NA&M"), a wholly-owned subsidiary of
the Company until merged with the Company in June 1999.
PATRICIA GIULIANI-RHEAUME has been our Vice President, Chief
Financial Officer, and Treasurer since February 1997. Immediately prior to
holding such positions, Ms. Giuliani-Rheaume was the Vice President and
Corporate Controller of The Robert Plan Corporation, an insurance services
company, since April 1991. Prior thereto, Ms. Giuliani-Rheaume was an audit
senior manager with KPMG Peat Marwick LLP. Ms. Giuliani-Rheaume is a certified
public accountant and a member of the AICPA and the New York State Society of
CPAs.
WILLEM F. SPECHT has been our Director of Information Technology
since May 1998 and previously held the position of Systems Analyst with us since
April 1995.
KENNETH G. GERAGHTY has been the Executive Vice President and Chief
Financial Officer of Insurance Services Office, Inc. since February 2000. From
March 1999 through January 2000, Mr. Geraghty was the Executive Vice President
and Chief Administrative Officer of Dycom Industries, Inc., a company which
provides engineering, construction and maintenance services to
telecommunications providers. Prior to holding
21
this position, Mr. Geraghty was the Senior Vice President, Strategic Finance of
Massachusetts Mutual Life Insurance Company from December 1997 through March
1999. From October 1995 through May 1997, Mr. Geraghty was the Vice President,
Change Management for American Express Company. Mr. Geraghty holds BS and MS
degrees in Chemical Engineering and a MBA degree in Finance.
RANDY GERSTENBLATT is currently the Senior Vice President of
ESPN/ABC Sports Customer Marketing and Sales. Prior to holding this position,
Mr. Gerstenblatt was Vice President of ESPN Customer Marketing and Sales from
January 2000 through October 2000. From November 1997 through January 2000, Mr.
Gerstenblatt was the Director of Integrated Sales and Marketing at ESPN. From
1991 through November 1997, he was the Director of Group Station Sales at ABC
National Television Sales.
COREY J. GOTTLIEB is the President/CEO of Targeted Media Partners
LTD, a sales, marketing and consulting company for established and start-up
ventures in the commercial advertising sector. From January 1998 through August
2001, Mr. Gottlieb was the Senior Vice President & National Sales Manager for
Transportation Displays Incorporated (TDI). Prior to holding this position, Mr.
Gottlieb was Senior Vice President & National Sales Manager for Paramount
Pictures Domestic Television Group for seven years and the first Senior Vice
President of Sales for the UPN television network. Mr. Gottlieb holds a BS
degree in Finance and a minor in Computer Science.
ANTHONY J. MERCORELLA, Esq. is a senior partner of the law firm of
Wilson, Elser, Moskowitz, Edelman & Dicker and has been a partner with such firm
since 1984, which he joined upon his retirement as a Justice of the Supreme
Court of the State of New York. Judge Mercorella currently serves as an
independent hearing officer for us.
ROBERT M. SILVERSON, JR., Esq. is a principal in the law firm of
Silverson, Pareres & Lombardi LLP and has been a principal with such firm since
founding it in 1992. Judge Silverson previously served as a Judge of the Civil
Court of the City of New York. Judge Silverson currently serves as an
independent hearing officer for us.
Audit Committee
Under the definition of "independence" as set forth in NASDAQ Marketplace
Rule 4350, we do not have a fully independent audit committee. As our common
stock is traded via the Over-the-Counter Bulletin Board and is not listed on or
with a national securities exchange or national securities association, we are
not required to have a fully independent audit committee. In addition, Kenneth
G. Geraghty, a member of the Audit Committee, has been designated as our audit
committee financial expert. Mr. Geraghty is an executive officer of a company
that is an affiliate of a holder of 16% of our stock and, as such, Mr. Geraghty
may be considered an affiliate of our company and thereby deemed not to be
independent. Mr. Geraghty disclaims beneficial ownership of such stock and the
Board of Directors concluded that they believe Mr. Geraghty to be independent.
Code of Ethics
We have adopted a Code of Ethics for our Senior Financial Officers as well
as a Code of Business Conduct and Ethics for all of our employees. We shall,
without charge, provide to any person, upon request, a copy of our Code of
Ethics for our Senior Financial Officers. All such requests should be mailed to:
clickNsettle.com, Inc., 1010 Northern Blvd, Suite 336, Great Neck, NY 11021,
attention: Patricia Giuliani-Rheaume, VP & CFO.
As required by SEC rules, we will report within five business days the
nature of any change or waiver of our Code of Ethics for our Senior Financial
Officers.
Nominating Committee
As we are not required by federal securities laws to have a separate
Nominating Committee, the entire Board is responsible for this function.
22
Compensation Committee
We have established a Compensation Committee, the members of which meet
the criteria for "independence" according to the standard set by NASDAQ for such
committee members.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following summarizes the aggregate compensation paid during
fiscal year 2004 to our Chief Executive Officer and any officer who earned more
than $100,000 in salary and bonus (the "Named Persons"):
Summary Compensation Table
Annual Long Term
Compensation Compensation
------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options(1) Compensation
------------------ ---- --------- --------- ------------ ----------- ------------
Roy Israel,
President, Chief 2004 $ 321,631 -- $ 22,907(2) 230,000(3) $ 14,110(4)
Executive Officer
and Chairman of the 2003 $ 302,288 $ 90,330 $ 22,196(2) 1,200,000 $ 14,110(4)
Board
2002 $ 284,065 -- $ 24,066(2) 900,000 $ 14,110(4)
Patricia Giuliani-
Rheaume, Vice 2004 $ 153,248 -- -- 70,000(3) $ 2,400(4)
President, Chief
Financial Officer 2003 $ 147,615 -- -- 450,000 $ 2,400(4)
and Treasurer
2002 $ 142,019 -- -- 210,000 $ 2,400(4)
Willem F. Specht,
Vice President, 2004 $ 126,226 -- -- 70,000(3) --
Director of
Information 2003 $ 106,250 -- -- 450,000 --
Technology and
Director 2002 $ 100,192 -- -- 210,000 --
Alan Littman,
Executive Vice 2004 $ 143,365 -- -- 260,000(3) --
President(5)
(1) Such option amounts have been restated to reflect the 1-for-3 reverse
stock split of our common stock effectuated on August 20, 2001 and the
6-for-1 forward stock split of our common stock effectuated on December
22, 2003.
(2) Such amount represents tax gross ups for Mr. Israel for medical, life and
disability payments.
(3) Such figure is also reflected in the table for Options Granted in Last
Fiscal Year.
(4) Such amount represents premium payments on life insurance policies for the
named executive officer.
(5) Mr. Littman was an executive officer during his employment with the
Company from September 8, 2003 through September 20, 2004.
23
Options Granted in Last Fiscal Year
Number of Securities Percent of Total Exercise Market Price
Name and Underlying Granted to Employees in or Base on Date of
Principal Position Options Granted Fiscal Year Price Grant Expiration Date
------------------ --------------- ----------- ----- ----- ---------------
Roy Israel,
President, Chief Executive
Officer and Chairman of the
Board 230,000 30.9% $0.154 $ 0.14 6/4/09
Patricia
Giuliani-Rheaume,
Vice President, Chief
Financial Officer
And Treasurer 70,000 9.4% $ 0.14 $ 0.14 6/4/14
Willem F. Specht,
Vice President, Director of
Information Technology and
Director 70,000 9.4% $ 0.14 $ 0.14 6/4/14
Alan Littman,
Executive Vice President 260,000 34.9% (1) (2) (3)
(1) 240,000 options are exercisable at a price of $0.058 per share and 20,000
options at a price of $0.14 per share.
(2) The market price on the date of grant for the 240,000 options priced at
$0.058 is $0.058 and the market price on the date of grant for the 20,000
options priced at $0.14 is $0.14.
(3) The expiration date for the 240,000 options priced at $0.058 is 9/8/13 and
the expiration date for the 20,000 options priced at $0.14 is 6/4/14.
Employment Contracts and Termination of Employment and Change In Control
Arrangements
Roy Israel. In March 2002, we entered into an employment agreement with
Mr. Israel effective as of July 1, 2002. Per the agreement, Mr. Israel's current
annual base salary is $338,316. However, in an effort to reduce expenses, as of
July 14, 2004, Mr. Israel voluntarily reduced his salary by 15% to $287,569.
Pursuant to the agreement, he is entitled to an annual base salary increase
equal to the greater of 6% or an amount which reflects the increase in the Urban
Consumer Price Index, and an annual bonus based on the achievement of specified
criteria with respect to revenues, cash flow and/or pretax income (loss). For
the fiscal year ended June 30, 2004, Mr. Israel did not receive a bonus. In
addition, the agreement provides, among other things, that we shall pay up to an
aggregate of $15,000 per policy year for a key man life insurance policy in
favor of us for $1,000,000 and life insurance in favor of the estate of Mr.
Israel, a disability policy for coverage of 60% of his base salary (before the
voluntary reduction), and an allowance for leasing an automobile (up to a
monthly lease payment of $1,000.) If this agreement is terminated other than for
cause or as a result of a change in duties, Mr. Israel will be entitled to the
greater of (i) his then current base salary (before the voluntary reduction) and
severance bonus for the remainder of the employment term or (ii) three times his
then current base salary (before the voluntary reduction) and severance bonus,
to be paid over a one-year period. The severance bonus is 115% of the bonus paid
for the full fiscal year immediately prior to termination. In addition, all
unvested options shall immediately vest. If this agreement is terminated due to
a change in control, Mr. Israel will be entitled to the same severance package
as previously described but to be paid in one lump sum. Mr. Israel's employment
agreement with us expires June 30, 2007 and automatically renews for one-year
terms unless terminated at least 90 days prior to the end of an employment term
by either party. If we give notice of non-renewal of the agreement or we do not
enter into a new employment agreement with Mr. Israel, he is entitled to receive
one year of his base salary (before the voluntary reduction) plus the severance
bonus amount which shall be paid to Mr. Israel during the one-year period
following the end of the employment term. The agreement also contains a one-year
non-competition clause if the agreement is terminated or upon expiration. In the
event of a breach of the agreement by us, the non-competition clause is null and
void.
Alan Littman. In August 2003, we entered into an employment agreement with
Mr. Littman effective as of September 8, 2003. The agreement provides for an
annual base salary of $175,000, an annual bonus based on the achievement of
specified criteria with respect to the Company's revenues and a one-time grant
of options to
24
purchase 240,000 shares of common stock (as restated to reflect the 6-for-1
forward stock split of our common shares effectuated on December 22, 2003) with
an exercise price equal to the closing bid price on the first day of employment.
The options vest over two years. However, as of July 14, 2004, in an effort to
reduce expenses, Mr. Littman voluntarily reduced his salary by 15% to $148,750.
In addition, the agreement provides, among other things, that Mr. Littman shall
be entitled to participate in the Company's benefits programs and shall be
entitled to a $1,000 a month allowance for leasing an automobile. The agreement
also contains a one-year non-competition clause if the agreement is terminated
for any reason or upon expiration. As of September 20, 2004, upon mutual
agreement, Mr. Littman ceased employment with us and the Company may elect to
pay him four weeks of base salary.
Patricia Giuliani-Rheaume. Ms. Giuliani-Rheaume's employment agreement
with us currently expires December 31, 2004. It automatically renews for
one-year terms unless terminated at least 45 days prior to the end of an
employment term by either party. Pursuant to this agreement, her annual base
salary is $155,000, and she is eligible for an annual bonus at the discretion of
the Company's Chief Executive Officer, subject to the approval of the
Compensation Committee of the Board of Directors. However, as of July 14, 2004,
in an effort to reduce expenses, Ms. Giuliani-Rheaume voluntarily reduced her
salary by 15% to $131,750. In addition, the agreement provides, among other
things, that we shall pay for a life insurance policy of $250,000, full family
health insurance, and a $400 a month allowance for leasing an automobile. The
agreement also contains a one-year non-competition clause if the agreement is
terminated for any reason or upon expiration. If the agreement is terminated
without cause, Ms. Giuliani-Rheaume shall receive a payment of severance of an
amount equal to six months of the base salary in effect at such time.
Willem Specht. Mr. Specht's agreement contains a one-year non-competition
clause if his employment is terminated for any reason. His salary and bonus are
set at the discretion of the Chief Executive Officer, subject to the approval of
the Compensation Committee of the Board of Directors. Mr. Specht's annual base
salary is $131,250. However, as of July 14, 2004, in an effort to reduce
expenses, Mr. Specht voluntarily reduced his salary by 15% to $111,563. Mr.
Specht's employment is terminable at will.
25
ITEM 11: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of September 15, 2004, certain
information with respect to the beneficial ownership of each class of our voting
equity securities by each director and director nominee, beneficial owners of 5%
or more of our common stock, the Named Persons and all our directors and
executive officers as a group:(1)
Amount and Nature of
Name of Beneficial Owner(2) Beneficial Ownership(3) Percent of Total
----------------------------------------------- ----------------------- ----------------
Roy Israel (4) 4,599,278 43.2%
President, Chief Executive Officer and Chairman
of the Board
Anthony J. Mercorella(5) 52,998 *
Director
Robert M. Silverson, Jr. (6) 41,000 *
Director
Willem F. Specht (7) 561,000 6.2%
Vice President, Director of Information
Technology and Director
Corey J. Gottlieb (8) 54,998 *
Director
Randy Gerstenblatt (9) 35,396 *
Director
Kenneth G. Geraghty (10)(13) 1,712,464 19.4%
Director
Patricia A. Giuliani-Rheaume (11)
Vice President, Chief Financial Officer and 661,800 7.3%
Treasurer
Alan Littman, Executive Vice President (12) 120,000 1.4%
ISO Investment Holdings, Inc. (13) 1,682,464 19.1%
M. D. Sabbah (14) 585,000 6.9%
All Officers, Directors and Director 7,838,934 62.6%
Nominees as a Group
(9 persons) (4)(5)(6)(7)(8)(9)(10)(11)(12)
----------
* Less than one percent (1%).
26
(1) Applicable percentage of ownership is based on 8,449,056 shares of
our common stock, which were outstanding on September 15, 2004,
plus, for each person or group, any securities that person or group
has the right to acquire within sixty (60) days pursuant to options
and warrants.
(2) The address for each beneficial owner is c/o clickNsettle.com, Inc.,
1010 Northern Boulevard, Suite 336, Great Neck, New York 11021.
(3) Beneficial ownership has been determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended, and
unless otherwise indicated, represents shares for which the
beneficial owner has sole voting and investment power. The
percentage of class is calculated in accordance with Rule 13d-3.
(4) Includes options to purchase 2,078,000 shares of our common stock
that are vested and are exercisable or will vest and become
exercisable within 60 days from the date hereof. Also includes
123,806 shares owned by Mr. Israel's wife, Carla Israel, the
Secretary of our company, and options to purchase 111,000 shares of
our common stock that are vested and are exercisable. Mr. Israel
disclaims beneficial ownership as to such securities.
(5) Includes options to purchase 51,000 shares of our common stock,
which are vested and exercisable.
(6) Includes options to purchase 41,000 shares of our common stock,
which are vested and exercisable.
(7) Includes options to purchase 561,000 shares of our common stock,
which are vested and exercisable or will vest and become exercisable
within 60 days from the date hereof.
(8) Includes options to purchase 35,000 shares of our common stock,
which are vested and exercisable.
(9) Includes options to purchase 35,000 shares of our common stock,
which are vested and exercisable.
(10) Includes warrants to purchase 360,000 shares of our common stock and
options to purchase 30,000 shares of our common stock, both of which
are vested and exercisable. The common shares and warrants are owned
by ISO Investment Holdings, Inc. Mr. Geraghty disclaims beneficial
ownership of these securities.
(11) Includes options to purchase 661,800 shares of our common stock,
which are vested and exercisable or will vest and become exercisable
within 60 days from the date hereof.
(12) Includes options to purchase 120,000 shares of our common stock,
which are vested and exercisable or will vest and become exercisable
within 60 days from the date hereof. As of September 20, 2004, by
mutual agreement, Mr. Littman ceased employment with the Company.
(13) Includes warrants to purchase 360,000 shares of our common stock,
which are vested and exercisable.
(14) This information was taken from an Amendment to Form 13D filed by
M.D. Sabbah on June 2, 2000. We are not aware of any subsequent
filings with the SEC after this date.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since our inception, there have not been any material transactions between
us and any of our officers and directors, except as set forth herein. Judge
Mercorella and Judge Silverson currently serve as independent hearing officers
for us through their respective law firms. Carla Israel, our Sales Supervisor
and Secretary of the Company, is the wife of Roy Israel, our president and chief
executive officer. Her compensation for the year ended June 30, 2004 was
$60,554. She also received a car allowance (including insurance) of $9,176 for
the year ended June 30, 2004.
27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit
Number Description of Document
------- -----------------------
3.1(a) Certificate of Incorporation, as amended (1)
3.1(b) Certificate of Designation of Series A Exchangeable Preferred Stock
(5)
3.1(c) Certificate of Correction of Certificate of Designation of Series A
Exchangeable Preferred Stock (6)
3.1(d) Certificate of Amendment of Certificate of Incorporation (8)
3.1(e) Certificate of Amendment of Certificate of Incorporation, as amended
(11)
3.1(f) Certificate of Amendment of Certificate of Incorporation, second
amendment (14)
3.2 By-Laws of the Company, as amended (3)
4.1 Stock Purchase Agreement dated May 10, 2000 (7)
4.2 Stock Purchase Warrant dated May 10, 2000 (7)
4.3 Exchangeable Preferred Stock and Warrants Purchase Agreement (5)
10.1 1996 Stock Option Plan, amended and restated (3)
10.2 Employment Agreement between Company and Roy Israel effective July
1, 2002 (12)
10.5 Employment Agreement between Company and Patricia Giuliani-Rheaume
(2)
10.7 Lease Agreement for Great Neck, New York facility (1)
10.7.1 Amendment to Lease Agreement for Great Neck, New York facility (4)
10.7.2 Second Amendment to Lease Agreement for Great Neck, New York
facility (10)
10.14 Advertising Agreement dated August 11, 2000 (9)
10.14.1 Amendment to Advertising Agreement dated August 11, 2000 (13)
10.14.2 Second Amendment to Advertising Agreement dated August 11, 2000 (14)
10.14.3 Third Amendment to Advertising Agreement dated August 11, 2000 **
10.15 Employment Agreement between Company and Alan Littman (13)
11 Consent of Independent Registered Public Accounting Firm**
31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)**
31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)**
32.1 Section 1350 Certification (CEO)**
32.2 Section 1350 Certification (CFO)**
----------
(1) Incorporated herein in its entirety by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-9493, as
filed with the Securities and Exchange Commission on August 2, 1996.
(2) Incorporated herein in its entirety by reference to the Company's
1997 Annual Report on Form 10-KSB.
(3) Incorporated herein in its entirety by reference to the Company's
1998 Annual Report on Form 10-KSB.
(4) Incorporated herein in its entirety by reference to the Company's
1999 Annual Report on Form 10-KSB.
28
(5) Incorporated herein in its entirety by reference to the Company's
SB-2 filed on March 28, 2000.
(6) Incorporated herein in its entirety by reference to the Company's
SB-2A filed on April 21, 2000.
(7) Incorporated herein in its entirety by reference to the Company's
Form 8-K filed on May 17, 2000.
(8) Incorporated herein in its entirety by reference to the Company's
Form 8-K filed on June 21, 2000.
(9) Incorporated herein in its entirety by reference to the Company's
Form 8-K filed on August 24, 2000.
(10) Incorporated herein in its entirety by reference to the Company's
2000 Annual Report on Form 10-KSB.
(11) Incorporated herein in its entirety by reference to the Company's
2001 Annual Report on Form 10-KSB.
(12) Incorporated herein in its entirety by reference to the Company's
2002 Annual Report on Form 10-KSB.
(13) Incorporated herein in its entirety by reference to the Company's
2003 Annual Report on Form 10-KSB.
(14) Incorporated herein in its entirety by reference to the Company's
Quarterly Report for the quarter ended December 31, 2003 on Form
10-QSB.
** Filed herewith.
B. Reports on Form 8-K:
Form 8K was filed on May 17, 2004 by the Company to announce its revenues and
results for the third quarter and nine months ended March 31, 2004.
29
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees billed by our independent
auditors, Grant Thornton, for the fiscal years ended June 30, 2004 and
2003:
FY 2004 FY 2003
------- -------
Audit fees and quarterly reviews $73,860 $59,200
Financial information systems design and implementation fees
All other fees:
Tax return preparation 19,640 19,000
Audit related services 800
Non-audit related services
--------------------
Total Fees $93,500 $79,000
--------------------
The Audit Committee considered and determined that the services
performed for "financial information systems design and implementation
fees" and "all other fees" are compatible with maintaining the
independence of the independent auditors.
Policy on Audit Committee Pre-Approval of Audit and Permissable Non-Audit
Services of Independent Auditor
The Audit Committee is responsible for pre-approving all audit and
permitted non-audit services to be performed for us by our independent
auditor as outlined in its Audit Committee charter. Prior to engagement of
the independent auditor for each year's audit, management or the
independent auditor submits to the Audit Committee for approval an
aggregate request of services expected to be rendered during the year,
which the Audit Committee pre-approves. During the year, circumstances may
arise when it may become necessary to engage the independent auditor for
additional services not contemplated in the original pre-approval. In
those circumstances, the Audit Committee requires specific pre-approval
before engaging the independent auditor. The Audit Committee does not
delegate to management its responsibility to pre-approve services
performed by the independent auditor.
30
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.
clickNsettle.com, Inc.
Date: September 23, 2004 By: /s/ Roy Israel
--------------------------------
Roy Israel, Chairman of the
Board, CEO and President
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.
Date: September 23, 2004 By: /s/ Roy Israel
--------------------------------
Roy Israel, Chairman of the
Board, CEO and President
Date: September 23, 2004 By: /s/ Patricia Giuliani-Rheaume
--------------------------------
Patricia Giuliani-Rheaume, Vice
President, Chief Financial Officer
and Treasurer
Date: September 23, 2004 By: /s/ Kenneth G. Geraghty
--------------------------------
Kenneth G. Geraghty, Director
Date: September 23, 2004 By: /s/ Randy Gerstenblatt
--------------------------------
Randy Gerstenblatt, Director
Date: September 23, 2004 By: /s/ Corey J. Gottlieb
--------------------------------
Corey J. Gottlieb, Director
Date: September 23, 2004 By: /s/ Anthony J. Mercorella
--------------------------------
Anthony J. Mercorella, Director
Date: September 23, 2004 By: /s/ Robert M. Silverson, Jr.
--------------------------------
Robert M. Silverson, Jr., Director
Date: September 23, 2004 By: /s/ Willem F. Specht
--------------------------------
Willem F. Specht, Vice President,
Director of Information Technology
and Director
31