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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 September 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.
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(f/k/a DriverShield Corp; f/k/a driversshield.com Corp and f/k/a First Priority
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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
Coral Springs, Florida 33071 (954-752-6161)
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(Address of principal executive offices) (Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value $.015 per share
Preferred Stock Purchase Rights par value $.01 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 11, 2003, the issuer had outstanding a total of 11,187,073
shares of common stock.
Transitional Small Business Format (check one) Yes [ ] No [X]
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ACCESSITY CORP.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
CONTENTS
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of September 30, 2003 (Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss
(Unaudited) for the Three Months ended
September 30, 2003 and 2002 4
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss)
(Unaudited) for the Nine Months ended
September 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months ended
September 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 14
Item 3. Controls and Procedures 18
Part II. OTHER INFORMATION 19
Item 6. Exhibits and Reports on Form 8-K 19
Certifications 21
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
ACCESSITY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 459,907
Accounts receivable, trade 173,323
Investments 4,269,950
Prepaid expenses and other current assets 95,523
------------
Total current assets 4,998,703
Property and equipment, net of accumulated depreciation 500,286
Restricted certificate of deposit 300,000
Security deposits and other assets 53,511
------------
Total assets $ 5,852,500
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 91,267
Accrued expenses and other current liabilities 337,749
Capital lease obligation 28,762
------------
Total current liabilities 457,778
------------
Shareholders' equity:
Common stock, $.015 par value, authorized 30,000,000
shares; issued 11,978,991 179,685
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 10,920,909
Accumulated other comprehensive loss, unrealized holding
loss on investment securities (35,561)
Deficit (3,965,839)
------------
7,099,204
Less common stock held in treasury, at cost,
877,918 shares 1,704,482
------------
Total shareholders' equity 5,394,722
------------
Total liabilities and shareholders' equity $ 5,852,500
============
See notes to condensed consolidated financial statements.
3
ACCESSITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended,
September 30 September 30
2003 2002
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Revenue:
Collision repairs and fees $ 29,358 $ 927,830
Hospital fees 164,993 --
------------ ------------
Total revenues 194,351 927,830
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Operating expenses:
Collision repair expenses 1,057 806,225
Sales and marketing 105,185 332,570
General and administrative 391,309 985,819
Non-cash compensation (Note 8) -- (33,767)
Depreciation and amortization 67,733 99,409
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Total operating expenses 565,284 2,190,256
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(370,933) (1,262,426)
Investment and other income, net of interest expense 54,567 57,510
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Loss from continuing operations before provision for income taxes (316,366) (1,204,916)
Provision for income (tax) benefit (Note 11) -- 747,672
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Loss from continuing operations (316,366) (457,244)
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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) -- (486,589)
Loss from fleet services subsidiary (additional tax expense
due to change in estimate of effective tax rate in 2002) -- (3,498)
Income from affinity services subsidiary (net of $114,089 tax in 2002) 26,407 69,772
Gain on disposal of affinity services subsidiary (no tax effect) 10,000
------------ ------------
Income (loss) from discontinued operations 36,407 (420,315)
------------ ------------
Net Income (loss) $ (279,959) $ (877,559)
Other comprehensive gain (loss) - unrealized gain (loss) on
marketable securities, net of reclassification adjustments (28,808) 9,332
------------ ------------
Comprehensive loss $ (308,767) $ (868,227)
============ ============
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.03) $ (0.04)
Discontinued operations 0.00 (0.04)
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Total $ (0.03) $ (0.08)
============ ============
Weighted average number of common shares outstanding 10,932,595 10,890,458
Effect of dilutive securities, stock options and warrants -- --
------------ ------------
Weighted average diluted common shares outstanding 10,932,595 10,890,458
============ ============
See notes to condensed consolidated financial statements.
4
ACCESSITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Nine Months Ended,
September 30 September 30
2003 2002
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Revenue:
Collision repairs and fees $ 219,624 $ 2,019,763
Hospital fees 227,725 --
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Total revenues 447,349 2,019,763
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Operating expenses:
Collision repair expenses 102,052 1,739,225
Sales and marketing 354,157 722,834
General and administrative 1,321,660 2,387,102
Non-cash compensation (Note 8) -- (129,200)
Depreciation and amortization 237,116 283,217
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Total operating expenses 2,014,985 5,003,178
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(1,567,636) (2,983,415)
Investment and other income, net of interest expense 141,125 261,144
------------ ------------
Loss from continuing operations before provision for income taxes (1,426,511) (2,722,271)
Provision for income (tax) benefit (Note 11) -- 1,474,032
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Loss from continuing operations (1,426,511) (1,248,239)
------------ ------------
Discontinued operations (Note 3 and Note 5):
Gain on disposal of fleet services subsidiary (net of taxes
of $3,345,302 in 2002) -- 2,737,066
Income from fleet services subsidiary (net of taxes
of $24,048 in 2002) -- 19,677
Income from affinity services subsidiary (net of taxes
of $370,726 in 2002, zero in 2003) 214,711 315,803
Gain on disposal of affinity services subsidiary (no tax effect) 10,000
------------ ------------
Income from discontinued operations 224,711 3,072,546
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Net income (loss) $ (1,201,800) $ 1,824,307
Other comprehensive gain (loss) - unrealized gain (loss) on
marketable securities, net of reclassification adjustments (49,765) 5,363
------------ ------------
Comprehensive income (loss) $ (1,251,565) $ 1,829,670
============ ============
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.13) $ (0.11)
Discontinued operations 0.02 0.28
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Total $ (0.11) $ 0.17
============ ============
Weighted average number of common shares outstanding 10,890,597 10,910,839
Effect of dilutive securities, stock options and warrants -- --
------------ ------------
Weighted average diluted common shares outstanding 10,890,597 10,910,839
============ ============
See notes to condensed consolidated financial statements
5
ACCESSITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30 September 30
2003 2002
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Cash flows provided by (used in) operating activities:
Net income (loss) $(1,201,800) $ 1,824,307
=========== ===========
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization (including bond premium
amortization) 256,746 361,927
Non-cash compensation -- (129,200)
Gain on sale of fleet services subsidiary -- (6,082,368)
Loss on sale of investments 14,919 --
Options granted for services 8,955 26,865
Changes in assets and liabilities:
Accounts receivable (23,638) (151,775)
Prepaid expenses and other assets 243,664 (98,550)
Deferred tax asset -- 1,900,000
Investment in net assets of discontinued operations -- (60,022)
Accounts payable (207,948) 186,990
Accrued expenses and other current liabilities (521,566) 753,660
----------- -----------
Total adjustments (228,868) (3,292,473)
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Net cash provided by (used in) operating activities (1,430,668) (1,468,166)
=========== ===========
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (28,693) (340,393)
Proceeds from sale of fleet service subsidiary, net -- 6,174,389
Proceeds from bond redemption -- 4,929,000
Proceeds from sale of investments 6,349,183 --
Purchase of Certificate of Deposit (300,000)
Purchase of investments (5,393,699) (7,558,638)
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Net cash provided by (used in) investing activities 926,791 2,904,358
=========== ===========
Cash flows provided by (used in) financing activities:
Payments under capital lease (23,621) (2,427)
Proceeds from sales of common stock 78,750 --
Proceeds from issuance of preferred stock -- 1,000,000
Purchase of treasury stock -- (92,696)
=========== ===========
Net cash provided by (used in) financing activities 55,129 904,877
=========== ===========
Net increase (decrease) in cash and cash equivalents (448,748) 2,341,069
Cash and cash equivalents at beginning of period 908,655 265,408
=========== ===========
Cash and cash equivalents at end of period $ 459,907 $ 2,606,477
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ -- $ 16,353
=========== ===========
Cash paid during the period for interest $ 3,733 $ --
=========== ===========
See notes to condensed consolidated financial statements.
6
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
1. BASIS OF PRESENTATION
- ------------------------
The information contained in the condensed consolidated financial
statements for the three and nine months ended September 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, as of August 1, 2003, sold 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 billing recovery business. It is also continuing to
seek acquisitions that will complement its new business strategy. It divested
its original automotive 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,
currently, is no longer engaged in collision repair management. It remains
liable for warranties of auto repairs it provided, however warranty costs have
historically not been significant.
In addition, the Company also sold its remaining automotive business,
effective August 1, 2003, that provided automobile affinity services for
individuals. A definitive
7
agreement was completed 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 permitted 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 included 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 warranted all repairs completed
through its network of repair facilities, for periods up to as long as the
driver owned the vehicles and issued warranty certificates for claims processed
through its supplier network. The Company recorded revenues gross in these
circumstances, having acted as the principal in the transaction. As described in
Note 4, this business is now managed by ClaimsNet, Inc. ("ClaimsNet").
During the third quarter of 2002, the Company began a new business, Sentaur
Corp. ("Sentaur") engaged in medical billing recovery, a new business segment.
The business provides benefits to the hospital segment of the healthcare
industry by recouping inappropriate discounts taken from hospital billings by
institutional or insurance payors. To date, the Company has signed seven
recovery management contracts representing nine hospitals. During the second and
third quarters Sentaur collected $188,000 and $495,000, respectively, on behalf
of its hospital customers. Collections have consistently increased and the
division is profitable based on its direct expenses, and is providing
contribution to corporate overheads which the Company does not allocate to its
operating units (see Note 13). The Company records revenues net for this
business, having acted as an agent of the hospitals.
Four of the Company's customers currently accounted for approximately 89%
of its 2003 continuing revenues to date, and three of the Company's customers
currently account for 93% of its outstanding trade receivables (including one
from its discontinued operations which accounts for 10%) at September 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 $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.
8
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 that was released during 2003.
Operating results during the nine months ended September 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 $1,088,000
Cost of sales (879,000)
Selling, general and administrative (165,000)
----------
Income from discontinued operations, pre-tax $ 44,000
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, 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.
During 2003 the Company processed 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. As consideration, ClaimsNet remits
a share of the profits 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 as15% 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 September 30, 2003 the Company recorded $29,000
in fees, and $82,000 year to date. In connection with the Partnership Agreement,
the Company also agreed to pay $20,000 for certain of its staff personnel costs
during the first two calendar quarters, to assist with this transition. No
further amounts will be paid as the transition period has ended. The contract
also grants ClaimsNet an option to purchase this business, pursuant to a
formula, beginning January 1, 2007.
9
5. DISCONTINUED OPERATIONS OF AUTOMOBILE AFFINITY SERVICES BUSINESS AND SALE TO
- -------------------------------------------------------------------------------
RELATED PARTY
- -------------
Upon approval of its board of directors, the Company negotiated 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 received a one-time fee of $10,000 on
September 30, 2003, plus it will receive reimbursement for its legal fees of
approximately $10,000 incurred for this sale. As a component of the transaction,
the individual purchaser also agreed to forego all future rights to receive
compensation and other benefits associated with his employment contract, which
was to expire in December 2004, but terminated on July 31, 2003. The purchase
price of the ADS business was renegotiated from amounts previously reported due
to changes in the financial performance of the business. All of the employees
and related costs of the ADS business were borne by the purchaser as of the
effective date, and the Company has no continuing management of, or
responsibility for, the operations. The net liabilities of the business at the
closing date, of approximately $31,000, consisting of primarily accounts
receivable and payable, were retained by the Company.
The purchaser of the ADS business is one of the four directors of the
Company, and a significant shareholder, and will retain his seat on the board of
directors. With the completion of this transaction, the Company has 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
recorded a net gain of $10,000 on the transaction in the quarter ended September
30, 2003.
Operating results during the periods ended September 30, 2003 and 2002, for
the discontinued affinity services operations, and through the date of its sale
on August 1, 2003, were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 41,000 $256,000 $419,000 $914,000
Cost of sales, selling, general and
administrative expenses (15,000) (72,000) (204,000) (227,000)
-------- -------- -------- ---------
Income from discontinued operations, pre-tax $ 26,000 $184,000 $215,000 $687,000
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 nine months ended September 30, 2003 and 2002,
respectively, approximately 3,501,000 and 5,200,000 of potentially dilutive
common stock equivalents were excluded
10
from the earnings per share calculations, as their inclusion would have been
anti-dilutive. Subsequent to the balance sheet date 540,000 stock options
expired, and 118,000 were exercised, resulting in a balance of 2,843,000 common
stock equivalents that could be dilutive in the future.
7. Stock-Based Compensation Plans
- ---------------------------------
The Company issues stock options to its employees and outside directors pursuant
to stockholder-approved stock option programs, and accounts for 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 nine months
ended September 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss), as reported ($279,959) ($877,559) ($ 1,201,800) $1,824,307
Deduct: Total stock-based employee
compensation expense
determined under fair value-
based method for all awards,
net of related tax effects (133,054) (168,651) (408,735) (462,717)
-------- ---------- ---------- ----------
Pro forma net income (loss) ($413,013) ($1,046,210) ($1,610,535) $1,361,590
-------- ---------- ---------- ----------
Earnings (loss) per share:
Basic, as reported ($ .03) ($ .08) ($ .11) $ .17
Basic, pro forma ($ .04) ($ .10) ($ .15) $ .13
Diluted, as reported ($ .03) ($ .08) ($ .11) $ .17
Diluted, pro forma ($ .04) ($ .10) ($ .15) $ .13
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.
11
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 nine months ended
September 30, 2002, there were credits to income, resulting from a decline in
the stock price, of $34,000 and $129,000 respectively.
9. INVESTMENTS
- --------------
Investments at September 30, 2003 consist of available-for-sale securities
that had a fair market value of $4,270,000.
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, and approximately $99,000 year to
date. Pursuant to the lease agreement, the Company is also required to pay
various building maintenance, insurance and other specified charges, as
incurred, to other unrelated vendors. It was also required to establish a
$300,000 certificate of deposit as described in the Liquidity and Capital
Resources section of Managements Discussion and Analysis or Plan of Operation.
13. SEGMENT INFORMATION
- -----------------------
The Company currently reports two segments, medical and automotive.
As described in Note 4, however, the Company participates in the automotive
segment only through a profit-sharing arrangement; it no longer operates, or has
liability for, the current
12
(Note 13. SEGMENT INFORMATION, Continued)
activities of the automotive segment, which functions under the managerial
autonomy of ClaimsNet, pursuant to its contractual arrangement with the Company.
The Company manages these segments separately since each serves different
markets and users, as described in Note 2.
All of the Company's sales are made within the domestic United
States. Segment information follows.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
----------------------- -----------------------
Revenue:
Medical $ 165,000 $ --- $ 228,000 $ ---
Automotive 29,000 928,000 219,000 2,020,000
---------- ---------- ---------- ----------
Consolidated total $ 194,000 $ 928,000 $ 447,000 $2,020,000
Segment profit (loss):
Medical (1) $ 25,000 $ --- $ (156,000) $ ---
Automotive (1) 3,000 (283,000) (24,000) (646,000)
Other/corporate (1) (344,000) (922,000) (1,246,000) (2,076,000)
---------- ---------- ---------- ----------
Consolidated total $ (316,000) $(1,205,000) $(1,426,000) $(2,722,000)
Identifiable assets:
Medical $ 155,000 $ ---
Automotive 148,000 771,000
Other, corporate 5,549,000 7,924,000
---------- ----------
Consolidated total $5,852,000 $8,695,000
(1) The Company does not allocate taxes, other income, interest income or
expense, or its corporate general and administrative expenses (including such
items as rent, utilities, legal, accounting and auditing and others) to its
individual segments. The segment profit reflects those costs (including selling,
general and administrative) that are specifically identifiable with the
operating activities of the segment. The remaining amounts are included in the
category "Other/ Corporate," and reconcile to the Company's consolidated pretax
loss from continuing operations, in accordance with FAS 131.
13
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 September 30, 2003 (the "2003 Quarter") Compared to Three
- ----------------------------------------------------------------------------
Months ended September 30, 2002 (the "2002 Quarter").
- -----------------------------------------------------
The 2003 Quarter reflected a net loss of $280,000 compared to a net loss of
$878,000 in the 2002 Quarter. Loss from continuing operations was $316,000
versus a loss of $457,000 in the 2002 Quarter, after a tax benefit of $748,000.
Excluding the non-cash impact of the tax benefits, the pretax loss from
continuing operations was $316,000 in the 2003 Quarter versus a pretax loss of
$1,205,000 in the 2002 Quarter, a 74% decrease in losses. Basic and diluted loss
per share from continuing operations was $.03 and $.04 per share in the 2003 and
2002 Quarters respectively. Basic and diluted loss per share from discontinued
operations was $.04 in the 2002 Quarter and zero in the 2003 Quarter.
Revenues from Continuing Operations
- -----------------------------------
Revenues were $194,000 in the 2003 Quarter, versus $928,000 in the 2002
Quarter, representing a decrease of $734,000 or 79%. The Company's revenues
decreased by $899,000 in its automotive segment, from $928,000 in the 2002
Quarter to $29,000 in the 2003 Quarter as a result of transferring the operating
responsibility of its CRM business to ClaimsNet, effective January 2003.
However, as described below, the significant reduction in infrastructure costs
eliminated the direct expenses and losses from this business segment (excluding
corporate overhead which the Company does not allocate to its operating units).
The revenues the Company recorded in the 2003 Quarter reflect referral fees
associated with claims processed by ClaimsNet. Offsetting this reduction in
revenues from its automotive segment was an increase in revenues of $165,000
from Sentaur, the Company's new financial recovery business for hospitals. There
was no comparable amount in the 2002 Quarter.
Operating Income and Expenses from Continuing Operations
- --------------------------------------------------------
Pretax losses from continuing operations decreased 74%, to $316,000 in the
2003 Quarter compared to a pretax loss of $1,205,000 in the 2002 Quarter, a
decrease in losses of $889,000. The comparative amounts are described below.
Collision repair and fees earned relating to its automotive repair
business, net of collision repair costs, decreased $94,000 to $28,000 in the
2003 Quarter versus $122,000 in the 2002 Quarter resulting from the transfer of
the business to ClaimsNet, described above.
14
Selling expenses decreased by $228,000 (68%), to $105,000 in the 2003
Quarter, from $333,000 in the 2002 Quarter. This was primarily the result of
increased costs for marketing, personnel and related travel activities of
Sentaur of approximately $37,000, the Company's new medical billing recovery
business, offset by the elimination of costs of its CRM automotive industry
segment, which is now operated by ClaimsNet.
General and administrative expenses decreased by $595,000 (60%), from
$986,000 in the 2002 Quarter to $391,000 in the 2003 Quarter resulting primarily
from lower personnel costs and other various expenses no longer incurred due to
the reduced scale of operations related to the elimination of its automotive
segment. The non-cash charges associated with recording the impact of variable
stock option grants resulted in a credit of $34,000 in the 2002 Quarter; there
was no comparable charge or credit in the 2003 Quarter.
Depreciation declined $31,000, from $99,000 in the 2002 Quarter to $68,000
in the 2003 Quarter, resulting from assets which became fully depreciated during
2003.
Investment and other income, net, decreased $3,000 from $58,000 in the 2002
Quarter to $55,000 in the 2003 Quarter primarily resulting from decreased
interest income caused by declining rates and lower investment balances.
Discontinued Operations
- -----------------------
Discontinued operations in the 2002 Quarter, relating to the sale of the
fleet services subsidiary which was sold at a significant gain, reflected a
charge of $490,000 due to an increase in the tax calculation resulting from a
change in estimate of the effective 2002 tax rate (this was a non-cash adjusting
entry). These additional tax amounts were offset in part from income from
discontinued operations of the affinity services business of $70,000, the net
amount of which was also impacted by the revised tax calculations. In the 2003
Quarter the affinity services business was the only discontinued operation,
reflecting income from operations of $26,000, and a $10,000 gain from its
disposal.
Nine Months ended September 30, 2003 (the "2003 Period") Compared to Nine Months
- --------------------------------------------------------------------------------
ended September 30, 2002 (the "2002 Period").
- ---------------------------------------------
The 2003 Period reflected a net loss of $1,202,000 compared to net income of
$1,824,000 in the 2002 Period. The 2002 earnings include the impact of the gain
on sale of the fleet business in discontinued operations. Loss from continuing
operations was $1,427,000 in the 2003 Period versus a loss of $1,248,000 in the
2002 Period, after a non-cash tax benefit of $1,474,000 in 2002. Excluding this
non-cash adjustment, the loss from pretax continuing operations decreased from
$2,722,000 in the 2002 Period to $1,427,000 in the 2003 Period, a 48% decrease,
or $1,295,000. Basic and diluted loss per share from continuing operations was
$.13 and $.11 per share in the 2003 and 2002 Period, respectively. Basic and
diluted earnings per share from discontinued operations, was $.28 in the 2002
Period, versus $.02 in the 2003 Period. The discontinued operations in the 2003
Period reflect the operating results of the affinity services business that was
sold effective August 1, 2003.
15
Revenues from Continuing Operations
- -----------------------------------
Revenues were $447,000 in the 2003 Period, versus $2,020,000 in the 2002
Period, representing a decrease of $1,573,000, or 78%. A decrease of $1,801,000
in the automotive segment, from $2,020,000 to $219,000, was due to the transfer
of the operating responsibility of its CRM business to ClaimsNet, effective
January 1, 2003. However, as described below, the significant reduction in
infrastructure costs eliminated the direct expenses and losses from this
business segment (excluding corporate overhead which the Company does not
allocate to its operating units). In the 2003 Period the Company recorded its
remaining in-process claims, along with $82,000 in fees it received from
ClaimsNet. The Company's new subsidiary Sentaur, providing financial recovery
for hospitals, recorded revenues of $228,000 in the 2003 Period; there was no
comparable amount in the prior year.
Operating Income and Expenses from Continuing Operations
- --------------------------------------------------------
Pretax loss from continuing operations was $1,427,000 in the 2003 Period, a
decrease in losses of $1,295,000, or 48%, compared to a pretax loss of
$2,722,000 in the 2002 Period. The comparative amounts are described below.
Collision repair and claim fee revenues, net of collision repair costs,
decreased $163,000 to $118,000 in the 2003 Period versus $281,000 in the 2002
Period resulting from the transfer of this business to ClaimsNet, as previously
described. However, as described below, the reduction in infrastructure costs
associated with the automotive segment resulted in the elimination of losses for
this business by the third quarter of the 2003 Period.
Selling expenses decreased by $369,000 (51%), to $354,000 in the 2003
Period, from $723,000 in the 2002 Period. This was primarily the result of the
elimination of infrastructure sales costs of its CRM insurance industry business
($547,000), which is now operated by ClaimsNet, offset by increased costs for
marketing, personnel and related travel activities of Sentaur, the Company's new
medical billing recovery business.
General and administrative expenses decreased by $1,065,000 (45%), from
$2,387,000 in the 2002 Period to $1,322,000 in the 2003 Period resulting
primarily from various infrastructure expenses and personnel costs no longer
needed without the automotive CRM business and, to a lesser extent, 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 the 2003 Period. The non-cash
charges associated with recording the impact of variable stock option grants
resulted in a credit (income) of $129,000 in the 2002 Period; there was no
comparable credit in the 2003 Period.
Depreciation declined $46,000, from $283,000 in the 2002 Period to $237,000
in the 2003 Period, resulting from assets that were fully depreciated during
2003.
Investment and other income, net, decreased $120,000 from $261,000 in the
2002 Period to $141,000 in the 2003 Period primarily resulting from lower
investment balances and a loss on a sale of $15,000, as well as by declining
interest rates.
16
Discontinued Operations
- -----------------------
Income, net of income taxes, from discontinued operations in the 2002
Period was $3,073,000. This was comprised of $20,000 in income from business
activities of the fleet operations, $2,737,000 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 $316,000.
In the 2003 Period discontinued operations reflects income of $225,000 from
the affinity services business which was sold effective August 1, 2003. The
decrease in profitability in the affinity services business resulted from sales
decreases of $495,000 or 54%, to $419,000 in the 2003 Period, as compared to
$914,000 for the 2002 Period, reflecting a large percentage of members that did
not renew their memberships.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 2003 the Company had cash and cash equivalents of
$460,000. The Company also holds shares in a number of highly liquid mutual
funds valued at $4,270,000. Working capital of the Company as of September 30,
2003, was $4,541,000 and its working capital ratio was 11:1.
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 due to operating losses,
which have been declining. While the Company's only current operating entity,
Sentaur, is now providing profit contribution to the Company, as Sentaur begins
to add more to its customer base it may require additional funds for personnel
expenses and software systems development, but this would occur in anticipation
of future revenue growth. In addition, the Company has been pursuing acquisition
candidates and may 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 lien and judgment 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 liquidity 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.
17
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.
18
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) EXHIBITS
10.1 Stock Purchase Agreement dated as of August 1, 2003 by and among
American Member Corp. and Accessity Corp.
10.2 Employment Termination Agreement dated August 1, 2003 by and
between Accessity Corp., f/k/a drivershield.com Corp. and Barry
J. Spiegel
10.3 Web Site Linking Agreement dated August 1, 2003 by and among
Accessity Corp., American Member Corp. and DriverShield ADS
Corp.
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 August 19, 2003 containing a press
release that was issued announcing the financial results of the registrant for
the period ended June 30, 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: November 14, 2003 By: Barry Siegel
------------------------
Chairman of the Board, Secretary and
Chief Executive Officer
Date: November 14, 2003 By: Philip B. Kart
------------------------
Senior Vice President, Treasurer and
Chief Financial Officer
19
INDEX OF EXHIBITS
-----------------
10.1 Stock Purchase Agreement dated as of August 1, 2003 by and among
American Member Corp. and Accessity Corp.
10.2 Employment Termination Agreement dated August 1, 2003 by and
between Accessity Corp., f/k/a drivershield.com Corp. and Barry
J. Spiegel
10.3 Web Site Linking Agreement dated August 1, 2003 by and among
Accessity Corp., American Member Corp. and DriverShield ADS
Corp.
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
20