U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
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, 2002
|_| 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 10021
(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 NASDAQ Small Cap Market
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. $3,957,069
The aggregate market value of the voting stock held by non-affiliates per the
closing stock price of September 10, 2002 is $894,319.
As of September 10, 2002, 1,408,176 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. -- Proxy statement to be filed by October 28, 2002
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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.
Our objective is to become the leading global provider of dispute
resolution services by providing services and software/web-enabled tools
designed to enhance and streamline the traditional and often time-consuming and
expensive legal process. We believe we are uniquely positioned to offer
customized solutions built upon our sophisticated technology platform. 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 transactional client base will be charged with growing this book of
business and exploiting our inherent market advantages. Further, certain aspects
of our transactional business that had minimal revenues to date and have minimal
future revenue potential, such as our online, blind bid offering, have been
discontinued at this time. However, we have a patent pending on our automated
dispute resolution processing and oversight system and, dependent upon market
acceptance, we will continue to review the needs of our current and prospective
customers and offer those solutions that we believe will be of most value to our
clients and to our Company. 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) the licensing and/or sale of dispute
resolution-related software; (2) build brand recognition of NAM (the Arbitration
Company) as the premier provider of dispute resolution solutions through our
advertising campaign; (3) attract and retain the services of highly talented,
former top-tier judges and attorneys; and (4) broaden the type and complexity of
the dispute resolution cases we administer.
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We believe that the ADR business is a growing industry based upon (a) the
continuing inability of the public court system to effectively manage its docket
of civil cases; (b) the current economic slowdown together with the recent
string of corporate failures and scandals which creates a fertile environment
for ADR services, particularly oversight applications; (c) the growing
acceptance of ADR as a forum for resolving disputes and (d) the significant cost
savings which can be achieved with ADR's quicker, more efficient dispute
resolution mechanisms as compared to the tremendous expense related to
traditional litigation. We believe our electronic application serves this
audience. 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.
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 1,500 hearing officers worldwide.
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
hearing officers may fashion remedies in accordance with whatever parameters are
agreed to by the parties.
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
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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 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, advisory opinions, mock jury trials and other specialized
dispute resolution programs depending on the parties' particular needs. We also
offer Case Resolution Days. Case Resolution Days are events usually scheduled at
an insurance company client's office in which we arrange for parties to hold
high volume direct settlement meetings without the participation of a hearing
officer. If the individual meetings do not resolve the dispute, we provide a
hearing officer to mediate the dispute if the parties wish to pursue settlement.
Electronic Oversight Applications: In connection with our existing
services, we offer customized oversight applications that provide a new and
efficient method to manage large-scale, high volume ADR programs.
Marketing and Sales
Much of our marketing effort has been concentrated on demonstrating our
software program, designed to streamline and administer ADR initiatives, to our
existing clientele. We believe our web-based program clearly distinguishes our
ADR offering as our online management "toolkit" enables our clients to
accurately assess the value of ADR, which we believe will result in an increase
in case referrals. Further, we have also targeted our marketing efforts towards
commercial and governmental entities, which are well suited to benefit from our
patent-pending, online dispute resolution software that provides 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 3,
2002, we employed 9 Account Executives and 3 Sales Trainees to market our
services. These individuals are salaried employees and are eligible for
additional commissions/incentives based on revenue generated.
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Our President is active in working with our Account Executives. Account
Executives in our regional office first report to a Regional Manager who then
reports to the President. The employment agreement of the Regional Manager of
our Massachusetts office provides for additional compensation based on the
profits of his operation.
The majority of our clients are insurance carriers and law firms. In
fiscal years 2002 and 2001, no customer exceeded 10% of net revenues. We have a
diversified customer base with our revenue distributed among more than 1,700
clients in both fiscal years 2002 and 2001.
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
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 global arbitration and mediation services and extensive
case management tools, is unique. 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 web-enabled dispute
resolution case management and operational system which can summarize and
provide 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.
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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 3, 2002, we employed 34 persons, including two part-time
employees; of these, two were in executive positions, 14 were Sales Managers,
Account Executives and Sales Trainees and the remaining 18 employees support our
operations with respect to information technology, accounting, scheduling,
confirming, billing and other administrative duties. The Company also currently
utilizes the services of two temporary employees who are eligible for long-term
employment.
Hearing Officers
As of September 3, 2002, we maintained relationships with approximately
1,500 hearing officers. We have exclusive agreements with respect to ADR
proceedings with a number of these hearing officers. Such hearing officers
accounted for approximately 64% of the number of in-person cases handled by us
for the year ended June 30, 2002. The balance of non-exclusive hearing officers
makes 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 hearing officers is based on the number of proceedings conducted and the
length of time of such proceedings.
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
We have incurred operating losses each fiscal year of the six-year period
ended June 30, 2002. Going forward, we may continue to incur operating losses
and 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 grow slower than we anticipate, 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.
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 self-insured and employment
initiatives
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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 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
8
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. For our fiscal year ended June 30, 2002, 36% of the number of our
cases were heard by non-exclusive hearing officers. Accordingly, at any time,
these hearing officers 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
630,507 shares or approximately 44.8% of the common stock outstanding based on
1,408,176 shares of common stock outstanding as of June 30, 2002. Of that
number, Mr. Israel beneficially owns 401,713 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:
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
9
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.
We May Have Issues With Our Continued Listing on the Nasdaq SmallCap Market in
the Future
Although our securities are currently quoted on the Nasdaq SmallCap
Market, we cannot assure you that a trading market will be maintained. In
addition, we cannot assure you that we will in the future meet the maintenance
criteria for continued quotation of the securities on the Nasdaq SmallCap
Market. The maintenance criteria for the Nasdaq SmallCap Market include, among
other things:
o $2,000,000 in net tangible assets (to be replaced effective November
1, 2002 by a requirement of $2,500,000 in net stockholders' equity);
or $35,000,000 in market capitalization; or $500,000 Net Income (in
the latest fiscal year or two of the last three fiscal years). As of
June 30, 2002, both our net tangible assets and our net
stockholders' equity were $2,093,006;
o a public float of 500,000 shares with a market value equal to
$1,000,000;
o two market makers;
o a minimum bid price of $1.00 per share of common stock; and
o 300 shareholders (round lot holders).
If we were removed from the Nasdaq SmallCap Market, trading, if any, in
our securities would thereafter have to be conducted in the over-the-counter
market in the so-called "pink sheets" or, if then available, the NASD's OTC
Electronic Bulletin Board. As a result, an investor would find it more difficult
to purchase, dispose of and to obtain accurate quotations as to the value of our
securities.
In addition, if our common stock is delisted from trading on the Nasdaq
SmallCap Market and the trading price of the common stock is less than $5.00 per
share, trading in the common stock would also be 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:
o a requirement that they make an individualized written suitability
determination for the purchaser; and
o 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,
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any equity security not traded on an exchange or quoted on Nasdaq SmallCap 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. We cannot assure
you that our securities will not be delisted or treated as a penny stock.
ITEM 2. DESCRIPTION OF PROPERTIES
We maintain 2 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 in the New York area. The lease expires June 2005.
We also lease 1,320 square feet of space, which lease expires November 2002, for
our North Easton, Massachusetts office. We believe this space is adequate for
our reasonably anticipated future needs.
The aggregate rental expense for all of our offices was $262,633 during
the year ended June 30, 2002.
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 MATERIALS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. Our Common Stock is quoted on the Nasdaq SmallCap Market under the trading
symbol "CLIK" and has been quoted since we commenced public trading on November
18, 1996. Our Warrants, under the trading symbol "CLIKW," were quoted on the
NASD's Over-the-Counter Bulletin Board since February 28, 2001; prior thereto,
they were quoted on the Nasdaq SmallCap Market. On November 13, 2001, the
Warrants expired. 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 Warrants
High Low High Low
---------------------------------
Fiscal Year 2002:
First quarter (07/1/01-9/30/01) $ 3.27 $ 0.90 $ 0.02 $ 0.01
Second quarter (10/01/01-12/31/01) 2.75 0.65 0.01 0.00
Third quarter (01/01/02/-03/31/02) 2.64 0.78 N/A N/A
Fourth quarter (04/01/02-06/30/02) 1.53 1.11 N/A N/A
Fiscal Year 2001:
First quarter (07/1/00-9/30/00) $15.38 $ 8.25 $ 1.19 $ 0.41
Second quarter (10/01/00-12/31/00) 8.44 1.88 0.63 0.03
Third quarter (01/01/01-03/31/01) 3.38 1.78 0.03 0.03
Fourth quarter (04/01/01-06/30/01) 2.63 0.90 0.02 0.01
On August 20, 2001, we effectuated a 1-for-3 reverse stock split of our
common stock. All common stock prices above have been restated to reflect the
reverse stock split. The above redeemable warrants have not been restated as the
terms of exercise were instead adjusted. On September 10, 2002, the closing bid
price for our common stock, as reported by the Nasdaq Small Cap Market, was
$1.15.
As of September 6, 2002, there were approximately 500 holders of our
common stock.
Nasdaq amended one of its standards for continued listing on the SmallCap
Market from requiring a minimum of $2,000,000 in net tangible assets to a
minimum of $2,500,000 of net equity. As of June 30, 2002, both the Company's net
tangible assets and its net equity were $2,093,006. The Company's net equity is
below the new minimum standard that goes into effect in November 2002 and,
therefore, the Company may have its common stock delisted from the Nasdaq
SmallCap Market when and if such noncompliance were to occur.
We have not paid, nor do we contemplate or anticipate paying, any
dividends upon our common stock in the foreseeable future. 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.
The Series A Exchangeable Preferred Stock had accrued dividends at a rate
of 4% annually. On April 5, 2001, we redeemed all of the outstanding preferred
stock at par value. The
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4% accrued dividend, aggregating $82,517, was eliminated retroactively,
resulting in no payment of dividends from the date of issuance of the preferred
shares.
B. In November 1996, we raised additional capital through an initial public
offering of our securities. Net proceeds after offering expenses approximated
$4,700,000 of which $3,862,000 had been utilized through June 30, 2000. During
the year ended June 30, 2001, we additionally expended the remaining balance of
approximately $838,000 for working capital and general corporate purposes.
The preceding information updates Form SR filed by the Company in February
1997 pursuant to former Rule 463.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We provide 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. We believe that with our global 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 worldwide.
We opened for business in March 1992 in New York and currently operate
from locations in New York and Massachusetts.
Our objective is to become the leading global provider of dispute
resolution services by providing services and software/web-enabled tools
designed to enhance and streamline the traditional and often time-consuming and
expensive legal process. We believe we are uniquely positioned to offer
customized solutions built upon our sophisticated technology platform. 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 transactional client base will be charged with growing this book of
business and exploiting our inherent market advantages. Further, certain aspects
of our transactional business that had minimal revenues to date and have minimal
future revenue potential, such as our online, blind bid offering, have been
discontinued at this time. However, we have a patent pending on our automated
dispute resolution processing and oversight system and, dependent upon market
acceptance, we will continue to review the needs of our current and prospective
customers and offer those solutions that we believe will be of most value to our
clients and to our Company. 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) the licensing and/or sale of dispute
resolution-related software; (2) build brand recognition of NAM (the Arbitration
Company) as the premier provider of dispute resolution solutions through our
advertising campaign; (3) attract and retain the
13
services of highly talented, former top-tier judges and attorneys; and (4)
broaden the type and complexity of the dispute resolution cases we administer.
Future Trends
With the recent string of corporate failures and scandals, it is likely
that individuals and groups will seek retribution via a legal outlet. At the
same time, a greater emphasis has been placed on the protection of investors,
employees and other groups as evidenced by many new proposed and adopted
corrective actions and laws. The confluence of the above in conjunction with the
current economic slowdown creates a fertile environment for our services,
particularly those related to oversight applications that can uniquely address
and facilitate many of these areas of concern. Our oversight
applications/web-based services 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) continuing development and other costs associated with our software
initiatives for new products and (b) our advertising campaign. Although we are
actively promoting our services, there can be no assurance as to the amount of
revenues to be realized therefrom. Additionally, we currently expect that our
advertising campaign will continue into the first quarter of fiscal year 2004.
In August 2000, 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 61,474 shares of our common
stock (as adjusted for the 1-for-3 reverse stock split effectuated on August 20,
2001). As part of that agreement, we will additionally purchase $250,000 of
advertising during the period from August 2002 through August 2003. We believe
that targeting our advertising to the legal community will continue to increase
awareness of our comprehensive suite of dispute resolution services. However,
there can be no assurance that this effort will result in increased revenues.
Year Ended June 30, 2002 Compared to Year Ended June 30, 2001
Results of Operations
Revenues. Revenues increased 2.4% to $3,957,069 for the year ended June
30, 2002 from $3,866,058 for the year ended June 30, 2001. The increase in
revenues is primarily attributable to a rise in the average dollars earned per
hearing. Offsetting this increase was a decline in the number of hearings
conducted. As New York is our primary market, the terrorist attacks on September
11, 2001 adversely impacted our business as there was a decline in the number of
hearings conducted in the New York metropolitan area as well as at our satellite
offices as a general malaise was experienced in the business community. The
insurance industry, which was particularly hard hit by the recent events,
represents a major portion of our clientele. Also, in the prior year, revenue of
$60,000 was generated from a unique, non-recurring video-conferencing contract
that was fulfilled in the prior year. We continue to add to our exclusive pool
of former, top-tier hearing officers and have highlighted such in our present
advertising campaign. We believe this will enable us to attract a higher volume
and diversity of cases, the nature of which demands the talented and
well-respected hearing officers that we have to offer. As a result, we believe
the average dollars earned per hearing will be favorably impacted.
Cost of Services. Cost of services increased 2.0% to $971,255 for the year
ended June 30, 2002 from $952,263 for the year ended June 30, 2001.
Additionally, the cost of services as a percentage of
14
revenues remained consistent between the years at approximately 25% for both
fiscal years 2002 and 2001. The ratio of cost of services as a percentage of
revenues for fiscal year 2001 was favorably impacted by the recognition of
revenue from a videoconferencing contract in which the use of hearing officers
was not needed. The ratio of cost of services to revenues will fluctuate based
on the number of hours per case and our ability (or inability) to take advantage
of volume arrangements with hearing officers which may lower the cost per case.
Sales and Marketing. Sales and marketing costs decreased 26.1% to
$1,649,643 for the year ended June 30, 2002 from $2,232,678 for the year ended
June 30, 2001. Sales and marketing costs as a percentage of revenues decreased
to 42% for fiscal year 2002 from 58% for fiscal year 2001. Most of the decrease
(approximately $501,600) relates to employee costs and salary-related items
(including benefits and payroll taxes) and travel and entertainment expenses. As
part of our migration towards centralizing operations through the utilization of
our web platform, we began migrating our marketing efforts toward fewer but more
efficient primary customer service centers and national account arrangements, as
opposed to the continuation of running smaller and less efficient regional
office locations. We believe that building on the present platform is the
appropriate strategy to enhance operating results. As such, the consolidation of
our offerings into a comprehensive suite of web-enabled dispute resolution tools
enabled us to streamline personnel and related costs including travel and
entertainment expenses. Additionally, promotions and trade show costs declined
by approximately $113,200 from fiscal year 2001 to fiscal year 2002 as we no
longer were promoting our blind bid program. Advertising costs increased by
approximately $31,800 primarily through our advertising 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 through August 2002. The related non-cash amount expensed in the
years ended June 30, 2002 and 2001 approximated $461,300 and $290,400,
respectively. Additional non-cash charges of $18,300 for print advertising
relating to this agreement will be incurred during the first quarter of fiscal
year 2003. As part of our agreement, we will purchase $250,000 of advertising
during the period from August 2002 through August 2003. Due to the economic
slowdown, many businesses are decreasing the level of advertising and therefore,
as commercial clutter lessens, we believe our targeted campaign should be more
prominent and receive more attention.
General and Administrative. General and administrative costs decreased
7.8% to $2,488,719 for the year ended June 30, 2002 from $2,699,081 for the year
ended June 30, 2001. Furthermore, general and administrative costs as a
percentage of revenues decreased to 63% for fiscal year 2002 from 70% for fiscal
year 2001. A portion of the decrease (approximately $140,000) relates to
professional fees for various consulting services, a majority of which related
to market research, systems evaluations and investor-relations projects which
were completed by December 31, 2000. These initiatives were undertaken in order
to position us for future growth and to enhance operating efficiencies.
Secondly, we incurred approximately $38,000 in one-time costs to promote our
company to investors overseas in the prior fiscal year. By enhancing operational
efficiencies, we reduced expenditures for employee recruitment, seminars,
postage, printing, supplies and telephone that approximated $83,100. Offsetting
these declines was an increase in legal fees of approximately $46,400 related to
mergers and acquisitions activity and an investment made to obtain international
patents for our web-enabled dispute resolution management and operational
system.
Other (Expenses) Income. Other (expenses) income changed by ($131,773)
from other income of $56,839 for the year ended June 30, 2001 to other expenses
of ($74,934) for the year ended June 30, 2002. Other (expenses) income is
composed primarily of investment income and realized gains (losses) generated
from investments. Net realized losses (which includes write-downs for other than
temporary declines in the value of marketable securities) approximated
($137,600) in fiscal year 2002 versus ($223,100) in fiscal year 2001, an
improvement of $85,500. As an offset, net investment income
15
generated primarily from investments in money market funds declined by
approximately $206,300 from $255,400 in the prior fiscal year due to lower
invested balances and a decline in the prevailing interest rates from fiscal
year 2001 to fiscal year 2002. At June 30, 2002, approximately 85% 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, 2002 and 2001 were not recognized as we recorded a full
valuation allowance against the net operating loss carryforwards during the
periods. As of June 30, 2002, we had net operating loss carryforwards for
Federal tax purposes of approximately $6,634,000 and net capital loss
carryforwards for Federal tax purposes of approximately $204,000.
Net Loss. For the year ended June 30, 2002, we had a net loss of
($1,227,482) as compared to a net loss of ($1,961,125) for the year ended June
30, 2001. The loss declined as we were able to secure higher fees for services
rendered to clients as well as realize operating efficiencies by streamlining
and centralizing operations through the utilization of our enhanced processing
system.
Year Ended June 30, 2001 Compared to Year Ended June 30, 2000
Results of Operations
Revenues. Revenues decreased 3.1% to $3,866,058 for the year ended June
30, 2001 from $3,987,928 for the year ended June 30, 2000. The decrease in
revenue is attributable to a decline in the number of in-person hearings
conducted at our satellite offices. As part of our migration towards
centralizing our operations through the utilization of our web platform, we
elected to close these offices as the expense of running additional non-hub
locations adversely affected earnings, and forecasts indicated that they would
have continued to do so. Utilizing the www.clickNsettle.com web site as a
centralized dispute resolution location, we began migrating our marketing
efforts toward fewer but more efficient primary customer service centers and
national account arrangements, as opposed to the continuation of running smaller
and less efficient regional locations. The results of such a strategic plan have
been beneficial to date as quarterly sequential performance already reflects the
benefits of such efficiencies. We believe that building on the present platform
is the appropriate strategy to enhance operating results. Offsetting this
decline was a 10% price increase in our administrative fees effective for cases
commencing in the fourth quarter of fiscal 2001 or thereafter; a rise in the
average dollars earned per in-person hearing;fees earned from
international/commercial cases and revenues from a video-conferencing dispute
resolution contract.
Cost of Services. Cost of services decreased 6.1% to $952,263 for the year
ended June 30, 2001 from $1,013,611 for the year ended June 30, 2000.
Additionally, the cost of services as a percentage of revenues remained the same
at approximately 25% for both fiscal years 2001 and 2000. Subsequent to our
price increase, our cost of sales as a percentage of revenues declined by 1
point to 24% in the fourth quarter of fiscal year 2001. The ratio of cost of
services to revenues will fluctuate based on the amount of electronic revenue
(which does not require the services of an in-person hearing officer), 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 1.8% to
$2,232,678 for the year ended June 30, 2001 from $2,274,318 for the year ended
June 30, 2000. Sales and marketing costs as a percentage of revenues increased
slightly to 58% for fiscal year 2001 from 57% for fiscal year 2000. Most of the
decrease (approximately $312,000) relates to employee costs and salary-related
items (including benefits and payroll taxes) and travel and entertainment
expenses. The consolidation of our offerings
16
into a one-stop, comprehensive suite of web-enabled dispute resolution tools
enabled us to streamline sales personnel and related costs including travel and
entertainment expenses. Offsetting these declines were increases in advertising,
promotions and trade shows. Advertising and external public relations costs
increased by approximately $185,000 from fiscal year 2000 to fiscal year 2001.
Most of this increase relates to our 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 commencing August 2000 in exchange
for our common stock. The related non-cash amount expensed through June 30, 2001
approximated $290,000. Additional non-cash charges for print advertising
relating to this agreement will be incurred during fiscal years 2002 and 2003
and, in total, will approximate $480,000. Potentially, we may be obligated to
purchase $250,000 of additional print advertising in connection with this
agreement during fiscal years 2003 and 2004 if certain agreed-upon criteria are
not achieved on February 11, 2002. Due to the economic slowdown, many businesses
are decreasing the level of advertising and therefore, as commercial clutter
lessens, we believe our targeted campaign should be more prominent and receive
more attention. Furthermore, trade show and promotions expense increased by
about $86,000 as we participated in several large legal and insurance related
exhibitions primarily early in fiscal year 2001 to promote the "total solution."
General and Administrative. General and administrative costs increased
2.8% to $2,699,081 for the year ended June 30, 2001 from $2,625,513 for the year
ended June 30, 2000. Furthermore, general and administrative costs as a
percentage of revenues increased to 70% for fiscal year 2001 from 66% for fiscal
year 2000. A portion of the increase (approximately $81,000) relates to
professional fees for various consulting services, a majority of which related
to market research, systems evaluations and investor-relations projects which
were completed by the end of the second quarter of fiscal year 2001. These
initiatives were undertaken in order to position us for future growth and to
enhance operating efficiencies. Secondly, we incurred approximately $38,000 in
one-time costs to promote our company to investors overseas. The remaining
increase was largely related to higher rent and utilities in the amount of
$69,000 due to the leasing of additional space at our headquarters in Great
Neck, New York as of July 1, 2000. As part of an effort to reduce overhead, we
reduced expenditures for legal fees, seminars, auto expenses, telephone and
miscellaneous expenses that approximated $80,000.
Other Income. Other income declined from $381,415 for the year ended June
30, 2000 to $56,839 for the year ended June 30, 2001. Other income is composed
primarily of investment income and realized gains (losses) generated from
investments. During fiscal year 2001, we evaluated the carrying value of our
investments in marketable equity securities and recorded a write-down for other
than temporary declines in the value of such securities of approximately
$146,000. Such realized loss is included in investment income on the
accompanying statement of operations for the year ended June 30, 2001.
Additionally, we recorded approximately $77,000 in realized losses from sales of
securities in fiscal year 2001. Total net realized losses therefore approximated
$223,000 for fiscal year 2001 as compared to net realized gains of $259,000 in
the prior fiscal year. Offsetting this decline was an increase in investment
income of approximately $141,000 that rose due to higher invested balances in
money market funds. At June 30, 2001, approximately 86% 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, 2001 and 2000 were not recognized as we recorded a full
valuation allowance against the net operating loss carryforwards during the
periods. As of June 30, 2001, we had net operating loss carryforwards for
Federal tax purposes of approximately $5,594,000 and net capital loss
carryforwards for Federal tax purposes of approximately $88,000.
17
Net Loss. For the year ended June 30, 2001, we had a net loss of
($1,961,125) as compared to a net loss of ($1,544,099) for the year ended June
30, 2000. The loss increased primarily due to non- cash investments in
advertising and realized losses on the sale and write-down of marketable
securities as compared to realized gains on marketable securities in the prior
fiscal year.
Liquidity and Capital Resources
At June 30, 2002, the Company had a working capital surplus of $1,833,092
as compared to $3,003,997 at June 30, 2001. The decrease in working capital
occurred primarily as a result of the loss from operations in fiscal year 2002.
Net cash used in operating activities was $491,220 for the fiscal year
ended June 30, 2002 versus $1,531,099 in the prior fiscal year. Cash used in
operating activities principally declined due to a reduction in the loss from
operations from fiscal year 2001 to fiscal year 2002.
Net cash used in investing activities was $78,923 for the year ended June
30, 2002 versus $172,207 for the year ended June 30, 2001. The change in cash
from investing activities was principally due to a lower level of purchases of
fixed assets in fiscal year 2002 as compared to fiscal year 2001. This was
partially offset by an increase in net purchases of marketable securities in
fiscal year 2002 as compared to fiscal year 2001.
Net cash used in financing activities was $71,163 for the year ended June
30, 2002 versus $1,714,761 for the year ended June 30, 2001. In the current
year, we purchased 36,500 shares of our common stock for an aggregate cost of
$71,163 as compared to purchases of 5,583 shares of our common stock (as
adjusted for the 1-for-3 reverse stock split effectuated on August 20, 2001) for
an aggregate cost of $12,755 in the prior fiscal year. In the prior year, we
redeemed all outstanding shares of the Series A Exchangeable Preferred stock at
its par value of $1,800,000. Additionally, in the prior year, we received net
proceeds from the issuance of 6,221 shares of our common stock at a price of
$12.525 (as adjusted for the 1-for-3 reverse stock split effectuated on August
20, 2001) for $77,914 and also received proceeds of $21,000 from the exercise of
stock options.
We have incurred net losses and had negative cash flow from operations in
each year in the six-year period ended June 30, 2002. 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, 2002, we had $1,917,066 in aggregate cash and cash equivalents. We
believe that, through the proper utilization of these existing funds, from
revenue generated from existing and new web-based services and from expense
reductions achieved by streamlining operations through the utilization of an
enhanced processing system, we will have sufficient cash to meet our needs over
the next twelve months.
Critical Accounting Policies
The Securities and Exchange Commission recently 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:
18
- 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.
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 June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations," and Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Intangible Assets." The new standards require that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method. In addition, all intangible assets acquired that are obtained
through contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged shall be recognized as an asset apart
from goodwill. Goodwill and intangibles with indefinite lives will no longer be
subject to amortization, but will be subject to at least an annual assessment
for impairment by applying a fair value-based test. SFAS No. 141 is effective
for all business combinations completed after June 30, 2001. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, certain
provisions of this statement apply to goodwill and other intangible assets
acquired between July 1, 2001 and the effective date of SFAS No. 142. The
Company has not participated in any business combinations nor does it carry
goodwill or material amounts of other intangible assets as described in SFAS No.
142.
Termination of Acquisition of E-Vue, Inc.
On July 9, 2001, we signed a letter of intent to acquire E-Vue, Inc., a
development stage company engaged in developing next-generation end-to-end
solutions for multimedia delivery over broadband and/or wireless networks based
on the MPEG-4 standard and associated compliant
19
technologies. The proposed purchase price under the letter of intent consisted
of a combination of common stock and convertible preferred stock to be issued by
us depending on certain financing conditions on the part of E-Vue, Inc. In the
event either party breached the agreement, the non-breaching party was to be
reimbursed for actual costs incurred up to a maximum of $100,000 and was
entitled to a $100,000 break up fee. The acquisition, which would have required
shareholder approval, was initially expected to close in October 2001. However,
the Nasdaq Listing Qualifications Panel informed us that the proposed merger
would have resulted in a change of control for purposes of Nasdaq Marketplace
rules, and therefore the combined entities would have been required to evidence
compliance with all requirements for initial listing on the Nasdaq SmallCap
Market immediately upon consummation of the transaction. On January 8, 2002, we
announced that discussions had ended with respect to the proposed merger of the
entities. The acquisition of E-Vue, Inc. was not concluded and no break up fees
were incurred.
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 August 20, 2001, a 1-for-3
reverse stock split of our outstanding common stock was effectuated. Our
shareholders previously approved this action in a meeting held on July 5, 2001.
Also, in accordance with our redeemable warrant agreement, the terms of the then
outstanding redeemable warrants were adjusted. Originally, each redeemable
warrant entitled the holder to purchase one share of common stock at a price of
$6 per share at any time from issuance until November 13, 2001. After the
reverse stock split, in order to obtain one share of common stock, the
redeemable warrant holder had to exercise 3 warrants and pay an aggregate of $18
in cash. On November 13, 2001, the redeemable warrants expired.
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 reverse stock split.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants 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 - F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-27
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 2002 and 2001, 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 generally accepted
in the United States of America. 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, 2002 and 2001, 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.
GRANT THORNTON LLP
Melville, New York
August 28, 2002
F-2
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 2002 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,917,066 $ 2,558,372
Marketable securities 319,600 402,807
Accounts receivable (net of allowance for doubtful
accounts of $140,000 in 2002 and 2001) 380,518 355,674
Prepaid expenses and other current assets 84,393 469,885
------------ ------------
Total current assets 2,701,577 3,786,738
FURNITURE AND EQUIPMENT - AT COST,
less accumulated depreciation 216,939 309,242
OTHER ASSETS 42,975 91,452
------------ ------------
$ 2,961,491 $ 4,187,432
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 258,097 $ 179,196
Accrued liabilities 270,750 284,412
Accrued payroll and employee benefits 37,231 35,020
Deferred revenues 302,407 284,113
------------ ------------
Total current liabilities 868,485 782,741
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.001 par value; 15,000,000 shares authorized; 1,450,259
shares issued; 1,408,176 and 1,444,676 shares
outstanding in 2002 and 2001, respectively 1,450 1,450
Additional paid-in capital 10,111,324 10,109,385
Accumulated deficit (7,914,736) (6,687,254)
Accumulated other comprehensive loss (21,114) (6,135)
Less common stock in treasury at cost, 42,083 and 5,583
shares in 2002 and 2001, respectively (83,918) (12,755)
------------ ------------
Total stockholders' equity 2,093,006 3,404,691
------------ ------------
$ 2,961,491 $ 4,187,432
============ ============
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,
2002 2001
----------- -----------
Net revenues $ 3,957,069 $ 3,866,058
----------- -----------
Operating costs and expenses
Cost of services 971,255 952,263
Sales and marketing expenses 1,649,643 2,232,678
General and administrative expenses 2,488,719 2,699,081
----------- -----------
5,109,617 5,884,022
----------- -----------
Loss from operations (1,152,548) (2,017,964)
Other (expenses) income
Investment (loss) income (88,542) 31,768
Other income 13,608 25,071
----------- -----------
(74,934) 56,839
----------- -----------
Loss before income taxes (1,227,482) (1,961,125)
Income taxes
----------- -----------
NET LOSS (1,227,482) (1,961,125)
Preferred stock dividend and deemed dividend on preferred stock
for beneficial conversion (181,918)
----------- -----------
Loss before cumulative effect of change in accounting principle for
deemed dividend on preferred stock for beneficial
conversion (1,227,482) (2,143,043)
Cumulative effect of change in accounting principle for deemed
dividend on preferred stock for beneficial conversion (217,583)
----------- -----------
Net loss attributable to common stockholders $(1,227,482) $(2,360,626)
=========== ===========
Loss per common share - basic and diluted
Loss before cumulative effect of change in accounting principle $ (.87) $ (1.50)
Cumulative effect of change in accounting principle (.15)
----------- -----------
Net loss per common share $ (.87) $ (1.65)
=========== ===========
Weighted-average shares outstanding - basic and diluted 1,415,020 1,432,674
=========== ===========
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, 2002 and 2001
Accumu-
lated
other
compre-
Preferred stock Common stock Additional hensive
---------------------- --------------------- paid-in Accumulated income
Shares Amount Shares Amount capital deficit (loss)
-------- -------- -------- -------- ---------- ----------- -------
Balances at June 30, 2000 1,850 $1,634,789 4,093,279 $ 4,093 $8,939,677 $(4,326,628) $14,443
Compensation related to stock
options and warrants 37,031
Common shares issued upon
exercise of stock options 11,250 11 21,084
Common shares issued in exchange
for future advertising services,
net of issuance costs of $1,015 184,422 184 768,801
Common shares issued 18,662 19 77,895
Preferred stock dividend and
deemed dividend on preferred
stock for beneficial conversion 10,149 (64,915)
Common shares issued pursuant to
conversion of preferred stock (50) (44,457) 43,163 44 44,413
Purchase of common shares for
treasury
Cumulative effect of change in
accounting principle for
deemed dividend on preferred
stock for beneficial conversion 217,583 (217,583)
Redemption of preferred stock (1,800) (1,600,481) (117,003)
Net loss (1,961,125)
Change in unrealized gain (loss)
on marketable securities (20,578)
-------- -------- -------- -------- ---------- ----------- -------
Comprehensive loss
Balances at June 30, 2001
(carried forward) 4,350,776 4,351 10,106,484 (6,687,254) (6,135)
Total
Common stock- Compre-
stock in holders' hensive
treasury equity loss
-------- ----------- -------
Balances at June 30, 2000 $ 6,266,374
Compensation related to stock
options and warrants 37,031
Common shares issued upon
exercise of stock options 21,095
Common shares issued in exchange
for future advertising services,
net of issuance costs of $1,015 768,985
Common shares issued 77,914
Preferred stock dividend and
deemed dividend on preferred
stock for beneficial conversion (54,766)
Common shares issued pursuant to
conversion of preferred stock
Purchase of common shares for
treasury $(12,755) (12,755)
Cumulative effect of change in
accounting principle for
deemed dividend on preferred
stock for beneficial conversion
Redemption of preferred stock (1,717,484)
Net loss (1,961,125) $(1,961,125)
Change in unrealized gain (loss)
on marketable securities (20,578) (20,578)
-------- ----------- -----------
Comprehensive loss $(1,981,703)
===========
Balances at June 30, 2001
(carried forward) (12,755) 3,404,691
The accompanying notes are an integral part of this statement.
F-5
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS (continued)
Years ended June 30, 2002 and 2001
Accumu-
lated
other
compre- Total
Common stock Additional hensive Common stock-
--------------------- paid-in Accumulated income stock in holders'
Shares Amount capital deficit (loss) treasury equity
----------- ----------- ------------ ----------- -------- -------- ----------
Balances at June 30, 2001
(brought forward) 4,350,776 $ 4,351 $ 10,106,484 $(6,687,254) $ (6,135) $(12,755) $3,404,691
One-for-three reverse stock split
effectuated August 20, 2001 (2,900,517) (2,901) 2,901
Compensation related to stock
options 1,939 1,939
Purchase of common shares for
treasury (71,163) (71,163)
Net loss (1,227,482) (1,227,482)
Change in unrealized gain (loss)
on marketable securities (14,979) (14,979)
----------- ----------- ------------ ----------- -------- -------- ----------
Comprehensive loss
Balances at June 30, 2002 1,450,259 $ 1,450 $ 10,111,324 $(7,914,736) $(21,114) $(83,918) $2,093,006
=========== =========== ============ =========== ======== ======== ==========
Compre-
hensive
loss
-----------
Balances at June 30, 2001
(brought forward)
One-for-three reverse stock split
effectuated August 20, 2001
Compensation related to stock
options
Purchase of common shares for
treasury
Net loss $(1,227,482)
Change in unrealized gain (loss)
on marketable securities (14,979)
-----------
Comprehensive loss $(1,242,461)
===========
Balances at June 30, 2002
The accompanying notes are an integral part of this statement.
F-6
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
2002 2001
----------- -----------
Cash flows from operating activities
Net loss $(1,227,482) $(1,961,125)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 101,826 107,912
Losses on sales of marketable securities 22,607 77,248
Write-down of marketable securities 115,020 145,849
Losses on disposals of furniture and equipment 595
Advertising in exchange for common stock 461,318 290,397
Compensation related to stock options and warrants 1,939 37,031
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (24,844) 87,795
(Increase) decrease in prepaid expenses and other current assets (27,348) 47,487
(Increase) in other assets (12,264)
Increase (decrease) in accounts payable and accrued liabilities 65,239 (271,331)
Increase (decrease) in accrued payroll and employee benefits 2,211 (58,802)
Increase (decrease) increase in deferred revenues 18,294 (21,891)
----------- -----------
Net cash used in operating activities (491,220) (1,531,099)
----------- -----------
Cash flows from investing activities
Purchases of marketable securities (124,225) (361,140)
Proceeds from sales of marketable securities 54,826 315,846
Purchases of furniture and equipment (9,524) (126,913)
----------- -----------
Net cash used in investing activities (78,923) (172,207)
----------- -----------
Cash flows from financing activities
Redemption of preferred stock (1,800,000)
Issuance of common stock, net of issuance costs and proceeds
from exercise of stock options 97,994
Purchase of treasury stock at cost (71,163) (12,755)
----------- -----------
Net cash used in financing activities (71,163) (1,714,761)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (641,306) (3,418,067)
Cash and cash equivalents at beginning of year 2,558,372 5,976,439
----------- -----------
Cash and cash equivalents at end of year $ 1,917,066 $ 2,558,372
=========== ===========
Supplemental disclosures of cash flow information:
Noncash financing activities
Preferred stock dividend and deemed dividend on preferred
stock for beneficial conversion $ 64,915
Issuance of common stock in exchange for prepaid advertising 770,000
Conversion of preferred stock to common stock 44,457
The accompanying notes are an integral part of these statements.
F-7
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
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.
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. Basis of Presentation and Operations
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 six-year period ended June 30, 2002.
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, 2002, the Company had $1,917,066 in aggregate cash
and cash equivalents. Management believes that, through the proper
utilization of these existing funds, from revenue generated from
existing and new web-based services and from expense reductions
achieved by streamlining operations through the utilization of an
enhanced processing system, it will have sufficient cash to meet its
needs over the next twelve months.
F-8
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 2 (continued)
b. 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. Estimates
are used when accounting for the allowance for uncollectible
accounts receivable, depreciation, taxes and contingencies, among
others.
c. 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.
d. 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 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.
F-9
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 2 (continued)
e. Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and money market
funds.
f. Marketable Securities
Investments classified as marketable securities include equity
securities which 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 in order to provide the
Company flexibility to respond to various factors, including changes
in market conditions and tax planning considerations.
Investment income, consisting of interest and dividends, is
recognized when earned. Realized gains and losses on sales,
maturities or liquidation of investments 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 which range from two to ten years. Leasehold
improvements are amortized over the life of the remaining lease.
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 during the fiscal years ended June 30, 2002 and
2001.
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
F-10
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 2 (continued)
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 $539,071 and $507,252 for advertising
and external public relations costs in fiscal 2002 and 2001,
respectively. These amounts include $461,318 and $290,397 relating
to noncash advertising charges in fiscal 2002 and 2001, respectively
(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 734,604 and 1,110,531, at June 30, 2002 and 2001, respectively,
would be antidilutive as the Company incurred net losses for the
years ended June 30, 2002 and 2001.
l. Effect of Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141 ("SFAS No.
141"), "Business Combinations," and Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible
Assets." The new standards require that all business combinations
initiated after June 30, 2001 be accounted for under the purchase
method. In addition, all intangible assets acquired that are
obtained through contractual or legal right, or are capable of being
separately sold, transferred, licensed, rented or exchanged shall be
recognized as an asset apart from goodwill. Goodwill and intangibles
with indefinite lives will no longer be subject to amortization, but
will be subject to at least an annual assessment for impairment by
applying a fair value-based test. SFAS No. 141 is effective for all
business combinations completed after June 30, 2001. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this statement apply to goodwill
F-11
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 2 (continued)
and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS No. 142. The Company has not participated in
any business combinations nor does it carry goodwill or material
amounts of other intangible assets as described in SFAS No. 142.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive loss, net of tax effects, are as follows:
2002 2001
----------- -----------
Net loss $(1,227,482) $(1,961,125)
----------- -----------
Unrealized gain (loss) on marketable securities, net of tax
effects of $0 in 2002 and 2001, respectively
Unrealized losses arising in period (39,901) (5,372)
Reclassification adjustment - gain (loss) included
in net loss 24,922 (15,206)
----------- -----------
Net unrealized loss (14,979) (20,578)
----------- -----------
Comprehensive loss $(1,242,461) $(1,981,703)
=========== ===========
Accumulated other comprehensive loss represents the unrealized gain (loss)
on marketable equity securities, net of tax effects of $0 in fiscal 2002
and 2001, respectively.
F-12
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 4 - MARKETABLE SECURITIES
Marketable 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, 2002
Equity securities $340,714 $23,432 $(44,546) $319,600
------- ------ ------- -------
Total marketable securities $340,714 $23,432 $(44,546) $319,600
======= ====== ======= =======
June 30, 2001
Equity securities $408,942 $42,786 $(48,921) $402,807
------- ------ ------- -------
Total marketable securities $408,942 $42,786 $(48,921) $402,807
======= ====== ======= =======
Proceeds on sales of securities were $54,826 and $315,846 for the years
ended June 30, 2002 and 2001, respectively. During fiscal 2002 and 2001,
gross gains of $12 and $44,404, respectively, and gross losses of $22,619
and $121,652, respectively, were realized on these sales. During 2002 and
2001, the Company evaluated the carrying value of its investments in
marketable equity securities and recorded a write-down for other than
temporary declines in the value of such securities in the amount of
$115,020 and $145,849, respectively. Such write-downs are included in
investment income (loss) on the accompanying statements of operations. Net
unrealized losses on marketable securities were $(21,114) and $(6,135) at
June 30, 2002 and 2001, respectively. During fiscal 2002 and 2001, no
income tax benefits were provided on the unrealized losses 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, 2002 and 2001
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
June 30,
--------------------------
2002 2001
----------- -----------
Furniture $ 234,020 $ 233,656
Equipment 549,633 540,824
Leasehold improvements 21,993 21,993
----------- -----------
805,646 796,473
Less accumulated depreciation (588,707) (487,231)
----------- -----------
$ 216,939 $ 309,242
=========== ===========
Depreciation expense for the years ended June 30, 2002 and 2001 was
$101,826 and $107,912, respectively.
NOTE 6 - INCOME TAXES
Temporary differences which give rise to deferred taxes are summarized as
follows:
2002 2001
----------- -----------
Deferred tax assets
Net operating loss and other carryforwards $ 2,660,000 $ 2,190,000
Provision for bad debts 56,000 56,000
Deferred compensation 1,000 4,000
Deferred rent and other 53,000 52,000
Depreciation 24,000 18,000
----------- -----------
Net deferred tax asset before valuation
allowance 2,794,000 2,320,000
Valuation allowance (2,794,000) (2,320,000)
----------- -----------
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, 2002 and 2001
NOTE 6 (continued)
The Company's effective income tax rate differs from the statutory Federal
income tax rate as a result of the following:
2002 2001
--------- ---------
Benefit at statutory rate $(417,344) $(666,783)
State and local benefit, net of Federal tax (71,256) (114,821)
Nondeductible expenses - net 14,563 16,053
Increase in the valuation allowance 474,037 765,551
--------- ---------
$ -- $ --
========= =========
At June 30, 2002, the Company had a net operating loss carryforward for
Federal income tax reporting purposes amounting to approximately
$6,634,000, expiring from 2012 through 2022. Additionally, the Company has
a net capital loss carryforward for Federal income tax reporting purposes
at June 30, 2002 of approximately $204,000 which expires from 2006 through
2007. No income taxes were paid in the years ended June 30, 2002 and 2001.
Under current tax law, the utilization of net operating losses will be
restricted if an ownership change were to occur. In addition, their use is
limited to future earnings of the Company.
NOTE 7 - STOCKHOLDERS' EQUITY
a. Capitalization
On August 20, 2001, the Company effected a 1-for-3 reverse stock
split. All references to number of shares and per share data in the
consolidated financial statements and accompanying notes have been
restated, except with respect to certain redeemable warrants which
were adjusted (see Note 7 (f)), to reflect the reverse stock split.
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, of which 2,100 shares are
designated as Series A Exchangeable Preferred Stock. The Series A
Exchangeable Preferred Stock has (a) no voting rights, except that
holders of 75% of the Series A preferred stock must approve changes
to the Certificate of Designation and issuance of securities with
rights senior to the Series A preferred stock and (b) an annual
dividend rate of 4%.
F-15
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
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. Holders of the Series A Exchangeable Preferred Stock
could have exchanged such shares into shares of the Company's common
stock at any time and must exchange such shares at the Company's
request, which cannot be made until the earlier of February 14, 2002
or the date upon which the average closing bid price of the
Company's common stock for five consecutive trading days was at
least $10 and the average daily trading volume for the thirty
consecutive trading days ending on the fifth day was at least 40,000
shares and the common stock underlying the outstanding Series A
Exchangeable Preferred Stock is registered pursuant to a
then-effective registration statement.
Through July 15, 2000, the exchange rate for each share of the
Series A Exchangeable Preferred Stock was equal to $1,000 divided by
$10.45. On July 15, 2000 and thereafter, the exchange rate for each
share of Series A Exchangeable Preferred Stock was equal to $1,000
divided by the lesser of (i) $10.45 or (ii) the market price, which
was the average of any three consecutive closing bid prices of the
Company's common stock selected by the holders during the thirty
trading day period ending on the day immediately prior to the
exchange. Until February 14, 2001, the exchange rate could never be
greater than $10.45 or less than $2.375. These adjustments to the
market price could potentially result in a conversion price below
the then trading market price of the stock on the date of the
exchange. In recognition of this beneficial conversion feature, the
Company initially allocated $101,482 of the proceeds from the
offering to additional paid-in capital. The beneficial conversion
feature was accounted for as a deemed dividend and was accreted to
preferred stock over the five-month period from February 15, 2000
through July 15, 2000. The amount accreted for the year ended June
30, 2001 was $10,149, which increased the net loss attributable to
common stockholders.
During the second quarter of fiscal 2001, the Company adopted
certain provisions of Emerging Issues Task Force ("EITF") 00-27,
"Application of EITF Issue No. 98-5, `Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios to Certain Convertible Instruments'."
EITF 00-27 changed the approach of calculating the conversion price
used in determining the value of the beneficial conversion feature
from using the conversion price stated in the preferred stock
certificate to using the effective conversion price. The adoption of
EITF 00-27 increased the original value of the beneficial conversion
feature to $319,065 from the $101,482 that was recorded in
connection with the preferred stock issuance in February 2000. In
accordance with EITF 00-27, the adoption was treated as a cumulative
effect of an accounting change which resulted in a cumulative
adjustment to dividends of $217,583 as of the beginning of the
second quarter of fiscal 2001.
F-16
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 7 (continued)
In the event of a liquidation of the Company, the holders of the
Series A Exchangeable Preferred Stock would receive, before any
payments to common stockholders, $1,000 per share plus any accrued
but unpaid dividends. The Series A Exchangeable Preferred Stock
accrued dividends at a rate of 4% annually, unless the thirty-day
average trading price of the Company's common stock was equal to or
greater than $9 at any time after July 15, 2000, in which case
dividends would cease to accrue and accrued but unpaid dividends
would be cancelled. Dividends were payable at the Company's option,
in cash or in registered common stock.
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.
The 4% accrued dividend on the preferred shares, aggregating
$82,517, was eliminated retroactively resulting in no payment of
dividends from the date of issuance of the preferred shares. The
excess of the fair value of the consideration paid to redeem the
preferred stock over the carrying amount of the stock, net of the
eliminated accrued dividends, approximated $117,003.
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 18,750 shares of common stock at a price
per share of $31.56. The warrants expire on August 15, 2005. The
fair value of the warrants approximated $205,000. Such amount
reduced the stated value of the preferred stock and increased
additional paid-in capital, resulting in no net change to
stockholders' equity.
The Company issued 1,667 shares of its common stock and paid a fee
of $92,500 to the placement agent, Triton West Group, Inc., for the
offering.
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 has 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. As of June 30, 2002, based on market conditions
and the provisions of the Agreement as stated below, the Company
does not intend to make any draw downs under the Agreement. The
maximum and minimum amounts that Moldbury Holdings Limited would be
required to purchase at any given time are subject to a floating
number based on the closing bid price of the Company's common stock
and the average trading volume of such stock in a thirty-day period.
If the closing bid price or the average trading volume are below a
defined minimum (that is, below $2 closing bid price or below 20,000
shares average 30 trading day volume), the maximum amount the
investor can be required to
F-17
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 7 (continued)
purchase at that point in time will be $250,000 of the Company's
common stock. There is also a minimum of 15 trading days between
each request for investment. The price per share in each such
purchase shall be the greater of (i) 89% of the average closing bid
price for the day of the Company's notice to Moldbury Holdings
Limited requesting its purchase and the two days preceding the
notice and the two days following the notice and (ii) the minimum
price set by the Company for such purchase. Moldbury Holdings
Limited is not required to make any purchase if the shares being
purchased are not registered pursuant to a then-effective
registration statement. The registration statement filed in April
2000 is no longer effective. If deemed to be beneficial, the Company
can elect to amend such registration statement or file a new one.
Further, if the Company were no longer listed on the Nasdaq SmallCap
Market, the Company would be required to obtain the consent of the
investor prior to any request for purchases. The Agreement limits
the Company's ability to enter into a similar agreement at prices
below the then current bid price without prior consent of Moldbury
Holdings Limited.
In connection with the Agreement, the Company issued a warrant to
Moldbury Holdings Limited to purchase 20,000 shares of common stock
at a price per share of $28.02, of which 15,000 warrants were issued
on February 16, 2000 and the remaining 5,000 warrants are to be
issued immediately after Moldbury Holdings Limited has invested
$3,500,000 to purchase shares of common stock under the terms and
conditions of the Agreement. The warrants expire on August 16, 2003.
The Company issued 1,667 shares of its common stock to the placement
agent for the offering, Triton West Group, Inc. A fee of 5% of the
gross proceeds will be paid when Moldbury Holdings Limited purchases
the Company's common stock, at the Company's request, pursuant to
the Agreement.
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 214,190 common shares, par value
$.001 per share, to ISO at a price of $18.675 per share or
$4,000,000. In connection therewith, the Company issued a warrant to
ISO to purchase 60,000 common shares at an exercise price of $24.27
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.).
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.
F-18
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 7 (continued)
Pursuant to the Stock Purchase Agreement, ISO has one demand
registration right commencing May 10, 2001 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 terminate upon the
earlier of (i) May 10, 2004 and (ii) such time as ISO shall be
permitted to sell all of its purchased securities in any three-month
period under Rule 144 promulgated under the Securities Act.
On August 11, 2000, the Company entered into an advertising
agreement with American Lawyer Media, Inc. ("ALM"), whereby the
Company issued 61,474 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 (see
Note 9 (c)). 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 is being expensed as the advertising takes place. During the
years ended June 30, 2002 and 2001, the Company expensed $461,318
and $290,397, respectively, of advertising costs related to this
transaction. As of June 30, 2002, $18,285 was classified as
short-term and included in prepaid expenses and other current assets
in the accompanying balance sheet based on the expected utilization.
Pursuant to the Stock Purchase Agreement between the Company and
ISO, 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 after the issuance of shares to ALM. ISO
exercised this preemptive right on August 21, 2000, whereby the
Company issued 6,221 shares of common stock to ISO. The total
offering price was $77,914.
f. Redeemable Warrants
In November 1996, the Company completed an initial public offering
("IPO") which consisted of 1,400,000 units, each unit consisting of
one share of common stock and one redeemable warrant, not effected
for the reverse split (see Note 7 (a)). After the reverse stock
split, in order to obtain one share of common stock, the warrant
holder had to exercise three warrants and pay an aggregate of $18 in
cash, subject to adjustment, at any time from issuance until
expiration. Such warrants were redeemable by the Company, with the
prior written consent of the underwriter, at a redemption price of
$.05 commencing November 13, 1997 provided that the average closing
bid price of the common stock equaled or exceeded $27.00, subject to
adjustment, for a specified period of time. In addition, there was
an overallotment option for 210,000 units which was exercised by the
underwriter. On November 13, 2001, the redeemable warrants expired.
F-19
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 7 (continued)
g. Underwriter's Warrants
In connection with the IPO, the Company sold to the underwriter, for
nominal consideration, warrants to purchase from the Company 46,666
units (the "underwriter's warrants"). The underwriter's warrants
were exercisable at $17.40. The shares of common stock and
redeemable warrants issuable upon exercise of the underwriter's
warrants were identical to those offered to the public. The
underwriter's warrants contained provisions providing for adjustment
of the number of warrants and exercise price under certain
circumstances. The underwriter's warrants granted to the holders
thereof certain rights of registration of the securities issuable
upon exercise of the underwriter's warrants. On November 13, 2001,
40,833 of unexercised underwriter's warrants expired.
h. Treasury Stock
On March 14, 2002, 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 266,667 shares. The Purchase Plan
shall expire on the earlier of all of the shares being purchased or
March 14, 2003, provided, however, that the Purchase Plan may be
discontinued at any time by the Company. As of June 30, 2002, the
Company has purchased 42,083 shares under the Purchase Plan for an
aggregate cost of $83,918.
i. 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 1,000,000 shares of the Company's common stock. 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.
F-20
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 7 (continued)
Directors who are not officers of the Company receive annually, on
the last trading day of June, stock options for 833 shares at an
exercise price equal to the fair market value of the stock on the
date of grant.
The Company's stock option awards granted to employees, directors
and consultants as of and for the years ended June 30, 2002 and 2001
are summarized as follows:
2002 2001
------------------ ------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
------ --------- ------ ---------
Outstanding at beginning of year 392,356 $ 8.50 438,750 $ 9.81
Awards granted 259,165 $ 1.46 65,889 $ 4.15
Awards exercised -- -- (3,750) $ 5.63
Awards canceled/forfeited (14,000) $12.70 (108,533) $11.23
------- --------
Outstanding at end of year 637,521 $ 5.55 392,356 $ 8.50
======= ========
Options exercisable at year-end 308,523 $ 7.44 234,440 $ 7.48
======= ========
Weighted-average fair value
of options granted during
the year $ 1.21 $ 2.96
F-21
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 7 (continued)
The following information applies to options outstanding and
exercisable at June 30, 2002:
Outstanding Exercisable
----------------------------------- ----------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number life in exercise Number exercise
Range of exercise prices outstanding years price exercisable price
------------------------ ----------- ----------- --------- ----------- ---------
$ 0.93 - $ 1.40 131,665 9.70 $ 1.38 6,665 $ 1.10
$ 1.53 - $ 3.56 162,690 4.60 $ 1.86 32,689 $ 3.17
$ 4.12 - $ 4.86 167,004 5.20 $ 4.37 141,173 $ 4.34
$ 5.06 - $14.81 64,329 2.48 $ 6.70 64,329 $ 6.70
$15.00 - $30.00 111,833 6.07 $16.90 63,667 $17.91
------- -------
637,521 308,523
======= =======
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,
2002 and 2001, 130,000 and 14,167 options, respectively, were
granted above the closing bid price on the date of grant. As of June
30, 2002, 350,479 shares were available for granting of options
under the Plan.
The Company accounts for stock-based compensation under the
guidelines of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," as allowed by Statement of Financial Accounting
Standards No. 123, ("SFAS No. 123") "Accounting for Stock-Based
Compensation." Accordingly, no compensation expense was recognized
concerning options granted to employees and to members of the board
of directors, as such options were granted to board members in their
capacity as directors.
F-22
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 7 (continued)
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, 2002 and 2001 would be
increased to the pro forma amounts indicated below:
2002 2001
----------- ----------
Net loss attributable to common stockholders
As reported $(1,227,482) $(2,360,626)
Pro forma (1,887,958) (3,193,857)
Net loss per common share, includes cumulative effect
of change in accounting principle of $(.15) per share
in 2001 - basic and diluted
As reported $ (.87) $ (1.65)
Pro forma (1.33) (2.23)
These pro forma amounts may not be representative of future
disclosures because they do not take into effect pro forma
compensation expense related to awards made before 1996. 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 2002 and 2001, respectively: a
dividend yield of zero for both years; a risk-free interest rate
ranging from 2.92% to 4.82% in 2002 and 4.38% to 5.99% in 2001; an
expected term of two to four years in 2002 and one and one-half to
four years in 2001; an expected stock price volatility of 149.01% in
2002 and 118.91% in 2001; and a forfeiture rate of 15% in 2002 and
25% in 2001.
During the fiscal year 2001, the Company granted 8,389 options to
consultants. Compensation expense of $1,939 and $20,931 was
recognized during the years ended June 30, 2002 and 2001,
respectively, for options granted to consultants.
F-23
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 7 (continued)
j. Stock Warrants
In April 2000, the Company entered into an agreement with a
financial public relations firm whereby the Company granted warrants
to purchase 3,333 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. Compensation expense of $16,100 relating to
the fair value of the warrants was recorded in fiscal 2001. In
August 2000, the Company terminated the agreement and no additional
warrants in excess of the 3,333 warrants were granted.
k. Common Stock Reserved
At June 30, 2002, the Company has reserved for issuance 1,085,083
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 for the benefit
of the Company. The related expenditures for these services for the years
ended June 30, 2002 and 2001 were $50,188 and $29,763, respectively.
F-24
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 9 - COMMITMENTS AND CONTINGENCIES
a. Leases
As of June 30, 2002, the Company has lease agreements for equipment
and office space. Rent expense amounted to $285,233 and $278,863 for
the years ended June 30, 2002 and 2001, respectively. The minimum
lease payments under noncancelable leases as of June 30, 2002 are as
follows:
2003 $278,000
2004 267,500
2005 265,200
2006 900
--------
$811,600
========
b. Employment/Consulting Agreements
In March 2002, the Company entered into a new employment agreement
with its Chief Executive Officer effective as of July 1, 2002 as the
prior agreement expired June 30, 2002. The new 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.
The Company has also entered into an employment agreement with a
regional office manager. This agreement provides for additional
compensation based on the profits of the manager's operation.
In July 1996, the Company entered into a financial public relations
consulting agreement with two individuals who were founders of the
Company and former directors. The four-year agreement provided for
annual payments of $48,000 payable in equal monthly payments of
$4,000 through November 2000. In November 1998, the agreement was
amended and extended to reduce the fee
F-25
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 9 (continued)
as of October 1998 to $2,000 per month. In February 2001, the
agreement was further amended and terminated with a final payment of
$35,000. The related expense for the year ended June 30, 2001 was
$45,000.
c. Advertising
In connection with an advertising agreement with ALM (see Note
7(e)), the Company has agreed to purchase $250,000 in additional
advertising in the year subsequent to the initial two-year term.
Such advertising will be incurred during the one-year period ended
August 2003.
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 noncontributory 401(k) savings and retirement plan,
whereby eligible employees may contribute 15% of their salaries up to the
maximum allowed under the Internal Revenue Code. Although the Company may
make discretionary contributions, none were made in fiscal years 2002 and
2001.
NOTE 11 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 2002 and 2001, the Company's financial instruments included
cash and cash equivalents, marketable securities, receivables and accounts
payable. The fair values of cash and cash equivalents, 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.
F-26
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 12 - CREDIT CONCENTRATIONS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, 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, 2002,
the amount in excess of Federally insured limits was $141,088.
Additionally, the Company maintains other money market accounts and its
equity portfolio at Merrill Lynch, Pierce, Fenner & Smith Inc., which
insures these balances against its financial failure.
The Company sells it services principally to insurance companies and law
firms. In fiscal years 2002 and 2001, 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 - TERMINATION OF ACQUISITION
In July 2001, the Company signed a letter of intent to acquire E-Vue,
Inc., a development stage company engaged in developing next-generation
end-to-end solutions for multimedia delivery over broadband and/or
wireless networks based on the MPEG-4 standard and associated compliant
technologies. The proposed purchase price under the letter of intent
consisted of a combination of common stock and convertible preferred stock
to be issued by the Company depending on certain financing conditions on
the part of E-Vue, Inc. In the event either party breached the agreement,
the non-breaching party was to be reimbursed for actual costs incurred up
to a maximum of $100,000 and was entitled to a $100,000 breakup fee. The
Nasdaq Listing Qualifications Panel informed the Company that the proposed
merger would have resulted in a change of control for purposes of Nasdaq
Marketplace rules, and therefore the combined entities would have been
required to evidence compliance with all requirements for initial listing
on the Nasdaq SmallCap Market immediately upon consummation of the
transaction. On January 8, 2002, the Company announced that discussions
had ended with respect to the proposed merger of the entities. The
acquisition of E-Vue, Inc. was not concluded and no breakup fees were
incurred.
F-27
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002 and 2001
NOTE 14 - NASDAQ LISTING
Nasdaq amended one of its standards for continued listing on the SmallCap
Market from requiring a minimum of $2,000,000 in net tangible assets to a
minimum of $2,500,000 of net equity. As of June 30, 2002, both the
Company's net tangible assets and its net equity were $2,093,006. The
Company's net equity is below the new minimum standard that goes into
effect in November 2002 and, therefore, the Company may have its common
stock delisted from the Nasdaq SmallCap Market when and if such
noncompliance occurs.
F-28
PART III
ITEM 9. (Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act); ITEM 10. (Executive
Compensation); ITEM 11 (Security Ownership of Certain Beneficial Owners and
Management); and ITEM 12 (Certain Relationships and Related Transactions) will
be incorporated in the Company's Proxy Statement to be filed within 120 days of
June 30, 2002, and are incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit
Number Description of Document
------ -----------------------
3.1 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)
3.2 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)
10.1 1996 Stock Option Plan, amended and restated (3)
10.2 Employment Agreement between Company and Roy Israel effective July
1, 2002**
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)
10.8 Exchangeable Preferred Stock and Warrants Purchase Agreement (5)
10.9 Preferred Stock Registration Rights Agreement (5)
10.11 Private Equity Line of Credit Agreement between Moldbury Holdings
and Company (5)
10.12 Private Equity Line of Credit Registration Rights Agreement (5)
10.13 Stock Purchase Warrant for Moldbury Holdings Limited (5)
10.14 Advertising Agreement dated August 11, 2000 (9)
11 Consent of Independent Certified Public Accountants**
99.1 Certification of CEO under Section 302 of the Sarbanes-Oxley Act of
2002**
99.2 Certification of CFO under Section 302 of the Sarbanes-Oxley Act of
2002**
99.3 Certification of CEO under Section 906 of the Sarbanes-Oxley Act of
2002**
99.4 Certification of CFO under Section 906 of the Sarbanes-Oxley Act of
2002**
----------
(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.
21
(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.
(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.
** Filed herewith.
B. Reports on Form 8-K: None during the fourth quarter.
22
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 24, 2002 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 24, 2002 By: /s/ Roy Israel
--------------
Roy Israel, Chairman of the
Board, CEO and President
Date: September 24, 2002 By: /s/ Patricia Giuliani-Rheaume
-----------------------------
Patricia Giuliani-Rheaume, Vice President,
Chief Financial Officer and Treasurer
Date: September 24, 2002 By: /s/ Frank J. Coyne
------------------
Frank J. Coyne, Director
Date: September 24, 2002 By: /s/ Randy Gerstenblatt
----------------------
Randy Gerstenblatt, Director
Date: September 24, 2002 By: /s/ Corey J. Gottlieb
---------------------
Corey J. Gottlieb, Director
Date: September 24, 2002 By: /s/ Anthony J. Mercorella
-------------------------
Anthony J. Mercorella, Director
Date: September 24, 2002 By: /s/ Robert M. Silverson, Jr.
----------------------------
Robert M. Silverson, Jr., Director
Date: September 24, 2002 By: /s/ Willem F. Specht
--------------------
Willem F. Specht, Director of
Information Technology and Director
23