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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, 2004
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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.)
(Name of small business issuer in its charter)
NEW YORK 11-2750412
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3200 University Drive
Coral Springs, Florida 33065
(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. [ ]
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State the issuer's revenues for its most recent fiscal year. $825,000
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The aggregate market value of the issuer's voting stock held by
non-affiliates of the issuer as of March 10, 2005, based upon the closing
price on the date thereof is: $16,529,000.
As of March 10, 2005, the issuer had outstanding a total of 2,339,414
shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
THE FOLLOWING INFORMATION IS PROVIDED AS BACKGROUND RELATED TO THE HISTORIC
AND CURRENT BUSINESS ACTIVITIES OF THE COMPANY. HOWEVER, THE COMPANY IS
CURRENTLY ENGAGED IN A TRANSACTION WHICH, IF CONCLUDED, WILL COMPLETELY CHANGE
ITS BUSINESS MODEL AND RESULT IN THE TERMINATION OF ITS DIRECTORS AND OFFICERS,
RENDERING THIS INFORMATION NO LONGER RELEVANT. SEE "RECENT DEVELOPMENTS", BELOW.
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 royalties, (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 our
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. In January 2005 the Company terminated its lease at that
location and relocated to 3200 University Drive, Coral Springs, Florida 33065.
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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. It began generating billings in
March 2003 but is not profitable. In the event that the Share Exchange Agreement
(see "Recent Developments" below) is consummated, this business will be sold to
CEO and Chairman of the Board, Barry Siegel
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.
In the event that the Share Exchange Agreement (see "Recent Developments"
below) is consummated, this business will be transferred to CEO and Chairman of
the Board, Barry Siegel
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
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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.
RECENT DEVELOPMENTS
CONTEMPLATED SHARE EXCHANGE AGREEMENT WITH PACIFIC ETHANOL GROUP
On May 17, 2004 the Company signed a definitive agreement ("the Share
Exchange Agreement") with Pacific Ethanol Inc., a California company, Kinergy
Marketing, LLC, an Oregon limited liability company, and Re-Energy, LLC, a
California company, (collectively hereinafter referred to as the "PEI Group")
all of which are geographically located in California, to acquire those
companies in exchange for approximately 18.8 million shares on a fully diluted
basis (of which approximately 1.5 million shares would be reserved to replace
existing PEI Group options and for its convertible debt, if converted) of
Accessity common stock to the then current shareholders of those companies. In
addition, as a condition precedent to the consummation of the transaction,
Pacific Ethanol was required to raise $7 million or more in equity which will
result in additional shares being issued depending on the amount of equity which
is sold. Pacific Ethanol is now attempting to obtain a minimum of $13.5 million
and a maximum of $15 million in new equity through the sale of common stock and
warrants, and this would result in approximately four to five million additional
shares being issued when completed. Under the terms of the private placement of
PEI common stock, all proceeds will be held in an escrow account and released
only if: (i) PEI has received and accepted executed commitment letters from
senior and mezzanine lenders providing for an aggregate minimum debt financing
of $48 million, (ii) subscriptions have been received representing aggregate
subscriptions of not less than $13.5 million and (iii) all conditions to closing
of the Share Exchange have been satisfied or waived as set forth in the Share
Exchange Agreement. Accordingly the Share Exchange transaction will not be
consummated unless the funding conditions are satisfied. The Share Exchange
Agreement was approved by our shareholders pursuant to their vote on February
28, 2005. The transaction was structured as a stock-for-stock share exchange;
with Accessity continuing as the surviving parent company and the PEI Group
entities becoming wholly owned subsidiaries of Accessity. Pacific Ethanol, Inc.
is to receive the largest block of shares and would become the accounting
acquirer in this transaction.
Under the terms of the Share Exchange Agreement, the former directors,
officers and employees of the Company will be required to terminate their
positions with Accessity. The business operations of Sentaur, including the
related personal property in use at the Coral Springs Florida location, will be
sold to CEO and founder Barry Siegel. The stock of DriverShield CRM, whose
operations consists of its royalty stream from ClaimsNet will be transferred to
Barry Siegel in lieu of a portion of the cash payments required under his
employment contract. Thereafter, having shut down all activities in Florida, the
management of Accessity would be transferred to the new management of the PEI
Group, and the principal executive officers will be located in Fresno,
California where Pacific Ethanol currently has its executive offices. The
present Accessity Board of Directors will have the right to nominate one
director with a term that expires until the 2005 Accessity shareholders meeting.
The remaining assets, including all of the Company's cash and investment funds,
certain prepaid and other assets and selected liabilities,
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would be retained under the control of the new management of the PEI Group. In
addition, the Share Exchange Agreement requires the prosecution of the lawsuit
against Presidion's investment bankers, the Mercator Group LLC, Global Taurus
LLC, et al, for in excess of $100 million. [See Item 3. Legal Proceedings]. The
proceeds, if any, from a successful outcome of this suit, after the payment of
legal fees, will be distributed pursuant to a formula as set forth in the Share
Exchange Agreement.
SALE OR TRANSFER OF FORMER BUSINESS UNITS
FLEET SERVICES BUSINESS
In October 2001 the Company entered into a Stock Purchase Agreement ("the
Purchase Agreement"), which was approved by a vote of the Company's shareholders
on February 4, 2002, 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 Vehicle Management Services, LLC ("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. In May 2004, we entered into the Stock
Repurchase Agreement that provided for the Company, at our option, to repurchase
the preferred stock previously issued to PHH. In August 2004, we assigned the
Stock Repurchase Agreement to a third party for no financial consideration, who
then converted the preferred stock into common stock in September 2004.
Accordingly, no preferred shares were outstanding at December 31, 2004.
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 was also a member
of our board of directors at the time, for $10,000. The sale excluded certain
assets and liabilities consisting primarily of accounts receivable and payables.
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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
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 were subsequently advised that we were 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.
NASDAQ NOTIFICATION
In February 2005, we received a Nasdaq Staff Determination that we failed
to hold our annual meeting of shareholders for the fiscal year ended December
31, 2004, and as a result, our common shares were subject to delisting. We
requested a hearing before the Nasdaq Listing Qualifications Panel to appeal the
Staff Determination which resulted in an immediate stay of the delisting
process. The Company had originally scheduled its shareholder meeting on
December 28, 2004, but adjourned the meeting for lack of a quorum to February 1
and adjourned the meeting for a second time to February 28, 2005 in order to
ensure that we had sufficient votes to approve all of the proposals related to
the Share Exchange. As we held our Annual Meeting of Shareholders on February
28, 2005, and notified the Nasdaq staff accordingly, we were advised on March 2,
2005 that the hearing was moot and we had met the requirements for continued
listing.
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.
Four customers accounted for 75% of its sales in 2004 ranging in size from
16% to 21% of sales, and five customers accounted for 75% of its accounts
receivables at December 31, 2004, within a range of 13% to 19% of the total
receivables. One of these customers was in the automotive segment and the others
were in the medical recovery segment. 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. These
figures exclude those accounts associated with the discontinued ADS businesses
that was sold in August, 2003. See "Recent Developments", above.
7
EMPLOYEES
At year-end, we employed 11 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 January 2005, we relocated to new office space located at 3200
University Drive, Coral Springs, Florida, 33065. The lease is for a one year
term, under the name of our wholly-owned subsidiary, Sentaur Corp. This space
consists of approximately 1100 square feet and the monthly rent is approximately
$2,000 per month.
In May 2002, we entered into a lease for our former office space,
where we were the sole occupant of the building at 12514 West Atlantic
Boulevard, Coral Springs, Florida, 33071. The space consisted of approximately
7,300 square feet of office space. The lease commenced in October 2002, and was
for a five and a half year term. We terminated this lease in January 2005 after
approximately two and a half years. The property was owned by two current
members and one former member of the Company's board of directors [see "Certain
Relationships and Related Transactions" below].
ITEM 3. LEGAL PROCEEDINGS
In January 2003, the Company and Barry Siegel, our Chief Executive Officer,
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 (the
"Zulter Action"). Mr. Zutler is seeking damages aggregating $2.25 million, plus
punitive damages and reasonable attorneys' fees. We believe that we 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's
attorney 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 appealed that ruling and the decision was overturned by the
Appellate Division of the New York Supreme Court in February 2005. 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
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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. ("Presidion") alleging that Presidion breached the terms of the Memorandum
of Understanding (the "MOU") between Accessity and Presidion dated January 17,
2003. The Company sought a break-up fee of $250,000 pursuant to the terms of the
MOU alleging that Presidion breached the MOU by wrongfully terminating the MOU.
Additionally, the Company sought out of pocket costs of its due diligence
amounting to approximately $37,000. Presidion filed a counterclaim against
Accessity alleging that Accessity had breached the MOU and therefore owes
Presidion a break-up fee of $250,000. The dispute was heard by a single
arbitrator before the American Arbitration Association in Broward County,
Florida in late February 2004. During June 2004, the arbitrator awarded us the
$250,000 break-up fee set forth in the MOU between the Company and Presidion, as
well as our share of the costs of the arbitration and interest from the date of
the termination by Presidion of the MOU, aggregating approximately $280,000.
During the third quarter of 2004, Presidion paid us the full amount of the award
with accrued interest. The arbitrator dismissed Presidion's counterclaim against
us.
In 2003, the Company filed a lawsuit seeking damages in excess of $100
million as a result of information obtained during the course of the arbitration
discussed above, against: (i) Presidion Corporation, f/k/a MediaBus Networks,
Inc., Presidion's parent corporation, (ii) Presidion's investment bankers,
Mercator Group, LLC ("Mercator") and various related and affiliated parties and
(iii) Taurus Global LLC ("Taurus"), (collectively referred to as the "Mercator
Action"), alleging that these parties committed a number of wrongful acts,
including, but not limited to tortiously interfering in the transaction between
the Company and Presidion. In 2004, the Company dismissed this lawsuit without
prejudice, which was filed in Florida state court. We recently refiled this
action in the State of California, for a similar amount, as it believes this to
be the proper jurisdiction. 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 any judgment. The Share Exchange
Agreement provides that following full and final settlement or other final
resolution of the Mercator Action, after deduction of all fees and expenses
incurred by the law firm representing us in this action and payment of the
twenty-five percent (25%) contingency fee to the law firm, shareholders of
record on the closing date of the Share Exchange will receive two-thirds of the
net proceeds from any Mercator Action recovery and Accessity will retain the
remaining one-third for the benefit of the shareholders at that time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
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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
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2004
First Quarter $2.61 $1.70
Second Quarter $6.09 $1.62
Third Quarter $5.71 $4.50
Fourth Quarter $6.75 $4.48
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
The number of record holders of the Company's common shares as of February
28, 2005 was 335.
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.
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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
future performance and actual results may differ materially from those in the
forward-looking statements.
YEAR ENDED DECEMBER 31, 2004 (THE "2004 PERIOD") COMPARED TO YEAR ENDED DECEMBER
31, 2003 (THE "2003 PERIOD")
The 2004 Period reflected a net loss of $1,486,000 versus a net loss of
$1,626,000 in the 2003 Period. Continuing operations reflected a loss of
$1,486,000 in the 2004 Period versus a loss of $1,852,000 in the 2003 Period.
Discontinued operations reflected income of $226,000 in 2003 Period resulting
primarily from the operations of the affinity service business which was sold in
August 2003. Basic and diluted loss per share from continuing operations was
$.65 in the 2004 Period and $.84 from continuing operations in the 2003 Period.
Basic and diluted earnings per share from discontinued operations were $.10 in
the 2003 Period.
REVENUES
Revenues were $825,000 in the 2004 Period compared to $658,000 in the 2003
Period, representing an increase of $167,000, or 25%. These figures exclude the
revenues from the ADS business that was sold August 1, 2003 which is now
reflected in the Company's financial statements as discontinued operations.
Revenues declined by $105,000 in the automotive segment, to $175,000 in the 2004
Period from $280,000 in the 2003 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 royalties it receives
through ClaimsNet. This decrease in revenues was offset by $272,000 in increased
revenues from Sentaur, the medical recovery business that began revenue
recording in April 2003.
INCOME AND EXPENSES FROM CONTINUING OPERATIONS
Losses from continuing operations improved; the losses decreased by
$366,000 to a loss of $1,486,000 in the 2003 Period, from a higher loss of
$1,852,000 in the 2002 Period. The decrease in losses, and comparative amounts,
are described below.
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Collision repair costs was $102,000 in the 2003 Period with no comparable
amount in the 2004 Period. This decrease resulted from the transfer of the CRM
business to ClaimsNet who assumed the costs and obligations of collision
repairs.
Selling expenses decreased by $17,000, from $479,000 in the 2003 Period to
$462,000 in the 2004 Period, or 4%, primarily as a result of decreased
expenditures for travel, lodging and meals due to employing local personnel.
General and administrative expenses increased $14,000 or 1%, from $1,852,000 in
the 2003 Period to $1,866,000 in the 2004 Period. Legal expenses relating to our
claim against Presidion Solutions, Inc. (an award was granted to the Company) in
the 2004 Period, as well as two other claims (as described in the Company's
December 31, 2003 10-KSB), one in which it is a plaintiff and one as a
defendant, resulted in an increase of $16,000. In addition, the Company incurred
increased consulting, accounting and SEC filing costs related to the review and
filing of its proxy to vote on the Share Exchange Agreement. These items totaled
$109,000. However, these increases were largely offset by reductions in numerous
administrative categories including payroll taxes, health insurance, office
supplies and expenses, repairs and maintenance, bank charges and others.
Depreciation and amortization in the 2003 Period was $299,000 and $295,000
in the 2004 Period, a decrease of $4,000. For the year ended December 31, 2004
the Company also recorded an impairment of $61,000 to its fixed assets based on
circumstances which indicate that due to the Share Exchange Agreement it is more
likely than not that the carrying amount of certain long-lived assets may not be
recoverable.
Investment and other income increased $136,000 to $363,000 in the 2004
Period compared to $227,000 in the 2003 Period. Other income in the 2004 Period
included $280,000 from Presidion resulting from an arbitration award from their
breach of an agreement with the Company. Offsetting the award was a non-cash
impairment of $40,000 which recognized most of the unrealized losses incurred on
fixed income mutual funds, and a realized losses of $44,000 recorded on sales of
fixed income mutual funds which had been held by the Company. Aside these items,
other income declined $60,000 primarily from declining investment balances.
The 2004 Period tax provision in the income statement reflects a tax refund
from New York State; there was no comparable amount in the 2003 Period. There is
no other tax impact in the income statement in either year resulting from a
valuation allowance that has been established for all operating loss
carry-forward benefits.
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. Sales were $419,000 in the
2003 Period through its date of sale.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had cash and cash equivalents of $188,000, and we
also held shares in a number of highly liquid mutual funds valued at $3,228,000.
Our working capital was $3,482,000 and our working capital ratio was 8:1 at
December 31, 2004.
In connection with the rental of our former office space in Florida, we
pledged, as security, $300,000 with a Florida bank for the five and a half year
term of the lease, as a guarantee of our future rental commitments. These
restricted funds were to decline as the remaining rental commitment declined, in
$100,000 increments on the 36th, 48th, and 60th month of the lease. The Company
was the beneficiary of the interest income. We terminated this lease in January
2005. Upon the subsequent consummation of the building sale, the $300,000 was
released and returned to the Company by the bank. In addition, our security
deposit of $22,000 was returned by the landlord. This property was owned and
operated by B & B Lakeview Realty Corp. (the "Landlord"), owned by two members
of the Board of Directors, Barry Siegel and Kenneth Friedman, and a third
shareholder, Barry Spiegel, formerly a member of the Company's Board of
Directors. The terms of the lease required 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 was to terminate five years and six months thereafter. Upon notice to
the Landlord that we intended to terminate the lease prematurely, in
contemplation of the pending Share Exchange Agreement with Pacific Ethanol, the
landlord decided to sell the building and permitted us to terminate this lease
early, in exchange for a lease termination fee of $25,000.
We have no major expenditures that we currently anticipate for capital
equipment, however we are continuing to expend funds due to operating losses.
Sentaur has not become profitable, nor is it providing a contribution to
administrative overhead expenses. Further, as Sentaur obtains additional
hospital customers, and seeks to expand its sales, it may require additional
funds for personnel expenses or software systems development, and these
expenditures will occur in anticipation of future revenue growth. In addition,
we also incurred significant legal expenses during 2004 pursuing certain legal
matters. The Mercator Action and the Zutler Action may result in additional
legal expenses in 2005 and thereafter.
In addition, during the 2004 and 2003 Period the Company spent considerable
funds, and the efforts of its management, pursuing acquisition candidates, and
is continuing to expend funds for administrative matters in connection with the
Share Exchange Agreement with the PEI Group, which has not yet concluded.
Pursuant to the contemplated Share Exchange Agreement, described more fully in
"Recent Developments" above, if consummated, we will issue approximately 18.8
millions shares on a fully diluted basis to the PEI Group to acquire the three
companies in this transaction, and will issue additional shares to investors who
participate in the equity private placement in which Pacific Ethanol is now
engaged. As a condition precedent to the Share Exchange Agreement, a minimum of
$7 million is required to be raised pursuant to the Share Exchange Agreement.
[See Item 1. Description of Business, Recent Developments]
13
Effective May 13, 2004, in exchange for certain mutual releases and the
Amendment of the Stock Purchase Agreement dated October 29, 2001 resulting in
the extension of certain non-compete clauses in favor of PHH, the Company and
PHH entered into a Stock Repurchase Agreement providing the Company, or its
assigns, with the right to repurchase these Preferred Shares for $350,000.
Pursuant to the terms of the Stock Repurchase Agreement, the Company was
required to repurchase the Preferred Shares only in the event that the
arbitration matter between the Company and Presidion Solutions, Inc. (Note 6)
was successfully concluded in favor of the Company, and, the award had been
fully collected. In June 2004 the arbitrator ruled in favor of the Company, and
during the third quarter of 2004, the Company collected the full amount due in a
series of payments. On September 9, 2004 an unrelated individual was assigned
our rights under the Stock Repurchase Agreement who repurchased the Preferred
Shares and immediately thereafter, converted them into 100,000 common stock
shares. Accordingly, our cash position and liquidity were not impacted by the
repurchase, and there were no convertible preferred shares outstanding on
December 31, 2004.
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. No additional common shares
have been acquired since.
The Company believes that its present liquidity will enable it to continue
to support its existing 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. The foregoing assessment does not consider liquidity issues if the
Share Exchange Agreement is consummated.
DEFERRED INCOME TAXES
The Company has a net operating loss carry forward of approximately
$4.7 million that is available to offset future taxable income at December 31,
2004. Since the Company has determined that it is more likely than not 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. In the event the Company consummates the Share Exchange
Agreement with the PEI Group, the use of these carryforwards would be severely
restricted.
NEW ACCOUNTING STANDARDS
The new accounting pronouncements described in footnote 1 of the Consolidated
Financial Statements are incorporated by reference.
14
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.
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 recognize royalty revenue for the license of software technology pursuant to
the terms of a 2002 contract, when the licensee notifies us that such revenue is
earned. At each reporting date we estimate royalties through such reporting date
and periodically adjust the accrual as the licensee reports to us. We recognize
revenue for our medical billing recovery business after we have provided all
relevant services and receive notification from the hospitals that they have
collected funds from their customers.
Accounts Receivable
Once a customer is billed for services, we actively manage the accounts
receivable to minimize credit risk.
15
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 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 AND CAUTIONARY FACTORS
Certain statements in this report on Form 10-KSB constitute
"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 "the Company may", "the Company intends", or variations of those
terms including their use in the negative. 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. You should not place undue reliance on these forward-looking
statements which speak only as to our expectations as of the date of this
report. These forward-looking statements are subject to a number of risks and
uncertainties, including those identified under "Cautionary Factors" below.
Although we believe that these expectations are reasonable, actual conditions
and results could differ materially from those expressed in these
forward-looking statements. Except as required by law, we do not undertake any
obligation to update any forward-looking statement after the date of this report
either to conform any statement to reflect the actual results or to reflect the
occurrence of unanticipated results. 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:
16
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. If we do not consummate the
Share Exchange Agreement ( see "Recent Developments"), 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 The Company's existing business model is continuing to incur
significant operating and cash flow losses.
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 may seek 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
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 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
17
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 seventeen percent
(17%) 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 may be in a position to impede transactions that may be
desirable for other shareholders.
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.
5. If the pending Share Exchange Agreement with the PEI Group is consummated
the future success of the Company will be in the control of others with an
entirely different business model which may or may not succeed.
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 December
31, 2004. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosures 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.
Management is aware that due to the small size staff of its accounting and
administrative function there is a lack of segregation of duties in this
function. However, we do not believe that the expense of additional personnel is
justified or that the benefits would support such additional costs. We will
evaluate other control procedures to compensate for this weakness.
18
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.
In connection with the audit of the year ended December 31, 2004, Nussbaum
Yales & Wolpow, PC, the Company's independent auditors, informed our audit
committee that they have identified a reportable condition they believe exists
related to a deficiency in the Company's internal control design; a lack of
segregation of duties and functions in the accounting department of the Company
consistent with appropriate control objectives. The auditors have informed the
audit committee that they believe that the aforementioned lack of segregation
of duties and functions represents a material weakness in the operation of our
internal control.
The Company's management identified an event which occurred in December
2004, (see below) which we believe constitutes a material weakness in the
Company's internal control. The Company is in the process of remediating this
material weakness.
Section 13.11 of the Share Exchange Agreement provides: "The parties
acknowledge and agree that the personal property at the facilities of Accessity
located in Coral Springs, Florida shall also be transferred to Barry Siegel or
an entity owned or controlled by Barry Siegel (which may be Sentaur Corp.)"
Additionally, we had requested that the Landlord for the premises containing our
corporate headquarters terminate the lease early. In anticipation of the Share
Exchange, the Company and the Landlord agreed upon a lease termination date in
January 2005. However, due to the delays in closing of the Share Exchange, the
move from the Coral Springs headquarters occurred before the closing of the
Share Exchange Agreement. Therefore, we were required to vacate the space and
move to a smaller space in Coral Springs, Florida. We were then faced with the
problem of moving and storing the additional personal property that would not
fit into the new smaller corporate headquarters. Mr. Siegel, the Chief Executive
Officer, made the decision to sell and/or donate the excess personal property,
rather than have the Company incur moving and storage costs for unwanted
property. As Section 13.11 of the Share Exchange Agreement provides that upon
closing, all personal property within the Coral Springs facility would be
transferred to Mr. Siegel, in December 2004, he sold or donated the unwanted
personal property prior to the closing of the Share Exchange and retained the
proceeds of these sales, as if the closing of the Share Exchange Agreement had
already occurred. In this process documentation was not created for the sales of
these fully depreciated assets properly documenting the purchaser, the specific
items sold and the sales price. These sales occurred during a period when our
Chief Financial Officer was out of the office on medical leave. Although the
sale of furniture and other personal property assets has been a rare occurrence
for the Company, and on previous occasions we had appropriate documentation, we
had not disseminated these procedures adequately. As a result, and in the
absence of our Chief Financial Officer, documentation demonstrating the items
sold and the proceeds from the sale of certain furniture and equipment was
unavailable. Accordingly, the amount used in the financial statements reflects
the amount which has been represented to us, and to our auditors, by our Chief
Executive Officer whom had the funds advanced to him, in anticipation of the
consummation of the Share Exchange Transaction which transfers the ownership of
those assets to him upon its completion. Upon
19
learning that the proceeds of these asset sales should have been retained by the
Company, Mr. Siegel returned the funds ($13,775) to the Company.
This matter has been discussed in detail by and among our independent
accounting firm, our Audit Committee and management and we are committed to
implementing improved internal controls with respect to this type of
transaction.
20
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............... 53 Chairman of the Board, President and Chief
Executive Officer
Philip B. Kart............. 55 Senior Vice President, Secretary, Treasurer
and Chief Financial Officer
Kenneth J. Friedman *...... 50 Director
Bruce S. Udell*............ 52 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.
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 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.
21
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 2004, our board held two meetings attended by members of the board either
in person or via telephone, and on six 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 2004 were Kenneth J. Friedman 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. The Audit Committee met once in 2004. 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, 2004.
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.
22
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, 2002, 2003 and
2004 for our Chief Executive Officer and each of the other most highly
compensated executive officers who earned more than $100,000 in salary for the
year ended December 31, 2004:
23
SUMMARY COMPENSATION TABLE
Securities
Underlying Other
Name and Position(s) Year Salary($) Options(#) Bonus ($) Compensation
- -------------------- ---- --------- ---------- --------- ------------
Barry Siegel 2004 300,000 0
Chairman of the Board of 2003 300,000 0
Directors, President and 2002 300,000 110,000 250,000 $12,500(a)
Chief Executive Officer
Philip B. Kart 2004 155,000 0
Senior Vice President, 2003 155,000 10,000 $62,000(b)
Secretary, Treasurer and 2002 155,000 30,000
Chief Financial Officer
Steven DeLisi 2004 175,000 0
President, Sentaur Corp. 2003 175,000 10,000
2002 68,654 50,000 5,000
(a) Reimbursed to Mr. Siegel for direct costs he incurred in connection with his
relocation.
(b) Provided to Mr. Kart, upon his relocation, for costs incurred in connection
with relocation.
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, expired on December 31, 2004 but was amended to extend for
three years until December 31, 2007. 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.
24
We are party to an employment agreement with Philip B. Kart that commenced
on January 1, 2002, expired on December 31, 2004 and was amended to extend for
one year until December 31, 2005. 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 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, which expired 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 $5,000 for each signed contract.
His employment agreement provides that following a change in control (as defined
in the agreement), all stock options previously granted to him will immediately
become fully exercisable.
STOCK OPTIONS
We made no awards of stock options during the last fiscal year to the
executive officers named in the summary compensation table as part of their
employment, however upon his resignation from the Company in July 2003, Mr.
Spiegel was granted 10,000 options in accordance with Company's policy of option
grants to its directors. The following table indicates the number of exercised
and unexercised stock options held by each executive officer named in the
Summary Compensation Table, as of December 31, 2004.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUE TABLE
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at FY-End Options/SARs at FY-End
(Exercisable/Unexercisable) (Exercisable/Unexercisabl)
Shares Acquired Value --------------------------- --------------------------
Name on Exercise(#) Realized($) (#) ($)
- ---- ------------- ----------- --- ---
Barry Siegel None $0 80,000/36,667 $0/0
Philip B. Kart None $0 65,000/10,000 $197,438/0
Steven DeLisi None $0 33,333/16,667 $0/0
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
Shares to be issued Weighted average Number of Securities
upon exercise of outstanding exercise Available for
options, warrants or stock price Future Issuance
Plan Category rights(#) ($) (#)
--------- --- ---
Approved by Shareholders:
Stock Option Plan 357,667 $6.03 842,333
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 February 20, 2005. 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 of Amount and Nature of Percentage of
Title of Class Beneficial Owner Beneficial Owner Common Stock(1)
- --------------- ---------------- ---------------- ---------------
Common stock Barry Siegel 460,873(2)(3) 19.0%
c/o Accessity Corp.
3200 University Drive
Coral Springs, FL 33065
Common stock Barry J. Spiegel 309,792 13.2%
c/o Accessity Corp.
3200 University Drive
Coral Springs, FL 33065
Common stock Philip B. Kart 65,000(4) 2.7%
c/o Accessity Corp.
3200 University Drive
Coral Springs, FL 33065
26
Common stock Kenneth J. Friedman 73,399(5) 3.1%
c/o Accessity Corp.
3200 University Drive
Coral Springs, FL 33065
Common stock Bruce S. Udell 16,750(6) .7%
c/o Accessity Corp.
3200 University Drive
Coral Springs, FL 33065
Common stock Steve DeLisi 33,637(7) 1.4%
c/o Accessity Corp.
3200 University Drive
Coral Springs, FL 33065
Common stock All directors & officers 649,659 25.5%
as a group (5 persons)
(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 2,339,414 shares of common stock were outstanding on
Feb. 20, 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 February 20, 2005.
(5) Includes options to purchase 16,000 shares of common stock exercisable
within 60 days of February 20, 2005.
(6) Includes options to purchase 10,000 shares of common stock exercisable
within 60 days of February 20, 2005.
(7) Includes options to purchase 33,333 shares of common stock exercisable
within 60 days of February 20, 2005.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2002 we signed a five and a half year lease to occupy a 7,300 square
foot building in Coral Springs, Florida. We terminated this lease on January 14,
2005, and the building was sold, concurrently, by the landlord. This property
was owned and operated by B & B Lakeview Realty Corp., two shareholders, Barry
Siegel and Ken Friedman, are members of the Company's Board of Directors and a
third, Barry Spiegel, was formerly a member of the Board of Directors. The terms
of the lease required 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 was to terminate five years and six
months thereafter. The Company and the landlord each expended approximately
$140,000 to complete the interior space. In addition, during July 2002, the
Company pledged $300,000 in an interest bearing account initially as a
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
was to decline in $100,000 increments on the 36th month, 48th month, and 60th
month, as the balance of the rent commitment declined. These funds, along with
unpaid and earned interest, were returned us in January 2005 upon the
consummation of the sale of
27
the building. We also had a security deposit of $22,000 held by the related
party which was also repaid at that time. At the Company's request, the Landlord
agreed to sell the building and permit us to terminate this lease early, in
exchange for the Company reimbursing the Landlord for the prepayment penalty, of
$25,000, that the Landlord incurred due to the early pay off of its mortgage
loan. These fees paid to the Landlord equaled far less than the Company's
liabilities pursuant to the lease. During the 2004 Period the Company paid B&B
Lakeview Realty rent payments of $145,000. Operating expenses, insurance and
taxes, as required by the lease, were generally paid directly to the providers
by the Company.
In December 2004 our President, Mr. Barry Siegel, disposed of certain fully
depreciated office equipment of the Company in connection with our impending
office relocation, and retained the proceeds. Under the terms of the Share
Exchange Agreement these proceeds are intended to be transferred to Mr. Siegel
upon consummation. Mr. Siegel has indicated that the proceeds amounted to
approximately $13,775, however Mr. Siegel claims that he did not obtain any of
the documentation. Upon learning that this advance was prohibited under Section
402 of the Sarbanes-Oxley Act of 2002, Mr. Siegel reimbursed the Company in
full. [See Item 8A. Controls and Procedures]
28
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3. ARTICLES OF INCORPORATION AND BY-LAWS
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 RIGHTS OF SECURITY HOLDERS
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. Material Contracts
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.
29
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.
10.15 Second Amendment to the Employment Agreement between the Company and
Philip Kart dated March 3, 2005 previously filed as Exhibit 10.2 with
the Company's Form 8-K dated February 25, 2005 and incorporated by
reference hereto.
10.16 First Amendment to the Employment Agreement between the Company and
Barry Siegel dated March 3, 2005 previously filed as Exhibit 10.1 with
the Company's Form 8-K dated February 25, 2005 and incorporated by
reference hereto.
10.17 Lease Termination Agreement dated January 14, 2005 between the Company
and B & B Lakeview Realty Corp. previously filed as Exhibit 10.3 with
the Company's Form 8-K dated February 25, 2005 and incorporated by
reference hereto.
13. QUARTERLY REPORTS
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. CODE OF ETHICS
14.1 Code of Ethics filed as Exhibit 14.1 with the Company's Form 10-KSB for
the fiscal year ended December 31, 2003 and incorporated by reference
hereto.
21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
21.1 List of subsidiaries filed as Exhibit 21 with the Company's Form 10-KSB
for the fiscal year ended December 31, 2003 and incorporated by
reference hereto.
30
31-32. CERTIFICATIONS
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 15, 2004
disclosing a press release that announced the Company's financial
results for the third quarter and nine months ended September 30, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees for professional services
billed to us by our principal accounting firm, Nussbaum Yates & Wolpow, P.C.,
for the past two fiscal years.
2004 2003
---- ----
Audit Fees $ 67,500 $ 51,500
Tax Fees 0 0
All Other Fees 40,726 1,939
--------- ---------
Total $ 108,226 $ 53,439
Audit Fees consist of amounts billed for professional services rendered for
the audit of our annual consolidated financial statements and review of the
interim consolidated financial statements included in the quarterly reports
filed in connection with Form 10-KSB and Form 10-QSB.
All Other Fees consist of amounts billed for services other than those
noted above. In fiscal 2004 these services were primarily related to assistance
and review of our proxy and matters related to the review of the Share Exchange
Agreement which was filed with the Securities and Exchange Commission in the
fourth quarter of fiscal 2004. In fiscal 2003 the amounts billed were for
services provided in connection with our registration of common stock on Form
S-8 and other miscellaneous services.
All work performed by our independent public accountants must be
pre-approved by our Audit Committee to ensure that such work is compatible with
the principal accountant's independence.
31
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
----------------------
Barry Siegel
Chairman of the Board of Directors,
President and
Chief Executive Officer Date: March 17, 2005
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 17, 2005
----------------------
Barry Siegel
Chairman of the Board of Directors,
President, and
Chief Executive Officer,
By: /s/Philip Kart Date: March 17, 2005
----------------------
Philip Kart
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
By: /s/Kenneth J. Friedman Date: March 17, 2005
----------------------
Kenneth J. Friedman
Director
By: /s/Bruce S. Udell Date: March 17, 2005
----------------------
Bruce S. Udell
Director
32
INDEX OF EXHIBITS
3. ARTICLES OF INCORPORATION AND BY-LAWS
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 RIGHTS OF SECURITY HOLDERS
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. Material Contracts
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
33
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.
10.15 Second Amendment to the Employment Agreement between the Company and
Philip Kart dated March 3, 2005 previously filed as Exhibit 10.2 with
the Company's Form 8-K dated February 25, 2005 and incorporated by
reference hereto.
10.16 First Amendment to the Employment Agreement between the Company and
Barry Siegel dated March 3, 2005 previously filed as Exhibit 10.1 with
the Company's Form 8-K dated February 25, 2005 and incorporated by
reference hereto.
10.17 Lease Termination Agreement dated January 14, 2005 between the Company
and B & B Lakeview Realty Corp. previously filed as Exhibit 10.3 with
the Company's Form 8-K dated February 25, 2005 and incorporated by
reference hereto.
13. QUARTERLY REPORTS
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. CODE OF ETHICS
14.1 Code of Ethics filed as Exhibit 14.1 with the Company's Form 10-KSB for
the fiscal year ended December 31, 2003 and incorporated by reference
hereto.
21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
21.1 List of subsidiaries filed as Exhibit 21 with the Company's Form 10-KSB
for the fiscal year ended December 31, 2003 and incorporated by
reference hereto.
34
31-32. CERTIFICATIONS
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
35
ACCESSITY CORP. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2004 AND 2003
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors
Accessity Corp. and Subsidiaries
Coral Springs, Florida
We have audited the consolidated balance sheet of Accessity Corp. and
subsidiaries as of December 31, 2004, and the consolidated statements of
operations, shareholders' equity, and cash flows for the years ended December
31, 2004 and 2003. 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 the Standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, and the results of
their operations and cash flows for the years ended December 31, 2004 and 2003,
in conformity with U.S. generally accepted accounting principles.
Melville, New York NUSSBAUM YATES & WOLPOW, P.C.
February 16, 2005
Except for Note 17 as to which
the date is March 2, 2005, and
the second paragraph of Note 3
as to which the date is
February 28, 2005
F-1
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
2004
------------
Current assets:
Cash and cash equivalents $ 188,444
Accounts receivable 124,800
Due from officer 13,775
Investments 3,228,109
Restricted certificate of deposit 300,000
Prepaid expenses and other current assets 99,432
------------
Total current assets 3,954,560
Property and equipment, net 86,489
Security deposits and other assets 4,026
------------
Total assets $ 4,045,075
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 55,446
Accrued expenses and other current liabilities 416,789
------------
Total current liabilities 472,235
------------
Shareholders' equity:
Common stock, $.015 par value, authorized
30,000,000 shares; issued 2,521,398 shares 37,821
Additional paid-in capital 11,107,158
Accumulated other comprehensive income,
unrealized holding gain on investment
securities 33,195
Deficit (5,875,892)
------------
5,302,282
Less common stock held in treasury, at cost,
181,984 shares 1,729,442
------------
Total shareholders' equity 3,572,840
------------
Total liabilities and shareholders' equity $ 4,045,075
============
See notes to consolidated financial statements.
F-2
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Revenues:
Royalties and collision repair $ 174,984 $ 279,734
Hospital billing recovery fees 649,653 377,809
------------ ------------
Total revenues 824,637 657,543
------------ ------------
Operating expenses:
Collision repair expenses -- 102,052
Sales and marketing 462,215 478,562
General and administrative 1,865,780 1,851,617
Depreciation and amortization 295,366 299,108
Asset impairment charge 61,033 --
------------ ------------
Total operating expenses 2,684,394 2,731,339
------------ ------------
(1,859,757) (2,073,796)
------------ ------------
Other income (expense):
Investment and other income 363,462 226,608
Interest expense (1,045) (4,504)
------------ ------------
Total other income 362,417 222,104
------------ ------------
Loss from continuing operations before
provision for income tax benefit (1,497,340) (1,851,692)
Provision for income tax benefit 11,525 --
------------ ------------
Loss from continuing operations (1,485,815) (1,851,692)
------------ ------------
Discontinued operations:
Income from affinity services subsidiary
(no income tax effect) -- 215,654
Gain on disposal of affinity services
subsidiary (no income tax effect) -- 10,000
------------ ------------
Income from discontinued operations -- 225,654
------------ ------------
Net loss $ (1,485,815) $ (1,626,038)
------------ ------------
Basic and diluted earnings (loss) per
common share:
Continuing operations $ (0.65) $ (0.84)
Discontinued operations -- 0.10
------------ ------------
Net loss $ (0.65) $ (0.74)
------------ ------------
Basic and diluted weighted average number
of common shares outstanding 2,269,200 2,195,519
============ ============
See notes to consolidated financial statements.
F-3
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
PREFERRED ACCUMULATED TOTAL
COMMON STOCK STOCK ADDITIONAL OTHER TREASURY STOCK SHARE-
------------------ -------------- PAID-IN COMPREHENSIVE -------------------- HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT SHARES AMOUNT EQUITY
--------- ------- ------ ------ ----------- ------------ ----------- ------- ----------- -----------
Balance,
January 1, 2003 2,349,398 $35,241 1,000 $ 10 $10,977,648 $ 14,204 $(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 loss -- -- -- -- -- 14,919 -- -- -- 14,919
Unrealized holding
loss -- -- -- -- -- (66,908) -- -- -- (66,908)
-----------
Comprehensive loss -- -- -- -- -- -- -- -- -- (1,678,027)
Exercise of stock
options 63,600 954 -- -- 89,711 -- -- -- -- 90,665
Shares tendered upon
exercise of stock
options 6,400 96 -- -- 24,864 -- -- 6,400 (24,960) --
Options granted for
services -- -- -- -- 8,955 -- -- -- -- 8,955
--------- ------- ------ ------ ----------- ------------ ----------- ------- ----------- -----------
Balance,
December 31, 2003 2,419,398 36,291 1,000 10 11,101,178 (37,785) (4,390,077) 181,984 (1,729,442) 4,980,175
-----------
Net loss -- -- -- -- -- -- (1,485,815) -- -- (1,485,815)
Add reclassification
adjustment for
realized losses
included in net loss -- -- -- -- -- 44,418 -- -- -- 44,418
Unrealized holding
gain -- -- -- -- -- 26,562 -- -- -- 26,562
-----------
Comprehensive loss -- -- -- -- -- -- -- -- -- (1,414,835)
Exercise of stock
options 2,000 30 -- -- 7,470 -- -- -- -- 7,500
Reclassification
adjustment upon
preferred shares
becoming mandatorily
redeemable -- -- (1,000) (10) (349,990) -- -- -- -- (350,000)
Conversion of preferred
shares into common
stock 100,000 1,500 -- -- 348,500 -- -- -- -- 350,000
--------- ------- ------ ------ ----------- ------------ ----------- ------- ----------- -----------
Balance,
December 31, 2004 2,521,398 $37,821 -- $ -- $11,107,158 $ 33,195 $(5,875,892) 181,984 $(1,729,442) $ 3,572,840
========= ======= ====== ====== =========== ============ =========== ======= =========== ===========
See notes to consolidated financial statements.
F-4
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Cash flows used in operating activities:
Net loss $ (1,485,815) $ (1,626,038)
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization
(including bond premium amortization in 2003) 295,366 318,837
Impairment loss on property and equipment 61,033 --
Options granted for services -- 8,955
Gain on sale of subsidiary -- (10,000)
Gain on sale of property and equipment (13,775) --
Loss on sale of investments 44,418 14,919
Impairment loss on marketable securities 40,002 --
Changes in assets and liabilities:
Accounts receivable 31,296 (6,411)
Prepaid expenses and other current assets 14,871 220,418
Security deposits and other assets 49,523 4,430
Accounts payable 3,249 (247,018)
Accrued expenses and other current liabilities (2,110) (430,143)
------------ ------------
Total adjustments 523,873 (126,013)
------------ ------------
Net cash used in operating activities (961,942) (1,752,051)
------------ ------------
Cash flows provided by investing activities:
Purchase of property and equipment (3,867) (39,793)
Proceeds from sale of subsidiary -- 10,000
Purchase of investments (1,398,776) (5,439,087)
Proceeds from investments 2,470,340 6,349,183
------------ ------------
Net cash provided by investing activities $ 1,067,697 $ 880,303
------------ ------------
(Continued)
See notes to consolidated financial statements.
F-5
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Cash flows provided by (used in) financing activities:
Payments under capital lease $ (20,386) $ (31,997)
Proceeds from exercise of stock options 7,500 90,665
------------ ------------
Net cash provided by (used in) financing activities (12,886) 58,668
------------ ------------
Net increase (decrease) in cash and cash equivalents 92,869 (813,080)
Cash and cash equivalents at beginning of year 95,575 908,655
------------ ------------
Cash and cash equivalents at end of year $ 188,444 $ 95,575
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,045 $ 4,504
------------ ------------
Supplemental disclosure of non-cash activities:
During 2003, the Company acquired 6,400 shares of treasury stock
with shares tendered upon the exercise of stock options.
See Note 4 regarding the conversion of preferred shares into common stock.
See Note 15 regarding the disposal of property and equipment during 2004.
See notes to consolidated financial statements.
F-6
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Accessity Corp. and its subsidiaries (collectively referred to as the
"Company" and "Accessity"). All material intercompany balances and
transactions have been eliminated.
DISCONTINUED OPERATIONS
On August 1, 2003, the Company sold its affinity services business (see
Note 6). The Company's consolidated statements of operations for the year
ended December 31, 2003 reflects the results of its affinity services
business as discontinued operations. Although the Company only reported
one business segment for its automotive operations, the Company operated
its individual automotive related businesses as distinct businesses with
separate major lines of businesses and classes of customers. Accordingly,
upon its sale, the Company determined that the 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.
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. 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, 2004 AND 2003
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, unless a decline in fair value below
cost is determined to be other than temporary. Realized gains or losses
are determined based on the specific identification method.
REVENUE RECOGNITION
The Company recognizes royalty revenue for the license of software
technology pursuant to the terms of a 2002 contract (Note 5) when the
licensee notifies the Company that such revenue is earned. At each
reporting date, the Company estimates royalties by the Company through
the reporting date and accrues such estimates of royalties. The Company
periodically adjusts this accrual as the licensee reports to the Company.
As of December 31, 2004, the Company had accrued $12,000 which is
included in accounts receivable. The Company recognizes revenue for its
medical billings recovery business after it has provided all relevant
services and 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. The company does not
generally require collateral from its customers.
F-8
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
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.
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.
ADVERTISING EXPENSE
Advertising expenditures, which are expensed as incurred, amounted to
approximately $19,000 and $42,000 in 2004 and 2003.
F-9
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
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, 2004, approximately 842,000 options remain available for
future grants.
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 2004 and 2003, respectively: annual dividends of $-0-
for both years, expected volatility of 138% and 146%, risk-free interest
rate of 1.35% and 1.13%, and expected life of five years for all grants.
The weighted-average fair value of stock options granted in 2004 and 2003
was $4.33 and $1.77, respectively.
Under the above model, the total value of stock options granted in 2004
and 2003 was $86,608 and $70,763, 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:
2004 2003
------------ ------------
Net loss:
As reported $ (1,485,815) $ (1,626,038)
Stock-based compensation cost,
(no tax effect in either year),
that would have been included in
the determination of net income
if the fair value based method
had been applied to all awards (350,467) (562,745)
------------ ------------
Pro forma $ (1,836,282) $ (2,188,783)
------------ ------------
Basic and diluted loss per share:
As reported $ (.65) $ (.74)
Pro forma $ (.81) $ (1.00)
F-10
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123 (revised 2004) that will require compensation
costs related to share-based payment transactions to be recognized in the
financial statements. With limited exceptions, the amount of compensation
cost will be measured based on the grant-date fair value of the equity or
liability instruments issued. In addition, liability awards will be
measured each reporting period. Statement 123(R) replaces FASB Statement
No. 123, Accounting for Stock-Based Compensation, and supercedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) is
effective as of the first interim or annual reporting period that begins
after December 15, 2005. The Company is currently assessing the impact of
adopting SFAS 123(R).
In December 2003, the FASB revised FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" by issuing FIN 46R. FIN 46R
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 loss, receive a majority of the variable interest entity's
expected residual returns, or both. The Company, in connection with the
preparation of its financial statements for the year ended December 31,
2004, made an initial determination with respect to its June 2002 leasing
agreement for former office space with a related party (see Note 14),
that the related party did not have to be consolidated with the Company's
financial statements, as the criteria for consolidation under FIN 46R
were not met.
2. DESCRIPTION OF BUSINESS AND CONCENTRATIONS
------------------------------------------
THE FOLLOWING INFORMATION IS PROVIDED AS BACKGROUND RELATED TO THE
HISTORIC AND CURRENT BUSINESS ACTIVITIES OF THE COMPANY. AS INDICATED IN
NOTE 3, HOWEVER, THE COMPANY IS CURRENTLY ENGAGED IN A TRANSACTION WHICH,
IF CONCLUDED, WILL CHANGE ITS BUSINESS MODEL AND DIRECTORS AND OFFICERS,
RENDERING THIS INFORMATION NO LONGER RELEVANT AS ALL CURRENT BUSINESS
OPERATIONS OF THE COMPANY WILL CEASE.
F-11
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
2. DESCRIPTION OF BUSINESS AND CONCENTRATIONS (CONTINUED)
------------------------------------------------------
The Company offered collision repair management services 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 5), 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 5.
The Company's remaining automotive business that provided automobile
affinity services for individuals was sold to the president of that
subsidiary (see Note 6). The Company believes that it operated its
automotive-related businesses in one operating segment.
In 2002, the Company began a new business engaged in medical billing
recovery which is managed as a separate segment under its subsidiary,
Sentaur Corp., "Sentaur". 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, but to date this business has been unable
to generate revenues in excess of its direct costs. 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 75% of its sales in 2004 ranging in size from 16% to 21% of sales,
and five customers accounted for 75% of its accounts receivable at
December 31, 2004, within a range of 13% to 19% of the total receivables.
Four customers accounted for substantially all of the Company's sales in
2003.
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.
3. DEFINITIVE AGREEMENT SIGNED FOR POTENTIAL ACQUISITIONS, CHANGE OF CONTROL
-------------------------------------------------------------------------
AND CHANGE IN BUSINESS MODEL
----------------------------
On May 17, 2004 the Company signed a definitive agreement ("the Share
Exchange Agreement") with Pacific Ethanol Inc., a California company,
Kinergy Marketing, LLC, an Oregon limited liability company, and
Re-Energy, LLC, a California company, (collectively hereinafter referred
to as the "PEI Group") all of which are geographically located in
California, to acquire those companies in exchange for 18.8 million
shares on a fully diluted basis (of which approximately 1.5 million
shares would be reserved to replace existing PEI Group options and its
convertible debt, if converted) of Accessity common stock to the then
current shareholders of those companies.
F-12
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
3. DEFINITIVE AGREEMENT SIGNED FOR POTENTIAL ACQUISITIONS, CHANGE OF CONTROL
-------------------------------------------------------------------------
AND CHANGE IN BUSINESS MODEL (CONTINUED)
----------------------------------------
As noted below, Pacific Ethanol is now attempting to obtain between $13
and $15 million in new equity, and this would result in approximately
four to five million additional shares being issued when completed,
excluding warrants associated with the equity placement. The Share
Exchange transaction is structured as a stock-for-stock exchange with
Accessity continuing as the surviving parent company and the PEI Group
entities becoming wholly owned subsidiaries of Accessity. Pacific
Ethanol, Inc. is to receive the largest block of shares and would become
the accounting acquirer in this transaction. The Company's proxy was
reviewed by the Securities and Exchange Commission and mailed to its
shareholders who voted in favor of completing the transaction at the
shareholders' meeting on February 28, 2005.
However, certain significant conditions precedent to the transaction
which are required to be completed by the PEI Group, including equity and
debt financing, have not yet been completed by the PEI Group.
Accordingly, the Share Exchange is not and cannot be consummated until
the time when, and if, these conditions are satisfied. Privately held PEI
Group is presently a re-seller of ethanol.
Under the terms of the Share Exchange Agreement, which is subject to
satisfactory completion of due diligence and completion of equity
financing, the existing directors, officers and employees of the Company
will be required to terminate their positions with Accessity. The
existing business operations of Sentaur, including the related personal
property at the Coral Springs, Florida location, will be sold to CEO and
founder Barry Siegel for $5,000. The stock of DriverShield CRM, whose
operations consists of its royalty stream from ClaimsNet (see Note 5),
will be transferred to Barry Siegel in lieu of a portion of the cash
payments required under his employment contract. Thereafter, having
eliminated the existing business activities of the Company, the
management of Accessity would be transferred to the new management of the
PEI Group. The present Accessity Board of Directors will have the right
to nominate one director with a term that continues until the 2005
Accessity shareholders meeting. The remaining assets, including all of
the Company's cash and investment funds, certain prepaid and other assets
and selected liabilities, would be retained under the control of the new
management of the PEI Group. In addition, the Share Exchange Agreement
requires Accessity to prosecute the lawsuit against Presidion's
investment bankers, the Mercator Group LLC, Global Taurus LLC, et al, for
in excess of $100 million, as described Note 14. The proceeds, if any,
from a successful outcome of this suit, after the payment of legal fees,
will be distributed two-thirds to Accessity shareholders of record on the
date of closing of the transaction with the PEI Group, with the remaining
one-third being retained by the Company. In the event Accessity
terminates the Share Exchange Agreement for a Superior Proposal, as
defined in the Share Exchange Agreement, Accessity will pay the expenses
of the other parties up to a maximum amount of $150,000.
F-13
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
3. DEFINITIVE AGREEMENT SIGNED FOR POTENTIAL ACQUISITIONS, CHANGE OF CONTROL
-------------------------------------------------------------------------
AND CHANGE IN BUSINESS MODEL (CONTINUED)
----------------------------------------
The Company has signed four amendments to the Share Exchange Agreement
primarily revising the date upon which the Share Exchange Agreement will
terminate from October 29, 2004 to March 25, 2005. Additionally,
Amendment No. 2 to the Share Exchange Agreement provided for revision to
the following material terms: (i) subject to shareholder approval,
Accessity will sell the Sentaur subsidiary to Barry Siegel for the sum of
$5,000 (ii) an additional condition to closing was added requiring PEI to
raise at least $7 million in new equity, with all but $500,000 being held
in escrow subject to consummation of the Share Exchange Agreement.
4. PREFERRED STOCK REPURCHASE AND CONVERSION
-----------------------------------------
Effective May 13, 2004, in exchange for certain mutual releases and the
amendment of the Stock Purchase Agreement dated October 29, 2001
resulting in the extension of certain non-compete clauses in favor of PHH
Vehicle Management Services, LLC ("PHH") the Company and PHH entered into
a Stock Repurchase Agreement providing the Company, or its assigns, with
the right to repurchase these Preferred Shares which had a liquidation
preference of $1,250,000 for $350,000. Pursuant to the terms of the Stock
Repurchase Agreement, the Company was required to repurchase the
Preferred Shares only in the event that the arbitration matter between
the Company and Presidion Solutions, Inc. (Note 14) was successfully
concluded in favor of the Company, and the award had been fully
collected. In June 2004 the arbitrator ruled in favor of the Company, and
during the third quarter of 2004 the Company collected the full amount
due in a series of payments. In connection with this award, during 2004,
the Company was required to repurchase the preferred stock and
accordingly reclassified such stock out of equity. On September 9, 2004
an unrelated individual assumed the obligations of the Company without
any exchange of consideration and repurchased the preferred shares and
immediately thereafter converted them into 100,000 common shares.
Accordingly, there were no convertible preferred shares outstanding on
December 31, 2004.
5. ROYALTY LICENSE AND INSURANCE COLLISION REPAIR 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.
F-14
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
5. ROYALTY LICENSE AND INSURANCE COLLISION REPAIR BUSINESS (CONTINUED)
-------------------------------------------------------------------
In 2004 and 2003, revenues related to the above were as follows:
2004 2003
------------ ------------
Royalties $ 174,984 $ 162,693
Collision repairs -- 117,041
------------ ------------
$ 174,984 $ 279,734
============ ============
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.
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. Since the repairs are performed by
subcontracted repair shops who warranty the repairs, the Company has had
no significant warranty costs to date nor does it expect to incur any
costs in the future.
6. 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 was 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 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 was formerly one of the directors of the Company, and is
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 gain of $10,000
on the transaction in 2003.
F-15
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
6. DISCONTINUED OPERATIONS OF AUTOMOBILE AFFINITY SERVICES BUSINESS AND SALE
-------------------------------------------------------------------------
TO RELATED PARTY (CONTINUED)
----------------------------
Operating results during the year ended December 31, 2003 for the
discontinued affinity services operations, through the date of its sale
on August 1, 2003, were as follows:
Revenues $ 419,417
Cost of sales, selling, general
and administrative expenses 203,763
----------
Income from discontinued affinity
services subsidiary, (no income tax effect) $ 215,654
==========
7. INVESTMENTS
-----------
AT DECEMBER 31, 2004:
--------------------- UNREALIZED
FAIR HOLDING
COST VALUE GAIN
---------- ---------- ----------
Fixed income mutual funds $2,144,914 $2,178,109 $ 33,195
Corporate short-term debt instruments 1,050,000 1,050,000 --
---------- ---------- ----------
$3,194,914 $3,228,109 $ 33,195
========== ========== ==========
In the quarter ended June 30, 2004 the Company reviewed its securities
investment positions and recognized an impairment of its investment
securities, characterized as other-than-temporary, of approximately
$73,000 which is included in the caption investment and other income on
the consolidated statement of operations. In July 2004 the Company made
the decision to sell one of those investment positions, which represented
$33,000 of the impairment amount noted above, leaving a balance of
approximately $40,000. At that time the Company considered the increasing
interest rate environment, which resulted in decreasing prices for each
of the fixed income mutual funds that the Company held, as well as its
need to fund its operating losses precluding its ability to hold
securities sufficiently to realize its initial investment. However, by
December 31, 2004 the mutual funds in which the Company had retained its
investment position had recovered all but approximately $7,000 of the
$40,000 of impaired values.
F-16
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
8. PROPERTY AND EQUIPMENT AND ASSET IMPAIRMENT
-------------------------------------------
PROPERTY AND EQUIPMENT
2004
------------
Machinery and equipment $ 428,808
Furniture and fixtures 35,691
Website development costs 291,654
------------
756,153
Less accumulated depreciation
and amortization 669,664
------------
$ 86,489
============
During 2004 and 2003, the Company wrote off certain fully depreciated
property and equipment and leaseholds improvements aggregating $206,435
and $586,899. In 2004, in conection with its planned relocation (Note
14), the Company had reduced the estimated remaining life of its
leasehold improvements.
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 its fair value. In connection with the preparation of its
2004 year end financial statements, the Company determined that present
circumstances indicated that the carrying amount of certain long-lived
assets (property and equipment) may not be recoverable. Such
circumstances include a current expectation, based upon the definitive
agreement signed for potential change in control of the company and its
business model (see Note 3) that, more likely than not, certain
long-lived assets will be sold or otherwise disposed of significantly
before the end of their previously estimated useful life. Based on the
above, the Company obtained appraisals and other indicators of the fair
values of such assets, and since the carrying amounts exceeded the fair
values, the Company recognized an impairment loss of $61,033.
F-17
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
9. EARNINGS (LOSS) PER COMMON SHARE
--------------------------------
Basic earnings (loss) per common share is 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 and if
the outstanding preferred stock was converted. The computation of diluted
earnings (loss) per common share in 2004 and 2003 excludes the effect of
the assumed exercise of approximately 383,000 and 517,000 stock options
and warrants, and for 2003 the assumed conversion of outstanding
preferred stock, 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
------------ ------------ ------------
2004 - Net Loss $ (1,485,815) 2,269,200 $ (.65)
------------ ------------ ------------
2003 - Net Loss $ (1,626,038) 2,195,519 $ (.74)
============ ============ ============
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, 2004 and 2003, all of these
options, except for 6,667, were either forfeited or expired. There was no
charge or credit for the year ended December 31, 2004 or 2003 as a result
of either the expiration of these options, or that the price per share of
common stock remained below the exercise price.
F-18
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
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, 2003 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 granted 20,000 $4.88 - $ 5.00 $4.94
Options canceled (54,667) $3.75 - $ 6.25 $5.53
---------
Options outstanding, December 31, 2004 357,666 $1.56 - $10.65 $6.03
---------
Options exercisable, December 31, 2003 219,000 $1.56 - $10.65 $5.15
---------
Options exercisable, December 31, 2004 246,000 $1.56 - $10.65 $5.75
---------
The following table summarizes information about options outstanding and
exercisable at December 31, 2004:
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 96,666 2.21 $ 3.02 75,000 $ 2.48
$5.50 - $ 7.45 148,000 2.56 $ 6.45 94,667 $ 6.45
$8.00 - $10.65 113,000 2.03 $ 8.07 76,333 $ 8.10
----------- -----------
357,666 246,000
=========== ===========
F-19
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
11. COMMON STOCK AND STOCK WARRANTS
-------------------------------
Outstanding warrants to acquire 20,000 shares of common stock at $2.65
per share, and 5,000 warrants to acquire 5,000 shares of common stock at
$4.35 per share are currently exercisable and expire in 2006.
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. No shares were purchased during 2003 and 2004.
12. PREFERRED STOCK PURCHASE RIGHTS
-------------------------------
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, 2004 AND 2003
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, 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 $6,000 in 2004 and
$11,000 in 2003.
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
------------------------------------------------------------
OPERATING LEASES
In May 2002, the Company signed a five and a half year lease to occupy
the space it had occupied throughout 2004 and 2003. This 7,300 square
foot building in Coral Springs, Florida was owned and operated by B&B
Lakeview Realty Corp., two of whose three shareholders, Barry Siegel,
(President and Chief Executive Officer) and Ken Friedman, are members of
the Company's Board of Directors and the third, Barry J. Spiegel, is a
former member. The terms of the lease required net rental payments plus
maintenance, 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. These funds, along with unpaid and earned interest, were
returned to the Company in January 2005 upon the consummation of the sale
of the building. The Company also had a security deposit of $22,000 held
by the related party which was also repaid at that time. As a result of
the early termination of its lease, the Company agreed to pay a lease
termination fee of approximately $25,000.
The Company's lease of office space, that it occupied in Florida until
January 14, 2005, required minimum rentals as well as common area
maintenance and other expenses including property insurance and real
estate taxes. The Company terminated this lease effective January 14,
2005 and now operates under a one-year lease in Florida, obtained by its
wholly owned subsidiary Sentaur, at a cost of approximately $2,000 per
month, occupying 1,100 square feet of space.
During 2004 and 2003, the Company paid rental costs of approximately
$145,000 and $127,000 to the related party. Occupancy expense under the
rental arrangements, including common area maintenance, property
insurance and real estate taxes, was $183,000 in 2004 and $177,000 in
2003.
F-21
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
------------------------------------------------------------------------
DUE FROM OFFICER
During December 2004, the Company's President, Mr. Barry Siegel disposed
of certain fully depreciated office equipment of the Company in
connection with the company's impending office relocation and retained
the proceeds of the sale. Under the terms of the Share Exchange
Agreement, these amounts are intended to be transferred to Mr. Siegel if
the transaction is consummated. Mr. Siegel advised the Company that the
proceeds amounted to $13,775, however Mr. Siegel claims that he did not
obtain or retain any documentation related to the sales of the assets.
Upon learning that the transaction was in violation of the Sarbanes-Oxley
Act, Mr. Siegel subsequently reimbursed the Company in full for the
proceeds in 2005.
EMPLOYMENT CONTRACTS
At December 31, 2004, the Company has employment contracts with its two
principal officers. The CEO's contract expires on December 31, 2007 and
the CFO's contract expires on December 31, 2005. 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 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 contract with the CFO provides 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. In connection with the Share
Exchange Agreement (Note 3), both the CEO and the CFO, who would
terminate their employment under the provisions of a change of control in
the event the Share Exchange Agreement is consummated, have agreed that
they will accept 600,000 shares of common stock in the aggregate, and
relinquish rights to any cash and benefits that would otherwise be
required to be paid to them in accordance with their employment
contracts. They have also agreed to non-competition and consulting
agreements in exchange for these shares.
F-22
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
------------------------------------------------------------------------
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 the Company's attorney
removed from the case on the basis that he would call him as a witness.
The motion was granted by the court, but the Company appealed that
ruling. In February 2005, the Supreme Court of the State of New York
overturned this ruling, permitting the Company's attorneys to remain on
the case. 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.
Therefore, the Company must incur $100,000 of legal expenses to satisfy
the policy deductible before the carrier commences reimbursement for
fifty percent of the legal defense and/or any possible recovery in favor
of the plaintiff. No provision for any loss has been made with respect to
the above matter.
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 sought 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 was seeking other out-of-pocket costs,
amounting to approximately $37,000. Presidion filed a counterclaim
against the Company, alleging that the Company had breached the
Memorandum and, therefore, owed Presidion a break-up fee of $250,000. The
case was heard before the American Arbitration Association in Broward
County, Florida in late February 2004. Subsequently, the Company received
notice that the American Arbitration Association had concluded that the
Company was entitled to the $250,000 break-up fee set forth in the
Memorandum, as well as its share of certain of the costs of the
arbitration and interest from the date of the termination of that
agreement by Presidion, aggregating approximately $30,000. All amounts
were received in full from Presidion during 2004 and are included in
investment and other income. The counterclaim by Presidion was dismissed.
F-23
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
------------------------------------------------------------------------
LITIGATION (CONTINUED)
In 2003 the Company 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 ("Mercator") and Taurus Global LLC ("Taurus"), ("the
defendants"), alleging that these parties tortiously interfered in the
transaction between the Company and Presidion. In 2004 the Company
dismissed this lawsuit, which was filed under Florida jurisdiction,
without prejudice. It has refiled its claim in the state of California,
for a similar amount, as it believes it to be the proper jurisdiction.
The final outcome of this action will most likely take an extended period
of 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. SEGMENT INFORMATION
-------------------
The Company currently reports two segments, medical and automotive. As
described in Note 5, however, the Company participates in the automotive
segment only through a royalty 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, 2004 and 2003, follows:
2004 2003
------------ ------------
Revenue:
Automotive $ 175,000 $ 280,000
Medical 650,000 378,000
------------ ------------
Consolidated total $ 825,000 $ 658,000
============ ============
Segment profit (loss):
Automotive $ 95,000 $ 8,000
Medical (58,000) (195,000)
Other, corporate (1,523,000) (1,665,000)
------------ ------------
Consolidated total $ (1,486,000) $ (1,852,000)
============ ============
F-24
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
15. SEGMENT INFORMATION (CONTINUED)
-------------------------------
Segment profit (loss) is from continuing operations before provision for
income taxes (benefit).
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.
2004 2003
------------ ------------
Identifiable assets:
Automotive $ 36,000
Medical 171,000
Other, corporate 3,838,000
------------
Consolidated total $ 4,045,000
============
Capital expenditures:
Automotive $ -- $ --
Medical 3,000 17,000
Other, corporate 1,000 23,000
------------ ------------
Consolidated total $ 4,000 $ 40,000
============ ============
Depreciation and amortization:
Automotive $ 76,000 $ 155,000
Medical 16,000 2,000
Other, corporate 203,000 142,000
------------ ------------
Consolidated total $ 295,000 $ 299,000
============ ============
16. 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.
F-25
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
16. INCOME TAXES (CONTINUED)
------------------------
At December 31, 2004 and 2003, the Company has a net operating loss
carryforward of approximately $4,700,000 and $3,800,000. In the event the
Company consummates the Share Exchange Agreement, the use of these
carryovers could be restricted pursuant to Section 382 of the Internal
Revenue Code. At December 31, 2004 and 2003, 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, 2004, the Company's net operating loss carryforwards are
scheduled to expire as follows:
Year ended December 31,
-----------------------
2019 $ 1,609,000
2021 439,000
2023 1,597,000
2024 1,055,000
------------
$ 4,700,000
============
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:
2004 2003
---------------- ----------------
AMOUNT % Amount %
--------- ---- --------- ----
Expected tax (benefit) at U.S.
statutory rate $(505,177) (34.0)% $(629,575) (34.0)%
State taxes, net of Federal
effect (11,525) (.1) -- --
Non-deductible merger related
costs 60,000 4.0 -- --
Operating losses generating no
current tax benefit 445,177 30.0 629,575 34.0
--------- ---- --------- ----
Income tax expense (benefit) $ (11,525) (.1) $ -- --
========= ==== ========= ====
F-26
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
16. INCOME TAXES (CONTINUED)
------------------------
Deferred tax assets consist of the following:
2004
------------
Deferred tax assets:
Net operating loss carryforwards $ 1,700,000
Other 90,000
------------
1,790,000
Valuation allowance (1,790,000)
------------
Deferred tax asset $ --
============
17. NASDAQ NOTIFICATIONS
--------------------
In February 2005, the Company received a Nasdaq Staff Determination
notice that it failed to hold an annual meeting of its shareholders for
the year ended December 31, 2004, and as a result its common shares were
subject to delisting. The Company requested a hearing which resulted in a
stay of that delisting until the results of the hearing, which was
scheduled for March 10, 2005. The Company had originally scheduled its
shareholder meeting for December 28, 2004 but adjourned the meeting first
to February 1 and then to February 28, 2005 in order to ensure that it
had sufficient votes to approve certain proposals related to the Share
Exchange Agreement (Note 3). The Company was informed by Nasdaq on March
2, 2005 that it is in full compliance with all Nasdaq requirements for a
continued listing since holding its shareholders meeting on February 28,
2005.
F-27