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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21467
ACCESSITY CORP.
(f/k/a DriverShield Corp; f/k/a driversshield.com Corp and
----------------------------------------------------------
f/k/a First Priority Group Inc
------------------------------
(Name of small business issuer in its charter)
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New York 11-2750412
- ------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12514 West Atlantic Boulevard (954-752-6161)
Coral Springs, Florida 33071 --------------
---------------------------- (Issuer's telephone number)
(Address of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value $.015 per share
Preferred Stock Purchase Rights par value $.01 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of August 11, 2003, the issuer had outstanding a total of 11,001,073
shares of common stock.
Transitional Small Business Format (check one) Yes [_] No [X]
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ACCESSITY CORP.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
CONTENTS
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of June 30, 2003 (Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) (Unaudited) for the
Three Months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) (Unaudited) for the
Six Months ended June 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months ended June 30,
2003 and 2002 6
Notes to Condensed Consolidated Financial 7
Statements
Item 2. Management's Discussion and Analysis 13
Item 3. Controls and Procedures 17
Part II. OTHER INFORMATION 18
Item 6. Exhibits and Reports on Form 8-K 18
2
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
ACCESSITY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,135,129
Accounts receivable, trade 230,883
Investments 3,854,362
Prepaid expenses and other current assets 112,943
------------
Total current assets 5,333,317
Property and equipment, net of accumulated depreciation 567,635
Restricted certificate of deposit 300,000
Security deposits and other assets 53,511
------------
Total assets $ 6,254,463
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 171,049
Accrued expenses and other current liabilities 394,620
Current portion of capital lease obligation 33,902
------------
Total current liabilities 599,571
------------
Obligations under capital lease, net of current portion 2,965
------------
Shareholders' equity:
Common stock, $.015 par value, authorized
30,000,000 shares; issued 11,828,991 177,435
Preferred stock, $.01 par value, authorized
1,000,000 shares; 1,000 issued and outstanding;
liquidation preference of $1.25 million 10
Additional paid-in capital 10,871,597
Accumulated other comprehensive loss,
unrealized holding loss on investment securities (6,753)
Deficit (3,685,880)
------------
7,356,409
Less common stock held in treasury, at cost,
877,918 shares 1,704,482
------------
Total shareholders' equity 5,651,927
------------
Total liabilities and shareholders' equity $ 6,254,463
============
See notes to condensed consolidated financial statements.
3
ACCESSITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended,
June 30 June 30
2003 2002
------------ ------------
Revenue:
Collision repairs and fees $ 49,006 $ 613,274
Hospital fees 62,732 --
------------ ------------
Total revenues 111,738 613,274
------------ ------------
Operating expenses:
Collision repair expenses 3,483 511,685
Sales and marketing 109,892 212,311
General and administrative 433,268 575,957
Non-cash compensation (Note 8) -- (276,935)
Depreciation and amortization 85,123 95,277
------------ ------------
Total operating expenses 631,766 1,118,295
------------ ------------
(520,028) (505,021)
Investment and other income, net of interest expense 44,396 122,824
------------ ------------
Loss from continuing operations before
provision for income taxes (475,632) (382,197)
Provision for income (tax) benefit (Note 11) -- 315,308
------------ ------------
Loss from continuing operations (475,632) (66,889)
------------ ------------
Discontinued operations (Note 3 and Note 5):
Disposal of fleet services subsidiary (additional
tax expense due to change in estimate of
effective tax rate in 2002) -- (425,764)
Loss from fleet services subsidiary (additional
tax expense due to change in estimate of
effective tax rate in 2002) -- (3,061)
Income from affinity services subsidiary
(net of $191,366 taxes in 2002) 47,228 40,596
------------ ------------
Income (loss) from discontinued operations 47,228 (388,229)
------------ ------------
Net Income (loss) $ (428,404) $ (455,118)
Other comprehensive gain or loss - unrealized gain
or loss on marketable securities, net of
reclassification adjustments (1,275) 3,890
------------ ------------
Comprehensive income (loss) $ (429,679) $ (451,228)
============ ============
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.04) $ (0.01)
Discontinued operations 0.00 (0.03)
------------ ------------
Total $ (0.04) $ (0.04)
============ ============
Weighted average number of common shares outstanding 10,869,425 10,962,218
Effect of dilutive securities, stock options and warrants -- --
------------ ------------
Weighted average diluted common shares outstanding 10,869,425 10,962,218
============ ============
See notes to condensed consolidated financial statements.
4
ACCESSITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME LOSS
(UNAUDITED)
Six Months Ended,
June 30 June 30
2003 2002
------------ ------------
Revenue:
Collision repairs and fees $ 190,266 $ 1,091,933
Hospital fees 62,732 --
------------ ------------
Total revenues 252,998 1,091,933
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Operating expenses:
Collision repair expenses 100,996 933,000
Sales and marketing 248,969 390,820
General and administrative 930,352 1,400,728
Non-cash compensation (Note 8) -- (95,433)
Depreciation and amortization 169,385 183,809
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Total operating expenses 1,449,702 2,812,924
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(1,196,704) (1,720,991)
Investment and other income, net of interest expense 86,559 203,634
------------ ------------
Loss from continuing operations before provision for income taxes (1,110,145) (1,517,357)
Provision for income (tax) benefit (Note 11) -- 700,951
------------ ------------
Loss from continuing operations (1,110,145) (816,406)
------------ ------------
Discontinued operations (Note 3 and Note 5):
Gain on disposal of fleet services subsidiary (net of taxes
of $2,858,713 in 2002) -- 3,223,655
Income from fleet services (net of taxes
of $20,551 in 2002) -- 23,175
Income from affinity services subsidiary (net of taxes
of $231,228 in 2002, zero in 2003) 188,306 271,442
------------ ------------
Income from discontinued operations 188,306 3,518,272
------------ ------------
Net income (loss) $ (921,839) $ 2,701,866
Other comprehensive loss - unrealized loss on
marketable securities, net of reclassification adjustments (20,957) (3,969)
------------ ------------
Comprehensive income (loss) $ (942,796) $ 2,697,897
============ ============
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.10) $ (0.07)
Discontinued operations 0.02 0.32
------------ ------------
Total $ (0.08) $ 0.25
============ ============
Weighted average number of common shares outstanding 10,869,250 10,920,740
Effect of dilutive securities, stock options and warrants -- --
------------ ------------
Weighted average diluted common shares outstanding 10,869,250 10,920,740
============ ============
See notes to condensed consolidated financial statements.
5
ACCESSITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30 June 30
2003 2002
------------ ------------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (921,839) $ 2,701,866
------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization (including bond premium
amortization) 188,912 233,877
Non-cash compensation -- (95,433)
Gain on sale of fleet services subsidiary -- (6,082,368)
Loss on sale of investments 14,919 --
Options granted for services 8,955 17,910
Changes in assets and liabilities:
Accounts receivable (81,198) (280,040)
Prepaid expenses and other assets 226,244 (127,541)
Deferred tax asset -- 1,900,000
Investment in net assets of discontinued operations -- (60,022)
Accounts payable (128,166) 32,797
Accrued expenses and other current liabilities (464,695) 529,924
------------ ------------
Total adjustments (235,029) (3,930,896)
------------ ------------
Net cash provided by (used in) operating activities (1,156,868) (1,229,030)
------------ ------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (28,211) (137,436)
Proceeds from sale of fleet service subsidiary, net -- 6,174,389
Proceeds from bond redemption -- 150,465
Proceeds from sale of investments 6,349,183 --
Purchase of Certificate of Deposit (300,000)
Purchase of investments (4,949,302) (5,044,132)
------------ ------------
Net cash provided by (used in) investing activities 1,371,670 843,286
------------ ------------
Cash flows provided by (used in) financing activities:
Payments under capital lease (15,516) --
Proceeds from sales of common stock 27,188 --
Proceeds from issuance of preferred stock -- 1,000,000
------------ ------------
Net cash provided by (used in) financing activities 11,672 1,000,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 226,474 614,256
Cash and cash equivalents at beginning of period 908,655 265,408
------------ ------------
Cash and cash equivalents at end of period $ 1,135,129 $ 879,664
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ -- $ 7,180
------------ ------------
Cash paid during the period for interest $ 2,720 $ --
------------ ------------
See notes to condensed consolidated financial statements.
6
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
1. BASIS OF PRESENTATION
- ------------------------
The information contained in the condensed consolidated financial
statements for the three and six months ended June 30, 2003 and 2002 is
unaudited, but includes all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and the results of operations for these periods.
The financial statements and notes are presented in accordance with the
requirements of Form 10-QSB, and do not contain certain information included in
the Company's annual statements and notes. These financial statements should be
read in conjunction with the Company's annual financial statements as reported
in its most recent annual report on Form 10-KSB.
On February 7, 2002 the Company sold its fleet services business (see Note
3), and is in negotiations to sell, as of August 1, 2003, its affinity service
automobile business (see Note 5). The accompanying financial statements reflect
the results of these businesses as Discontinued Operations. Accordingly, certain
prior period amounts have been reclassified.
This report may contain forward-looking statements that involve certain
risks and uncertainties. Factors may arise, including those identified in the
Company's Form 10-KSB for the year ended December 31, 2002, which could cause
the Company's operating results to differ materially from those contained in any
forward-looking statement.
2. BUSINESS OF THE COMPANY
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The Company, a New York corporation, had been engaged in automotive repair
and collision management from its inception in 1983, but has exited that market
and entered into a medical business. It is continuing to seek acquisitions that
will compliment its new business strategy. It divested its original business in
February 2002 (Note 3), which provided collision repair and fleet management
services primarily for numerous Fortune 500 companies.
The Company also offered collision repair management services during 2002
for the insurance industry through a website on the Internet. Revenues for such
services commenced in December 2001. However, under a strategic partnership
agreement, effective January 2, 2003 (see Note 4), the Company transferred the
operating responsibilities and management of this business to a third party and,
upon the completion of in-process claims that are currently the Company's
responsibility, it will no longer be engaged in collision repair management. It
will remain liable for warranties of auto repairs it provided, however warranty
costs have historically not been significant.
7
In addition, the Company is also negotiating the sale of its remaining
automotive business, effective August 1, 2003, with the approval of the
Company's board of directors, that provides automobile affinity services for
individuals. A definitive agreement provides for the sale of all of the
outstanding shares of its wholly owned subsidiary to the president of the
business (see Note 5). The Company believes that it operated its
automotive-related businesses in one operating segment.
During the periods presented, the Company provided collision and general
repair programs and appraisal services, for the insurance industry and insurance
carriers. The Company facilitated the repair process for insurance carriers by
installing its internet-based software at customer sites, which permits them to
enter new claims and to monitor the Company's activities. Once a claim was
initiated on the website, the Company commenced its efforts. This includes the
audit of repair estimates, negotiation of the repair price with one of its
suppliers selected from its network of approximately 2,000 providers, management
of time for completion of repair, selection or approval of part specifications,
and obtaining third party appraisals if required. The Company assumed the risks
and responsibilities of the vehicle repair process, from commencement to
completion, for its insurance clients. It warrants all repairs completed through
its network of repair facilities, for periods up to as long as the driver owns
the vehicles and issues warranty certificates for claims processed through its
supplier network. The Company records revenues gross in these circumstances,
having acted as the principal in the transaction.
During the third quarter of 2002, the Company began a new business, Sentaur
Inc. ("Sentaur") engaged in medical billing recovery, a new business segment.
The business seeks to recoup inappropriate discounts taken from hospital
billings by institutional or insurance payors. To date, the Company has signed
contracts with six hospitals, begun the detailed analytic process at four, and
commenced sending invoices on behalf of the two hospitals. The Company recently
began the collection process and during the second quarter collected $188,000 on
behalf of two hospital customers, of which it was entitled to $63,000 in fees;
collections increased monthly during the quarter ended June 2003, and nearly 70%
of the amounts collected were received in the month of June 2003. This business
incurred operating expenses of $120,000 during the current quarter resulting in
a pretax loss of $57,000. At June 30, 2003 Sentaur's only significant asset or
liability was comprised of accounts receivable of $44,000.
Three of the Company's customers currently accounted for approximately 72%
of its 2003 continuing revenues to date, and four of the Company's customers
currently account for 90% of its outstanding trade receivables (including two
from its discontinued operations which account for 72%) at June 30, 2003.
3. DISCONTINUED OPERATIONS OF FLEET BUSINESS AND PREFERRED STOCK SALE
- ---------------------------------------------------------------------
On February 7, 2002, following shareholder approval of the Stock Purchase
Agreement ("the Purchase Agreement"), the Company sold all of the outstanding
shares of its former wholly-owned subsidiary, driversshield.com FS Corp. ("FS"),
that operated the collision repair and fleet services business, to PHH Vehicle
Management Services, LLC, d/b/a PHH Arval ("PHH"), a subsidiary of the Cendant
Corporation (NYSE, symbol CD) for $6.3 million in cash and, pursuant to the
Preferred Stock Purchase Agreement, received
8
$1.0 million for the sale of 1000 shares of the Company's Series A Convertible
Preferred Stock (the "Preferred Shares") to PHH. The Preferred Shares can be
converted, at the holder's discretion, into 500,000 shares of the Company's
common stock (subject to adjustments for stock splits, re-capitalization and
anti-dilution provisions). The Preferred Shares have a liquidation preference of
125% of its original investment value as provided in the Company's Certificate
of Incorporation.
During the quarter ended March 31, 2002, the Company recorded a pretax gain
on the sale of FS of $6.1 million. The sale of FS impacted the Company's
consolidated balance sheet by reducing accounts receivable and accounts payable
and other accrued liabilities. Certain cash balances were also transferred to
PHH representing primarily customer deposits, prepayments, or funds received by
the Company pending repayments to its customers.
Of the gross proceeds paid by PHH, $175,000 was remitted into an escrow
account, for a one-year period, in the event indemnification obligations arose.
This amount was released during 2003.
Operating results during the six months ended June 30, 2002, for the
discontinued fleet services operations from the period January 1, 2002 through
February 7, 2002, its date of sale, were as follows:
2002
----
Revenues $1,087,658
Cost of sales (878,776)
Selling, general and administrative (165,157)
----------
Income from discontinued operations, pre-tax $ 43,725
In accordance with the Transition Services Agreement with PHH, the Company
managed FS operations from the date of its sale through June 30, 2002, and
received fees associated with those activities.
4. STRATEGIC PARTNERSHIP FOR INSURANCE BUSINESS
- -----------------------------------------------
In December 2002, the Company entered into a Strategic Partnership
Agreement (the "Partnership Agreement"), effective January 2, 2003, with
ClaimsNet, Inc. ("ClaimsNet"), a wholly-owned subsidiary of the CEI Group, Inc.
("CEI"), a Pennsylvania corporation, in which ClaimsNet assumed the
responsibilities of servicing the operations and management of DriverShield CRM,
the business that provided insurance carriers with collision repair management
for their insureds. The Company is currently processing only those claims that
were initiated prior to the effective date, and ClaimsNet has assumed
responsibility for new repairs. The Company did not sell this business, but
granted an exclusive license of its technology, including its website software,
that enables insurance customers to access the vehicle claims management system
via the Internet, and a non-transferable license of its network of repair
facilities, as well as training of its processing methodologies, in order for
ClaimsNet to fulfill its obligations under the Partnership Agreement. ClaimsNet
agreed to a profit-sharing arrangement that provides payments to the Company
equivalent to 25% of vendor referral fees for repairs initiated and completed,
beginning in March 2003, and 50% of administrative fees, as defined, on all
existing customers, beginning in February 2003, as well as 15% of all
administrative and vendor referral fees for all new customers that use the
licensed technology to have their vehicles repaired. For the quarter ended June
30, 2003 the
9
Company recorded $45,000 in fees, which have increased monthly, and $53,000 year
to date. In connection with the Partnership Agreement, the Company also accrued
$8,000 in personnel costs for the quarter ended June 30th, 2003, and $20,000
year to date, that the Company agreed to assume during the initial months of
this transition. No further amounts will be due as the period covering the
transition has ended. The contract also grants ClaimsNet an option to purchase
this business, pursuant to a formula, beginning January 1, 2007.
5. DISCONTINUED OPERATIONS OF AUTOMOBILE AFFINITY SERVICES BUSINESS
- -------------------------------------------------------------------
Upon approval of its board of directors, the Company is negotiating a Stock
Purchase Agreement ("the ADS Agreement"), effective August 1, 2003, for the sale
of all of the outstanding shares of its wholly owned subsidiary, DriverShield
ADS Corp. ("ADS") to an employee who is the president of this business. Under
the terms of the ADS Agreement the Company is to receive a payment of $15,000
per month, or 15% of the pretax net profits, whichever is greater, for three
months following the closing date of the transaction beginning in October 2003,
and subsequently receive 15% of the net profits (as defined) of the business of
ADS. Such amounts are to be paid monthly no later than forty-five days following
each month end. The Company does not currently believe that these subsequent
payments, based on 15% of the profits, will be significant in relation to the
overall cash flows of the operations of the disposed business based upon its
current performance metrics. All of the employees and related costs of the ADS
business will be borne by the purchaser, and the Company will have no continuing
management of, or responsibility for, the operations. In addition, the
individual purchaser will also relinquish any rights to receive compensation and
other benefits associated with his employment contract, which shall be
terminated as of the effective date of the closing. The buyer may elect to
terminate the monthly payments by providing a lump-sum amount equal to 18 months
of payments, if paid within the first 60 months after the transaction, or, the
equivalent of 12 months of payments if paid after the 60 month period. The net
tangible assets of the business as of the date of the closing, primarily
accounts receivable and payable, which are estimated to be approximately
$45,000, will be retained by the Company.
The purchaser of the ADS business is one of the five directors of the
Company, and a significant shareholder, and will retain his seat on the board of
directors. Upon the completion of this transaction, on August 1, 2003, the
Company will have exited from all operating activities of its various automotive
businesses.
The operating results of the affinity services business have been presented
as discontinued operations in the accompanying financial statements. The Company
expects to record a net gain on the transaction when realized.
Operating results during the periods ended June 30, 2003 and 2002, for the
discontinued affinity services operations, were as follows:
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 377,000 $ 658,000 $ 142,000 $ 304,000
Cost of sales, selling, general
and administrative expenses (189,000) (155,000) (95,000) (72,000)
--------- --------- --------- ---------
Income from discontinued
operations, pre-tax $ 188,000 $ 503,000 $ 47,000 $ 232,000
10
6. EARNINGS (LOSS) PER SHARE
- ----------------------------
Basic earnings (loss) per share is computed by dividing earnings (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflect the potential dilution that could occur if
common stock equivalents, such as preferred stock, stock options and warrants,
were exercised. For the three and six months ended June 30, 2003 and 2002,
respectively, approximately 3,600,000 and 5,200,000 of potentially dilutive
common stock equivalents were excluded from the earnings per share calculations,
as their inclusion would have been anti-dilutive. These potentially dilutive
shares could be dilutive in the future.
7. STOCK-BASED COMPENSATION PLANS
- ---------------------------------
We issue stock options to our employees and outside directors pursuant to
stockholder-approved stock option programs. We account for our stock-based
compensation plans under the intrinsic value method of accounting as defined by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income (loss) for the three months and six months ended
June 30, 2003 and 2002, as all options granted under these plans had an exercise
price equal to the fair market value of the underlying common stock on the date
of grant. See Note 8 for variable priced stock options. For pro forma
disclosures, the estimated fair value of the option is amortized over the
vesting period, which range from immediate vesting to three years. The following
table illustrates the effect on net income (loss) and earnings (loss) per share
if we had accounted for our stock option and stock purchase plans under the fair
value method of accounting under Statement 123, as amended by Statement 148:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss), as reported ($428,404) ($455,118) ($921,839) $2,701,866
Deduct: Total stock-based employee
compensation expense
determined under fair value-
based method for all awards,
net of related tax effects (135,447) (157,539) (275,681) (294,066)
---------- ---------- ---------- ----------
Pro forma net income (loss) ($563,851) ($612,657) ($1,197,520) $2,407,800
---------- ---------- ---------- ----------
Earnings (loss) per share:
Basic, as reported ($ .04) ($ .04) ($ .08) $ .25
Basic, pro forma ($ .05) ($ .06) ($ .11) $ .22
Diluted, as reported ($ .04) ($ .04) ($ .08) $ .25
Diluted, pro forma ($ .05) ($ .06) ($ .11) $ .22
11
8. NON-CASH COMPENSATION FOR VARIABLE PRICED OPTIONS
- ----------------------------------------------------
In October 1999 the Company repriced certain options previously granted to
employees and third parties. The original grants gave holders the right to
purchase common shares at prices ranging from $1.00 to $1.24; these were
repriced to prices ranging from $.75 to $.83 per share. At the date of the
repricing, the new exercise price was equal to the fair market value of the
shares (110% of the fair market value in the case of an affiliate). In addition,
in September 2002 the Company granted a five-year extension to the life of
certain fully vested options that had expired. Pursuant to FASB Interpetation
No. 44, the Company accounts for these as variable from the date of the
modification until they are exercised, forfeited or expired, and records the
intrinsic value of such grants. There was no charge or credit during the current
quarter, or year to date period in 2003, as the price per share of the Company's
common stock continued to trade at levels below the exercise prices. For the
three and six months ended June 30, 2002, there were credits to income,
resulting from a decline in the stock price, of $277,000 and $95,000
respectively.
9. INVESTMENTS
- --------------
Investments at June 30, 2003 consist of available-for-sale securities that
had a fair market value of $3,854,000.
10. PROFORMA INFORMATION
- ------------------------
Proforma information, assuming that the disposal of FS, and the disposal of
ADS, occurred at the beginning of the earliest quarterly period presented, has
not been presented since the disposals have been accounted for as discontinued
operations, and such amounts have been reclassified from continuing operations.
11. INCOME TAXES
- ----------------
At December 31, 2002, the Company had operating loss carry forwards of
approximately $2,000,000 and had established a valuation allowance for the full
amount of its deferred tax asset as it is more likely that the Company will not
be able to realize the tax benefits. To the extent the Company is profitable in
the future periods such carry forwards may be available to offset future taxable
earnings. To the extent the Company is not profitable it would not be able to
realize this benefit.
12. FLORIDA OFFICE LEASE AND RELATED PARTY TRANSACTION
- ------------------------------------------------------
The 7,300 square foot building in Coral Springs, Florida which the Company
leases for its headquarters is owned and operated by B & B Lakeview Realty
Corp., whose three shareholders, Barry Siegel, Barry Spiegel and Ken Friedman,
are members of the Company's board of directors. In accordance with the terms of
the lease the Company paid required rentals to B & B Lakeview Realty of
approximately $33,000 in the current quarter.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -----------------------------------------------------------------
Forward Looking Statements - Cautionary Factors
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes hereto appearing elsewhere in
this report. This report contains forward-looking statements within the meaning
of the Private Securities Litigation Act of 1995. The Company cautions that
forward-looking statements are not guarantees of future performance and involve
certain risks and uncertainties (including those identified in "Risk Factors" in
the Company's Form 10-KSB for the year ended December 31, 2002) and that actual
results may differ materially from those in the forward-looking statements as a
result of various factors. Except for the historical information and statements
contained in this Report, the matters and items set forth in this Report are
forward looking statements.
Three Months ended June 30, 2003 (the "2003 Quarter") Compared to Three Months
- ------------------------------------------------------------------------------
ended June 30, 2002 (the "2002 Quarter").
- -----------------------------------------
The 2003 Quarter reflected a net loss of $428,000 compared to a net loss of
$455,000 in the 2002 Quarter. Loss from continuing operations was $476,000
versus a loss of $67,000 in the 2002 Quarter, after a tax benefit of $315,000.
Basic and diluted loss per share from continuing operations was $.04 and $.01
per share in the 2003 and 2002 Quarters respectively. Basic and diluted loss per
share from discontinued operations was $.03 in the 2002 Quarter and zero in the
2003 Quarter.
Revenues from Continuing Operations
- -----------------------------------
Revenues were $112,000 in the 2003 Quarter, versus $613,000 in the 2002
Quarter, representing a decrease of $501,000 or 82%. The Company's revenues
decreased by $564,000 from its insurance industry business from $613,000 in the
2002 Quarter to $49,000 in the 2003 Quarter as a result of transferring the
operating responsibility of its CRM business to ClaimsNet, effective January
2003. The revenues it recorded reflect those remaining claims in process that it
is completed, but also included its share of claim and referral fees associated
with claims processed by ClaimsNet. After the Company has exhausted its
in-process repairs, it will only record the fees it receives under its agreement
with ClaimsNet. Offsetting this reduction in its insurance business was $63,000
in revenues from Sentaur, the Company's new hospital fee recovery business.
There was no comparable amount in the 2002 Quarter.
Operating Income and Expenses from Continuing Operations
- --------------------------------------------------------
Pretax loss from continuing operations was $476,000 in the 2003 Quarter
compared to a pretax loss of $382,000 in the 2002 Quarter, an increase in losses
of $94,000. The comparative amounts are described below.
Collision repair and fees from its insurance repair business, net of
collision repair costs, decreased $56,000 to $46,000 in the 2003 Quarter versus
$102,000 in the 2002 Quarter resulting from the transfer of the business to
ClaimsNet, described above. As part of this business, the Company recorded
$45,000 in fee income from ClaimsNet.
13
Selling expenses decreased by $102,000 (48%), to $110,000 in the 2003
Quarter, from $212,000 in the 2002 Quarter. This was the primarily the result of
increased costs for marketing, personnel and related travel activities of
Sentaur of approximately $95,000, the Company's medical billing recovery
business, offset by the elimination of costs of its CRM insurance industry
business, which is now operated by ClaimsNet.
General and administrative expenses decreased by $143,000 (25%), from
$576,000 in the 2002 Quarter to $433,000 in the 2003 Quarter resulting primarily
from lower personnel costs and, to a lesser extent, other various expenses no
longer incurred due to the reduced scale of operations. The non-cash charges
associated with recording the impact of variable stock option grants resulted in
a credit of $277,000 in the 2002 Quarter; there was no comparable charge or
credit in the 2003 Quarter.
Investment and other income, net, decreased $79,000 from $123,000 in the
2002 Quarter to $44,000 in the 2003 Quarter primarily resulting from decreased
interest income caused by declining rates and lower investment balances.
Discontinued Operations
- -----------------------
Income from discontinued operations in the 2002 Quarter showed a loss of
$388,000 primarily due to an increase in the tax calculation of $429,000
resulting from a change in estimate of the effective 2002 tax rate on the sale
of the fleet business, which was sold in February 2002. These additional tax
amounts were offset in part from income of the discontinued affinity services
business of $41,000. In the 2003 Quarter the affinity services business was the
only discontinued operation and reflected income of $47,000.
The discontinued operations of the affinity services business, that is expected
to be sold effective August 1, 2003, reflected pretax income of $232,000, and
$41,000 net of tax of $191,000 in the 2002 quarter. The high tax rate resulted
from a change in estimate of the 2002 effective tax rate. In the 2003 Quarter
the affinity service business had pretax and after-tax earnings of $47,000;
there was no tax due to net operating loss carry forwards that had been fully
reserved. Lower revenues and pretax earnings in 2003 resulted from memberships
that did not renew from the prior year.
Six Months ended June 30, 2003 (the "2003 Period") Compared to Six Months ended
- -------------------------------------------------------------------------------
June 30, 2002 (the "2002 Period").
- ----------------------------------
The 2003 Period reflected a net loss of $922,000 compared to net income of
$2,702,000 in the 2002 Period. Loss from continuing operations was ($1,110,000)
versus a loss of ($816,000) in the 2002 Period, after a tax benefit of $701,000.
Basic and diluted loss per share from continuing operations was ($.10) and
($.07) per share in the 2003 and 2002 Period. Basic and diluted earnings per
share from discontinued operations, was $.32 in the 2002 Period, versus $.02 in
the 2003 Period. The 2002 earnings from discontinued operations reflect the
impact of the gain on sale of the fleet business. The discontinued operations in
the 2003 Period reflect the operating results of the affinity services business
that is being sold effective August 1, 2003.
14
Revenues from Continuing Operations
- -----------------------------------
Revenues were $253,000 in the 2003 Period, versus $1,092,000 in the 2002
Period, representing a decrease of $839,000 or 77%. This was predominantly due
to the transfer of the operating responsibility of its CRM business to
ClaimsNet, effective January 2003. The revenues it recorded in the 2003 Period
are those in-process claims that it is completed in 2003, along with its share
of fees from claim and referral from ClaimsNet. Upon completion of its
outstanding in-process claims, it will only record its share of these fees in
the future.
Operating Income and Expenses from Continuing Operations
- --------------------------------------------------------
Pretax loss from continuing operations was $1,110,000 in the 2003 Period
compared to a pretax loss of $1,517,000 in the 2002 Period, a decrease in losses
of $407,000. The comparative amounts are described below.
Collision repair and claim fee revenues, net of collision repair costs,
decreased $70,000 to $89,000 in the 2003 Period versus $159,000 in the 2002
Period resulting from the transfer of this business to ClaimsNet, as described
above. During the 2003 Period the Company received a one-time contract
termination fee of $21,000 and $53,000 in fees from ClaimsNet.
Selling expenses decreased by $142,000 (36%), to $249,000 in the 2003
Period, from $391,000 in the 2002 Period. This was primarily the result of
increased costs for marketing, personnel and related travel activities of
Sentaur of approximately $205,000, the Company's medical billing recovery
business, offset by the elimination of costs of its CRM insurance industry
business ($332,000), which is now operated by ClaimsNet.
General and administrative expenses decreased by $471,000 (34%), from
$1,401,000 in the 2002 Period to $930,000 in the 2003 Period resulting partially
from the $250,000 bonus provided to the CEO upon the sale of the fleet business
in 2002 for which there was no comparable payment in 2003 Period, and the
remainder of decreases for various expenses and personnel costs no longer
incurred due to the reduced scale of operations without the CRM business. The
non-cash charges associated with recording the impact of variable stock option
grants resulted in a credit of $95,000 in the 2002 Period; there was no
comparable charge or credit in the 2003 Period.
Investment and other income, net, decreased $117,000 from $204,000 in the
2002 Period to $87,000 in the 2003 Period primarily resulting from decreased
interest income caused by declining rates, lower investment balances and a loss
on a sale of $15,000.
Discontinued Operations
- -----------------------
Income, net of income taxes, from discontinued operations in the 2002
Period was $3,518,000. This was comprised of $23,000 in income from business
activities of the fleet operations, $3,224,000 on the gain on the sale of this
business that was sold in February 2002, and, income from the activities of the
affinity services business of $271,000.
15
In the 2003 Period discontinued operations reflects income of $188,000 from
the affinity services business which is being sold effective August 1, 2003. The
decrease in profitability in the affinity services business resulted from sales
decreases of $281,000 or 43%, to $377,000 in the 2003 Period, as compared to
$658,000 for the 2002 Period, reflecting a large percentage of members that did
not renew their memberships.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2003 the Company had cash and cash equivalents of
$1,135,000. The Company also holds shares in a number of highly liquid, mutual
funds valued at $3,854,000. Working capital of the Company as of June 30, 2003,
was $4,733,000 and its working capital ratio was 9:1.
In connection with the Company's rental of office space in Florida, in July
2002, the Company established a $300,000 certificate of deposit with a Florida
bank for the five and a half year term of the lease, as a guarantee of its
future rental commitments. Such amounts were excluded from liquidity and working
capital, described above, and presented as restricted certificate of deposit.
The certificate of deposit declines as the remaining rental commitment declines,
as follows; the balance of the certificate will be $200,000 after the 36th
month, $100,000 after the 48th month, and zero after 60 months.
The Company's Board of Directors approved a stock repurchase program
whereby the Company may purchase up to 500,000 shares of its common shares
traded on the Nasdaq SmallCap Market. Since the repurchase program was approved,
during the third quarter of 2002, the Company acquired 93,000 shares at a cost
of $93,000.
The Company has no major expenditures that it currently anticipates for
capital equipment needs, however it is expending funds, and incurring losses, to
support its operations including the marketing and growth of its Sentaur
subsidiary in the development of medical billing recovery business. The funding
levels that occurred for Sentaur during the first and second quarter are
expected to continue at that level, or modestly higher, for the near term, but
in June 2003 Sentaur's revenues offset all of its expenditures. As Sentaur
begins to add to its customer base it may require additional funds for personnel
expenses but this would occur in anticipation of future revenue growth. In
addition, the Company has been pursuing acquisition candidates and will continue
to incur varying levels of expenses in connection with each evaluation. These
may range from minor amounts for such expenses as an initial business trip or,
more extensively, multiple trips for due diligence, legal review and title
searches. Should the Company complete an acquisition, it may use a significant
amount of its funds to either pay a portion of the purchase price and/or expand
the business it acquires.
The Company believes that its present cash position will enable it to
continue to support its operations for the next twelve months and for an
extended period thereafter depending on the extent of use of its funds to build
existing businesses or possible use of funds to develop or acquire new
businesses.
16
Deferred Income Taxes
- ---------------------
At December 31, 2002, the Company had operating loss carry forwards of
approximately $2,000,000 and had established a valuation allowance for the full
amount of its deferred tax asset as it is more likely that the Company will not
be able to realize the tax benefits. To the extent the Company is profitable in
the future periods such carry forwards may be available to offset future taxable
earnings. To the extent the Company is not profitable it would not be able to
realize this benefit.
ITEM 3. CONTROLS AND PROCEDURES
- -------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) as of
the end of the period covered by the report. Based upon that evaluation required
by paragraph Rule 13a-15 or Rule 15d-15, the Chief Executive Officer and Chief
Financial Officer concluded that, our disclosure controls and procedures were
effective in timely alerting them to the material information relating to us (or
our consolidated subsidiaries) required to be included in our periodic SEC
filings.
CHANGES IN INTERNAL CONTROLS.
There were no significant changes made in our internal controls during the
period covered by this report, or to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated May 16, 2003 containing a press release
that was issued announcing the financial results of the registrant for the
period ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Accessity Corp.
Date: August 14, 2003 By: Barry Siegel
-----------------------
Chairman of the Board, Secretary and
Chief Executive Officer
Date: August 14, 2003 By: Philip B. Kart
-----------------------
Senior Vice President, Treasurer and
Chief Financial Officer
18
INDEX OF EXHIBITS
-----------------
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
19