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, 2003
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 0-21419
clickNsettle.com, Inc.
(Name of small business issuer as specified in its charter)
Delaware 23-2753988
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
1010 NORTHERN BOULEVARD, SUITE 336
GREAT NECK, NEW YORK 11021
(Address of Principal Executive Offices)
(516) 829-4343
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock $.001 Par Value Over the Counter Bulletin Board
Title of each class Name of each exchange on which registered
Common Stock $.001 Par Value Boston Stock Exchange
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent files in response to Item 405 of
Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-KSB
or any amendments to this Form 10-KSB.|_|
State issuer's revenues for its most recent fiscal year. $4,078,119
The aggregate market value of the voting stock held by non-affiliates per the
closing stock price of September 8, 2003 is $273,812.
As of September 8, 2003, 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, 2003
2
PART I
From time to time, including in this annual report on Form 10-KSB,
clickNsettle.com, Inc. (formerly NAM Corporation) (the "Company" or "we") may
publish forward-looking statements relating to such matters as anticipated
financial performance, business prospects, future operations, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, we note that a
variety of factors could cause our actual results to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements. The risks and uncertainties that may affect the operations,
performance, development and results of our business include, without
limitation, the following: changes in the insurance and legal industries; our
inability to retain current or new hearing officers; changes in the public court
systems; and the degree and timing of the market's acceptance of our arbitration
and mediation programs and electronic oversight applications and other risks
that are set forth herein.
ITEM 1. DESCRIPTION OF BUSINESS
The Company
We operate in one business segment as a provider of arbitration and
mediation services, also known as alternative dispute resolution services, or
ADR services, and related electronic oversight applications, principally to
insurance companies, law firms, corporations and municipalities. An ADR
proceeding is an alternative forum to the public court system for resolving
civil disputes.
An ADR proceeding streamlines the traditional cumbersome public litigation
process. As compared to the public court system, an ADR proceeding generally
offers litigants a faster resolution, confidentiality, reduced expenses,
flexibility in procedures and solutions, and control over the process. With
respect to business-to-business disputes, ADR proceedings can also preserve
business relations among the parties because its nature is potentially less
adversarial and disputes may be resolved promptly.
Our objective is to become the leading global provider of dispute
resolution services by providing services and technology designed to enhance and
streamline the traditional and often time-consuming and expensive legal process.
We believe we are uniquely positioned within the ADR industry as we offer highly
qualified hearing officers, premium services and innovative solutions designed
to appeal to a client base which has become more sophisticated with the
continuing acceptance and utilization of ADR. We have a patent pending on our
inventions relating to dispute resolution processing and oversight.
Additionally, depending upon market acceptance, we will review the needs of our
current and prospective customers and offer those solutions that we believe will
be of the most value to our clients and to our shareholders. We believe that our
marketing efforts going forward will best be directed towards large-scale
applications that benefit from our proprietary electronic infrastructure. As
such, our marketing emphasis will be driven by our unique capabilities as an
administrator. Additionally, the staff presently dedicated to our existing
client base will be charged with growing our business and exploiting our
inherent market advantages. Therefore, our plan is as follows: (1) exploit
potential revenue streams driven by our technological innovations in software,
systems and intellectual property such as (i) the administration of high-volume,
customized dispute resolution programs for large corporations, governmental
bodies, law firms and agencies and (ii) the licensing and/or sale of dispute
resolution-related software; (2) build brand recognition of NAM (National
Arbitration
3
and Mediation) as the premier provider of dispute resolution solutions through
our advertising campaign; (3) continue to attract and retain the services of
highly talented, former top-tier judges and attorneys to act as independent and
impartial hearing officers; and (4) broaden the type and complexity of the
dispute resolution cases we administer.
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.
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 1,700 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
parties may fashion whatever parameters are mutually agreed upon.
Generally, arbitration decisions are binding in nature and, unless
otherwise stipulated by the parties, are appealable in only limited
circumstances in the public court system. We do not currently offer any type of
appeal procedure. Our arbitration decisions are generally enforceable in the
public court system by following prescribed filing procedures in the applicable
local jurisdiction.
4
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, ADR consulting and training, mock jury trials, specialized
ADR video conferencing and other custom dispute resolution services depending on
the sensitivities of our clients and their respective cases.
Electronic Oversight Applications: In combination with our existing
services, we offer oversight applications that provide a new and efficient
method to manage large-scale, high volume ADR programs, while affording parties
transparency and integrity of process. We believe our unique innovations in this
area will continue to meet with increased market acceptance.
Marketing and Sales
Our comprehensive suite of ADR offerings is designed to streamline and
administer non-judicial dispute resolution initiatives. Much of our marketing
effort has been concentrated on demonstrating our complete line of services to
our existing clientele as we believe there exists great potential to expand
these relationships. We believe our web-based management "toolkit" enables our
clients to accurately assess the value of ADR and adds invaluable transparency
and metrics to ensure the integrity of ADR initiatives. As such, we believe case
referrals should increase. Further, we have also targeted our marketing efforts
towards commercial and governmental entities, which are well suited to benefit
from our patent-pending dispute resolution inventions that provide
organizational oversight over large-scale, multi-dimensional ADR programs.
Our Account Executives are charged with the goal of pursuing new business
as well as increasing the volume of business with existing clients through
in-person meetings, presentations and educational seminars relating to ADR
services. Each is equipped with various tools and metrics enabling them to gauge
client activity and their own individual sales effectiveness. As of September 8,
2003, we employed 15 Account Executives to market our services. These
individuals are salaried employees and are generally eligible for additional
commissions/incentives based on revenue generated.
Our President and Executive Vice President of Sales are active in working
with our Account Executives. Account Executives in our regional office first
report to a Regional Manager
5
who then reports to the Executive Vice President of Sales. The employment
agreements of the Executive Vice President of Sales and of the Regional Manager
of our Massachusetts office provide for additional compensation based on the
achievement of specified financial criteria for their respective areas.
The majority of our clients are insurance carriers, law firms and
corporations. In fiscal years 2003 and 2002, no customer exceeded 10% of net
revenues. We have a diversified customer base with our revenue distributed among
more than 1,750 clients in both fiscal years 2003 and 2002.
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 a superior roster of highly qualified hearing officers
available on a global basis and extensive case management tools, is unique.
Further, we believe we have certain advantages that enable us to better serve
our clients. These advantages include: (1) exclusive agreements with many of our
most sought after hearing officers, who are generally former judges and
respected attorneys and (2) our web-enabled dispute resolution case management
and operational system, which provides transparency and ensures integrity of
process, while also providing analysis of a client's entire ADR program on a
regional, national or global basis. We cannot assure you, however, that these
perceived advantages will enable us to compete successfully in the future.
6
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 8, 2003, we employed 34 persons, including one part-time
employee; of these, three were in executive positions, 16 were Sales Managers
and Account Executives and the remaining 15 employees support our operations
with respect to information technology, accounting, scheduling, confirming,
billing and other administrative duties. The Company also currently utilizes the
service of a temporary employee who is eligible for long-term employment.
Hearing Officers
As of September 8, 2003, we maintained relationships with approximately
1,700 hearing officers. We have exclusive agreements with respect to ADR
proceedings with a number of these hearing officers. Such hearing officers
accounted for approximately 66% of the number of in-person cases handled by us
for the year ended June 30, 2003. The remaining non-exclusive hearing officers
make their services available to us on a case-by-case basis. With the exception
of the exclusive hearing officers, the remainder of our roster of hearing
officers can provide their services to competing ADR providers. Compensation to
the hearing officers is based on the number of proceedings conducted and the
length of time of such proceedings.
ITEM 2. DESCRIPTION OF PROPERTY
We maintain two leased facilities, which are located in office buildings.
Currently, we lease 9,080 square feet of space at 1010 Northern Boulevard, Great
Neck, New York for our corporate headquarters and for providing
hearing/conference facilities in the New York area. The lease expires June 2005.
During fiscal year 2003, we entered into a sub-lease agreement for 2,750 square
feet at our Great Neck facility for the period from March 2003 through June 2005
with sublease rentals of approximately $73,900 per annum. We also lease 1,320
square feet of space, on a month-to-month basis, for our North Easton,
Massachusetts office. We believe this space is adequate for our reasonably
anticipated future needs.
The aggregate rental expense, net of sublease income of $24,536, for all
of our offices was $238,647 during the year ended June 30, 2003.
ITEM 3. LEGAL PROCEEDINGS
We are a party to legal matters arising in the general conduct of
business. The ultimate outcome of such matters is not expected to have a
material adverse effect on the results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. Our Common Stock is quoted on the NASD's Over-the-Counter Bulletin Board
under the trading symbol "CLIK" since March 5, 2003; prior thereto, our Common
Stock was quoted on The Nasdaq SmallCap Market 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 2003:
First quarter (07/1/02-9/30/02) $ 1.35 $ 0.77 N/A N/A
Second quarter (10/01/02-12/31/02) 0.77 0.57 N/A N/A
Third quarter (01/01/03-03/31/03) 0.73 0.25 N/A N/A
Fourth quarter (04/01/03-06/30/03) 0.95 0.55 N/A N/A
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
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 8, 2003, the closing bid
price for our common stock, as reported by the Over-the-Counter Bulletin Board,
was $0.35.
As of August 29, 2003, there were approximately 480 holders of our common
stock.
We have not paid any dividends upon our common stock. The payment of
common stock dividends, if any, in the future rests within the discretion of our
board of directors and will depend, among other things, upon our earnings,
capital requirements and financial condition, as well as other relevant factors.
8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We provide alternative dispute resolution services, or ADR services, to
insurance companies, law firms, corporations and municipalities. We focus the
majority of our marketing efforts on developing and expanding relationships with
these entities, which we believe are some of the largest consumers of ADR
services. Furthermore, we believe that there is greater market acceptance and a
positive trend relating to the utilization of ADR services as opposed to the
traditional litigation process. The variety, complexity and volume of cases
being submitted for ADR are illustrative and, we believe, accurate barometers of
the integration of ADR into the legal landscape. Further, we see this trend
continuing. 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 technology designed to enhance and
streamline the traditional and often time-consuming and expensive legal process.
We believe we are uniquely positioned within the ADR industry as we offer highly
qualified hearing officers, premium services and innovative solutions designed
to appeal to a client base which has become more sophisticated with the
continuing acceptance and utilization of ADR. We have a patent pending on our
inventions relating to dispute resolution processing and oversight.
Additionally, depending upon market acceptance, we will 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 shareholders. We believe that our
marketing efforts going forward will best be directed towards large-scale
applications that benefit from our proprietary electronic infrastructure. As
such, our marketing emphasis will be driven by our unique capabilities as an
administrator. Additionally, the staff presently dedicated to our existing
client base will be charged with growing our business and exploiting our
inherent market advantages. Therefore, our plan is as follows: (1) exploit
potential revenue streams driven by our technological innovations in software,
systems and intellectual property such as (i) the administration of high-volume,
customized dispute resolution programs for large corporations, governmental
bodies, law firms and agencies and (ii) the licensing and/or sale of dispute
resolution-related software; (2) build brand recognition of NAM (National
Arbitration and Mediation) as the premier provider of dispute resolution
solutions through our advertising campaign; (3) continue to attract and retain
the services of highly talented, former top-tier judges and attorneys to act as
independent and impartial hearing officers; and (4) broaden the type and
complexity of the dispute resolution cases we administer.
Future Trends
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
9
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 suite of 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 enhancements and other costs associated with our investment in
technology and (b) our advertising expenses. Our advertising campaign commenced
in August 2000 when we signed an agreement with American Lawyer Media, Inc., the
nation's leading legal journalism and information company, to provide $1,000,000
of advertising and promotional opportunities in their national and regional
publications over a two-year period in exchange for 61,474 shares of our common
stock (as adjusted for the 1-for-3 reverse stock split effectuated on August 20,
2001). At the time this advertising was contracted for, we were promoting our
new corporate name, clickNsettle.com, as well as continuing to promote our
established brand name, NAM (National Arbitration and Mediation). We believe
that NAM is a proven and well-respected brand in the ADR industry. As part of
our agreement, as amended, with American Lawyer Media, Inc., we agreed to
purchase an additional $250,000 of advertising. Such advertising is to be
expended from May 2003 though June 2004. However, we currently anticipate that,
at the conclusion of our present campaign, we will reduce our advertising
expenses and we believe our revenues will not be adversely impacted.
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
Results of Operations
Revenues. Revenues increased 3.1% to $4,078,119 for the year ended June
30, 2003 from $3,957,069 for the comparable prior period. We believe our revenue
has been adversely affected by the consolidation and turmoil in the insurance
industry, which represents a major portion of our clientele. This affects the
number of cases heard. However, at the same time, the average dollars earned per
hearing has increased. In a broader sense, we believe that lawsuits continue to
be commenced and that our services should prove to be vital to insurers in their
ability to address a growing caseload with reduced costs and increased
efficiency. We believe our services will benefit clients as they seek to
optimize efficiencies in the litigation process in order to improve their own
financial outlook as, due to low interest rates, insurers cannot rely on
investment income to offset operational and indemnity expenses. Additionally,
plaintiffs benefit from a speedier resolution of their claims which is of
greater importance in difficult economic times.
As we continue to add to our exclusive pool of highly qualified hearing
officers, we believe our roster will enable us to attract a higher volume and
diversity of cases. As a result, we believe the average dollars earned per
hearing will continue to be favorably impacted.
Cost of Services. Cost of services increased 3.6% to $1,006,562 for the
year ended June 30, 2003 from $971,255 for the year ended June 30, 2002. The
cost of services as a percentage of revenues remained consistent between the
years at approximately 25% for both fiscal years 2003 and 2002. The ratio of
cost of services to revenues will fluctuate based on the type of cases
administered, the number of hours per case and our ability (or inability) to
take advantage of volume arrangements with hearing officers which usually lower
the cost per case.
10
Sales and Marketing. Sales and marketing costs decreased 31.0% to
$1,137,489 for the year ended June 30, 2003 from $1,649,643 for the year ended
June 30, 2002. Sales and marketing costs as a percentage of revenues decreased
to 28% in fiscal year 2003 from 42% in fiscal year 2002. Most of the decrease
(approximately $468,300) relates to advertising costs. Our initial agreement
with American Lawyer Media, Inc., which provided us with $1,000,000 of
advertising and promotional opportunities in their national and regional
publications over a two-year period, ended in August 2002. The related non-cash
amount expensed for the years ended June 30, 2003 and 2002 was $18,285 and
$461,318, respectively. As part of our agreement, as amended, with American
Lawyer Media, Inc., we agreed to purchase an additional $250,000 of advertising.
Such advertising is to be expended from May 2003 though June 2004. During the
year ended June 30, 2003, we incurred $22,835 of advertising expense related to
this commitment. The remainder of the decrease in sales and marketing costs
pertained primarily to salaries and related costs that declined by approximately
$54,800.
General and Administrative. General and administrative costs
decreased 2.0% to $2,437,805 for the year ended June 30, 2003 from $2,488,719
for the year ended June 30, 2002. There was a large decrease (approximately
$169,100) in legal and professional fees which, in the prior year period,
primarily related to fees incurred to apply for international patents and
trademarks for our technology inventions and mergers and acquisitions activity
that did not recur in the current year. Additionally, we reduced expenditures by
approximately $78,900 with respect to autos, depreciation, telephones and taxes.
Offsetting these decreases was an increase of approximately $208,000 relating to
employee costs and related items (including benefits, payroll taxes, outside
services and employee recruitment), an allowance provided on notes receivable
and the increased cost of insurance. Employee costs rose due to the recruiting
and staffing of computer programmers in our information technology department
and for other administrative functions to further enhance and expand our
comprehensive suite of ADR offerings. General and administrative costs as a
percentage of revenues decreased to 60% for fiscal year 2003 from 63% for fiscal
year 2002.
Other Income (Expenses). Other income (expenses) changed by $99,160, from
other expenses of ($74,934) for the year ended June 30, 2002 to other income of
$24,226 for the year ended June 30, 2003. Other income (expenses) is composed
primarily of investment income and realized gains (losses) generated from
investments. Realized gains (losses) (which includes write-downs for other than
temporary declines in the value of marketable securities) approximated
($137,600) in fiscal year 2002 versus ($12,400) in fiscal year 2003, an
improvement of $125,200. As an offset, net interest income generated primarily
from investments in money market funds declined by approximately $23,225 from
$49,084 in the prior year due to lower invested balances and a decline in the
prevailing interest rates between the two years. At June 30, 2003, approximately
90% of cash equivalents and marketable securities were invested in money market
funds (whose rate of return will fluctuate based on prevailing interest rates).
Income Taxes. Tax benefits resulting from net losses incurred for the
years ended June 30, 2003 and 2002 were not recognized as we recorded a full
valuation allowance against the net operating loss carryforwards during the
periods. As of June 30, 2003, we had net operating carryforwards for Federal tax
purposes of approximately $6,833,000 and net capital loss carryforwards for
Federal tax purposes of approximately $282,000, both with full valuation
allowances.
Net Loss. For the year ended June 30, 2003, we had a net loss of $479,511
as compared to a net loss of $1,227,482 for the year ended June 30, 2002. The
loss declined as we secured higher fees for services rendered to our clients as
a result of an increase in the type and diversity of cases
11
heard, and due to a reduction in advertising expenses, enhanced operating
efficiencies and improved investment results.
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 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 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 additional
advertising after August 2002. Due to the economic slowdown,
12
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 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.
Liquidity and Capital Resources
At June 30, 2003, the Company had a working capital surplus of $1,492,023
as compared to $1,833,092 at June 30, 2002. The decrease in working capital
occurred primarily as a result of the net loss in fiscal year 2003.
Net cash used in operating activities was $297,662 for the fiscal year
ended June 30, 2003 versus $491,220 in the prior fiscal year. Cash used in
operating activities principally declined due to a reduction in the loss from
operations which was partially offset by a decrease in non-cash charges for
advertising.
13
Net cash provided by investing activities was $179,382 for the year ended
June 30, 2003 versus net cash used in investing activities of $78,923 for the
year ended June 30, 2002. The change in cash from investing activities was
principally due to a higher level of net sales of marketable securities in
fiscal year 2003 as compared to fiscal year 2002 where there was a higher level
of net purchases of marketable securities.
Net cash used in financing activities was $0 for the year ended June 30,
2003 versus $71,163 for the year ended June 30, 2002. In the prior year, we
purchased 36,500 shares of our common stock for an aggregate cost of $71,163.
In accordance with the terms of our August 2000 advertising agreement, as
amended, with American Lawyer Media, Inc., we agreed to purchase an additional
$250,000 of advertising. Such advertising is to be expended from May 2003
through June 2004. During the year ended June 30, 2003, we incurred $22,835 of
advertising expense related to this commitment.
We have incurred net losses and had negative cash flow from operations in
each year in the seven-year period ended June 30, 2003. 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, 2003, we had $1,798,786 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 further efficiencies achieved by utilizing 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 released Financial Reporting
Release No. 60 which requires all companies to include a discussion of critical
accounting policies and methods used in the preparation of their financial
statements. The significant accounting policies and methods used in the
preparation of our consolidated financial statements are discussed in Note 2 of
the Notes to Consolidated Financial Statements. The following is a list of our
critical accounting policies and a brief discussion of each:
- Revenue recognition
- Allowance for doubtful accounts
- Income taxes and valuation allowance
Revenue recognition - We principally derive our revenue from fees charged for
arbitrations and mediations. Each party to a proceeding is charged an
administrative fee, which generally includes the first hour of
hearing/conference time. Additional fees are billed based on the total time
spent by the hearing officer. Hearing officer time includes, but is not limited
to, case review time, decision preparation time, telephone or verbal conference
time, as well as actual hearing/conference time expended. The Company generally
recognizes revenue when the arbitration or mediation occurs. Fees received prior
to such arbitration or mediation are reflected as deferred revenue.
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
14
economic trends and any specific customer collection issues that have been
identified. The allowance for doubtful accounts is reviewed periodically and
adjustments are recorded as deemed necessary.
Income taxes and valuation allowance - We are required to estimate our actual
current tax expense together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which would be included within
our consolidated balance sheet. We then assess the likelihood that the deferred
tax assets will be recovered from future taxable income and, to the extent we
believe recovery is not likely, a valuation allowance is recognized. We have
recorded a valuation allowance to the extent a portion or all of a deferred tax
asset may not be realizable.
Effect of Recently Issued Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148
encourages, but does not require, companies to record compensation cost for
stock-based compensation plans at fair value. In addition, SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 148
requires disclosures in the summary of significant accounting policies in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
The Company elected to adopt, effective December 31, 2002, only the
disclosure provisions of SFAS No. 148 and to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, compensation expense is not recognized for
options granted to employees and to members of the board of directors when such
options are granted to board members in their capacity as directors.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"),
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This statement establishes standards for how an issuer
classifies and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In accordance
with the standard, financial instruments that embody obligations for the issuer
are required to be classified as liabilities. This statement shall be effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. As the Company has not issued any such financial
instruments, the adoption of SFAS No. 150 is not expected to have a material
impact on the financial position and results of operations of the Company.
RISK FACTORS
Our business faces risks. These risks include those described below and
may include additional risks of which we are not currently aware or which we
currently do not believe are material. If any of the events or circumstances
described in the following risks actually occurs, our business, financial
condition or results of operations could be adversely affected. These risks
should be read in conjunction with the other information set forth in this
report.
15
We have Recent, and Anticipate Continuing, Losses
We have incurred operating losses each fiscal year of the seven-year
period ended June 30, 2003. Going forward, we may continue to incur operating
losses and make capital expenditures and, as a result, we will need to generate
higher revenues to achieve and maintain profitability and provide working
capital needed to fund losses. We cannot assure you that we can achieve or
sustain profitability in the future. If revenues 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 catastrophic injury,
self-insured commercial and employment initiatives represent a growing
percentage of our revenues, there can be no assurance that we will be able to
continue to expand our insurance and non-insurance-related dispute business, or
maintain or increase our current level of cases. In addition, we cannot assure
you that changes in the insurance industry will not affect our business.
Possible Improvements in the Public Court System, Including Use of ADR Services,
May Affect Our Business
The ADR industry, in general, furnishes an alternative to public dispute
mechanisms, principally the local, state and federal court systems. Our
marketing efforts have been based on our belief that there exists a high degree
of dissatisfaction among litigants and their counsel with the public court
system. If the public courts, in the markets we are currently serving or seek to
serve, reduce case backlogs and provide effective settlement mechanisms at no,
or substantially reduced cost to litigants, our business opportunities in such
markets may be significantly reduced. Several public court systems, both on the
federal and state level, including certain federal and state courts located in
New York State, have instituted court coordinated ADR programs. Similar programs
are under consideration in a number of states and may be adopted at any time.
The success of such ADR programs could have a material adverse effect on our
business by diminishing the demand for private ADR services.
The Private ADR Services Business is Highly Competitive
The private ADR business is highly competitive, both on a national and
regional level. Barriers to entry in the ADR business are relatively low, and
new competitors can begin doing business relatively quickly. There are two types
of competitors, not-for-profit and for-profit entities:
o We believe that our largest not-for-profit competitor is the
American Arbitration Association which has significant market share
in complex commercial cases.
o We believe that our largest for-profit competitor is JAMS.
At this time, we believe that numerous other private ADR firms are
competing with us in the regions we currently serve. Increased competition could
decrease the fees we are able to charge for our services and limit our ability
to obtain qualified hearing officers. This could have a material adverse effect
on our ability to be profitable in the future. Certain competitors
16
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 existing
clients and with new clients. We also rely on case referrals from our current
clients. We may not continue to receive our current level of, or an adequate
level of, referrals of cases. If we do not maintain such levels, there could be
a material adverse effect on our business.
We Depend Upon Qualified Hearing Officers
The market for our services depends on a perception by our clients that
our hearing officers are impartial, qualified, and experienced. Our ability to
retain qualified hearing officers in the event that competition increases would
be uncertain. We have mitigated this risk by retaining exclusive hearing
officers. Of the total number of cases heard during the fiscal year ended June
30, 2003, approximately 66% were heard by exclusive hearing officers.
Accordingly, at any time, the remaining hearing officers who are not under
contract with us can refuse to continue to provide their services to us and are
free to render services independently or through competing ADR services. If
qualified hearing officers are unwilling or unable to continue to provide their
services through us for any reason, including possible agreements to provide
their services to our competitors on an exclusive basis, our business and
operations could be materially and adversely affected.
Our Current Stockholders Have the Ability to Exert Significant Control
Our executive officers, directors, and their affiliates beneficially own
625,856 shares or approximately 44.4% of the common stock outstanding based on
1,408,176 shares of common stock outstanding as of June 30, 2003. 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.
17
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 trademark law
o contractual provisions
o certain technology and security measures
o copyright law
o patent law
o confidentiality agreements
The steps we have taken regarding our proprietary technology, however, may
be insufficient to deter misappropriation.
In the systems and software industries, it is common that companies
receive notices from time to time alleging infringement of patents, copyrights
or other intellectual property rights of others. We may from time to time be
notified of claims that we may be infringing upon patents, copyrights or other
intellectual property rights owned by third parties. Companies may pursue claims
against us with respect to the alleged infringement of patents, copyrights or
other intellectual property rights owned by third parties. Although we believe
we have not violated or infringed upon any intellectual property patents and
have taken measures to protect our own rights, there is no assurance that we
will avoid litigation. Litigation may be necessary to protect our intellectual
property rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against third party claims of
invalidity. Any litigation could result in substantial costs and diversion of
resources away from the day-to-day operation of our business.
Existing copyright, trademark, patent and trade secret laws afford only
limited protection. Existing laws, in combination with the steps we have taken
to protect our proprietary rights may be inadequate to prevent misappropriation
of our technology or other proprietary rights. Also, such protections do not
preclude competitors from independently developing products with functionality
or features similar or superior to our products and technologies.
Our common stock is no longer listed on The Nasdaq SmallCap Market
On March 5, 2003, The Nasdaq Listing Qualifications Panel delisted our
common stock from The Nasdaq SmallCap Market. Since that date, trading in our
securities has been conducted in the over-the-counter market in the NASD's OTC
Electronic Bulletin Board. As a result, an investor may find it more difficult
to purchase, dispose of and to obtain accurate quotations as to the value of our
securities.
In addition, as the trading price of our common stock has been less than
$5.00 per share, trading in our common stock is also subject to the requirements
of Rule 15g-9 under the Securities Exchange Act of 1934. Under that rule,
broker/dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including (a) a requirement that they make an
individualized written suitability determination for the purchaser and (b)
receive the purchaser's written consent prior to the transaction.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
also requires additional disclosure in connection with any trades involving a
stock defined as a penny stock (generally, any equity security not traded on an
exchange or quoted on The Nasdaq SmallCap Market that has a
18
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.
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 DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that
material information relating to the Company are made known to our Chief
Executive Officer ("CEO"), Chief Financial Officer ("CFO") and others in the
Company involved in the preparation of this annual report, by others within the
Company. Our CEO and CFO have reviewed our disclosure controls and procedures
within 90 days prior to the filing of this annual report and have concluded that
they are effective. There were no significant changes in our internal controls
or other factors that could significantly affect our internal controls
subsequent to the last date they were reviewed by our CEO and CFO.
19
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
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F- 25
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, 2003 and 2002, 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, 2003 and 2002, 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.
/S/ GRANT THORNTON LLP
Melville, New York
August 29, 2003
F-2
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 2003 2002
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,798,786 $ 1,917,066
Marketable securities 181,063 319,600
Accounts receivable (net of allowance for doubtful
accounts of $140,000 in 2003 and 2002) 435,667 380,518
Prepaid expenses and other current assets (net of allowance for doubtful
note receivable of $49,148 in 2003) 39,825 84,393
------------ ------------
Total current assets 2,455,341 2,701,577
FURNITURE AND EQUIPMENT - AT COST,
less accumulated depreciation 143,824 216,939
OTHER ASSETS 42,975 42,975
------------ ------------
$ 2,642,140 $ 2,961,491
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 277,608 $ 258,097
Accrued expenses and other liabilities 275,428 270,750
Accrued payroll and employee benefits 141,305 37,231
Deferred revenues 268,977 302,407
------------ ------------
Total current liabilities 963,318 868,485
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.001 par value; 15,000,000 shares
authorized; 1,450,259 shares issued and outstanding
in 2003 and 2002 1,450 1,450
Additional paid-in capital 10,111,577 10,111,324
Accumulated deficit (8,394,247) (7,914,736)
Accumulated other comprehensive income (loss) 43,960 (21,114)
Less common stock in treasury at cost, 42,083
shares in 2003 and 2002 (83,918) (83,918)
------------ ------------
Total stockholders' equity 1,678,822 2,093,006
------------ ------------
$ 2,642,140 $ 2,961,491
============ ============
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,
2003 2002
----------- -----------
Net revenues $ 4,078,119 $ 3,957,069
----------- -----------
Operating costs and expenses
Cost of services 1,006,562 971,255
Sales and marketing expenses 1,137,489 1,649,643
General and administrative expenses 2,437,805 2,488,719
----------- -----------
4,581,856 5,109,617
----------- -----------
Loss from operations (503,737) (1,152,548)
Other income (expenses)
Investment income (loss) 13,448 (88,542)
Other income 10,778 13,608
----------- -----------
24,226 (74,934)
----------- -----------
Loss before income taxes (479,511) (1,227,482)
Income taxes
----------- -----------
NET LOSS $ (479,511) $(1,227,482)
=========== ===========
Net loss per common share $ (.34) $ (.87)
=========== ===========
Weighted-average shares outstanding - basic and diluted 1,408,176 1,415,020
=========== ===========
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, 2003 and 2002
Accumu-
lated
other
compre- Total
Common stock Additional hensive Common stock- Compre-
------------------- paid-in Accumulated income stock in holders' hensive
Shares Amount capital deficit (loss) treasury equity loss
--------- ------- ----------- ----------- -------- --------- ----------- ------------
Balances at June 30, 2001 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) $(1,227,482)
Change in unrealized gain
(loss) on marketable
securities (14,979) (14,979) (14,979)
---------- ------- ----------- ----------- -------- --------- ----------- -----------
Comprehensive loss $(1,242,461)
===========
Balances at June 30, 2002 1,450,259 1,450 10,111,324 (7,914,736) (21,114) (83,918) 2,093,006
Compensation related to stock
options 253 253
Net loss (479,511) (479,511) $ (479,511)
Change in unrealized gain
(loss) on marketable
securities 65,074 65,074 65,074
---------- ------- ----------- ----------- -------- --------- ----------- -----------
Comprehensive loss $ (414,437)
===========
Balances at June 30, 2003 1,450,259 $ 1,450 $10,111,577 $(8,394,247) $ 43,960 $ (83,918) $ 1,678,822
========== ======= =========== =========== ======== ========= ===========
The accompanying notes are an integral part of this statement.
F-5
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
2003 2002
----------- -----------
Cash flows from operating activities
Net loss $ (479,511) $(1,227,482)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 84,933 101,826
(Gains) losses on sales of marketable securities (46,322) 22,607
Write-down of marketable securities 58,733 115,020
Advertising in exchange for common stock 18,285 461,318
Compensation related to stock options 253 1,939
Provision for write-down of note receivable 49,148
Changes in operating assets and liabilities
(Increase) in accounts receivable (55,148) (24,844)
(Increase) in prepaid expenses and other current assets (22,866) (27,348)
Increase in accounts payable, accrued expenses and other liabilities 24,189 65,239
Increase in accrued payroll and employee benefits 104,074 2,211
(Decrease) increase in deferred revenues (33,430) 18,294
----------- -----------
Net cash used in operating activities (297,662) (491,220)
----------- -----------
Cash flows from investing activities
Purchases of marketable securities (535,518) (124,225)
Proceeds from sales of marketable securities 726,718 54,826
Purchases of furniture and equipment (11,818) (9,524)
----------- -----------
Net cash provided by (used in) investing activities 179,382 (78,923)
----------- -----------
Cash flows from financing activities
Purchase of treasury stock at cost (71,163)
----------- -----------
Net cash used in financing activities (71,163)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (118,280) (641,306)
Cash and cash equivalents at beginning of year 1,917,066 2,558,372
----------- -----------
Cash and cash equivalents at end of year $ 1,798,786 $ 1,917,066
=========== ===========
The accompanying notes are an integral part of these statements.
F-6
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
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 seven-year period ended June 30,
2003. 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, 2003, the Company had $1,798,786 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 further efficiencies
achieved by utilizing an enhanced processing system, it will have
sufficient cash to meet its needs over the next twelve months.
F-7
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
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.
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
F-8
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 2 (continued)
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.
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 that are reported at their fair values. Unrealized gains
or losses on these securities are reported as a separate component
of accumulated other comprehensive income (loss), net of related tax
effects, within stockholders' equity. The Company categorizes all
equity securities as available-for-sale.
Investment income consists of interest, dividends and gains and
losses on marketable securities. Interest and dividends are
recognized when earned. Realized gains and losses on sales,
maturities or liquidation of investments 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, 2003 and
2002.
F-9
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 2 (continued)
i. Income Taxes
The Company follows the asset and liability method of accounting for
income taxes by applying statutory tax rates in effect at the
balance sheet date to differences among the book and tax bases of
assets and liabilities. The resulting deferred tax liabilities or
assets are adjusted to reflect changes in tax laws or rates by means
of charges or credits to income tax expense. A valuation allowance
is recognized to the extent a portion or all of a deferred tax asset
may not be realizable.
j. Advertising Costs
The cost of advertising is expensed when the advertising takes
place. The Company incurred $70,745 and $539,071 for advertising and
external public relations costs in fiscal 2003 and 2002,
respectively. These amounts include $18,285 and $461,318 relating to
non-cash advertising charges in fiscal 2003 and 2002, 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 981,935 and 734,604, at June 30, 2003 and 2002, respectively,
would be antidilutive as the Company incurred net losses for the
years ended June 30, 2003 and 2002.
l. Accounting for Stock Options
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS No. 148"). SFAS No. 148 encourages, but does not
require, companies to record compensation cost for stock-based
compensation plans at fair value. In addition, SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee
compensation and amends the disclosure requirements of Statement of
Financial
F-10
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 2 (continued)
Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 148 requires disclosures in the summary of
significant accounting policies in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company elected to adopt, effective December 31, 2002, only the
disclosure provisions of SFAS No. 148 and to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations (see Note 7(i)). Accordingly,
compensation expense is not recognized for options granted to employees
and to members of the board of directors when such options are granted to
board members in their capacity as directors.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for options granted to employees and to
members of the board of directors consistent with the "fair value"
methodology prescribed by SFAS No. 123, the Company's net loss
attributable to common stockholders and net loss per share for the years
ended June 30, 2003 and 2002 would be increased to the pro forma amounts
indicated below:
2003 2002
----------- -----------
Net loss attributable to common stockholders
As reported $ (479,511) $(1,227,482)
Deduct:Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (419,983) (660,476)
----------- -----------
Proforma net loss $ (899,494) $(1,887,958)
----------- -----------
Net loss per common share:
Basic and diluted - as reported $ (.34) $ (.87)
Basic and diluted - proforma $ (.64) (1.33)
F-11
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 2 (continued)
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.
Compensation expense of $253 and $1,939 was recognized during the
years ended June 30, 2003 and 2002, respectively, for options
granted to consultants.
m. Effect of Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 150 ("SFAS
No. 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in
its statement of financial position certain financial instruments
with characteristics of both liabilities and equity. In accordance
with the standard, financial instruments that embody obligations for
the issuer are required to be classified as liabilities. This
statement shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at
the beginning of the first interim period beginning after June 15,
2003. As the Company has not issued any such financial instruments,
the adoption of SFAS No. 150 is not expected to have a material
impact on the financial position and results of operations of the
Company.
F-12
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive loss, net of tax effects, are as follows:
2003 2002
----------- -----------
Net loss $ (479,511) $(1,227,482)
----------- -----------
Unrealized gain (loss) on marketable securities, net of tax
effects of $0 in 2003 and 2002, respectively
Unrealized gains (losses) arising in period 65,204 (39,901)
Reclassification adjustment - (loss) gain included
in net loss (130) 24,922
----------- -----------
Net unrealized gain (loss) 65,074 (14,979)
----------- -----------
Comprehensive loss $ (414,437) $(1,242,461)
=========== ===========
Accumulated other comprehensive income (loss) represents the unrealized
gain (loss) on marketable equity securities, net of tax effects of $0 in
fiscal 2003 and 2002, respectively.
F-13
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 4 - MARKETABLE SECURITIES
Marketable securities, accounted for as available-for-sale securities, are
carried at fair value. A summary of investments in marketable securities
and a reconciliation of amortized cost to the fair value follow:
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- --------
June 30, 2003
Equity securities $137,103 $ 43,960 $ $181,063
-------- -------- -------- --------
Total marketable securities $137,103 $ 43,960 $ $181,063
======== ======== ======== ========
June 30, 2002
Equity securities $340,714 $ 23,432 $(44,546) $319,600
-------- -------- -------- --------
Total marketable securities $340,714 $ 23,432 $(44,546) $319,600
======== ======== ======== ========
Proceeds on sales of securities were $726,718 and $54,826 for the years
ended June 30, 2003 and 2002, respectively. During fiscal 2003 and 2002,
gross gains of $69,736 and $12, respectively, and gross losses of $23,414
and $22,619, respectively, were realized on these sales. During 2003 and
2002, the Company evaluated the carrying value of its investments in
marketable equity securities and recorded write-downs for other than
temporary declines in the value of such securities in the amount of
$58,733 and $115,020, respectively. Such write-downs are included in
investment income (loss) on the accompanying statements of operations. Net
unrealized gains (losses) on marketable securities were $43,960 and
$(21,114) at June 30, 2003 and 2002, respectively. During fiscal 2003 and
2002, no income taxes (benefits) were provided on the unrealized gains
(losses) due to the Company's net operating loss.
F-14
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
June 30,
----------------------------
2003 2002
----------- -----------
Furniture $ 234,020 $ 234,020
Equipment 561,451 549,633
Leasehold improvements 21,993 21,993
----------- -----------
817,464 805,646
Less accumulated depreciation (673,640) (588,707)
----------- -----------
$ 143,824 $ 216,939
=========== ===========
Depreciation expense for the years ended June 30, 2003 and 2002 was
$84,933 and $101,826, respectively.
NOTE 6 - INCOME TAXES
Temporary differences which give rise to deferred taxes are summarized as
follows:
2003 2002
----------- -----------
Deferred tax assets
Net operating loss and other carryforwards $ 2,770,000 $ 2,660,000
Provision for bad debts 76,000 56,000
Deferred compensation 38,000 1,000
Deferred rent and other 52,000 53,000
Depreciation 33,000 24,000
----------- -----------
Net deferred tax asset before valuation allowance 2,969,000 2,794,000
Valuation allowance (2,969,000) (2,794,000)
----------- -----------
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-15
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 6 (continued)
The Company's effective income tax rate differs from the statutory Federal
income tax rate as a result of the following:
2003 2002
---------- ----------
Benefit at statutory rate $ (163,034) $ (417,344)
State and local benefit, net of Federal tax (26,148) (71,256)
Nondeductible expenses - net 14,858 14,563
Increase in the valuation allowance 174,324 474,037
---------- ----------
$ -- $ --
========== ==========
At June 30, 2003, the Company had a net operating loss carryforward for
Federal income tax reporting purposes amounting to approximately
$6,833,000, expiring from 2012 through 2023. Additionally, the Company has
a net capital loss carryforward for Federal income tax reporting purposes
at June 30, 2003 of approximately $282,000 which expires from 2006 through
2008. No income taxes were paid in the years ended June 30, 2003 and 2002.
Under current tax law, the utilization of net operating losses will be
restricted if significant changes in the Company's ownership were to
occur. In addition, their use is limited to future earnings of the
Company.
NOTE 7 - STOCKHOLDERS' EQUITY
a. Capitalization
On 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.
F-16
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 7 (continued)
c. Series A Exchangeable Preferred Stock
On February 15, 2000, the Company issued 1,850 shares of its Series
A Exchangeable Preferred Stock for an aggregate purchase price of
$1,850,000. On April 5, 2001, pursuant to approval by the board of
directors, the Company redeemed all of its Series A Exchangeable
Preferred Stock at par value. There were 1,800 shares outstanding
before the redemption and the Company paid $1,800,000 to redeem
these shares.
In connection with the sale of the Series A Exchangeable Preferred
Stock, the Company issued warrants to the preferred holders to
purchase an aggregate of 18,750 shares of common stock at a price
per share of $31.56. The warrants expire on August 15, 2005.
d. Equity Line of Credit
On February 16, 2000, the Company entered into an Equity Line of
Credit Agreement (the "Agreement") with Moldbury Holdings Limited.
Under this Agreement, the Company had the right, until February 15,
2003, to require that Moldbury Holdings Limited purchase between
$500,000 and $7,000,000 of the Company's common stock subject to
certain limitations. The Company did not make any draw downs under
the Agreement.
In connection with the Agreement, the Company issued a warrant to
Moldbury Holdings Limited to purchase 15,000 shares of common stock
at a price per share of $28.02. The warrants expired on August 16,
2003.
e. Private Placements
On May 10, 2000, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") with ISO Investment Holdings, Inc.
("ISO"), whereby the Company issued 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.).
F-17
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 7 (continued)
Pursuant to the Stock Purchase Agreement, ISO has the right to
designate one individual to be nominated as a member of the
Company's board of directors. Additionally, under certain
circumstances, ISO is entitled to purchase, upon the same terms,
such number of securities to enable it to retain its fully diluted
ownership position in the Company that it held immediately prior to
a proposed issuance, sale or exchange of the Company's equity
securities.
Pursuant to the Stock Purchase Agreement, ISO has one demand
registration right commencing May 10, 2002 and unlimited incidental
registration rights commencing immediately. In the case of a demand
for registration by ISO, the Company shall not be required to file
any such registration statement unless the anticipated aggregate
gross offering price is at least $2,000,000. The registration rights
granted under the Stock Purchase Agreement 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. The
number of shares issued by the Company was calculated based on the
average per share closing price of the common stock for the five
trading days prior to August 11, 2000. The Company initially
recorded $770,000 as prepaid advertising. Such amount was expensed
as the advertising occurred. During the years ended June 30, 2003
and 2002, the Company expensed $18,285 and $461,318, respectively,
of advertising costs related to this transaction (see Note 9(c)).
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)). In addition, there was an
overallotment option for 210,000 units that was exercised by the
underwriter. 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. On November 13, 2001,
the redeemable warrants expired.
F-18
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
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. On November
13, 2001, 40,833 of unexercised underwriter's warrants expired.
h. Treasury Stock
On March 14, 2003, 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, 2004, provided, however, that the Purchase Plan may be
discontinued at any time by the Company. There were no purchases
during the year ended June 30, 2003. As of June 30, 2003, the
Company had purchased an aggregate of 42,083 shares under the
Purchase Plan for a total 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-19
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
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. In
December 2002, the Plan was amended to increase the number of options
granted to each non-employee director from options to purchase 833 shares
to options to purchase 2,500 shares.
The Company's stock option awards granted to employees, directors and
consultants as of and for the years ended June 30, 2003 and 2002 are
summarized as follows:
2003 2002
--------------------- --------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
-------- --------- ------- ---------
Outstanding at beginning of year 637,521 $5.55 392,356 $ 8.50
Awards granted 362,500 $0.27 259,165 $ 1.46
Awards exercised -- -- -- --
Awards canceled/forfeited (115,170) $5.65 (14,000) $12.70
-------- -------
Outstanding at end of year 884,851 $3.37 637,521 $ 5.55
======== =======
Options exercisable at year-end 424,851 $6.43 308,523 $ 7.44
======== =======
Weighted-average fair value
of options granted during
the year $0.19 $1.21
F-20
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 7 (continued)
The following information applies to options outstanding and exercisable
at June 30, 2003:
Outstanding Exercisable
------------------------------------------- -----------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number life in exercise Number exercise
Range of exercise prices outstanding years price exercisable price
------------------------ ----------- ----------- --------- ----------- ---------
$ 0.25 - $ 0.65 362,500 8.34 $ 0.27 12,500 $ 0.65
$ 0.93 - $ 1.40 96,665 8.70 $ 1.37 51,665 $ 1.35
$ 1.53 - $ 3.56 152,187 3.59 $ 1.75 87,187 $ 1.92
$ 4.12 - $ 4.86 149,005 4.11 $ 4.35 149,005 $ 4.35
$ 5.06 - $14.81 30,996 3.46 $ 7.49 30,996 $ 7.49
$15.00 - $30.00 93,498 5.10 $17.16 93,498 $17.16
------- -------
884,851 424,851
======= =======
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, 2003 and
2002, 100,000 and 130,000 options, respectively, were granted above the
closing bid price on the date of grant. As of June 30, 2003, 103,149
shares were available for granting of options under the Plan.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions for 2003 and 2002, respectively: a dividend
yield of zero for both years; a risk-free interest rate of 1.94% in 2003
and 4.78% in 2002; an expected term of 2.97 years in 2003 and 3.97 years
in 2002; an expected stock price volatility of 125.27% in 2003 and 149.01%
in 2002; and a forfeiture rate of 15 % in 2003 and 2002, respectively.
F-21
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
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. 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, 2003, 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, 2003 and 2002 were $37,525 and $50,188, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
a. Leases
As of June 30, 2003, the Company has lease agreements for equipment and
office space. The minimum lease payments under noncancelable leases as of
June 30, 2003, net of sublease rentals, are as follows:
2004 $193,900
2005 190,700
2006 900
--------
$385,500
========
F-22
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 9 (continued)
During fiscal year 2003, the Company entered into a sublease agreement for
the period from March 2003 through June 2005 with sublease rentals of
approximately $73,900 per annum. Rent expense amounted to $261,382 and
$285,233 for the years ended June 30, 2003 and 2002, respectively, net of
sublease income of $24,536 for the year ended June 30, 2003.
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.
In August 2003, the Company hired an Executive Vice President of Sales
(the "EVP"). In connection therewith, the Company entered into an
employment agreement with the EVP effective as of September 8, 2003. The
agreement provides for an annual base salary of $175,000, an annual bonus
based on the achievement of specified criteria with respect to the
Company's revenues and options to purchase 40,000 shares of common stock
with an exercise price equal to the closing bid price on the first day of
employment. The options vest over two years. If this agreement is
terminated other than for cause on or before September 7, 2004, the EVP
will be entitled to the greater of (i) base salary through September 7,
2004 or (ii) four weeks base salary. If this agreement is terminated
other than for cause after September 7, 2004, the EVP will be entitled to
four weeks base salary.
The Company has also entered into an employment agreement with a regional
office manager. This agreement provides for additional compensation based
on the profits of the manager's operation.
F-23
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
NOTE 9 (continued)
c. Advertising
In accordance with the terms of the August 2000 advertising agreement, as
amended, with ALM (see Note 7(e)), the Company will purchase $250,000 of
advertising subsequent to the initial two-year term. Such advertising is
to be expended as follows: $50,000 on or before August 11, 2003; $100,000
on or before December 31, 2003; $40,000 on or before March 31, 2004 and
the remaining $60,000 on or before June 30, 2004. During the year ended
June 30, 2003, the Company incurred $22,835 of advertising expense related
to this commitment.
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 2003 and
2002.
NOTE 11 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 2003 and 2002, 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-24
clickNsettle.com, Inc. and Subsidiaries
(formerly known as NAM Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2003 and 2002
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, 2003,
the amount in excess of Federally insured limits was $158,210.
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. Additionally, SIPC
(The Securities Investor Protection Corporation) protects securities in
the account up to $500,000.
The Company sells it services principally to insurance companies and law
firms. In fiscal years 2003 and 2002, no customer exceeded 10% of net
revenues. The Company monitors exposure to credit losses and maintains
allowances for anticipated losses considered necessary under the
circumstances.
NOTE 13 - NASDAQ LISTING
On September 25, 2002, the Company received a letter from The Nasdaq
SmallCap Market that its common stock had failed to maintain a minimum
market value of publicly held shares of $1,000,000. As a result, the
Company had been provided 90 calendar days, or until December 24, 2002, to
regain compliance. The Company was not able to regain compliance.
Additionally, on November 6, 2002, the Company received a letter from The
Nasdaq SmallCap Market that its commons stock had failed to maintain a
minimum bid price of $1.00 over the previous 30 consecutive trading days.
As a result, the Company had been provided 180 calendar days, or until May
5, 2003, to regain compliance. Additionally, on December 23, 2002, the
Company received a Nasdaq Staff Determination indicating that the Company
failed to comply with the minimum $2,500,000 stockholders' equity
requirement for continued listing set forth in Marketplace Rule
4310(c)(2)(B), and that its securities were, therefore, subject to
delisting from The Nasdaq SmallCap Market. The Company met with The Nasdaq
Listing Qualifications Panel on January 30, 2003 to consider its request
for continued listing of the Company's common stock on The Nasdaq SmallCap
Market. On March 5, 2003, The Nasdaq Listing Qualifications Panel delisted
the Company's securities from The Nasdaq SmallCap Market. Since that date,
the Company's common stock has been listed on the OTC Bulletin Board.
F-25
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); ITEM 12 (Certain Relationships and Related Transactions) and ITEM
14 (Principal Accountant Fees and Services) will be incorporated in the
Company's Proxy Statement to be filed within 120 days of June 30, 2003, 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 (12)
10.5 Employment Agreement between Company and Patricia Giuliani-Rheaume
(2)
10.7 Lease Agreement for Great Neck, New York facility (1)
10.7.1 Amendment to Lease Agreement for Great Neck, New York facility (4)
10.7.2 Second Amendment to Lease Agreement for Great Neck, New York
facility (10)
10.8 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)
10.14.1 Amendment to Advertising Agreement dated August 11, 2000**
10.15 Employment Agreement between Company and Alan Littman**
11 Consent of Independent Certified Public Accountants**
31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)**
31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)**
32.1 Section 1350 Certification (CEO)**
32.2 Section 1350 Certification (CFO)**
----------
(1) Incorporated herein in its entirety by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-9493, as
filed with the Securities
20
and Exchange Commission on August 2, 1996.
(2) Incorporated herein in its entirety by reference to the Company's
1997 Annual Report on Form 10-KSB.
(3) Incorporated herein in its entirety by reference to the Company's
1998 Annual Report on Form 10-KSB.
(4) Incorporated herein in its entirety by reference to the Company's
1999 Annual Report on Form 10-KSB.
(5) Incorporated herein in its entirety by reference to the Company's
SB-2 filed on March 28, 2000.
(6) Incorporated herein in its entirety by reference to the Company's
SB-2A filed on April 21, 2000.
(7) Incorporated herein in its entirety by reference to the Company's
Form 8-K filed on May 17, 2000.
(8) Incorporated herein in its entirety by reference to the Company's
Form 8-K filed on June 21, 2000.
(9) Incorporated herein in its entirety by reference to the Company's
Form 8-K filed on August 24, 2000.
(10) Incorporated herein in its entirety by reference to the Company's
2000 Annual Report on Form 10-KSB.
(11) Incorporated herein in its entirety by reference to the Company's
2001 Annual Report on Form 10-KSB.
(12) Incorporated herein in its entirety by reference to the Company's
2002 Annual Report on Form 10-KSB.
** Filed herewith.
B. Reports on Form 8-K:
Form 8K was filed on May 16, 2003 by the Company to announce its revenues and
results for the third quarter and nine months ended March 31, 2003.
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
clickNsettle.com, Inc.
Date: September 23, 2003 By: /s/ Roy Israel
-------------------------------
Roy Israel, Chairman of the
Board, CEO and President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: September 23, 2003 By: /s/ Roy Israel
-------------------------------
Roy Israel, Chairman of the
Board, CEO and President
Date: September 23, 2003 By: /s/ Patricia Giuliani-Rheaume
-------------------------------
Patricia Giuliani-Rheaume, Vice
President, Chief Financial Officer
and Treasurer
Date: September 23, 2003 By: /s/ Kenneth G. Geraghty
-------------------------------
Kenneth G. Geraghty, Director
Date: September 23, 2003 By: /s/ Randy Gerstenblatt
-------------------------------
Randy Gerstenblatt, Director
Date: September 23, 2003 By: /s/ Corey J. Gottlieb
-------------------------------
Corey J. Gottlieb, Director
Date: September 23, 2003 By: /s/ Anthony J. Mercorella
-------------------------------
Anthony J. Mercorella, Director
Date: September 23, 2003 By: /s/ Robert M. Silverson, Jr.
-------------------------------
Robert M. Silverson, Jr., Director
Date: September 23, 2003 By: /s/ Willem F. Specht
-------------------------------
Willem F. Specht, Director of
Information Technology and Director
22