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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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.)
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(Name of small business issuer in its charter)
NEW YORK 11-2750412
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12514 West Atlantic Boulevard Coral Springs, Florida 33071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (954-752-6161)
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) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year $658,000
The aggregate market value of the issuer's voting stock held by
non-affiliates of the issuer as of March 26, 2004, based upon the closing price
on the date thereof is $3,591,000.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 26, 2004, the issuer had outstanding a total of 2,237,414
shares.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
On November 23, 1983, drivershield.com FS Corp. ("FS"), formerly known as
National Fleet Service, Inc., a New York corporation was formed and commenced
operations as an automotive fleet administrator. Thereafter, Accessity Corp.,
(f/k/a DriverShield Corp.; f/k/a driversshield.com Corp, and f/k/a First
Priority Group, Inc.) a New York corporation, was formed on June 28, 1985, and
was engaged in automotive fleet management and administration of automotive
repairs for businesses, insurance companies and members of affinity groups.
Accessity Corp. ("the Company") became the parent company to driversshield.com
FS Corp. On February 7, 2002, all of the outstanding shares of driversshield.com
FS Corp. were sold (see Recent Developments) and, thereafter the Company was no
longer engaged in the fleet management business. In addition, on January 2, 2003
we established a strategic partnership with a third party and transferred the
management and operating responsibilities of our DriverShield CRM ("CRM") unit
in exchange for profit sharing, (see Recent Developments). DriverShield CRM
provided collision repair management services for insurance industry clients
during fiscal 2002. Effective August 1, 2003 our business unit offering
automobile services to affinity groups through our wholly owned subsidiary,
DriverShield ADS Corp. ("ADS"), was sold to the president of that business unit.
Our remaining business activities are now operated by our wholly owned
subsidiary Sentaur Corp. ("Sentaur"), a business unit which we began in 2002
that specializes in medical billing recovery for hospitals.
In January 2003 we changed our name to Accessity Corp. from DriverShield
Corp. Our former name was no longer relevant due to the sale or transfer of its
automotive businesses.
The Company relocated its corporate headquarters to 12514 West Atlantic
Boulevard, Coral Springs, Florida 33071, from New York, during the fourth
quarter of 2002.
NATURE OF SERVICES
MEDICAL BILLING RECOVERY
In late 2002, we established a new business unit to diversify from the
automobile repair industry. Sentaur provides hospitals the opportunity to recoup
discounts improperly taken by insurance companies and other institutional payors
of medical treatments. This business unit contracts with hospitals and, upon
analytic review of their internal records and contracts, isolates those payors
who have improperly discounted the fees they have paid and seeks appropriate
recovery. Sentaur's fee income from the hospitals is earned upon the successful
collection of the receivable by the hospital. Sentaur currently has a number of
hospitals under signed contracts and by December 31, 2003 had recovered in
excess of $1 million on their behalf since it began generating billings in March
2003.
2
INSURANCE CARRIER MARKET
Effective January 2, 2003, under a Strategic Partnership Agreement with
ClaimsNet, Inc. ("ClaimsNet"), we transferred to ClaimsNet all responsibility
for the management and processing new automobile claims and repairs for CRM (see
"Recent Developments" below). During 2003 we completed the repairs that were in
process prior to the effective date of the agreement with ClaimsNet. CRM offered
Internet based vehicle repair management services, including collision and
general repair programs, estimating and auditing services and vehicle rentals
for insurance companies and affinity group members.
Throughout fiscal 2002 and for a short period in early 2003, during which
in-process repairs were completed, we provided auto repair services for our
insurance carrier clients. We assumed the risks and responsibilities for the
vehicle repair process from commencement to completion. Our insurance industry
clients used the internet to access our collision management system to record a
claim, which then initiated our activities to proceed with vehicle repairs. The
interactive website facilitated information gathering and distribution to launch
the repair process. The website enabled insurance carriers to utilize the
Company's website to directly enter the initial vehicle claim information, find
and select the most accessible automobile collision repair shop from the
Company's network of approximately 2,000 shops throughout the United States, and
enabled the insurance carrier and the insured to track the repairs of the
vehicle until completion. Our software also allowed us, and our clients, to view
digitized images of the damaged vehicle. Because of the volume of work we
provided, we were able to obtain significantly lower repair costs, and expedited
turnaround time, for our clients.
Once the client initiated the claims management system, we were
automatically notified to commence activities. We coordinated activities with
the shops, used our audit and estimating staff to negotiate the lowest price for
every claim and repair, monitored the use of certain types of parts, tracked the
work and timeliness of the repair process which could be viewed by our clients,
on our website, to judge our efforts, obtained independent appraisals when
requested, and, finally, guaranteed the repairs for as long as the driver owned
the vehicle. We issued warranty certificates for every repair done within our
network and were responsible to our clients if the repairs were not done
appropriately. We managed our warranty risk by monitoring the quality and
consistency of our network repair facilities and quickly eliminating those shops
that did not maintain proper standards. We paid the independent repair shops
directly upon completion of their work, and invoiced our insurance clients
separately. A number of insurance carriers had signed multi-year contracts with
CRM.
FLEET MANAGEMENT
Effective February 7, 2002, the Company sold all of the outstanding shares
of FS to PHH Vehicle Management Services LLC ("PHH"). [See "Recent Developments"
below.]
AFFINITY GROUP PROGRAMS
Effective August 1, 2003 the Company sold all of the outstanding shares of
our wholly owned subsidiary, DriverShield ADS Corp. to its president (see
"Recent Developments" below). Through ADS we offered various programs for
vehicle-related services for consumers who were sold the programs through
affinity groups, financial institutions, corporations and organizations. These
programs were used as re-enrollment incentives and/or membership premiums, or
resold at a profit. The programs consisted of collision repair discounts,
discounts for certain auto services including oil changes, brake repairs and the
like, and an auto hotline providing advice on actions to take for their
vehicles.
3
RECENT DEVELOPMENTS
SALE OR TRANSFER OF BUSINESS UNITS
FLEET SERVICES BUSINESS
In October 2001 the Company entered into a Stock Purchase Agreement ("the
Purchase Agreement") to sell all of the outstanding shares of its wholly-owned
subsidiary, drivershhield.com FS Corp, its collision repair and fleet services
business, to PHH, a subsidiary of Cendant Corporation (NYSE, symbol CD) for $6.3
million in cash, and pursuant to the Preferred Stock Purchase Agreement sold
$1.0 million of the Company's Series A Convertible Preferred Stock to PHH. The
Purchase Agreement was approved by a vote of the Company's shareholders on
February 4, 2002, and the transaction was consummated on February 7, 2002. Under
the terms of the Transition Services Agreement, PHH contracted with the Company
to operate FS until June 30, 2002.
INSURANCE COLLISION REPAIR 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 operations and
management of CRM, our business that provided insurance carriers with collision
repair for their insureds. The Company granted an exclusive license of its
technology, including its website software that enables insurance customers to
access our 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. In return, ClaimsNet agreed to pay
us 25% of vendor referral fees and 50% of administrative fees (as defined in the
agreement) on all existing customers, beginning in March and February 2003
respectively, and 15% of all administrative and vendor referral fees for all new
customers that use the licensed technology to have their vehicles repaired. The
term of the Partnership Agreement is for a five-year period, with a two-year
renewal unless terminated ninety days prior to the end of the then current term.
Additionally, ClaimsNet has an option to purchase the DriverShield CRM business
commencing on January 1, 2007 for a purchase price equal to the total royalties
paid by ClaimsNet for the prior twenty-four months.
AFFINITY SERVICES BUSINESS
Effective August 1,2003, we sold all of the outstanding shares of our
wholly owned subsidiary, ADS, our business unit offering automobile services to
affinity groups, to the president of that business unit, who is also a member of
our board of directors, for $10,000. The sale excluded certain assets and
liabilities consisting primarily of accounts receivable and payables.
REVERSE COMMON STOCK SPLIT
On January 7, 2004, upon approval by our common stock shareholders at the
December 15, 2003 Annual Shareholders Meeting, we effected a one-for-five share
reverse common stock split. In addition, all options, warrants and other
securities convertible into common shares were adjusted to reflect the reverse
4
stock split thereby increasing the conversion price by fivefold. We elected this
transaction in order to comply with the continued listing requirements of the
Nasdaq SmallCap Stock Market which mandates that common shares maintain a $1
trading price per share. We have been advised that we are now in compliance with
the listing requirements. All common share amounts and prices presented in this
Form 10-KSB have been adjusted to reflect this split.
SALES AND MARKETING
Our customers for the medical recovery business are hospitals. Sales
activities are primarily performed by our own personnel and augmented by outside
sales representatives. Sales are made through referrals, cold canvassing of
appropriate prospects and direct mailings.
Our clients for the CRM program were property and casualty insurance
companies. Our clients for the affinity programs were financial institutions,
organizations and affinity groups that resell the programs to individuals.
In 2003, four customers accounted for 92% of our continuing revenues,
comprising 36%, 22%, 20% and 14% individually. Two were in the medical recovery
segment and two were in the auto segment. In 2002, one customer accounted for
26% of our revenues and another accounted for 59% of revenues, both in the
automotive segment. These figures exclude those accounts associated with the
discontinued operating fleet service and ADS businesses that were sold in
February 2002 and August, 2003 respectively. See "Recent Developments", above.
EMPLOYEES
At year-end, we employed 12 full-time employees and one part-time employee.
None of our employees are governed by a union contract and we believe that our
employee relationships are satisfactory.
COMPETITION
Medical Billing Recovery. We believe that this is an emerging market, but
are not aware of any major entities involved in this business. We are aware of a
few privately held companies that have initiated similar business activities in
regional parts of the United States.
ITEM 2. DESCRIPTION OF PROPERTY
In May 2002, the Company entered into a lease for new office space, and is
the sole occupant of the building at 12514 West Atlantic Boulevard, Coral
Springs, Florida, 33071. The space consists of approximately 7,300 square feet
of office space. The lease term commenced in October 2002, and is for five and a
half years. The property is owned by three members of the Company's board of
directors [see "Certain Relationships and Related Transactions" below].
5
ITEM 3. LEGAL PROCEEDINGS
In January 2003 the Company and its CEO were served with a complaint filed
by Gerald Zutler, our former President and Chief Operating Officer, alleging
that the Company breached his employment contract, fraudulent concealment of the
Company's intention to terminate its employment agreement with Mr. Zutler, and
discrimination on the basis of age and aiding and abetting violation of the New
York State Human Rights Law. Mr. Zutler is seeking damages aggregating $2.25
million, plus punitive damages and reasonable attorneys' fees. We believe that
the Company properly terminated Mr. Zutler's employment for cause and intend to
vigorously defend this suit as it believes that Mr. Zutler's allegations are
without merit. Our answer to the complaint was served on February 28, 2003. In
2003, Mr. Zutler filed a motion to have our attorney removed from the case on
the basis that he would call our attorney as a witness. The motion was granted
by the Court, but we have appealed that ruling and the action has been stayed
pending determination of the appeal. The Company has filed a claim with its
carrier under its Directors' and Officers' and Employment Practices Liability
Policy. The policy has a $50,000 deductible and a liability limit of $3 million
per policy year. At the present time, the carrier has agreed to cover the
portion of the claim that relates to Mr. Siegel and has agreed to a fifty
percent (50%) allocation of expenses. Therefore, we must incur $100,000 of legal
expenses to satisfy the policy deductible, before the carrier commences
reimbursing us for fifty percent of the legal defense and/or any possible
recovery in favor of the plaintiff.
The Company filed a Demand for Arbitration against Presidion Solutions,
Inc. alleging that Presidion breached the terms of the Memorandum of
Understanding between Accessity and Presidion dated January 17, 2003. The
Company is seeking a Break-up Fee of $250,000 pursuant to the terms of the
Memorandum of Understanding alleging that Presidion breached the Memorandum of
Understanding by wrongfully terminating the Memorandum of Understanding.
Additionally, the Company is seeking its out of pocket costs of due diligence
amounting to approximately $37,000. Presidion has filed a counterclaim against
Accessity alleging that Accessity had breached the Memorandum of Understanding
and therefore owes Presidion a Break-up Fee of $250,000. We believe that the
claim alleged by Presidion is without merit. The dispute was heard by a single
arbiter before the American Arbitration Association in Broward County, Florida
in late February 2004. A decision is expected during the second quarter of 2004.
In addition, we have filed a lawsuit seeking damages in excess of $100
million, as a result of discovery conducted in connection with the Presidion
matter described above, against Presidion's investment bankers, Mercator Group,
LLC and related parties ("Mercator"), and Taurus Global LLC ("Taurus"), ("the
Defendants"), alleging that these parties tortiously interfered in the
transaction between the Company and Presidion. Mercator has made a motion to
dismiss this action with a hearing pending sometime in the future. We have
obtained a default judgment against Taurus and intend to enforce this judgment.
The final outcome of the Mercator action will most likely take an indefinite
time to resolve. We currently have limited information regarding the financial
condition of the defendants and the extent of their insurance coverage.
Therefore, it is possible that we may prevail but may not be able to collect
substantially on our judgment.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders in December 2003. The
following matters were voted upon at the meeting:
1. Elect one director of the Board of Directors: Barry M. Siegel
For Against Abstain
--- ------- -------
1,529,185 0 71,883
2. Amend the Certificate of Incorporation to effect a one-for-five reverse
stock split.
For Against Abstain
--- ------- -------
1,514,936 82,473 3,658
3. Ratify the selection of Nussbaum Yates & Wolpow, P.C. as auditors
For Against Abstain
--- ------- -------
1,573,502 26,180 1,385
The following individuals continued to serve as members of the Board of
Directors with Mr. Siegel: Barry J. Spiegel, Kenneth J. Friedman and Bruce S.
Udell.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common shares are traded on The Nasdaq SmallCap market. The
following table shows the high and low closing prices for the periods indicated.
Sale Price($)
High Low
---- ---
2003
- ----
First Quarter $5.05 $1.35
Second Quarter $2.80 $1.80
Third Quarter $2.90 $1.75
Fourth Quarter $3.90 $2.35
2002
- ----
First Quarter $10.00 $6.25
Second Quarter $7.35 $3.80
Third Quarter $5.70 $3.50
Fourth Quarter $3.80 $1.55
The number of record holders of the Company's common shares as of March 15,
2004 was 357.
The Company has never paid dividends on its common stock and is not
expected to do so in the foreseeable future. Payment of dividends is within the
discretion of the Company's Board of Directors and would depend on, among other
factors, the earnings, capital requirements and operating and financial
condition of the Company.
8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and the notes appearing elsewhere in this
report as Item 7, and Forward-Looking Statements-Cautionary Factors, below. This
discussion and analysis may contain statements that constitute forward-looking
statements within the meaning of the private Securities Litigation Reform Act of
1995.The Company cautions that forward-looking statements are not guarantees of
performance and actual results may differ materially from those in the
forward-looking statements.
YEAR ENDED DECEMBER 31, 2003 (THE "2003 PERIOD") COMPARED TO YEAR ENDED DECEMBER
- --------------------------------------------------------------------------------
31, 2002 (THE "2002 PERIOD")
- ----------------------------
The 2003 Period reflected a net loss of $1,626,000 versus net income of
$1,248,000 in the 2002 Period. Continuing operations reflected a loss of
$1,852,000 in the 2003 Period versus a loss of $1,469,000 in the 2002 Period.
However, excluding the recognition of tax loss carry-forwards of $2,277,000 in
the 2002 Period, continuing operations improved from a pretax loss of $3,746,000
in the 2002 Period to a pretax loss of $1,852,000 in the 2003 Period.
Discontinued operations reflected income of $2,717,000 in 2002 Period resulting
primarily from the gain on the sale of the fleet business. In the 2003 Period
income from discontinued operations was $226,000. Basic and diluted loss per
share from continuing operations was $.84 in the 2003 Period and $.67 the 2002
Period. Basic and diluted earnings per share from discontinued operations was
$.10 in the 2003 Period and $1.24 in the 2002 Period.
REVENUES
- --------
Revenues were $658,000 in the 2003 Period compared to $2,895,000 in the
2002 Period, representing a decrease of $2,237,000, or 77%. These figures
exclude the revenues from the ADS business that was sold August 1, 2003, and the
fleet services business that was sold in February 2002. Both are now reflected
in the Company's financial statements as discontinued operations. Revenues
declined by $2,615,000 in the automotive segment, to $280,000 in the 2003 Period
from $2,895,000 in the 2002 Period, as a result of the transfer of the CRM
business to ClaimsNet in January, 2003. The Company completed certain repairs in
the 2003 Period that were in process at the end of the 2002 Period, and
thereafter recorded its share of the CRM business from fees it receives through
ClaimsNet. This decrease in revenues was offset by $378,000 in revenues from
Sentaur, the medical recovery business that began revenue recording in April
2003. As described more fully below, although we incurred a substantial decline
in revenues, the significant reduction in infrastructure costs which was
required by the CRM (excluding the corporate overhead which the Company does not
allocate to its operating units), eliminated the losses associated with the CRM
business.
9
INCOME AND EXPENSES FROM CONTINUING OPERATIONS
- ----------------------------------------------
Pretax losses from continuing operations improved; the losses decreased by
$1,894,000 to a loss of $1,852,000 in the 2003 Period, from a higher loss of
$3,746,000 in the 2002 Period. The decrease in losses, and comparative amounts,
are described below.
Collision repair and claim fee revenues net of collision repair costs, was
$178,000 in the 2003 Period compared to $395,000 in the 2002 Period, a decrease
of $217,000, resulting from the transfer of the CRM business to ClaimsNet.
Selling expenses decreased by $473,000, from $952,000 in the 2002 Period to
$479,000 in the 2003 Period, or 50%, primarily as a result of decreased
expenditures of $632,000 for its CRM business which was transferred to
ClaimsNet, offset by $244,000 in increased expenses for Sentaur for personnel
and their related selling expenses. General and administrative expenses
decreased $1,383,000, or 43%, from $3,235,000 in the 2002 Period to $1,852,000
in the 2003 Period resulting primarily from various infrastructure and
supporting personnel costs which were no longer needed without the automotive
CRM business of approximately $681,000; as well as costs incurred in 2002 which
did not recur, including a one-time bonus of $250,000 to Barry Siegel, the Chief
Executive Officer of the Company, upon consummation of the sale of FS, and, the
costs of relocating the office in New York and then to Florida, along with the
associated costs of severance to terminated employees totaling $386,000. In the
2002 Period the Company recorded a credit, an income item, of $132,000 in
non-cash compensation (due to decreases in the Company's price per share of its
common stock) as a result of re-pricing certain stock options during 1999. There
was no impact in the 2003 Period.
Depreciation and amortization in the 2003 Period was $299,000, reflecting a
decrease of $102,000 from $401,000, caused by assets that became fully
depreciated in 2003.
Investment and other income decreased $176,000 to $227,000 in the 2003
Period compared to $403,000 in the 2002 Period resulting from declining interest
rates, lower cash and investment balances and a loss on a sale of $15,000.
Interest expense decreased $84,000 from $89,000 to $5,000 relating primarily to
bond premium recorded as interest expense in 2002. The amounts were lower in the
current period as the bonds were either sold or matured during 2003.
The 2002 Period tax provision in the income statement (inclusive of
continuing and discontinued operations) reflected a tax expense of $1,924,000.
The tax expense in the 2002 Period was largely the result of the $6.1 million
gain on the sale of the fleet business offset, in part, by credits from losses
on operating activities. In the 2003 Period no tax impact in the income
statement is reflected, resulting from a valuation allowance that has been
established for all operating loss carry-forward benefits.
10
DISCONTINUED OPERATIONS
- -----------------------
In the 2003 Period discontinued operations reflects income of $226,000 from
the affinity services business (including the $10,000 gain on the sale of this
business), which was sold effective August 1, 2003, compared to income of
$309,000 for the affinity services business in the 2002 Period. The performance
of this business had been declining due to the non-renewal of annual
memberships. Sales were $1,123,000 in the 2002 Period and $419,000 in the 2003
Period through its date of sale.
The 2002 Period also reflects income, net of income taxes, from
discontinued operations of the fleet services business that was sold effective
February 2002 of $17,000, and a $2,391,000 gain on its disposal.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At December 31, 2003, the Company had cash and cash equivalents of $96,000.
The Company also holds shares in a number of highly liquid mutual funds valued
at $4,313,000. Working capital of the Company was $4,177,000 and its working
capital ratio was 9:1 at December 31, 2003.
In connection with the Company's rental of office space in Florida, in July
2002, the Company also pledged as security, a $300,000 certificate of deposit
with a Florida bank for the five and a half year term of the lease, for the
benefit of the landlord's mortgage lender. Such amounts were excluded from
liquidity, described above, and presented as a 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
is the beneficiary of the interest income. In addition, during 2002 the Company
expended approximately $140,000 in connection with the build-out of the space.
This property is owned and operated by B & B Lakeview Realty Corp., whose three
shareholders, Barry Siegel, Barry Spiegel and Kenneth Friedman, are members of
the Company's board of directors. The terms of the lease require net rentals to
be paid in increasing annual amounts over the term of the lease from $127,000 to
$168,000 plus related insurance, taxes and operating expenses. The lease term
commenced in October 2002 and terminates five years and six months thereafter.
The Company has no major expenditures that it currently anticipates for
capital equipment needs, however it is expending funds due to operating losses.
As Sentaur obtains additional hospital customers, and seeks to expand its sales,
it will require additional funds for personnel expenses and software systems
development, and these expenditures will occur in anticipation of future revenue
growth. We expect to use our resources to support its growth during 2004 and
thereafter.
In addition, during the 2003 Period the Company has spent considerable
effort with its management pursuing acquisition candidates and may continue to
do so and 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.
11
The Company's Board of Directors approved a stock repurchase program
whereby the Company may purchase up to 100,000 shares of its common shares
traded on the Nasdaq SmallCap Market. During the third quarter of 2002 the
Company acquired 18,600 shares at a cost of $93,000.
The Company believes that its present liquidity will enable it to continue
to support its operations for the next twelve months, and for some extended
period thereafter depending on the extent of its use of funds in developing its
existing business or possible use of funds in acquiring new businesses.
DEFERRED INCOME TAXES
- ---------------------
The Company has a net operating loss carry forward of approximately $3.6
million that is available to offset future taxable income at December 31, 2003.
Since the Company has determined that it is more likely than not that it may not
be able to recover these carry-forward benefits, a valuation allowance has been
established for the full amount of the deferred tax benefit. Accordingly, no
deferred income tax asset has been reflected in the Company's financial
statements. If the Company is profitable in the future, such benefits will be
available to offset future income taxes.
NEW ACCOUNTING STANDARDS
- ------------------------
The new accounting pronouncements described in footnote 1 of the Consolidated
Financial Statements are incorporated by reference.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles( "GAAP") in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. The most significant estimates include:
* revenue recognition
* valuation of long-lived assets
* income tax valuation allowance
We continually evaluate our accounting policies and the estimates we use to
prepare the consolidated financial statements. In general, the estimates are
based on historical experience, on information from third party professionals
and on various other sources and assumptions that are believed to be reasonable
under the facts and circumstances at the time such estimates are made.
Management considers an accounting estimate to be critical if:
* it requires assumptions to be made that were uncertain at the time
the estimate was made; and
* changes in the estimate, or the use of different estimating methods,
could have a material impact on the Company's consolidated results of
operations or financial condition.
12
Actual results could differ from those estimates. Significant accounting
policies are described in Note 1 to the consolidated financial statements, which
are included in this Form 10-KSB filing. In many cases, the accounting treatment
of a particular transaction is specifically dictated by GAAP. There are also
areas in which management's judgment in selecting any available alternative
would not produce a materially different result.
Certain of our accounting policies are deemed "critical", as they require
management's highest degree of judgment, estimates and assumptions. The
following critical accounting policies are not intended to be a comprehensive
list of all of our accounting policies or estimates.
Revenue Recognition
We apply the provisions of Staff Accounting Bulletin 101 "Revenue Recognition".
We recognize revenue from collision repairs at the time of customer approval and
completion of repair services. We recognize collision royalty revenue upon
notification from our licensee that the claim has been processed and repaired.
We recognize hospital fees at the time we receive notification from the
hospitals that they have recovered funds from their customers.
Accounts Receivable
Once a customer is billed for services, we actively manage the accounts
receivable to minimize credit risk.
We assess the collectibility of accounts receivable by analyzing historical bad
debts, review of the aging of customer receivables, and the current
creditworthiness of our customers.
Impairment of Long-Lived Assets
We follow the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement requires that certain assets be
reviewed for impairment and, if impaired, remeasured at fair value whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Impairment loss estimates are primarily based upon
management's analysis and review of the carrying value of long-lived assets at
each balance sheet date, utilizing an undiscounted future cash flow calculation.
Income Taxes
We estimate the degree to which tax assets and loss carryforwards will result in
a benefit based on expected profitability by tax jurisdiction. A valuation
allowance for such tax assets and loss carryforwards
13
is provided when it is determined that such assets will more likely than not go
unused. If it becomes more likely than not that a tax asset or loss carryforward
will be used, the related valuation allowance on such assets is reversed. If
actual future taxable income by tax jurisdiction varies from estimates,
additional allowances or reversals of reserves may be necessary.
FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS
- -----------------------------------------------
Certain statements in this report on Form 10-KSB contain "forward-looking
statements" within the meaning of the Private Securities Litigation Act of 1995.
These statements are typically identified by their inclusion of phrases such as
"the Company anticipates", or "the Company believes", or other phrases of
similar meaning. These forward-looking statements involve risks and
uncertainties and other factors that may cause the actual results, performance
or achievements to differ from any future results, performance or achievements
expressed or implied by such forward-looking statements. Except for the
historical information and statements contained in this Report, the matters and
items set forth in this Report are forward looking statements that involve
uncertainties and risks some of which are discussed at appropriate points in the
Report and are also summarized as follows:
1. As the Company has sold its traditional automobile business lines and
embarked on a new medical business, there will be new and additional risks
that may influence the business of the Company. These risks include:
o The Company has either sold or transferred the businesses upon which
it was originally founded (auto collision repair and managed care
services) and we are not sure our new business enterprise, in medical
billing recovery, will be successful or that we can generate
sufficient revenue from this activity.
o As is typical for any new, rapidly evolving market, demand and market
acceptance for recently introduced medical billing recovery services
are subject to a high level of uncertainty and risk. It is also
difficult to predict the market's future growth rate, if any. If the
market fails to develop among the potential hospital users, or
develops more slowly than expected or becomes saturated with
competitors, or our services do not achieve or sustain market
acceptance, our business, results of operations and financial
condition could be materially and adversely affected.
o We also depend on establishing and maintaining a number of commercial
relationships with other companies. Our business could be adversely
affected if we do not maintain our existing commercial relationships
on terms as favorable as currently in effect, if we do not establish
additional commercial relationships on commercially reasonable terms
or if our commercial relationships do not result in the expected
increased use of our Website.
o We are also seeking to make new acquisitions that will either augment
existing business lines or move us into new areas. We cannot assure
you that we will be able to find the appropriate business for a public
company, on commercially acceptable terms. Furthermore, we cannot
assure you that the services or products of those companies will
achieve additional market acceptance or commercial success.
o We are dependent on certain key personnel. Our future success is
substantially dependent on our senior management. If one or more of
14
our key employees decided to leave us, join a competitor or otherwise
compete directly or indirectly with us, this could have a material
adverse effect on our business, results of operations and financial
condition. Competition for such personnel is intense, and we may not
be able to attract, assimilate or retain such personnel in the future.
The inability to attract and retain the necessary managerial,
technical, sales and marketing personnel could have a material adverse
effect on our business, results of operations and financial condition.
Further, as we engage in new markets or acquisitions, we may not have
experience in those markets and may be required to attract new
personnel.
o Our success may be dependent on keeping pace with advances in
technology. If we are unable to keep pace with advances in technology,
businesses may stop using our services and our revenues will decrease.
The Internet and electronic commerce markets are characterized by
rapid technological change, changes in user and customer requirements,
frequent new service and product introductions embodying new
technologies and the emergence of new industry standards and practices
that could render our existing Website and technology obsolete. If we
are unable to adapt to changing technologies, our business, results of
operations and financial condition could be materially and adversely
affected.
o We are uncertain of our ability to obtain additional financing for our
future capital needs. If we are unable to obtain additional financing,
we may not be able to continue to operate our business or create the
growth we wish. We currently anticipate that our cash, cash
equivalents and short-term investments will be sufficient to meet our
anticipated needs for working capital and other cash requirements at
least for the next 12 months, and beyond. However we may need to raise
additional funds, in order to fund more rapid expansion, for
acquisitions, to develop new or enhance existing services or products,
to respond to competitive pressures or to acquire complementary
products, businesses or technologies.
o There can be no assurance that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to
fund our expansion, take advantage of potential acquisition
opportunities, develop or enhance services or products or respond to
competitive pressures would be significantly limited. Such limitation
could have a material adverse effect on our business, results of
operations, financial condition and prospects.
2. As the Company's medical billing programs gain some success, it is possible
that the competition will attempt to copy these programs and incorporate
them into their programs. This could lead to increased competitive
pressures on those programs that are the most successful. The competition
could result in decreased profit margins and/or the loss of certain
customers.
3. Certain senior management personnel may be able to exercise voting control.
Barry Siegel, our Chairman of the Board and Chief Executive Officer,
beneficially owns and controls the vote of approximately 17 % of the
outstanding shares of our common stock. In addition, Barry J. Spiegel, a
director and the President of former ADS subsidiary, beneficially owns and
controls the vote of approximately 14% of the outstanding shares of our
common stock. This concentration of ownership, which is not subject to any
voting restrictions, could limit the price that investors might be willing
to pay for common stock. In addition, Mr. Siegel and Mr. Spiegel are in a
position to impede transactions that may be desirable for other
shareholders.
15
4. Our articles of incorporation and by-laws contain certain provisions that
could make it more difficult for shareholders to effect certain corporate
actions, and could make it more difficult for anyone to acquire control of
us without negotiating with our board of directors. These provisions could
limit the price that investors might be willing to pay in the future for
our common stock.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and schedules appear at the end of this
Report after Item 14.
ITEM 8A. 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 ss.ss.240.13a-14(c) and 240.15d-14(c)) as of a date
(the Evaluation Date) within 90 days of the filing date of this Report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, 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.
16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Each member of our board of directors serves for staggered three-year terms
and until his or her successor is duly elected and qualified. Our executive
officers and directors are as follows:
Name Age Position
- ---- --- --------
Barry Siegel................ 52 Chairman of the Board, President and
Chief Executive Officer
Barry J. Spiegel............ 55 Director
Philip B. Kart.............. 54 Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
Kenneth J. Friedman*........ 50 Director
Bruce S. Udell*............. 51 Director
* Member of the Audit Committee. The Board of Directors has determined that the
Company does not have a financial expert, as defined in the SEC regulations,
sitting on its audit committee.
Barry Siegel has served as one of our directors and through December 2003
as Secretary, since we were incorporated. He was elected to the additional post
of President in December 2003. He has served since January 1998, as our Chief
Executive Officer and Chairman of the Board since November 1997. Previously, he
served as our Chairman of the Board, Co-Chief Executive Officer, Treasurer, and
Secretary from August 1997 through November 1997. From October 1987 through
August 1997, he served as our Co-Chairman of the Board, Co-Chief Executive
Officer, Treasurer, and Secretary. He also served for more than five years as
Treasurer and Secretary of driversshield.com FS Corp., a former wholly owned
subsidiary.
Barry J. Spiegel served as President of DriverShield ADS from September
1996 to August 1, 2003, its date of sale. He served as President of American
International Insurance Associates, Inc. from January 1996 through August 1996.
For more than five years prior to August 1996, Mr. Spiegel served as Senior Vice
President at American Bankers Insurance Group, Inc.
Philip Kart has served as Secretary of the Company since December 2003,
Senior Vice President and Treasurer since February 2002 and Chief Financial
Officer since October 2000. From February 1998 through September 2000, he was
Vice President and Chief Financial Officer of Forward Industries, Inc., a Nasdaq
SmallCap listed company, and prior to that, from March 1993 to December 1997,
Chief
17
Financial Officer of Ongard Systems, Inc. Mr. Kart has also held financial
management positions with Agrigenetics Corporation, Union Carbide and was with
the accounting firm Price Waterhouse Coopers. Mr. Kart is a CPA.
Kenneth J. Friedman has served as our director since October 1998. Mr.
Friedman has for more than five years served as President of the Primary Group,
Inc., an executive search consultant.
Bruce S. Udell was first elected to be a member of the Board of Directors
in September 2002. Since 1976, Mr. Udell has served as President and Chief
Executive Officer of Udell Associates, a financial planning firm specializing in
life insurance and estate planning. Additionally, since 1998, he has served as
President of Asset Management Partners, a registered investment advisor.
BOARD OF DIRECTORS AND COMMITTEES
Our board of directors serves as the representative of our shareholders. The
board establishes broad corporate policies and oversees our overall performance.
The board is not, however, involved in day-to-day operating details. Members of
the board are kept informed of our business activities through discussion with
the chief executive officer, by reviewing analyses and reports sent to them by
management, and by participating in board meetings.
During 2003, our board held three meetings attended by members of the board
either in person or via telephone, and on two occasions approved resolutions by
unanimous written consent in lieu of a meeting.
Our board currently has one standing committee, the Audit Committee. The members
of the Audit Committee in 2003 were Kenneth J. Friedman, Barry J. Spiegel and
Bruce S. Udell. Neither Mr. Friedman nor Mr. Udell is currently an officer of
Accessity or any of its subsidiaries, and both are "independent" under the
Nasdaq listing requirements as currently in effect. Mr. Spiegel was an officer
of the Company until August 1, 2003 and is now also independent. The Audit
Committee met once in 2003. The Audit Committee operates pursuant to a charter
approved by our board of directors. In February 2004, Mr. Friedman and Mr. Udell
were re-elected as members of the Audit Committee with Mr. Friedman designated
as Chairman.
COMPENSATION OF DIRECTORS
We do not pay our directors for serving on our board. Our 1995 Incentive Stock
Plan (the "Plan") does, however, provide that when they are elected to the board
and every anniversary thereafter as long as they serve, our non-employee
directors are granted a non-statutory stock option to purchase up to 10,000
shares of our common stock which vests over three years. Prior to February 4,
2002, directors received 3,000 shares as the annual stock option grant.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
We are not aware of any officer or director that did not comply with
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year
ended December 31, 2003, except for Kenneth J. Friedman
18
and Bruce S. Udell who each filed his Form 5 late that was due forty-five days
following the end of the fiscal year.
CODE OF ETHICS.
The Company has adopted a Code of Ethics for adherence by its Chief Executive
Officer, Chief Financial Officer, Chief Accounting Officer and Controller to
ensure honest and ethical conduct; full, fair and proper disclosure of financial
information in the Company's periodic reports filed pursuant to the Securities
Exchange Act of 1934; and compliance with applicable laws, rules, and
regulations. The text of the Company's Code of Ethics is included as Exhibit
14.1 hereto. Any person may obtain a copy of our Code of Ethics by mailing a
request to the Company at the address appearing on the front page of this Annual
Report on Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table summarizes the compensation we paid, or compensation
accrued, for services rendered for the years ended December 31, 2001, 2002 and
2003 for our Chief Executive Officer and each of the other most highly
compensated executive officers who earned more than $100,000 in salary for the
year ended December 31, 2003:
19
SUMMARY COMPENSATION TABLE
--------------------------
Securities
Underlying Other
Name and Position(s) Year Salary ($) Options (#) Bonus ($) Compensation
- -------------------- ---- ---------- ----------- --------- ------------
Barry Siegel 2003 300,000 0
Chairman of the Board of Directors, 2002 300,000 110,000 250,000 $12,500(a)
President and Chief Executive Officer 2001 285,000 0
Gerald Zutler (b) 2002 138,191 40,000
Former President and Chief 2001 149,525 0
Operating Officer
John M. McIntyre (c) 2003 124,615 0
Former President and 2002 84,339 50,000
Chief Operating Officer
Barry J. Spiegel (d ) 2003 107,692 0
President, DriverShield ADS Corp. 2002 175,000 50,000
2001 129,525 0
Philip B. Kart 2003 155,000 0 $62,000(e)
Senior Vice President, Secretary, 2002 155,000 30,000 10,000
Treasurer and Chief Financial Officer 2001 139,093 0
Steven DeLisi 2003 175,000 0 10,000
President, Sentaur Corp. 2002 68,654 50,000 5,000
(a) Reimbursed to Mr. Siegel for direct costs he incurred in connection with his relocation.
(b) Mr. Zutler's employment terminated in August 2002.
(c) Mr. McIntyre's employment terminated on December 31, 2003.
(d) Mr. Spiegel's employment terminated on July 31, 2003.
(e) Provided to Mr. Kart, upon his relocation, for costs incurred in connection with relocation.
20
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We are party to an employment agreement with Barry Siegel that commenced on
January 1, 2002, and expires on December 31, 2004. Mr. Siegel's annual salary is
$300,000, and he has been granted stock options, under the Company's 1995
Incentive Stock Option Plan ("the Plan"), providing the right to purchase 60,000
shares of the Company's common stock, in addition to certain other perquisites.
His employment agreement provides that following a change of control (as defined
in the agreement), we will be required to pay Mr. Siegel (1) a severance payment
of 300% of his average annual salary for the past five years, less $100, (2) the
cash value of his outstanding but unexercised stock options, and (3) other
perquisites should he be terminated for various reasons specified in the
agreement. The agreement specifies that in no event will any severance payments
exceed the amount we may deduct under the provisions of the Internal Revenue
Code. In recognition of the sale of the fleet services business, Mr. Siegel was
also awarded a $250,000 bonus, which was paid in February 2002, and an
additional grant of 50,000 options.
We were party to an employment agreement with Gerald M. Zutler that
commenced on January 1, 2002, and was to expire on December 31, 2004, but which
terminated in August 2002. Mr. Zutler's annual salary was $190,000, and he had
been granted 40,000 stock options under the Company's 1995 Incentive Stock
Option Plan ("the Plan"), which expired, in addition to certain other
perquisites. His employment agreement contained a change in control provision
that mirrored in Mr. Siegel's employment agreement, except that the applicable
percentage for severance payment purposes is 100%. Mr. Zutler has filed suit
against the Company for wrongful termination (see "Legal Proceedings").
We were party to an employment agreement with Barry J. Spiegel that
commenced on January 1, 2002, and was to expire on December 31, 2004, but
terminated upon the sale of ADS to Mr. Spiegel effective August 1, 2003. Mr.
Spiegel's annual salary was $175,000 per annum and he had been granted stock
options, under the Company's 1995 Incentive Stock Option Plan ("the Plan"),
providing the right to purchase 50,000 shares of the Company's common stock, in
addition to certain other perquisites, and the applicable percentage for
severance payment purposes was 100%. Mr. Spiegel exercised a total of 30,000
options for an equivalent number of common shares prior to expiration.
We were party to an employment agreement with John M. McIntyre that
commenced on July 15, 2002, and was to expire on December 31, 2004 but his
employment terminated on December 31, 2003. Mr. McIntyre's annual salary was
$190,000 per annum and he had been granted stock options, under the Company's
1995 Incentive Stock Option Plan ("the Plan"), providing the right to purchase
50,000 shares of the Company's common stock, in addition to certain other
perquisites, and the applicable percentage for severance payment purposes is
100%. His employment agreement provided that following a change in control (as
defined in the agreement), all stock options previously granted to him would
immediately become fully exercisable. In July 2003 the Company and Mr. McIntyre
modified his agreement by reducing his time commitment covering the five months
ended December 31, 2003, which resulted in a salary of $3,000 per month plus
health benefits; thereafter his employment terminated.
We are party to an employment agreement with Philip B. Kart that commenced
on January 1, 2002, and expires on December 31, 2004. Mr. Kart's annual salary
is $155,000 per annum and he has been granted stock options, under the Company's
1995 Incentive Stock Option Plan ("the Plan"), providing the right to purchase
30,000 shares of the Company's common stock, in addition to certain other
perquisites, and the applicable percentage for severance payment purposes is
100%. His
21
employment agreement provides that following a change in control (as defined in
the agreement), all stock options previously granted to him will immediately
become fully exercisable. Mr. Kart's contract also provided for relocation
expense payments that were conditioned upon his relocation to the Company's new
headquarters, which occurred in early 2003.
Under an agreement with our wholly owned subsidiary, Sentaur, Corp., we are
party to an employment agreement with Steven DeLisi that commenced on September
3, 2002, and expires on December 31, 2004. Mr. DeLisi's annual salary is
$175,000 per annum and he has been granted stock options, under the Company's
1995 Incentive Stock Option Plan ("the Plan"), providing the right to purchase
50,000 shares of the Company's common stock, in addition to certain other
perquisites, and the applicable percentage for severance payment purposes is
100%. Mr. DeLisi also participates in a bonus program established for his
business that provides a bonus of 50% of his salary upon the achievement of
$25,000 in profits for three consecutive months. During his first twelve months
of employment he received an interim bonus of $5,000 for each signed contract.
His employment agreement provides that following a change in control (as defined
in the agreement), all stock options previously granted to him will immediately
become fully exercisable.
STOCK OPTIONS
We made no awards of stock options during the last fiscal year to the
executive officers named in the summary compensation table as part of their
employment, however upon his resignation from the Company Mr. Spiegel was
granted 10,000 options in accordance with Company's policy of option grants to
its directors. The following table indicates the number of exercised and
unexercised stock options held by each executive officer named in the Summary
Compensation Table, as of December 31, 2003.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
---------------------------------------------------
AND FY-END OPTION/SAR VALUE TABLE
---------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Acquired Value Options/SARs at FY-End Options/SARs at FY-End
Name on Exercise (#) Realized ($) (Exercisable/Unexercisable)(#) (Exercisable/Unexercisable)($)
---- --------------- ------------ ---------------------------- ----------------------------
Barry Siegel 40,000 $25,250 80,000/36,667 $0/0
Gerald M. Zutler None $0 0/0 $0/0
John M. McIntyre None $0 16,667/0 $0/0
Barry J. Spiegel 30,000 $23,625 0/3,333 $0/0
Philip B. Kart None $0 65,000/10,000 $36,000/0
Steven DeLisi None $0 16,667/33,333 $0/0
22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
Shares to be issued
upon exercise of outstanding Number of Securities
options, warrants or stock Weighted average Available for
Plan Category rights(#) exercise price($) Future Issuance(#)
- ------------- --------- ----------------- ------------------
Approved by Shareholders:
Stock Option Plan 392,333 $6.00 807,667
Not Approved by Shareholders:
Consultant's Warrants 25,000 $2.99 0
The following table provides information about the beneficial ownership of
our common stock as of March 20, 2004. We have listed each person who
beneficially owns more than 5% of our outstanding common stock, each of our
directors and executive officers identified in the summary compensation table,
and all directors and executive officers as a group. Unless otherwise indicated,
each of the listed shareholders has sole voting and investment power with
respect to the shares beneficially owned.
SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
Name and Address Amount and Nature Percentage of
Title of Class of Beneficial Owner of Beneficial Owner Common Stock (1)
- -------------- ------------------- ------------------- ----------------
Common stock Barry Siegel 460,873(2)(3) 19.9%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Gerald M. Zutler 40,200 1.8%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Barry J. Spiegel 309,792 13.8%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
23
Common stock Philip B. Kart 65,000(4) 2.8%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Kenneth J. Friedman 69,733(5) 3.1%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Bruce S. Udell 10,083(6) .4%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock John M. McIntyre 19,667(7) .9%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Steve DeLisi 16,971(8) .8%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock All directors & officers 932,452 37.7%
as a group
(1) The percentages have been calculated in accordance with Instruction 3 to
Item 403 of Regulation S-B. Percentage of beneficial ownership is
calculated assuming 2,237,414 shares of common stock were outstanding on
March 28, 2004.
(2) Includes 667 shares held by Barry Siegel as custodian for two nephews and
13 shares held directly by Barry Siegel's wife, Lisa Siegel. Both Barry and
Lisa Siegel disclaim beneficial ownership of shares held by the other.
(3) Includes options held by Barry Siegel to purchase 80,000 shares of common
stock exercisable within 60 days of March 28, 2004.
(4) Includes options to purchase 65,000 shares of common stock exercisable
within 60 days of March 28, 2004.
(5) Includes options to purchase 12,333 shares of common stock exercisable
within 60 days of March 28, 2004.
(6) Includes options to purchase 3,333 shares of common stock exercisable
within 60 days of March 28, 2004.
(7) Includes options to purchase 19,667 shares of common stock exercisable
within 60 days of March 28, 2004.
(8) Includes options to purchase 16,667 shares of common stock exercisable
within 60 days of March 28, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2002 the Company signed a five and a half year lease to occupy a new
7,300 square foot building in Coral Springs, Florida. This property 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.
The terms of the lease require net rentals increasing in annual amounts from
$127,000 to $168,000 plus real estate taxes, insurance and other operating
expenses. The lease period commenced in October 2002 and terminates five years
and six months thereafter. The
24
Company and the landlord each expended approximately $140,000 to complete the
interior space. In addition, during July 2002, the Company pledged a $300,000
certificate of deposit with a Florida bank, (the mortgage lender to B & B
Lakeview Realty Corp) as security for the Company's future rental commitments
for the benefit of the landlord's mortgage lender. The certificate of deposit
declines to $200,000 after the 36th month, $100,000 after the 48th month, and to
zero after 60 months, as the balance of the rent commitment declines. During the
2003 Period the Company paid B&B Lakeview Realty rent payments of $127,000. The
Company also accrued a payment of $20,000 as reimbursement for some insurance
and tax amounts paid by B&B Lakeview during 2003. Operating expenses, insurance
and taxes, as required by the lease, are generally paid directly to the
providers by the Company.
25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3.1 Restated and Amended Certificate of Incorporation incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2001 previously filed with the
Commission.
3.2. Amended and restated By-laws of the Company, incorporated by reference
to Exhibit 4 to the Company's Current Report on Form 8-K dated
December 28, 1998.
3.3 Amendment to the Company's Certificate of Incorporation dated January
15, 2003.
4.0 Shareholders Rights Agreement dated as of December 28, 1998, between
First Priority Group, Inc. and North American Transfer Co., as Rights
Agent, together with Exhibits A, B and C attached thereto incorporated
by reference to the Registrant's Registration Statement on Form 8-A
filed on December 31, 1998.
10.1 Stock Purchase Agreement dated October 29, 2001 by and among PHH
Vehicle Management Services, LLC, and driversshield.com Corp., and
driversshield.com FS Corp incorporate by reference as Exhibit 10.1 to
the Form 10-QSB for the period ended September 30, 2002.
10.2 Employment Agreement between the Company and Barry Siegel dated
February 4, 2002 previously filed with the Commission and incorporated
by reference hereto.
10.3 Employment Agreement between the Company and Barry J. Spiegel dated
February 4, 2002 previously filed with the Commission and incorporated
by reference hereto.
10.4 Employment Agreement between the Company and Philip Kart dated
February 4, 2002 previously filed with the Commission and incorporated
by reference hereto.
10.5 Employment Agreement between the Company and John M. McIntyre dated
July 15, 2002 previously filed with the Commission and incorporated by
reference hereto.
10.6 First Amendment to the Employment Agreement between the Company and
Philip Kart dated November 15, 2002 previously filed with the
Commission and incorporated by reference hereto.
10.7 Amended 1995 Incentive Stock Plan of Accessity Corp. previously filed
with the Commission and incorporated by reference hereto.
10.8 Strategic Partnership Agreement by and among DriverShield CRM Corp.,
Accessity Corp., f/k/a DriverShield Corp. and ClaimsNet, Inc., dated
December 17, 2002 previously filed with the Commission and
incorporated by reference hereto.
10.9 Employment Agreement between Sentaur Corp., f/k/a DRVR Corp. and
Steven T. DeLisi dated June 18, 2002 previously filed with the
Commission and incorporated by reference hereto.
10.10 Lease Agreement dated May 28, 2002 between the Company and B & B
Lakeview Realty Corp. previously filed with the Commission and
incorporated by reference hereto.
10.11 First Amendment to the Lease Agreement dated July 10, 2002 between the
Company and B & B Lakeview Realty Corp. previously filed with the
Commission and incorporated by reference hereto.
10.12 Stock Purchase Agreement dated as of August 1, 2003 by and among
American Member Corp. and Accessity Corp. previously filed as Exhibit
10.1 with the Company's Form 10-QSB for the period ended September 30,
2003 and incorporated by reference hereto..
10.13 Employment Termination Agreement dated August 1, 2003 by and between
Accessity Corp., f/k/a drivershield.com Corp. and Barry J. Spiegel
previously filed as Exhibit 10.2 with the Company's Form 10-QSB for
the period ended September 30, 2003 and incorporated by reference
hereto..
10.14 Web Site Linking Agreement dated August 1, 2003 by and among Accessity
Corp., American Member Corp. and DriverShield ADS Corp. previously
filed as Exhibit 10.3 with the Company's Form 10-QSB for the period
ended September 30, 2003 and incorporated by reference hereto..
13.1 Form 10-QSB for the quarter ending March 31, 2003 incorporated by
reference hereto and previously filed with the Commission.
26
13.2 Form 10-QSB for the quarter ending June 30, 2003 incorporated by
reference hereto and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 2003 incorporated by
reference hereto and previously filed with the Commission.
14.1 Code of Ethics filed herein.
21 List of subsidiaries filed herein.
31.1 Certification of Barry Siegel, Chief Executive Officer, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Philip Kart, Chief Financial Officer, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Barry Siegel, Chief Executive Officer, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Philip Kart, Chief Financial Officer, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated November 11, 2003
disclosing a press release that announced the Company's financial
results for the third quarter and nine months ended September 30,
2003.
The Company filed a Current Report on Form 8-K dated July 15,
2003reflecting the resignation of John M. McIntyre as the President,
Chief Operating Officer and a member of the Board of Directors and
modification of his employment agreement.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Nussbaum Yates & Wolpow, P.C. have been engaged to perform our 2003 annual
audit at a fee of $27,500, and have billed and been paid $24,000 for
professional services rendered for reviews of the financial statements included
in our Forms 10-QSB for the first three calendar quarters of the 2003 Period,
and $1,939 in fees for professional services rendered regarding other matters.
Their fee for the 2002 annual audit was $29,000, and $34,679 was paid to them
for services rendered in connection with the reviews of the financial statements
included in our Forms 10-QSB for the three calendar quarters of the 2002 Period.
We also paid $975 to them for other matters during the 2002 Period.
27
ACCESSITY CORP. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2003 AND 2002
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
Accessity Corp.
Coral Springs, Florida
We have audited the accompanying consolidated balance sheets of Accessity Corp.
and subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Accessity Corp. and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Melville, New York NUSSBAUM YATES & WOLPOW, P.C.
March 4, 2004
F-1
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 95,575 $ 908,655
Accounts receivable 156,096 149,685
Investments 4,313,114 5,309,481
Prepaid expenses and other current assets 114,301 334,719
------------ ------------
Total current assets 4,679,086 6,702,540
Property and equipment, net 449,295 708,976
Restricted certificate of deposit 300,000 300,000
Security deposits and other assets 53,549 57,979
------------ ------------
Total assets $ 5,481,930 $ 7,769,495
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52,197 $ 299,215
Accrued expenses and other current liabilities 429,172 859,315
Current portion of capital lease obligation 20,386 31,968
------------ ------------
Total current liabilities 501,755 1,190,498
------------ ------------
Obligations under capital lease,
net of current portion -- 20,415
------------ ------------
Shareholders' equity (Note 1):
Common stock, $.015 par value, authorized
30,000,000 shares; issued 2,419,398 shares
in 2003 and 2,349,398 shares in 2002 36,291 35,241
Preferred stock, all series, $.01 par value, authorized
1,000,000 shares; 1,000 issued and outstanding 10 10
Additional paid-in capital 11,101,178 10,977,648
Accumulated other comprehensive income (loss),
unrealized holding gain (loss) on investment securities (37,785) 14,204
Deficit (4,390,077) (2,764,039)
------------ ------------
6,709,617 8,263,064
Less common stock held in treasury, at cost,
181,984 shares in 2003 and 175,584 shares in 2002 1,729,442 1,704,482
------------ ------------
Total shareholders' equity 4,980,175 6,558,582
------------ ------------
Total liabilities and shareholders' equity $ 5,481,930 $ 7,769,495
============ ============
See notes to consolidated financial statements.
F-2
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Revenues:
Collision repair, fees and royalties $ 279,734 $ 2,895,001
Hospital fees 377,809 --
------------ ------------
Total revenues 657,543 2,895,001
------------ ------------
Operating expenses (income):
Collision repair expenses 102,052 2,499,570
Sales and marketing 478,562 951,764
General and administrative 1,851,617 3,235,057
Non-cash compensation -- (131,666)
Depreciation and amortization 299,108 400,626
------------ ------------
Total operating expenses 2,731,339 6,955,351
------------ ------------
(2,073,796) (4,060,350)
------------ ------------
Other income (expense):
Investment and other income 226,608 402,820
Interest expense (4,504) (88,503)
------------ ------------
Total other income 222,104 314,317
------------ ------------
Loss from continuing operations before
provision for income taxes (1,851,692) (3,746,033)
Provision for income tax benefit -- (2,276,619)
------------ ------------
Loss from continuing operations (1,851,692) (1,469,414)
------------ ------------
Discontinued operations:
Gain on disposal of fleet subsidiary (net of income taxes of $3,690,886) -- 2,391,482
Income from discontinued fleet subsidiary (net of income taxes
of $26,533) -- 17,192
Income from affinity services subsidiary (net of income taxes
of $-0- in 2003 and $482,830 in 2002) 215,654 308,694
Gain on disposal of affinity services subsidiary (no tax effect) 10,000 --
------------ ------------
Income from discontinued operations 225,654 2,717,368
------------ ------------
Net income (loss) ($ 1,626,038) $ 1,247,954
============ ============
Basic and diluted earnings (loss) per common share (Note 1):
Continuing operations ($ 0.84) ($ 0.67)
Discontinued operations 0.10 1.24
------------ ------------
Net earnings (loss) ($ 0.74) $ 0.57
============ ============
Basic and diluted weighted average number of common
shares outstanding 2,195,519 2,180,062
============ ============
See notes to consolidated financial statements.
F-3
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2003 AND 2002
ACCUMULATED
COMMON STOCK PREFERRED STOCK ADDITIONAL OTHER
------------------------- --------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS)
--------- ------------ ----- ------------ ------------ ------------
Balance, January 1, 2002 2,303,331 $ 34,550 -- $ -- $ 9,930,444 $ 680
Net income -- -- -- -- -- --
Unrealized holding gain -- -- -- -- -- 13,524
Comprehensive income -- -- -- -- -- --
Issuance of preferred stock -- -- 1,000 10 999,990 --
Shares tendered upon exercise
of stock options 46,067 691 -- -- 128,060 --
Treasury shares purchased -- -- -- -- -- --
Non-cash compensation (credit)
recorded for variable priced
options -- -- -- -- (131,666) --
Options granted for services -- -- -- -- 50,820 --
--------- ------------ ----- ------------ ------------ ------------
Balance, December 31, 2002 2,349,398 35,241 1,000 10 10,977,648 14,204
Net loss -- -- -- -- -- --
Add reclassification adjustment
for realized losses included
in net income -- -- -- -- -- 14,919
Unrealized holding loss -- -- -- -- -- (66,908)
Comprehensive loss -- -- -- -- -- --
Exercise of stock options 63,600 954 -- -- 89,711 --
Shares tendered upon exercise
of stock options 6,400 96 -- -- 24,864 --
Options granted for services -- -- -- -- 8,955 --
--------- ------------ ----- ------------ ------------ ------------
Balance, December 31, 2003 2,419,398 $ 36,291 1,000 $ 10 $ 11,101,178 ($ 37,785)
========= ============ ===== ============ ============ ============
TOTAL
TREASURY STOCK SHARE-
------------------------ HOLDERS'
DEFICIT SHARES AMOUNT EQUITY
------------ ------- ------------ ------------
Balance, January 1, 2002 ($ 4,011,993) 143,934 ($ 1,483,034) $ 4,470,647
------------
Net income 1,247,954 -- -- 1,247,954
Unrealized holding gain -- -- -- 13,524
------------
Comprehensive income -- -- -- 1,261,478
Issuance of preferred stock -- -- -- 1,000,000
Shares tendered upon exercise
of stock options -- 13,005 (128,751) --
Treasury shares purchased 18,645 (92,697) (92,697)
Non-cash compensation (credit)
recorded for variable priced
options -- -- -- (131,666)
Options granted for services -- -- -- 50,820
------------ ------- ------------ ------------
Balance, December 31, 2002 (2,764,039) 175,584 (1,704,482) 6,558,582
------------
Net loss (1,626,038) -- -- (1,626,038)
Add reclassification adjustment
for realized losses included
in net income -- -- -- 14,919
Unrealized holding loss -- -- -- (66,908)
------------
Comprehensive loss -- -- -- (1,678,027)
Exercise of stock options -- -- -- 90,665
Shares tendered upon exercise
of stock options -- 6,400 (24,960) --
Options granted for services -- -- -- 8,955
------------ ------- ------------ ------------
Balance, December 31, 2003 ($ 4,390,077) 181,984 ($ 1,729,442) $ 4,980,175
============ ======= ============ ============
See notes to consolidated financial statements.
F-4
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Cash flows used in operating activities:
Net income (loss) ($ 1,626,038) $ 1,247,954
------------ ------------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization (including bond
premium amortization) 318,837 488,934
Non-cash compensation -- (131,666)
Options granted for services 8,955 50,820
Gain on sale of subsidiaries (10,000) (6,082,368)
Loss on sale of investments 14,919 --
Deferred tax asset -- 1,900,000
Changes in assets and liabilities:
Accounts receivable (6,411) (13,235)
Prepaid expenses and other current assets 220,418 (167,118)
Security deposits and other assets 4,430 (30,416)
Investment in net assets of discontinued operations -- (60,022)
Accounts payable (247,018) 143,885
Accrued expenses and other current liabilities (430,143) 425,519
------------ ------------
Total adjustments (126,013) (3,475,667)
------------ ------------
Net cash used in operating activities (1,752,051) (2,227,713)
------------ ------------
Cash flows provided by investing activities:
Purchase of property and equipment (39,793) (433,853)
Proceeds from sales of subsidiaries, net 10,000 6,174,389
Purchase of investments (5,439,087) (8,396,026)
Proceeds from investments 6,349,183 4,929,000
Purchase of restricted certificate of deposit -- (300,000)
------------ ------------
Net cash provided by investing activities 880,303 1,973,510
============ ============
(Continued)
See notes to consolidated financial statements.
F-5
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Cash flows used in financing activities:
Payments under capital lease ($ 31,997) ($ 9,853)
Proceeds from exercise of stock options 90,665 --
Proceeds from issuance of preferred stock -- 1,000,000
Purchase of treasury stock -- (92,697)
------------ ------------
Net cash provided by financing activities 58,668 897,450
------------ ------------
Net increase (decrease) in cash and cash equivalents (813,080) 643,247
Cash and cash equivalents at beginning of year 908,655 265,408
============ ============
Cash and cash equivalents at end of year $ 95,575 $ 908,655
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ -- $ 23,533
============ ============
Cash paid during the year for interest $ 4,504 $ 2,313
============ ============
Supplemental disclosure of non-cash activities:
During 2002, the Company purchased computer equipment costing $82,719, of
which $62,236 was financed.
During 2003 and 2002, the Company acquired 6,400 and 13,005 shares of
treasury stock with shares tendered upon the exercise of stock options.
See notes to consolidated financial statements.
F-6
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Accessity Corp. and its wholly-owned subsidiaries (collectively referred
to as the "Company"). All material intercompany balances and transactions
have been eliminated.
DISCONTINUED OPERATIONS
On February 7, 2002, the Company sold its fleet services business (see
Note 3) and on August 1, 2003, the Company sold its affinity services
business (see Note 5). The Company's consolidated statements of operations
for the years ended December 31, 2003 and 2002 reflect the results of
these businesses as discontinued operations. Prior to 2002, the fleet
service business comprised the vast majority of the Company's business.
Although the Company only reported as one business segment, the Company
operated as distinct businesses with separate major lines of businesses
and classes of customers. Accordingly, upon their sales, the Company
determined that the fleet business and affinity services business should
be reported as discontinued operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides
depreciation for machinery and equipment and for furniture and fixtures by
the straight-line method over the estimated useful lives of the assets,
principally five years. Leasehold improvements are amortized on a
straight-line basis over their estimated useful lives or the remaining
term of the lease, whichever is less. Website development costs are
amortized over their estimated useful life of three years on a
straight-line basis. For the year ended December 31, 2002, website
development costs capitalized amounted to $76,226, of which $42,750
represented employee salary and related costs. There were no additional
website development costs in 2003.
COMMON STOCK SPLIT
Upon approval from its shareholders at the December 15, 2003 annual
shareholders' meeting, the Company effected a one-for-five reverse common
stock split. This reduced, by a factor of five, all outstanding common
shares, and all options, warrants or other issues convertible into common
stock. Commensurately, the price per share of its common stock traded on
the Nasdaq SmallCap exchange, and the effective conversion price per share
of any common shares equivalents, increased by a factor of five. The
Company and its shareholders effected this transaction in order to comply
with the continued listing requirements of the Nasdaq SmallCap exchange
which mandates a $1 price per share. The Company has been advised that it
is now in compliance with the listing requirements. The effective date of
the stock split was January 7, 2004. All references to common share
amounts have been adjusted to reflect this stock split on a retroactive
basis. The number of authorized common shares and the par value per share
were not changed.
F-7
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVESTMENTS
Investments consist of securities available for sale, which are carried at
fair value with unrealized gains or losses reported in a separate
component of shareholders' equity. Realized gains or losses are determined
based on the specific identification method.
REVENUE RECOGNITION
The Company recognizes revenue for its collision repairs, fees and
royalties at the time of customer approval and completion of repair
services. The Company warrants such services for varying periods ranging
up to the period that the driver owns or operates the vehicle. Such
warranty expense is borne by both the Company and the repair facilities;
resulting from its management of the repair process, and the selection of
facilities, warranty expense has not been material to the Company. The
Company recognizes revenue for its medical billings recovery business at
the time it receives notification that funds are collected by its hospital
customers.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
In order to record the Company's accounts receivable at their net
realizable value, the Company must assess their collectibility. A
considerable amount of judgment is required in order to make this
assessment, including an analysis of historical bad debts and other
adjustments, a review of the aging of the Company's receivables, and the
current creditworthiness of the Company's customers.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Significant
estimates relate to the income tax valuation allowance and conclusions
regarding the impairment of long-lived assets. Actual results could differ
from those estimates, and any difference between the amounts recorded and
amounts ultimately realized or paid will be adjusted prospectively as new
facts become known.
F-8
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
o CASH AND CASH EQUIVALENTS AND RESTRICTED CERTIFICATE OF DEPOSIT
The carrying amounts approximate fair value due to the short maturity
of the instruments.
o INVESTMENTS
Investment securities that are available for sale are stated at fair
value as measured by quoted market price.
o CAPITAL LEASE OBLIGATION
The carrying amount of the Company's capital lease obligation
approximates fair value.
ADVERTISING EXPENSE
Advertising expenditures, which are expensed as incurred, amounted to
approximately $42,000 and $196,000 in 2003 and 2002.
STOCK COMPENSATION PLAN
The Company accounts for its stock option plan under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" under
which no compensation expense is recognized. The Company has adopted
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) for disclosure purposes;
accordingly, no compensation expense has been recognized in the results of
operations for its stock option plan. Under the plan, the Company may
grant options to its employees, directors and consultants for up to
1,200,000 shares of common stock. Incentive stock options may be granted
at no less than the fair market value of the Company's stock on the date
of grant, and in the case of an optionee who owns directly or indirectly
more than 10% of the outstanding voting stock ("an Affiliate"), 110% of
the market price on the date of grant. The maximum term of an option is
ten years, except for incentive stock options granted to an Affiliate, in
which case the maximum term is five years. As of December 31, 2003,
approximately 808,000 options remain available for future grants.
F-9
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
STOCK COMPENSATION PLAN (CONTINUED)
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted in 2003 and 2002, respectively: annual dividends of $-0-
for both years, expected volatility of 146% and 136%, risk-free interest
rate of 1.13% and 1.67%, and expected life of five years for all grants.
The weighted-average fair value of stock options granted in 2003 and 2002
was $1.77 and $1.01, respectively.
Under the above model, the total value of stock options granted in 2003
and 2002 was $70,763 and $1,767,498, respectively, which would be
amortized ratably on a pro forma basis over the related vesting periods,
which range from immediate vesting to five years. Had compensation cost
been determined based upon the fair value of the stock options at grant
date for all awards, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
2003 2002
------------ ------------
Net income (loss):
As reported ($ 1,626,038) $ 1,247,954
Stock-based compensation cost, net of
related tax effects in 2002, that would have
been included in the determination of net
income if the fair value based method had
been applied to all awards (562,745) (624,269)
------------ ------------
Pro forma ($ 2,188,783) $ 623,685
============ ============
Basic and diluted earnings (loss) per share:
As reported ($ .74) $ .57
Pro forma ($ 1.00) $ .29
Stock-based employee compensation
cost, net of related tax effects, included
in the determination of net income as
reported $ -0- $-0-
F-10
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which is effective for exit or disposal activities initiated
after December 31, 2002. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred and that the initial measurement of a liability be
at fair value. The Company elected the early adoption of SFAS 146 during
2002, and the adoption did not have a material impact on its consolidated
results of operations and financial position.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which is effective for fiscal
years ending after December 15, 2002. The provisions of this statement
provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
employee compensation, and requires disclosure about the effects on
reported net income of an entity's accounting policy decisions with
respect to stock-based compensation. The Company did not change its
accounting method for stock-based employee compensation and, accordingly,
the provisions of this new standard did not have a material impact on its
consolidated results of operations and financial position.
In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 requires
consolidation by the reporting entity of variable interest entities which
have certain characteristics as described therein when the reporting
entity will absorb a majority of the variable interest entity's expected
losses, receive a majority of the variable interest entity's expected
residual returns, or both. If applicable, the Company would be required to
apply the provisions of FIN 46 as of December 31, 2004. The Company has
not made an initial determination as to whether its June 2002 leasing
agreement for Florida office space with a related party, (See Note 14),
represents an interest in a variable interest entity, and has not
determined the effect, if any, on its financial statements.
F-11
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. DESCRIPTION OF BUSINESS AND CONCENTRATIONS
------------------------------------------
The Company, through its fleet services subsidiary, had been, since its
inception, engaged in automotive fleet management and administration of
automotive repairs for major, nationally recognized corporate clients
throughout the United States. It offered its clients a cost-effective
method for repairing their vehicles by arranging for repair of the
vehicles through its nationwide network of independently owned contracted
facilities, and it also offered subrogation, salvage and appraisal
services. This business was sold in 2002 (see Note 3).
The Company 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, 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 active or in-process claims
that were the Company's responsibility during the first half of 2003, it
is no longer engaged in collision repair management, but will remain in
the business through the licensing described in Note 4. The Company's
remaining automotive business that provided automobile affinity services
for individuals was sold to the president of that subsidiary (see Note 5).
The Company believes that it operated its automotive-related businesses in
one operating segment.
In the third quarter of 2002, the Company began a new business engaged in
medical billing recovery which is managed as a separate segment. The
business seeks to recoup inappropriate discounts taken from hospital
billings by institutional or insurance payors. The Company has signed
contracts with a number of hospitals throughout the United States, and
during 2003, collected in excess of $1 million on their behalf. Costs
associated with this business are expensed as incurred.
The Company is subject to credit risk through trade receivables. The
Company does not obtain collateral or other security for its receivables.
Such risk is minimized through contractual arrangements with its
customers, as well as the size and financial strength of its customers.
Based upon the Company's continuing operations, four customers accounted
for substantially all of the Company's sales in 2003 and its receivables
at December 31, 2003. Two customers accounted for 26% and 59%,
respectively, of the Company's sales in 2002 and 6% and 39% of its
receivables, respectively, at December 31, 2002.
The Company is also subject to credit risk through investments which are
held at one brokerage firm and are not fully insured by the Securities
Investor Protection Corporation. The Company has no financial instruments
with significant off-balance-sheet risk.
F-12
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
3. DISCONTINUED OPERATIONS - SALE OF COLLISION REPAIR AND FLEET SERVICES
---------------------------------------------------------------------
BUSINESS
--------
On February 4, 2002, the Company's shareholders approved the sale of all
the outstanding shares of a wholly-owned subsidiary, driversshield.com FS
Corp. ("FS"), its 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, in
accordance with a Stock Purchase Agreement (the "Purchase Agreement")
dated October 29, 2001 and, pursuant to the Preferred Stock Purchase
Agreement of the same date, approved the sale of $1.0 million of the
Company's convertible preferred stock to PHH, comprising 1,000 shares (see
Note 12). These transactions were consummated on February 7, 2002. The
Company recorded a pre-tax gain on the sale of FS of approximately $6.1
million.
The accompanying consolidated statements of operations have been presented
to reflect the sale of the fleet business as discontinued operations.
Operating results of the discontinued fleet services operations for the
year ended December 31, 2002, to the date of sale, are summarized 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
============
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 operations and management of DriverShield CRM, the
business that provided insurance carriers with collision repair management
for their insureds. During 2003, the Company processed those claims that
were initiated prior to the effective date, and ClaimsNet assumed
responsibility for new repairs. The Company granted an exclusive license
of its technology, including its website software, which 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 pay royalties to the Company equivalent to 25% of vendor
referral fees and 50% of administrative fees, as defined, on all existing
customers, beginning in March and February 2003, respectively, and 15% of
all administrative and vendor referral fees for all new customers that use
the licensed technology to have their vehicles repaired. The term of the
Partnership Agreement is for a five-year period, with a two-year renewal,
unless terminated ninety days prior to the end of the then-current term.
F-13
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
4. STRATEGIC PARTNERSHIP FOR INSURANCE BUSINESS (CONTINUED)
--------------------------------------------------------
Additionally, ClaimsNet has an option to purchase the business commencing
on January 1, 2007 for a purchase price equal to the total royalties paid
for the previous twenty-four months. Upon completion of those repairs that
the Company processed during the first part of 2003, the Company is no
longer directly responsible for auto repairs, but remains liable for
automobile repair warranties provided. Historically, warranty costs have
not been significant. Total royalties earned by the Company during 2003
amounted to $162,693.
As of December 31, 2003, the net book value of the website development
costs amounted to approximately $104,000, and the Company has determined
that such costs are not impaired due to the anticipated cash flows from
the Partnership Agreement.
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 received
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. All of the employee 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.
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.
F-14
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
5. DISCONTINUED OPERATIONS OF AUTOMOBILE AFFINITY SERVICES BUSINESS AND SALE
-------------------------------------------------------------------------
TO RELATED PARTY (CONTINUED)
----------------------------
Operating results during the periods ended December 31, 2003 and 2002, for
the discontinued affinity services operations, through the date of its
sale on August 1, 2003, were as follows:
2003 2002
------------ ------------
Revenues $ 419,417 $ 1,123,436
Cost of sales, selling, general
and administrative expenses 203,763 331,912
------------ ------------
Income from discontinued affinity
services subsidiary, pre-tax $ 215,654 $ 791,524
============ ============
6. INVESTMENTS
-----------
AT DECEMBER 31, 2003:
UNREALIZED
FAIR HOLDING
COST VALUE (LOSS)
---------- ---------- ----------
Fixed income mutual funds $4,350,899 $4,313,114 ($ 37,785)
---------- ---------- ----------
AT DECEMBER 31, 2002:
UNREALIZED
FAIR HOLDING
COST VALUE GAIN
---------- ---------- ----------
Fixed income mutual funds $1,984,759 $1,985,362 $ 603
Corporate debt securities 3,310,518 3,324,119 13,601
---------- ---------- ----------
$5,295,277 $5,309,481 $ 14,204
========== ========== ==========
F-15
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
7. PROPERTY AND EQUIPMENT AND ASSET IMPAIRMENT
-------------------------------------------
PROPERTY AND EQUIPMENT
2003 2002
---------- ----------
Machinery and equipment $ 500,090 $ 630,564
Furniture and fixtures 35,594 142,769
Leasehold improvements 140,855 143,746
Website development costs 291,654 615,642
---------- ----------
968,193 1,532,721
Less accumulated depreciation
and amortization 518,898 823,745
---------- ----------
$ 449,295 $ 708,976
========== ==========
During 2003 and 2002, the Company wrote off certain fully depreciated
property and equipment aggregating $586,899 and $630,710.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
forecasted net undiscounted cash flows expected to be generated by the
asset. If such assets are determined to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the discounted cash flows or appraised values, depending
upon the nature of the assets.
8. CAPITAL LEASE OBLIGATION
------------------------
In August 2002, the Company entered into a lease agreement containing a
bargain purchase option for computer equipment. Obligations under the
capital lease have been recorded in the accompanying financial statements
at the present value of future minimum lease payments, discounted at an
interest rate of 12.96%. The remaining capital lease obligation of $20,386
is payable during 2004 and presented as a current obligation in the
financial statements at December 31, 2003.
F-16
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
9. EARNINGS (LOSS) PER COMMON SHARE
--------------------------------
Basic earnings (loss) per common share are computed by dividing the
earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common share
reflects the potential dilution that could occur if common stock
equivalents, such as stock options and warrants, were exercised. The
computation of diluted earnings (loss) per common share in 2003 and 2002
excludes the effect of the assumed exercise of approximately 517,000 and
920,000 stock options and warrants, and the assumed conversion of
preferred stock that was outstanding as of December 31, 2003 and 2002
because the effect would be anti-dilutive.
Basic and diluted earnings (loss) per common share is calculated as
follows:
Income
(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------ --------- ------------
2003 - Net Loss ($ 1,626,038) 2,195,519 ($ .74)
------------ --------- ------------
2002 - Net Income $ 1,247,954 2,180,062 $ .57
------------ --------- ------------
10. STOCK OPTIONS
-------------
VARIABLE-PRICED OPTIONS
In October 1999, the Company repriced certain options granted to employees
and third parties, representing the right to purchase 440,000 shares of
common stock. The grants gave the holders the right to purchase common
stock at prices ranging from $5.00 to $6.20 per share. The options were
repriced at prices ranging from $3.75 to $4.15 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).
Pursuant to FASB Interpretation No. 44, the Company accounts for these
modified option awards as variable from the date of the modification to
the date the awards are exercised, forfeited, or expire unexercised. As of
December 31, 2003, all of these options, except for 33,334, were either
forfeited or expired. There was no charge or credit for the year ended
December 31, 2003 as the price per share of common stock remained below
the exercise price. For the year ended December 31, 2002, $132,000 in
non-cash compensation credits (income) were recorded, resulting from a
decrease in the price per share.
F-17
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
10. STOCK OPTIONS (CONTINUED)
-------------------------
NON-INCENTIVE STOCK OPTION AGREEMENTS
The Company has non-incentive stock option agreements with six of its
directors and/or officers.
SUMMARY
Stock option transactions are summarized as follows:
Weighted
Number Exercise Average
of Price Exercise
Shares Range Price
-------- -------------- -----
Options outstanding, January 1, 2002 644,733 $1.56 - $18.75 $4.40
Options granted 356,000 $2.55 - $ 9.00 $7.15
Options canceled (239,333) $1.56 - $15.95 $6.20
Options exercised (46,067) $1.56 - $ 3.75 $2.80
--------
Options outstanding, December 31, 2002 715,333 $1.51 - $18.75 $5.35
Options granted 40,000 $ 6.25 $6.25
Options canceled (293,000) $1.56 - $18.75 $5.37
Options exercised (70,000) $1.56 - $ 1.72 $1.65
--------
Options outstanding, December 31, 2003 392,333 $1.56 - $10.65 $6.00
--------
Options exercisable, December 31, 2002 384,666 $1.56 - $18.75 $4.15
--------
Options exercisable, December 31, 2003 219,000 $1.56 - $10.65 $5.15
--------
The following table summarizes information about options outstanding and
exercisable at December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------ ----------- ------------ ----- ----------- -----
$1.56 - $ 5.00 111,666 2.00 $3.26 108,333 $3.24
$5.50 - $ 7.45 167,667 3.49 $6.42 71,000 $6.38
$8.00 - $10.65 113,000 3.03 $8.07 39,667 $8.20
------- -------
392,333 219,000
======= =======
F-18
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
11. COMMON STOCK AND STOCK WARRANTS
-------------------------------
In July 2001, the Company issued 20,000 shares of its common stock to an
individual in consideration of a consulting agreement covering a one-year
period ending June 30, 2002. The Company recorded the cost of the services
based on the price per share of its common stock at the date of their
issuance, aggregating $150,000, and amortized the cost over the term of
the contract.
During 2001, the Company granted warrants to acquire 20,000 shares of its
common stock at $2.65 per share, and an additional 5,000 warrants to
acquire 5,000 shares of its common stock at $4.35 per share (the fair
market values at the dates of the grants) in consideration for certain
consulting services. The warrants expire in 2006. The Company recorded
consulting expense in the amount of $9,000, which was equal to the value
of the services provided.
In December 1997, the Company raised $2,330,813 through the private
placement issuance of 116,250 units at $20.05 per unit. Each unit included
one warrant. In 2002, these warrants expired unexercised.
A $10 million equity funding commitment, which provided the Company the
option of drawing equity financing against an available line, expired in
November 2001, and was unused during its twelve- month duration. The
financing source was provided warrants to purchase 13,794 of the Company's
common stock, at $10.85 per share, in exchange for providing this line. In
2002, these warrants expired unexercised.
On June 27, 2002, the Company's Board of Directors authorized a common
stock repurchase program whereby up to 100,000 shares of the Company's
common stock may be purchased in open market transactions over the
following 24 months. As of December 31, 2002, 18,645 shares had been
repurchased under the program for amounts aggregating $92,697.
F-19
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
12. PREFERRED STOCK AND PREFERRED STOCK PURCHASE RIGHTS
---------------------------------------------------
Pursuant to the Preferred Stock Purchase Agreement between the Company and
PHH as part of its purchase of the fleet business in February 2002 (Note
3), PHH invested $1.0 million to acquire 1,000 shares of the Company's
Series A convertible preferred stock, par value of $.01 per share (the
"Preferred Shares"). The Preferred Shares can be converted, at the
holder's discretion, into 100,000 shares of the Company's common stock
(subject to adjustments for stock splits, recapitalization and
anti-dilution provisions). Other key terms of the Preferred Shares include
voting rights, together with the common shareholders, on all matters, and
separately on certain specified matters; a liquidation preference equal to
125% of their initial investment paid only in the event of dissolution of
the Company; the nomination of one board member; certain pre-emptive
rights and registration rights; and the approval of Preferred Shares for
certain corporate actions. PHH has not exercised its right to nominate a
board member.
On December 28, 1998, the Board of Directors authorized the issuance of up
to 200,000 shares of non-redeemable Junior Participating Preferred Stock
("JPPS"). The JPPS shall rank junior to all other series of preferred
stock (but senior to the common stock) with respect to payment of
dividends and any other distributions. Among other rights, the holders of
the JPPS shall be entitled to receive, when and if declared, quarterly
dividends per share equal to the greater of (a) $100 or (b) the sum of
1,000 (subject to adjustment) times the aggregate per share of all cash
and non cash dividends (other than dividends payable in common stock of
the Company and other defined distributions). Each share of JPPS shall
entitle the holders to voting rights equal to 1,000 votes per share. The
holders of JPPS shall vote together with the common stockholders. No
shares of JPPS have been issued.
On December 28, 1998, the Board of Directors also adopted a Rights
Agreement ("the Agreement"). Under the Agreement, each share of the
Company's common stock carries with it one preferred share purchase right
("Rights"). The Rights themselves will at no time have voting power or pay
dividends. The Rights become exercisable (1) when a person or group
acquires 20% or more of the Company's common stock (10% in the case of an
Adverse Person as defined) and an additional 1% or more in the case of
acquisitions by any shareholder with beneficial ownership of 20% or more
on the record date (10% in the case of an Adverse Person as defined) or
(2) on the tenth business day after a person or group announces a tender
offer to acquire 20% or more of the Company's common stock (10% in the
case of an Adverse Person as defined). When exercisable, each Right
entitles the holder to purchase 1/1000 of a share of the JPPS at an
exercise price of $137.50 per 1/1000 of a share, subject to adjustment.
F-20
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
13. EMPLOYEE BENEFIT PLAN
---------------------
The Company has a 401(k) profit sharing plan for the benefit of all
eligible employees as defined in the plan documents. The plan provides for
voluntary employee salary contributions not to exceed the statutory
limitation provided by the Internal Revenue Code. The Company may, at its
discretion, match within prescribed limits, the contributions of the
employees or, in certain circumstances, may make additional contributions
in order to retain the tax exempt status of the plan. Employer
contributions to the plan amounted to approximately $11,000 in 2003 and
$14,000 in 2002.
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
------------------------------------------------------------
OPERATING LEASES
The Company's lease of office space that it formerly occupied in New York,
and in its new headquarters in Florida, require minimum rentals as well as
common area maintenance and other expenses including property insurance
and real estate taxes. Until the lease terminated in June 2002, a portion
of its New York premises was under a sublease agreement. Sublease income
was approximately $22,000 in 2002.
In May 2002, the Company signed a five and a half year lease to occupy a
new 7,300 square foot building in Coral Springs, Florida. This property 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. The terms of the lease require net rental payments
plus property insurance and real estate taxes. The lease term commenced in
October 2002. The Company and the property owners each expended
approximately $140,000 to complete the interior space. In addition, during
July 2002, the Company established a $300,000 interest-bearing certificate
of deposit with a Florida bank (the mortgage lender to B&B Lakeview Realty
Corp.) as collateral for its future rental commitments. The certificate of
deposit declines to $200,000 after the 36th month, $100,000 after the 48th
month, and to zero after 60 months, as the balance of the rent commitment
declines. During 2003, the Company paid rental costs of approximately
$127,000 to this related party, and accrued an additional $20,000 as
reimbursement for facility expenses paid by the related party. The Company
has a security deposit of $22,000 held by the related party.
Occupancy expense under the rental arrangements, including common area
maintenance, property insurance and real estate taxes, was $177,000 in
2003 and $180,000 in 2002.
F-21
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
------------------------------------------------------------------------
OPERATING LEASES (CONTINUED)
The Company's future minimum rental commitments payable to the related
party are as follows:
2004 $ 137,000
2005 146,000
2006 157,000
2007 168,000
Thereafter 44,000
---------
$ 652,000
=========
CAPITAL LEASE
The Company leases certain computer equipment with a lease term through
2004. Obligations under the capital lease have been recorded in the
accompanying financial statements at the present value of future minimum
lease payments. The capitalized cost included in property and equipment is
$82,719. Accumulated depreciation on the equipment at December 31, 2003
was $16,544.
The future minimum lease payments under the capital lease are as follows:
December 31, 2004 $ 21,750
Less amount representing
interest and fees 1,364
---------
Present value of future minimum
lease payments $ 20,386
=========
F-22
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
------------------------------------------------------------------------
EMPLOYMENT CONTRACTS
At December 31, 2003, the Company has employment contracts with its two
principal officers, which expire on December 31, 2004. The agreements
provide minimum annual salaries of $300,000 to the Chief Executive Officer
("CEO"), and $155,000 to the Chief Financial Officer ("CFO"). The CEO's
contract also specified a one-time bonus award of $250,000 plus 50,000
additional stock options in recognition of the sale of the fleet business
in February 2002. In connection with these employment contracts, 140,000
options were granted in February 2002. In addition, another subsidiary of
the Company has an employment agreement with its President that commenced
on September 3, 2002, and expires on December 31, 2004, providing a base
salary of $175,000 plus performance bonus, and he has been granted 50,000
stock options. During 2003, employment contracts with the Company's former
President and another subsidiary President were terminated.
The CEO's employment contract provides that, in the event of termination
of the employment within three years after a change in control of the
Company, then the Company would be liable to pay a lump-sum severance
payment of three years' salary (average of last five years), less $100, in
addition to the cash value of any outstanding but unexercised stock
options. The other employment contracts of the principal officers provide
that, in the event of termination of the employment of the officer within
one year after a change in control of the Company, then the Company would
be liable to pay a lump sum severance payment of one year's salary, as
determined on the date of termination or the date on which a change in
control occurs, whichever is greater. In no event would the maximum amount
payable exceed the amount deductible by the Company under the provisions
of the Internal Revenue Code.
LITIGATION
In January 2003, the Company was served with a complaint filed by Mr.
Gerald Zutler, its former President and Chief Operating Officer, alleging,
among other things, that the Company breached his employment contract,
that there was fraudulent concealment of the Company's intention to
terminate its employment agreement with Mr. Zutler, and discrimination on
the basis of age and aiding and abetting violation of the New York State
Human Rights Law. Mr. Zutler is seeking damages aggregating $2.25 million,
plus punitive damages and reasonable attorney's fees. Management believes
that the Company properly terminated Mr. Zutler's employment for cause,
and intends to vigorously defend this suit. Answer to the complaint was
served by the Company on February 28, 2003. In 2003, Mr. Zutler filed a
motion to have our attorney removed from the case on the basis that he
would call our attorney as a witness. The motion was granted by the court,
but the Company has appealed that ruling and the action is stayed pending
determination of the appeal. The Company has filed a claim with its
insurance carrier under its directors and officers and employment
practices' liability policy. The carrier has agreed to cover certain
portions of the claim as they relate to Mr. Siegel. The policy has a
$50,000 deductible and a liability limit of $3,000,000 per policy year. At
the present time, the carrier has agreed to cover the portion of the claim
that relates to Mr. Siegel and has agreed to a fifty percent allocation of
expenses.
F-23
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
------------------------------------------------------------------------
LITIGATION (CONTINUED)
Therefore, the Company must incur $100,000 of legal expenses to satisfy
the policy deductible before the carrier commences reimbursing the Company
for fifty percent of the legal defense and/or any possible recovery in
favor of the plaintiff.
The Company filed a Demand for Arbitration against Presidion Solutions,
Inc., ("Presidion"), alleging that Presidion breached the terms of the
Memorandum of Understanding (the "Memorandum") between the Company and
Presidion, dated January 17, 2003. The Company is seeking a break-up fee
of $250,000 pursuant to the terms of the Memorandum, alleging that
Presidion breached the Memorandum by wrongfully terminating the
Memorandum. Additionally, the Company is seeking its out-of-pocket costs
of due diligence, amounting to approximately $37,000. Presidion has filed
a counterclaim against the Company, alleging that the Company had breached
the Memorandum and, therefore, owes Presidion a break-up fee of $250,000.
The Company believes that the claim alleged by Presidion is without merit.
The case was heard before the American Arbitration Association in Broward
County, Florida in late February 2004. A decision is expected during the
second quarter of 2004.
No provision for any loss has been made with respect to either of the
above matters.
In addition, the Company has filed a lawsuit seeking damages in excess of
$100,000,000 as a result of discovery conducted in connection with the
Presidion matter described above, against Presidion's investment bankers,
Mercator Group, LLC and related parties ("Mercator") and Taurus Global LLC
("Taurus"), ("the defendants"), alleging that these parties tortiously
interfered in the transaction between the Company and Presidion. Mercator
has made a motion to dismiss this action with a hearing pending some time
in the future. The Company has obtained a default judgment against Taurus
and intends to enforce this judgment. The final outcome of the Mercator
action will most likely take an indefinite time to resolve. The Company
currently has limited information regarding the financial condition of the
defendants and the extent of their insurance coverage. Therefore, it is
possible that the Company may prevail but may not be able to collect the
judgment.
15. CLOSURE OF NEW YORK OFFICE
--------------------------
In conjunction with relocating its office within New York, and then to
Florida during the fourth quarter of 2002, the Company incurred an
aggregate expense of $386,000, including $216,000 relating to one-time
employee termination benefits, and the remainder for relocation expenses.
Such amounts are included in general and administrative expenses in the
consolidated statement of operations.
F-24
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
16. 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 activities of the automotive segment,
which is under the managerial autonomy of ClaimsNet pursuant to its
contractual arrangement with the Company. The Company manages these
segments separately since each services different markets and users.
All of the Company's revenues are derived from customers within the
continental United States. Segment information as of and for the years
ended December 31, 2003 and 2002, follows:
2003 2002
------------ ------------
Revenue:
Automotive $ 280,000 $ 2,895,000
Medical 378,000 --
------------ ------------
Consolidated total $ 658,000 $ 2,895,000
============ ============
Segment profit (loss):
Automotive $ 8,000 ($ 760,000)
Medical (195,000) (182,000)
Other, corporate (1,665,000) (2,804,000)
------------ ------------
Consolidated total ($ 1,852,000) ($ 3,746,000)
============ ============
Segment profit (loss) is from continuing operations before provision for
income taxes (benefit).
Identifiable assets:
Automotive $ 130,000 $ 303,000
Medical 145,000 3,000
Other, corporate 5,207,000 7,463,000
------------ ------------
Consolidated total $ 5,482,000 $ 7,769,000
============ ============
The Company does not allocate taxes, investment and other income, interest
expense, or general and administrative expenses to its individual
segments. The segment profit (loss) shown above reflects those costs that
are directly and specifically identifiable with the operating activities
of the segment.
F-25
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
16. SEGMENT INFORMATION (CONTINUED)
-------------------------------
2003 2002
------------ ------------
Capital expenditures::
Automotive $ -- $ 114,000
Medical 17,000 --
Other, corporate 23,000 382,000
------------ ------------
Consolidated total $ 40,000 $ 496,000
============ ============
Depreciation and amortization:
Automotive $ 155,000 $ 201,000
Medical 2,000 --
Other, corporate 142,000 200,000
------------ ------------
Consolidated total $ 299,000 $ 401,000
============ ============
17. INCOME TAXES
------------
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards (SFAS) 109, "Accounting for
Income Taxes". Under the liability method specified by SFAS 109, deferred
tax assets and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse.
At December 31, 2003 and 2002, the Company has a net operating loss
carryforward of approximately $3,600,000 and $2,000,000. At December 31,
2003 and 2002, the Company has provided a valuation allowance for the full
amount of its deferred tax asset since it is more likely than not that the
Company will not realize the benefit.
At December 31, 2003, the Company's net operating loss carryforwards are
scheduled to expire as follows:
Year ended December 31,
2018 $ 642,000
2019 946,000
2021 439,000
2023 1,573,000
----------
$3,600,000
==========
F-26
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
17. INCOME TAXES (CONTINUED)
------------------------
Income tax expense (benefit) was allocated as follows:
2003 2002
------------ ------------
Loss from continuing operations $ -- ($ 2,276,619)
Income from discontinued operations -- 4,200,249
------------ ------------
Income tax expense $ -- $ 1,923,630
============ ============
Income tax expense (benefit) from continuing operations was comprised of
the following:
2003 2002
------------ ------------
Current tax expense, state and local $ -- $ 23,630
------------ ------------
Deferred benefit:
Federal -- (1,955,211)
State and local -- (345,038)
------------ ------------
-- (2,300,249)
------------ ------------
Income tax (benefit) $ -- ($ 2,276,619)
============ ============
A reconciliation of U.S. statutory federal income tax expense (benefit) to
income tax expense (benefit) on earnings (loss) from continuing operations
is as follows:
2003 2002
----------------------------- -----------------------------
AMOUNT % Amount %
------------ ----- ------------ -----
Expected tax (benefit) at U.S.
statutory rate ($ 629,575) (34.0%) ($ 1,273,651) (34.0%)
State taxes, net of Federal effect -- -- 6,471 .2
Intraperiod allocation to adjust
effective tax rate -- -- (1,009,439) (26.9)
Operating losses generating no
current tax benefit 629,575 34.0 -- --
------------ ----- ------------ -----
Income tax expense (benefit) $ -- -- ($ 2,276,619) (60.7%)
============ ===== ============ =====
F-27
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
17. INCOME TAXES (CONTINUED)
------------------------
Deferred tax assets and liabilities consist of the following:
2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 1,350,000 $ 750,000
Deferred compensation -- 40,000
Other 10,000 --
------------ ------------
1,360,000 790,000
Deferred tax liability, other -- (20,000)
------------ ------------
1,360,000 770,000
Valuation allowance (1,360,000) (770,000)
------------ ------------
Deferred tax asset $ -- $ --
============ ============
F-28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ACCESSITY CORP
By: /s/ Barry Siegel Date: March 29, 2004
--------------------
Barry Siegel
Chairman of the Board of Directors,
President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Barry Siegel Date: March 29, 2004
-------------------
Barry Siegel
Chairman of the Board of Directors,
President, and
Chief Executive Officer,
By: /s/ Barry J. Spiegel Date: March 29, 2004
-----------------------
Barry J. Spiegel
Director
By: /s/ Philip Kart Date: March 29, 2004
------------------
Philip Kart
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
By: /s/ Kenneth J. Friedman Date: March 29, 2004
--------------------------
Kenneth J. Friedman
Director
By: /s/ Bruce S. Udell Date: March 29, 2004
---------------------
Bruce S. Udell
Director
INDEX OF EXHIBITS
3.1 Restated and Amended Certificate of Incorporation incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2001 previously filed with the
Commission.
3.2. Amended and restated By-laws of the Company, incorporated by reference
to Exhibit 4 to the Company's Current Report on Form 8-K dated
December 28, 1998.
3.3 Amendment to the Company's Certificate of Incorporation dated January
15, 2003.
4.0 Shareholders Rights Agreement dated as of December 28, 1998, between
First Priority Group, Inc. and North American Transfer Co., as Rights
Agent, together with Exhibits A, B and C attached thereto incorporated
by reference to the Registrant's Registration Statement on Form 8-A
filed on December 31, 1998.
10.1 Stock Purchase Agreement dated October 29, 2001 by and among PHH
Vehicle Management Services, LLC, and driversshield.com Corp., and
driversshield.com FS Corp incorporate by reference as Exhibit 10.1 to
the Form 10-QSB for the period ended September 30, 2002.
10.2 Employment Agreement between the Company and Barry Siegel dated
February 4, 2002 previously filed with the Commission and incorporated
by reference hereto.
10.3 Employment Agreement between the Company and Barry J. Spiegel dated
February 4, 2002 previously filed with the Commission and incorporated
by reference hereto.
10.4 Employment Agreement between the Company and Philip Kart dated
February 4, 2002 previously filed with the Commission and incorporated
by reference hereto.
10.5 Employment Agreement between the Company and John M. McIntyre dated
July 15, 2002 previously filed with the Commission and incorporated by
reference hereto.
10.6 First Amendment to the Employment Agreement between the Company and
Philip Kart dated November 15, 2002 previously filed with the
Commission and incorporated by reference hereto.
10.7 Amended 1995 Incentive Stock Plan of Accessity Corp. previously filed
with the Commission and incorporated by reference hereto.
10.8 Strategic Partnership Agreement by and among DriverShield CRM Corp.,
Accessity Corp., f/k/a DriverShield Corp. and ClaimsNet, Inc., dated
December 17, 2002 previously filed with the Commission and
incorporated by reference hereto.
10.9 Employment Agreement between Sentaur Corp., f/k/a DRVR Corp. and
Steven T. DeLisi dated June 18, 2002 previously filed with the
Commission and incorporated by reference hereto.
10.10 Lease Agreement dated May 28, 2002 between the Company and B & B
Lakeview Realty Corp. previously filed with the Commission and
incorporated by reference hereto.
10.11 First Amendment to the Lease Agreement dated July 10, 2002 between the
Company and B & B Lakeview Realty Corp. previously filed with the
Commission and incorporated by reference hereto.
10.12 Stock Purchase Agreement dated as of August 1, 2003 by and among
American Member Corp. and Accessity Corp. previously filed as Exhibit
10.1 with the Company's Form 10-QSB for the period ended September 30,
2003 and incorporated by reference hereto.
10.13 Employment Termination Agreement dated August 1, 2003 by and between
Accessity Corp., f/k/a drivershield.com Corp. and Barry J. Spiegel
previously filed as Exhibit 10.2 with the Company's Form 10-QSB for
the period ended September 30, 2003 and incorporated by reference
hereto.
10.14 Web Site Linking Agreement dated August 1, 2003 by and among Accessity
Corp., American Member Corp. and DriverShield ADS Corp. previously
filed as Exhibit 10.3 with the Company's Form 10-QSB for the period
ended September 30, 2003 and incorporated by reference hereto.
13.1 Form 10-QSB for the quarter ending March 31, 2003 incorporated by
reference hereto and previously filed with the Commission.
13.2 Form 10-QSB for the quarter ending June 30, 2003 incorporated by
reference hereto and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 2003 incorporated by
reference hereto and previously filed with the Commission.
14.1 Code of Ethics filed herein.
21 List of subsidiaries filed herein.
31.1 Certification of Barry Siegel, Chief Executive Officer, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Philip Kart, Chief Financial Officer, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Barry Siegel, Chief Executive Officer, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Philip Kart, Chief Financial Officer, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002