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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission File Number 0-21467
ACCESSITY CORP.
(f/k/a DriverShield Corp.; f/k/a driversshield.com Corp and
f/k/a First Priority Group, Inc.)
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(Name of small business issuer in its charter)
NEW YORK 11-2750412
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12514 West Atlantic Boulevard
Coral Springs, Florida 33071
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(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
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year $4,018,000
The aggregate market value of the issuer's voting stock held by
non-affiliates of the issuer as of March 27, 2003, based upon the closing price
on the date thereof is $3,692,000.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 27, 2003, the issuer had outstanding a total of 10,869,073
shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
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THE REMAINING PORTION OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
On November 23, 1983, drivershield.com FS Corp. ("FS"), formerly known
as National Fleet Service, Inc., a New York corporation was formed and commenced
operations as an automotive fleet administrator. Thereafter, Accessity Corp.,
(f/k/a DriverShield Corp.; f/k/a driversshield.com Corp, and f/k/a First
Priority Group, Inc.) a New York corporation, was formed on June 28, 1985, and
was engaged in automotive fleet management and administration of automotive
repairs for businesses, insurance companies and members of affinity groups.
Accessity Corp. ("the Company") became the parent company to driversshield.com
FS Corp. On February 7, 2002, all of the outstanding shares of driversshield.com
FS Corp. were sold (see Recent Developments) and, thereafter the Company was no
longer engaged in the fleet management business. In addition, on January 2, 2003
we established a strategic partnership with a third party and transferred the
management and operating responsibilities of our DriverShield CRM unit in
exchange for a royalty, (see Recent Developments). DriverShield CRM provided
collision repair management services for insurance industry clients during
fiscal 2002. Our remaining business units consist of automobile services offered
to affinity groups through our wholly owned subsidiary, DriverShield ADS Corp.
("ADS"), and Sentaur Corp., a new business unit specializing in medical billing
recovery for hospitals.
In February 2003 the Company changed its name to Accessity Corp. from
DriverShield Corp.
The Company relocated its corporate headquarters to 12514 West Atlantic
Boulevard, Coral Springs, Florida 33071, from New York, during the fourth
quarter of 2002.
NATURE OF SERVICES
INSURANCE CARRIER MARKET
------------------------
During fiscal 2002 we offered vehicle repair management services,
including collision and general repair programs, estimating and auditing
services and vehicle rentals for insurance companies and affinity group members.
Effective January 2, 2003, under a Strategic Partnership Agreement with
ClaimsNet, Inc. ("ClaimsNet"), ClaimsNet assumed all responsibility for
processing new claims and repairs for DriverShield CRM (see Recent
Developments). We will complete the repairs that were in process prior to the
effective date of the agreement with ClaimsNet.
Throughout fiscal 2002 and for a short period in early 2003, during
which in-process repairs are 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.
During our nineteen years of experience in vehicular repair management, we had
established a proprietary network of over 2,000 high-quality automobile repair
shops. We controlled and negotiated the cost of every repair, the use of certain
parts,
3
and guaranteed the quality of the 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 over 2,000 shops
throughout the United States, and enable 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. This
network of automobile repair shops can handle, on a per incident basis, any
repair that the clients' drivers may encounter. Because the Company had many
long-term relationships with a large number of repair shops, whenever a repair
to a client's vehicle was needed, the chances were excellent that a local repair
shop would be available to perform the required repair work. Because of the
volume of work we provided, we were able to obtain significantly lower repair
costs, and expedited turnaround time, for our clients.
Once the client initiated the claims management system, we were
automatically notified to commence activities. We coordinate activities with the
shop, use our audit and estimating staff to negotiate the lowest price for every
claim, monitor the use of certain types of parts, track the work and timeliness
of the repair process which can be viewed by our clients, on our website, to
judge our efforts, obtain independent appraisals when requested, and, finally,
guarantee the repairs for as long as the driver owns the vehicle. We issued
DriverShield warranty certificates for every repair done within our network and
are responsible to our clients if the repairs are not done appropriately. We
managed our warranty risk by monitoring the quality and consistency of our
network repair facilities and quickly eliminating those shops that do not
maintain proper standards. We paid the independent repair shops directly upon
completion of their work, and invoiced our insurance clients separately. A
number of insurance carriers signed multi-year contracts with CRM. The website
address is: www.drivershield.com.
FLEET MANAGEMENT.
-----------------
Effective February 7, 2002, the Company sold all of the outstanding
shares of FS to PHH Vehicle Management Services LLC ("PHH"). [See "Recent
Developments" below.]
AFFINITY GROUP PROGRAMS.
------------------------
Through our wholly owned subsidiary, DriverShield ADS Corp., we offer
various programs for vehicle-related services for consumers who are sold the
programs through affinity groups, financial institutions, corporations and
organizations. These programs may be used as re-enrollment incentives and/or
membership premiums, or resold at a profit, may be sold individually, or a
variety of services can be bundled together as a high-value package.
Driver's Shield(R). - This is the premium program consisting
of components, which may be sold individually. This package consists of the
Collision Damage Repair Program, Driver Discount Program and the Auto Service
Hotline, as well an auto buying service, legal defense reimbursement, and custom
trip routing services.
Collision Damage Repair Program (CDR). - This is the corporate
collision program modified to suit consumer needs. Drivers participating in this
program may utilize the Company's proprietary network of collision body repair
shops. Additionally, the Company's customer service department will supervise
the entire price from expediting estimates and repairs, to troubleshooting any
problems or difficulties that may occur.
4
Driver Discount Program (DDP). This program offers drivers
discounts of up to forty percent off automotive-related services through
thousands of premium auto chain facilities throughout the nation. It applies
these discounts to virtually all-routine maintenance including oil changes,
brakes, transmissions, mufflers, shocks, tires and glass. An option to this
program also provides 24-hour emergency roadside assistance for drivers anywhere
in the U.S.
Auto Service Hotline (ASH). This program provides drivers with
their own repair specialist who will help the driver determine a course of
action to repair the vehicle, and if necessary, provide a referral to one of
thousands of independently owned auto repair facilities. Drivers will receive a
ten percent discount off repairs and an enhanced nationwide warranty when
utilizing the shop to which they were referred. Additionally, drivers will be
offered rental replacement cars at preferred rates that are delivered to and
picked up from the driver's home or office.
MEDICAL BILLING RECOVERY
------------------------
In late 2002, we established a new business unit to diversify from the
automobile repair industry. Sentaur, Inc. 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. Fee income from the hospitals is earned upon the
successful collection of the receivable. To date, Sentaur has received three
signed contracts and has commenced its detailed review and recovery process for
one of them, and is in the initial stages for the others.
RECENT DEVELOPMENTS
In October 2001 the Company entered into a Stock Purchase Agreement
("the Purchase Agreement") to sell all of the outstanding shares of its
wholly-owned subsidiary, drivershhield.com FS Corp, its collision repair and
fleet services business, to PHH 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. The Purchase Agreement
was approved by a vote of the Company's shareholders on February 4, 2002, and
the transaction was consummated on February 7, 2002. Under the terms of the
Transition Services Agreement, PHH contracted with the Company to operate FS
until June 30, 2002.
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, 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 royalties equivalent
to 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
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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.
SALES AND MARKETING
The Company's clients for the CRM program were property and casualty
insurance companies.
The Company's clients for its affinity programs are financial institutions,
organizations and affinity groups that resell the programs to individuals. The
Company's customers for its medical recovery business are hospitals. Sales
activities are primarily performed by the Company's own personnel. Sales are
made through referrals, cold canvassing of appropriate prospects and direct
mailings. The Company also attends trade shows in order to increase its identity
awareness and client base, and intends to support its brand name and products
through advertising and trade journals.
In 2002, one customer accounted for 26% of the Company's revenues and
another accounted for 59% of revenues. In 2001, one of the same customers
accounted for 87% of the Company's revenues. These figures exclude the
discontinued operating results of the fleet services business that was sold in
February 2002. See "Recent Developments", above.
EMPLOYEES
At year-end, upon closure of its Long Island, New York office on
December 31, 2002, the Company employed 14 full-time employees. None of the
Company's employees are governed by a union contract and the Company believes
that its employee relationships are satisfactory.
COMPETITION
Affinity Group Programs. Although there are several companies providing
various types of auto club programs the Company believes that there is only one
other company that offers a program providing similar services offered by the
Company's ADS subsidiary.
Insurance Carriers. The Company is aware of four other companies that
offer some aspect of automotive collision repair services to insurance
companies. One of these competitors is primarily offering a comparable product
as that of the Company. Two of the companies are in the fleet management
business, while the other is in the vehicle software valuation business. The
Company believes that its services for insurance companies are superior to those
offered by such other companies.
Medical Billing Recovery. The Company believes that this is an emerging
market but is 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.
6
ITEM 2. DESCRIPTION OF PROPERTY
In May 2002, the Company entered into a lease for new office space, and
is the sole occupant of the building at 12514 West Atlantic Boulevard, Coral
Springs, Florida, 33071. The space consists of approximately 7,300 square feet
of office space. The lease term commenced in October 2002, and is for five and a
half years. The property is owned by three members of the Company's board of
directors [see "Certain Relationships and Related Transactions" below].
ITEM 3. LEGAL PROCEEDINGS
In January 2003 the Company was served with a complaint filed by Gerald
Zutler, our former President and Chief Operating Officer, alleging that the
Company breached his employment contract, fraudulent concealment of the
Company's intention to terminate its employment agreement with Mr. Zutler, and
discrimination on the basis of age and aiding and abetting violation of the New
York State Human Rights Law. Mr. Zutler is seeking damages aggregating $2.25
million, plus punitive damages and reasonable attorneys' fees. We believe that
the Company properly terminated Mr. Zutler's employment for cause and intends to
vigorously defend this suit as it believes that Mr. Zutler's allegations are
without merit. Answer to the complaint was served by the Company on February 28,
2003, and no discovery has yet been conducted. The Company has filed a claim
with its carrier under its Directors&, Officers, Insured Entity and Employment
Practices Liability policy. The Company has not yet received a response from the
carrier and does not know if the carrier will cover this claim under the policy,
the policy has a $50,000 deducible and a liability limit of $3 million per
policy year.
The Company filed a Demand for Arbitration against Presidion Solutions,
Inc. alleging that Presidion breached the terms of the Memorandum of
Understanding between Accessity and Presidion dated January 17, 2003. The
Company is seeking a Break-up Fee of $250,000 pursuant to the terms of the
Memorandum of Understanding alleging that Presidion breached the Memorandum of
Understanding by wrongfully terminating the Memorandum of Understanding.
Additionally, the Company is seeking its out of pocket costs of due diligence
amounting to approximately $37,000. Presidion has filed a counterclaim against
Accessity alleging that Accessity had breached the Memorandum of Understanding
and therefore owes Presidion a Break-up Fee of $250,000. We believe that the
claim alleged by Presidion is without merit. The dispute will be settled by a
single arbiter and the case will be heard before the American Arbitration
Association in Broward County, Florida.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders in December 2002.
The following matters were voted upon at the meeting:
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1. Amend the Certificate of Incorporation to change our name to Accessity Corp.
For Against Abstain
--- ------- -------
11,055,879 100,401 273
2. Elect our Directors: Barry J. Spiegel, Kenneth J. Friedman, Bruce S. Udell
Barry J. Spiegel
For Against Abstain
--- ------- -------
11,056,152 0 100,401
Kenneth J. Friedman
For Against Abstain
--- ------- -------
11,055,952 0 100,601
Bruce S. Udell
For Against Abstain
--- ------- -------
11,055,952 0 100,601
3. Ratify the selection of Nussbaum Yates & Wolpow, P.C. as auditors
For Against Abstain
--- ------- -------
11,055,879 100,401 273
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are traded on The Nasdaq SmallCap market.
The following table shows the high and low closing prices for the periods
indicated.
Sale Price($)
High Low
---- ---
2002
----
First Quarter $2.00 $1.25
Second Quarter $1.47 $ .76
Third Quarter $1.14 $ .70
Fourth Quarter $ .76 $ .31
2001
----
First Quarter $1.06 $ .38
Second Quarter $1.51 $ .56
Third Quarter $1.84 $ .87
Fourth Quarter $1.72 $1.00
The number of record holders of the Company's common shares as of March
15, 2003 was 337.
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.
9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and the notes appearing elsewhere in
this report as Item 7, and Forward-Looking Statements-Cautionary Factors, below.
This discussion and analysis may contain statements that constitute
forward-looking statements within the meaning of the private Securities
Litigation Reform Act of 1995.The Company cautions that forward-looking
statements are not guarantees of performance and actual results may differ
materially from those in the forward-looking statements.
YEAR ENDED DECEMBER 31, 2002 (THE "2002 PERIOD") COMPARED TO YEAR ENDED DECEMBER
--------------------------------------------------------------------------------
31, 2001 (THE "2001 PERIOD")
----------------------------
The 2002 Period reflected net income of $1,248,000 versus net income of
$1,169,000 in the 2001 Period. Of those amounts, continuing operations reflected
a loss of $1,161,000 in the 2002 Period versus income of $259,000 in the 2001
Period. The decrease resulted predominantly from the recognition of deferred tax
assets in the 2001 Period. Discontinued operations reflected a gain of
$2,409,000 in 2002 versus $780,000 in the 2001 Period resulting from the
recognition of the gain on the sale of the fleet business. Basic and diluted
earnings per share were $.11 in the 2002 Period and the 2001 Period.
REVENUES
--------
Revenues were $4,018,000 in the 2002 Period compared to $1,697,000 in
the 2001 Period, representing an increase of $2,321,000, or 137%. These figures
exclude the fleet services business that was sold in February 2002, and is
reflected in the Company's financial statements as discontinued operations. The
increase in revenues is the net change from $2,895,000 of new CRM revenues,
offset by a decrease in affinity service revenues of $574,000 resulting from
affinity members that did not renew their memberships in 2002.
INCOME AND EXPENSES FROM CONTINUING OPERATIONS
----------------------------------------------
Pretax loss from continuing operations increased by $1,153,000, to
$2,955,000 in the 2002 Period, from a loss of $1,802,000 in the 2001 Period. The
increased losses, and comparative amounts, are described below.
Collision repair and claim fee revenues from insurance carriers, net of
collision repair costs, from new business was $395,000; there were no comparable
amounts in the 2001 Period. This was offset by a reduction in Affinity Service
revenues of $574,000, as described above.
Selling expenses increased by $483,000, from $692,000 in the 2001
Period to $1,175,000 in the 2002 Period, or 70%, primarily as a result of
increased expenditures of $210,000 in sales personnel and
10
their related activities for its CRM business, and $175,000 for Sentaur, Inc.
General and administrative expenses increased $1,057,000, or 46%, from
$2,276,000 in the 2001 Period to $3,333,000 in the 2002 Period resulting
primarily from: a one-time bonus of $250,000 to Barry Siegel, the Chief
Executive Officer of the Company, upon consummation of the sale of FS; the
non-recurring costs of relocating the office in New York and then to Florida,
along with the associated costs of severance to terminated employees totaling
$386,000; and, the costs of increased labor in customer service to accommodate
the increased volume of the CRM business. The Company recorded $240,000 in
non-cash compensation expense in the 2001 Period as a result of re-pricing
certain stock options during 1999; the impact in the 2002 Period resulted in a
credit, an income item, of $132,000, a net change of $372,000. A credit, or
income in this calculation results when there is a decrease in the price per
share on which the options impact is calculated. Depreciation and amortization,
including asset impairment charge in the 2001 Period, was relatively unchanged
reflecting a decrease of $6,000 to $403,000.
Investment and other income increased $197,000 to $394,000 in the 2002
Period, compared to $197,000 in the 2001 Period despite declines in interest
rates. This was the result of higher cash and investment balances resulting from
the funds received from the sale of the fleet business. Interest expense
increased to $88,000 from $2,000 primarily as a result of the amortization of
bond premium, which is included as interest expense.
The Company also recorded a non-recurring, non-cash charge in the 2001
Period of $77,000 for the issuance of certain restricted shares to an existing
shareholder. There was no comparable amount in the 2002 Period.
The 2002 Period tax provision in the income statement (inclusive of
continuing, discontinued and extraordinary tax charges and credits) reflects a
tax expense of $1,924,000 versus a tax benefit of $1,893,000 in the 2001 Period.
The tax expense in the 2002 Period is largely the result of the $6.1 million
gain on the sale of the fleet business offset, in part, by credits from losses
on operating activities. In the 2001 Period the tax benefits resulted from the
recognition of $5,000,000 from net operating loss carryforwards. A valuation
allowance had been recognized for virtually all of those carryforward benefits
until such time as it became apparent that they should be utilized upon the gain
from the sale of the fleet business in the 2001 Period.
DISCONTINUED OPERATIONS
-----------------------
Income from discontinued operations of the fleet services business
increased by $1,629,000, from $780,000 in the 2001 Period to $2,409,000 in the
2002 Period. The increase was attributable to the recognition of the net gain on
the sale of the fleet business of $2,391,000, which occurred in February 2002.
The 2001 Period reflects only the operating results of the fleet business for
the entire year, while the comparable period of operating activity occurred for
only five weeks in the 2002 Period.
11
EXTRAORDINARY ITEM
------------------
In the 2001 Period, extraordinary income, in the amount of $130,000,
was realized upon the settlement of a legal and arbitration matter with EDS.
This amount had been accrued by the Company in a prior period, but settlement of
these matters released the Company from payment of any indebtedness. There was
no comparable amount in the 2002 Period.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At December 31, 2002, the Company had cash and cash equivalents of
$909,000, and also held 202,381 shares of Salomon Smith Barney Adjustable Rate
Government Income Fund securities valued at $1,985,000. In addition the Company
held fixed income investments totaling $3,324,000. Further, escrow funds of
$163,000 held in conjunction with the sale of the fleet business, were released
in January 2002 (an additional $12,000 is pending review by both parties).
In connection with the Company's rental of office space in Florida, in
July 2002, the Company also pledged as security, a $300,000 certificate of
deposit with a Florida bank for the five and a half year term of the lease, for
the benefit of the landlord's mortgage lender. Such amounts were excluded from
liquidity, described above, and presented as a restricted certificate of
deposit. The certificate of deposit declines as the remaining rental commitment
declines, as follows; the balance of the certificate will be $200,000 after the
36th month, $100,000 after the 48th month, and zero after 60 months. In
addition, during 2002 the Company expended approximately $140,000 in connection
with the build-out of the space. The Company is the beneficiary of the interest
income. This property is owned and operated by B & B Lakeview Realty Corp.,
whose three shareholders, Barry Siegel, Barry Spiegel and Kenneth Friedman, are
members of the Company's board of directors. The terms of the lease require net
rentals to be paid in increasing annual amounts from $125,000 to $168,000 plus
tax and operating expenses. The lease term commenced in October 2002 and
terminates five years and six months thereafter.
The Company's Board of Directors approved a stock repurchase program
whereby the Company may purchase up to 500,000 shares of its common shares
traded on the Nasdaq SmallCap Market. Since the repurchase program was approved,
during the third quarter of 2002, the Company acquired 93,000 shares at a cost
of $93,000.
The Company believes that its present financial condition will enable
it to continue to support its operations for the next twelve months, and for
some period thereafter depending on its activities and use of funds in
developing existing or new businesses.
12
DEFERRED INCOME TAXES
---------------------
The Company has a net operating loss carry forward of approximately $2
million that is available to offset future taxable income at December 31, 2002.
Since the Company has determined that it is more likely than not that it may not
be able to recover these carryforward benefits, a valuation allowance has been
established for the full amount of the deferred tax benefit. Accordingly, no
deferred income tax asset has been reflected in the Company's financial
statements. If the Company is profitable in the future, such benefits will be
available to offset future income taxes.
NEW ACCOUNTING STANDARDS
------------------------
The new accounting pronouncements described in footnote 1 of the Consolidated
Financial Statements are incorporated by reference.
FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS
-----------------------------------------------
Certain statements in this report on Form 10-KSB contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. These statements are typically identified by their
inclusion of phrases such as "the Company anticipates", or "the Company
believes", or other phrases of similar meaning. These forward-looking statements
involve risks and uncertainties and other factors that may cause the actual
results, performance or achievements to differ from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Except for the historical information and statements contained in
this Report, the matters and items set forth in this Report are forward looking
statements that involve uncertainties and risks some of which are discussed at
appropriate points in the Report and are also summarized as follows:
1. As the Company has sold its traditional business lines and embarked on a
new business, there will be new and additional risks that may influence the
business of the Company. These risks include:
o The Company has either sold or transferred the businesses upon which
it was originally founded (auto collision repair and managed care
services) and we are not sure our new business enterprise, in
medical billing recovery, will be successful or that we can generate
sufficient revenue from this activity.
o As is typical for any new, rapidly evolving market, demand and
market acceptance for recently introduced medical billing recovery
services are subject to a high level of uncertainty and risk. It is
also difficult to predict the market's future growth rate, if any.
If the market fails to develop among the potential hospital users,
or develops more slowly than expected or becomes saturated with
competitors, or our services do not achieve or sustain market
acceptance, our business, results of operations and financial
condition could be materially and adversely affected.
o We also depend on establishing and maintaining a number of
commercial relationships with other companies. Our business could be
adversely affected if we do not maintain our existing commercial
relationships on terms as favorable as currently in effect, if we do
not establish additional commercial relationships on commercially
reasonable
13
terms or if our commercial relationships do not result in the
expected increased use of our Website.
o We are also seeking to make new acquisitions that will either
augment existing business lines or move us into new areas. We cannot
assure you that we will be able to find the appropriate business for
a public company, on commercially acceptable terms. Furthermore, we
cannot assure you that the services or products of those companies
will achieve additional market acceptance or commercial success.
o We are dependent on certain key personnel. Our future success is
substantially dependent on our senior management. If one or more of
our key employees decided to leave us, join a competitor or
otherwise compete directly or indirectly with us, this could have a
material adverse effect on our business, results of operations and
financial condition. Competition for such personnel is intense, and
we may not be able to attract, assimilate or retain such personnel
in the future. The inability to attract and retain the necessary
managerial, technical, sales and marketing personnel could have a
material adverse effect on our business, results of operations and
financial condition. Further, as we engage in new markets or
acquisitions, we may not have experience in those markets and may be
required to attract new personnel.
o Our success may be dependent on keeping pace with advances in
technology. If we are unable to keep pace with advances in
technology, businesses may stop using our services and our revenues
will decrease. The Internet and electronic commerce markets are
characterized by rapid technological change, changes in user and
customer requirements, frequent new service and product
introductions embodying new technologies and the emergence of new
industry standards and practices that could render our existing
Website and technology obsolete. If we are unable to adapt to
changing technologies, our business, results of operations and
financial condition could be materially and adversely affected.
We are uncertain of our ability to obtain additional financing for
our future capital needs. If we are unable to obtain additional
financing, we may not be able to continue to operate our business or
create the growth we wish. We currently anticipate that our cash,
cash equivalents and short-term investments will be sufficient to
meet our anticipated needs for working capital and other cash
requirements at least for the next 12 months, and beyond. However we
may need to raise additional funds, in order to fund more rapid
expansion, for acquisitions, to develop new or enhance existing
services or products, to respond to competitive pressures or to
acquire complementary products, businesses or technologies.
o There can be no assurance that additional financing will be
available on terms favorable to us, or at all. If adequate funds are
not available or are not available on acceptable terms, our ability
to fund our expansion, take advantage of potential acquisition
opportunities, develop or enhance services or products or respond to
competitive pressures would be significantly limited. Such
limitation could have a material adverse effect on our business,
results of operations, financial condition and prospects.
o The Company's ADS business still involves the repair of motor
vehicles through a contracted network of automobile collision repair
shops. These shops are obligated to maintain certain minimum limits
of liability insurance, indemnify the Company from any and
14
all claims and expenses related to the shop's negligent acts or from
the breach of the agreement between the Company and the shop, and
name the Company as an additional insured under the shop's liability
policy. However, the repair shop and/or the Company's general
liability insurance may not cover all potential claims to which we
are exposed and may not be adequate to indemnify us for all
liability that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of insurance coverage could
have a material adverse effect on our business, results of
operations and financial condition.
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. The Company, under the ADS business, has clients that either individually
controls a large number of insureds, or a large number of participants in
programs such as Driver's Shield(R). The loss of any one affinity group,
terminating its relationship with the Company, could have an adverse impact
on the continued growth of that business. The Company has addressed the
issue of customer retention by implementing a policy of entering into
long-term contracts with its customers.
5. 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 16 % of the
outstanding shares of our common stock. In addition, Barry J. Spiegel, a
director and the President of ADS, beneficially owns and controls the vote
of approximately 13% of the outstanding shares of our common stock. This
concentration of ownership, which is not subject to any voting
restrictions, could limit the price that investors might be willing to pay
for common stock. In addition, Mr. Siegel and Mr. Spiegel are in a position
to impede transactions that may be desirable for other shareholders.
6. Our articles of incorporation and by-laws contain certain provisions that
could make it more difficult for shareholders to effect certain corporate
actions, and could make it more difficult for anyone to acquire control of
us without negotiating with our board of directors. These provisions could
limit the price that investors might be willing to pay in the future for
our common stock.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and schedules appear at the end of this
Report after Item 14
15
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.................... 51 Chairman of the Board, Secretary, Chief
Executive Officer
Barry J. Spiegel *.............. 54 Director, President of Affinity
Services Division
John M. McIntyre................ 47 Director, President and Chief Operating
Officer
Philip B. Kart.................. 53 Sr. Vice President and Chief Financial
Officer
Kenneth J. Friedman *........... 49 Director
Bruce S. Udell*................. 51 Director
* Member of the Audit Committee
Barry Siegel has served as one of our directors and our Secretary since
we were incorporated. 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.
John M. McIntyre was elected to our board of directors on December 4,
2001, and became President of the Company in July 2002 and assumed the
additional post as Chief Operating Officer in August 2002. Mr. McIntyre has
spent the last 20 years working in the auto repair industry. In 1981, he founded
Apple Auto Body Incorporated, a privately owned, multiple-location group of auto
repair shops based in Massachusetts, and since 1981 has acted as its president.
In 1989 he founded Trust Group Inc., a privately held property and casualty
insurer based in Massachusetts. Since 2000, Mr. McIntyre has also been a member
of Barefoot Properties of Hilton Head, LLC, a rental-property broker based in
Hilton Head, South Carolina. Since 1977, he has also served as a financial
consultant to TeleSouth a division of RHS Communications. Mr. McIntyre holds a
Bachelor of Science in Public Administration from Bentley College, Waltham, MA.
16
Barry J. Spiegel has served as President of our Affinity Services
Division since September 1996. He served as President of American International
Insurance Associates, Inc. from January 1996 through August 1996. For more than
five years prior to August 1996, Mr. Spiegel served as Senior Vice President at
American Bankers Insurance Group, Inc.
Philip Kart has served as 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. 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.
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 50,000
shares of our common stock. Prior to February 4, 2002, directors received 15,000
shares as the annual stock option grant.
17
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, 2002, except for Kenneth J. Friedman who filed his Form 5
late that was due forty-five days following the end of the fiscal year.
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, 2000, 2001 and
2002, for our Chief Executive Officer and each of the other most highly
compensated executive officers who earned more than $100,000 in salary for the
year ended December 31, 2002:
SUMMARY COMPENSATION TABLE
--------------------------
Securities
Underlying
Name and Position(s) Year Salary ($) Options (#) Bonus ($)
-------------------- ---- ---------- ----------- ---------
Barry Siegel
Chairman of the Board of
Directors, Secretary and Chief 2002 300,000 550,000 250,000 (a)
Executive Officer 2001 285,000 0
2000 276,492 200,000
Gerald Zutler (b)
Former President and Chief 2002 138,191 200,000
Operating Officer 2001 149,525 0
2000 145,540 150,000
Barry J. Spiegel
President, DriverShield ADS 2002 175,000 250,000
Corp. 2001 129,525 0
2000 122,154 150,000
Philip B. Kart
Sr. Vice President and Chief 2002 155,000 150,000
Financial Officer 2001 139,093 0
2000 32,000 225,000
(a) Excludes $12,500 paid to Mr. Siegel for costs incurred in connection with
his relocation.
(b) Mr. Zutler's employment terminated in August 2002.
18
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We are party to an employment agreement with Barry Siegel that
commenced on January 1, 2002, and expires on December 31, 2004. Mr. Siegel's
annual salary is $300,000, and he has been granted stock options, under the
Company's 1995 Incentive Stock Option Plan ("the Plan"), providing the right to
purchase 300,000 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 250,000 options.
We were party to an employment agreement with Gerald M. Zutler that
commenced on January 1, 2002, and was to expire on December 31, 2004, but which
terminated in August 2002. Mr. Zutler's annual salary was $190,000, and he had
been granted stock options, under the Company's 1995 Incentive Stock Option Plan
("the Plan"), providing the right to purchase 200,000 shares of the Company's
common stock, in addition to certain other perquisites. His employment agreement
contained a change in control provision that mirrors that in Mr. Siegel's
employment agreement, except that the applicable percentage for severance
payment purposes is 100%. Mr. Zutler has filed suit against the Company for
wrongful termination (see "Legal Proceedings").
We are party to an employment agreement with Barry J. Spiegel that
commenced on January 1, 2002, and expires on December 31, 2004. Mr. Spiegel'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 250,000 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.
We are party to an employment agreement with John M. McIntyre that
commenced on July 15, 2002, and expires on December 31, 2004. Mr. McIntyre's
annual salary is $190,000 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 250,000 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.
We are party to an employment agreement with Philip B. Kart that
commenced on January 1, 2002, and expires on December 31, 2004. Mr. Kart's
annual salary is $155,000 per annum and he has been granted stock options, under
the Company's 1995 Incentive Stock Option Plan ("the Plan"), providing the right
to purchase 150,000 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
19
provides for relocation expense payments associated with, and conditioned upon,
his relocation to the Company's new headquarters.
Under an agreement with our wholly owned subsidiary, Sentaur, Corp., we
are party to an employment agreement with Steven DeLisi that commenced on
September 3, 2002, and expires on December 31, 2004. Mr. DeLisi's annual salary
is $175,000 per annum and he has been granted stock options, under the Company's
1995 Incentive Stock Option Plan ("the Plan"), providing the right to purchase
250,000 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. He receives an interim bonus of
$5,000 for each signed contract, which is offset against his first year's bonus.
His employment agreement provides that following a change in control (as defined
in the agreement), all stock options previously granted to him will immediately
become fully exercisable.
STOCK OPTIONS
We made awards of stock options during the last fiscal year to the
executive officers named in the summary compensation table. The following table
indicates the number of exercised and unexercised stock options held by each
executive officer named in the Summary Compensation Table, as of December 31,
2002.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
---------------------------------------------------
AND FY-END OPTION/SAR VALUE TABLE
---------------------------------
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Value Options/SARs at FY-End Options/SARs at FY-End
Name on Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisabl)
---- ----------- -------- --------------------------- --------------------------
(#) ($) (#) ($)
--- --- --- ---
Barry Siegel None 0 500,000/550,000 $0/0
Gerald M. Zutler None 0 0/0 $0/0
Barry J. Spiegel None 0 316,666/250,000 $0/0
Philip B. Kart None 0 158,334/216,666 $0/0
20
Item 11. Security Ownership Of Certain Beneficial Owners and Management and
Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
Shares to be issued
upon exercise of Weighted average Number of Securities
Plan Category outstanding options, exercise Available for Future
------------- warrants or stock price Issuance
rights (#) ($) (#)
---------- --- ---
Approved by
Shareholders:
Stock Option Plan 3,576,664 $1.07 2,423,336
Not Approved by
Shareholders:
Consultant's Warrants 125,000 $.60 0
The following tables provide information about the beneficial ownership
of our common stock as of March 20, 2003. 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 2,387,696 (2)(3) 20.7%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Gerald M. Zutler 201,000 1.8%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Barry J. Spiegel 1,830,960 (4) 16.2%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Philip B. Kart 208,333 (5) 1.9%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
21
Common stock Kenneth J. Friedman 396,999 (6) 3.6%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock Bruce S. Udell 33,750 .3%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock John M. McIntyre 41,500 (7) .4%
c/o Accessity Corp.
12514 W. Atlantic Blvd.
Coral Springs, FL 33071
Common stock All directors & officers 4,899,238 39.9%
as a group
(1) The percentages have been calculated in accordance with Instruction 3 to
Item 403 of Regulation S-B. Percentage of beneficial ownership is
calculated assuming 10,869,073 shares of common stock were outstanding on
March 28, 2003.
(2) Includes 3,334 shares held by Barry Siegel as custodian for two nephews and
67 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 683,334 shares of common
stock exercisable within 60 days of March 28, 2003.
(4) Includes options to purchase 399,999 shares of common stock exercisable
within 60 days of March 28, 2003.
(5) Includes options to purchase 208,333 shares of common stock exercisable
within 60 days of March 28, 2003.
(6) Includes options to purchase 110,000 shares of common stock exercisable
within 60 days of March 28, 2003.
(7) Includes options to purchase 15,000 shares of common stock exercisable
within 60 days of March 28, 2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2002 the Company signed a five and a half year lease to occupy a
new 7,300 square foot building in Coral Springs, Florida. This property is
owned and operated by B & B Lakeview Realty Corp., whose three shareholders,
Barry Siegel, Barry Spiegel and Ken Friedman, are members of the Company's
board of directors. The terms of the lease require net rentals increasing in
annual amounts from $125,000 to $168,000 plus sales tax, and operating
expenses. The lease period commenced in October 2002 and terminates 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 a $300,000 certificate of deposit with a
Florida Bank, (the mortgage lender to B & B Lakeview Realty Corp) as
security for the Company's future rental commitments for the benefit of the
landlord's mortgage lender. The certificate of deposit declines to $200,000
after the 36th month, $100,000 after the 48th month, and to zero after 60
months, as the balance of the rent commitment declines. During the 2002
Period the Company paid B&B Lakeview Realty a total of $57,000 consisting of
rent payments of $35,000, and a two-month security deposit of $22,000.
22
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3.1 Restated and Amended Certificate of Incorporation incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2001 previously filed with the
Commission.
3.2. Amended and restated By-laws of the Company, incorporated by reference
to Exhibit 4 to the Company's Current Report on Form 8-K dated December
28, 1998.
3.3 Amendment to the Company's Certificate of Incorporation dated January
15, 2003.
4.0 Shareholders Rights Agreement dated as of December 28, 1998, between
First Priority Group, Inc. and North American Transfer Co., as Rights
Agent, together with Exhibits A, B and C attached thereto incorporated
by reference to the Registrant's Registration Statement on Form 8-A
filed on December 31, 1998.
10.1 Stock Purchase Agreement dated October 29, 2001 by and among PHH
Vehicle Management Services, LLC, and driversshield.com Corp., and
driversshield.com FS Corp incorporate by reference as Exhibit 10.1 to
the Form 10-QSB for the period ended September 30, 2002.
10.2 Employment Agreement between the Company and Barry Siegel dated
February 4, 2002 and filed herein.
10.3 Employment Agreement between the Company and Barry J. Spiegel dated
February 4, 2002 and filed herein.
10.4 Employment Agreement between the Company and Philip Kart dated February
4, 2002 and filed herein.
10.5 Employment Agreement between the Company and John M. McIntyre dated
July 15, 2002 and filed herein.
10.6 First Amendment to the Employment Agreement between the Company and
Philip Kart dated November 15, 2002 and filed herein.
10.7 Amended 1995 Incentive Stock Plan of Accessity Corp. filed herein.
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.
10.9 Employment Agreement between Sentaur Corp., f/k/a DRVR Corp. and Steven
T. DeLisi dated June 18, 2002.
10.10 Lease Agreement dated May 28, 2002 between the Company and B & B
Lakeview Realty Corp.
10.11 First Amendment to the Lease Agreement dated July 10, 2002 between the
Company and B & B Lakeview Realty Corp.
13.1 Form 10-QSB for the quarter ending March 31, 2002 incorporated by
reference and previously filed with the Commission.
23
13.2 Form 10-QSB for the quarter ending June 30, 2002 incorporated by
reference and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 2002 incorporated by
reference and previously filed with the Commission.
21 List of subsidiaries filed herein.
99.1 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
99.2 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
None
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act)
as of a date (the Evaluation Date) within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective in timely alerting them to the material
information relating to us (or our consolidated subsidiaries) required to be
included in our periodic SEC filings.
CHANGES IN INTERNAL CONTROLS.
There were no significant changes made in our internal controls during
the period covered by this report, or to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
24
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,
Secretary and Chief
Executive Officer Date: March 31, 2003
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 31, 2003
------------------------------
Barry Siegel
Chairman of the Board of Directors,
Secretary, and
Chief Executive Officer,
By: /s/ Barry J. Spiegel Date: March 31, 2003
------------------------------
Barry J. Spiegel
President
Driversshield.com ADS Corp.
Director
By: /s/ Philip Kart Date: March 31, 2003
------------------------------
Philip Kart
Senior Vice President,
Treasurer and Chief Financial Officer
By: /s/ Kenneth J. Friedman Date: March 31, 2003
------------------------------
Kenneth J. Friedman
Director
By: /s/ John M. McIntyre Date: March 31, 2003
------------------------------
John M. McIntyre
President and Chief Operating Officer
Director
By: /s/ Bruce S. Udell Date: March 31, 2003
------------------------------
Bruce S. Udell
Director
25
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO REGULATION SS.240.15D-14 AS PROMULAGATED
BY THE SECURITIES AND EXCHANGE COMMISSION
In connection with the Annual Report of Accessity Corp. (the "Company") on Form
10-KSB for the period ended December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Barry Siegel, Chairman
of the Board, Secretary and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 pursuant to Regulation ss.240.15d-14 as promulgated
by the Securities and Exchange Commission, that:
(1) I have reviewed the Report being filed;
(2) Based on my knowledge, the Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in the Report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (as such term
is defined in paragraph (c) of this section) for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to them by others within those entities,
particularly during the period in which the periodic Reports are being
prepared;
(ii) Evaluated the effectiveness of the issuer's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
the Report ("Evaluation Date"); and
(iii) Presented in the Report their conclusions about the effectiveness
of the disclosure controls and procedures based on their evaluation as
of the Evaluation Date;
(5) I and the other certifying officers have disclosed, based on their most
recent evaluation, to the issuer's auditors and the audit committee of the board
of directors (or persons fulfilling the equivalent function):
26
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record,
process, summarize and Report financial data and have identified for
the issuer's auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in the
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By /s/ Barry Siegel
----------------------------------------
Barry Siegel
Chairman of the Board, Secretary and
Chief Executive Officer
27
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO REGULATION SS.240.15D-14 AS PROMULAGATED
BY THE SECURITIES AND EXCHANGE COMMISSION
In connection with the Annual Report of Accessity Corp. (the "Company") on Form
10-KSB for the period ended December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Philip Kart, Senior
Vice President, Treasurer and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 pursuant to Regulation ss.240.15d-14 as promulgated
by the Securities and Exchange Commission, that:
(1) I have reviewed the Report being filed;
(2) Based on my knowledge, the Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in the Report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (as such term
is defined in paragraph (c) of this section) for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to them by others within those entities,
particularly during the period in which the periodic Reports are being
prepared;
(ii) Evaluated the effectiveness of the issuer's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
the Report ("Evaluation Date"); and
(iii) Presented in the Report their conclusions about the effectiveness
of the disclosure controls and procedures based on their evaluation as
of the Evaluation Date;
(5) I and the other certifying officers have disclosed, based on their most
recent evaluation, to the issuer's auditors and the audit committee of the board
of directors (or persons fulfilling the equivalent function):
28
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record,
process, summarize and Report financial data and have identified for
the issuer's auditors any material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in the
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By /s/ Philip Kart
----------------------------------------
Philip Kart
Senior Vice President,
Treasurer and Chief Financial Officer
29
INDEX OF EXHIBITS
3.1 Restated and Amended Certificate of Incorporation incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2001 previously filed with the
Commission.
3.2. Amended and restated By-laws of the Company, incorporated by reference
to Exhibit 4 to the Company's Current Report on Form 8-K dated December
28, 1998.
3.3 Amendment to the Company's Certificate of Incorporation dated January
15, 2003.
4.0 Shareholders Rights Agreement dated as of December 28, 1998, between
First Priority Group, Inc. and North American Transfer Co., as Rights
Agent, together with Exhibits A, B and C attached thereto incorporated
by reference to the Registrant's Registration Statement on Form 8-A
filed on December 31, 1998.
10.1 Stock Purchase Agreement dated October 29, 2001 by and among PHH
Vehicle Management Services, LLC, and driversshield.com Corp., and
driversshield.com FS Corp incorporate by reference as Exhibit 10.1 to
the Form 10-QSB for the period ended September 30, 2002.
10.2 Employment Agreement between the Company and Barry Siegel dated
February 4, 2002 and filed herein.
10.3 Employment Agreement between the Company and Barry J. Spiegel dated
February 4, 2002 and filed herein.
10.4 Employment Agreement between the Company and Philip Kart dated February
4, 2002 and filed herein.
10.5 Employment Agreement between the Company and John M. McIntyre dated
July 15, 2002 and filed herein.
10.6 First Amendment to the Employment Agreement between the Company and
Philip Kart dated November 15, 2002 and filed herein.
10.7 Amended 1995 Incentive Stock Plan of Accessity Corp. filed herein.
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.
10.9 Employment Agreement between Sentaur Corp., f/k/a DRVR Corp. and Steven
T. DeLisi dated June 18, 2002.
10.10 Lease Agreement dated May 28, 2002 between the Company and B & B
Lakeview Realty Corp.
10.11 First Amendment to the Lease Agreement dated July 10, 2002 between the
Company and B & B Lakeview Realty Corp.
13.1 Form 10-QSB for the quarter ending March 31, 2002 incorporated by
reference and previously filed with the Commission.
30
13.2 Form 10-QSB for the quarter ending June 30, 2002 incorporated by
reference and previously filed with the Commission.
13.3 Form 10-QSB for the quarter ending September 30, 2002 incorporated by
reference and previously filed with the Commission.
21 List of subsidiaries filed herein.
99.1 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 filed herein.
99.2 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 filed herein.
31
ACCESSITY CORP. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2002 AND 2001
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
Accessity Corp.
Coral Springs, Florida
We have audited the accompanying consolidated balance sheets of Accessity Corp.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Accessity Corp. and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Melville, New York NUSSBAUM YATES & WOLPOW, P.C.
March 5, 2003
F-1
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 908,655 $ 265,408
Accounts receivable 149,685 136,450
Investment securities 5,309,481 1,915,121
Prepaid expenses and other current assets 334,719 167,601
Investment in net assets of discontinued
operations -- 32,000
Deferred tax assets -- 1,900,000
------------ ------------
Total current assets 6,702,540 4,416,580
Restricted Certificate of Deposit 300,000 --
Property and equipment, net 708,976 615,630
Security deposits and other assets 57,979 27,563
------------ ------------
Total assets $ 7,769,495 $ 5,059,773
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 299,215 $ 155,330
Accrued expenses and other current liabilities 859,315 433,796
Current portion of capital lease obligation 31,968 --
------------ ------------
Total current liabilities 1,190,498 589,126
------------ ------------
Capital lease obligation, net of current portion 20,415 --
------------ ------------
Shareholders' equity:
Common stock, $.015 par value, authorized
30,000,000 shares; issued 11,746,991 shares
in 2002 and 11,516,655 shares in 2001 176,205 172,750
Preferred stock, all series, $.01 par value, authorized
1,000,000 shares; 1,000 issued and outstanding in 2002 10 --
Additional paid-in capital 10,836,684 9,792,244
Accumulated other comprehensive income,
unrealized holding gain on investment securities 14,204 680
Deficit (2,764,039) (4,011,993)
------------ ------------
8,263,064 5,953,681
Less common stock held in treasury, at cost,
877,918 shares in 2002 and 719,667 in 2001 1,704,482 1,483,034
------------ ------------
Total shareholders' equity 6,558,582 4,470,647
------------ ------------
Total liabilities and shareholders' equity $ 7,769,495 $ 5,059,773
============ ============
See notes to consolidated financial statements.
F-2
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
Revenues:
Collision repairs and fees (Note 4) $ 2,895,001 $ --
Automobile affinity services 1,123,436 1,696,856
------------ ------------
4,018,437 1,696,856
------------ ------------
Operating expenses (income):
Collision repair (Note 4) 2,499,570 --
Sales and marketing 1,175,100 692,116
General and administrative 3,332,818 2,276,196
Non-cash compensation (income) expense (131,666) 240,236
Depreciation and amortization 402,744 350,032
Asset impairment -- 58,719
------------ ------------
Total operating expenses 7,278,566 3,617,299
------------ ------------
(3,260,129) (1,920,443)
------------ ------------
Other income (expense):
Investment and other income 394,123 196,997
Interest expense (88,503) (1,500)
Shares issued for restriction agreement -- (77,438)
------------ ------------
Total other income 305,620 118,059
------------ ------------
Loss from continuing operations before income tax benefit (2,954,509) (1,802,384)
Income tax benefit (1,793,789) (2,061,703)
------------ ------------
Income (loss) from continuing operations (1,160,720) 259,319
------------ ------------
Discontinued operations:
Gain on sale of subsidiary (net of income taxes of $3,690,886) 2,391,482 --
Income from discontinued operations (net of income taxes of
$26,533 and $144,454 in 2002 and 2001) 17,192 779,788
------------ ------------
2,408,674 779,788
------------ ------------
Income before extraordinary item 1,247,954 1,039,107
Extraordinary gain from release of indebtedness (net of taxes
of $24,113) -- 130,162
------------ ------------
Net income $ 1,247,954 $ 1,169,269
============ ============
Basic earnings (loss) per common share:
Continuing operations ($ .11) $ .02
Discontinued operations .22 .08
Extraordinary gain -- .01
------------ ------------
Total $ .11 $ .11
------------ ------------
Diluted earnings (loss) per common share:
Continuing operations ($ .11) $ .02
Discontinued operations .22 .08
Extraordinary gain -- .01
------------ ------------
Total $ .11 $ .11
============ ============
Weighted average number of common shares outstanding:
Basic 10,900,312 10,709,111
============ ============
Diluted 10,900,312 11,109,418
============ ============
See notes to consolidated financial statements.
F-3
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2002 AND 2001
COMMON STOCK PREFERRED STOCK ADDITIONAL
--------------------------- ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------------ ------------ ------------ ------------
Balance, January 1, 2001 11,241,655 $ 168,625 -- $ -- $ 9,275,656
Net income -- -- -- -- --
Unrealized holding loss -- -- -- -- --
Comprehensive income
Shares issued in exchange for
restriction agreement 175,000 2,625 -- -- 74,813
Shares issued for services 100,000 1,500 -- -- 148,500
Non-cash compensation recorded
for variable priced options -- -- -- -- 240,236
Options and warrants granted
for services -- -- -- -- 53,039
---------- ------------ ------------ ------------ ------------
Balance, December 31, 2001 11,516,655 172,750 -- -- 9,792,244
Net income -- -- -- -- --
Unrealized holding gain -- -- -- -- --
Comprehensive income -- -- -- -- --
Issuance of preferred stock -- -- 1,000 10 999,990
Shares tendered upon exercise
of stock options 230,336 3,455 -- -- 125,296
Treasury shares purchased -- -- -- -- --
Non-cash compensation (credit)
recorded for variable priced options -- -- -- -- (131,666)
Options granted for services -- -- -- -- 50,820
---------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2002 11,746,991 $ 176,205 1,000 $ 10 $ 10,836,684
========== ============ ============ ============ ============
ACCUMULATED TOTAL
OTHER TREASURY STOCK SHARE-
COMPREHENSIVE ------------------------------ HOLDERS'
INCOME (LOSS) DEFICIT SHARES AMOUNT EQUITY
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2001 $ 3,570 ($ 5,181,262) 719,667 ($ 1,483,034) $ 2,783,555
------------
Net income -- 1,169,269 -- -- 1,169,269
Unrealized holding loss (2,890) -- -- -- (2,890)
------------
Comprehensive income 1,166,379
Shares issued in exchange for
restriction agreement -- -- -- -- 77,438
Shares issued for services -- -- -- -- 150,000
Non-cash compensation recorded
for variable priced options -- -- -- -- 240,236
Options and warrants granted
for services -- -- -- -- 53,039
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 680 (4,011,993) 719,667 (1,483,034) 4,470,647
------------
Net income -- 1,247,954 -- -- 1,247,954
Unrealized holding gain 13,524 -- -- -- 13,524
------------
Comprehensive income 1,261,478
Issuance of preferred stock -- -- -- -- 1,000,000
Shares tendered upon exercise
of stock options -- -- 65,026 (128,751) --
Treasury shares purchased -- -- 93,225 (92,697) (92,697)
Non-cash compensation (credit)
recorded for variable priced options -- -- -- -- (131,666)
Options granted for services -- -- -- -- 50,820
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2002 $ 14,204 ($ 2,764,039) 877,918 ($ 1,704,482) $ 6,558,582
============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-4
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
----------- -----------
Cash flows provided by (used in) operating activities:
Net income $ 1,247,954 $ 1,169,269
----------- -----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization (including bond
premium amortization) and asset impairment in 2001 488,934 408,751
Shares issued for restriction agreement -- 77,438
Shares issued for consulting services -- 150,000
Non-cash compensation (income) expense (131,666) 240,236
Options and warrants granted for services 50,820 53,039
Gain on sale of subsidiary (6,082,368) --
Gain on sale of property and equipment -- (3,198)
Deferred taxes 1,900,000 (1,900,000)
Changes in assets and liabilities:
Accounts receivable (13,235) 132,061
Prepaid expenses and other current assets (167,118) (68,527)
Investment in net assets of discontinued operations (60,022) 299,580
Security deposit and other assets (30,416) 175
Accounts payable 143,885 (122,303)
Accrued expenses and other current liabilities 425,519 270,438
----------- -----------
Total adjustments (3,475,667) (462,310)
----------- -----------
Net cash provided by (used in) operating activities (2,227,713) 706,959
----------- -----------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (433,853) (216,379)
Proceeds from sale of subsidiary 6,174,389 --
Purchase of investment securities (8,396,026) (1,128,506)
Proceeds from sale of investment securities 4,929,000 --
Purchase of restricted certificate of deposit (300,000) --
Proceeds from sale of property and equipment -- 15,600
----------- -----------
Net cash provided by (used in) investing activities 1,973,510 (1,329,285)
----------- -----------
(Continued)
See notes to consolidated financial statements.
F-5
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of preferred stock 1,000,000 --
Purchase of treasury stock (92,697) --
Payments under capital leases (9,853) --
Repayment of notes payable -- (14,644)
----------- -----------
Net cash provided by (used in) financing activities 897,450 (14,644)
----------- -----------
Net increase (decrease) in cash and cash equivalents 643,247 (636,970)
Cash and cash equivalents at beginning of year 265,408 902,378
----------- -----------
Cash and cash equivalents at end of year $ 908,655 $ 265,408
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 23,533 $ 6,864
----------- -----------
Cash paid during the year for interest $ 2,313 $ 1,500
----------- -----------
Supplemental disclosure of non-cash activities:
During 2002, the Company purchased computer equipment costing $82,719, of
which $62,236 was financed.
See notes to consolidated financial statements.
F-6
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Accessity Corp. (formerly known as DriverShield Corp.) and its
wholly-owned subsidiaries (collectively referred to as the "Company"). All
material intercompany balances and transactions have been eliminated.
DISCONTINUED OPERATIONS
On February 7, 2002, the Company sold its fleet services business (see
Note 3). The Company's consolidated balance sheets and consolidated
statements of cash flows and the consolidated statements of income for the
years ended December 31, 2002 and 2001 reflect the results of this
business as Discontinued Operations. Prior to 2001, the fleet service
business comprised the vast majority of the Company's business. Although
the Company only reported as one business segment, the Company operated as
distinct businesses with separate major lines of businesses and classes of
customers. Accordingly, upon the sale of the fleet services business, the
Company determined that the fleet business should be reported as a
discontinued operation.
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 over the
estimated useful lives or the remaining term of the lease, whichever is
less. Website development costs are amortized over their estimated useful
life of three years on a straight-line basis. For the years ended December
31, 2002 and 2001, website development costs capitalized amounted to
$76,226 and $185,978, of which $42,750 and $65,100 represented employee
salary and related costs.
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.
F-7
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
INVESTMENT SECURITIES
Investments consist of securities available for sale, which are carried at
fair value with unrealized gains or losses reported in a separate
component of shareholders' equity. Realized gains or losses are determined
based on the specific identification method.
REVENUE RECOGNITION
The Company recognizes revenue for its collision repairs at the time of
customer approval and completion of repair services. The Company warrants
such services for varying periods ranging up to the period that the driver
owns or operates the vehicle. Such warranty expense is borne by both the
Company and the repair facilities; resulting from its management of the
repair process, and the selection of facilities, warranty expense has not
been material to the Company. In accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 101, the Company has determined
that the portion of its business representing automobile affinity services
should be displayed in the financial statements on a net basis and
recognized as such services are rendered.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
In order to record the Company's accounts receivable at their net
realizable value, the Company must assess their collectibility. A
considerable amount of judgment is required in order to make this
assessment, including an analysis of historical bad debts and other
adjustments, a review of the aging of the Company's receivables, and the
current creditworthiness of the Company's customers.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-8
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
o CASH AND CASH EQUIVALENTS
The carrying amounts approximate fair value due to the short maturity
of the instruments.
o INVESTMENTS
Investment securities that are available for sale are stated at fair
value as measured by quoted market price.
o CAPITAL LEASE OBLIGATION
The carrying amount of the Company's capital lease obligation
approximates fair value.
ADVERTISING EXPENSE
Advertising expenditures, which are expensed as incurred, amounted to
approximately $196,000 and $96,000 in 2002 and 2001.
STOCK COMPENSATION PLAN
The Company accounts for its stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
expense is recognized. In 1996, the Company 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 6,000,000 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 in
regard to incentive stock options granted to an Affiliate, in which case
the maximum term is five years. As of December 31, 2002, approximately
2,430,000 options remain available for future grants.
F-9
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
STOCK COMPENSATION PLAN (CONTINUED)
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted in 2002 and 2001, respectively: annual dividends of $-0-
for both years, expected volatility of 136% and 139%, risk-free interest
rate of 1.67% and 4.18%, and expected life of five years for all grants.
The weighted-average fair value of stock options granted in 2002 and 2001
was $1.01 and $1.15, respectively.
Under the above model, the total value of stock options granted in 2002
and 2001 was $1,767,498 and $51,824, 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:
2002 2001
----------- -----------
Net income:
As reported $ 1,247,954 $ 1,169,269
Pro forma $ 623,685 $ 337,965
Basic earnings per share:
As reported $ .11 $ .11
Pro forma $ .06 $ .03
Diluted earnings per share:
As reported $ .11 $ .11
Pro forma $ .06 $ .03
Stock-based employee compensation
cost, net of related tax effects, included
in the determination of net income as
reported $ -0- $ -0-
F-10
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
during 2002, which did not have a material impact on the Company's
consolidated results of operations and financial position. SFAS 144
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," which is effective
for fiscal years beginning after May 15, 2002. This statement rescinds the
indicated statements and amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of
SFAS 145 is not expected to have a material impact on the Company's
consolidated results of operations and financial position.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit of disposal
activities initiated after December 31, 2002. SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS 146 requires that the
initial measurement of a liability be at fair value. The Company elected
the early adoption of SFAS 146 during 2002, and the adoption did not have
a material impact on its consolidated results of operations and financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which is effective
for fiscal years ending after December 15, 2002. The provisions of this
statement provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation, and requires disclosure about the
effects on reported net income of an entity's accounting policy decisions
with respect to stock-based compensation. The Company does not intend to
change its accounting method for stock-based employee compensation and,
accordingly, the Company does not expect the provisions of this new
standard to have a material impact on its consolidated results of
operations and financial position.
F-11
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. It separates
entities into two groups: (1) those for which voting interests are used to
determine consolidation, and (2) those for which variable interests are
used to determine consolidation (the subject of FIN 46). FIN 46 clarifies
how to identify a variable interest entity and how to determine when a
business enterprise should include the assets, liabilities,
non-controlling interests and results of activities of a variable interest
entity in its consolidated financial statements. FIN 46 is effective
immediately for variable interest entities created after January 31, 2003.
It also applies to interim periods beginning after June 15, 2003 and to
variable interest entities acquired before February 1, 2003. If it is
reasonably possible that an enterprise will consolidate or disclose
information about a variable interest entity when FIN 46 becomes
effective, the enterprise is required to disclose in all financial
statements issued after January 31, 2003, the nature, purpose, size and
activities of the variable interest entity and the enterprise's maximum
exposure to loss as a result of its involvement with the variable interest
entity. The Company is currently assessing the impact, if any, that the
related party lease described in Note 15 may have on its consolidated
financial statements.
2. DESCRIPTION OF BUSINESS AND CONCENTRATIONS
------------------------------------------
The Company, through its fleet services subsidiary, had been, since its
inception, engaged in automotive fleet management and administration of
automotive repairs for major, nationally recognized corporate clients
throughout the United States. It offered its clients a cost-effective
method for repairing their vehicles by arranging for repair of the
vehicles through its nationwide network of independently owned contracted
facilities, and it also offered subrogation, salvage and appraisal
services. This business was sold in 2002 (see Note 3).
F-12
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
2. DESCRIPTION OF BUSINESS AND CONCENTRATIONS (CONTINUED)
-----------------------------------------------------
The Company offered collision repair management services during 2002 for
the insurance industry through a website on the Internet. Revenues for
such services commenced in December 2001. However, under a strategic
partnership, effective January 2, 2003 (see Note 4), the Company
transferred the operating responsibilities and management of this business
to a third party and, upon the completion of active or in-process claims
that are currently the Company's responsibility, it will no longer be
engaged in collision repair management, but will remain in the business
through the licensing described in Note 4. The Company's remaining
automotive business provides automobile affinity services for individuals
which, to date, have been sold through large financial institutions. The
Company believes that it operates its automotive-related businesses in one
operating segment.
In the third quarter of 2002, the Company began a new business engaged in
medical billing recovery. While currently a start-up component of the
Company, it will be managed as a separate segment. The business seeks to
recoup inappropriate discounts taken from hospital billings by
institutional or insurance payors. The Company has signed contracts with a
few hospitals, but revenues have not yet commenced. During 2002, this
segment incurred operating expenses of $182,000. There were no
identifiable segment assets.
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, two customers accounted
for 26% and 59%, respectively, of the Company's sales in 2002 and 6% and
39% of its receivables, respectively, at December 31, 2002. One of those
customers accounted for 87% of the Company's sales in 2001 and 90% of its
receivables at December 31, 2001. The Company has no financial instruments
with significant off-balance-sheet risk or concentration of credit risk.
3. DISCONTINUED OPERATIONS - SALE OF COLLISION REPAIR AND FLEET SERVICES
---------------------------------------------------------------------
BUSINESS
--------
On February 4, 2002, the Company's shareholders approved the sale of all
the outstanding shares of a wholly-owned subsidiary, driversshield.com FS
Corp. ("FS"), its collision repair and fleet services business, to PHH
Vehicle Management Services, LLC d/b/a PHH Arval ("PHH"), a subsidiary of
the Cendant Corporation (NYSE symbol "CD") for $6.3 million in cash, in
accordance with a Stock Purchase Agreement (the "Purchase Agreement")
dated October 29, 2001 and, pursuant to the Preferred Stock Purchase
Agreement of the same date, approved the sale of $1.0 million of the
Company's convertible preferred stock to PHH, comprising 1,000 shares (see
Note 13). These transactions were consummated on February 7, 2002.
F-13
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
3. DISCONTINUED OPERATIONS - SALE OF COLLISION REPAIR AND FLEET SERVICES
---------------------------------------------------------------------
BUSINESS (CONTINUED)
-------------------
The Company recorded a pre-tax gain on the sale of FS of approximately
$6.1 million. The sale of FS impacted the Company's consolidated balance
sheet at December 31, 2001 by reducing accounts receivable and accounts
payable and other accrued liabilities. Certain cash balances were also
transferred to PHH representing primarily customer deposits, prepayments,
or funds received by the Company pending repayments to its customers.
Of the gross proceeds paid by PHH, $175,000 was remitted into an escrow
account, in the event indemnification obligations arise, and was to be
released twelve months from the date of the closing of the transaction. In
January 2003, $163,000 was released, and the remainder is under review.
The accompanying consolidated statements of income and the consolidated
balance sheets have been presented to reflect the sale of the fleet
business as discontinued operations. Operating results of the discontinued
fleet services operations for the years ended December 31, 2002, to the
date of sale, and 2001 are summarized as follows:
2002 2001
------------ ------------
Revenues $ 1,087,658 $ 14,358,976
Cost of sales (878,776) (11,959,279)
Selling, general and administrative (165,157) (1,475,455)
------------ ------------
Income from discontinued operations, pre-tax $ 43,725 $ 924,242
------------ ------------
The investment in the net assets of discontinued operations, reflected in
the accompanying consolidated balance sheet at December 31, 2001,
consisted of the following:
Cash $ 155,261
Accounts receivable, net 1,141,654
Prepaid expenses 2,450
Accounts payable and accrued expenses (1,267,365)
-----------
Net assets of discontinued operations $ 32,000
-----------
F-14
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
4. STRATEGIC PARTNERSHIP FOR INSURANCE BUSINESS
--------------------------------------------
In December 2002, the Company entered into a Strategic Partnership
Agreement (the "Partnership Agreement"), effective January 2, 2003, with
ClaimsNet, Inc. ("ClaimsNet"), a wholly-owned subsidiary of the CEI Group,
Inc. ("CEI"), a Pennsylvania corporation, in which ClaimsNet assumed the
responsibilities of operations and management of DriverShield CRM, the
business that provided insurance carriers with collision repair management
for their insureds. The Company will continue to process those claims that
were initiated prior to the effective date, and ClaimsNet will assume
responsibility for new repairs. The Company granted an exclusive license
of its technology, including its website software, that enables insurance
customers to access the vehicle claims management system via the Internet,
and a non-transferable license of its network of repair facilities, as
well as training of its processing methodologies, in order for ClaimsNet
to fulfill its obligations under the Partnership Agreement. ClaimsNet
agreed to 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 has in process and expects to complete during the first part
of 2003, the Company will no longer be directly responsible for auto
repairs, but will remain liable for automobile repair warranties provided.
Historically, warranty costs have not been significant.
As of December 31, 2002, the net book value of the website development
costs amounted to approximately $226,000, and the Company has determined
that such costs are not impaired due to the anticipated cash flows from
the Partnership Agreement.
5. EXTRAORDINARY GAIN FROM RELEASE OF INDEBTEDNESS
-----------------------------------------------
In November 2001, the Company reached an agreement with Electronic Data
Systems Corp. Both parties released each other from any and all existing
claims, and terminated the arbitration and legal proceedings related to a
dispute over website design. Accordingly, in the year ended December 31,
2001, the Company recognized $154,275 of extraordinary pre-tax gain
related to indebtedness that had been previously recorded.
F-15
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
6. INVESTMENT SECURITIES
---------------------
AT DECEMBER 31, 2002:
---------------------
UNREALIZED
FAIR HOLDING
COST VALUE GAIN
---------- ---------- ----------
Equity securities $1,984,759 $1,985,362 $ 603
Corporate debt securities 3,310,518 3,324,119 13,601
---------- ---------- ----------
$5,295,277 $5,309,481 $ 14,204
---------- ---------- ----------
At December 31, 2001:
---------------------
UNREALIZED
FAIR HOLDING
COST VALUE GAIN
---------- ---------- ----------
Equity securities $1,914,441 $1,915,121 $ 680
---------- ---------- ----------
7. PROPERTY AND EQUIPMENT AND ASSET IMPAIRMENT
-------------------------------------------
PROPERTY AND EQUIPMENT
2002 2001
---------- ----------
Machinery and equipment $ 630,564 $ 901,017
Furniture and fixtures 142,769 204,423
Leasehold improvements 143,746 22,485
Website development costs 615,642 539,416
---------- ----------
1,532,721 1,667,341
Less accumulated depreciation
and amortization 823,745 1,051,711
---------- ----------
$ 708,976 $ 615,630
---------- ----------
F-16
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
7. PROPERTY AND EQUIPMENT AND ASSET IMPAIRMENT (CONTINUED)
------------------------------------------------------
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 considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the discounted cash flows or appraised values, depending
upon the nature of the assets. The Company recognized an impairment of
approximately $59,000 related to long-lived assets during 2001.
8. NOTE PAYABLE
------------
In August 1998, the Company agreed to pay severance to its former
Co-Chairman and President in the amount of $100,000 including imputed
interest of 8.5% in quarterly installments of $12,500 commencing March 31,
1999. Amounts remaining on the note were paid in 2001.
9. CAPITAL LEASE OBLIGATION
------------------------
In August 2002, the Company entered into a lease agreement containing a
bargain purchase option for computer equipment. Obligations under the
capital lease have been recorded in the accompanying financial statements
for 2002 at the present value of future minimum lease payments, discounted
at an interest rate of 12.96%, as follows:
Capital lease obligation $ 52,383
Less current maturities 31,968
--------
$ 20,415
--------
Principal payments are due as follows:
2003 $ 31,968
2004 20,415
--------
$ 52,383
--------
F-17
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
10. EARNINGS PER SHARE
------------------
Basic earnings per share are computed by dividing the earnings by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could
occur if common stock equivalents, such as stock options and warrants,
were exercised. The computation of diluted earnings per common share in
2002 and 2001 excludes the effect of the assumed exercise of approximately
4,598,000 and 1,275,000 stock options, warrants, and the assumed exercise
of convertible preferred stock that were outstanding as of December 31,
2002 and 2001 because the effect would be anti-dilutive.
The reconciliations between basic and diluted earnings per common share
are as follows:
2002 2001
-------------------------------------- --------------------------------------
Net Income Shares Per-Share Net Income Shares Per-Share
---------- ---------- -------- ---------- ---------- --------
Basic earnings per
common share $1,247,954 10,900,312 $ .11 $1,169,269 10,709,111 $ .11
Effect of dilutive securities,
stock options and warrants -- -- -- -- 400,307 --
---------- ---------- -------- ---------- ---------- --------
Diluted earnings per
common share $1,247,954 10,900,312 $ .11 $1,169,269 11,109,418 $ .11
---------- ---------- -------- ---------- ---------- --------
11. STOCK OPTIONS
-------------
VARIABLE-PRICED OPTIONS
In October 1999, the Company repriced certain options granted to employees
and third parties, representing the right to purchase 2,200,000 shares of
common stock. The grants gave the holders the right to purchase common
stock at prices ranging from $1.00 to $1.24 per share. The options were
repriced at prices ranging from $.75 to $.83 per share. At the date of the
repricing, the new exercise price was equal to the fair market value of
the shares (110% of the fair market value in the case of an affiliate).
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. For
the year ended December 31, 2002, $132,000 in non-cash compensation
credits (income) were recorded, resulting from a decrease in the price per
share. For the year ended December 31, 2001, the calculation resulted in a
non-cash charge of $240,000.
F-18
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
11. 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, 2001 3,293,667 $.31 - $3.75 $ .87
Options granted 45,000 $1.10 - $1.49 $ 1.27
Options canceled (115,000) $.75 - $1.56 $ 1.11
---------
Options outstanding, December 31, 2001 3,223,667 $.31 - $3.75 $ .88
Options granted 1,780,000 $.51 - $1.80 $ 1.43
Options canceled (1,196,667) $.31 - $3.19 $ 1.24
Options exercised (230,336) $.31 - $.75 $ .56
---------
Options outstanding, December 31, 2002 3,576,664 $.31 - $3.75 $ 1.07
---------
Options exercisable, December 31, 2001 2,716,670 $.31 - $3.75 $ .90
---------
Options exercisable, December 31, 2002 1,923,332 $.31 - $3.75 $ .83
---------
The following table summarizes information about the options outstanding
at December 31, 2002:
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
----------------- ----------- ------------ -------------- ----------- -------------
$ .31 - $1.00 1,771,664 1.98 $ .57 1,596,666 $ .59
$1.10 - $1.75 1,730,000 1.57 $ 1.48 269,999 $ 1.57
$2.13 - $3.75 75,000 2.03 $ 2.47 56,667 $ 2.57
F-19
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
12. COMMON STOCK AND STOCK WARRANTS
-------------------------------
In March 2001, the Company issued 175,000 shares of its common stock to an
individual shareholder in consideration for the lock-up of certain shares
owned by this individual, and the right to purchase the individual's
shares under the same terms and conditions as previously granted to
another group. The new shares were issued with a restrictive legend
precluding their transferability for twelve months from the date of issue.
Additionally, restrictions were placed upon the transfer of other shares
held by this individual through December 31, 2001. The Company recorded
the cost of this transaction as a non-operating, non-cash expense of
$77,438 in 2001.
In July 2001, the Company issued 100,000 shares of its common stock to an
individual in consideration of a consulting agreement covering a one-year
period ending June 30, 2002. The Company recorded the cost of the services
based on the price per share of its common stock at the date of their
issuance, aggregating $150,000, and amortized the cost over the term of
the contract.
During 2001, the Company granted warrants to acquire 100,000 shares of its
common stock at $.53 per share, and an additional 25,000 warrants to
acquire 25,000 shares of its common stock at $.87 per share (the fair
market values at the dates of the grants) in consideration for certain
consulting services. The warrants expire in 2006. The Company recorded
consulting expense in the amount of $9,000, which was equal to the value
of the services provided.
In December 1997, the Company raised $2,330,813 through the private
placement issuance of 581,250 units at $4.01 per unit. Each unit included
one warrant. In 2002, these warrants expired unexercised.
A $10 million equity funding commitment, which provided the Company the
option of drawing equity financing against an available line, expired in
November 2001, and was unused during its twelve- month duration. The
financing source was provided warrants to purchase 68,970 of the Company's
common stock, at $2.17 per share, in exchange for providing this line. In
2002, these warrants expired unexercised.
On June 27, 2002, the Company's Board of Directors authorized a common
stock repurchase program whereby up to 500,000 shares of the Company's
common stock may be purchased in open market transactions over the
following 24 months. As of December 31, 2002, 93,225 shares had been
repurchased under the program for amounts aggregating $92,697.
F-20
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
13. PREFERRED STOCK AND PREFERRED STOCK PURCHASE RIGHTS
---------------------------------------------------
Pursuant to the Preferred Stock Purchase Agreement between the Company and
PHH as part of its purchase of the fleet business in February 2002, PHH
invested $1.0 million to acquire 1,000 shares of the Company's Series A
convertible preferred stock, par value of $.01 per share (the "Preferred
Shares"). The Preferred Shares can be converted, at the holder's
discretion, into 500,000 shares of the Company's common stock (subject to
adjustments for stock splits, recapitalization and anti-dilution
provisions). Other key terms of the Preferred Shares include voting
rights, together with the common shareholders, on all matters, and
separately on certain specified matters; a liquidation preference equal to
125% of their initial investment paid only in the event of dissolution of
the Company; the nomination of one board member; certain pre-emptive
rights and registration rights; and the approval of Preferred Shares for
certain corporate actions. PHH has not exercised its right to nominate a
board member.
On December 28, 1998, the Board of Directors authorized the issuance of up
to 200,000 shares of non-redeemable Junior Participating Preferred Stock
("JPPS"). The JPPS shall rank junior to all other series of preferred
stock (but senior to the common stock) with respect to payment of
dividends and any other distributions. Among other rights, the holders of
the JPPS shall be entitled to receive, when and if declared, quarterly
dividends per share equal to the greater of (a) $100 or (b) the sum of
1,000 (subject to adjustment) times the aggregate per share of all cash
and non cash dividends (other than dividends payable in common stock of
the Company and other defined distributions). Each share of JPPS shall
entitle the holders to voting rights equal to 1,000 votes per share. The
holders of JPPS shall vote together with the common stockholders. No
shares of JPPS have been issued.
On December 28, 1998, the Board of Directors also adopted a Rights
Agreement ("the Agreement"). Under the Agreement, each share of the
Company's common stock carries with it one preferred share purchase right
("Rights"). The Rights themselves will at no time have voting power or pay
dividends. The Rights become exercisable (1) when a person or group
acquires 20% or more of the Company's common stock (10% in the case of an
Adverse Person as defined) and an additional 1% or more in the case of
acquisitions by any shareholder with beneficial ownership of 20% or more
on the record date (10% in the case of an Adverse Person as defined) or
(2) on the tenth business day after a person or group announces a tender
offer to acquire 20% or more of the Company's common stock (10% in the
case of an Adverse Person as defined). When exercisable, each Right
entitles the holder to purchase 1/1000 of a share of the JPPS at an
exercise price of $27.50 per 1/1000 of a share, subject to adjustment.
F-21
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
14. EMPLOYEE BENEFIT PLAN
---------------------
The Company has a 401(k) profit sharing plan for the benefit of all
eligible employees as defined in the plan documents. The plan provides for
voluntary employee salary contributions not to exceed the statutory
limitation provided by the Internal Revenue Code. The Company may, at its
discretion, match within prescribed limits, the contributions of the
employees. Employer contributions to the plan amounted to approximately
$14,000 in 2002 and $16,800 in 2001.
15. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACATIONS
-------------------------------------------------------------
OPERATING LEASES
The Company's lease of office space that it formerly occupied in New York,
and in its new headquarters in Florida, require minimum rentals as well as
other expenses including real estate taxes. Until the lease terminated in
June 2002 and for most of 2001, a portion of its New York premises was
under a sublease agreement. Sublease income was approximately $22,000 in
2002 and $51,000 in 2001. Rent expense, including real estate taxes, was
$180,000 in 2002 and $199,000 in 2001.
In May 2002, the Company signed a five and a half year lease to occupy a
new 7,300 square foot building in Coral Springs, Florida. This property is
owned and operated by B&B Lakeview Realty Corp., whose three shareholders,
Barry Siegel, Barry Spiegel and Ken Friedman, are members of the Company's
Board of Directors. The terms of the lease require net rental payments
plus operating expenses. The lease term commenced in October 2002. The
Company and the property owners each expended approximately $140,000 to
complete the interior space. In addition, during July 2002, the Company
established a $300,000 interest-bearing certificate of deposit with a
Florida bank (the mortgage lender to B&B Lakeview Realty Corp.) as
collateral for its future rental commitments. The certificate of deposit
declines to $200,000 after the 36th month, $100,000 after the 48th month,
and to zero after 60 months, as the balance of the rent commitment
declines. During 2002, the Company paid rental costs of approximately
$35,000 to this related party. The Company has a security deposit of
$22,000 held by the related party
F-22
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
15. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
-----------------------------------------------------------------------
OPERATING LEASES (CONTINUED)
The Company's future minimum rental commitments payable to the related
party are as follows:
2003 $127,000
2004 137,000
2005 146,000
2006 157,000
2007 168,000
Thereafter 88,000
--------
$823,000
--------
CAPITAL LEASE
The Company leases certain computer equipment with a lease term through
2004. Obligations under the capital lease have been recorded in the
accompanying financial statements at the present value of future minimum
lease payments. The capitalized cost included in property and equipment is
$82,719. No depreciation was recorded on the equipment during 2002 as it
was not placed in service until 2003.
The future minimum lease payments under the capital lease are as follows:
2003 $ 37,312
2004 21,721
--------
59,033
Less amount representing
interest and fees 6,650
--------
Present value of future minimum
lease payments $ 52,383
--------
F-23
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
15. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
-----------------------------------------------------------------------
EMPLOYMENT CONTRACTS
The Company has employment contracts with its four principal officers,
which expire on December 31, 2004. The agreements provide minimum annual
salaries of $300,000 to the Chief Executive Officer ("CEO"), $190,000 to
the President, $175,000 to the President of a subsidiary, and $155,000 to
the Chief Financial Officer ("CFO"). The CEO's contract also specifies a
one-time bonus award of $250,000 plus 250,000 additional stock options in
recognition of the sale of the fleet business in February 2002. In
connection with these employment contracts, 1,150,000 options were granted
in February 2002. In addition, another subsidiary of the Company has an
employment agreement with its President that commenced on September 3,
2002, and expires on December 31, 2004, providing a base salary of
$175,000 plus performance bonus, and he has been granted 250,000 stock
options.
The CEO's employment contract provides that, in the event of termination
of the employment within three years after a change in control of the
Company, then the Company would be liable to pay a lump-sum severance
payment of three years' salary (average of last five years), less $100, in
addition to the cash value of any outstanding but unexercised stock
options. The other employment contracts of the principal officers provide
that, in the event of termination of the employment of the officer within
one year after a change in control of the Company, then the Company would
be liable to pay a lump sum severance payment of one year's salary, as
determined on the date of termination or the date on which a change in
control occurs, whichever is greater. In no event would the maximum amount
payable exceed the amount deductible by the Company under the provisions
of the Internal Revenue Code.
LITIGATION
In January 2003, the Company was served with a complaint filed by Mr.
Gerald Zutler, its former President and Chief Operating Officer, alleging,
among other things, that the Company breached his employment contract,
that there was fraudulent concealment of the Company's intention to
terminate its employment agreement with Mr. Zutler, and discrimination on
the basis of age and aiding and abetting violation of the New York State
Human Rights Law. Mr. Zutler is seeking damages aggregating $2.25 million,
plus punitive damages and reasonable attorney's fees. Management believes
that the Company properly terminated Mr. Zutler's employment for cause,
and intends to vigorously defend this suit. Answer to the complaint was
served by the Company on February 28, 2003, and no discovery has yet been
conducted, and it is too early for counsel to predict the outcome. The
Company has filed a claim with its carrier under its Directors, Officers,
Insured Entity and Employment Practices Liability Policy. The Company has
not yet received a response from the carrier and does not know if the
carrier will cover this claim under the policy, the policy has a $50,000
deductible and a liability limit of $3 million per policy year.
F-24
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
15. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
-----------------------------------------------------------------------
LITIGATION (CONTINUED)
The Company filed a Demand for Arbitration against Presidion Solutions,
Inc., ("Presidion"), alleging that Presidion breached the terms of the
Memorandum of Understanding (the "Memorandum") between the Company and
Presidion, dated January 17, 2003. The Company is seeking a break-up fee
of $250,000 pursuant to the terms of the Memorandum, alleging that
Presidion breached the Memorandum by wrongfully terminating the
Memorandum. Additionally, the Company is seeking its out-of-pocket costs
of due diligence, amounting to approximately $37,000. Presidion has filed
a counterclaim against the Company, alleging that the Company had breached
the Memorandum and, therefore, owes Presidion a break-up fee of $250,000.
The Company believes that the claim alleged by Presidion is without merit.
The dispute will be settled by a single arbiter, and the case will be
heard before the American Arbitration Association in Broward County,
Florida.
No provision for any loss has been made with respect to either of the
above matters.
16. CLOSURE OF NEW YORK OFFICE
In conjunction with relocating its office within New York, and then to
Florida during the fourth quarter of 2002, the Company incurred an
aggregate expense of $386,000, including $216,000 relating to one-time
employee termination benefits, and the remainder for relocation expenses.
Such amounts are included in general and administrative expenses in the
consolidated statement of operations.
17. INCOME TAXES
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards (SFAS) 109, "Accounting for
Income Taxes." Under the liability method specified by SFAS 109, deferred
tax assets and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse.
F-25
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
17. INCOME TAXES (CONTINUED)
-----------------------
At December 31, 2002, the Company has a net operating loss carryforward of
approximately $2,000,000. At December 31, 2001, the Company had a net
operating loss caryforward of approximately $5,000,000, which was
available to offset future taxable income. At December 31, 2002, the
Company has provided a valuation allowance for the full amount of its
deferred tax asset of $770,000 since it is more likely than not that the
Company will not realize the benefit. At December 31, 2001, a valuation
allowance of $200,000 was recognized to offset (1) the full amount of the
net deferred tax asset arising from other sources plus (2) $100,000
related to the utilization of the loss carryforwards due to the
uncertainty of realizing these assets in the future.
The effect of the change in the 2001 beginning-of-the year balance of the
valuation allowance ($1,780,000) that resulted from a change in judgment
about the realization of the deferred tax asset has been included in the
tax benefit attributable to continuing operations. The increase in the
valuation allowance in 2002 was due to the Company having losses from
continuing operations in excess of anticipated amounts.
At December 31, 2002, the Company's net operating loss carryforwards are
scheduled to expire as follows:
Year ended December 31,
2018 $ 612,000
2019 950,000
2021 438,000
----------
$2,000,000
----------
Income tax expense (benefit) was allocated as follows:
2002 2001
----------- -----------
Loss from continuing operations:
Beginning of the year valuation allowance $ -- ($1,780,000)
Current year continuing operations (1,793,789) (281,703)
----------- -----------
(1,793,789) (2,061,703)
Income from discontinued operations 3,717,419 144,454
Extraordinary gain -- 24,113
----------- -----------
Income tax expense (benefit) $ 1,923,630 ($1,893,136)
----------- -----------
F-26
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
17. INCOME TAXES (CONTINUED)
-----------------------
Income tax expense (benefit) from continuing operations was comprised of
the following:
2002 2001
----------- -----------
Current tax expense (benefit), State and local $ 23,630 $ 6,864
----------- -----------
Deferred tax (benefit):
Federal (1,544,806) (1,758,282)
State and local (272,613) (310,285)
----------- -----------
(1,817,419) (2,068,567)
----------- -----------
Income tax (benefit) ($1,793,789) ($2,061,703)
----------- -----------
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:
2002 2001
----------------------- ------------------------
AMOUNT % Amount %
----------- ------ ----------- -------
Expected tax (benefit) at U.S.
statutory rate ($1,004,533) (34.0%) ($ 612,811) (34.0%)
State taxes, net of Federal effect 6,471 .2 (18,024) (1.0)
Losses for which no tax benefit
has been recognized -- -- 349,132 19.4
Increase (decrease) in valuation
allowance -- -- (1,780,000) (98.8)
Intraperiod allocation to adjust
effective tax rate (795,727) (26.9) -- --
----------- ------ ----------- -------
Income tax expense (benefit) ($1,793,789) (60.7%) ($2,061,703) (114.4%)
----------- ------ ----------- -------
F-27
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
17. INCOME TAXES (CONTINUED)
-----------------------
Deferred tax assets and liabilities consist of the following:
2002 2001
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 750,000 $ 2,000,000
Deferred compensation 40,000 96,000
Other -- 39,000
----------- -----------
790,000 2,135,000
Deferred tax liability, other (20,000) (35,000)
----------- -----------
770,000 2,100,000
Valuation allowance (770,000) (200,000)
----------- -----------
Deferred tax asset $ -- $ 1,900,000
----------- -----------
F-28