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INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-12
ACCESSITY CORP.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
_____________________________________________________________________
2. Aggregate number of securities to which transaction applies:
_____________________________________________________________________
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined)
_____________________________________________________________________
4. Proposed maximum aggregate value of transaction:
_____________________________________________________________________
5. Total fee paid:
_____________________________________________________________________
|X| Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:______________________________________________
(2) Form, Schedule or Registration Statement No.: _______________________
(3) Filing Party: _______________________________________________________
(4) Date Filed:__________________________________________________________
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ACCESSITY CORP.
12514 WEST ATLANTIC BOULEVARD
CORAL SPRINGS, FLORIDA 33071
Dear Shareholder:
You are cordially invited to attend the 2004 annual meeting of the
shareholders of Accessity Corp. to be held on December 28, 2004, at the Coral
Springs Marriott Hotel, Golf Club and Convention Center, 11775 Heron Bay
Boulevard, Coral Springs, Florida 33076 at 10:00 a.m., local time. All holders
of our common stock as of the close of business on October 29, 2004 are entitled
to vote at the 2004 annual meeting.
Enclosed are a copy of the notice of annual meeting of shareholders, a
proxy statement, a proxy card, an annual report on Form 10-KSB and certain other
financial information.
We hope you will be able to attend the meeting. Whether or not you plan to
attend, please sign and date the enclosed proxy card as promptly as possible in
order to ensure your representation at the meeting. Returning the signed proxy
card will not prevent you from voting in person at the meeting, if you so
desire, but will help us to secure a quorum and reduce the expense of additional
proxy solicitation.
Sincerely,
/S/ BARRY SIEGEL
Barry Siegel,
Chairman of the Board, President and
Chief Executive Officer
Coral Springs, Florida
December 10, 2004
ACCESSITY CORP.
12514 WEST ATLANTIC BOULEVARD
CORAL SPRINGS, FLORIDA 33071
____________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 28, 2004
____________________
NOTICE IS HEREBY GIVEN that the 2004 annual meeting of the shareholders of
Accessity Corp. ("Accessity") is to be held on December 28, 2004, at the Coral
Springs Marriott Hotel, Golf Club and Convention Center, 11775 Heron Bay
Boulevard, Coral Springs, Florida 33076 at 10:00 a.m., local time, for the
following purposes:
1. To elect Bruce S. Udell as a Class III director of Accessity.
2. To consider and approve the issuance of shares of common stock of
Accessity to the shareholders of Pacific Ethanol, Inc., a California
corporation ("PEI") and the limited liability company members of
Kinergy Marketing, LLC ("Kinergy") and ReEnergy, LLC ("ReEnergy"),
in exchange for their ownership interests in such companies, and the
issuance of warrants to acquire shares of common stock of Accessity
to holders of issued and outstanding options and warrants to acquire
shares of common stock of PEI, pursuant to the Share Exchange
Agreement dated as of May 14, 2004, as amended on July 30, 2004 and
as of October 1, 2004 (as amended, the "Share Exchange Agreement"),
and the consummation of the transactions contemplated thereby
(collectively, the "Share Exchange"). Upon consummation of the Share
Exchange, each of PEI, Kinergy and ReEnergy will become a
wholly-owned subsidiary of Accessity. A copy of the Share Exchange
Agreement is attached as APPENDIX A to the proxy statement
accompanying this notice.
3. To consider and approve the transfer of DriverShield CRM Corp., a
wholly-owned subsidiary of Accessity, to Barry Siegel, the current
Chairman of the Board, President and Chief Executive Officer of
Accessity, if the Share Exchange is approved by the shareholders.
4. To consider and approve the sale of Sentaur Corp., a wholly-owned
subsidiary of Accessity, to Barry Siegel for the sum of $5,000, if
the Share Exchange is approved by the shareholders.
5. To approve a new 2004 Stock Option Plan of Accessity, if the Share
Exchange is approved by the shareholders.
6. To consider and approve the reincorporation of Accessity in the
State of Delaware under the name "Pacific Ethanol, Inc." to occur
immediately prior to the consummation of the Share Exchange, if the
Share Exchange is approved by the shareholders.
7. To consider and approve an amendment to the articles of
incorporation of Accessity to change the name of Accessity to
"Pacific Ethanol, Inc." effective immediately prior to the
consummation of the Share Exchange, if the Share Exchange is
approved by the shareholder and the reincorporation of Accessity in
the State of Delaware does not occur.
8. To transact such other business as may properly come before this
annual meeting or any adjournment or postponement thereof.
The foregoing proposals are more fully described in the accompanying proxy
statement.
The Board of Directors has fixed the close of business on October 29,
2004, as the record date for the determination of shareholders entitled to
ce of and to vote at this annual meeting and at any adjournment or
postponement thereof.
We are first mailing this proxy statement dated December 10, 2004 and the
forms of proxy on or about December 15, 2004.
By Order of the Board of Directors
/S/ BARRY SIEGEL
Barry Siegel,
Chairman of the Board, President and
Chief Executive Officer
Coral Springs, Florida
December 10, 2004
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN
PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, WE URGE YOU TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING. RETURNING THE
SIGNED PROXY CARD WILL NOT PREVENT YOU FROM VOTING IN PERSON AT THE ANNUAL
MEETING, IF YOU SO DESIRE, BUT WILL HELP US TO SECURE A QUORUM AND REDUCE THE
EXPENSE OF ADDITIONAL PROXY SOLICITATION.
TABLE OF CONTENTS
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VOTING AND PROXY...............................................................1
Summary Information Regarding Proposals Other Than Election
of the Class III Director..............................................1
Recommendation of Accessity's Board of Directors.........................3
How to Vote..............................................................3
Revoking Your Proxy......................................................4
Shareholders Entitled to Vote; Outstanding Shares and Quorum.............4
Solicitation and Expenses................................................5
Availability of Accountants..............................................5
AVAILABLE INFORMATION..........................................................6
Accessity Corp...........................................................6
Pacific Ethanol, Inc.....................................................6
Kinergy Marketing, LLC...................................................6
ReEnergy, LLC............................................................6
SUMMARY OF THE SHARE EXCHANGE..................................................7
The Share Exchange.......................................................7
Results of the Share Exchange............................................7
Transfer and Sale of Current Accessity Subsidiaries......................7
Adoption of Benefits Plan................................................8
Reincorporation..........................................................8
Corporate Name Change....................................................8
Accessity Corp...........................................................8
Pacific Ethanol, Inc.....................................................9
Kinergy Marketing, LLC...................................................9
ReEnergy, LLC...........................................................10
ACCESSITY SUMMARY CONSOLIDATED FINANCIAL INFORMATION.........................17
PEI SUMMARY CONSOLIDATED FINANCIAL INFORMATION...............................18
KINERGY SUMMARY FINANCIAL INFORMATION........................................19
REENERGY SUMMARY FINANCIAL INFORMATION.......................................20
RISK FACTORS..................................................................22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................35
INFORMATION RELATING TO ACCESSITY.............................................36
General.................................................................36
Nature of Services......................................................36
Recent Developments.....................................................37
Sales and Marketing.....................................................38
Competition.............................................................38
Employees...............................................................38
Facilities..............................................................39
Legal Proceedings.......................................................39
Directors and Executive Officers........................................40
Board Committees and Meetings...........................................41
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Director Compensation...................................................42
Security Holder Communications with the Board of Directors..............42
Policy With Regard to Board Members' Attendance at Annual Meetings......42
Compensation Committee Interlocks and Insider Participation.............42
Audit Committee Report..................................................42
Independent Public Accountant Fees and Services.........................43
Policy on Audit Committee Pre-Approval of Audit and Non-Audit
Services of Independent Public Accountants............................44
Section 16(a) Beneficial Ownership Reporting Compliance.................44
Code of Ethics..........................................................44
Compensation of Executive Officers......................................45
Stock Option Grants and Exercises.......................................45
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values.....................................................46
Equity Compensation Plan Information....................................46
Employment Agreements...................................................46
Limitation of Liability and Indemnification Matters.....................47
Certain Relationships and Related Transactions..........................47
Security Ownership of Certain Beneficial Owners and Management..........47
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................48
INFORMATION RELATING TO PEI...................................................56
Overview................................................................56
Industry Background.....................................................56
Strategy................................................................59
Customers...............................................................59
Suppliers...............................................................60
Competition.............................................................61
Governmental Regulation.................................................61
Additional Environmental Regulations....................................63
Research and Development................................................63
Intellectual Property...................................................63
Employees...............................................................64
Facilities..............................................................64
Legal Proceedings.......................................................64
Directors and Executive Officers........................................64
Board of Directors and Director Compensation............................66
Compensation of Executive Officers......................................66
Stock Options and Warrants..............................................66
Employment Agreements...................................................67
Limitation of Liability and Indemnification Matters.....................68
Certain Relationships and Related Transactions..........................69
Security Ownership of Certain Beneficial Owners and Management..........70
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................72
INFORMATION RELATING TO KINERGY...............................................75
Business................................................................75
Industry Background.....................................................75
Customers...............................................................76
Suppliers...............................................................77
Competition.............................................................78
Governmental Regulation.................................................78
Environmental Regulation................................................78
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Employees...............................................................78
Facilities..............................................................78
Legal Proceedings.......................................................78
Management..............................................................78
Manager and Officer Compensation........................................79
Stock Options and Warrants..............................................79
Employment Agreements...................................................79
Limitation of Liability and Indemnification Matters.....................79
Certain Relationships and Related Transactions..........................79
Security Ownership of Certain Beneficial Owners and Management..........79
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................80
INFORMATION RELATING TO REENERGY..............................................82
Business of ReEnergy....................................................82
Industry Background.....................................................82
Customers...............................................................82
Suppliers...............................................................82
Competition.............................................................82
Governmental Regulation.................................................82
Environmental Regulation................................................82
Research and Development................................................82
Intellectual Property...................................................82
Employees...............................................................83
Facilities..............................................................83
Legal Proceedings.......................................................83
Management..............................................................83
Manager and Officer Compensation........................................83
Stock Options and Warrants..............................................83
Limitation of Liability and Indemnification Matters.....................84
Certain Relationships and Related Transactions..........................84
Security Ownership of Certain Beneficial Owners and Management
of ReEnergy...........................................................84
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................84
PROPOSAL 1 ELECTION OF CLASS III DIRECTOR.....................................86
PROPOSAL 2 APPROVAL OF THE SHARE EXCHANGE AND RELATED TRANSACTIONS............87
Background of the Share Exchange........................................87
Recommendation of the Board of Directors of Accessity;
Accessity's Reasons For the Share Exchange............................88
Recommendation of the Board of Directors of PEI; PEI's
Reasons For the Share Exchange........................................89
Approval by the Sole Manager of Kinergy; Kinergy's Reasons
For the Share Exchange................................................90
Recommendation of the Managers of ReEnergy; ReEnergy's Reasons
For the Share Exchange................................................91
Interests of Certain Persons in the Share Exchange......................92
Option Agreement........................................................93
Agreements with LDI and W. M. Lyles Co..................................93
Consulting and Noncompetition Agreements................................93
Transfer of DriverShield and Sale of Sentaur............................94
Employment Agreements...................................................94
Noncompetition and Nonsolicitation Agreements...........................95
Certain Federal Income Tax Consequences.................................95
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Accounting Treatment....................................................96
Regulatory Matters......................................................96
No Dissenters' Rights for Shareholders of PEI...........................97
No Dissenters' Rights for Members of Kinergy or ReEnergy................97
Restrictions on Resale of Accessity Common Stock........................97
Nasdaq SmallCap Market Listing..........................................98
THE SHARE EXCHANGE AGREEMENT..................................................99
General.................................................................99
Share Exchange Consideration............................................99
Indemnification........................................................100
Stock Ownership Following the Share Exchange...........................101
Stock Certificates.....................................................101
Corporate Matters......................................................101
Conditions to the Share Exchange.......................................102
Representations and Warranties.........................................104
Covenants..............................................................105
Noncompetition and Nonsolicitation Agreements..........................108
Termination............................................................108
Expenses and Termination Fees..........................................109
HISTORIC AND PRO FORMA CAPITALIZATION........................................110
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY..................111
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS.....113
OPERATION, MANAGEMENT AND BUSINESS OF ACCESSITY AFTER THE SHARE EXCHANGE.....123
Business of Accessity..................................................123
Executive Officers and Directors.......................................123
Description of Capital Stock of Accessity..............................124
Listing of Accessity Common Stock......................................129
Transfer Agent.........................................................129
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF ACCESSITY AFTER
THE SHARE EXCHANGE.........................................................130
COMPARISON OF SECURITIES.....................................................132
Description of Securities of Accessity.................................132
Description of Securities of Pacific Ethanol, Inc. (Delaware)..........132
Description of Securities of PEI.......................................133
Description of Kinergy Limited Liability Company Membership
Interests............................................................134
Description of ReEnergy Limited Liability Company Membership
Interests............................................................134
COMPARISON OF SHAREHOLDERS' RIGHTS...........................................135
PROPOSAL 3 APPROVAL OF SUBSIDIARY TRANSFER...................................137
General................................................................137
Fairness Opinion.......................................................137
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PROPOSAL 4 APPROVAL OF SUBSIDIARY SALE.......................................139
General................................................................139
Terms of Subsidiary Sale...............................................139
PROPOSAL 5 APPROVAL OF 2004 PLAN.............................................140
Purpose................................................................140
Administration.........................................................140
Shares Subject to the 2004 Plan........................................140
Eligibility............................................................140
Terms of Options.......................................................141
Effect of Certain Corporate Events.....................................142
Amendment of Plan and Grants...........................................142
Termination of Plan....................................................142
Federal Income Tax Information.........................................142
Possible Anti-Takeover Effects.........................................143
New Plan Benefits......................................................144
Equity Compensation Plan Information...................................144
PROPOSAL 6 APPROVAL OF DELAWARE REINCORPORATION..............................145
Reasons for the Delaware Reincorporation...............................145
The Reincorporation Merger.............................................145
Dissenters' Rights.....................................................147
Termination of Rights Agreement and Elimination of Junior
Participating Preferred Stock........................................149
Accounting Treatment of the Delaware Reincorporation...................149
Acceleration of Outstanding Options....................................149
Federal Income Tax Consequences of the Delaware Reincorporation........150
No Change in Reporting Status..........................................150
Board of Directors Reservation of Rights...............................150
Delaware and New York Corporate Laws...................................151
Authorized Shares......................................................151
PROPOSAL 7 APPROVAL OF CORPORATE NAME CHANGE.................................157
SHAREHOLDER PROPOSALS........................................................158
SOLICITATION AND OTHER MATTERS...............................................158
APPENDIX A Share Exchange Agreement and Amendments No. 1 and No. 2 to Share
Exchange Agreement
APPENDIX B Form of 2004 Stock Option Plan of Accessity
APPENDIX C Form of Agreement and Plan of Merger for Delaware Reincorporation
APPENDIX D Form of Certificate of Incorporation of Pacific Ethanol, Inc.
(Delaware)
APPENDIX E Form of Bylaws of Pacific Ethanol, Inc. (Delaware)
APPENDIX F Financial Statements
APPENDIX G Sections 623 and 910 of the New York Business Corporation Law
regarding dissenters' rights
APPENDIX H Fairness Opinion of BearingPoint, Inc. addressed to the Board of
Directors of Accessity
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ACCESSITY CORP.
PROXY STATEMENT FOR ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD ON
DECEMBER 28, 2004
____________________
PROXY STATEMENT
____________________
VOTING AND PROXY
Accessity Corp. ("Accessity") is furnishing this proxy statement in
connection with the solicitation of proxies by the board of directors of
Accessity for use at the 2004 annual meeting of shareholders to be held on
December 28, 2004, at the Coral Springs Marriott Hotel, Golf Club and Convention
Center, 11775 Heron Bay Boulevard, Coral Springs, Florida 33076 at 10:00 a.m.,
local time, or at any adjournment or postponement of the meeting. This proxy
statement and the accompanying notice of annual meeting, proxy card and annual
report on Form 10-KSB are first being mailed to shareholders on or about
December 15, 2004.
SUMMARY INFORMATION REGARDING PROPOSALS OTHER THAN ELECTION OF THE CLASS III
DIRECTOR
The respective boards of directors of Accessity and Pacific Ethanol, Inc.
("PEI"), and the respective managers of Kinergy Marketing, LLC ("Kinergy"), and
ReEnergy, LLC ("ReEnergy"), have agreed to their companies being acquired by
Accessity pursuant to a share exchange transaction in which the shareholders of
PEI and the limited liability company members of Kinergy and ReEnergy will
exchange their ownership interests in such companies for shares of common stock
of Accessity and holders of options and warrants to acquire shares of common
stock of PEI will exchange their options and warrants for warrants to acquire
shares of common stock of Accessity. This transaction is referred to in this
proxy statement as the "Share Exchange" and PEI, Kinergy and ReEnergy are
sometimes referred to in this proxy statement as the "Acquired Companies."
If the Share Exchange is completed, each of PEI, Kinergy and ReEnergy will
become a wholly-owned subsidiary of Accessity. The shares of Accessity common
stock to be issued to the shareholders of PEI and limited liability company
members of Kinergy and ReEnergy, together with the shares of Accessity common
stock issuable upon the exercise or conversion of all outstanding options and
warrants and convertible debt, as the case may be, of PEI, will represent
approximately 86% of the outstanding common stock of Accessity after the
consummation of the Share Exchange.
At the annual meeting, the shareholders of Accessity will be asked to
consider and approve the Share Exchange pursuant to a Share Exchange Agreement
dated as of May 14, 2004, as amended on July 30, 2004 and as amended as of
October 1, 2004 (as amended, the "Share Exchange Agreement"), and the
consummation of the transactions contemplated thereby and several additional
proposals related to the consummation of the Share Exchange including the
Subsidiary Transfer (as defined below) and the Subsidiary Sale (as defined
below). A copy of the Share Exchange Agreement is attached as APPENDIX A to this
proxy statement.
In the Share Exchange, PEI shareholders will have the right to receive one
share of Accessity common stock in exchange for each share of PEI common stock
they then own (the "PEI Exchange Ratio"), the sole limited liability company
member of Kinergy will have the right to receive 38,750 shares of Accessity
common stock in exchange for each 1% of outstanding limited liability company
interest he then owns (the "Kinergy Exchange Ratio"), and the limited liability
company members of ReEnergy will have the right to receive 1,250 shares of
Accessity common stock in exchange for each 1% of outstanding limited liability
company interest they then own (the "ReEnergy Exchange Ratio"). In addition, the
holders of options and warrants to acquire shares of PEI common stock will
receive warrants to acquire
1
an aggregate of 348,487 shares of Accessity common stock at exercise prices
ranging from $0.0001 per share to $2.00 per share in exchange for cancellation
of outstanding options and warrants.
The Board of Directors of Accessity has also approved, subject to the
approval of the Share Exchange by Accessity shareholders:
o the transfer of DriverShield CRM Corp. ("DriverShield"), a
wholly-owned subsidiary of Accessity, to Barry Siegel, the current
Chairman of the Board, President and Chief Executive Officer of
Accessity, the issuance of up to 400,000 shares of Accessity common
stock to Barry Siegel and 200,000 shares of Accessity common stock to
Philip Kart, Accessity's current Chief Financial Officer and the
execution of a consulting and noncompetition agreement between
Accessity and each of Barry Siegel and Philip Kart (collectively, the
"Subsidiary Transfer"), in full consideration for the agreement of
each of Messrs. Siegel and Kart to relinquish cash payments that
otherwise would be due to each of them under their respective
employment agreements with Accessity as a result of the consummation
of the Share Exchange;
o the sale of Sentaur Corp. ("Sentaur"), a wholly-owned subsidiary of
Accessity, to Barry Siegel for the sum of $5,000 (the "Subsidiary
Sale");
o the 2004 Stock Option Plan of Accessity (the "2004 Plan");
o the reincorporation of Accessity in the State of Delaware under the
name "Pacific Ethanol, Inc." to occur immediately prior to the
consummation of the Share Exchange (the "Delaware Reincorporation");
and
o an amendment to the articles of incorporation of Accessity to change
the name of Accessity to "Pacific Ethanol, Inc." effective immediately
prior to the consummation of the Share Exchange, if the Share Exchange
is approved by the shareholders and the Delaware Reincorporation does
not occur (the "Corporate Name Change").
The Delaware Reincorporation will be effected through a merger of
Accessity with and into a wholly-owned Delaware subsidiary of Accessity named
Pacific Ethanol, Inc., to be formed for the purpose of effecting the
reincorporation (the "Delaware Reincorporation Subsidiary"). In lieu of
receiving common stock of the Delaware Reincorporation Subsidiary, Accessity
shareholders will have dissenters' rights. Accessity shareholders who properly
demand these rights will receive cash for the fair value of the Accessity common
stock that they held prior to the merger. The fair value would be determined by
a court or by agreement between Accessity and its shareholders who exercise
their dissenters' rights. If the proposal to reincorporate Accessity in the
State of Delaware is approved by the Accessity shareholders, but Accessity
receives demands for exercise of dissenters' rights that exceed 1% of the
outstanding shares of Accessity common stock, Accessity's board of directors may
elect not to proceed with the reincorporation. If the board of directors elects
not to proceed with the reincorporation or if the proposal is not approved by
Accessity's shareholders, Accessity will remain a New York corporation and
provided the Corporate Name Change is approved by the shareholders, Accessity
will change its name to Pacific Ethanol, Inc. If, however, the Delaware
Reincorporation is approved, the Delaware Reincorporation Subsidiary will
succeed to the rights, properties and assets and assume the liabilities of
Accessity, and its financial statements will be substantially identical to
Accessity, the only difference being those appropriate to reflect Accessity's
new corporate identity, the Share Exchange and the Subsidiary Transfer. This new
company (i.e., Accessity Corp., a New York corporation, renamed Pacific Ethanol,
Inc. or the Delaware Reincorporation Subsidiary named Pacific Ethanol, Inc.),
which combines the operations of the Acquired Companies, is referred to in this
proxy statement as the "Combined Company."
Accessity shareholders will vote on the matters described in this proxy
statement at the annual meeting of shareholders on the date set forth above. At
the annual meeting, you will be asked:
2
o to elect Bruce S. Udell as a Class III director of Accessity (Proposal
1);
o to approve the issuance of shares of Accessity common stock and
options and warrants in the Share Exchange pursuant to the Share
Exchange Agreement and the consummation of the transactions
contemplated thereby (Proposal 2);
o to approve the Subsidiary Transfer (Proposal 3), if the Share Exchange
is approved by the shareholders;
o to approve the Subsidiary Sale (Proposal 4), if the Share Exchange is
approved by the shareholders;
o to approve the 2004 Plan (Proposal 5), if the Share Exchange is
approved by the shareholders;
o to approve the Delaware Reincorporation (Proposal 6), if the Share
Exchange is approved by the shareholders; and
o to approve the Corporate Name Change (Proposal 7), if the Share
Exchange is approved by the shareholders and the Delaware
Reincorporation does not occur.
Neither the Share Exchange nor the other matters described in this proxy
statement (other than the election of a Class III director) can be completed
unless the shareholders of Accessity approve the Share Exchange and the other
matters described in this proxy statement (other than the election of a Class
III director).
RECOMMENDATION OF ACCESSITY'S BOARD OF DIRECTORS
The board of directors of Accessity, by unanimous vote, has determined
that the Share Exchange is in the best interests of the holders of Accessity's
common stock. In addition, the board of directors, without any influence from
Barry Siegel, by unanimous vote of the disinterested directors, has determined
that the Subsidiary Transfer and the Subsidiary Sale are in the best interests
of the holders of Accessity's common stock. The decisions of the board of
directors of Accessity to enter into the Subsidiary Transfer are based upon its
evaluation of a number of factors, including, among others, the written opinion
dated October 9, 2004, and confirmed in writing as of the date of this proxy
statement, of BearingPoint, Inc. ("BearingPoint") that, based upon and subject
to the matters set forth in the written opinion, as of such dates, the
Subsidiary Transfer is fair from a financial point of view to Accessity and the
shareholders of Accessity. See "Proposal 3--Approval of the Subsidiary
Transfer--Fairness Opinion." In addition, the board of directors of Accessity,
by unanimous vote, has determined that the approval of 1995 Plan amendment, the
2004 Plan, and the Delaware Reincorporation is in the best interests of the
shareholders of Accessity.
HOW TO VOTE
Shares held directly in your name as the "Shareholder of Record" may be
voted in person at the annual meeting. If you choose to do so, please bring the
enclosed proxy card or proof of identification. Even if you currently plan to
attend the annual meeting, we recommend that you also submit your proxy card as
described below so that your vote will be counted if you later decide not to
attend the annual meeting. Shares held through a broker or other nominee may be
voted in person by you only if you obtain a signed legal proxy from the record
holder giving you the right to vote the shares.
Your vote is very important. Whether or not you plan to attend the annual
meeting, please take the time to vote by completing and mailing the enclosed
proxy card to us. If you complete, sign, date and mail your proxy card without
indicating how you want to vote, your proxy will count as a vote in favor of
3
all proposals contained in this proxy statement. You may vote at the annual
meeting if you own shares as of the close of business on October 29, 2004.
Upon written or oral request, Accessity will promptly supply such
shareholders additional copies of this proxy statement. These requests should be
made by contacting Accessity's principal executive offices at 12514 West
Atlantic Boulevard, Coral Springs, Florida 33071 or by telephone at (954)
752-6161, Attention: Investor Relations. If shareholders sharing the same
address are receiving multiple copies of annual reports or proxy statements,
such shareholders can request delivery in the future of only a single copy of
the annual reports or proxy statements by contacting Accessity at the above
address.
REVOKING YOUR PROXY
A shareholder of Accessity who has submitted a proxy card may revoke it at
any time before it is voted, but only by executing and returning to the
secretary of Accessity at 12514 West Atlantic Boulevard, Coral Springs, Florida
33071, a proxy card bearing a later date, by giving notice of revocation to the
secretary of Accessity, or by attending the annual meeting and voting in person.
Attendance at the annual meeting does not, by itself, revoke a proxy. A
stockholder who holds shares through a broker or other nominee must bring a
legal proxy to the annual meeting if that shareholder desires to vote at the
annual meeting.
SHAREHOLDERS ENTITLED TO VOTE; OUTSTANDING SHARES AND QUORUM
Only holders of record of Accessity common stock at the close of business
on the record date, October 29, 2004, are entitled to notice of and to vote at
the annual meeting. On the record date, there were 2,339,414 shares of Accessity
common stock issued and outstanding. Each share of common stock is entitled to
one vote on each matter brought before the annual meeting. The presence in
person or by proxy of holders of a majority of the issued and outstanding common
stock as of the record date will constitute a quorum at the annual meeting. If a
quorum is not present, the annual meeting may be adjourned from time to time
until a quorum is obtained. Shares of Accessity common stock represented in
person or by proxy, as well as abstentions and "broker non-votes" will be
counted for purposes of determining whether a quorum is present at the annual
meeting.
Directors are elected by a plurality. Therefore, for Proposal 1, the
election of Bruce S. Udell as a Class III director, the nominee receiving the
highest number of votes will be elected. Abstentions and broker non-votes will
have no effect on Proposal 1.
Approval of Proposal 2, the Share Exchange, requires the affirmative vote
of holders of a majority of the outstanding shares of Accessity common stock as
of the record date.
Approval of Proposal 3, the Subsidiary Transfer, requires the affirmative
vote of holders of a majority of outstanding shares of Accessity common stock as
of the record date.
Approval of Proposal 4, the Subsidiary Sale, requires the affirmative vote
of holders of a majority of outstanding shares of Accessity common stock as of
the record date.
Approval of Proposal 5, the adoption of the 2004 Plan, requires the
affirmative vote of a majority of the shares of Accessity common stock entitled
to vote at and present in person or represented by proxy at the meeting.
Approval of Proposal 6, the Delaware Reincorporation, requires the
affirmative vote of holders of a majority of outstanding shares of Accessity
common stock as of the record date.
4
Approval of Proposal 7, the Corporate Name Change, requires the
affirmative vote of holders of a majority of the outstanding shares of Accessity
common stock as of the record date.
SOLICITATION AND EXPENSES
Regardless of whether the Share Exchange is consummated, each of
Accessity, PEI, Kinergy and ReEnergy will pay its own costs and expenses
incurred in connection with the Share Exchange Agreement and the transactions
contemplated thereby, except that fees and expenses (other than attorneys' fees)
incurred in connection with the printing and filing of this proxy statement will
be paid by Accessity. However, if Accessity receives a Superior Proposal (as
defined in the Share Exchange Agreement and described below) and terminates the
Share Exchange Agreement, then Accessity is required to pay the reasonable fees
and expenses of each of PEI, Kinergy and ReEnergy up to an aggregate maximum
amount of $150,000 for all of the Acquired Companies.
Subject to the foregoing, the cost of soliciting proxies will be paid by
Accessity. In addition to solicitations by mail, some directors, officers and
regular employees of Accessity, without extra remuneration, may conduct
solicitations by telephone, facsimile and personal interview. Accessity will
reimburse brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending proxy material to the beneficial
owners of common stock. Accessity has no present plans to hire special employees
or paid solicitors to assist it in obtaining proxies, but it reserves the right
to do so if it believes it is necessary to secure a quorum. As of the date of
this proxy statement, the board of directors of Accessity has no knowledge of
any matters to be presented for consideration at the annual meeting other than
those referred to above. However, persons named in the accompanying form of
proxy will have the authority to vote such proxy as to any other matters which
do properly come before the meeting and as to matters incidental to the conduct
of the meeting, according to their discretion.
AVAILABILITY OF ACCOUNTANTS
A representative of Nussbaum Yates & Wolpow, P.C., Accessity's Independent
Registered Public Accountants, is not expected to be present at the annual
meeting, but will be available by telephone.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THE PROXY STATEMENT. THE
PROPOSED SHARE EXCHANGE AND RELATED TRANSACTIONS ARE COMPLEX TRANSACTIONS AND
INVOLVE SIGNIFICANT RISKS. SHAREHOLDERS OF ACCESSITY AND PEI AND MEMBERS OF
KINERGY AND REENERGY ARE URGED TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO ON PAGE 22,
UNDER "RISK FACTORS."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT.
The date of this Proxy Statement is December 10, 2004
5
AVAILABLE INFORMATION
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROXY STATEMENT.
WE HAVE AUTHORIZED NO ONE TO PROVIDE YOU WITH ADDITIONAL OR DIFFERENT
INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROXY STATEMENT
IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THE DOCUMENT.
ACCESSITY CORP.
Accessity Corp. is a New York corporation. Accessity's principal executive
offices are located at 12514 West Atlantic Boulevard, Coral Springs, Florida
33071, and its telephone number is (954) 752-6161.
Accessity files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission, or SEC. You
may inspect and copy such material at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also obtain copies of such material from the SEC at prescribed rates by writing
to the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington.
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms. You can also find Accessity's SEC filings at the SEC's
website at http://www.sec.gov. Accessity is not incorporating any documents by
reference into this proxy statement.
Accessity's common stock is quoted on The Nasdaq SmallCap Market. The
trading symbol for Accessity is "ACTY." You may inspect reports and other
information concerning Accessity at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
PACIFIC ETHANOL, INC.
Pacific Ethanol, Inc. is a California corporation. PEI's principal
executive offices are located at 5711 N. West Avenue, Fresno, California 93711,
and its telephone number is (559) 435-1771.
PEI was incorporated in California in January 2003. PEI is not subject to
the information reporting requirements of the Securities Exchange Act of 1934,
or Exchange Act, and accordingly does not file reports, proxy statements or
other information with the SEC.
KINERGY MARKETING, LLC
Kinergy Marketing, LLC is an Oregon limited liability company. Kinergy's
principal executive offices are located at 1260 Lake Blvd., Suite 225, Davis,
California 95616, and its telephone number is (530) 750-3017.
Kinergy was organized in Oregon in September 2000. Kinergy is not subject
to the information reporting requirements of the Exchange Act, and accordingly
does not file reports, proxy statements or other information with the SEC.
REENERGY, LLC
ReEnergy, LLC is a California limited liability company. ReEnergy's
principal executive offices are located at 6020 Commerce Boulevard, Suite 128,
Rohnert Park, California 94928, and its telephone number is (707) 588-9885.
ReEnergy was organized in California in March 2001. ReEnergy is not
subject to the information reporting requirements of the Exchange Act, and
accordingly does not file reports, proxy statements or other information with
the SEC.
6
SUMMARY OF THE SHARE EXCHANGE
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FOUND IN GREATER DETAIL
ELSEWHERE IN THIS PROXY STATEMENT. THIS SUMMARY DOES NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. ACCESSITY URGES YOU TO READ THE ENTIRE
PROXY STATEMENT (INCLUDING THE APPENDICES) BEFORE YOU DECIDE HOW TO VOTE. THE
SHARE EXCHANGE AGREEMENT IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT.
SHAREHOLDERS ARE ENCOURAGED TO READ THE SHARE EXCHANGE AGREEMENT, WHICH IS THE
LEGAL DOCUMENT GOVERNING THE SHARE EXCHANGE, THE SUBSIDIARY TRANSFER AND THE
SUBSIDIARY SALE.
OVERVIEW OF THE TRANSACTION
THE SHARE EXCHANGE
o Pursuant to the Share Exchange Agreement, the current security holders
of each of PEI, Kinergy and ReEnergy will exchange their securities in
such companies for newly issued shares of Accessity common stock.
o It is anticipated that an aggregate of approximately 17,550,000 shares
of Accessity common stock will be issued to shareholders of PEI on a
fully diluted basis (including up to 2,750,000 shares to be issued in
connection with a $7 million equity financing to be used for corporate
growth and which is currently in process), an aggregate of 3,875,000
shares of Accessity common stock will be issued to Neil Koehler, the
sole limited liability company member of Kinergy, and an aggregate of
125,000 shares of Accessity common stock will be issued to the limited
liability company members of ReEnergy. For more information, see
"Proposal 2--Approval of the Share Exchange and Related Transactions,"
"Capitalization" and "Unaudited Pro Forma Combined Condensed Financial
Statements."
RESULTS OF THE SHARE EXCHANGE
o It is anticipated that current security holders of PEI, Kinergy and
ReEnergy will collectively own, on a fully-diluted basis,
approximately 86% of Accessity common stock outstanding immediately
following the exchange, and that current Accessity shareholders will
collectively own, on a fully-diluted basis, the remaining
approximately 14% of Accessity common stock outstanding immediately
following the exchange.
o Upon consummation of the Share Exchange, all current directors of
Accessity will resign except for Kenneth J. Friedman, and Neil
Koehler, Ryan Turner, William Lyles, Frank Greinke and John Pimentel
will be appointed to the board of directors of the Combined Company.
As a result, former directors of PEI will control the board of
directors of the Combined Company. Prior to the consummation of the
Share Exchange, PEI and Kinergy were not under common control.
o Following the exchange, each of PEI, Kinergy and ReEnergy will be a
wholly-owned subsidiary of Accessity. For more information, see
"Proposal 2--Approval of the Share Exchange and Related Transactions."
TRANSFER AND SALE OF CURRENT ACCESSITY SUBSIDIARIES
o Concurrent with the Share Exchange, it is anticipated that Accessity
will transfer DriverShield to Barry Siegel, Accessity's current
Chairman of the Board, President and Chief Executive Officer, issue up
to 400,000 shares of Accessity common stock to Barry Siegel and
200,000 shares of Accessity common stock to Philip Kart, Accessity's
current Chief Financial Officer, and enter into a consulting and
noncompetition agreement with each of Barry Siegel and Philip Kart,
all in full consideration for the agreement of each of Messrs. Siegel
and Kart to relinquish cash payments that otherwise would be due to
each of them under their respective employment
7
agreements with Accessity as a result of the consummation of the Share
Exchange. In addition, Accessity will sell Sentaur to Barry Siegel for
the sum of $5,000. As a result, Accessity will no longer engage in its
current businesses but will thereafter conduct the businesses of PEI,
Kinergy and ReEnergy. For more information, see "Proposal 2--Approval
of the Share Exchange and Related Transactions--Transfer of
DriverShield and Sale of Sentaur," "Proposal 3--Approval of Subsidiary
Transfer" and "Proposal 4--Approval of Subsidiary Sale."
ADOPTION OF BENEFITS PLAN
o In connection with the transactions contemplated by the Share Exchange
Agreement, it is anticipated that Accessity will adopt the 2004 Plan,
a stock option plan to be administered by a committee of Accessity's
board of directors under which incentive stock options may be granted
to employees (including officer and director employees), and
non-statutory stock options may be granted to employees, directors,
officers, independent contractors and consultants. For more
information, see "Proposal 5--Approval of the 2004 Plan."
REINCORPORATION
o Immediately prior to the consummation of the Share Exchange, it is
anticipated that Accessity will change its name to Pacific Ethanol,
Inc. and reincorporate in Delaware. Current Accessity shareholders
will have dissenters' appraisal rights under New York law in
connection with the reincorporation. If the proposed reincorporation
is not approved by the shareholders of Accessity or if the proposal is
approved, but Accessity receives demands for exercise of dissenters'
rights that exceed 1% of the outstanding shares of Accessity common
stock, the board of directors of Accessity may elect not to proceed
with the reincorporation in which case Accessity will remain a New
York corporation and, provided the Corporate Name Change Proposal is
approved, change its name to Pacific Ethanol, Inc. For more
information, see "Proposal 6--Approval of Delaware Reincorporation"
and "Proposal 7--Approval of Corporate Name Change."
CORPORATE NAME CHANGE
o If the Share Exchange is approved by the shareholders and the proposal
to reincorporate Accessity in the State of Delaware does not occur, it
is anticipated that immediately prior to the consummation of the Share
Exchange, Accessity will change its name to Pacific Ethanol, Inc. For
more information, see "Proposal 7--Approval of Corporate Name Change."
THE COMPANIES TO THE SHARE EXCHANGE
ACCESSITY CORP.
Accessity is a provider of medical billing recovery services through its
wholly-owned subsidiary, Sentaur, and, until January 2003, also was a provider
of management and processing services for new automobile claims and repairs
through its wholly-owned subsidiary, DriverShield. Effective January 2, 2003,
Accessity transferred to ClaimsNet, Inc. all responsibility for such management
and processing services pursuant to a Strategic Partnership Agreement by and
among Accessity, DriverShield and ClaimsNet, Inc. Although Accessity continues
to provide medical billing recovery services through Sentaur, if the Share
Exchange is consummated, Accessity will transfer DriverShield to Barry Siegel
and sell Sentaur to Barry Siegel. As a result, Accessity will no longer engage
in either business but will thereafter conduct the businesses of PEI, Kinergy
and ReEnergy.
Accessity was incorporated in New York on June 28, 1985 under the name
First Priority Group, Inc. and was originally engaged in the automotive fleet
management business and administration of automobile repairs for businesses,
insurance companies and members of affinity groups. For more information, see
"Information Relating to Accessity."
8
PACIFIC ETHANOL, INC.
PEI has purchased a 137-acre parcel of real property in Madera County,
California on which it intends to construct an ethanol production facility and a
grain receiving, processing and storage facility anticipated to produce up to 35
million gallons of denatured ethanol and 290,000 tons of distillers grain
annually. The site already has 50,000 tons of grain storage, a fully automated
processing mill, and two existing rail loops that will allow PEI to cost
effectively receive corn from any region of the country for making ethanol.
Pacific AG Products, LLC ("PAP"), a subsidiary of PEI in which PEI holds 90% of
the limited liability company membership interests and Doug Dickson, President
of PAP, holds the remaining 10% limited liability company interests, intends to
manage corn purchasing for the ethanol plant and to market distillers grain, the
main co-product of ethanol manufacturing.
PEI plans to do the following:
o make strategic acquisitions in the ethanol refining and marketing
industry;
o construct an ethanol plant in Madera County, California for the
production of up to 35 million gallons of ethanol per year (and, if
possible, construct an additional ethanol production facility on real
property located in Visalia, California with respect to which it has
an option to purchase);
o upon completion of construction of its ethanol production facility,
market and sell ethanol using the marketing services of Kinergy
primarily in the Central Valley region of California to major and
independent oil customers who control the majority of all gasoline
sales in California;
o through PAP, market and sell wet distillers grain ("DWG") to dairy
farmers in California; and
o to the extent possible, sell carbon dioxide, another co-product of
ethanol manufacturing, to dry ice companies in California.
The demand for ethanol in 2003 reached approximately 750 million gallons
statewide in California and PEI believes that the demand for ethanol will
continue to grow. PEI believes it will have a competitive advantage in the
Central Valley of California market because competing Midwest-sourced ethanol
must be "double-handled" to reach Central Valley distribution racks. In
addition, the San Joaquin Valley (located in the southern half of the Central
Valley) has over 1.3 million head of dairy cattle in an area less than 30,000
square miles, which should provide an excellent market for DWG, an important
protein source for dairy cows.
PEI was incorporated in California in January 2003. For more information,
see "Information Relating to PEI."
KINERGY MARKETING, LLC
Kinergy is in the business of marketing ethanol throughout the western
United States and providing related transportation, storage and delivery
services through third party service providers. Kinergy sells ethanol into
California, Arizona and Oregon and has extensive customer relationships
throughout the western United States. Kinergy's operations generated
approximately $35 million in revenues during the year ended December 31, 2003,
approximately $56 million in revenues for the nine months ended September 30,
2004 and is expected to generate approximately $75 million during 2004. Kinergy
believes that by combining its operations with the proposed operations of PEI,
and the proposed operations of ReEnergy, the Combined Company can become a
leader in the production and sale of ethanol in the State of California and
other Western states.
9
Kinergy was organized in Oregon in September 2000. Neil Koehler, the Chief
Executive Officer of PEI, is the sole manager and sole limited liability company
member of Kinergy. For more information, see "Information Relating to Kinergy."
REENERGY, LLC
ReEnergy intends to develop a large-scale ethanol plant in California. To
date, ReEnergy has had no significant operations, other than entering into an
Option Agreement dated as of July 30, 2003, with Kent Kaulfuss, a limited
liability company member of ReEnergy, and his wife with respect to the
acquisition of approximately 89.3 acres of real property located in Visalia,
California, with respect to which real property ReEnergy has granted to PEI an
option to purchase upon ReEnergy's purchase of same from Kent Kaulfuss and his
wife.
ReEnergy believes that by combining its operations with the proposed
operations of PEI, and the operations of Kinergy, the Combined Company can
become a leader in the production and sale of ethanol in the State of California
and other Western states.
ReEnergy was organized in California in March 2001. For more information,
see "Information Relating to ReEnergy."
STRATEGY OF THE COMBINED COMPANY
The primary goal of the Combined Company is to create a vertically
integrated marketing, distribution and production alternative fuels business
focused in the ethanol market, employing existing traditional production
techniques and concurrently exploring advanced processing methods, including
hydrogen fuel cells. The Combined Company will include the ethanol marketing and
distribution business of Kinergy that is anticipated to generate revenues of
approximately $75 million during 2004. Kinergy has achieved 100% annual revenue
growth during the last two years. The Combined Company intends to acquire
complementary businesses that will either expand Kinergy's distribution reach,
or provide ethanol production to capture more of the value in the ethanol supply
chain. To that end, PEI has commenced discussions with several potential
acquisition targets, although no assurance can be given that PEI will be
successful in making any acquisitions. The Combined Company expects to use its
common stock, where appropriate, to make these proposed acquisitions. To the
extent PEI is successful in raising an additional $7 million of equity capital
prior to consummation of the Share Exchange, the Combined Company is expected to
have approximately $10 million of liquid funds upon consummation of the Share
Exchange. In addition, the Combined Company intends to raise additional capital
and build one, and possibly additional, ethanol production facilities in
California. It is expected that funding for construction of the first facility,
for which all permits and plans have been completed, will occur, if at all,
after the consummation of the Share Exchange. See "Information Relating to
PEI--Strategy."
ACCESSITY'S REASONS FOR THE SHARE EXCHANGE,
SUBSIDIARY TRANSFER AND SUBSIDIARY SALE
The board of directors of Accessity believes that the proposed Share
Exchange, Subsidiary Transfer and Subsidiary Sale will establish a new business
direction for Accessity, which should provide a significant growth opportunity
for Accessity in a burgeoning industry.
In particular, the board of directors of Accessity believes that the
potential benefits of the Share Exchange, Subsidiary Transfer and Subsidiary
Sale include the following:
o the potential size and scope of the business of the Combined Company
has greater national market potential than the Sentaur medical
business may have, and therefore may be of potentially greater value
to Accessity shareholders;
10
o the California market for ethanol, as an initial target, is the
largest market in the United States and is growing as a result of
regulatory actions banning the use of methyl tertiary-butyl ether
("MTBE") in California, which went into effect on January 1, 2004;
o the alternative fuels business has both mid-term and long-term
potential in the United States as the price of fuel has increased and
major sources of supply are outside the control of this country;
o the United States, for geopolitical reasons, needs to diversity from
its reliance on foreign oil, the infrastructure for ethanol is in
place and ethanol can be used by the millions of vehicles currently in
use. In addition, there are opportunities other than ethanol in the
alternative fuel markets that the PEI may pursue, which are of a
longer-term nature, that also have great potential; and
o the Acquired Companies provide a strong and experienced management
team that Accessity believes has the ability to execute on their
combined business plan.
The board of directors of Accessity, by unanimous vote, has determined
that the Share Exchange is in the best interests of the holders of Accessity's
common stock. In addition, the board of directors, by unanimous vote of a
majority of the disinterested members, has determined that the Subsidiary
Transfer and the Subsidiary Sale are in the best interests of the holders of
Accessity's common stock. The decision of the board of directors of Accessity to
enter into the Share Exchange and Subsidiary Transfer is based upon its
evaluation of a number of factors, including, among others, the written opinion
dated October 9, 2004, and confirmed in writing as of the date of this proxy
statement, of BearingPoint that, based upon and subject to the matters set forth
in the written opinion, as of such dates the Subsidiary Transfer is fair from a
financial point of view to Accessity and the shareholders of Accessity. See
"Proposal 2--Approval of the Share Exchange and Related Transactions," "Proposal
3--Approval of the Subsidiary Transfer--Fairness Opinion," and "Proposal
4--Approval of Subsidiary Sale."
VOTE REQUIRED
At the close of business on October 29, 2004, the record date for the 2004
annual meeting, 2,339,414 shares of Accessity common stock were issued and
outstanding and entitled to vote at the meeting. Approval of the Share Exchange
requires the affirmative vote of holders of a majority of outstanding shares of
Accessity common stock as of the record date.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN HOLDERS
As of November 30, 2004, the directors and executive officers of
Accessity, as a group, beneficially owned 445,000 shares of Accessity common
stock.
INTERESTS OF CERTAIN PERSONS IN THE SHARE EXCHANGE
As an Accessity shareholder, you should note that members of Accessity's
management and certain members of management of each of PEI, Kinergy and
ReEnergy have interests in the Share Exchange that are different from, or in
addition to, your interest as a shareholder. If the Share Exchange is completed,
certain compensation arrangements for persons that are members of Accessity's
management and certain members of management of each of PEI, Kinergy and
ReEnergy will be implemented. For more information, see "Proposal 2--Approval of
the Share Exchange and Related Transactions--Interests of Certain Persons in the
Share Exchange."
CONDITIONS TO THE SHARE EXCHANGE
Accessity will complete the Share Exchange only if a number of conditions
are either satisfied or waived by Accessity, some of which include:
11
o the representations and warranties of each of the Acquired Companies
and the owners thereof made in the Share Exchange Agreement and in all
certificates and other documents delivered by such Acquired Company
are true and accurate;
o PEI has raised an additional $7 million in equity capital since
October 1, 2004 and prior to closing;
o each of the Acquired Companies performs and complies in all material
respects with all agreements, obligations and conditions contained in
the Share Exchange Agreement;
o holders of at least 95% of PEI's common stock, all of the holders of
options and warrants to acquire shares of PEI common stock and all of
the limited liability company members of each of Kinergy and ReEnergy
sign the Share Exchange Agreement;
o the Accessity shareholders approve the Share Exchange pursuant to the
Share Exchange Agreement and the consummation of the transactions
contemplated thereby and, if the Share Exchange is approved by the
shareholders, each of the other proposals to be voted on at the annual
meeting is also approved;
o Accessity receives all required consents, approvals, authorizations,
filings, notices and recordations of third parties;
o Accessity enters into a consulting and noncompetition agreement with
Barry Siegel, the Chairman of the Board, President and Chief Executive
Officer of Accessity, and with Philip Kart, the Chief Financial
Officer of Accessity;
o Accessity enters into noncompetition and nonsolicitation agreements
with Ryan Turner, Neil Koehler, William Jones, Andrea Jones and Tom
Koehler;
o Accessity is not required to issue to the holders of PEI common stock
and the respective limited liability company members of Kinergy and
ReEnergy or any other person more than 21,700,000 shares of Accessity
common stock on a fully-diluted basis;
o Accessity has completed its financial and legal due diligence
investigation of each of the Acquired Companies with results thereof
satisfactory to Accessity in its sole discretion;
o Accessity has received a fairness opinion regarding the Subsidiary
Transfer;
o there is no material adverse change to the business, financial
condition, operations or financial performance of any of the Acquired
Companies;
o this proxy statement is not subject to any proceedings commenced or
threatened by the SEC; and
o there are no restraining orders, injunctions and other orders
preventing the consummation of the Share Exchange.
Each of the Acquired Companies will complete the Share Exchange only if a
number of conditions are either satisfied or waived by each of the Acquired
Companies, some of which include:
o the representations and warranties of Accessity made in the Share
Exchange Agreement and in all certificates and other documents
delivered by Accessity are true and accurate;
o Accessity performs and complies in all material respects with all
agreements, obligations and conditions contained in the Share Exchange
Agreement;
12
o holders of at least 95% of PEI's common stock, all of the holders of
options and warrants to acquire shares of PEI common stock and all of
the limited liability company members of each of Kinergy and ReEnergy
sign the Share Exchange Agreement;
o the Accessity shareholders approve the Share Exchange pursuant to the
Share Exchange Agreement and the consummation of the transactions
contemplated thereby and, if the Share Exchange is approved by the
shareholders, each of the other proposals to be voted on at the annual
meeting (other than the election of a Class III director and the
Corporate Name Change) is approved;
o each Acquired Company receives all required consents, approvals,
authorizations, filings, notices and recordations of third parties;
o the Acquired Companies receive written resignations of all officers
and directors of Accessity as of the consummation of the Share
Exchange, other than the resignation of Kenneth J. Friedman;
o the shares of Accessity common stock to be issued pursuant to the
Share Exchange are validly issued, fully paid and nonassessable under
applicable law and have been duly issued in a non-public offering in
compliance with all applicable federal and state securities laws;
o at the time of the closing, Accessity has at least the same cash
balance as reported in its Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2004 filed with the SEC, subject to certain
agreed upon adjustments;
o Accessity has not more than 2,800,000 shares of capital stock issued
and outstanding on a fully-diluted basis immediately preceding the
closing of the Share Exchange and there are no shares of preferred
stock outstanding;
o the Subsidiary Transfer is completed and each of Barry Siegel and
Philip Kart has waived the change in control provisions set forth in
his respective employment agreement with Accessity;
o the Subsidiary Sale is completed;
o Accessity has adopted the 2004 Plan;
o Accessity has established an escrow account into which Accessity will
deposit the net proceeds from a recovery from the current arbitration
proceedings with Presidion Solutions, Inc. to be used solely to fund
the legal fees, expenses and disbursements incurred in connection with
the lawsuit previously filed by Accessity against Mercator Group, LLC,
Mercator Advisory Group, LLC, Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP and Mercator Focus Fund, LP, Taurus Global, LLC
and the action that was previously filed, dismissed without prejudice
and may be re-filed against John E. Burcham, II, Craig A. Vanderburg,
James E. Baiers and MediaBus Networks, Inc. n/k/a Presidion Corp. in
the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade
County, Florida, Case No. 03-30243 CA 15, or as removed or re-filed in
such other venue, as the case may be (the "Mercator Action");
o Accessity has completed its financial and legal due diligence
investigation of each of the Acquired Companies with results thereof
satisfactory to Accessity in its sole discretion;
o Accessity has received a fairness opinion regarding the Subsidiary
Transfer;
o there is no material adverse change to the business, financial
condition, operations or financial performance of any of the Acquired
Companies;
13
o this proxy statement is not subject to any proceedings commenced or
threatened by the SEC; and
o there are no restraining orders, injunctions and other orders
preventing the consummation of the Share Exchange.
For more information on the conditions to the Share Exchange, see "The
Share Exchange Agreement--Conditions to the Share Exchange."
INDEMNIFICATION
The representations and warranties made by PEI, Kinergy and ReEnergy and
the holders of ownership interests in such companies in the Share Exchange shall
expire on the second anniversary of the closing date unless a claim for recovery
based on an alleged inaccuracy or breach of any of such representations or
warranties is made prior to the earlier of the second anniversary of the closing
date, in which case, such representation or warranty shall survive the second
anniversary of the closing until such time as such claim is fully and finally
resolved (except for the representations and warranties made with respect to
taxes and tax returns, title to properties and encumbrances, intellectual
property, compliance with laws and environmental matters, which in each case
will survive until the expiration of the applicable statute of limitations for
the underlying cause of action plus six months). The Acquired Companies shall,
severally and not jointly, indemnify Accessity and its officers, directors,
shareholders, successors and assigns against any damages to the extent arising
from, relating to or otherwise in respect of any inaccuracy in or breach of any
representation or warranty made by such Acquired Company or any failure of such
Acquired Company to perform any agreements or covenants of such Acquired Company
contained in the Share Exchange Agreement.
Similarly, the representations and warranties made by Accessity in the
Share Exchange will expire on the second anniversary of the closing date unless
a claim for recovery based on an alleged inaccuracy or breach of any of such
representations or warranties is made prior to the earlier of the second
anniversary of the closing date, in which case, such representation or warranty
will survive the second anniversary of the closing until such time as such claim
is fully and finally resolved. Accessity will indemnify each of the Acquired
Companies and their respective owners, warrant holders and option holders,
officers, directors, shareholders, successors and assigns against any damages to
the extent arising from, relating to or otherwise in respect of any inaccuracy
in or breach of any representation or warranty made by Accessity or any failure
of Accessity to perform any agreements or covenants of Accessity contained in
the Share Exchange Agreement.
No indemnification payment shall be required to be made until the total of
all damages that have been suffered or incurred exceeds $25,000 in the
aggregate, at which point the indemnified party is entitled to be indemnified
for the entire amount of such damages.
TERMINATION OF THE SHARE EXCHANGE AGREEMENT
The Share Exchange Agreement can be terminated at any time prior to the
closing:
o by the mutual consent of Accessity and each of the Acquired Companies;
o by either Accessity or any of the Acquired Companies, upon written
notice, if there has been a material misrepresentation or any breach
on the part of a party to the Share Exchange Agreement in the
representations, warranties or covenants contained in the Share
Exchange Agreement which is not cured within ten business days;
o by either Accessity or the Acquired Companies if the closing has not
occurred on or before January 7, 2005;
14
o by Accessity, if the shareholders of Accessity shall not have approved
the Share Exchange Agreement and each of the other proposals contained
in this proxy statement (other than the election of a Class III
director);
o by Accessity, if the board of directors of Accessity shall have
received a Superior Proposal (as defined in the Share Exchange
Agreement);
o by either Accessity or any of the Acquired Companies, upon written
notice, if Accessity or such Acquired Company, as the case may be,
shall have determined in good faith not to proceed with the closing on
the basis of the results of its financial and legal due diligence
investigation of the other parties to the Share Exchange Agreement;
o by either Accessity or any of the Acquired Companies, if all of the
conditions for closing shall not have been satisfied or waived on or
before the Final Date (as defined in the Share Exchange Agreement)
other than as a result of a breach of the Share Exchange Agreement by
the terminating party;
o by either Accessity or any of the Acquired Companies, if a permanent
injunction or other order by any federal or state court that would
make illegal or otherwise restrain or prohibit the consummation of the
Share Exchange or the other transactions contemplated hereby shall
have been issued and shall have become final and nonappealable; or
o by either Accessity or any of the Acquired Companies, if holders of 1%
or more of the common stock of Accessity exercise their dissenters'
rights in connection with the proposed Delaware Reincorporation.
For more information on termination of the Share Exchange Agreement, see
"The Share Exchange Agreement--Termination.
TAX CONSEQUENCES
In general, the Share Exchange has been structured to qualify as part of a
unified plan for the exchange of stock that is intended by the parties to
qualify for non-recognition treatment under Section 351 of the Internal Revenue
Code of 1986, or Code. However, no legal opinion will be obtained by Accessity
or any of the Acquired Companies with respect to such non-recognition treatment
or any other tax consequences of the Share Exchange. See "Proposal 2--Approval
of the Share Exchange and Related Transactions--Material Federal Income Tax
Consequences."
REGULATORY APPROVALS
Accessity is not required to notify the Federal Trade Commission, or FTC,
or the Antitrust Division of the United States Department of Justice before
Accessity can complete the Share Exchange. However, the FTC or the Antitrust
Division has the authority to challenge the Share Exchange on antitrust grounds
before or after the Share Exchange is completed. For more information, see
"Proposal 2--Approval of the Share Exchange and Related Transactions--Regulatory
Matters."
FORWARD-LOOKING STATEMENTS
Accessity and the Acquired Companies have made forward-looking statements
in this proxy statement that are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of Accessity or the Combined Company. Also,
words such as "believes," "expects," "anticipates" or similar expressions,
indicate that a forward-looking statement is being made. See "Special Note
Regarding Forward-Looking Statements."
15
RISK FACTORS
You should note that the Share Exchange and an investment in securities of
Accessity involve certain risks and uncertainties discussed under "Risk Factors"
and elsewhere in this proxy statement. For more information on these risks, see
"Risk Factors."
MARKETS AND MARKET PRICES
Accessity's common stock is currently traded on The Nasdaq SmallCap Market
under the symbol "ACTY." The following table sets forth the closing price per
share of Accessity common stock as reported on The Nasdaq SmallCap Market and
the equivalent per share price, as explained below, of PEI common stock on May
13, 2004, the last day of trading before the day the Share Exchange was
announced, on October 29, 2004, the record date, and on December 10, 2004, the
date of this proxy statement:
ACCESSITY
COMMON STOCK EQUIVALENT PEI
PER SHARE PRICE PER SHARE PRICE(1)
--------------- ------------------
May 13, 2004.......................... $ 2.84 $ 2.84
October 29, 2004...................... 4.92 4.92
December 10, 2004..................... 6.00 6.00
_____________
(1) The equivalent PEI price represents the price of one share of Accessity
common stock.
The sole limited liability company member of Kinergy will have the right
to receive 38,750 shares of Accessity common stock in exchange for each 1% of
outstanding limited liability company interest he owns. Accordingly, the
equivalent value for each 1% of outstanding limited liability company interests
of Kinergy owned by the sole limited liability company member of Kinergy on May
13, 2004, the last day of trading before the day the Share Exchange was
announced, on October 29, 2004, the record date, and December 10, 2004, the date
of this proxy statement were $110,050, $190,650 and $232,500, respectively.
The limited liability company members of ReEnergy will have the right to
receive 1,250 shares of Accessity common stock in exchange for each 1% of
outstanding limited liability company interest they own. Accordingly, the
equivalent value for each 1% of outstanding limited liability company interests
owned by the limited liability company members of ReEnergy on May 13, 2004, the
last day of trading before the day the Share Exchange was announced, on October
29, 2004, the record date, and December 10, 2004, the date of this proxy
statement were $3,550, $6,150 and $7,500, respectively.
The number of record holders of shares of Accessity common stock as of
October 29, 2004 was 342.
The actual prices of Accessity common stock prior to or at the time of the
closing of the Share Exchange cannot be guaranteed or predicted.
NASDAQ SMALLCAP MARKET LISTING
Accessity expects to submit an initial listing application covering all
shares of the Combined Company's common stock (including those shares of
Accessity common stock to be issued in connection with the Share Exchange) on
The Nasdaq SmallCap Market under the symbol "PEIX." No assurance can be
given that the Combined Company will be successful in obtaining this listing on
The Nasdaq SmallCap Market. See "Risk Factors."
16
ACCESSITY
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated financial information of Accessity for
the years ended December 31, 2003 and 2002 has been derived from and should be
read in conjunction with the audited consolidated financial statements of
Accessity and related notes thereto included elsewhere in this proxy statement.
The following summary consolidated financial information of Accessity as of
September 30, 2004 and for each of the nine month periods ended September 30,
2004 and 2003 have been derived from and should be read in conjunction with the
unaudited consolidated financial statements of Accessity included elsewhere in
this proxy statement, which have been prepared on the same basis as the audited
consolidated financial statements of Accessity and, in the opinion of management
of Accessity, contain all adjustments consisting only of normal recurring
adjustments, necessary for a fair presentation of Accessity's financial position
and results of operations for such periods. The results of operations for the
nine months ended September 30, 2004 and 2003 are not necessarily indicative of
the results to be expected for the full year or any future periods.
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2004 2003
------------ ------------ ------------ ------------
(Audited) (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues ............................................................. $ 657,543 $ 2,895,001 $ 622,398 $ 447,349
Operating expenses ................................................... 2,731,339 6,955,351 1,949,465 2,014,985
------------ ------------ ------------ ------------
Operating income (loss) .............................................. (2,073,796) (4,060,350) (1,327,067) (1,567,636)
------------ ------------ ------------ ------------
Income (loss) from continuing operations, before tax ................. (1,851,692) (3,746,033) (1,015,562) (1,426,511)
============ ============ ============ ============
Income from discontinued operations .................................. 225,654 2,717,368 -- 224,711
============ ============ ============ ============
Net income (loss) .................................................... (1,626,038) 1,247,954 (1,000,631) (1,251,565)
============ ============ ============ ============
Basic and diluted net income (loss) per share, continuing operations.. (.84) (.67) (.45) (.65)
Basic net income (loss) per share, discontinued operations ........... .10 1.24 -- .10
Net income (loss) per share .......................................... (.74) .57 (.45) (.55)
Shares used in computing basic and diluted net loss per share ........ 2,195,519 2,180,062 2,245,539 2,178,119
SEPTEMBER 30,
2004
CONSOLIDATED BALANCE SHEET DATA: ------------
Cash and liquid investments......................................................................................... $ 3,730,917
Working capital .................................................................................................... 3,781,032
Total assets ....................................................................................................... 4,474,424
Total shareholders' equity ......................................................................................... 4,024,830
17
PEI
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated financial information of PEI for the
period from January 30, 2003 (inception) to December 31, 2003, has been derived
from and should be read in conjunction with the audited consolidated financial
statements of PEI and related notes thereto included elsewhere in this proxy
statement. The following summary consolidated financial information of PEI as of
September 30, 2004 and for the nine month period ended September 30, 2004 and
the period from January 30, 2003 (inception) to September 30, 2003 have been
derived from and should be read in conjunction with the unaudited consolidated
financial statements of PEI included elsewhere in this proxy statement, which
have been prepared on the same basis as the audited consolidated financial
statements of PEI and, in the opinion of management of PEI, contain all
adjustments consisting only of normal recurring adjustments, necessary for a
fair presentation of PEI's financial position and results of operations for such
periods. The results of operations for the nine month period ended September 30,
2004 and the period from January 30, 2003 (inception) to September 30, 2003 are
not necessarily indicative of the results to be expected for the full year or
any future periods.
PERIOD FROM NINE MONTHS PERIOD FROM
JANUARY 30, 2003 ENDED JANUARY 30, 2003
(INCEPTION) TO SEPTEMBER 30, (INCEPTION) TO
DECEMBER 31, 2003 2004 SEPTEMBER 30, 2003
------------ ------------ ------------
(Audited) (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales ............................................ $ 1,016,594 $ 16,832 $ 923,985
Gross profit ......................................... 70,582 6,043 101,573
------------ ------------ ------------
Operating loss ....................................... (577,149) (1,571,187) (302,341)
------------ ------------ ------------
Net loss ............................................. (858,679) (1,992,945) (458,076)
============ ============ ============
Basic loss per share ................................. (.07) (.15) (.04)
Diluted loss per share ............................... (.07) (.15) (.04)
Shares used in computing:
Basic loss per share .............................. 11,733,200 13,332,200 11,582,003
Diluted loss per share ............................ 11,733,200 13,332,200 11,582,003
SEPTEMBER 30,
2004
CONSOLIDATED BALANCE SHEET DATA: ------------
Cash and cash equivalents................................................................ $ 220,908
Working capital ......................................................................... (558,005)
Total assets ............................................................................ 7,502,714
Total stockholders' equity .............................................................. 1,841,830
18
KINERGY
SUMMARY FINANCIAL INFORMATION
The following summary financial information of Kinergy for the years ended
December 31, 2003 and 2002 has been derived from and should be read in
conjunction with the audited financial statements of Kinergy and related notes
thereto included elsewhere in this proxy statement. The following summary
financial information of Kinergy as of September 30, 2004 and for each of the
nine month periods ended September 30, 2004 and 2003 have been derived from and
should be read in conjunction with the unaudited financial statements of Kinergy
included elsewhere in this proxy statement, which have been prepared on the same
basis as the audited financial statements of Kinergy and, in the opinion of
management of Kinergy, contain all adjustments consisting only of normal
recurring adjustments, necessary for a fair presentation of Kinergy's financial
position and results of operations for such periods. The results of operations
for the nine months ended September 30, 2004 and 2003 are not necessarily
indicative of the results to be expected for the full year or any future
periods.
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2004 2003
------------ ------------ ------------ ------------
(Audited) (Unaudited)
STATEMENTS OF OPERATIONS DATA:
Revenues ............................................................. $ 35,539,636 15,280,424 $ 56,529,115 $ 18,691,650
Gross margin.......................................................... 1,557,109 335,254 2,317,486 798,626
------------ ------------ ------------ ------------
Operating income ..................................................... 1,387,527 241,529 2,150,172 695,832
============ ============ ============ ============
Net income ........................................................... 1,376,994 244,794 2,147,484 685,293
============ ============ ============ ============
Basic net income per 1% LLC interest ................................. 35.54 6.32 55.42 17.68
Diluted net income per 1% LLC interest ............................... 35.54 6.32 55.42 17.68
SEPTEMBER 30,
2004
BALANCE SHEET DATA: ------------
Cash and cash equivalents........................................................................................... $ 337,040
Working capital .................................................................................................... 1,824,202
Total assets ..................................................................................................... 2,911,264
Total member's equity .............................................................................................. 1,826,326
19
REENERGY
SUMMARY FINANCIAL INFORMATION
The following summary financial information of ReEnergy for the years
ended December 31, 2003 and 2002 has been derived from and should be read in
conjunction with the audited financial statements of ReEnergy and related notes
thereto included elsewhere in this proxy statement. The following financial
information of ReEnergy as of September 30, 2004 and for each of the nine month
periods ended September 30, 2004 and 2003 have been derived from and should be
read in conjunction with the unaudited financial statements of ReEnergy included
elsewhere in this proxy statement, which have been prepared on the same basis as
the audited financial statements of ReEnergy and, in the opinion of management
of ReEnergy, contain all adjustments consisting only of normal recurring
adjustments, necessary for a fair presentation of ReEnergy's financial position
and results of operations for such periods. The results of operations for the
nine months ended September 30, 2004 and 2003 are not necessarily indicative of
the results to be expected for the full year or any future periods.
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2004 2003
------------ ------------ ------------ ------------
(Audited) (Unaudited)
STATEMENTS OF OPERATIONS DATA:
Revenues ............................................................. $ 0 $ 0 $ 0 $ 0
Gross margin.......................................................... 0 0 0 0
------------ ------------ ------------ ------------
Operating loss ....................................................... 0 (387) (5,000) 0
============ ============ ============ ============
Net loss ............................................................. (800) (1,187) (5,800) (800)
============ ============ ============ ============
Basic net income (loss) per 1% LLC interest .......................... (.64) (.95) (4.64) (.64)
Diluted net income (loss) per 1% LLC interest ........................ (.64) (.95) (4.64) (.64)
SEPTEMBER 30,
2004
BALANCE SHEET DATA: ------------
Cash and cash equivalents........................................................................................... $ 2,895
Working capital .................................................................................................... 2,895
Total assets ....................................................................................................... 89,268
Total members' equity .............................................................................................. 89,268
20
SUMMARY UNAUDITED PRO FORMA CONDENSED
COMBINED CONSOLIDATED FINANCIAL INFORMATION
The summary unaudited pro forma condensed combined consolidated financial
information set forth below gives effect to the Share Exchange, Subsidiary
Transfer and Subsidiary Sale. Each of Accessity, PEI, Kinergy and ReEnergy has a
fiscal year ending on December 31. Accordingly, the unaudited pro forma combined
statement of operations data combine Accessity's historical results for the
years ended December 31, 2003 and for the nine month periods ended September 30,
2004 with the historical results of PEI, Kinergy and ReEnergy for the years
ended December 31, 2003 and for the nine month periods ended September 30, 2004
giving effect to the Share Exchange, Subsidiary Transfer and Subsidiary Sale as
if each had occurred at the beginning of the earliest period presented. This
data should be read in conjunction with the selected historical consolidated
financial information, the unaudited pro forma combined condensed financial
statements and the separate historical consolidated financial statements of
Accessity, PEI, Kinergy and ReEnergy and the notes thereto included elsewhere in
this proxy statement. The unaudited pro forma combined condensed financial
information, presented for illustrative purposes only, is not necessarily
indicative of the operating results or financial position that would have been
achieved had the Share Exchange, Subsidiary Transfer and Subsidiary Sale been
consummated at the beginning of the earliest period presented and should not be
construed as representative of future operations. See "Proposal 2--Approval of
the Share Exchange--Unaudited Pro Forma Combined Condensed Financial
Information."
The unaudited pro forma combined balance sheet data combine Accessity's
consolidated balance sheet as of September 30, 2004 with the consolidated
balance sheets of each of PEI, Kinergy and ReEnergy as of September 30, 2004,
respectively.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2003 SEPTEMBER 30, 2004
----------------- ------------------
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales............................................. $36,556,230 $56,545,947
Gross profit.......................................... 1,627,691 2,323,529
Operating income (loss) .............................. (2,748,457) (1,117,488)
Net income (loss) .................................... (2,814,712) (1,219,704)
Basic net income (loss) per share .................... (.12) (.05)
Diluted net income (loss) per share .................. (.12) (.05)
Shares used in computing:
Basic net income (loss) per share ................. 22,777,719 22,827,739
Diluted net income (loss) per share ............... 22,777,719 22,827,739
SEPTEMBER 30, 2004
PRO FORMA CONSOLIDATED BALANCE SHEET DATA: ------------------
Cash and cash equivalents ............................................. $ 5,951,205
Working capital........................................................ 9,926,805
Total assets........................................................... 32,468,048
Total stockholders' equity............................................. 25,478,683
21
RISK FACTORS
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF THE COMBINED
COMPANY MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND
ELSEWHERE IN THIS PROXY STATEMENT IN MAKING AN INVESTMENT DECISION.
RISKS RELATING TO THE SHARE EXCHANGE
THE FAILURE TO FULFILL ALL CONDITIONS PRECEDENT MAY PREVENT THE CONSUMMATION OF
THE SHARE EXCHANGE OR MAY LEAD TO A CHANGE IN THE TERMS OF THE SHARE EXCHANGE
AGREEMENT.
Pursuant to the terms and conditions of the Share Exchange Agreement, the
closing of the Share Exchange is subject to a number of conditions precedent
including, among others, approval of the Share Exchange by the shareholders of
Accessity, the completion of financial and legal due diligence investigation of
each company to the Share Exchange Agreement with results satisfactory to each
such party and the requirement that PEI raise at least $7 million of additional
equity capital between October 1, 2004 and the closing of the Share Exchange. If
one or more conditions precedent to the closing of the Share Exchange Agreement
are not met, then any party to the Share Exchange Agreement may elect not to
proceed with the Share Exchange or may instead waive any or all conditions
precedent. Accordingly, no assurance can be given that the Share Exchange will
be consummated or, if consummated, that the final terms of the Share Exchange
will be identical to the terms contained in the current version of the Share
Exchange Agreement attached to this proxy statement.
MANAGEMENT OF THE COMBINED COMPANY MAY NOT BE SUCCESSFUL IN INTEGRATING THE
BUSINESSES OF PEI, KINERGY AND REENERGY, WHICH COULD HARM THE BUSINESS OF THE
COMBINED COMPANY.
Upon consummation of the Share Exchange, the current businesses of
Accessity will no longer be conducted by Accessity. Rather, only the businesses
conducted by PEI, Kinergy and ReEnergy will be conducted by the Combined Company
after consummation of the Share Exchange. Integrating the respective businesses
of PEI, Kinergy and ReEnergy will be complex, time-consuming and expensive, and
management of the Acquired Companies may not successfully integrate the
respective businesses of the Acquired Companies under Accessity, which would
harm the operations of the Combined Company.
Before the Share Exchange, each of PEI, Kinergy and ReEnergy operated
independently, each with its own business, culture, clients, employees and
systems. After the Share Exchange, PEI, Kinergy and ReEnergy must operate as a
combined organization under the Combined Company, utilizing common information
and communication systems, operating procedures, financial controls and human
resource practices, including benefit, training and professional development
programs. There may be substantial difficulties, costs and delays involved in
integrating PEI, Kinergy and ReEnergy. These include:
o diversion of management resources from the business of the Combined
Company;
o potential incompatibility of business cultures;
o perceived adverse change in client service standards, business focus,
billing practices, or service offerings available to clients;
o perceived uncertainty in career opportunities, benefits and the
long-term value of stock options available to employees;
o costs and delays in implementing common systems and procedures; and
22
o potential inefficiencies in delivering services to the clients of the
Combined Company.
Any one or all of these factors may cause increased operating costs, lower
than anticipated financial performance or the loss of customers and employees.
Many of these factors are outside the control of any of the Acquired Companies
or Accessity.
THE CHANGE IN BUSINESS OF ACCESSITY MAY RESULT IN A LOWER STOCK PRICE OF THE
COMBINED COMPANY.
Many shareholders of Accessity have invested in Accessity based on the
businesses conducted by Accessity. Following the Share Exchange, the current
businesses of Accessity will no longer be conducted by the Combined Company and
only the businesses conducted by PEI, Kinergy and ReEnergy will be conducted by
the Combined Company. Investors may be apprehensive in regard to the conduct of
the businesses of PEI, Kinergy and ReEnergy under the Combined Company and the
prospects of success for the Combined Company, which may cause investors to sell
their shares of Accessity common stock. If Accessity shareholders sell their
shares of Accessity common stock, the stock price of Accessity common stock may
fall significantly.
THE EXERCISE OF REGISTRATION RIGHTS BY FORMER PEI SHAREHOLDERS MAY RESULT IN A
LOWER STOCK PRICE OF THE COMBINED COMPANY.
Holders of at least 1,252,200 shares of common stock of the Combined
Company, who were holders of shares of PEI common stock prior to the
consummation of the Share Exchange, will have certain rights to require the
Combined Company to register the shares of common stock of the Combined Company
held by them for resale pursuant to a registration statement filed under the
Securities Act Exchange of 1933 (the "Securities Act"), with the SEC. PEI
expects that holders of an additional approximately 2,500,000 shares of common
stock of the Combined Company that may be outstanding upon the consummation of
the Share Exchange as a result of PEI's $7 million capital raise will have
similar registration rights. If and when a registration statement covering these
shares of common stock is declared effective, holders of these shares may freely
sell such shares of common stock of the Combined Company. This may cause the
stock price of the Combined Company to fall significantly.
THE RIGHTS OF PEI SHAREHOLDERS AND KINERGY AND REENERGY MEMBERS WILL CHANGE
AFTER THE SHARE EXCHANGE.
Following the Share Exchange, PEI shareholders and the Kinergy and
ReEnergy limited liability company members will become shareholders of the
Combined Company. There are important differences between the rights of
shareholders of the Combined Company and the rights of shareholders in PEI and
important differences between the rights of shareholders of the Combined Company
and the rights of the Kinergy and ReEnergy limited liability company members.
For a description of these differences, see "Comparison of Shareholder Rights."
NO ASSURANCE CAN BE GIVEN THAT THE INITIAL LISTING APPLICATION TO LIST COMMON
STOCK OF THE COMBINED COMPANY ON THE NASDAQ SMALLCAP MARKET CONCURRENT WITH THE
CONSUMMATION OF THE SHARE EXCHANGE WILL BE APPROVED. IF THE APPLICATION IS NOT
APPROVED, AN ACTIVE MARKET IN COMMON STOCK OF THE COMBINED COMPANY IS LESS
LIKELY TO DEVELOP AND TRADING IN COMMON STOCK OF THE COMBINED COMPANY MAY BE
SUBJECT TO THE "PENNY STOCK" RULES.
In connection with the consummation of the Share Exchange, Accessity
expects to apply for the listing of common stock of the Combined Company on The
Nasdaq SmallCap Market. There can be no assurance that shares will be listed on
The Nasdaq SmallCap Market upon consummation of the Share Exchange, or ever. In
the event shares of common stock of the Combined Company are not listed on The
Nasdaq SmallCap Market, shares of common stock of the Combined Company likely
will trade on the OTC Bulletin Board. If the application is not approved, an
active market in common stock of the Combined Company is less likely to develop,
and the Combined Company may be subject to the "penny stock" rules, both of
which may make it difficult for stockholders to sell shares of common stock of
the Combined Company.
23
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by penny stock rules adopted by the SEC. Penny stocks are,
generally, equity securities with a price of less than $5.00 per share that
trade on the OTC Bulletin Board or the Pink Sheets. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the nature and level of risks in
investing in the penny stock market. The broker-dealer also must provide the
prospective investor with current bid and offer quotations for the penny stock
and the amount of compensation to be paid to the broker-dealer and its
salespeople in the transaction. Furthermore, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market, and must provide each holder of penny stock
with a monthly account statement showing the market value of each penny stock
held in the customer's account. In addition, broker-dealers who sell penny
stocks to persons other than established customers and "accredited investors"
must make a special written determination that the penny stock is a suitable
investment for the prospective investor and receive the purchaser's written
agreement to the transaction. These requirements may have the effect of reducing
the level of trading activity in a penny stock, and investors in common stock of
the Combined Company may find it difficult to sell their shares.
NO ASSURANCE CAN BE GIVEN THAT AN ACTIVE MARKET FOR SHARES OF COMMON STOCK OF
THE COMBINED COMPANY WILL DEVELOP OR, IF IT DOES DEVELOP, WILL BE MAINTAINED IN
THE FUTURE. IF AN ACTIVE MARKET DOES NOT DEVELOP, INVESTORS MAY NOT BE ABLE TO
READILY SELL THEIR SHARES OF ACCESSITY COMMON STOCK.
Since the commencement of trading of Accessity's common stock on The
Nasdaq SmallCap Market, there has been limited trading in shares of Accessity
common stock, at widely varying prices. No assurance can be given that an active
market for shares of common stock of the Combined Company will be established or
maintained in the future, whether as a result of the Share Exchange or
otherwise. If an active market is not established or maintained, investors may
not be able to readily sell their shares of common stock of the Combined
Company.
RISKS RELATING TO THE BUSINESS OF PEI
PEI HAS NO HISTORY OF OPERATIONS AND HAS BEEN UNPROFITABLE TO DATE, WHICH MAY
ADVERSELY IMPACT PEI'S BUSINESS AND ITS SHAREHOLDERS.
PEI has to date not conducted any significant business operations, other
than the acquisition of real property located in Madera County, California on
which it intends to construct an ethanol production facility and an option to
acquire additional real property located in Visalia, California on which it may
construct an additional ethanol production facility. In addition, although PEI
has commenced discussions with several potential acquisition targets, no
assurance can be given that PEI will be successful in making any acquisitons.
Accordingly, there is no prior operating history by which to evaluate the
likelihood of PEI's profitability or success and no assurances can be given that
PEI will ever complete construction of an ethanol production facility or acquire
an ethanol production or marketing company or, if PEI completes construction of
an ethanol production facility or acquires an ethanol production or marketing
company, that PEI will ever be profitable or successful. PAP, PEI's subsidiary,
generated approximately $1 million in revenues for the year ended December 31,
2003 from the sale of grain purchased with the facility and minor transloading
operations. PAP intends to manage corn procurement for the ethanol plant and
market DWG, the main co-product of ethanol manufacturing. However, there can be
no assurance that PAP will be able to expand its feed business or continue to
generate revenues at current levels or at all.
PEI's recurring losses from operations and accumulated deficit, among
other factors, raised doubt about PEI's ability to continue as a going concern
and led PEI's independent certified public accountants to include an explanatory
paragraph related to PEI's ability to continue as a going concern in their
report for the year ended December 31, 2003. Reports of independent auditors
questioning a company's ability to continue as a going concern generally are
viewed unfavorably by analysts and investors. This report
24
may make it difficult for the Combined Company to raise additional debt or
equity financing to the extent needed for its continued operations or for
planned expansion, particularly if the Combined Company is unable to attain and
maintain profitable operations in the future. Consequently, future losses may
have a material adverse effect on PEI's business, prospects, financial
condition, results of operations and cash flows. Accessity urges potential
investors to review the report of PEI's independent certified public accountants
and its consolidated financial statements set forth in EXHIBIT F before making a
decision to invest in the Combined Company.
IF PEI IS UNABLE TO SUCCESSFULLY IDENTIFY OR MAKE STRATEGIC ACQUISITIONS OR
ALLIANCES, ITS LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.
PEI's business strategy includes growth through acquisitions that it
believes will improve its competitive capabilities or provide additional market
penetration or business opportunities in areas that are consistent with its
overall business plan. Identifying and pursuing strategic acquisition and
integrating acquired businesses requires a significant amount of management time
and skill. Acquisitions may also require PEI to expend a substantial amount of
cash or other resources. If PEI is unable to make strategic acquisitions due to
its inability to identify appropriate targets, to raise the necessary funds, or
to manage the difficulties or costs involved in the acquisitions, its long-term
competitive positioning could suffer.
ADDITIONAL FINANCING IS REQUIRED IN ORDER FOR PEI TO CONSTRUCT AN ETHANOL
PRODUCTION FACILITY. FAILURE TO OBTAIN THIS ADDITIONAL FINANCING WOULD ADVERSELY
AFFECT THE BUSINESS OF THE COMBINED COMPANY.
PEI will need to obtain additional debt and/or equity financing in an
aggregate amount of up to $60 million (which amount includes the $7 million of
additional equity capital required to be raised by PEI prior to the closing of
the Share Exchange) from one or more sources in order to be able to construct an
ethanol production facility on the 137-acre parcel of real property located in
Madera County, California owned by PEI. PEI has been negotiating with several
sources of such additional financing, but to date PEI has not obtained any
commitment or entered into any agreement with respect to any debt or equity
financing. In addition, PEI has previously obtained a loan from Lyles
Diversified, Inc. ("LDI") in the principal amount of $5.1 million pursuant to a
Term Loan Agreement dated June 16, 2003 in order to purchase the Madera County,
California property, the repayment of which loan is secured by a first deed of
trust on the Madera County, California property, and any additional debt
financing obtained by PEI is required to be subordinated to the repayment
obligations of PEI to LDI and to the security interest of LDI under the Term
Loan Agreement. Accordingly, there can be no assurance that PEI will be able to
obtain any such debt or equity financing or, if it is able to obtain such
financing, that such financing will be obtained on terms that are reasonably
satisfactory to PEI or in an amount or amounts that will enable PEI to complete
construction of the ethanol production facility. Failure to obtain this
additional financing at such times and in such amounts as are necessary to
enable PEI to timely complete construction of the ethanol production facility
would adversely affect the operations and business of PEI and, therefore, would
adversely affect the consolidated results of operations of the Combined Company.
PEI'S LACK OF DIVERSIFICATION COULD ADVERSELY AFFECT ITS BUSINESS.
It is anticipated that PEI's business will be that of the production and
marketing of ethanol and its by-products, such as DWG and carbon dioxide. PEI
will not have any other lines of business or other sources of revenue.
Accordingly, if PEI is unable to complete construction of an ethanol production
facility or if PEI is unable to market ethanol and its by-products, PEI's
business would be adversely affected.
THE EXISTENCE OF GOVERNMENTAL REGULATIONS COULD ADVERSELY AFFECT PEI'S BUSINESS.
PEI's business is subject to extensive regulation by federal, state and
local governmental agencies. PEI cannot predict in what manner or to what extent
such regulation will harm or help its business or
25
the ethanol production and marketing industry in general. For example, the State
of California has requested a waiver from the federal Environmental Protection
Agency, or EPA, to reduce the amount of ethanol required in gasoline, which
would boost supplies of ethanol in California and potentially lower demand for
ethanol, which would cause the price of ethanol to decline. In addition,
officials in the State of California, including officials from the California
Air Resources Board, have argued to the EPA that ethanol is a volatile fuel that
evaporates easily and contributes to smog by increasing ozone levels and adding
particulate matter to the air. If the EPA grants the requested waiver,
refineries would no longer be required to blend ethanol into gasoline, which
would adversely affect PEI's business. Previously, California refiners used
MTBE, another oxygenate, which was banned by former Governor Gray Davis for
contaminating groundwater and was completely phased out in January 2004. If the
State of California were to ban the use of ethanol as an oxygenate in gasoline,
PEI's business would be adversely affected.
The fuel ethanol business depends upon tax incentive policies and
environmental regulations that favor the use of ethanol in motor fuel blends in
the United States. Currently, a gasoline marketer that sells gasoline without
ethanol must pay a federal tax of $0.18 per gallon compared to $0.13 per gallon
for gasoline that is blended with 10% ethanol. Smaller credits are available for
gasoline blended with lesser percentages of ethanol. The repeal or substantial
modification of the federal excise tax, or FET, exemption for ethanol-blended
gasoline or, to a lesser extent, other federal or state policies and regulations
that encourage the use of ethanol could have a detrimental effect on the ethanol
industry and adversely affect PEI's business and results of operation. Changes
in gasoline specifications could increase PEI's costs of ethanol production and
would adversely affect PEI's business, financial condition and results of
operation.
PEI'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO COMPLY WITH
GOVERNMENTAL REGULATIONS.
The production and sale of ethanol is subject to regulation by agencies of
the federal government, including but not limited to the EPA, as well as other
agencies in each jurisdiction in which ethanol is produced, sold, stored, or
transported. PEI will be subject to extensive air, water and other environmental
regulation, and PEI will need to obtain a number of additional environmental
permits to construct and operate its ethanol production facility. Ethanol
production involves the emission of various airborne pollutants, including
particulates, carbon monoxide, oxides of nitrogen and volatile organic
compounds. As a result, PEI will need to obtain an air quality permit from the
California Air Quality Management District and/or the San Joaquin Valley Air
Pollution Control District. PEI may also be required to obtain various other
water-related permits, such as a storm-water discharge permit, a water
withdrawal permit, public water supply permit, and a water discharge permit. If
for any reason PEI is unable to obtain any of such permits, construction costs
for the ethanol production facility may increase or the facility may not be
constructed at all. It is also likely that operations at the facility will be
governed by the federal Occupational Safety and Health Administration, or OSHA.
Compliance with such regulations may be time-consuming and expensive and may
delay or even prevent sales in California or in other states. In addition, such
laws and regulations are subject to change, which changes can be made
retroactively. Failure to comply with federal or state regulations or the
applicable regulations of any foreign jurisdiction in which PEI produces, sells,
stores, transports or delivers ethanol could adversely affect PEI's business,
financial condition and operations.
PEI'S DEPENDENCE ON W. M. LYLES CO. MAY ADVERSELY AFFECT ITS BUSINESS.
PEI will be highly dependent upon W. M. Lyles Co. to design and build the
ethanol production facility. PEI has entered into a Standard Form of
Design-Build Agreement and General Conditions Between Owner and Design-Builder
with W. M. Lyles Co. (as amended, the "Construction Agreement"). The
Construction Agreement contains a number of provisions that are favorable to W.
M. Lyles Co. and unfavorable to PEI. The Construction Agreement also includes a
provision that requires PEI to pay a
26
termination fee of $5 million to W. M. Lyles Co. if PEI terminates the
Construction Agreement, in addition to payment of all costs of W. M. Lyles Co.
for services rendered through the date of termination. Consequently, if the
Construction Agreement is terminated by PEI, the requirement of PEI to pay such
termination fee would adversely affect PEI's business, financial condition and
results of operations.
If W. M. Lyles Co. has entered into or enters into a construction contract
with one or more other parties, it may be under pressure to complete another
project or projects in order to avoid operation of a consequential damage clause
or liquidated damage clause in such contract and may prioritize the completion
of another project or projects ahead of PEI's facility. As a result, PEI's
ability to sell ethanol products would be delayed and would adversely affect
PEI's business, financial condition and results of operations.
CONSTRUCTION RISKS MAY ADVERSELY AFFECT PEI'S BUSINESS.
Though PEI believes that W. M. Lyles Co. has the expertise and track
record to construct and deliver the ethanol production facility in a fully
functional state, there is no assurance that delays in construction or defects
in materials and/or workmanship will not occur. Though PEI expects W. M. Lyles
Co. to correct all defects in material or workmanship, material defects in
material or workmanship may still occur. Such defects could cause PEI to delay
the commencement of operations of the facility, or, if such defects are
discovered after operations have commenced, to halt or discontinue operation of
the facility. In addition, construction projects often involve delays in
obtaining permits, or encounter construction delays due to weather conditions,
fire, provision of materials or labor or other events that delay the
construction schedule. PEI experienced a fire at the Madera County, California
site during the first quarter of 2004 that the expenditure of funds to repair
areas and equipment damaged by the fire. Accordingly, any such event may
adversely affect PEI's business, financial condition and results of operations.
Although PEI has selected the Madera County site for construction of the
ethanol production facility after inspection of the site, there can be no
assurance that PEI will not encounter hazardous conditions at the site.
Accordingly, PEI may encounter conditions at the site that may delay
construction of the facility. Upon encountering a hazardous condition at the
site, work may be suspended and PEI may be required to correct the condition
prior to continuing construction. The presence of a hazardous condition would
likely delay construction of the facility and may require significant
expenditure of resources to correct the condition. In addition, it is
anticipated that W. M. Lyles Co. would be entitled to an adjustment in price and
time of performance if it has been adversely affected by the hazardous
condition. If PEI encounters any hazardous conditions during construction, such
event may adversely affect PEI's business, financial condition and results of
operations.
PEI has based its estimated capital needs on a design for the ethanol
production facility and related co-generation facility that will cost
approximately $60 million (which amount includes the $7 million of additional
equity capital required to be raised by PEI prior to the closing of the Share
Exchange). The estimated cost of the facility is based on preliminary
discussions and estimates, and there is no assurance that the final cost of the
facility will not be higher. Any significant increase in the estimated
construction cost of the facility may adversely affect on PEI's business,
financial condition and results of operation. PEI intends to acquire insurance
with coverage adequate to prevent loss from foreseeable risks. However, events
may occur for which no insurance is available or for which insurance is not
available on terms that are acceptable to PEI. Loss from such an event, such as,
but not limited to, earthquakes, floods, war, riot, acts of terrorism, or other
risks, may not be insured and such a loss may adversely affect PEI's business,
financial condition and results of operation. PEI must also obtain and maintain
liability, property and casualty and other policies of insurance during
operation after completion of construction. Any failure to obtain and maintain
such insurance, with adequate policy limits and/or self-retention limits, may
adversely affect PEI's business, financial condition and results of operations.
27
AN INDUSTRY SHIFT AWAY FROM ETHANOL WOULD ADVERSELY AFFECT PEI'S BUSINESS.
PEI's revenue will be derived primarily from sales of ethanol. Currently,
the predominant oxygenate used to blend with gasoline is ethanol. Ethanol
competes with several other existing products and other alternative products
could also be developed for use as fuel additives. An industry shift away from
ethanol or the emergence of new competing products may reduce the demand for
ethanol products and adversely affect PEI's business.
IF PEI DOES NOT COMPETE EFFECTIVELY IN THE ETHANOL PRODUCTION INDUSTRY, ITS
BUSINESS WILL BE ADVERSELY AFFECTED.
The ethanol production industry is highly competitive. PEI faces
substantial competition from established companies, many of which are larger
companies, such as Archer Daniels Midland Corporation, or ADM, and Cargill, that
have greater financial, engineering and production resources than PEI and have
larger service organizations and long-standing customer relationships. PEI will
face competition for capital, labor, management, raw materials and other
resources from such companies and from the major oil companies, many of whom are
potential customers of PEI. PEI expects it may face additional competition from
new entrants into the ethanol production and sale industry and from existing and
new competitors utilizing new technologies and processes. PEI may not have
sufficient resources to continue to make investments in research and
development. Even if sufficient funds are available, PEI may not be able to make
the technological advances necessary to maintain competitive advantages. PEI's
competitors can be expected to continue to improve the technologies and
processes used in the manufacture of ethanol and to develop alternative fuels,
gasoline oxygenates and other products which will increase the competitive
price/performance characteristics of ethanol and which could even replace
ethanol as the preferred gasoline oxygenate. PEI anticipates that, as additional
ethanol plants are constructed and brought on line, the supply of ethanol will
increase. The absence of increased demand and other competitive pressures may
necessitate price reductions, which could adversely affect PEI's financial
condition and results of operations. Accordingly, there is no assurance that PEI
will be able to compete successfully or that such competition will not adversely
affect on PEI's business, financial condition and results of operations.
RAW MATERIALS AND SUPPLIES TO PRODUCE ETHANOL MAY BE UNAVAILABLE OR MAY INCREASE
IN PRICE WHICH, IN TURN, MAY ADVERSELY AFFECT PEI'S BUSINESS.
The production of ethanol requires a significant amount of raw materials
and supplies, primarily corn, natural gas, electricity and water. The failure of
PEI to be able to obtain sufficient quantities of such raw materials or supplies
when needed by PEI could adversely affect PEI's business and results of
operations. In particular, PEI's planned Madera County production facility will
require approximately 12.5 million bushels or more of corn each year and,
accordingly, PEI's financial condition and results of operation will be
significantly affected by the cost and supply of corn. Because corn is not in
large supply near PEI's facility in Madera County, a significant amount of corn
will need to be sourced from the Midwest. Although PEI intends to implement
various hedging and contracting techniques in order to reduce the risk of corn
price fluctuations, PEI may not be able to anticipate increases in the price of
corn. Generally, higher corn prices will produce lower profit margins (or even
losses). The price of corn has fluctuated significantly in the past and may
fluctuate significantly in the future. If PEI is not able to pass any such price
increases on to its customers, such price increases could adversely affect PEI's
business, financial condition and results of operation. In addition, droughts,
severe winter weather in the Midwest, and other problems can causes delays or
interruptions of various durations in the delivery of corn to California and
reduce corn supplies. Any such delays or interruptions or reductions in corn
supplied could adversely affect PEI's business and results of operations.
In an attempt to minimize the effects of the volatility of corn costs on
operating profits, PEI will likely take hedging positions in corn futures
markets. Hedging means protecting the price at which PEI
28
buys corn and the price at which PEI will sell its products in the future. It is
a way to attempt to reduce the risk caused by price fluctuation. The
effectiveness of such hedging activities is dependent upon, among other things,
the cost of corn and PEI's ability to sell sufficient amounts of ethanol and
DWG. Although PEI will attempt to link hedging activities to sales plans and
pricing activities, such hedging activities can themselves result in costs
because price movements in corn contracts are highly volatile and are influenced
by many factors that are beyond PEI's control. PEI's purchasing and hedging
activities may or may not lower its price of corn, and in a period of declining
corn prices, these purchase and hedging strategies may result in PEI paying a
higher price for corn than its competitors pay. Accordingly, PEI may incur
significant costs from its purchasing and hedging strategies, which could
adversely affect PEI's business, financial condition and results of operation.
In addition, there can be no assurance that PEI will be able to enter into
definitive agreements with any corn producers to provide corn to PEI's ethanol
production facility or that the terms of such agreements will be acceptable to
PEI.
In addition to corn, the ethanol production facility will require a
significant and uninterrupted supply of water, electricity and natural gas to
operate. Although PEI intends to enter into agreements with local gas,
electricity and water utilities to provide required amounts of energy and water,
there can be no assurance that those utilities will be able to reliably supply
the water, electricity and gas that the facility will need or will supply such
resources on terms that are acceptable to PEI. In addition, if there is an
interruption in the supply of energy or water for any reason, PEI may be
required to halt ethanol production. If production is halted for an extended
period of time, it may adversely affect PEI's business, financial condition and
results of operation. As with corn prices, the price of natural gas and
electricity has fluctuated significantly in the past and may fluctuate
significantly in the future. If PEI is not able to pass any such price increases
on to its customers, such price increases could also adversely affect PEI's
business, financial condition and results of operations.
BECAUSE THE MARKET PRICE OF ETHANOL IS VOLATILE AND SUBJECT TO SIGNIFICANT
FLUCTUATION, PEI'S RESULTS OF OPERATIONS MAY FLUCTUATE SIGNIFICANTLY.
The market price of ethanol is dependent on the price of gasoline, which
is in turn dependent on the price of petroleum. Petroleum prices are highly
volatile and difficult to forecast due to daily changes on the geo-political
front and in the world economy. The distribution of petroleum throughout the
world is affected by incidents in unstable political environments, such as Iraq,
Iran, Kuwait, Saudi Arabia and other countries. Because of the industrialized
world's critical dependence upon oil from such areas, any disruption or other
reduction in supply can cause the price of oil (and gasoline) to fluctuate
significantly. PEI cannot predict the price of oil or gasoline from time to time
and may establish unprofitable prices for the sale of its ethanol due to
significant fluctuations in market price. Such failure to price its ethanol
consistently in a manner that is profitable to PEI could adversely affect PEI's
business, financial conditions and results of operations.
PEI believes that ethanol production is expanding rapidly at this time.
There are a number of new plants under construction and planned for
construction, both inside and outside California. PEI expects existing ethanol
plants to expand by increasing production. However, no assurance can be provided
that there will be any material or significant increases in the demand for
ethanol. Increased production of ethanol may lead to lower prices. The increased
production of ethanol could have other adverse effects as well. For example, the
increased production could lead to increased supplies of co-products from the
production of ethanol, such as DWG. Those increased supplies could lead to lower
prices for those co-products. Also, the increased production of ethanol could
result in increased demand for corn. This could result in higher prices for corn
and corn production, creating lower profits. There can be no assurance as to the
price of ethanol or DWG in the future. Any material adverse change affecting the
price of ethanol and/or DWG may adversely affect PEI's business, financial
condition and results of operations.
29
In addition to those factors described above, many other factors may
influence PEI's results of operations in any particular quarter. These include:
o volume and timing of the receipt of orders for ethanol from major
customers;
o competitive pricing pressures;
o ability to produce ethanol on a cost-effective and timely basis;
o inability to obtain construction, capital equipment and/or working
capital financing;
o the introduction and announcement of new products and processes by
PEI's competitors; and
o changing conditions in the ethanol and fuel markets.
Furthermore, PEI believes that economic conditions in the United States
could have a negative impact on PEI's results of operations. Accordingly, PEI's
results of operations could be subject to significant quarterly variation.
BECAUSE PEI EXPECTS THAT SALES OF ETHANOL WILL BE MADE TO A LIMITED NUMBER OF
PURCHASERS, PEI WILL BE SUBJECTED TO SIGNIFICANT PAYMENT RISKS.
Upon completion of construction of its ethanol production facility, PEI
intends to market and sell ethanol using the marketing services of Kinergy
primarily in the Central Valley region of California to major and independent
oil customers who control the majority of all gasoline sales in California. With
such a limited number of large purchasers, the risk that a large customer could
fail to make payments for ethanol purchases when due, or at all, is significant.
Although PEI intends to establish payment terms of less than net ten days with
its customers, the failure of any large customer to make any payment for
purchases when due, or at all, would adversely affect PEI's business, financial
condition and results of operations.
THE FAILURE TO RETAIN OR ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT PEI.
The future success of PEI is dependent, in part, on its ability to retain
certain key personnel. PEI is presently, and is likely for some time to continue
to be, dependent upon its founding members. PEI currently has few employees, and
PEI's founders and initial directors will therefore be instrumental to PEI's
success. It is possible that one or more of PEI's founding members and/or
initial directors may later become unable to serve, and PEI may be unable to
recruit and retain suitable replacements. PEI currently does not maintain key
employee life insurance for any of its founding members and/or initial
directors. Accordingly, PEI's dependence on its founding members and initial
directors may adversely affect PEI's business, results of operations, and
financial condition. PEI also needs to attract additional skilled technical,
clerical, sales and managerial personnel in all areas of its business to
continue to grow. The competition for such individuals in the growing ethanol
production and marketing industry is intense. There can be no assurance that PEI
will be able to retain its existing personnel or attract additional qualified
employees in the future.
In particular, PEI is dependent upon its relationship with Neil Koehler,
its Chief Executive Officer. Mr. Koehler has considerable experience in the
construction, start-up and operation of an ethanol production facility. Any loss
of PEI's relationship with Mr. Koehler, particularly during the construction and
start-up period for the ethanol production facility, may adversely affect PEI's
business, results of operations, and financial condition.
30
PEI'S EXPANSION PLANS MAY ADVERSELY AFFECT ITS FUTURE PROFITABILITY.
PEI intends to expand its ethanol production facilities to include
operations on an 89.3-acre parcel of real property in Visalia, California for
which PEI has an option to purchase, and to also expand its sales and marketing
efforts. Such expansion will necessitate increased expenditures by PEI, which
will be funded through additional capital raises. Such funding or expansion may
not occur. If such funding and expansion do occur, they may not result in
increased revenues or profitability.
FAILURE BY PEI TO MANAGE ITS GROWTH EFFECTIVELY COULD ADVERSELY AFFECT ITS
BUSINESS.
Any expansion plans that PEI may choose to implement may place a
significant strain on its personnel and management resources and financial and
management control systems. Personnel, management resources and PEI's management
and financial control systems may not be adequate to address future expansion of
PEI's business and operations. Failure by PEI to maintain adequate personnel and
management resources or to upgrade its operating, management and financial
control systems, or any difficulties encountered during such upgrades, could
adversely affect PEI's business. The success of PEI's expansion plans will
depend in part on its ability to expand its personnel and management resources
and to improve its management and financial control systems. PEI may not be
successful in any of these regards.
RISKS RELATING TO THE BUSINESS OF KINERGY
KINERGY'S EXPANSION PLANS MAY ADVERSELY AFFECT ITS FUTURE PROFITABILITY.
Kinergy intends to expand the ethanol marketing services it offers and to
expand its operations and sales and marketing efforts, particularly after
construction of the ethanol production facility by PEI has been completed and
Kinergy begins to provide marketing services for the ethanol production by the
facility. Such expansion will necessitate increased expenditures by Kinergy,
which is anticipated to be funded out of cash flow from operations and/or from
advances obtained under the $2 million business line of credit that Kinergy has
established with Comerica Bank. Expansion may not occur. If expansion does
occur, expansion may not result in increased revenues or profitability. If cash
flow from operations and/or borrowing under Kinergy's business line of credit is
insufficient to cover the increased costs resulting from expansion, Kinergy may
sustain losses, which would adversely affect Kinergy's business, financial
condition and results of operations.
FAILURE BY KINERGY TO MANAGE ITS GROWTH EFFECTIVELY COULD ADVERSELY AFFECT ITS
BUSINESS.
Although part of Kinergy's expansion plans is to grow through appropriate
acquisitions of technologies and/or industry service providers as and if
acquisitions become feasible, there can be no assurance that Kinergy will ever
become positioned to undertake any acquisitions. Kinergy's current expansion
plans may place a significant strain on its personnel and management resources
and financial and management control systems. Personnel, management resources
and Kinergy's management and financial control systems may not be adequate to
address future expansion of Kinergy's business and operations. Failure by
Kinergy to maintain adequate personnel and management resources or to upgrade
its operating, management and financial control systems, or any difficulties
encountered during such upgrades, could adversely affect Kinergy's business. The
success of Kinergy's expansion plans will depend in part on its ability to
expand its personnel and management resources and to improve its management and
financial control systems. Kinergy may not be successful in any of these
regards.
31
KINERGY'S DEPENDENCE ON LIMITED SOURCES OF SUPPLY MAY ADVERSELY AFFECT ITS
BUSINESS AND OPERATIONS.
Ethanol products are available only from limited sources. Although Kinergy
generally buys ethanol under short-term (6-month) purchase orders and contracts
and does not have long-term agreements with its suppliers, Kinergy relies on
only approximately up to nine suppliers to satisfy its ethanol requirements.
Four of these suppliers accounted for over 90% of Kinergy's purchases of ethanol
during the fiscal year ended December 31, 2003. Although alternate suppliers are
believed to be available for ethanol, the process of qualifying replacement
ethanol suppliers, replacing orders and receiving ethanol supplies from a new
vendor could take six months or more. If the supply of ethanol products were
interrupted for any reason, Kinergy may not be able to establish alternative
sources of supply of ethanol products without substantial disruption to
Kinergy's business, financial condition and operations. In addition, any
significant increase in ethanol prices or a decrease in ethanol availability
could have a material adverse effect on Kinergy's business, financial condition
and results of operations.
BECAUSE KINERGY EXPECTS THAT SALES OF ETHANOL WILL CONTINUE TO BE TO A LIMITED
NUMBER OF PURCHASERS, KINERGY WILL BE SUBJECTED TO SIGNIFICANT PAYMENT RISKS.
Kinergy markets and sells ethanol primarily in the Central Valley region
of California to large oil customers who control the majority of all gasoline
sales in California. During the fiscal year ended December 31, 2003, Kinergy
purchased and resold an aggregate of approximately 26 million gallons of fuel
grade ethanol to approximately 20 customers. Sales to five of Kinergy's
customers accounted for 67% and 59% of revenue for the year ended December 31,
2003 and for the nine months ended September 30, 2004, respectively. With such a
limited number of large purchasers, the risk that a large customer could cease
purchasing ethanol from Kinergy or fail to make payments for ethanol purchases
when due, or at all, is significant. Although Kinergy has established payment
terms of less than net ten days with its customers, the failure of any large
customer to continue to purchase ethanol from Kinergy or to make any payment for
purchases when due, or at all, would adversely affect Kinergy's business,
financial condition and results of operations.
KINERGY MAY NOT BE SUCCESSFUL IF ADDITIONAL FUNDING IS UNAVAILABLE.
If Kinergy's capital requirements or revenue vary materially from current
plans or if unforeseen circumstances occur, Kinergy may require additional
financing. Additional financing may not be available on a timely basis, in
sufficient amounts or on terms acceptable to Kinergy and/or Combined Company.
Any debt financing or other financing of securities senior to common stock will
likely include financial and other covenants that will restrict Kinergy's and
the Combined Company's flexibility.
KINERGY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO COMPLY WITH
GOVERNMENTAL REGULATIONS.
The production and marketing of ethanol is subject to regulation by
agencies of the federal government, as well as other agencies in the State of
California and in each other jurisdiction in which ethanol products are sold or
used. Compliance with such regulations may be time-consuming and expensive and
may delay or even prevent sales in California or in particular jurisdictions.
Failure to comply with federal or state regulations or the applicable
regulations of any foreign jurisdiction in which Kinergy's products are sold or
used could adversely affect Kinergy's business. See "Risks Relating to the
Business of PEI--Governmental regulation could adversely affect PEI's business"
and "--PEI's business may be adversely affected if it is unable to comply with
governmental regulations."
32
THE FUTURE PERFORMANCE OF KINERGY DEPENDS IN PART ON FUTURE GROWTH IN THE
ETHANOL FUEL MARKETS.
The failure of the ethanol fuel markets to grow as anticipated would harm
Kinergy's business, financial condition and results of operation. Kinergy's
sales of ethanol may also be adversely affected by the overall health of the
United States economy. A downturn or slowdown in economic conditions in the
United States could result in customers failing to place orders for ethanol,
which would adversely affect Kinergy's business.
AN INDUSTRY SHIFT AWAY FROM ETHANOL WOULD HARM KINERGY'S BUSINESS.
Kinergy's revenue is and will continue to be derived primarily from sales
of ethanol. Currently, the predominant oxygenate used to blend with gasoline is
ethanol. Ethanol competes with several other existing products and other
alternative products could also be developed for use as fuel additives. In
addition, some studies, including a study conducted at the University of
California, Berkeley in 2003, suggest that producing ethanol from corn requires
burning as much as twice the amount of gasoline already used in cars, thereby
harming the environment more than pure gasoline. Although Kinergy intends to
become involved with renewable fuels as a broader industry, including possibly
biodiesel and other fuel blends with renewable components and related
technologies, such as ethanol reformers for fuel cells, Kinergy will be
completely focused on the marketing of ethanol for the foreseeable future and
there can be no assurance that Kinergy will be able to expand into such areas.
Accordingly, an industry shift away from ethanol or the emergence of new
competing products may reduce the demand for ethanol products and adversely
affect Kinergy's business.
KINERGY MAY NOT BE SUCCESSFUL IF IT IS UNABLE TO COMPETE EFFECTIVELY.
The ethanol marketing industry is highly competitive. Kinergy expects new
competitors to enter into its markets. Some or all of Kinergy's current and
future competitors have or may have significantly greater financial, technical,
manufacturing and marketing resources than Kinergy. Kinergy's ability to compete
in the market depends on a number of factors. These factors include:
o price;
o product distribution abilities; and
o general economic conditions.
Kinergy competes in the ethanol re-marketing industry mainly on the basis
of price and delivery performance. Kinergy believes that price competition will
increase in the future. A key marketing strategy of Kinergy is to provide
ethanol products at a competitive price. However, Kinergy may not continue to
perform at levels expected by customers or be priced competitively.
THE FAILURE TO RETAIN OR ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT KINERGY.
The future success of Kinergy is dependent, in part, on its ability to
retain certain key personnel. Kinergy is presently, and is likely for some to
continue to be, dependent upon its founding member. Kinergy currently has no
employees, and Kinergy's founder will therefore be instrumental to Kinergy's
success. It is possible that Kinergy's founding member may later become unable
to serve, and Kinergy may be unable to recruit and retain suitable replacements.
Accordingly, Kinergy's dependence on its founding member may adversely affect
Kinergy's business, results of operations, and financial condition. Kinergy also
needs to attract additional skilled technical, clerical and managerial personnel
in all areas of its business to continue to grow. The competition for such
individuals in the growing ethanol production and marketing industry is intense.
There can be no assurance that Kinergy will be able to retain its
33
existing personnel or attract additional qualified personnel in the future.
Kinergy has not entered into long-term contracts with any of its employees and
does not maintain key employee life insurance.
In particular, Kinergy is dependent upon its relationship with Neil
Koehler, its sole manager and sole limited liability company member. Mr. Koehler
has considerable experience in the construction, start-up and operation of an
ethanol production facility and in the ethanol marketing business. Any loss of
Kinergy's relationship with Mr. Koehler may adversely affect Kinergy's business,
results of operations, and financial condition.
FLUCTUATIONS IN QUARTERLY PERFORMANCE COULD ADVERSELY AFFECT KINERGY'S BUSINESS.
Kinergy's operating results have fluctuated significantly in the past, and
Kinergy expects its operating results to fluctuate significantly from quarter to
quarter in the future depending on a number of factors. These factors include:
o volume and timing of the receipt of orders for ethanol from major
customers;
o competitive pricing pressures;
o Kinergy's ability to sell and deliver ethanol on a cost-effective and
timely basis;
o the introduction and announcement of new products and processes by
Kinergy's competitors; and
o changing conditions in the ethanol and fuel markets.
Furthermore, Kinergy believes that the economic conditions in California
and other states, as well as the United States as a whole, could have a negative
impact on Kinergy's results of operations. Accordingly, Kinergy's results of
operations could be subject to significant quarterly variation due to general
economic conditions. Demand for ethanol products could also be adversely
affected by a slow down in overall demand for oxygenate and gasoline additive
products.
A portion of Kinergy's ethanol purchases and spending levels is made based
upon forecasted demand. Accordingly, any inaccuracy in forecasting anticipated
revenues and expenses could adversely affect Kinergy's business. Furthermore,
Kinergy recognizes revenues from ethanol sales at the time of delivery. The
failure to receive anticipated orders or to complete delivery in any quarter
could adversely affect Kinergy's results of operations for that quarter.
Quarterly results are not necessarily indicative of future performance for any
particular period, and Kinergy may not experience revenue growth or
profitability on a quarterly or annual basis.
RISKS RELATING TO THE BUSINESS OF REENERGY
ReEnergy intends to develop a large-scale ethanol plant in California. To
date, ReEnergy has had no significant operations, other than entering into an
Option Agreement dated as of July 30, 2003, with Kent Kaulfuss, a limited
liability company member of ReEnergy, and his wife, with respect to the
acquisition of approximately 89.3 acres of real property located in Visalia,
California, with respect to which real property ReEnergy has granted to PEI an
option to purchase upon ReEnergy's purchase from Kent Kaulfuss and his wife.
Accordingly, the risks relating to the business of ReEnergy are generally the
same as or substantially similar to the general risks relating to the business
of PEI. See "Risk Factors--Risks Relating to the Business of PEI."
34
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements, including
statements concerning future conditions in the ethanol refining and marketing
industries, and concerning the Combined Company's future business, financial
condition, operating strategies, and operational and legal risks. Words like
"believe," "expect," "may," "will," "could," "seek," "estimate," "continue,"
"anticipate," "intend," "future," "plan" or variations of those terms and other
similar expressions, including their use in the negative, are used in this proxy
statement to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements, which speak only as to the
expectations of Accessity and the Acquired Companies, as the case may be, as of
the date of this proxy statement. These forward-looking statements are subject
to a number of risks and uncertainties, including those identified under "Risk
Factors" and elsewhere in this proxy statement. Although Accessity and the
Acquired Companies, as the case may be, believe that the expectations reflected
in these forward-looking statements are reasonable, actual conditions in the
ethanol refining and marketing industries, and actual conditions and results in
the Acquired Companies' businesses, could differ materially from those expressed
in these forward-looking statements. In addition, none of the events anticipated
in the forward-looking statements may actually occur. Any of these different
outcomes could cause the price of the Combined Company's common stock to decline
substantially. Except as required by law, neither Accessity nor any of the
Acquired Companies undertakes no duty to update any forward-looking statement
after the date of this proxy statement, either to conform any statement to
reflect actual results or to reflect the occurrence of unanticipated events.
35
INFORMATION RELATING TO ACCESSITY
GENERAL
On November 23, 1983, drivershield.com FS Corp., a New York corporation,
was formed and commenced operations as an automotive fleet administrator.
Thereafter, Accessity Corp., 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 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 and, thereafter Accessity was no longer engaged in the fleet
management business. In addition, on January 2, 2003, Accessity established a
strategic partnership with a third party and transferred the management and
operating responsibilities of Accessity's DriverShield subsidiary in exchange
for profit sharing. DriverShield provided collision repair management services
for insurance industry clients during fiscal 2002. Effective August 1, 2003,
Accessity's business unit offering automobile services to affinity groups
through Accessity's wholly-owned subsidiary, DriverShield ADS Corp. ("ADS"), was
sold to the president of that business unit. Accessity's remaining business
activities are now operated by Accessity's wholly-owned subsidiary, Sentaur, a
business unit which Accessity began in 2002 that specializes in medical billing
recovery for hospitals.
If the Share Exchange is consummated, Accessity will transfer DriverShield
and sell Sentaur to Barry Siegel, the current President and CEO of Accessity. As
a result, the businesses conducted to date by Accessity will no longer be
conducted by the Combined Company. Upon consummation of the Share Exchange, the
principal executive and business offices of Combined Company will be the
principal executive and business offices of PEI located at 5711 N. West Avenue,
Fresno, California 93711. Accordingly, the foregoing and following information
regarding the business of Accessity is essentially irrelevant with respect to
the business to be conducted by the Combined Company, PEI, Kinergy and ReEnergy
upon consummation of the Share Exchange.
NATURE OF SERVICES
MEDICAL BILLING RECOVERY. In late 2002, Accessity established a new
business unit to diversify from the automobile repair industry. Sentaur provides
hospitals the opportunity to recoup discounts improperly taken by insurance
companies and other institutional payors of medical treatments. This business
unit contracts with hospitals and, upon analytic review of their internal
records and contracts, isolates those payors who have improperly discounted the
fees they have paid and seeks appropriate recovery. Sentaur's fee income from
the hospitals is earned upon the successful collection of the receivable by the
hospital. Sentaur currently has a number of hospitals under signed contracts and
by December 31, 2003 had recovered in excess of $1.0 million on their behalf
since it began generating billings in March 2003.
INSURANCE CARRIER MARKET. Effective January 2, 2003, under a Strategic
Partnership Agreement with ClaimsNet, Inc., Accessity transferred to ClaimsNet
all responsibility for the management and processing new automobile claims and
repairs for DriverShield. During 2003, Accessity completed the repairs that were
in process prior to the effective date of the agreement with ClaimsNet.
DriverShield offered Internet-based vehicle repair management services,
including collision and general repair programs, estimating and auditing
services and vehicle rentals for insurance companies and affinity group members.
Throughout fiscal 2002 and for a short period in early 2003, during which
time in-process repairs were completed, Accessity provided auto repair services
for Accessity's insurance carrier clients. Accessity assumed the risks and
responsibilities for the vehicle repair process from commencement to completion.
Accessity's insurance industry clients used the Internet to access Accessity's
collision management system to record a claim, which then initiated Accessity's
activities to proceed with vehicle repairs. The interactive website facilitated
information gathering and distribution to launch the repair
36
process. The website enabled insurance carriers to utilize Accessity's website
to directly enter the initial vehicle claim information, find and select the
most accessible automobile collision repair shop from Accessity's network of
approximately 2,000 shops throughout the United States, and enabled the
insurance carrier and the insured to track the repairs of the vehicle until
completion. Accessity's software also allowed Accessity, and its clients, to
view digitized images of the damaged vehicle. Because of the volume of work
Accessity provided, Accessity was able to obtain significantly lower repair
costs, and expedited turnaround time, for Accessity's clients.
Once the client initiated the claims management system, Accessity was
automatically notified to commence activities. Accessity coordinated activities
with the shops, used its audit and estimating staff to negotiate the lowest
price for every claim and repair, monitored the use of certain types of parts,
tracked the work and timeliness of the repair process which could be viewed by
Accessity's clients, on Accessity's website, to judge Accessity's efforts,
obtained independent appraisals when requested, and, finally, guaranteed the
repairs for as long as the driver owned the vehicle. Accessity issued warranty
certificates for every repair done within Accessity's network and was
responsible to its clients if the repairs were not done appropriately. Accessity
managed its warranty risk by monitoring the quality and consistency of its
network repair facilities and quickly eliminating those shops that did not
maintain proper standards. Accessity paid the independent repair shops directly
upon completion of their work, and invoiced its insurance clients separately. A
number of insurance carriers had signed multi-year contracts with DriverShield.
FLEET MANAGEMENT. Effective February 7, 2003, Accessity sold all of the
outstanding shares of driversshield.com FS Corp. to PHH Vehicle Management
Services LLC ("PHH").
AFFINITY GROUP PROGRAMS. Effective August 1, 2003, Accessity sold all of
the outstanding shares of ADS to its president. Through ADS, Accessity offered
various programs for vehicle-related services for consumers who were sold the
programs through affinity groups, financial institutions, corporations and
organizations. These programs were used as re-enrollment incentives and/or
membership premiums, or resold at a profit. The programs consisted of collision
repair discounts, discounts for certain auto services including oil changes,
brake repairs and the like, and an auto hotline providing advice on actions to
take for their vehicles.
RECENT DEVELOPMENTS
SALE OF FLEET SERVICES BUSINESS UNIT. In October 2001, Accessity entered
into a Preferred Stock Purchase Agreement (the "Purchase Agreement") to sell all
of the outstanding shares of its wholly-owned subsidiary, driversshield.com FS
Corp. to PHH for $6.3 million in cash, and pursuant to the Purchase Agreement
sold $1.0 million of Accessity's Series A Convertible Preferred Stock to PHH.
The Purchase Agreement was approved by a vote of Accessity'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 Accessity to
operate driversshield.com FS Corp. until June 30, 2002.
TRANSFER OF INSURANCE COLLISION REPAIR BUSINESS. In December 2002,
Accessity entered into a Strategic Partnership Agreement (the "Partnership
Agreement"), effective January 2, 2003, with ClaimsNet, in which ClaimsNet
assumed the responsibilities of operations and management of DriverShield,
Accessity's business that provided insurance carriers with collision repair for
their insureds. Accessity granted an exclusive license of its technology,
including its website software that enables insurance customers to access its
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 Accessity
25% of vendor referral fees and 50% of administrative fees (as defined in the
Partnership 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
37
technology to have their vehicles repaired. The term of the Partnership
Agreement is for a five-year period, with a two-year renewal unless terminated
ninety days prior to the end of the then current term. Additionally, ClaimsNet
has an option to purchase the DriverShield business commencing on January 1,
2007 for a purchase price equal to the total royalties paid by ClaimsNet for the
prior twenty-four months.
SALE OF AFFINITY SERVICES BUSINESS. Effective August 1, 2003, Accessity
sold all of the outstanding shares of its wholly-owned subsidiary, ADS, to the
president of that business unit, who was also a member of Accessity's board of
directors, for $10,000. The sale excluded certain assets and liabilities
consisting primarily of accounts receivable and payables.
REVERSE COMMON STOCK SPLIT. On January 7, 2004, upon approval by the
Accessity shareholders at the December 15, 2003 Annual Shareholders Meeting,
Accessity effected a one-for-five share reverse common stock split. In addition,
all options, warrants and other securities convertible into common shares were
adjusted to reflect the reverse stock split, thereby increasing the conversion
price by fivefold. Accessity elected this transaction in order to comply with
the continued listing requirements of The Nasdaq SmallCap Market, which mandates
that common shares maintain a $1.00 trading price per share. All common share
amounts and prices presented in this proxy statement with respect to Accessity
have been adjusted to reflect this split.
SALES AND MARKETING
Accessity's customers for the medical recovery business are hospitals.
Sales activities are primarily performed by Accessity's own personnel and
augmented by outside sales representatives. Sales are made through referrals,
cold canvassing of appropriate prospects and direct mailings.
Accessity's clients for the DriverShield program were property and
casualty insurance companies. Accessity's clients for the affinity programs were
financial institutions, organizations and affinity groups that resell the
programs to individuals.
In 2003, four customers accounted for 92% of Accessity's continuing
revenues, comprising 36%, 22%, 20% and 14% individually. Two were in the medical
recovery segment and two were in the auto segment. In 2002, one customer
accounted for 26% of Accessity's revenues and another accounted for 59% of
revenues, both in the automotive segment. These figures exclude those accounts
associated with the discontinued operating fleet service and ADS businesses that
were sold in February 2002 and August 2003 respectively.
COMPETITION
Accessity believes that medical billing recovery is an emerging market,
but is not aware of any major entities involved in this business. Accessity is
aware of a few privately held companies that have initiated similar business
activities in regional parts of the United States.
EMPLOYEES
As of November 30, 2004, Accessity employed 11 full-time employees and one
part-time employee. Accessity has never had a work stoppage or strike, and no
employees are represented by a labor union or covered by a collective bargaining
agreement. As a condition to the consummation of the Share Exchange, all of the
employees of Accessity are required to voluntarily terminate their employment
with Accessity.
38
FACILITIES
In May 2002, Accessity 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
one-half years. The property is owned by members of Accessity's current board of
directors. The landlord of the Coral Springs premises has listed the property
for sale and Accessity has agreed to terminate the lease upon the sale of the
building. If the Share Exchange proposal is approved by the Accessity
shareholders, until the landlord of the Coral Springs facility sells the
building, Mr. Siegel or an entity owned or controlled by him (which may be
Sentaur) with the consent of the lessor under the existing lease agreement for
such facilities, on terms and conditions reasonably satisfactory to the Acquired
Companies, will contribute the sum of $3,500 towards the monthly rental
obligation. However, once the Acquired Companies have made lease payments of
$50,000 under the lease, Mr. Siegel will make all lease payments until the
project is sold. Upon consummation of the Share Exchange, the principal
executive and business offices of the Combined Company will be the principal
executive and business offices of PEI located at 5711 N. West Avenue, Fresno,
California 93711.
LEGAL PROCEEDINGS
In January 2003, Accessity and its CEO were served with a complaint filed
by Gerald Zutler, Accessity's former President and Chief Operating Officer,
alleging that Accessity breached his employment contract, fraudulently concealed
Accessity's intention to terminate its employment agreement with Mr. Zutler, and
discriminated on the basis of age and aided and abetted 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. Accessity
believes that it 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. The answer to the complaint was served on
February 28, 2003. In 2003, Mr. Zutler filed a motion to have Accessity's
attorney removed from the case on the basis that he would call Accessity's
attorney as a witness. The motion was granted by the court, but Accessity has
appealed that ruling and the action has been stayed pending determination of the
appeal. Accessity has filed a claim with its carrier under its Directors' and
Officers' and Employment Practices Liability Policy. The policy has a $50,000
deductible and a liability limit of $3 million per policy year. At the present
time, the carrier has agreed to cover the portion of the claim that relates to
Mr. Siegel and has agreed to a 50% allocation of expenses. Therefore, Accessity
must incur $100,000 of legal expenses to satisfy the policy deductible, before
the carrier commences reimbursing Accessity for 50% of the legal defense and/or
any possible recovery in favor of the plaintiff.
Accessity 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. Accessity was 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,
Accessity was seeking its out of pocket costs of due diligence amounting to
approximately $37,000. Presidion 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. The dispute was heard by a single arbiter
before the American Arbitration Association in February 2004. During June 2004,
Accessity received notice that the arbitration proceedings under the auspices of
the American Arbitration Association had concluded that Accessity was entitled
to the $250,000 break-up fee set forth in the Memorandum of Understanding, as
well as its share of the costs of the arbitration and interest from the date of
the termination of that agreement by Presidion, aggregating approximately
$30,000. As an accommodation, Accessity accepted an initial payment of $98,332
on June 28, 2004, and an interest-bearing promissory note, in the aggregate
amount of $181,358, comprising two payments of approximately similar amounts to
be made on July 28
39
and August 27, 2004. Accessity received all the payments that were due. The
arbitrator dismissed Presidion's counterclaim.
In addition, Accessity has filed a lawsuit seeking damages in excess of
$100 million, as a result of discovery conducted in connection with the
Presidion matter described above, against Presidion's investment bankers,
Mercator Group, LLC and related parties ("Mercator"), and Taurus Global LLC
("Taurus") (collectively, the "Defendants"), alleging that these parties
tortuously interfered in the transaction between Accessity and Presidion.
Accessity has decided to dismiss all actions without prejudice against the
Defendants and plans to refile this action against these same Defendants in
California state court. The final outcome of the Mercator action will most
likely take an indefinite time to resolve. Accessity currently has limited
information regarding the financial condition of the defendants and the extent
of their insurance coverage. Therefore, it is possible that Accessity may
prevail but may not be able to collect substantially on its judgment.
DIRECTORS AND EXECUTIVE OFFICERS
Each member of Accessity's board of directors serves for staggered
three-year terms and until his or her successor is duly elected and qualified.
The names, ages and positions held by Accessity's directors, director nominee
and executive officers as of November 30, 2004 are as follows:
NAME AGE POSITIONS HELD
---- --- --------------
Barry Siegel................... 53 Chairman of the Board, President and
Chief Executive Officer
Philip B. Kart................. 54 Senior Vice President, Secretary and
Chief Financial Officer
Kenneth J. Friedman(1)......... 50 Director
Bruce S. Udell(1).............. 51 Director and Director Nominee
...................
(1) Member of the Audit Committee. The board of directors of Accessity has
determined that Accessity does not have a financial expert, as defined in
the rules and regulations promulgated by the SEC, sitting on its audit
committee.
BARRY SIEGEL has served as one of Accessity's directors and through
December 2003 as Secretary, since Accessity was incorporated. He was elected to
the additional post of President in December 2003. He has served since November
1997 as Accessity's Chief Executive Officer and Chairman of the Board.
Previously, he served as Accessity's 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 Accessity's 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 of Accessity. Mr. Siegel is a Class I director.
PHILIP KART has served as Secretary of Accessity since December 2003,
Senior Vice President and Treasurer since February 2002 and Chief Financial
Officer since October 2000. From February 1998 through September 2000, he was
Vice President and Chief Financial Officer of Forward Industries, Inc., a Nasdaq
SmallCap listed company, and prior to that, from March 1993 to December 1997, he
was Chief Financial Officer of Ongard Systems, Inc. Mr. Kart has also held
financial management positions with Agrigenetics Corporation and Union Carbide
and was with the accounting firm Price Waterhouse Coopers. Mr. Kart is a CPA.
KENNETH J. FRIEDMAN has served as a director of Accessity since October
1998. Mr. Friedman has for more than five years served as President of the
Primary Group, Inc., an executive search consulting firm. Mr. Friedman is a
Class II director.
40
BRUCE S. UDELL was first elected to be a member of the board of directors
of Accessity 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. Mr. Udell is a Class III director.
BOARD COMMITTEES AND MEETINGS
Accessity's board of directors serves as the representative of the
Accessity shareholders. The board establishes broad corporate policies and
oversees Accessity's overall performance. The board is not, however, involved in
day-to-day operating details. Members of the board are kept informed of
Accessity's business activities through discussion with the chief executive
officer, by reviewing analyses and reports sent to them by management, and by
participating in board meetings.
During 2003, Accessity's board of directors held three meetings attended
by members of the board either in person or via telephone, and on two occasions
approved resolutions by unanimous written consent in lieu of a meeting.
Accessity's board of directors currently has one standing committee, the
Audit Committee. The members of Accessity's Audit Committee in 2003 were Kenneth
J. Friedman, Barry J. Spiegel, a former director who resigned from the board in
May 2004, and Bruce S. Udell. Neither Mr. Friedman nor Mr. Udell is currently an
officer of Accessity or any of its subsidiaries, and both are "independent"
under the Nasdaq listing requirements as currently in effect. Mr. Spiegel was an
officer of Accessity until August 1, 2003 and was thereafter an independent
director until his resignation from the board in May 2004. The Audit Committee
met once in 2003. The Audit Committee operates pursuant to a charter approved by
Accessity's board of directors. In February 2004, Mr. Friedman and Mr. Udell
were re-elected as members of the Audit Committee, with Mr. Friedman designated
as Chairman.
The Audit Committee meets with Accessity's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the board the independent auditors to be retained; and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls.
Accessity's board of directors does not have a nominating committee
because the board of directors has determined that the entire board of directors
can efficiently and effectively fulfill this function by using a variety of
methods for identifying and evaluating nominees for director, including
candidates that may be referred by Accessity's shareholders. Shareholders who
desire to recommend candidates for evaluation may do so by contacting Accessity
in writing, identifying the potential candidate and providing background
information. See "Security Holder Communications with the Board of Directors."
Candidates may also come to the attention of the board of directors through
current members of the board of directors, professional search firms and other
persons. In evaluating potential candidates, the board of directors takes into
account a number of factors, including among others, the following:
o independence from management;
o whether the candidate has relevant business experience;
o judgment, skill, integrity and reputation;
o existing commitments to other businesses;
o corporate governance background;
41
o financial and accounting background, to enable the board of directors
to determine whether the candidate would be suitable for Audit
Committee membership; and
o the size and composition of the board of directors.
During the fiscal year ended December 31, 2003, all directors attended at
least 75% of the aggregate of the meetings of the board of directors and of the
committees on which he served, held during the period for which he was a
director or committee member, respectively.
DIRECTOR COMPENSATION
Accessity does not pay its directors any cash compensation for serving on
the board of directors. The 1995 Plan does, however, provide that when they are
elected to the board and every anniversary thereafter as long as they serve,
Accessity's non-employee directors are granted a non-statutory stock option to
purchase up to 10,000 shares of Accessity common stock which vests over three
years. Prior to February 4, 2002, directors received only 3,000 shares as the
annual stock option grant.
SECURITY HOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
The board of directors has established a process to receive communications
from security holders. Security holders and other interested parties may contact
any member (or all members) of the board of directors, or the independent
directors as a group, any committee of the board of directors or any chair of
any such committee, by mail or electronically. To communicate with the board of
directors, any individual directors or any group or committee of directors,
correspondence should be addressed to the board of directors or any such
individual directors or group or committee of directors by either name or title.
All such correspondence should be sent "c/o Corporate Secretary" at Accessity
Corp., 12514 West Atlantic Boulevard, Coral Springs, Florida 33071. To
communicate with any of Accessity's directors electronically, security holders
should send an email to Accessity's Corporate Secretary at:
pkart@accessitycorp.com.
All communications received as set forth in the preceding paragraph will
be opened by the Corporate Secretary for the sole purpose of determining whether
the contents represent a message to Accessity's directors. Any contents that are
not in the nature of advertising, promotions of a product or service, patently
offensive material or matters deemed inappropriate for the board of directors
will be forwarded promptly to the addressee. In the case of communications to
the board of directors or any group or committee of directors, Accessity's
Corporate Secretary will make sufficient copies (or forward such information in
the case of e-mail) of the contents to send to each director who is a member of
the group or committee to which the envelope or e-mail is addressed.
POLICY WITH REGARD TO BOARD MEMBERS' ATTENDANCE AT ANNUAL MEETINGS
It is Accessity's policy that its directors are invited and encouraged to
attend all of its annual meetings. At the date of Accessity's 2003 annual
meeting, Accessity had four members on its board of directors, all of whom were
in attendance at the 2003 annual meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity.
AUDIT COMMITTEE REPORT
In fulfilling its oversight duties, the Audit Committee reviewed and
discussed with management and Accessity's independent auditors, Nussbaum Yates &
Wolpow, P.C., Accessity's audited financial
42
statements for the fiscal year ended December 31, 2003. The Audit Committee also
discussed with Accessity's auditors the matters required to be communicated in
accordance with the American Institute of Certified Public Accountants Statement
on Auditing Standards and Independence Board Standards. These matters include
the independent auditors' judgments as to the quality, not just the
acceptability, of Accessity's accounting principles, as well as such other
matters Accessity's auditors are required to discuss with the Audit Committee
under generally accepted auditing standards. The Audit Committee received the
written disclosures and letter from Accessity's auditors required by
Independence Standards Board Standard No. 1 (Independence Discussion with Audit
Committees) and discussed with Accessity's auditors their independence.
Nussbaum Yates & Wolpow, P.C. billed Accessity an aggregate of $51,500 in
fees for professional services rendered for the audit of Accessity's annual
financial statements for fiscal year 2003 and review of interim financial
statements included in Accessity's Form 10-QSBs for 2003 and $1,939 in fees for
professional services rendered regarding other matters.
Based upon the above review and discussions with management and
Accessity's independent auditors, the Audit Committee recommended to Accessity's
board of directors that Accessity's audited financial statements be included in
Accessity's Annual Report on Form 10-KSB for the fiscal year ended December 31,
2003, for filing with the SEC.
Respectfully submitted,
THE AUDIT COMMITTEE
Kenneth J. Friedman
Bruce S. Udell
The foregoing report of the Audit Committee may not be deemed incorporated
by reference in any previous or future documents filed by us with the SEC under
the Securities Act or the Securities Exchange Act, except to the extent
Accessity specifically incorporates it by reference in any such document.
INDEPENDENT PUBLIC ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees billed to Accessity by
Nussbaum Yates & Wolpow, P.C. for professional services rendered for the years
ended December 31, 2003 and 2002:
Fee Category 2003 2002
------------ ------- -------
Audit Fees $51,500 $63,679
All Other Fees 1,939 2,763
------- -------
Total $53,439 $66,442
AUDIT FEES. Consists of fees billed for professional services rendered for
the audit of Accessity's annual consolidated financial statements and review of
the interim consolidated financial statements included in quarterly reports and
services that are normally provided by Nussbaum Yates & Wolpow, P.C. in
connection with statutory and regulatory filings or engagements.
ALL OTHER FEES. Consists of fees for products and services other than the
services reported above. In fiscal 2003, these services included assistance
regarding Accessity's registration of common stock on Form S-8 and other
miscellaneous services. In fiscal 2002, these services included tax advice and
other miscellaneous services.
43
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF
INDEPENDENT PUBLIC ACCOUNTANTS
Accessity's audit committee pre-approves all services provided by Nussbaum
Yates & Wolpow, P.C.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, or Exchange Act,
requires Accessity's executive officer, directors and persons who beneficially
own more than 10% of a registered class of Accessity's equity securities
("reporting persons") to file initial reports of ownership and reports of
changes in ownership of Accessity common stock and other equity securities with
the SEC. The reporting persons are required by the SEC regulations to furnish
Accessity with copies of all reports that they file.
Based solely upon a review of copies of the reports furnished to Accessity
during its fiscal year ended December 31, 2003 and thereafter, or any written
representations received by Accessity from reporting persons that no other
reports were required, Accessity believes that all Section 16(a) filing
requirements applicable to its reporting persons during Accessity's fiscal year
end December 31, 2003 were met, except that each of Kenneth J. Friedman and
Bruce S. Udell filed a late Form 5 to report one transaction.
CODE OF ETHICS
Accessity has adopted a Code of Ethics for adherence by its Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer and
Controller to ensure honest and ethical conduct; full, fair and proper
disclosure of financial information in Accessity's periodic reports filed
pursuant to the Securities Exchange Act of 1934; and compliance with applicable
laws, rules, and regulations. Any person may obtain a copy of Accessity's Code
of Ethics by mailing a request to Accessity at the principal business offices of
Accessity located at 12514 West Atlantic Boulevard, Coral Springs, Florida
33071.
44
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 2003,
2002 and 2001, compensation awarded or paid to, or earned by, Accessity's Chief
Executive Officer and each of the other most highly compensated executive
officers of Accessity who earned more than $100,000 in salary for the year ended
December 31, 2003 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------- ----------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS OPTIONS/SARS (#) ($)
--------------------------- -------- ----------- ----------- ---------------- ---------------
Barry Siegel................................. 2003 300,000 -- -- --
Chairman of the Board, President and 2002 300,000 250,000 110,000 12,500(1)
Chief Executive Officer 2001 285,000 -- -- --
John M. McIntyre(2).......................... 2003 124,615 -- -- --
Former President and Chief Operating Officer 2002 84,339 -- 50,000 --
2001 -- -- --
Barry J. Spiegel(3).......................... 2003 107,692 -- -- --
President, DriverShield ADS Corp. 2002 175,000 -- 50,000 --
2001 129,525 -- -- --
Philip B. Kart............................... 2003 155,000 10,000 -- 62,000(4)
Senior Vice President, Secretary, Treasurer 2002 155,000 -- 30,000 --
and Chief Financial Officer 2001 139,093 -- -- --
Steven DeLisi................................ 2003 175,000 10,000 -- --
President, Sentaur Corp. 2002 68,654 5,000 50,000 --
2001 -- -- -- --
_____________________
(1) Reimbursed to Mr. Siegel for direct costs he incurred in connection with
his relocation.
(2) Mr. McIntyre's employment terminated on December 31, 2003 and he resigned
from the board of directors in May 2004.
(3) Mr. Spiegel's employment terminated on July 31, 2003 and he resigned from
the board of directors in May 2004.
(4) Provided to Mr. Kart, upon his relocation, for costs incurred in
connection with his relocation.
STOCK OPTION GRANTS AND EXERCISES
Accessity made no awards of stock options during the last fiscal year to
the Named Executive Officers as part of their employment. However, upon his
resignation from Accessity, Mr. Spiegel was granted an option that expires
September 1, 2008, as compensation for his services as a non-employee director,
to purchase 10,000 shares of Accessity common stock at a price per share equal
to $6.25 in accordance with Accessity's policy of option grants to its
non-employee directors. The following table indicates the number of exercised
and unexercised stock options held by each Named Executive Officer as of
December 31, 2003.
45
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ACQUIRED ON VALUE OPTIONS/SARS AT FY-END (#) AT FY-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
Barry Siegel....................... 40,000 $ 25,250 80,000/36,667 0/0
John M. McIntyre................... -- -- 16,667/0 0/0
Barry J. Spiegel................... 30,000 $ 23,625 0/3,333 0/0
Philip B. Kart..................... -- -- 65,000/10,000 0/0
Steven DeLisi...................... -- -- 16,667/33,333 $36,000/0
EQUITY COMPENSATION PLAN INFORMATION
SHARES TO BE
ISSUED UPON EXERCISE OF
OUTSTANDING, NUMBER OF
OPTIONS, WARRANTS WEIGHTED AVERAGE SECURITIES AVAILABLE
PLAN CATEGORY OR STOCK RIGHTS (#) EXERCISE PRICE ($) FOR FUTURE ISSUANCE
------------- ------------------ ----------------- -------------------
APPROVED BY SHAREHOLDERS:
1995 Plan.......................... 392,333 $6.00 807,667
NOT APPROVED BY SHAREHOLDERS:
Consultant's Warrants.............. 25,000 $2.99 0
EMPLOYMENT AGREEMENTS
Accessity is a 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 1995
Plan, providing the right to purchase 60,000 shares of Accessity's common stock,
in addition to certain other perquisites. His employment agreement provides that
following a change of control (as defined in the agreement), Accessity 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 Accessity may deduct
under the provisions of the Internal Revenue Code. In recognition of the sale of
the fleet services business, Mr. Siegel was also awarded a $250,000 bonus, which
was paid in February 2002, and an additional grant of 50,000 options.
Accessity is a 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 1995 Plan, providing the right to purchase 30,000 shares of Accessity's
common stock, in addition to certain other perquisites, and the applicable
percentage for severance payment purposes is 100%. His employment agreement
provides that following a change in control (as defined in the agreement), all
stock options previously granted to him will immediately become fully
exercisable. Mr. Kart's contract also provided for relocation expense payments
that were conditioned upon his relocation to Accessity's new headquarters, which
occurred in early 2003.
Under an agreement with Accessity's wholly-owned subsidiary, Sentaur,
Accessity is 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
1995 Plan, providing the right to purchase 50,000 shares of Accessity's common
stock, in addition to certain other perquisites, and the applicable percentage
for severance payment purposes is 100%. Mr. DeLisi also participates in a bonus
program established for his business that provides a bonus of 50% of his salary
upon the achievement of $25,000 in profits for three consecutive months. During
his
46
first twelve months of employment he received an interim bonus of $5,000 for
each signed contract. His employment agreement provides that following a change
in control (as defined in the agreement), all stock options previously granted
to him will immediately become fully exercisable.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Accessity has adopted provisions in its articles of incorporation which
eliminate the liability of the directors of Accessity to the fullest extent
permissible under New York law and authorize Accessity to indemnify its
directors and officers within certain applicable limits of the New York Business
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies, such as injunctive relief or recession. In addition,
Accessity's bylaws provide that Accessity shall indemnify its directors and
officers who are, or are threatened to be made, parties to proceedings as a
result of their position with Accessity against expenses, judgments, fines,
settlements and certain other amounts in connection with such proceedings,
subject to certain limitations, except that with regard to any action by or in
right of Accessity, such indemnification shall be only for certain expenses
incurred by such parties and shall be subject to certain limitations, including
compliance with fiduciary obligations.
There is no pending litigation or proceeding involving a director or
officer of Accessity as to which indemnification is being sought, nor is
Accessity aware of any pending or threatened litigation that may result in
claims for indemnification by any director or officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2002, Accessity 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 current or former members of Accessity's
board of directors. The terms of the lease require net rentals increasing in
annual amounts from $127,000 to $168,000 plus real estate taxes, insurance and
other operating expenses. The lease period commenced in October 2002 and
terminates five years and six months thereafter. Accessity and the landlord each
expended approximately $140,000 to complete the interior space. In addition,
during July 2002, Accessity pledged a $300,000 certificate of deposit with a
Florida bank, (the mortgage lender to B & B Lakeview Realty Corp) as security
for Accessity's future rental commitments for the benefit of the landlord's
mortgage lender. The certificate of deposit declines to $200,000 after the 36th
month, $100,000 after the 48th month, and to zero after 60 months, as the
balance of the rent commitment declines. During the 2003 period, Accessity paid
B & B Lakeview Realty rent payments of $127,000. Accessity also accrued a
payment of $20,000 as reimbursement for some insurance and tax amounts paid by B
& B Lakeview Realty during 2003. Operating expenses, insurance and taxes, as
required by the lease, are generally paid directly to the providers by
Accessity.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of Accessity's common stock as of November 30, 2004 by:
o each person known by Accessity to beneficially own more than 5% of the
outstanding shares of Accessity's common stock;
o each of Accessity's current directors and the director nominee;
o each of the Named Executive Officers in the summary compensation table
above; and
o all current Accessity directors and executive officers as a group.
47
The percentage of share ownership indicated below is based on 2,339,414
shares of Accessity common stock outstanding as of November 30, 2004.
The beneficial ownership numbers and percentages indicated below are
calculated based on requirements of the SEC. All shares of Accessity's common
stock subject to options and warrants currently exercisable either currently or
within 60 days after November 30, 2004 are deemed to be outstanding for the
purpose of computing the percentage of ownership of the person holding the
options and/or warrants, but are not deemed to be outstanding for computing the
percentage of ownership of any other person.
Unless otherwise indicated below, each shareholder named in the following
table has sole voting and investment power with respect to all shares of
Accessity common stock beneficially owned, subject to applicable community
property laws. The address of each of the following stockholders is c/o
Accessity Corp., 12514 W. Atlantic Blvd., Coral Springs, Florida 33071.
SHARES BENEFICIALLY OWNED
--------------------------
NAME BENEFICIAL OWNER NUMBER PERCENT
--------------------- ----------- -----------
Barry Siegel(1)..................................... 460,873 19.0%
Barry J. Spiegel.................................... 309,792 13.2%
Philip B. Kart(2)................................... 65,000 2.7%
Kenneth J. Friedman(3).............................. 73,399 3.1%
Bruce S. Udell(4)................................... 16,750 *
John M. McIntyre(5)................................. 3,000 *
Steve DeLisi(6)..................................... 16,971 *
All directors and executive
officers as a group (5 persons).................... 632,993 25.0%
_____________________
* Less than 1%
(1) Includes 80,000 shares of common stock underlying options held by Barry
Siegel and 13 shares held directly by Barry Siegel's wife, Lisa Siegel.
Both Barry and Lisa Siegel disclaim beneficial ownership of shares held by
the other.
(2) Represents shares of common stock underlying options.
(3) Includes 16,000 shares of common stock underlying options.
(4) Includes 10,000 shares of common stock underlying options.
(5) Represents 3,000 shares of common stock underlying options.
(6) Represents 16,667 shares of common stock underlying options.
(7) Includes 180,333 shares of common stock underlying options and 13 shares
held directly by Barry Siegel's wife, Lisa Siegel. Both Barry and Lisa
Siegel disclaim beneficial ownership of shares held by the other.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
If the Share Exchange is consummated, Accessity will transfer DriverShield
and sell Sentaur to Barry Siegel, the current Chairman of the Board, President
and Chief Executive Officer of Accessity. As a result, the businesses conducted
to date by Accessity will no longer be conducted by the Combined Company. Upon
consummation of the Share Exchange, the principal executive and business offices
of Accessity shall be changed from the offices of Accessity in Coral Springs,
Florida to the principal executive and business officers of PEI located at 5711
N. West Avenue, Fresno, California 93711. Accordingly, the foregoing information
in regard to the business of Accessity and the following financial information
in regard to Accessity is essentially irrelevant with respect to the business to
be conducted by the Combined Company upon consummation of the Share Exchange.
48
The following discussion should be read in conjunction with Accessity's
financial statements and notes thereto contained in APPENDIX F attached to this
proxy statement.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (THE "2004 PERIOD") TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (THE "2003 PERIOD")
OVERVIEW. The 2004 Period reflected a net loss of $1,004,000 compared to a
net loss of $1,202,000 in the 2003 Period. Loss from continuing operations was
$1,004,000 in the 2004 Period versus a loss of $1,427,000 in the 2003 Period; a
reduction in losses of $423,000, or 30%. The reduction was largely attributable
to the receipt of a one-time arbitration award of $280,000 resulting from a
breach of an agreement and increases in revenue. Basic and diluted loss per
share from continuing operations was $.45 and $.65 per share in the 2004 and
2003 Period respectively. Basic and diluted income per share from discontinued
operations was $.10 in the 2003 Period and zero in the 2004 Period.
REVENUES FROM CONTINUING OPERATIONS. Revenues were $622,000 in the 2004
Period, versus $447,000 in the 2003 Period, representing an increase of $175,000
or 39%. Accessity's revenues decreased by $78,000 in its automotive segment,
from $220,000 in the 2003 Period to $142,000 in the 2004 Period as a result of
transferring the operating responsibility of its CRM business to ClaimsNet,
effective January 2003. However, as described below, the significant reduction
in infrastructure costs eliminated the direct expenses and losses from this
business segment (excluding corporate overhead which Accessity does not allocate
to its operating units). The revenues Accessity recorded in the 2004 Period
reflect referral fees associated with claims processed by ClaimsNet. Offsetting
the reduction in revenues from its automotive segment was an increase in
revenues of $252,000 from Sentaur, Accessity's financial recovery business for
hospitals. Its revenues increased from $228,000 in the 2003 Period to $480,000
in the 2004 Period. Sentaur commenced recording revenues in April 2003 and there
were only six months billings in the 2003 Period. While revenues have increased,
Sentaur is currently losing money and not supporting its direct expenses.
49
PRETAX LOSSES. Pretax losses from continuing operations decreased $411,000
or 29%, to $1,016,000 in the 2004 Period compared to pretax losses of $1,427,000
in the 2003 Period. The comparative amounts are described above.
COLLISION REPAIR EXPENSES. Collision repair expense relating to its
automotive repair business, decreased to zero in the 2004 Period versus $102,000
in the 2003 Period resulting from the transfer of the business to ClaimsNet.
SELLING EXPENSES. Selling expenses decreased by $32,000 (9%), to $322,000
in the 2004 Period, from $354,000 in the 2003 Period. This was the result of
lower selling expenses for all business activities including Sentaur and other
corporate marketing activities, including some transition marketing expenses
incurred for CRM in the 2003 Period for which there was no comparable amount in
the 2004 Period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $105,000 (8%), from $1,322,000 in the 2003 Period to $1,427,000 in
the 2004 Period. Increased legal expenses relating to Accessity's claim against
Presidion Solutions, Inc. which was arbitrated (and an award granted to the
Accessity) in the 2004 Period, as well as two other claims (as described in
Accessity's December 31, 2003 Form 10-KSB), one in which it is a plaintiff and
one in which it is a defendant, are the primary reasons for the increase.
Accessity has incurred legal expenses associated with due diligence for the
Share Exchange transaction. The foregoing resulted in increased legal expenses
of $43,000 over the 2003 Period. In addition, Accessity incurred $64,000 in
consulting fees during the 2004 Period relating to the Share Exchange Agreement
for a fairness opinion on the potential transfer of certain assets.
DEPRECIATION AND AMORTIZATION. Depreciation declined $36,000, from
$237,000 in the 2003 Period to $201,000 in the 2004 Period, resulting from
assets which became fully depreciated, a decline of $80,000, offset by $44,000
in accelerated amortization on its leasehold improvements in its Florida
corporate office, which Accessity expects it will vacate in early January 2005.
INVESTMENT AND OTHER INCOME. Investment and other income, net, increased
$171,000 from $141,000 in the 2003 Period to $312,000 in the 2004 Period. Other
income in the 2004 Period included $280,000 from Presidion resulting from an
arbitration award from their breach of an agreement with Accessity. Accessity
was awarded $250,000 for the stipulated break-up fee, plus certain costs and
interest. Offsetting the award was a non-cash impairment of $40,000 which
recognized most of the unrealized losses incurred on fixed income mutual funds,
and a realized loss of $33,000 recorded on marketable securities. Aside from the
arbitration award and the impairment, other income declined $30,000 resulting
primarily from declining investment balances and lower interest rates.
PROVISION (BENEFIT) FOR INCOME TAXES. Accessity also recorded a tax credit
to be repaid from the New York State Department of Taxation and Finance in the
2004 Period resulting from overpayments in the prior tax year. There was no such
amount in the 2003 Period.
DISCONTINUED OPERATIONS. Discontinued operations in the 2003 Period
reflects the net operating results of the affinity services subsidiary which was
sold effective August 1, 2003. In the 2004 Period there were no discontinued
operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 (THE "2003 YEAR") AND DECEMBER 31,
2002 (THE "2002 YEAR")
OVERVIEW. The 2003 Year reflected a net loss of $1,626,000 versus net
income of $1,248,000 in the 2002 Year. Continuing operations reflected a loss of
$1,852,000 in the 2003 Period versus a loss of $1,469,000 in the 2002 Year.
However, excluding the recognition of tax loss carry-forwards of $2,277,000 in
the 2002 Year, continuing operations improved from a pretax loss of $3,746,000
in the 2002 Year to a pretax loss of $1,852,000 in the 2003 Year. Discontinued
operations reflected income of
50
$2,717,000 in the 2002 Year resulting primarily from the gain on the sale of the
fleet business. In the 2003 Year income from discontinued operations was
$226,000. Basic and diluted loss per share from continuing operations was $0.84
in the 2003 Year and $0.67 the 2002 Year. Basic and diluted earnings per share
from discontinued operations was $.10 in the 2003 Period and $1.24 in the 2002
Year.
REVENUES FROM CONTINUING OPERATIONS. Revenues from continuing operations
were $658,000 in the 2003 Year compared to $2,895,000 in the 2002 Year,
representing a decrease of $2,237,000, or 77%. These figures exclude the
revenues from the ADS business that was sold August 1, 2003, and the fleet
services business that was sold in February 2002. Both are now reflected in
Accessity's financial statements as discontinued operations. Revenues declined
by $2,615,000 in the automotive segment, to $280,000 in the 2003 Year from
$2,895,000 in the 2002 Year, as a result of the transfer of the CRM business to
ClaimsNet in January, 2003. Accessity completed certain repairs in the 2003 Year
that were in process at the end of the 2002 Year, and thereafter recorded its
share of the CRM business from fees it receives through ClaimsNet. This decrease
in revenues was offset by $378,000 in revenues from Sentaur, the medical
recovery business that began recording revenue in April 2003. As described more
fully below, although Accessity incurred a substantial decline in revenues, the
significant reduction in infrastructure costs that were required by the CRM
business (excluding the corporate overhead which Accessity does not allocate to
its operating units), eliminated the losses associated with the CRM business.
Pretax losses from continuing operations improved; the losses decreased by
$1,894,000 to a loss of $1,852,000 in the 2003 Year, from a higher loss of
$3,746,000 in the 2002 Year. The decrease in losses, and comparative amounts,
are described below.
COLLISION REPAIR EXPENSES. Collision repair and claim fee revenues, net of
collision repair costs, were $178,000 in the 2003 Year compared to $395,000 in
the 2002 Year, a decrease of $217,000, resulting from the transfer of the CRM
business to ClaimsNet.
SELLING EXPENSES. Selling expenses decreased by $473,000, from $952,000 in
the 2002 Year to $479,000 in the 2003 Year, or 50%, primarily as a result of
decreased expenditures of $632,000 for its CRM business which was transferred to
ClaimsNet, offset by $244,000 in increased expenses for Sentaur for personnel
and their related selling expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $1,383,000, or 43%, from $3,235,000 in the 2002 Year to $1,852,000 in
the 2003 Year resulting primarily from various infrastructure and supporting
personnel costs which were no longer needed without the automotive CRM business
of approximately $681,000; as well as costs incurred in 2002 which did not
recur, including a one-time bonus of $250,000 to Barry Siegel, the Chief
Executive Officer of Accessity, upon consummation of the sale of FS, and, the
costs of relocating the office in New York and then to Florida, along with the
associated costs of severance to terminated employees totaling $386,000. In the
2002 Year Accessity recorded a credit, an income item, of $132,000 in non-cash
compensation (due to decreases in Accessity's price per share of its common
stock) as a result of re-pricing certain stock options during 1999. There was no
impact in the 2003 Year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the 2003
Period was $299,000, reflecting a decrease of $102,000 from $401,000, caused by
assets that became fully depreciated in 2003.
INVESTMENT AND OTHER INCOME (EXPENSE). Investment and other income
decreased $176,000 to $227,000 in the 2003 Year compared to $403,000 in the 2002
Year resulting from declining interest rates, lower cash and investment balances
and a loss on a sale of $15,000. Interest expense decreased $84,000 from $89,000
to $5,000 relating primarily to bond premium recorded as interest expense in
2002. The amounts were lower in the 2003 year as the bonds were either sold or
matured during 2003.
51
PROVISION (BENEFIT) FOR INCOME TAXES. The 2002 Year tax provision in the
income statement (inclusive of continuing and discontinued operations) reflected
a tax expense of $1,924,000. The tax expense in the 2002 Year was largely the
result of the $6.1 million gain on the sale of the fleet business offset, in
part, by credits from losses on operating activities. In the 2003 Year no tax
impact in the income statement is reflected, resulting from a valuation
allowance that has been established for all operating loss carry-forward
benefits.
DISCONTINUED OPERATIONS
In the 2003 Period discontinued operations reflects income of $226,000
from the affinity services business (including the $10,000 gain on the sale of
this business), which was sold effective August 1, 2003, compared to income of
$309,000 for the affinity services business in the 2002 Year. The performance of
this business had been declining due to the non-renewal of annual memberships.
Sales were $1,123,000 in the 2002 Year and $419,000 in the 2003 Year through its
date of sale.
The 2002 Year also reflects income, net of income taxes, from discontinued
operations of the fleet services business that was sold effective February 2002
of $17,000, and a $2,391,000 gain on its disposal.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, Accessity had cash and cash equivalents of
$361,000. Accessity also holds shares in a number of highly liquid mutual funds
valued at $3,369,000 at September 30, 2004. Working capital of Accessity as of
September 30, 2004 was $3,781,000 and its working capital ratio was 9:1.
In connection with Accessity's rental of office space in Florida, in July
2002, Accessity was required to establish $300,000 in restricted funds with a
Florida bank for the five and a half year term of the lease, as a guarantee of
its future capital commitments. Such amounts are presented as restricted funds.
The restricted fund amount is scheduled to decline 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 connection with the Share Exchange, the landlord has offered the building for
sale and signed an offer, which when concluded, would release Accessity from
further rent obligations by terminating its lease, and thereby result in the
return of $300,000 restricted funds. Accordingly, the restricted funds have been
reclassified to a current asset from the non-current status.
Accessity has no major expenditures that it currently anticipates for
capital equipment, however it is expending funds due to operating losses,
including funding the growth of its Sentaur business unit. As Sentaur obtains
new hospital customers and seeks to expand its sales, it may require additional
funds for personnel expenses and software systems development, but this would
occur in anticipation of future revenue growth. Should Accessity not complete
the Share Exchange, Accessity would expect to use its resources to support
Sentaur's growth during the remainder of 2004 and thereafter. Also, Accessity
incurred an unusually high level of legal expense in the 2004 Period in
connection with three claims, two in which Accessity is the plaintiff and one in
which it is the defendant. Accessity anticipates this level of legal costs will
decline.
In addition, Accessity has spent considerable management effort and time
pursuing acquisition candidates, and has incurred varying levels of expenses in
connection with each evaluation. These have ranged from minor amounts for such
expenses as an initial business trip or, more extensively, multiple trips for
due diligence, legal review and lien and judgment searches. Accessity is
currently expending funds for the share exchange transaction with PEI, Kinergy
and ReEnergy. Should Accessity not complete this transaction, and seek another
acquisition, Accessity may use a significant amount of its funds to either pay a
portion of the purchase price and/or expand the business Accessity acquires.
52
Accessity believes that its present liquidity will enable it to continue
to support its operations, as they are currently configured for its continuing
business, for the next twelve months and for an extended period thereafter
depending on the extent of its use of funds in developing its existing business
or possible use of funds in acquiring new businesses.
CONTEMPLATED SHARE EXCHANGE TRANSACTION
Accessity announced on May 17, 2004 that it has signed a share exchange
agreement to acquire PEI, Kinergy and ReEnergy in a stock-for-stock share
exchange transaction. Upon consummation of the share exchange, each of the
acquired companies will become wholly-owned subsidiaries of Accessity and
Accessity will re-incorporate in the State of Delaware and change its name to
Pacific Ethanol, Inc.
Accessity will issue approximately 18.8 million shares to acquire all the
companies in this transaction. It is contemplated that the Combined Company will
have approximately 22 million shares of common stock outstanding, on a
fully-diluted basis, should all options and warrants be exercised following
consummation of the share exchange transaction. However, a $7 million private
placement intended for acquisitions and other general corporate uses, currently
in process by PEI, and which is a required condition to closing the Share
Exchange, would result in an additional 2.5 million shares being issued when it
is completed.
The proposed Share Exchange, expected to be completed as quickly as
possible, is subject to satisfaction of due diligence investigations by all of
the parties, approval by a majority of Accessity's shareholders and certain
other additional conditions to closing including completion of the $7 million
private equity placement noted above. As a further condition to the completion
of the acquisitions, the current management of Accessity will resign and the
current management of the Acquired Companies will assume management of the
Combined Company. The former board of directors of Accessity will designate one
person to serve on the board of directors of Pacific Ethanol, Inc. until the
2005 annual shareholders meeting.
PREFERRED STOCK REPURCHASE
In connection with the sale of Accessity's former wholly-owned subsidiary,
FS, its collision repair and fleet services business, to PHH, a subsidiary of
the Cendant Corporation in February 2002 and, pursuant to the Preferred Stock
Purchase Agreement, PHH acquired 1,000 shares of Accessity's Series A
Convertible Preferred Stock (the "Preferred Shares") for $1.0 million. The
Preferred Shares provided for conversion, at the holder's discretion, into
100,000 shares of Accessity common stock (subject to adjustments for stock
splits, re-capitalization and anti-dilution provisions).
Effective May 13, 2004, in exchange for certain mutual releases and the
extension of certain non-compete clauses in favor of PHH, Accessity and PHH
amended the Preferred Stock Agreement executed in February 2002, and entered
into a Stock Repurchase Agreement providing Accessity, or its assigns, with the
right to repurchase these shares for $350,000. The repurchase of the Preferred
Shares by Accessity is required only in the event that the arbitration matter,
described elsewhere in this proxy statement for the fiscal year ended December
31, 2003, between Accessity and Presidion Solutions, Inc. is successfully
concluded with an award granted and collected by Accessity. PHH may exercise its
right to convert all of its Preferred Shares into common stock before Accessity
elects to repurchase the stock through the termination date of September 15,
2004. On September 9, 2004 an assignee of Accessity, exercised the right to
acquire the Preferred Shares from PHH and immediately thereafter converted the
Preferred Shares into 100,000 common shares. Accordingly, Accessity's cash
position and liquidity was unaffected by the repurchase.
DEFERRED INCOME TAXES
Accessity has a net operating loss carry-forward of approximately $3.6
million that is available to offset future taxable income at December 31, 2003.
Since Accessity has determined that it is more likely than not that it may not
be able to recover these carry-forward benefits, a valuation allowance has been
established for the full amount of the deferred tax benefit. Accordingly, no
deferred income tax asset has been reflected in Accessity's financial
statements. If Accessity is profitable in the future, such benefits may be
available to offset future income taxes, but due to the Share Exchange
transaction and change of control, such benefits will be severely restricted
annually pursuant to regulations of the Internal Revenue Service, and may expire
prior to their complete utilization.
NEW ACCOUNTING STANDARDS
The new accounting pronouncements described in Note 1 to Accessity's
consolidated financial statements contained elsewhere in this proxy statement
are incorporated herein by this reference.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. The most significant estimates include:
o revenue recognition
o valuation of long-lived assets
o income tax valuation allowance
Accessity continually evaluates its accounting policies and the estimates
it uses to prepare the consolidated financial statements. In general, the
estimates are based on historical experience, on information from third party
professionals and on various other sources and assumptions that are believed to
be reasonable under the facts and circumstances at the time such estimates are
made. Management considers an accounting estimate to be critical if:
o it requires assumptions to be made that were uncertain at the time the
estimate was made; and
o changes in the estimate, or the use of different estimating methods,
could have a material impact on Accessity's consolidated results of
operations or financial condition.
Actual results could differ from those estimates. Significant accounting
policies are described in Note 1 to Accessity's consolidated financial
statements, which are included in this proxy statement. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
GAAP. There are also areas in which management's judgment in selecting any
available alternative would not produce a materially different result.
Certain of Accessity's accounting policies are deemed "critical," as they
require management's highest degree of judgment, estimates and assumptions. The
following critical accounting policies are not intended to be a comprehensive
list of all of Accessity's accounting policies or estimates:
Revenue Recognition. Accessity applies the provisions of Staff Accounting
Bulletin 101 "Revenue Recognition." Accessity recognizes revenue from collision
repairs at the time of customer approval and
54
completion of repair services. Accessity recognizes collision royalty revenue
upon notification from the licensee that the claim has been processed and
repaired. Accessity recognizes hospital fees at the time it receives
notification from the hospitals that they have recovered funds from their
customers.
Accounts Receivable. Once a customer is billed for services, Accessity
actively manages the accounts receivable to minimize credit risk. Accessity
assesses the collectibility of accounts receivable by analyzing historical bad
debts, review of the aging of customer receivables, and the current
creditworthiness of our customers.
Impairment of Long-Lived Assets. Accessity follows the provisions of SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement requires that certain assets be reviewed for impairment and, if
impaired, remeasured at fair value whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Impairment loss estimates are primarily based upon management's analysis and
review of the carrying value of long-lived assets at each balance sheet date,
utilizing an undiscounted future cash flow calculation.
Income Taxes. Accessity estimates the degree to which tax assets and loss
carry-forwards will result in a benefit based on expected profitability by tax
jurisdiction. A valuation allowance for such tax assets and loss carry-forwards
is provided when it is determined that such assets will more likely than not go
unused. If it becomes more likely than not that a tax asset or loss
carry-forward will be used, the related valuation allowance on such assets is
reversed. If actual future taxable income by tax jurisdiction varies from
estimates, additional allowances or reversals of reserves may be necessary.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Accessity's Chief Executive Officer and Chief Financial Officer (its
principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluation as of June 30, 2004 that the design and
operation of Accessity's "disclosure controls and procedures" (as defined in
Rule 13a-15(e) under the Exchange Act), are effective to ensure that information
required to be disclosed by Accessity in the reports filed or submitted by
Accessity under the Securities Exchange Act is accumulated, recorded, processed,
summarized and reported to Accessity's management, including Accessity's
principal executive officer and Accessity's principal financial officer, as
appropriate to allow timely decisions regarding whether or not disclosure is
required.
55
INFORMATION RELATING TO PEI
OVERVIEW
PEI has to date not conducted any significant business operations, other
than the acquisition of real property located in Madera County, California on
which it intends to construct an ethanol production facility and an option to
acquire additional real property located in Visalia, California on which it may
construct an additional ethanol production facility. PAP intends to manage corn
purchasing for the ethanol plant and market distillers grains, the main
co-product of ethanol manufacturing. PAP generated approximately $1 million in
revenues for the year ended December 31, 2003.
PEI plans to do the following:
o make strategic acquisitions in the ethanol refining and marketing
industry;
o construct an ethanol plant in Madera County for the production of up
to 35 million gallons of ethanol per year (and, if possible, construct
an additional ethanol production facility on real property located in
Visalia, California with respect to which it has an option to
purchase);
o upon completion of construction of its ethanol production facility,
market and sell ethanol using the marketing services of Kinergy
primarily in the Central Valley region of California to major and
independent oil customers who control the majority of all gasoline
sales in California;
o through PAP, market and sell DWG to dairy farmers in California; and
o to the extent possible, sell carbon dioxide, another co-product of
ethanol manufacturing, to dry ice companies in California.
The demand for ethanol in 2003 reached approximately 750 million gallons
statewide in California and PEI believes that the demand for ethanol will
continue to grow. PEI believes it will have a competitive advantage in the
Central Valley of California market because competing Midwest-sourced ethanol
must be "double-handled" to reach Central Valley distribution racks. In
addition, the San Joaquin Valley (located in the southern half of the Central
Valley) has over 1.3 million head of dairy cattle in an area less than 30,000
square miles, which should provide an excellent market for DWG, an important
protein source for dairy cows.
INDUSTRY BACKGROUND
OVERVIEW OF ETHANOL PRODUCTION PROCESS
The production of ethyl alcohol, or ethanol, from starch or sugar-based
feedstocks has been practiced for thousands of years. While the basic production
steps remain the same, the process has been refined considerably in recent
years, leading to a highly efficient process that now yields more energy in the
ethanol and co-products than is required to make the products. The modern
production of ethanol requires large amounts of corn and water as well as
chemicals, enzymes and yeast, denaturants such as unleaded gasoline or liquid
natural gas (which must meet the minimum specifications of ASTM D 4806), in
addition to natural gas and electricity.
In the dry milling process, corn or other high-starch grains are first
ground into meal and then slurried with water to form a mash. Enzymes are then
added to the mash to convert the starch into the simple sugar, dextrose. Ammonia
is also added for acidic (pH) control and as a nutrient to the yeast. The mash
is processed through a high temperature cooking procedure, which reduces
bacteria levels prior to
56
fermentation. The mash is then cooled and transferred to fermenters, where yeast
is added and the conversion of sugar to ethanol and carbon dioxide begins.
After fermentation, the resulting "beer" is transferred to distillation,
where the ethanol is separated from the residual "stillage." The ethanol is
concentrated to 190 proof using conventional distillation and then is dehydrated
to approximately 200 proof (100%) in a molecular sieve system. The resulting
anhydrous ethanol is then blended with about 5% denaturant (usually gasoline)
and is then ready for shipment to market.
The residual stillage is separated into a coarse grain portion and a
liquid portion through a centrifugation process. The soluble liquid portion is
concentrated to about 30% dissolved solids by an evaporation process. This
intermediate state is called condensed distillers solubles, or "syrup." The
coarse grain and syrup portions are then mixed to produce DWG or can be mixed
and dried to produce dried distillers grain with solubles ("DDGS"). Both DWG and
DDGS are high protein animal feed products.
OVERVIEW OF ETHANOL MARKET
Methyl tertiary-butyl ether, or MTBE, has been used for over 20 years in
California and other states to improve the air quality characteristics of
gasoline. However, MTBE is a known carcinogen that contaminates groundwater, and
California banned the addition of MTBE to motor fuels effective January 1, 2004.
Ethyl alcohol, or ethanol, has recently replaced MTBE in California, New York
and Connecticut. The EPA now lists 20 states with partial or complete bans on
the use of MTBE. Currently, ethanol is the only commercially available fuel
additive to replace MTBE for meeting the federal Clean Air Act's reformulated
gasoline standards required in states with severe air quality problems. Ethanol
is presently believed to account for more than 60% of the oxygenate market
nationwide.
California is the nation's largest market for gasoline. Approximately 26
million vehicles are registered in California and are estimated to use up to 16
billion gallons of gasoline during 2004. California's last oil refinery was
built in 1969. The stringent permitting process and economics of constructing
and operating an oil refinery in California present difficult barriers to entry
into the oil refining market. In addition, California is in a volatile and
highly sensitive energy situation due to its geographic isolation from the rest
of the country and declining production capacity and inventory levels.
California imports about 10% of its finished fuel products and over 50% of its
total petroleum supply. At least one oil refinery in California is expected to
close by the end of 2004, further reducing production capacity.
The ethanol production industry is expected to produce up to 3.5 billion
gallons of ethanol in 2004, an increase of up to 25% from the approximately 2.8
billion gallons produced in 2003. The California ethanol market accounts for
more than 25% of the national market and will likely reach 900 million gallons
(about $1.5 billion in sales) per year beginning in 2004. However, California
only has two small ethanol plants with a combined production capacity of less
than 10 million gallons per year, leaving California with a substantial
shortfall in ethanol production. The balance of ethanol is shipped via rail from
the Midwest to California. Gasoline and diesel products that feed the major fuel
terminals are shipped in pipelines throughout the northern and southern portions
of California. Unlike gasoline and diesel, though, ethanol cannot be shipped in
the existing pipelines because is has an affinity for the water already present
in the pipelines. When mixed, water dilutes ethanol and creates significant
quality control issues. Therefore, ethanol must be trucked from rail terminals
to the regional fuel terminals, or "blending racks."
Approximately 95% of the ethanol produced in the United States is made in
the Midwest from corn. Ethanol is typically blended at 5.7% to 10% by volume in
the United States, but is also blended at up to 85% for vehicles designed to
operate on 85% ethanol. Compared to gasoline, ethanol is generally considered to
be less expensive, higher octane and cleaner burning. The ever increasing demand
for transportation fuels with limited opportunities for gasoline refinery
expansions and the growing
57
importance of CO2 emission reductions from renewable fuels is anticipated to
drive additional ethanol market growth in California.
Ethanol sold into the Central Valley is currently shipped via rail from
the Midwest, and then double-handled into trucks and shipped to the blending
racks in Sacramento, Stockton, Fresno and Bakersfield. This one to two thousand
mile transport and double handing can add up to $0.18 per gallon. Kinergy
estimates ethanol demand in the Central Valley to be upwards of 200 million
gallons in 2004. Management of Kinergy believes that it could market locally all
or substantially all of the 35 million gallons of ethanol expected to be
produced by PEI at its initial facility to be located on real property owned by
PEI in Madera County.
Over the last ten years, rail-car delivered California ethanol prices have
ranged between $.90 and $1.75 per gallon, averaging approximately $1.27 per
gallon. Gasoline prices have the largest influence on ethanol pricing. Ethanol
prices, net the federal tax incentive, have tended to track at a level near
parity with gasoline prices. Ethanol prices in California are typically $.10 to
$.12 per gallon higher than in the Midwest due to the added freight costs of
delivering ethanol by ship and rail from the Midwest production facilities.
Approximately 40% of the ethanol consumed in the United States is
currently used in discretionary gasoline blending, where ethanol prices need to
be at or below gasoline prices for the petroleum companies to blend ethanol.
Over the last ten years, it is discretionary blending that has been the primary
determinant of ethanol pricing. A relative excess of supply over much of this
period has tended to discount ethanol pricing below its blending value as either
an octane enhancer or oxygenate. With the move to eliminate MTBE from gasoline
and other anticipated policy developments to expand the use of renewable fuels,
it is anticipated that future ethanol pricing will more closely reflect its
higher value as a clean air additive and octane enhancer.
Delivered ethanol prices to wholesale distribution points in the Central
Valley such as Fresno and Sacramento that must receive ethanol via trucks is
expected to be $.05 to $.07 per gallon higher than the rail-served terminals.
PEI is ideally positioned to service these markets. In addition, Kinergy has
rapidly expanded its market share at the Fresno terminal and is now supplying
over 50% of the approximately 50 million gallon per year Fresno ethanol market.
Fresno, the nearest terminal to PEI's first proposed production facility (20
miles), could easily consume all of the ethanol from PEI's first facility.
The largest ethanol producer in the United States is ADM, with wet and dry
mill plants in the Midwest and a total production capacity of about one billion
gallons per year, or about 30% of total United States ethanol production. In
all, 82 ethanol plants located primarily in the Midwest have a combined annual
production capacity of 3.5 billion gallons. Most of the growth in ethanol
production over the last ten years has been by farmer-owned co-ops as a strategy
for expanding corn markets and adding value through processing. Many smaller
ethanol plants rely on marketing groups such as Ethanol Products, Avantine, and
Renewable Products Marketing Group to move their product to market. Because it
is a commodity market, many of the Midwest producers can target California,
though producers in states like Nebraska and Kansas (further west) may enjoy
transport advantages.
OVERVIEW OF DISTILLERS GRAIN MARKET
Four million tons of dried distillers grains are produced and sold every
year in North America. Dairy cows and beef cattle are the primary consumers of
distillers grains. A dairy cow can consume 12-15 lbs of
58
DWG per day in a balanced diet. At this rate, the DWG output of a 35 million
gallons per year ethanol facility requires approximately 105,000-130,000 dairy
cows to feed.
The only distillers grains currently available in California is shipped
from the Midwest via rail cars and is in the dry form with approximately 10%
moisture content. In 2002, there were approximately 500,000 tons of DDGS shipped
to California. This is the equivalent of 1,286,000 tons of DWG with a 65%
moisture content.
DDGS from the Midwest face a number of challenges, including product
inconsistency, handling difficulty, and lower feed value. All of these issues
are mitigated with a consistent supply of DWG from a local plant. DDGS railed to
California from the Midwest undergo an intense drying process and exposure to
extreme heat at the plant and in the railcars, during which various nutrients
are burned off, reducing the nutritional composition of the final product. PEI
will preserve the feed integrity of the product by not drying the distillers
grains and shipping them locally. DDGS shipped via rail can take as long as two
weeks to be delivered to California, and scheduling errors or rail yard mishaps
can extend delivery time even further. The product sits in the rail car for as
long and has a tendency to solidify and set in place. It then becomes very
difficult and thus expensive to unload. Summertime rail cars typically take a
full day to unload, but can take longer. DDGS shipped from the Midwest can be
inconsistent because some Midwest producers use a variety of feedstocks
depending on the availability and price of competing crops. Corn, milo sorghum,
barley and wheat are all common feedstocks for ethanol production but lead to
significant variability in nutritional composition of distillers grains.
California dairies depend on rations that are calculated with precision and a
subtle difference in the makeup of a key ingredient can affect milk production
at dairies.
Historically, the distillers grains market has been steady in comparison
to the ethanol market. DDGS market price is determined through a number of
factors that include the market value of corn, the market value of soybean meal
and other competitive protein ingredients, the performance or value of DDGS in a
particular feed formulation, and market supply and demand. In the United States,
the base market value for distillers grains historically has been set by
producers of distilled spirits and more recently by the large corn dry-millers
that operate fuel ethanol plants. In California, feed pricing is most often set
by nutritional models that calculate its feed value by nutritional content.
STRATEGY
The primary goal of the Combined Company is to create a vertically
integrated marketing, distribution and production alternative-fuels business
focused in the ethanol market, employing existing traditional production
techniques and concurrently exploring advanced processing methods, including
hydrogen fuel cells. The Combined Company will include the ethanol marketing and
distribution business of Kinergy that is anticipated to generate revenues of
approximately $75 million during 2004. Kinergy has achieved 100% annual revenue
growth during the last two years. The Combined Company intends to acquire
complimentary businesses which will either expand Kinergy's distribution reach,
or provide ethanol production to capture more of the value in the ethanol supply
chain. To that end, PEI has commenced discussions with several potential
acquisition targets, although no assurance can be given that PEI will be
successful in making any acquisitions. The Combined Company expects to use its
common stock, where appropriate, to make these proposed acquisitions. To the
extent PEI is successful in raising an additional $7 million of equity capital
prior to consummation of the Share Exchange, the Combined Company is expected to
have approximately $10 million of liquid funds upon consummation of the Share
Exchange. In addition, the Combined Company intends to raise additional capital
and build one, and possibly additional, ethanol production facilities in
California. It is expected that funding for construction of the first facility,
for which all permits and plans have been completed, will occur, if at all,
after the consummation of the Share Exchange.
59
CUSTOMERS
Upon completion of its ethanol refining facility, PEI expects to market
ethanol through Kinergy, whose focus has been on growing its market share at the
Fresno fuel terminal (the only wholesale distribution point for gasoline between
Stockton, California and Bakersfield, California). The Fresno fuel terminal sits
only 20 miles southeast of the Madera County site and 35 miles northwest of the
Visalia site. The greater Fresno area is experiencing rapid population growth,
with Fresno/Clovis metro area population at nearly 700,000. In addition, the
Fresno terminal serves the California Central Valley which is one of the largest
agricultural regions in the world. Kinergy is currently selling over 50% of the
ethanol distributed out of the Fresno fuel terminal. PEI expects that all of the
ethanol generated by the Madera County plant can be sold locally in the Fresno
market that Kinergy has developed, capturing a key competitive advantage for
PEI.
The San Joaquin Valley of California has one of the highest concentrations
of dairy cows in the world, with over 1.3 million head in an area covering
approximately 30,000 square miles. There are approximately 500,000 dairy cows
within a 50-mile radius (about 30,000 square miles) of each of PEI's planned
plant sites, for a combined total (excluding overlap) of over 1 million dairy
cows. Each of PEI's planned ethanol production facilities should be able to
produce enough DWG to feed 105,000 - 130,000 dairy cows each year.
PEI expects to control and market (with PAP) the only DWG product in
California. PEI intends to position DWG as the protein feed of choice for its
nutritional composition, consistency of quality and delivery, ease of handling,
and its mixing ability with other feed ingredients. DWG contains an ideal
moisture level to carry such minerals, and PEI expects to capture a higher
profit margin for providing such products.
PEI has a proposal from Airgas Dry Ice to purchase all the CO2 from the
Madera County facility. The proposal also provides that Airgas Dry Ice would
lease land adjacent to the ethanol plant and capitalize the CO2 recovery and
processing plant. Under the proposal, Airgas would pay PEI $7.00 per ton of CO2
captured for use.
SUPPLIERS
The production of ethanol requires a significant amount of raw materials
and supplies, such as corn, natural gas, electricity and water. Corn is the most
important variable cost. A 35 million gallon per year ethanol facility requires
approximately 12.5 million bushels of corn each year, or nearly half of
California's total 2003 annual corn production of 27.2 million bushels.
Therefore, a California ethanol plant must be able to efficiently ship corn from
the Midwest via rail then, cheaply and reliably, truck processed ethanol to
local markets. The Madera County grain facility as built is one of the most
efficient grain receiving facilities in the United States. The unloading system
was built to unload 110 rail cars consistently in less than fifteen hours. The
plant will have the capacity to store a 49-day supply of corn, or approximately
1,750,000 bushels.
PAP, PEI's subsidiary, will be responsible for all sourcing of corn using
standard contracts, such as spot purchases, forward purchases, and basis
contracts. PAP expects to establish a relationship with a forwarding broker at
the Chicago Board of Trade and expects to establish allowable limits of open and
un-hedged grain transactions that its merchant will be required to follow
pursuant to a risk management program. The limits established are expected to be
reviewed and adjusted on a regular basis.
PEI expects to invest in a natural gas cogeneration facility to provide
all of the electricity and steam requirements for its facilities in Madera
County. PEI has selected Solar Turbines (a division of Caterpillar, Inc.) to
design and build the 7.5 megawatt cogeneration facility. Self-generation will
also help protect PEI from the notorious price swings of the California
electricity market. Solar Turbines has over
10,000 turbines in operation in the world and fully guarantees the construction
and operation of their units.
Water supply is one of the most critical issues in developing a project in
the state of California. There is a pervasive water shortage in the Central
Valley, often causing spikes in the price of available water. The Madera County
property has two deep-water wells on the property which PEI believes are able to
supply nearly twice the annual requirement for the ethanol production facility.
In addition, PEI has initiated the application process to annex the Madera
County property into the Madera Irrigation District ("MID"). Having the site in
the water district would allow PEI to buy water from MID if water quality
degradation issues arise from drawing down the water table on the property. An
important factor in makeup water is not just quantity but also quality. PEI has
run various water quality samples on both of its deep-water wells and the actual
data has been used to determine wastewater discharge requirements.
PEI has not yet entered into any formal agreements with any suppliers and
there can be no assurance that PEI will be able to do so. If and when PEI enters
into business arrangements with such suppliers, the partial or complete loss of
such suppliers could:
o increase PEI's costs;
o delay deliveries of ethanol while PEI qualifies a new supplier; and/or
o have an adverse effect on PEI's results of operations and damage
customer relationships
Further, a significant increase in the price of raw materials and other
necessary supplies for the production of ethanol supplied by these suppliers
could increase PEI's cost of goods sold and reduce its profit margins.
COMPETITION
The ethanol production and marketing industry is highly competitive. PEI's
primary competition is from ethanol producers in the Midwestern United States,
who control as much as 95% of existing ethanol production. PEI faces substantial
competition from established companies, many of which are larger companies, such
as ADM and Cargill, have greater financial, engineering and manufacturing
resources than PEI and have larger service organizations and long-standing
customer relationships. PEI's competitors can be expected to continue to improve
their engineering and production technology with increased competitive
price/production results. In addition, PEI's customers may choose to develop
proprietary technology, processes and equipment on their own, which may obviate
or lessen their need to purchase ethanol from PEI. PEI's customers may also use
multiple technologies and solutions, including competitors' technologies and
solutions, to replicate and replace PEI's technologies and solutions.
Competitive pressures may necessitate price reductions, which could adversely
affect PEI's results of operations and harm PEI's business. Although PEI
believes that it will have certain competitive advantages over its competitors,
realizing and maintaining such advantages will require a continued high level of
investment and effort by PEI in marketing and customer service and support. PEI
may not have sufficient resources to continue to make such investments and
effort. Even if sufficient funds are available, PEI may not be able to make the
modifications and improvements necessary to maintain such competitive
advantages.
GOVERNMENTAL REGULATION
The ethanol production and marketing industry is subject to extensive
governmental regulations, some of which are helpful to PEI's proposed business
and some of which are not. The ethanol fuel industry is greatly dependent upon
tax policies and environmental regulations that favor the use of ethanol
61
in motor fuel blends in North America. Some of the state and federal regulations
applicable to PEI's proposed business are briefly described below.
FEDERAL EXCISE TAX EXEMPTION. Ethanol blends have been either wholly or
partially exempt from the federal excise tax ("FET") on gasoline since 1978. The
exemption has ranged from $0.04 to $0.06 per gallon of gasoline during that
25-year period. Current law provides a $0.052 per gallon exemption from the
$0.183 per gallon FET on gasoline if the taxable product is blended in a mixture
containing 10% ethanol. The FET exemption was revised and extended for the sixth
time since its inception as part of the JOBS (Jumpstart Our Business Strenth)
Act enacted in October 2004. The new expiration date is December 31, 2007. PEI
believes that the tax incentive is likely to be extended to 2010 in upcoming
legislation. The Bush Administration's current set of budget proposals submitted
to Congress includes an extension of the ethanol incentive until 2014. PEI
believes that it is highly likely that the incentive will be extended beyond
2010 if Congress deems it necessary for the continued growth and prosperity of
the ethanol industry. Practically speaking, the corn lobby wields extensive
power, especially in the United States Senate, and has consolidated the support
needed for the continuation of the FET exemption for ethanol.
CLEAN AIR ACT AMENDMENTS OF 1990. In November 1990, a comprehensive
amendment to the Clean Air Act of 1977 established a series of requirements and
restrictions for gasoline content designed to reduce air pollution in identified
problem areas of the United States. The two principal components affecting motor
fuel content are the Oxygenated Fuels Program, which is administered by states
under federal guidelines, and a federally supervised Reformulated Fuel Program.
OXYGENATED FUELS PROGRAM. Federal law requires the sale of oxygenated
fuels in certain carbon monoxide non-attainment Metropolitan Statistical Areas
("MSA") during at least four winter months, typically November through February.
Any additional MSA not in compliance for a period of two consecutive years in
subsequent years may also be included in the program. The EPA Administrator is
afforded flexibility in requiring a shorter or longer period of use dependent
upon available supplies of oxygenated fuels or the level of non-attainment. This
law currently affects the Los Angeles area, where over 150 million gallons of
ethanol is blended each winter.
REFORMULATED GASOLINE. The Clean Air Amendments established special
standards effective January 1, 1995 for the most polluted ozone non-attainment
areas: Los Angeles Basin, Baltimore, Chicago Area, Houston Area, Milwaukee Area,
New York-New Jersey, Hartford Region, Philadelphia Area and San Diego, with
provisions to add other areas in the future if conditions warrant (California's
Central Valley was added in 2002). At the outset of the program there were a
total of ninety-six Metropolitan Statistical Areas not in compliance with Clean
Air standards for ozone, which currently represents approximately 60% of the
national market.
The legislation requires a minimum amount of oxygen (2.0% by weight) in
reformulated gasoline as a means of reducing carbon monoxide pollution and
replacing octane lost by reducing aromatics (high octane portions of refined
oil). The Reformulated Fuel Program also includes a provision that allows
individual states to "opt into" the federal program by request of the governor,
to adopt standards promulgated by California that are stricter than federal
standards, or to offer alternative programs designed to reduce ozone levels.
Nearly all of the Northeast and middle Atlantic areas from Washington, D.C., to
Boston not under the federal mandate have "opted into" the federal standards.
These state mandates in recent years have created a variety of gasoline
grades to meet different regional environmental requirements. Reformulated
gasoline accounts for about 30% of nationwide gasoline consumption. Under
current law, California refiners must blend 2% oxygenate by weight. This is the
equivalent of 5.7% ethanol in every gallon of gas or roughly 900 million gallons
of ethanol per year for California.
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ADDITIONAL ENVIRONMENTAL REGULATIONS
In addition to the governmental regulations applicable to the ethanol
product and marketing industry described above, PEI's business is subject to
additional federal, state and local environmental regulations, including
regulations established by the federal Environmental Protection Agency ("EPA"),
the California Air Quality Management District ("AQMD"), the San Joaquin Valley
Air Pollution Control District and the California Air Resources Board ("CARB").
As PEI has not commenced construction of its ethanol plant yet, it cannot
predict in what manner or to what extent such regulation will harm or help its
business or the ethanol production and marketing industry in general. For
example, the State of California has requested a waiver from the EPA to reduce
the amount of ethanol required in gasoline, which would boost supplies of
ethanol in California and potentially lower demand for ethanol and cause the
price of ethanol to decline. In addition, officials in the State of California,
including officials from the CARB, have argued to the EPA that ethanol is a
volatile fuel that evaporates easily and contributes to smog by increasing ozone
levels and adding particulates to the air. If the EPA grants the requested
waiver, refineries would no longer be required to blend ethanol into gasoline,
which would harm PEI's business.
RESEARCH AND DEVELOPMENT
The market for ethanol production and marketing is characterized by
continuous technological and engineering development and production innovation.
PEI believes that continued and timely development of new technological and
production enhancements to existing processes is important to maintain its
competitive position. Accordingly, PEI intends to devote a portion of its
personnel and financial resources to research and development programs and seeks
to maintain close relationships with customers to remain responsive to their
needs. However, PEI's research and development efforts are not expected to be
substantial at the outset of the commencement of ethanol production at its
facility in Madera County.
INTELLECTUAL PROPERTY
PEI will periodically review its inventions and processes to determine
which inventions or processes will provide substantial differentiation between
PEI's services and those of its competitors. In certain cases, PEI may also
choose to keep an invention or a process as a trade secret. PEI has entered into
and will enter into non-disclosure agreements to protect its proprietary
technology with its employees and consultants and in some instances with its
suppliers and its customers. Because of technological developments in the
ethanol production industry, the patent or other intellectual property position
of any ethanol producer is subject to uncertainties and may involve complex
legal and factual issues. Consequently, there can be no assurance that patents
will be obtained with respect to any inventions or processes developed or used
by PEI. Furthermore claims allowed by any existing or future patents or other
intellectual property registrations that may be issued to PEI may be challenged,
invalidated, or circumvented, and any rights granted thereunder may not provide
adequate protection to PEI. Others may develop technologies that are similar or
superior to PEI's technology, duplicate PEI's technology or design around
patents owned by PEI or other intellectual property rights of PEI.
In addition, litigation may be necessary in the future to enforce PEI's
patents and other intellectual property rights, to protect PEI's trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on PEI's results of operations or financial condition. Moreover,
PEI may be required to participate in interference proceedings to determine the
priority of inventions, which also could result in substantial cost to PEI.
63
EMPLOYEES
As of November 30, 2004, PEI employed four persons. PEI's employees are
highly skilled, and PEI's success will depend in part upon its ability to retain
such employees and attract new qualified employees who are in great demand. PEI
has never had a work stoppage or strike, and no employees are represented by a
labor union or covered by a collective bargaining agreement. PEI considers its
employee relations to be good.
FACILITIES
PEI's corporate headquarters, located in Fresno, California, consists of a
1,000 square foot office rented on a month-to-month basis.
PEI has acquired real property located in Madera County, California
consisting of approximately 137 acres on which it intends to construct an
ethanol production facility and has an option to acquire additional real
property located in Visalia, California consisting of approximately 89.3 acres
on which it may construct another ethanol production facility and expand its
operations. PEI leases the 137-acre property in Madera County, California that
it owns to PAP pursuant to an Industrial Lease agreement dated as of July 1,
2003 that expires on June 30, 2023, unless sooner terminated pursuant to its
terms.
LEGAL PROCEEDINGS
On September 22, 2004, R. A. Davis Commodities, LLC filed a complaint for
breach of contract, promissory estoppel and negligence in the Superior Court of
the State of California for the County of Fresno against PEI. The complaint
seeks actual and consequential damages in the amount of approximately $700,000
based on PEI's alleged breach of certain rolled corn purchase contracts. PEI is
in the process of responding to the complaint. PEI believes that the claims made
in the compliant are without merit and expects to vigorously defend this
lawsuit.
On November 8, 2004, Insurance Corporation of Hanover and Kruse
Investments dba Western Milling, LLC (collectively, the "Plaintiffs") filed a
complaint for damages in the Superior Court of the State of California for the
County of Madera against PEI. The complaint seeks actual and consequential
damages in the amount of approximately $960,800 based on PEI's alleged breach of
contract and negligence in connection with losses suffered by Plaintiffs arising
out of damage caused to Western Milling's canola meal that was stored at PEI's
grain silos located at PEI's Madera County facility, which facility was the
subject of a grain silo fire on January 12, 2004. PEI is in the process of
responding to the complaint. PEI believes that the claims made in the complaint
are without merit, are covered by insurance and expects to vigorously defend
this lawsuit.
DIRECTORS AND EXECUTIVE OFFICERS
PEI's directors and executive officers as of November 30, 2004 are as
follows:
NAME AGE POSITIONS HELD
---- --- --------------
Neil Koehler......... 46 Chairman of the Board and Chief Executive Officer
Tom Koehler.......... 44 Vice President, Public Policy and Markets
Ryan Turner.......... 30 Chief Operating Officer and Director
Maria Tharpe......... 49 Chief Financial Officer
Frank P. Greinke..... 49 Director
John Pimentel........ 38 Director
William Lyles........ 45 Director
Doug Dickson......... 51 President of PAP Products, LLC
NEIL KOEHLER has served as Chief Executive Officer of PEI since its
formation in January 2003 and Chairman of the Board since March 2004. Prior to
his association with PEI, Mr. Koehler was the co-founder and General Manager of
Parallel Products, one of the first ethanol production facilities in California
(and one of only two currently existing ethanol production facilities in
California), which was sold to a public company in 1997. Mr. Koehler is also the
sole manager and sole limited liability company member of Kinergy, which he
founded in September 2000. Mr. Koehler has over 20 years of
64
experience in the ethanol production, sales and marketing industry in the
Western United States. Mr. Koehler is the Director of the California Renewable
Fuels Partnership and a speaker on the issue of renewable fuels and ethanol
production in California. Mr. Koehler has a B.A. degree in Government, from
Pomona College and is the brother of Tom Koehler.
TOM KOEHLER has served as Vice President, Public Policy and Markets of PEI
since January 2003. Mr. Koehler is a limited liability company member and
manager of ReEnergy, LLC. Mr. Koehler has over 10 years of experience in
governmental affairs and marketing in the ethanol industry. As a consultant for
the Renewable Fuels Association, Mr. Koehler has played an integral role in
expanding the market for ethanol in California and is actively engaged in
pursuing the replacement of MTBE with ethanol in the Pacific Northwest and in
the Northeastern United States. Mr. Koehler has a B.A. degree in Economics from
Oregon State University and is the brother of Neil Koehler.
RYAN TURNER is a co-founder of PEI and has served as Chief Operating
Officer and a Director of PEI and led the business development efforts of PEI
since its inception in January 2003. Prior to joining PEI, Mr. Turner served in
the management of J & J Farms, a large-scale, diversified agriculture operation
of the west side of Fresno County, California for six years, where he guided the
production of corn, cotton, tomatoes, melons, alfalfa and asparagus crops and
operated a custom beef lot. Mr. Turner has a B.A. degree in Public Policy from
Stanford University and is a graduate of the California Agricultural Leadership
Program and is currently pursuing an M.B.A. at Fresno State University.
MARIA THARPE has served as Chief Financial Officer of PEI since November
2004. Ms. Tharpe joined PEI in June 2004 with over 8 years experience in public
accounting and over 16 years of experience as a controller and finance director.
Prior to joining PEI, Ms. Tharpe was finance director for a multi-site
subsidiary division of Beverly Enterprises, Inc., with operations in California
and Nevada.
FRANK P. GREINKE has served as a Director of PEI since October 2003. Mr.
Greinke is currently the CEO and sole owner of SC Fuels, Inc. which, along with
its related companies, generates over $1.0 billion in revenues and operates in
eleven Western states. SC Fuels, Inc. currently employs over 300 people and
services over 20,000 customers. Mr. Greinke is also a director of the Society of
Independent Gasoline Marketers of America, the Chairman of the Southern
California Chapter of the Young Presidents Organization and serves on the Board
of Directors of The Bank of Hemet and on the Advisory Board of Solis Capital
Partners, Inc.
JOHN PIMENTEL has served as a Director of PEI since April 2004. Since
2003, Mr. Pimentel has been a Director with Cagan-McAfee Capital Partners, LLC,
where he is responsible for business development, investment structuring, and
portfolio company management. Prior to joining Cagan-McAfee Capital Partners,
Mr. Pimentel worked with Bain & Company in the firm's Private Equity Group and
the general consulting practice from 1998 to 2002. From 1993 to 1996 Mr.
Pimentel served as Deputy Secretary for Transportation for the State of
California where he oversaw a $4.5 billion budget and 28,000 employees,
including the Department of Transportation, the California Highway Patrol, and
parts of the Department of Motor Vehicles. Mr. Pimentel has an M.B.A. from
Harvard Business School and a B.A. from University of California at Berkeley.
WILLIAM LYLES has served as a Director of PEI since October 2004. Since
January 2003, Mr. Lyles has served as the Vice President of Construction for
Lyles Diversified, Inc. His responsibilities include oversight of three
subsidiaries, including W. M. Lyles Co., that specialize in infrastructure
construction throughout California. These companies perform work on both a
competitive bid and design-build basis. Past projects have included plant
facilities, pipelines and pumping stations. Mr. Lyles has over 24 years
experience in the construction industry, with an emphasis in the application of
the design-build process to infrastructure construction. Mr. Lyles has B.S.
degrees from Purdue University in Civil Engineering and Economics.
DOUG DICKSON has served as President of PAP Products, LLC since its
inception in June 2003. Mr. Dickson is also the current President of Westside
Milling, LLC. Mr. Dickson is a California native
65
and has been active in the commodity and feed business for nearly 30 years,
gaining a valuable understanding of the feed and grain business during such
time. Prior to joining PEI, Mr. Dickson held various positions in commodity
merchandising with Cargill and Scoular Grain and held senior management
positions with Foster Farms, Zacky Farms and J. D. Heiskell.
BOARD OF DIRECTORS AND DIRECTOR COMPENSATION
Directors are elected annually and hold office until the next annual
meeting of shareholders, until their successors are elected or until their
earlier death, resignation or removal. Directors are not compensated for serving
on the board of directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal year ended December 31, 2003,
compensation awarded or paid to, or earned by, PEI's Chief Executive Officer and
its other three executive officers at December 31, 2003:
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ----------
SECURITIES
UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS(#) COMPENSATION
--------------------------- -------- ------------ ---------- ------------
Neil Koehler............................................. 2003 --
Chief Executive Officer and Chairman of the Board -- --
Tom Koehler.............................................. 2003 -- -- $12,000
Vice President, Public Policy and Markets
Ryan Turner.............................................. 2003 -- -- $30,000
Chief Operations Officer
Jeffrey Manternach....................................... 2003 $30,000 25,000 --
Former Chief Financial Officer
STOCK OPTIONS AND WARRANTS
As of November 30, 2004, options to purchase a total of 25,000 shares of
PEI common stock at an exercise price of $0.01 per share were held by Jeffrey
Manternach, the former Chief Financial Officer of PEI. In addition, as of that
date, PEI had outstanding warrants to acquire up to an aggregate of 93,487
shares of common stock at exercise prices of $1.50 per share (with respect to
warrants to acquire up to 43,487 shares of PEI common stock) to $2.00 per share
(with respect to warrants to acquire up to 50,000 shares of PEI common stock).
In addition, as of November 30, 2004, PEI had outstanding warrants to acquire
230,000 shares of PEI common stock at an exercise price of $.0001 per share.
These warrants vest ratably over a period of two years commencing upon the
closing of the Share Exchange.
EMPLOYMENT AGREEMENTS
Each of Messrs. Neil Koehler, Tom Koehler and Turner has executed an
employment agreement with PEI as more particularly described below:
EMPLOYMENT AGREEMENT WITH NEIL KOEHLER. The employment agreement with Mr.
Koehler provides for a one-year term commencing on the closing of the Share
Exchange and automatic one-year renewals thereafter, unless either Mr. Koehler
or PEI provides written notice to the other at least 90 days prior to the
expiration of the then current term. Mr. Koehler will receive a base salary of
$200,000 per year and is entitled to receive a cash bonus not to exceed 50% of
his base salary to be paid based upon performance
66
criteria set by the board on an annual basis and an additional cash bonus not to
exceed 50% of the net free cash flow (defined as marketing revenues, less his
salary and performance bonus, less capital expenditures and all expenses
incurred specific to the marketing division), subject to a maximum of $300,000
in any given year; provided that such bonus will be reduced by ten percentage
points each year, such that 2007 will be the final year of such bonus at 10% of
net free cash flow. PEI is also required to provide an office and administrative
support to Mr. Koehler and certain benefits, including medical insurance (or, if
inadequate due to his location of permanent residence, to reimburse him up to
$1,000 per month for obtaining health insurance coverage on his own), three
weeks of paid vacation per year, participation in the stock option plan to be
developed in relative proportion to his position in the organization, and
participation in benefit plans on the same basis and to the same extent as other
executives or employees. Mr. Koehler is also entitled to reimbursement for all
reasonable business expenses incurred in promoting or on behalf of the business
of PEI, including expenditures for entertainment, gifts and travel. Upon Mr.
Koehler's termination or resignation for any reason, he is entitled to receive
severance equal to 3 months of base salary during the first year after
termination or resignation and 6 months of base salary during the second year
after termination unless he is terminated for cause or voluntarily terminates
his employment without providing the required written notice. If Mr. Koehler is
terminated (other than for cause) or terminates for good reason following, or
within the 90 days preceding, any change in control, in lieu of further salary
payments to Mr. Koehler, PEI may elect to pay a lump sum severance payment equal
to the amount of his annual base salary. The employment agreement also provides
for indemnification by PEI for any claims, actions, costs, expenses, damages and
liabilities arising out of or in connection with Mr. Koehler's employment,
except to the extent resulting from his gross negligence or willful misconduct
or otherwise falling outside the scope of his employment.
EMPLOYMENT AGREEMENT WITH TOM KOEHLER. The employment agreement with Mr.
Koehler provides for a one-year term commencing on the closing of the Share
Exchange and automatic one-year renewals thereafter, unless either Mr. Koehler
or PEI provides written notice to the other at least 90 days prior to the
expiration of the then current term. Mr. Koehler will receive a base salary of
$125,000 per year and is entitled to receive a cash bonus not to exceed 50% of
his base salary to be paid based on performance criteria to be set by the board
of directors on an annual basis. PEI is also required to provide an office and
administrative support to Mr. Koehler and certain benefits, including medical
insurance (or, if inadequate due to his location of permanent residence, to
reimburse him up to $1,000 per month for obtaining health insurance coverage on
his own), three weeks of paid vacation per year, participation in the stock
option plan to be developed in relative proportion to his position in the
organization, and participation in benefit plans on the same basis and to the
same extent as other executives or employees. Mr. Koehler is also entitled to
reimbursement for all reasonable business expenses incurred in promoting or on
behalf of the business of PEI, including expenditures for entertainment, gifts
and travel. Upon Mr. Koehler's termination or resignation for any reason, he is
entitled to receive severance equal to 3 months of base salary during the first
year after termination or resignation and 6 months of base salary during the
second year after termination unless he is terminated for cause or voluntarily
terminates his employment without providing the required written notice. If Mr.
Koehler is terminated (other than for cause) or terminates for good reason
following, or within the 90 days preceding, any change in control, in lieu of
further salary payments to Mr. Koehler, PEI may elect to pay a lump sum
severance payment equal to the amount of his annual base salary. The employment
agreement also provides for indemnification by PEI for any claims, actions,
costs, expenses, damages and liabilities arising out of or in connection with
Mr. Koehler's employment, except to the extent resulting from his gross
negligence or willful misconduct or otherwise falling outside the scope of his
employment.
EMPLOYMENT AGREEMENT WITH RYAN TURNER. The employment agreement with Mr.
Turner provides for a one-year term commencing on the closing of the Share
Exchange and automatic one-year renewals thereafter, unless either Mr. Turner or
PEI provides written notice to the other at least 90 days prior to the
expiration of the then current term. Mr. Turner will receive a base salary of
$125,000 per year and is entitled to receive a cash bonus not to exceed 50% of
his base salary to be paid based on performance criteria to be set by the board
67
of directors on an annual basis. PEI is also required to provide an office and
administrative support to Mr. Turner and certain benefits, including medical
insurance (or, if inadequate due to his location of permanent residence, to
reimburse him up to $1,000 per month for obtaining health insurance coverage on
his own), three weeks of vacation per year, participation in the stock option
plan to be developed in relative proportion to his position in the organization,
and participation in benefit plans on the same basis and to the same extent as
other executives or employees. Mr. Turner is also entitled to reimbursement for
all reasonable business expenses incurred in promoting or on behalf of the
business of PEI, including expenditures for entertainment, gifts and travel.
Upon Mr. Turner's termination or resignation for any reason, he is entitled to
receive severance equal to 3 months of base salary during the first year after
termination or resignation and 6 months of base salary during the second year
after termination unless he is terminated for cause or voluntarily terminates
his employment without providing the required written notice. If Mr. Turner is
terminated (other than for cause) or terminates for good reason following, or
within the 90 days preceding, any change in control, in lieu of further salary
payments to Mr. Turner, PEI may elect to pay a lump sum severance payment equal
to the amount of his annual base salary. The employment agreement also provides
for indemnification by PEI for any claims, actions, costs, expenses, damages and
liabilities arising out of or in connection with Mr. Turner's employment, except
to the extent resulting from his gross negligence or willful misconduct or
otherwise falling outside the scope of his employment.
The term "for good reason" is defined in each of the above employment
agreements as (i) a general assignment by PEI for the benefit of creditors or
filing by PEI of a voluntary bankruptcy petition or the filing against PEI of
any involuntary bankruptcy which remains undismissed for 30 days or more or if a
trustee, receiver or liquidator is appointed, (ii) any material changes in his
titles, duties or responsibilities without his express written consent, or (iii)
he is not paid the compensation and benefits required under the employment
agreement. The term "for cause" is defined in each of the employment agreements
as (i) the willful and continued failure to substantially perform his duties, or
(ii) the willful engaging in misconduct which is materially injurious to PEI;
provided, that reasonable notice must be given to him, he is allowed 30 days to
cure or remedy (if possible) the reasons for termination, he is permitted (with
counsel) to address the board and he is given notice of termination thereafter
finding that he was guilty of misconduct in the good faith opinion of the board
and was unable to cure or remedy the reasons for termination and specifying the
particulars thereof in detail. The term "change in control" as used in each of
the employment agreements means (i) if any person (as such term is used in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Exchange
Act")), other than a trustee or fiduciary holding securities under an employment
benefit program is or becomes a "beneficial owner" (as defined in Rule 13-3
under the Exchange Act), directly or indirectly of securities of PEI
representing 51% or more of the combined voting power of PEI, (ii) there is a
merger (other than a reincorporation merger) or consolidation in which PEI does
not survive as an independent company, or (iii) the business of PEI is disposed
of pursuant to a sale of assets.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
PEI has adopted provisions in its articles of incorporation which
eliminate the liability of the directors of PEI to the fullest extent
permissible under California law and authorize PEI to indemnify its directors
and officers within certain applicable limits of the California Corporations
Code. Such limitation of liability does not affect the availability of equitable
remedies, such as injunctive relief or rescission. In addition, PEI's bylaws
provide that PEI shall indemnify its directors and officers who are, or are
threatened to be made, parties to proceedings as a result of their position with
PEI against expenses, judgments, fines, settlements and certain other amounts in
connection with such proceedings, subject to certain limitations, except that
with regard to any action by or in right of PEI, such indemnification shall be
only for certain expenses incurred by such parties and shall be subject to
certain limitations, including compliance with fiduciary obligations.
68
There is no pending litigation or proceeding involving a director or
officer of PEI as to which indemnification is being sought, nor is PEI aware of
any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Neil Koehler, the Chief Executive Officer of PEI, is also the sole manager
and sole limited liability company member of Kinergy. Mr. Koehler does not
receive compensation from PEI.
Tom Koehler, the Vice President of Public Policy and Markets, is also a
limited liability company member of ReEnergy. Mr. Koehler is the brother of Neil
Koehler and receives compensation from PEI (through Celilo Group, LLC) as an
independent contractor.
PEI and ReEnergy are parties to an Option to Purchase Land dated August
28, 2003, pursuant to which ReEnergy has agreed to sell approximately 89.3 acres
of real property in Visalia, California to PEI at a price of $12,000 per acre,
with respect to which real property ReEnergy has executed and Option Agreement
dated as of July 20, 2003 with Kent Kaulfuss, a limited liability company member
of ReEnergy, and his wife, which Option Agreement grants ReEnergy an option to
purchase such real property for a purchase price of $1,071,600 on or before June
15, 2005 and requires ReEnergy to lease the Wood Industries plant (comprising 35
acres) to Wood Industries (which is owned by Kent Kaulfuss and his wife) for an
indefinite period of time for a monthly rental of $800. Accordingly, if the real
property is purchased by PEI pursuant to the terms of the Option to Purchase
Land dated August 28, 2003, Kent Kaulfuss and his wife will realize a gain on
sale of approximately $178,600.
One of Kinergy's largest customers is SC Fuels, Inc. SC Fuels, Inc. is a
principal shareholder of PEI and owns 1,500,000 shares of the issued and
outstanding common stock of PEI. Mr. Frank Greinke, the President of SC Fuels,
Inc., is a director of PEI. During the fiscal year ended December 31, 2003, SC
Fuels, Inc. accounted for approximately 8.6% of the total revenues of Kinergy.
PEI has entered into a consulting agreement with Ryan Turner, a
shareholder of PEI, for consulting services at $6,000 per month. During 2003,
PEI paid Mr. Turner a total of $60,000 pursuant to such consulting contract.
PEI sold various cattle feed products totaling $109,698, at market rates,
to a business owned by William Jones, a shareholder of PEI.
PEI reimbursed William Jones, a shareholder of PEI, an aggregate of
$200,000 during 2003 for expenses paid on behalf of PEI.
On October 27, 2003, William and Maurine Jones, Ryan and Wendy Turner and
Andrea Jones entered into an agreement with SC Fuels, Inc., a shareholder of PEI
in which Frank P. Greinke, a director of PEI, is the owner and CEO, to sell
1,500,000 shares of PEI Common Stock that they were personally holding at $1.50
per share for total proceeds of $2,250,000. In addition, under the terms of the
agreement, William and Maurine Jones, Ryan and Wendy Turner and Andrea Jones
agreed to vote a significant number of their existing shares of PEI Common Stock
in favor of Mr. Greinke to be elected to the board of directors of PEI or any
successor-in-interest to PEI.
PEI has entered into a Standard Form of Design-Build Agreement and General
Conditions Between Owner and Design-Builder with W. M. Lyles Co. (as amended,
the "Construction Agreement"). The Construction Agreement contains a number of
provisions that are favorable to W. M. Lyles Co. and unfavorable to PEI. The
Construction Agreement also includes a provision that requires PEI to pay a
termination fee of $5 million to W. M. Lyles Co. if PEI terminates the
Construction Agreement, in
69
addition to payment of all costs of W. M. Lyles Co. for services rendered
through the date of termination. William Lyles, a director of PEI, is the
Chairman of the Board of W. M. Lyles Co.
PEI obtained a loan from LDI in the principal amount of $5.1 million
pursuant to a Term Loan Agreement dated June 16, 2003 in order to purchase the
Madera County, California property, the repayment of which loan is secured by a
first deed of trust on the Madera County property, and any additional debt
financing obtained by PEI is required to be subordinated to the repayment
obligations of PEI to LDI and to the security interest of LDI under the Term
Loan Agreement. William Lyles, a director of PEI, is the Vice President of
Construction of LDI.
Barry Siegel, on the one hand, and William Jones and Maurine Jones, Ryan
Turner and Wendy Turner and Andrea Jones (collectively, the "PEI Shareholders"),
on the other, are in the process of negotiating the terms of a stock purchase
agreement that will provide for, among other things, the sale of an aggregate of
250,000 shares (the "Shares") of PEI's common stock held by the PEI Shareholders
to Barry Siegel for an aggregate purchase price of $25.00. The sale and purchase
of the Shares will be conditioned upon the occurrence of certain events.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of PEI common stock as of November 30, 2004 by:
o each person known by PEI to beneficially own more than 5% of the
outstanding shares of PEI's common stock;
o each of PEI's directors;
o each of the executive officers named in the summary compensation table
above; and
o all PEI directors and executive officers as a group.
The percentage of share ownership indicated below is based on 13,443,866
shares of common stock outstanding as of November 30, 2004.
The beneficial ownership numbers and percentages indicated below are
calculated based on requirements of the Securities and Exchange Commission. All
shares of PEI's common stock subject to options and warrants currently
exercisable either currently or within 60 days after November 30, 2004 are
deemed to be outstanding for the purpose of computing the percentage of
ownership of the person holding the options and/or warrants, but are not deemed
to be outstanding for computing the percentage of ownership of any other person.
Unless otherwise indicated below, each shareholder named in the following
table has sole voting and investment power with respect to all shares of PEI
common stock beneficially owned, subject to applicable community property laws.
The address of each of the following stockholders, unless otherwise indicated
below, is c/o PEI, 5711 N. West Avenue, Fresno, California 93711.
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SHARES BENEFICIALLY OWNED
---------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
------------------- ---------- -----------
William "Bill" Jones.............................. 4,275,000 31.82%
Frank P. Greinke(2)............................... 1,500,000 11.17%
Andrea Jones...................................... 1,272,500 9.47%
Ryan Turner....................................... 1,218,333 9.07%
Cagan-McAfee Capital Partners, LLC(3)............. 1,064,167 7.88%
William Lyles (4)................................. 2,000,000 14.02%
John Liviakis(5).................................. 939,167 6.98%
Maria Tharpe...................................... -- --
Neil Koehler...................................... -- --
Tom Koehler....................................... -- --
Doug Dickson...................................... -- --
John Pimentel..................................... -- --
All directors and executive officers
as a group (8 persons)......................... 4,718,333 35.12%
___________________
(1) Messrs. Turner, Neil Koehler, Tom Koehler, Dickson and Ms. Tharpe are
executive officers of PEI. Messrs. Greinke, Turner, Pimentel, Neil Koehler
and Lyles are directors of PEI.
(2) Represents shares of PEI common stock held by SC Fuels, Inc. Mr. Greinke is
the CEO and sole owner of SC Fuels, Inc. and has sole voting and sole
investment power over the shares of PEI common stock held by SC Fuels, Inc.
The address of SC Fuels, Inc. is 1800 W. Katella, Suite 400, Orange,
California 92863.
(3) The address of Cagan-McAfee Capital Partners, LLC is 10600 N. DeAnza
Boulevard, Suite 250, Cupertino, California 95014. Mr. Pimentel, a director
of PEI, is a Principal of Cagan-McAfee Capital Partners, LLC.
(4) Consists of 1,170,000 shares of PEI common stock and 830,000 shares of PEI
common stock underlying a convertible note held by LDI. Mr. Lyles is the
Vice President of Construction of LDI and has sole voting and sole
investment power over the shares of PEI common stock held by LDI. The
address of LDI is 1210 W. Olive, Fresno, California 93728.
(5) Represents shares of PEI common stock held by Liviakis Financial
Communications, Inc. Mr. Liviakis is the President of Liviakis Financial
Communications, Inc. and has sole voting power and sole investment power
over the shares of PEI common stock held by Liviakis Financial
Communications, Inc. The address of Liviakis Financial Communications, Inc.
is 655 Redwood Highway, Suite 395, Mill Valley, California 94941.
71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with PEI's
consolidated financial statements and notes thereto included in this proxy
statement.
OVERVIEW
PEI has to date not conducted any significant business operations, other
than the acquisition of real property located in Madera County, California on
which it intends to construct an ethanol production facility and an option to
acquire additional real property located in Visalia, California on which it may
construct an additional ethanol production facility. PAP, PEI's subsidiary,
intends to manage corn purchasing for PEI's proposed ethanol plan and market
distillers grains, the main co-product of ethanol manufacturing.
RESULTS OF OPERATIONS
The following table sets forth certain operating data of PEI:
PERIOD FROM NINE MONTHS PERIOD FROM
JANUARY 30, 2003 ENDED JANUARY 30, 2003
(INCEPTION) TO SEPTEMBER 30, (INCEPTION) TO
DECEMBER 31, 2003 2004 SEPTEMBER 30, 2003
------------- ------------- -------------
Net sales ............................................. $ 1,016,594 $ 16,832 $ 923,985
Cost of goods sold .................................... 946,012 10,789 822,412
------------- ------------- -------------
Gross profit .......................................... 70,582 6,043 101,573
Selling, general and administrative expenses........... 647,731 714,730 403,914
Noncash compensation for consulting fees............... -- 862,500 --
------------- ------------- -------------
Operating loss......................................... (577,149) (1,571,187) (302,341)
Interest income (expense) and other income ............ (279,930) (413,358) (154,135)
------------- ------------- -------------
Loss before provision for income taxes ................ (857,079) (1,984,545) (456,476)
Provision for income taxes ............................ 1,600 8,400 1,600
------------- ------------- -------------
Net loss............................................... $ (858,679) $ (1,992,945) $ (458,076)
============= ============= =============
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE PERIOD FROM
JANUARY 30, 2003 (INCEPTION) TO SEPTEMBER 30, 2003
NET SALES. Net sales for the nine month period ended September 30, 2004
decreased approximately 98% to $16,832 from $923,985 for the period from January
30, 2003 (inception) to September 30, 2003. The decrease in net sales is
attributable primarily to a fire in one of the silos at the grain facility owned
by PEI located in Madera County, which hampered PEI's ability to process corn.
In addition, PEI has stopped offering transloading services until the planned
construction of the ethanol production plant is completed at the Madera County
site.
GROSS PROFIT. Gross profit for the nine month period ended September 30,
2004 decreased in real dollar terms to $6,043 from $101,573 but increased as a
percentage of net sales to 36% as compared to 11% for the period from January
30, 2003 (inception) to September 30, 2003. The increase in gross profit as a
percentage of net sales is due primarily to larger profit margins realized from
transloading services as compared to corn sales. The decrease in gross profit in
dollar terms is due to the discontinuance of corn sales and transloading
services until the planned construction of the ethanol production plant is
completed at the Madera County site.
72
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine month period ended September 30, 2004 were
$714,730, or approximately 4,246% of net sales, compared to $403,914, or
approximately 44% of net sales, for the period from January 30, 2003 (inception)
to September 30, 2003. The increase is due primarily to decreased sales
activities and increased overhead for payroll and professional fees and costs
incurred in connection with equity and debt financing transactions pursued by
PEI during the nine month period ended September 30, 2004 and other corporate
organizational matters.
INTEREST EXPENSE. Interest expense was $413,726 for the nine month period
ended September 30, 2004 as compared to $154,136 for the period from January 30,
2003 (inception) to September 30, 2003. This was primarily due to interest paid
to LDI on the $5.1 million principal amount of the loan made to PEI by LDI in
June 2003 and the amortization of the LDI note discount.
INCOME TAXES. The provision for income taxes was $8,400 for the nine month
period ended September 30, 2004 as compared to $1,600 for the period from
January 30, 2003 (inception) to September 30, 2003. This increase was due to
PAP's LLC fees for California-based revenues.
DISCUSSION OF PERIOD FROM JANUARY 30, 2003 (INCEPTION) TO DECEMBER 31, 2003
NET SALES. Net sales in 2003 were $1,016,594. The majority of sales were
of rolled and whole corn. Only approximately 15% of sales were from transloading
services provided by PEI.
GROSS PROFIT. Gross profit as a percentage of net sales was approximately
7% for 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $647,731 for 2003, or approximately 64% of net
sales.
INTEREST INCOME (EXPENSE) AND OTHER INCOME. Interest expense was $281,222
for 2003 and other income was $1,292 in 2003.
INCOME TAXES. The provision for income taxes was $1,600 in 2003,
representing the minimum corporate tax of $800 for each of PEI and PAP.
LIQUIDITY AND CAPITAL RESOURCES
There was no cash provided by operating activities for the nine months
ended September 30, 2004 and for the year ended December 31, 2003. PEI's
principal use of cash has been to finance working capital, capital expenditures
and debt service requirements. PEI anticipates these will continue to be the
principal uses of cash for the foreseeable future. As of September 30, 2004, PEI
had cash and cash equivalents of approximately $220,908 and accounts receivable
of $8,637.
Capital expenditures for the nine months ended September 30, 2004 and for
the period from January 30, 2003 (inception) to December 31, 2003 were $688,727
and $610,897, respectively. The majority of capital expenditures have been for
the construction of an ethanol plant and a minority of capital expenditures have
been for office furniture and computer equipment.
In June 2003, PEI obtained a loan in the principal amount of $5.1 million
in order to acquire a 137-acre parcel of real property in Madera County,
California, on which it intends to construct an ethanol production facility,
pursuant to the terms and conditions of a Term Loan Agreement dated as of June
16, 2003, by and between LDI and PEI (the "Loan Agreement"). The Loan Agreement
provides for an interest rate of 5% per annum through June 19, 2004 and,
thereafter, a rate per annum equal to THE WALL STREET JOURNAL Prime Rate plus 2%
from June 20, 2004 until June 20, 2008, which is based on a 365-day year and
compounded monthly. The first payment, consisting of interest only, was due June
19, 2004,
73
after which interest is due and payable monthly. Principal payments are due
annually in three equal installments beginning June 20, 2006 and ending June 20,
2008. PEI is also required to prepay the outstanding principal of the loan if
(i) the construction cost for the ethanol production facility is less than $42.6
million (in which case PEI is required to prepay an amount of principal equal to
the difference between the actual construction cost and $42.6 million) or (ii)
PEI obtains construction funding to construct a second ethanol production
facility in California (in which case PEI is required to prepay all of the
outstanding principal and all accrued and unpaid interest thereon). A late
payment charges equal to 5% of the amount past due may be assessed and be
immediately payable if any payment of principal or interest, or any portion
thereof, is not paid in accordance with the terms of the Loan Agreement.
Pursuant to the Loan Agreement, LDI has the right to convert up to $1,500,000 of
the principal amount of the loan into shares of common stock of PEI (or, if such
conversion occurs after consummation of the Share Exchange, into shares of
Accessity common stock) at a fixed rate of $1.50 per share at any time up to and
including March 31, 2005. In July 2004 and September 2004, LDI converted
$150,000 and $90,000 of the principal amount of the loan into shares of common
stock of PEI.
From August through December of 2003, PEI sold 733,200 shares of common
stock for net proceeds of $1,023,825. For the nine months ended September 30,
2004, PEI sold 1,439,000 shares of common stock for net proceeds of $914,047
with an additional $68,100 remaining to be paid. The failure by PEI to obtain
additional capital, if and when needed, could restrict growth and prevent PEI
from being able to construct an ethanol production plant on the real property
owned by PEI in Madera County, which would adversely affect the business,
financial condition and results of operations of PEI.
74
INFORMATION RELATING TO KINERGY
BUSINESS
Kinergy is in the business of marketing ethanol throughout the Western
United States and providing transportation, storage and delivery services for
the ethanol it sells through third party service providers. Kinergy sells
ethanol into California, Arizona and Oregon and has extensive customer
relationships throughout the Western United States. Kinergy's operations
generated approximately $35 million in revenues during the year ended December
31, 2003, approximately $56 million in revenues for the nine months ended
September 30, 2004 and expects to generate revenues of up to $75 million for the
year ending December 31, 2004. Kinergy believes that by combining its operations
with the proposed operations of PEI, the operations of PAP and the proposed
operations of ReEnergy, the Combined Company can become a leader in the
production and sale of ethanol in the State of California and other Western
states. Kinergy is a limited liability company that was organized in the State
of Oregon in September 2000.
Kinergy believes that it has a competitive advantage due to the market
niche it has developed by supplying ethanol to customers in rural areas and
markets in California. Kinergy also believes that the experience of its
management over the past two decades and the operations it has conducted over
the past four years have enabled it to establish valuable relationships in the
ethanol marketing industry and understand the business of marketing ethanol,
which should enable Kinergy to assist the Combined Company in becoming a
prominent player in the ethanol production and marketing industry.
INDUSTRY BACKGROUND
MTBE has been used for over 20 years in California and other states to
improve the air quality characteristics of gasoline. However, MTBE is a known
carcinogen that contaminates groundwater and California banned the addition of
MTBE to motor fuels effective January 1, 2004. Ethyl alcohol, or ethanol, has
recently replaced MTBE in California, New York and Connecticut. The EPA now
lists 20 states with partial or complete bans on the use of MTBE. Currently,
ethanol is the only commercially available fuel additive to replace MTBE for
meeting the federal Clean Air Act's reformulated gasoline standards required in
states with severe air quality problems. Ethanol is presently believed to
account for more than 60% of the oxygenate market nationwide.
California is the nation's largest market for gasoline. Approximately 26
million vehicles are registered in California and are estimated to use up to 16
billion gallons of gasoline during 2004. California's last oil refinery was
built in 1969. The stringent permitting process and economics of constructing
and operating an oil refinery in California present difficult barriers to entry
into the oil refining market. In addition, California is in a volatile and
highly sensitive energy situation due to its geographic isolation from the rest
of the country and declining production capacity and inventory levels.
California imports about 10% of its finished fuel products and over 50% of its
total petroleum supply. At least one oil refinery in California is expected to
close by the end of 2004, further reducing production capacity.
The ethanol production industry is expected to produce up to 3.3 billion
gallons of ethanol in 2004, an increase of up to 17% from the approximately 2.8
billion gallons produced in 2003. The California ethanol market accounts for
more than 25% of the national market and will likely reach 900 million gallons
(about $1.5 billion in sales) per year beginning in 2004. However, California
only has two small ethanol plants with a combined production capacity of less
than 10 million gallons per year, leaving California with a substantial
shortfall in ethanol production. The balance of ethanol is shipped via rail from
the Midwest to California. Gasoline and diesel products that feed the major fuel
terminals are shipped in pipelines throughout the northern and southern portions
of California. Unlike gas and diesel, though, ethanol cannot be shipped in the
existing pipelines because is has an affinity for the water already
75
present in the pipelines. When mixed, water dilutes ethanol and creates
significant quality control issues. Therefore, ethanol must be trucked from rail
terminals to the regional fuel terminals, or "blending racks."
Approximately 95% of the ethanol produced in the U.S. is made in the
Midwest from corn. Ethanol is typically blended at 5.7% to 10% by volume in the
U.S., but is also blended at up to 85% for vehicles designed to operate on 85%
ethanol. Compared to gasoline, ethanol is generally considered to be less
expensive, higher octane and cleaner burning. The ever increasing demand for
transportation fuels with limited opportunities for gasoline refinery expansions
and the growing importance of CO2 emission reductions from renewable fuels is
anticipated to drive additional ethanol market growth in California.
Ethanol sold into the Central Valley is currently shipped via rail from
the Midwest, and then double-handled into trucks and shipped to the blending
racks in Sacramento, Stockton, Fresno and Bakersfield. This one to two thousand
mile transport and double handing can add up to $0.18 per gallon. Kinergy
estimates ethanol demand in the Central Valley to be upwards of 200 million
gallons in 2004. Management of Kinergy believes that it could market locally all
or substantially all of the 35 million gallons of ethanol expected to be
produced by PEI at its initial facility to be located on real property owned by
PEI in Madera County.
Over the last ten years, rail-car delivered California ethanol prices have
ranged between $.90 and $1.75 per gallon, averaging approximately $1.27 per
gallon. Gasoline prices have the largest influence on ethanol pricing. Ethanol
prices, net the federal tax incentive, have tended to track at a level near
parity with gasoline prices. Ethanol prices in California are typically ten to
twelve cents per gallon higher than in the Midwest due to the added freight
costs of delivering ethanol by ship and rail from the Midwest production
facilities.
Approximately forty percent of the ethanol consumed in the United States
is currently used in discretionary gasoline blending, where ethanol prices need
to be at or below gasoline prices for the petroleum companies to blend ethanol.
Over the last ten years, it is discretionary blending that has been the primary
determinant of ethanol pricing. A relative excess of supply over much of this
period has tended to discount ethanol pricing below its blending value as either
an octane enhancer or oxygenate. With the move to eliminate MTBE from gasoline
and other anticipated policy developments to expand the use of renewable fuels,
it is anticipated that future ethanol pricing will more closely reflect its
higher value as a clean air additive and octane enhancer.
Delivered ethanol prices to wholesale distribution points in the Central
Valley such as Fresno and Sacramento that must receive ethanol via trucks is
expected to be five to seven cents per gallon higher than the rail-served
terminals. Kinergy has rapidly expanded its market share at the Fresno terminal
and is now supplying over 50% of the approximately 50 million gallon per year
Fresno ethanol market.
CUSTOMERS
Most of the major metropolitan areas in California have fuel terminals
served by rail, but smaller cities and rural areas in California do not. Kinergy
believes that it has developed a valuable niche in California by growing its
business to supply customers in these areas without rail access at fuel
terminals (primarily located in the Sacramento, San Joaquin and Imperial
Valleys). Kinergy manages the complicated logistics of shipping ethanol from the
Midwest by rail to intermediate storage locations throughout the West Coast and
then trucking the ethanol to blending racks. Establishing an efficient service
for truck deliveries to these more remote locations has differentiated Kinergy
from the competition, resulting in both increased sales and margin growth.
Kinergy plans to maintain a balance between contract and spot sales. Most
of the major oil companies in California contract for six-month to one-year
intervals for the majority of their ethanol
76
requirements, while the independents tend toward spot purchases. PEI and Kinergy
will benefit from the inevitable ethanol price spikes caused by rail delays in
delivering ethanol from the Midwest to California.
It is expected that after the consummation of the Share Exchange, Kinergy
will continue to purchase ethanol from other Midwest and California producers
and re-sell it in California and other western states. Kinergy expects to sell
over 100 million gallons of ethanol in 2006. This level of sales allows Kinergy
to be an important supplier to the large oil companies and to trade ethanol
positions with both oil companies and other ethanol sellers to optimize prices
for PEI.
Kinergy purchases and resells ethanol to various customers in the Western
United States. Kinergy also arranges for transportation, storage and delivery of
ethanol purchased by its customers through its agreements with third party
service providers. Kinergy's revenue is obtained primarily from sales of ethanol
to large oil companies. Kinergy maintains its sales and service office at its
headquarters in Davis, California.
During the fiscal year ended December 31, 2003, Kinergy purchased and
resold an aggregate of approximately 26 million gallons of fuel grade ethanol to
approximately 20 customers. Sales to five of Kinergy's customers represented
approximately 67% and 59% of revenue in fiscal 2003 and the nine months ended
September 30, 2004, respectively. Sales to each of Kinergy's other customers did
not represent more than approximately 5% of its revenue in fiscal 2003.
Upon completion of construction of the ethanol production plant by PEI at
the Madera County, site that it owns, Kinergy will begin to market the ethanol
produced by PEI at its plant. Kinergy believes that most or all of the ethanol
produced by the Madera County facility can be sold locally into the Fresno
market. Kinergy will continue to market ethanol and manage the shipping, storage
and delivery of ethanol from the Midwest to existing and new customers in
California. In addition, Kinergy intends to continue to expand its business in
other growing markets for ethanol in states where MTBE has been banned,
including Phoenix, Arizona, Las Vegas, Nevada and Portland, Oregon. Most of
Kinergy's key California customers sell to their own customers in these areas,
helping to sustain sales growth. Kinergy anticipates that Arizona's ban of MTBE
effective January 1, 2004 should result in significant new ethanol sales to this
large gasoline market.
SUPPLIERS
Kinergy does not engage in any manufacturing activities. Kinergy is a
marketer and reseller of ethanol throughout the Western United States.
Accordingly, Kinergy is dependent on various producers of fuel grade ethanol for
its revenue. Kinergy also provides related transportation, storage and delivery
services through third party service providers.
Kinergy enters into short-term (6 months or less) contracts with various
producers of fuel grade ethanol, most of which are located in the Midwestern
United States. Currently, Kinergy has entered into contracts that provide for
the purchase and delivery of ethanol through September 2005. Kinergy assumes
risk of loss with respect to each shipment of ethanol once the ethanol passes
the flange connecting the delivering apparatus of the seller and the receiving
apparatus of Kinergy at the agreed upon delivery location, and carries risk
until the ethanol is delivered by the carrier to the fuel terminal.
Kinergy does not own or lease any rail cars, tanker trucks or other fuel
transportation vehicles. Instead, Kinergy contracts with third party providers
to receive ethanol at agreed upon locations from the seller and to store and/or
deliver the ethanol to agreed upon locations on behalf of Kinergy's customers.
Such contracts generally run from year-to-year, subject to termination by either
party upon advance written notice before the end of the then current annual
term. During the fiscal year ended December 31, 2003, purchases from the four
largest suppliers of ethanol to Kinergy accounted for approximately 93% of
77
all of Kinergy's purchases of ethanol during fiscal 2003. During fiscal 2003,
Kinergy purchased and resold approximately 26 million gallons of fuel grade
ethanol.
COMPETITION
The ethanol production and marketing industry is highly competitive.
Kinergy faces substantial competition from established companies, many of which
are larger companies, have greater financial, engineering and manufacturing
resources than Kinergy and have larger service organizations and long-standing
customer relationships with important players in the ethanol production and
marketing industry. Kinergy's competitors can be expected to continue to improve
the design, technology, engineering and performance of their products and
services and to introduce new products and services with competitive
price/performance characteristics. In addition, Kinergy's customers may choose
to develop proprietary technology, processes and equipment, which may obviate or
lessen their need to purchase Kinergy's products, technology and processes.
Kinergy's customers may also use multiple technologies and solutions, including
competitors' products, to replicate the functionality of Kinergy's technologies
and solutions. Competitive pressures may necessitate price reductions, which
could adversely affect Kinergy's results of operations. Although Kinergy
believes that it has certain competitive advantages over its competitors,
realizing and maintaining such advantages will require a continued high level of
investment by Kinergy in marketing and customer service and support. Kinergy may
not have sufficient resources to continue to make such investments. Even if
sufficient funds are available, Kinergy may not be able to make the
modifications and improvements necessary to maintain such competitive
advantages.
GOVERNMENTAL REGULATION
The ethanol production and marketing industry is subject to an array of
governmental regulation. See "Information Relating to PEI--Governmental
Regulation."
ENVIRONMENTAL REGULATION
In addition to the governmental regulations applicable to the ethanol
product and marketing industry described above, the activities of Kinergy are
subject to extensive environmental regulations. See "Information Relating to
PEI--Environmental Regulation."
EMPLOYEES
As of November 30, 2004, Kinergy had no employees.
FACILITIES
Kinergy's corporate headquarters, located in Davis, California, consists
of a 500 square foot leased facility. The lease is month to month.
LEGAL PROCEEDINGS
Kinergy is not presently involved in any legal proceedings which, if not
settled in its favor, would, individually or collectively, adversely affect the
financial condition of Kinergy.
MANAGEMENT
Neil Koehler is the sole manager and sole limited liability company member
of Kinergy. Accordingly, Mr. Koehler does not hold any formal meetings of
managers and there are no committees. Mr. Koehler is also the Chief Executive
Officer of PEI.
78
For more information concerning Mr. Koehler, see "Information Relating to
PEI--Management of PEI."
MANAGER AND OFFICER COMPENSATION
In his capacity as the sole manager of Kinergy, Neil Koehler does not
receive any compensation. As the sole limited liability company member of
Kinergy, Mr. Koehler receives 100% of the allocation of net profit or net loss
of Kinergy each year. Mr. Koehler does not receive any other compensation from
Kinergy, other than reimbursement of business expenses and out-of-pocket
disbursements.
STOCK OPTIONS AND WARRANTS
Kinergy has never issued any options or warrants to acquire any limited
liability company interests of Kinergy. Accordingly, there are no outstanding
options or warrants to acquire any limited liability company interests of
Kinergy.
EMPLOYMENT AGREEMENTS
Other than the employment agreement with PEI to which Neil Koehler is
party, there are no employment agreements between Kinergy and any officer,
manager, member or employee of Kinergy. See "Information Relating to
PEI--Employment Agreements."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The operating agreement of Kinergy provides for the indemnification of its
sole manager and member to the fullest extent permissible under Oregon law. Such
limitation of liability does not affect the availability of equitable remedies,
such as injunctive relief or rescission.
There is no pending litigation or proceeding involving a manager, member
or officer of Kinergy as to which indemnification is being sought, nor is
Kinergy aware of any pending or threatened litigation that may result in claims
for indemnification by any manager, member or officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Neil Koehler is the Chief Executive Officer of PEI, as well as the sole
manager and sole limited liability company member of Kinergy and a limited
liability company member of Kinergy Resources, LLC, which is a member of
ReEnergy. Mr. Koehler receives compensation from PEI pursuant to his employment
agreement with PEI and does not receive compensation in his capacity as the sole
manager of Kinergy.
Neil Koehler is the brother of Tom Koehler. Tom Koehler is a limited
liability company member of ReEnergy.
One of Kinergy's largest customers is SC Fuels, Inc. SC Fuels, Inc. is a
principal shareholder of PEI and owns 1,500,000 shares, or approximately 12%, of
the issued and outstanding common stock of PEI. Mr. Frank Greinke, the President
of SC Fuels, Inc., is a director of PEI. During the fiscal year ended December
31, 2003, SC Fuels, Inc. accounted for approximately 20% of the total revenues
of Kinergy.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Neil Koehler is the sole limited liability company member of Kinergy and
owns 100% of the outstanding limited liability company membership interests of
Kinergy. As the sole limited liability company member of Kinergy, pursuant to
the Share Exchange Agreement Mr. Koehler will have the right
79
to receive 38,750 shares of Accessity common stock for each one percent (1%) of
outstanding limited liability company interest he owns. Accordingly, if the
Share Exchange is consummated, Mr. Koehler will receive 3,875,000 shares of
Accessity common stock in exchange for all of the limited liability company
membership interests of Kinergy.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with Kinergy's
financial statements and notes thereto contained in APPENDIX F to this proxy
statement.
OVERVIEW
Kinergy is in the business of marketing ethanol throughout the Western
United States and providing related transportation, storage and delivery
services through third party service providers. Kinergy derives substantially
all of its revenue from the purchase and resale of ethanol to a limited number
of customers in the oil and gas industry, and from providing related
transportation, storage and delivery services through third party service
providers. See "Information Relating to Kinergy--Industry Background."
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net sales:
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
2003 2002 2004 2003
---------- ---------- ---------- ----------
Net sales .......................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................................. 95.6 97.8 95.9 95.7
---------- ---------- ---------- ----------
Gross profit ....................................... 4.4 2.2 4.1 4.3
Selling, general and administrative expenses........ 0.5 0.6 0.3 0.6
---------- ---------- ---------- ----------
Operating income ................................... 3.9 1.6 3.8 3.7
Other income (expense) ............................. 0.0 0.0 0.0 0.0
---------- ---------- ---------- ----------
Net income ......................................... 3.9% 1.6% 3.8% 3.7%
========== ========== ========== ==========
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
NET SALES. Net sales for the nine month period ended September 30, 2004
increased 300.4 % to $56.5 million from $18.7 million for the comparable period
of 2003. The increase in net sales reflects the impact of a new California
regulation effective January 1, 2004 requiring a minimum 6% ethanol addition to
fuel.
GROSS PROFIT. Gross profit for the nine month period ended September 30,
2004 increased to $2.3 million, or 4.1% of net sales, from $798,626, or 4.3% of
net sales, for the comparable period of 2003. The increase is due primarily to
increased sales volume in 2004 generated by mandatory ethanol addition to fuel
at a minimum of 6%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine month period ended September 30, 2004 were
$167,314, or 0.3% of net sales, compared to $102,794, or 0.6% of net sales, for
the nine month period ended September 30, 2003. The increase in dollar terms is
due primarily to increased sales volume generating more corresponding expenses.
80
OTHER INCOME (EXPENSE). Interest income (expense) and other income was
$(2,688) for the nine month period ended September 30, 2004 as compared to
interest income and other (expense) of $(10,539) for the nine month period ended
September 30, 2003. This was primarily due to the establishment of a line of
credit with Washington Mutual Bank FA consisting of $500,000 for vendor letters
of credit and $1.5 million available for line of credit advances. The interest
charges are primarily applicable to loan origination fees associated with the
establishment of this line of credit.
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002
NET SALES. Net sales in 2003 increased 132.6% to $35,539,636 from
$15,280,424 in 2002. The increase in revenues during 2003 is due to an increase
in sales beginning in the fourth quarter of 2003 as customers ordered ethanol to
meet the new required 6% minimum ethanol fuel component by January 1, 2004.
GROSS PROFIT. Gross profit as a percent of net sales was approximately
4.4% for 2003 compared to approximately 2.2% in 2002. The higher gross profit
for 2003 is primarily due to a large fourth quarter 2003 ethanol inventory
purchase acquired at a lower cost per gallon prior to cost increases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $169,582, or 0.5% of net sales, in 2003
compared to $93,725, or 0.6% of net sales, in 2002. The increase in expenses for
2003 is due to legal and consulting fees incurred in connection with a proposed
transaction with PEI.
OTHER INCOME (EXPENSE). Interest income was $267 and other expense was
$10,800 in 2003, resulting in total other expenses of $10,533 in 2003 compared
to interest income of $4,815 and other expense of $1,550 in 2002, resulting in
total other income of $3,265 in 2002. This decrease in interest income and
increase in other expense was due to a contribution of $10,000 in 2003 and a
reduction in interest rates on deposits from the beginning of 2002 to the end of
2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) operating activities was $1,947,450 and
$(159,682) for the nine months ended September 30, 2004 and for the year ended
December 31, 2003, respectively. Accounts receivable remained fairly constant,
despite a significant increase in sales, due to timelier collections of accounts
receivable. Accounts payable declined due to a faster payment cycle to vendors.
There were no capital expenditures for the nine months ended September 30,
2004 and for the year ended December 31, 2003.
In April 2004, Kinergy established a $2 million line of credit with
Washington Mutual Bank to provide a total of $500,000 in letters of credit to
two vendors and $1.5 million as revolving credit. In September 2004, Kinergy
replaced the Washington Mutual Bank line with a $2 million line of credit with
Comerica Bank to provide a total of $600,000 in letters of credit to two vendors
and $1.4 million as revolving credit. This line is collateralized by inventory,
receivables and there are certain conditions and covenants that may impact
Kinergy's ability to access the entire $1.4 million. Kinergy has never needed
access to the line of credit.
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INFORMATION RELATING TO REENERGY
BUSINESS OF REENERGY
ReEnergy intends to develop a large-scale ethanol plant in California. To
date, ReEnergy has had no significant operations, other than entering into an
Option Agreement dated as of July 30, 2003, with Kent Kaulfuss, a limited
liability company member of ReEnergy, and his wife with respect to the
acquisition of approximately 89.3 acres of real property located in Visalia,
California, with respect to which real property ReEnergy has granted to PEI an
option to purchase upon ReEnergy's purchase of same from Kent Kaulfuss and his
wife. ReEnergy was organized in California in March 2001. Accordingly, the
information relating to ReEnergy is generally the same as or substantially
similar to the general information relating to PEI. See "Information Relating to
PEI."
ReEnergy believes that by combining its operations with the proposed
operations of PEI, the operations of PAP and the operations of Kinergy, the
Combined Company can become a leader in the production and sale of ethanol in
the State of California and other Western states.
INDUSTRY BACKGROUND
See "Information Relating to PEI--Industry Background."
CUSTOMERS
See "Information Relating to PEI--Customers."
SUPPLIERS
See "Information Relating to PEI--Suppliers."
COMPETITION
See "Information Relating to PEI--Competition."
GOVERNMENTAL REGULATION
The ethanol production and marketing industry is subject to an extensive
array of governmental regulation. See "Information Relating to PEI--Governmental
Regulation."
ENVIRONMENTAL REGULATION
In addition to the governmental regulations applicable to the ethanol
product and marketing industry described above, the activities of ReEnergy are
subject to additional environmental regulations. See "Information Relating to
PEI--Environmental Regulation."
RESEARCH AND DEVELOPMENT
See "Information Relating to PEI--Research and Development."
INTELLECTUAL PROPERTY
See "Information Relating to PEI--Intellectual Property."
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EMPLOYEES
As of November 30, 2004, ReEnergy had no employees.
FACILITIES
ReEnergy's corporate headquarters, located in Rohnert Park, California,
consists of a 1,000 square foot facility. The lease expires on January 14, 2005.
LEGAL PROCEEDINGS
ReEnergy is not presently involved in any legal proceedings which, if not
settled in its favor, would, individually or collectively, adversely affect the
financial condition of ReEnergy.
MANAGEMENT
The managers of ReEnergy are Neil Koehler, Frank R. Lindbloom, Kent
Kaulfuss and Tom Koehler. The operating agreement of ReEnergy provides that each
member of ReEnergy is permitted to appoint one manager of ReEnergy. Accordingly,
Neil Koehler is the manager designated by Kinergy Resources, LLC, Frank R.
Lindloom is the manager designated by Flin-Mac, Inc., and Kent Kaulfuss and Tom
Koehler are the other two managers and limited liability company members of
ReEnergy.
NEIL KOEHLER has been a limited liability company member and manager of
ReEnergy since its inception in March 2001 and the Chief Executive Officer and
Chairman of the Board of PEI since January 2003. For more information concerning
Mr. Koehler, see "Information Relating to PEI--Management of PEI."
FRANK R. LINDBLOOM has been a limited liability company member and manager
of ReEnergy since its inception in March 2001 and has served as President of
Flin-Mac, Inc., a California corporations engaged in the business of custom feed
product production and marketing, since its inception in December 1986.
KENT KAULFUSS has been a limited liability company member and manager of
ReEnergy since July 2003. Mr. Kaulfuss has been the President of Wood
Industries, Inc., a California corporation engaged in the business of composting
and recycling, since its inception in 1988.
TOM KOEHLER has been a limited liability company member and manager of
ReEnergy since May 2004 and has been the Vice President, Public Policy and
Markets of PEI since January 2003. For more information concerning Mr. Koehler,
see "Information Relating to PEI--Management of PEI."
MANAGER AND OFFICER COMPENSATION
As the limited liability company members of ReEnergy, Kinergy Resources,
LLC, Kent Kaulfuss, Flin-Mac, Inc. and Tom Koehler share 100% of the allocation
of net profit or net loss of ReEnergy each year.
STOCK OPTIONS AND WARRANTS
ReEnergy has never issued any options or warrants to acquire any limited
liability company interests of ReEnergy. Accordingly, there are no outstanding
options or warrants to acquire any limited liability company interests of
ReEnergy.
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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The operating agreement of ReEnergy provides for the indemnification of
its managers and members to the fullest extent permissible under California law.
Such limitation of liability does not affect the availability of equitable
remedies, such as injunctive relief or rescission.
There is no pending litigation or proceeding involving a manager, member
or officer of ReEnergy as to which indemnification is being sought, nor is
ReEnergy aware of any pending or threatened litigation that may result in claims
for indemnification by any manager, member or officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Tom Koehler, a limited liability company member of ReEnergy, is the Vice
President, Public Policy and Markets, of PEI. Tom Koehler is the brother of Neil
Koehler, the Chief Executive Officer of PEI.
PEI and ReEnergy are parties to an Option to Purchase Land dated August
28, 2003, pursuant to which ReEnergy has agreed to sell approximately 89.3 acres
of real property in Visalia, California to PEI at a price of $12,000 per acre,
with respect to which real property ReEnergy has executed an Option Agreement
dated as of July 20, 2003 with Kent Kaulfuss, a limited liability company member
of ReEnergy, and his wife, which Option Agreement grants ReEnergy an option to
purchase such real property for a purchase price of $893,000 on or before June
15, 2005 and requires ReEnergy to lease the Wood Industries plant (comprising 35
acres) to Wood Industries (which is owned by Kent Kaulfuss and his wife) for an
indefinite period of time for a monthly rental of $800. Accordingly, if the real
property is purchased by PEI pursuant to the terms of the Option to Purchase
Land dated August 28, 2003, Kent Kaulfuss and his wife will realize a gain on
sale of approximately $178,600.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF REENERGY
Each of Kinergy Resources, LLC, Kent Kaulfuss and Flin-Mac, Inc. holds a
23.5% limited liability company membership interest in ReEnergy. Tom Koehler
holds a 29.5% limited liability company interest in ReEnergy. Each of Kinergy
Resources, LLC, Kent Kaulfuss, Flin-Mac, Inc. and Tom Koehler will have the
right to receive 1,250 shares of Accessity common stock for each 1% of
outstanding limited liability company interest such limited liability company
member owns. Accordingly, if the Share Exchange is consummated, each of Kinergy
Resources, LLC, Kent Kaulfuss and Flin-Mac, Inc. will receive 29,375 shares of
Accessity common stock in exchange for their limited liability company
membership interests in ReEnergy and Tom Koehler will receive 36,875 shares of
Accessity common stock in exchange for his limited liability company membership
interests in ReEnergy.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with ReEnergy's
financial statements and notes thereto contained in APPENDIX F to this proxy
statement.
OVERVIEW
ReEnergy intends to develop a large-scale ethanol plant in California. To
date, ReEnergy has had no significant operations, other than entering into an
Option Agreement dated as of July 30, 2003, with Kent Kaulfuss, a limited
liability company member of ReEnergy, and his wife with respect to the
acquisition of approximately 89.3 acres of real property located in Visalia,
California, with respect to which real property ReEnergy has granted to PEI an
option to purchase upon ReEnergy's purchase of same from Kent Kaulfuss and his
wife. ReEnergy was organized in California in March 2001. Accordingly, the
information relating to ReEnergy is generally the same as or substantially
similar to the general information relating to PEI. See "Information Relating to
PEI."
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RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
REVENUES. Revenues for the nine months ended September 30, 2004 and for
the comparable period of 2003 were $0. ReEnergy has to date not conducted any
significant operations or generated any revenue.
OPERATING COSTS AND EXPENSES. Operating costs and expenses were $5,000 for
the nine months ended September 30, 2004 and $0 for the comparable period of
2003.
OTHER INCOME. Other income was $0 for the nine months ended September 30,
2004 and $0 for the nine months ended September 30, 2003.
TAXES. The provision for income taxes was $800 for the nine months ended
September 30, 2004 and $800 for the nine months ended September 30, 2003.
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002
REVENUES. Revenues for 2003 and for 2002 were $0. ReEnergy has to date not
conducted any significant operations or generated any revenue.
OPERATING COSTS AND EXPENSES. Operating costs and expenses were $0 in 2003
compared to $387 in 2002. The decrease in operating costs and expenses is
primarily due to the capitalization of costs associated with building an ethanol
plant.
OTHER INCOME. Other income was $0 for 2003 and $0 for 2002.
TAXES. The provision for income taxes was $800 for 2003 and $800 for 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $0 for both the nine months
ended September 30, 2004 and for the year ended December 31, 2003. ReEnergy has
to date not conducted any significant operations or generated any revenue.
Capital expenditures for the nine months ended September 30, 2004 and for
the year ended December 31, 2003 were $4,544 and $48,804, respectively. The
decrease is due to ReEnergy entering into the proposed Share Exchange Agreement.
All liquidity and capital resources are provided by capital contributions
from members, as deemed necessary.
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PROPOSAL 1
ELECTION OF CLASS III DIRECTOR
Accessity's bylaws provide that the board of directors shall consist of at
least three and no more than seven directors, with the exact number set by the
board of directors. The current number is set at five. The board is divided into
three classes of directors: Class I, Class II and Class III. The term of office
of each class of directors is three years, with one class expiring each year at
Accessity's annual meeting of shareholders.
Accessity's current board consists of one Class I director, Barry Siegel,
whose term expires at the 2006 annual meeting, one Class II director, Kenneth J.
Friedman, whose term expires at the 2005 annual meeting, one Class III director,
Bruce S. Udell, whose term expires at the 2004 annual meeting and who is named
as a nominee for election to serve a three-year term expiring at the 2007 annual
meeting or until he either is succeeded by another qualified director who has
been duly elected or is required to resign in connection with the Share
Exchange. See "Operation, Management and Business of Accessity After the Share
Exchange--Business of Accessity." Accessity has two vacancies on the board.
The proxy holders intend to vote all proxies received by them in favor of
the election of Mr. Udell unless instructions to the contrary are marked on the
proxy card. If Mr. Udell is unable or declines to serve as a director at the
time of the annual meeting, an event not now anticipated, the proxies will be
voted for any nominee designated by Accessity's present board. However, the
proxy holders may not vote proxies for a greater number of persons than the
number of nominees named on the proxy card.
REQUIRED VOTE OF STOCKHOLDERS AND BOARD RECOMMENDATION
Directors are elected by a plurality vote of shares present in person or
represented by proxy at the meeting. This means that the director nominee with
the most votes for a particular slot on the board is elected for that slot. In
an uncontested election for directors, the plurality requirement is not a
factor.
ACCESSITY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
ELECTION OF BRUCE S. UDELL AS A CLASS III DIRECTOR.
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PROPOSAL 2
APPROVAL OF THE SHARE EXCHANGE AND RELATED TRANSACTIONS
BACKGROUND OF THE SHARE EXCHANGE
The Share Exchange was initially proposed by representatives of PEI to
management of Accessity.
In December 2003, the board of directors of Accessity authorized
management to investigate potential business opportunities in addition to or in
lieu of the medical billing recovery business and insurance collision repair
business, which has been assigned to and assumed by ClaimsNet, a wholly-owned
subsidiary of The CEI Group, Inc. pursuant to a Strategic Partnership Agreement
effective January 2, 2003. Management did not focus on companies that were
engaged in markets which appeared to be similar to or the same as Accessity, but
focused on any companies that would be interested in an acquisition by
Accessity.
In March 2004, Accessity was contacted by Cagan-McAfee Capital Partners,
which had been retained by PEI for the purposes of finding a buyer or other
strategic partner for PEI. Previously, PEI had entered into a letter of intent
to enter into a business combination transaction with each of Kinergy and
ReEnergy, each of which were terminated effective May 14, 2004. While Kinergy
had experienced some growth and profit, the PEI board of directors and the
respective managers of Kinergy and ReEnergy determined that the consolidation of
ethanol plant construction planning and services and ethanol remarketing
services in conjunction with an acquisition by a public company was the best way
to achieve significant market penetration of its services and provide future
liquidity to its shareholders. In April 2004, Accessity and PEI signed a
confidential non-disclosure agreement and began due diligence and preliminary
acquisition discussions.
At the March 16, 2004 meeting of the board of directors of Accessity, the
board determined that PEI, together with Kinergy and ReEnergy, represented the
most appealing acquisition target because:
o the potential size and scope of the business of the Combined Company
has greater national market potential than the Sentaur medical
business may have, and therefore may be of potentially greater value
to Accessity shareholders;
o the California market for ethanol, as an initial target, is the
largest market in the United States and is growing as a result of
regulatory actions banning the use of MTBE in California that went
into effect on January 1, 2004;
o the alternative fuels business has both mid-term and long-term
potential in the United States as the price of fuel has increased and
major sources of supply are outside the control of this country;
o the United States, for geopolitical reasons, needs to diversify from
its reliance on foreign oil and the infrastructure for ethanol is in
place and ethanol can be used by the millions of vehicles currently in
use. In addition, there are opportunities other than ethanol in the
alternative fuel markets that the PEI may pursue, which are of a
longer-term nature, that also have great potential; and
o the Acquired Companies provide a strong and experienced management
team that Accessity believes has the ability to execute on their
combined business plan.
The board authorized the creation of a due diligence team, consisting of
consultants and two officers of Accessity, Barry Siegel and Philip Kart.
87
From March 2004 to May 2004, members of management and representatives of
each of Accessity, PEI, Kinergy and ReEnergy continued their due diligence
review and negotiated the terms of the Share Exchange Agreement.
On May 14, 2004, the board of directors of Accessity reviewed the effect
on Accessity's earnings per share for the current and next year that would
result from the consummation of the Share Exchange. Based on this valuation and
management's additional due diligence efforts, the board of directors of
Accessity approved the Share Exchange Agreement, which was signed by Accessity,
PEI, Kinergy and ReEnergy on May 14, 2004.
On August 4, 2004 and effective October 1, 2004, the board of directors of
Accessity approved amendments to the Share Exchange Agreement, which amendments
were signed by Accessity, PEI, Kinergy and ReEnergy on July 29, 2004 and
effective as of October 1, 2004, respectively.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF ACCESSITY; ACCESSITY'S REASONS FOR
THE SHARE EXCHANGE
THE BOARD OF DIRECTORS OF ACCESSITY UNANIMOUSLY RECOMMENDS THAT HOLDERS OF
ACCESSITY COMMON STOCK VOTE FOR THE SHARE EXCHANGE PROPOSAL.
The board of directors of Accessity believes that the terms of the
transaction contemplated by the Share Exchange are in the best interests of
Accessity and its shareholders. Accordingly, Accessity's board of directors has
approved the Share Exchange and related transactions and recommends approval
thereof by the shareholders of Accessity.
In view of the number of factors considered in connection with its
evaluation of the Share Exchange, the Accessity board of directors did not
quantify or otherwise attempt to assign relative weights to the separate factors
considered in reaching its determination. In reaching its determination to
recommend approval of the Share Exchange, the Accessity board of directors
consulted with Accessity management, as well as its legal counsel, and
considered a number of factors. The board of directors considered the nature and
scope of the business of the Acquired Companies, and quality and breadth of
their respective assets, products, competitive position and prospects for future
growth.
In reviewing these assets and operations, the board of directors of
Accessity took into account the quality of the Combined Company's senior
management. It also reviewed the complementary nature of the businesses of the
Acquired Companies, which have significant overlap and which present
opportunities for expansion. In that regard, the board considered that the
complementary nature of the two companies' businesses creates significant
opportunities for development of the Acquired Companies on a combined basis.
The board of directors of Accessity considered the terms and conditions of
the Share Exchange Agreement, including the number of shares of Accessity common
stock to be issued in the Share Exchange. In addition, the Accessity board of
directors considered the opinion of BearingPoint contained in a written opinion
dated October 9, 2004 and, confirmed in writing as of the date of this proxy
statement, that the Subsidiary Transfer is fair to Accessity and the holders of
Accessity common stock from a financial point of view. A copy of BearingPoint's
written opinion to the board of directors of Accessity dated October 9, 2004,
and confirmed in writing as of the date of this proxy statement, is attached
hereto as APPENDIX H and is incorporated herein by reference. See "Proposal
3--Approval of Subsidiary Transfer--Fairness Opinion."
The board of directors of Accessity believes that the proposed Share
Exchange will afford Accessity the complementary strengths of Combined Company,
will provide the Acquired Companies with the
88
potential benefits described above and may enable the Acquired Companies to
address emerging strategic opportunities in the ethanol fuel markets quickly and
effectively.
After due consideration, the board of directors of Accessity concluded
that the consummation of the Share Exchange was in the best interests of the
shareholders of Accessity.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF PEI; PEI'S REASONS FOR THE SHARE
EXCHANGE
THE BOARD OF DIRECTORS OF PEI UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
AND HOLDERS OF WARRANTS AND OPTIONS TO ACQUIRE SHARES OF PEI COMMON STOCK
EXECUTE THE SHARE EXCHANGE AGREEMENT.
PEI's board of directors believes that the terms of the Share Exchange and
the Share Exchange Agreement are in the best interests of PEI and its
shareholders. Accordingly, the PEI board has approved the Share Exchange and the
Share Exchange Agreement and the consummation of the transactions contemplated
thereby and has recommended that the shareholders and holders of warrants and
options to acquire shares of PEI common stock execute the Share Exchange
Agreement.
In view of the complexity and variety of factors considered by the PEI
board, the following discussion of the factors considered by the PEI board is
not intended to be exhaustive but is intended to include the material factors
considered by the PEI board. Additionally, the PEI board did not consider it
practical to quantify or otherwise attempt to assign any relative or specific
weights to the specific factors considered, and individual directors may have
given differing weights to different factors. In reaching its determination to
recommend approval of the acceptance by PEI shareholders of shares Accessity
common stock in connection with the Share Exchange, the PEI board consulted with
management of PEI, its legal counsel and its other advisors, and considered a
number of factors, including the following:
o ability to secure several million dollars of equity investment through
the combination of the companies' balance sheets;
o ability to utilize a publicly traded entity which enables increased
visibility to the public markets, which may lead to improved certainty
of liquidity for investors, and which potentially facilitates future
equity investments from institutions; and
o having a publicly-traded stock creates an acquisition currency which
may enable PEI to pursue accretive acquisitions of companies in the
ethanol marketplace which may have revenue and/or cost synergies with
PEI's core business.
In addition to the factors set forth above, in the course of its meetings
with Accessity, the PEI board reviewed and considered a wide variety of
information relevant to the Share Exchange including:
o the potential contingent liabilities and assets that may exist with
Accessity, including but not limited to current litigation, potential
future litigation, lease obligations and the accuracy and completeness
of a shareholders list; and
o the requirements to maintain a listing on The Nasdaq SmallCap Market.
The PEI Board also considered a number of risks in its deliberations
concerning the Share Exchange, including:
o the potential disruption to the business of PEI and the other
companies following announcement of the Share Exchange, including the
effects of employee uncertainty and the possibility that key
89
business contacts of PEI may not approve of the Share Exchange or may
determine to terminate their relationship with the Combined Company;
o the higher level of expenses that will be incurred by the Combined
Company;
o additional potential problems and costs associated with the
integration of all of the Acquired Companies into a single enterprise;
o the possibility that the Share Exchange would not be consummated;
o the significant transaction costs of the Share Exchange; and
o the other risks described under "Risk Factors."
After due consideration, the PEI board concluded that the benefits of the
transaction to PEI and its shareholders outweighed the risks associated with the
foregoing factors.
PEI's board of directors also reviewed comparable companies to Accessity,
Kinergy and ReEnergy in considering the strategic and financial rationale for
the Share Exchange. In that regard, PEI's board of directors considered, among
other things, the relative financial positions of Accessity, Kinergy and
ReEnergy and the potential impacts of the Share Exchange on the financial
position of the new Combined Company. PEI's board of directors also considered
the terms and conditions of the Share Exchange Agreement, including the number
of shares of Accessity common stock to be received by shareholders of PEI.
APPROVAL BY THE SOLE MANAGER OF KINERGY; KINERGY'S REASONS FOR THE SHARE
EXCHANGE
Kinergy's sole manager and limited liability company member believes that
the terms of the Share Exchange and the Share Exchange Agreement are in the best
interests of Kinergy and its sole limited liability company member. Accordingly,
the sole manager and member of Kinergy has approved the Share Exchange and the
Share Exchange Agreement and the consummation of the transactions contemplated
thereby, has executed the Share Exchange Agreement in his capacity as the sole
manager of Kinergy and intends to execute the Share Exchange Agreement as a
member of Kinergy.
In view of the complexity and variety of factors considered by the sole
manager and limited liability company member of Kinergy, the following
discussion of the factors considered by the sole manager and limited liability
company member of Kinergy is not intended to be exhaustive but is intended to
include the material factors considered by the sole manager and limited
liability company member of Kinergy. Additionally, the sole manager and limited
liability company member of Kinergy did not consider it practical to quantify or
otherwise attempt to assign any relative or specific weights to the specific
factors considered and he may have given differing weights to different factors.
In reaching his determination to execute the Share Exchange Agreement and accept
shares of Accessity common stock in connection with the Share Exchange, the sole
manager and limited liability company member of Kinergy consulted with legal
counsel and other advisors, and considered a number of factors, including the
following:
o the value of joining with a larger organization with deep management
resources and the capability to expand Kinergy's base business and to
forward integrate into the production of ethanol in California;
o the ability to maintain Kinergy's existing base of operations and
transition many of those customers to PEI; and
90
o the ability to utilize a public company for an acquisition strategy
that may create value for all shareholders by creating the opportunity
to achieve revenue and cost synergies with Kinergy's core business.
The sole manager and limited liability company member of Kinergy also
considered a number of risks in his deliberations concerning the Share Exchange,
including:
o the potential disruption to the business of Kinergy and the other
companies following announcement of the Share Exchange, including the
possibility that key business contacts of Kinergy may not approve of
the Share Exchange or may determine to terminate their relationship
with the Combined Company;
o the higher level of expenses that will be incurred by the Combined
Company;
o additional potential problems and costs associated with the
integration of all of the companies into a single enterprise;
o the possibility that the Share Exchange would not be consummated;
o the significant transaction costs of the Share Exchange; and
o the other risks described under "Risk Factors."
After due consideration, the sole manager and limited liability company
member of Kinergy concluded that the benefits of the transaction to Kinergy and
himself outweighed the risks associated with the foregoing factors.
The sole manager and limited liability company member of Kinergy also
reviewed comparable companies to Accessity, PEI and ReEnergy within the industry
in considering the strategic and financial rationale for the Share Exchange. In
that regard, the sole manager and limited liability company member of Kinergy
considered, among other things, the relative financial positions of Accessity,
PEI and ReEnergy and the potential impacts of the Share Exchange on the
financial position of the new Combined Company. The sole manager and limited
liability company member of Kinergy also considered the terms and conditions of
the Share Exchange Agreement, including the number of shares of Accessity common
stock to be received by him.
RECOMMENDATION OF THE MANAGERS OF REENERGY; REENERGY'S REASONS FOR THE SHARE
EXCHANGE
THE MANAGERS OF REENERGY UNANIMOUSLY RECOMMEND THAT THE LIMITED LIABILITY
COMPANY MEMBERS OF REENERGY EXECUTE THE SHARE EXCHANGE AGREEMENT.
ReEnergy's managers believe that the terms of the Share Exchange and the
Share Exchange Agreement are in the best interests of ReEnergy and its limited
liability company members. Accordingly, the managers of ReEnergy have approved
the Share Exchange and the Share Exchange Agreement and the consummation of the
transactions contemplated thereby and have recommended that the limited
liability company members of ReEnergy execute the Share Exchange Agreement.
In view of the complexity and variety of factors considered by the
managers of ReEnergy, the following discussion of the factors considered by
managers of ReEnergy is not intended to be exhaustive but is intended to include
the material factors considered by the managers of ReEnergy. Additionally, the
managers of ReEnergy did not consider it practical to quantify or otherwise
attempt to assign any relative or specific weights to the specific factors
considered and they may have given differing weights to
91
different factors. In reaching their determination to approve the Share Exchange
Agreement and recommend approval of the acceptance of shares of Accessity common
stock by the limited liability company members of ReEnergy in connection with
the Share Exchange, the managers of ReEnergy consulted with legal counsel and
other advisors, and considered a number of factors, including the following:
o the value of joining with a larger organization with deep management
resources and the capability to expand ReEnergy's base business and to
forward integrate into the production of ethanol in California;
o the ability to maximize the value of ReEnergy's land assets and
knowledge of the ethanol marketplace; and
o the ability to utilize a public company for an acquisition strategy
that may create value for all shareholders by creating the opportunity
to achieve revenue and cost synergies with ReEnergy's core business.
The managers of ReEnergy also considered a number of risks in their
deliberations concerning the Share Exchange, including:
o the potential disruption to the business of ReEnergy and the other
companies following announcement of the Share Exchange, including the
possibility that key business contacts of ReEnergy may not approve of
the Share Exchange or may determine to terminate their relationship
with the Combined Company;
o the higher level of expenses that will be incurred by the Combined
Company;
o additional potential problems and costs associated with the
integration of all of the companies into a single enterprise;
o the possibility that the Share Exchange would not be consummated;
o the significant transaction costs of the Share Exchange; and
o the other risks described under "Risk Factors."
After due consideration, the managers of ReEnergy concluded that the
benefits of the transaction to ReEnergy and the limited liability company
members of ReEnergy outweighed the risks associated with the foregoing factors.
The managers of ReEnergy also reviewed comparable companies to Accessity,
PEI and Kinergy within the industry in considering the strategic and financial
rationale for the Share Exchange. In that regard, the managers of ReEnergy
considered, among other things, the relative financial positions of Accessity,
PEI and Kinergy and the potential impacts of the Share Exchange on the financial
position of the new Combined Company. The managers of ReEnergy also considered
the terms and conditions of the Share Exchange Agreement, including the number
of shares of Accessity common stock to be received by the limited liability
company members of ReEnergy.
INTERESTS OF CERTAIN PERSONS IN THE SHARE EXCHANGE
As described below, certain members of Accessity's management, PEI's
management, ReEnergy's management and Kinergy's management may be deemed to have
certain interests in the Share Exchange
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that are in addition to their interests as holders of ownership interests in
Accessity, PEI, ReEnergy and Kinergy, respectively.
OPTION AGREEMENT
PEI and ReEnergy are parties to an Option to Purchase Land dated August
28, 2003, pursuant to which ReEnergy has agreed to sell approximately 89.3 acres
of real property in Visalia, California to PEI at a price of $12,000 per acre
(for a total of $1,071,600), with respect to which real property ReEnergy has
executed an Option Agreement dated as of July 20, 2003 with Kent Kaulfuss, a
limited liability company member of ReEnergy, and his wife which grants ReEnergy
an option to purchase such real property for a purchase price of $893,000 (which
Option Agreement expires on June 15, 2005 and requires ReEnergy to lease the
Wood Industries plant (comprising 35 acres) to Wood Industries (which is owned
by Kent Kaulfuss and his wife) for an indefinite period of time for a monthly
rental of $800). Accordingly, if the real property is purchased by PEI pursuant
to the terms of the Option to Purchase Land dated August 28, 2003, Kent Kaulfuss
and his wife will realize a gain on sale of approximately $178,600.
AGREEMENTS WITH LDI AND W. M. LYLES CO.
PEI has entered into a Standard Form of Design-Build Agreement and General
Conditions Between Owner and Design-Builder with W. M. Lyles Co. (as amended,
the "Construction Agreement"). The Construction Agreement contains a number of
provisions that are favorable to W. M. Lyles Co. and unfavorable to PEI. The
Construction Agreement also includes a provision that requires PEI to pay a
termination fee of $5 million to W. M. Lyles Co. if PEI terminates the
Construction Agreement, in addition to payment of all costs of W. M. Lyles Co.
for services rendered through the date of termination. William Lyles, a director
of PEI, is the Chairman of the Board of W. M. Lyles Co.
PEI obtained a loan from LDI in the principal amount of $5.1 million
pursuant to a Term Loan Agreement dated June 16, 2003 in order to purchase the
Madera County, California property, the repayment of which loan is secured by a
first deed of trust on the Madera County, California property, and any
additional debt financing obtained by PEI is required to be subordinated to the
repayment obligations of PEI to LDI and to the security interest of LDI under
the Term Loan Agreement. William Lyles, a director of PEI, is the Vice President
of Construction of LDI.
CONSULTING AND NONCOMPETITION AGREEMENTS
Upon consummation of the Share Exchange, and as a condition precedent to
the obligation of Accessity to consummate the Share Exchange, Barry Siegel, the
current Chairman of the Board, President and Chief Executive Officer of
Accessity, and Philip Kart, the current Chief Financial Officer of Accessity,
will each enter into a consulting and noncompetition agreement with Accessity,
pursuant to which they will receive an aggregate of up to 600,000 shares of
Accessity common stock. The fairness opinion issued by BearingPoint in
connection with the Subsidiary Transfer takes into account, among other things,
the execution of the consulting and noncompetition agreement and the issuance of
the 600,000 shares of Accessity common stock to Messrs. Siegel and Kart in
determining the fairness from a financial point of view of the Subsidiary
Transfer to Accessity and the shareholders of Accessity. See "Proposal
3--Approval of Subsidiary Transfer--Fairness Opinion."
Pursuant to the consulting and noncompetition agreement with Mr. Siegel,
the form and substance of which must be mutually acceptable to the Acquired
Companies, Accessity and Mr. Siegel, Mr. Siegel will be entitled to receive
payment of compensation in the form of the number of shares of Accessity common
stock equal to the excess, if any, of 400,000 shares of Accessity common stock
over the number of shares of Accessity common stock that he will receive in
consideration of his waiver of the change in control provisions in his current
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employment agreement with Accessity, which will be allocated between
compensation for consulting services and compensation for a covenant not to
compete, each in amounts as shall be mutually acceptable to the Acquired
Companies, Accessity and Mr. Siegel. In consideration of his waiver of the
change in control provisions in his current employment agreement with Accessity,
Mr. Siegel is entitled to receive a number of shares of Accessity common stock,
not to exceed 400,000 shares, with the exact number of shares equal to such
number as shall be equal to a fraction, the numerator of which is the excess of
the value of the waived severance payment he would otherwise be entitled to
receive pursuant to the change in control provisions in his current employment
agreement with Accessity over the fair market value of DriverShield, and the
denominator of which is the closing price per share of Accessity common stock on
the business day before the closing of the Share Exchange.
Pursuant to the consulting and noncompetition agreement with Mr. Kart, the
form and substance of which must be mutually acceptable to the Acquired
Companies, Accessity and Mr. Kart, and in consideration of his waiver of the
change in control provisions in his current employment agreement with Accessity,
Mr. Kart will be entitled to receive payment of compensation in the form of
200,000 shares of Accessity common stock, which shall be allocated between
compensation for consulting services and compensation for a covenant not to
compete, each in amounts as shall be mutually acceptable to the Acquired
Companies, Accessity and Mr. Kart.
TRANSFER OF DRIVERSHIELD AND SALE OF SENTAUR
As a condition to the consummation of the Share Exchange by Accessity, the
parties have agreed that Accessity shall transfer DriverShield and sell Sentaur
to Barry Siegel pursuant to written agreements, the form and substance of which
must be reasonably satisfactory to the Acquired Companies. The transfer of
DriverShield to Barry Siegel is in partial consideration for Barry Siegel to
relinquish cash payments that otherwise would be due to him under his employment
agreement with Accessity as a result of the consummation of the Share Exchange.
Accessity has obtained a fairness opinion from BearingPoint with respect to the
Subsidiary Transfer. See "Proposal 3--Approval of Subsidiary Transfer--Fairness
Opinion" and "Proposal 4--Approval of Subsidiary Sale."
The landlord of the Coral Spring, Florida premises currently has the
property listed for sale and Accessity has agreed to terminate the lease upon
sale of the building. As part of the disposition of DriverShield to Mr. Siegel,
until the landlord of the present Accessity headquarters in Coral Springs,
Florida sells the building, Mr. Siegel or an entity owned or controlled by Mr.
Siegel (which may include Sentaur) with the consent of the lessor under the
existing lease agreement for such facilities, on terms and conditions reasonably
satisfactory to the Acquired Companies, will contribute the sum of $3,500 toward
the monthly rent obligation. However, once the Acquired Companies have made
lease payments of $50,000 under the lease, Mr. Siegel will make all lease
payment until the building is sold. In addition, the personal property at the
facilities of Accessity located in Coral Springs, Florida will be transferred to
Mr. Siegel or an entity owned or controlled by Mr. Siegel (which may include
Sentaur) and Accessity will pay Barry Siegel or Sentaur $20,000 for moving
expenses. Upon consummation of the Share Exchange, the principal executive and
business offices of Accessity will become the principal executive and business
offices of PEI located at 5711 N. West Avenue, Fresno, California 93711.
EMPLOYMENT AGREEMENTS
Upon consummation of the Share Exchange, Neil Koehler, currently the Chief
Executive Officer of PEI, will become the Chief Executive Officer of Accessity,
Tom Koehler, currently a Vice President of PEI, will become a Vice President of
Accessity, and Ryan Turner, the current Chief Operations Officer of PEI, will
become the Chief Operations Officer of Accessity. Each of Messrs. Koehler,
Koehler and Turner has executed an employment agreement with PEI, which
agreement will be assigned to and
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assumed by Accessity upon consummation of the Share Exchange. For a description
of these employment agreements see "Information Relating to PEI--Employment
Agreements."
NONCOMPETITION AND NONSOLICITATION AGREEMENTS
Upon consummation of the Share Exchange, and as a condition precedent to
the obligation of Accessity to consummate the Share Exchange, Accessity and each
of Neil Koehler, Ryan Turner, William Jones, Andrea Jones and Tom Koehler will
enter into mutually acceptable noncompetition and nonsolicitation agreements
providing for, among other things, the agreement by each person not to compete
with Accessity nor solicit the employment of any then current employees of
Accessity for a stated period of time after the consummation of the Share
Exchange.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Accessity, PEI, Kinergy and ReEnergy intend that the consummation of the
Share Exchange will be treated as part of a unified plan for the exchange of
stock that is qualified for non-recognition treatment under Section 351 of the
Code, since no consideration that constitutes "other property or money" within
the meaning of Section 351(b) of the Code is being transferred by Accessity for
the ownership interests of the shareholders of PEI and the limited liability
company members of Kinergy and ReEnergy, and the shareholders of PEI and the
limited liability company members of Kinergy and ReEnergy will be "in control"
of Accessity within the meaning of Section 351(a) of the Code upon consummation
of the Share Exchange. Each of Accessity, PEI, Kinergy and ReEnergy has agreed
in the Share Exchange Agreement that they will not take a position on any tax
return that is inconsistent with such characterization.
Neither Accessity nor any of the Acquired Companies has requested, or will
request or receive, a ruling from the IRS or an opinion from legal counsel with
regard to any of the federal income tax consequences of the Share Exchange.
A successful IRS challenge to the non-recognition status of the Share
Exchange would result in significant adverse tax consequences to the
shareholders of PEI and the limited liability company members of Kinergy and
ReEnergy. Such shareholder or member would recognize gain or loss with respect
to surrendered shares of PEI capital stock or such member's limited liability
company interest, as the case may be, equal to the difference between the tax
basis in such shares or such limited liability company interest and the fair
market value, as of the closing of the Share Exchange, of the Accessity common
stock received in exchange therefor. In such event, a shareholder's or member's
aggregate basis in the Accessity common stock so received would equal its fair
market value, and such shareholder's or member's holding period for such stock
would begin the day after the closing date.
Even if the Share Exchange qualifies for non-recognition treatment, a
recipient of Accessity common stock would recognize income to the extent that,
for example, any such shares were determined to have been received in exchange
for services, to satisfy obligations or in consideration for anything other than
the capital stock or limited liability company membership interest surrendered.
In addition, to the extent that a recipient of Accessity common stock were
treated as receiving (directly or indirectly) consideration other than Accessity
common stock in exchange for such capital stock or limited liability company
membership interest, gain, if any, would have to be recognized.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE SHARE EXCHANGE. THUS,
HOLDERS OF PEI CAPITAL STOCK AND LIMITED LIABILITY COMPANY MEMBERS OF KINERGY
AND REENERGY ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE SHARE EXCHANGE, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF
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FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS AND THE EFFECTS OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
Based upon the current capitalization of each of Accessity, PEI, Kinergy
and ReEnergy, upon the consummation of the Share Exchange, the former
shareholder interests of PEI will own a larger percentage of the outstanding
shares of Accessity than the former shareholder interests of Accessity, Kinergy
and ReEnergy, and accordingly, PEI will be considered to be the acquiring entity
for financial accounting purposes.
The Share Exchange will be accounted for using the purchase method of
accounting, in accordance with generally accepted accounting principles. Under
the purchase method of accounting, assets and liabilities of the Acquired
Companies are recorded at fair market value at the date of the acquisition, with
any excess consideration paid over the fair market values recorded as goodwill.
Operating results of the businesses acquired are included in the consolidated
statements of income from the date of the acquisition forward.
The historical financial statements of Accessity will be the financial
statements of Accessity, prior to the closing of the Share Exchange. Following
the Closing of the Share Exchange, the results of operations of Accessity will
consist of the results of operations of PEI, Kinergy and ReEnergy.
The Unaudited Pro Forma Condensed Combined Financial Statements appearing
elsewhere in this proxy statement are based upon certain assumptions and
allocate the purchase price to assets and liabilities based upon valuations of
Kinergy and ReEnergy. The unaudited pro forma adjustments and combined amounts
are included for information purposes only. If the Share Exchange is
consummated, Accessity's financial statements will reflect the effects of the
acquisition adjustments only from the date of closing of the Share Exchange.
REGULATORY MATTERS
ANTITRUST. The Share Exchange is not subject to the premerger notification
requirements of the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended or, HSR Act. However, the FTC or the Antitrust Division of the United
States Department of Justice could take such action under the antitrust laws as
it deems necessary or desirable in the public interest, including seeking to
enjoin consummation of the Share Exchange or seeking to cause divestiture of
significant assets of Accessity, PEI, Kinergy or ReEnergy or their respective
subsidiaries. There can be no assurance that a challenge to the Share Exchange
on antitrust grounds will not be made, or, if such challenge is made, of what
the result would be. Consummation of the Share Exchange is conditioned upon,
among other things, the absence of any temporary restraining order, preliminary
or permanent injunction, or other order issued by any federal or state court in
the United States which prevents the consummation of the Share Exchange.
GOVERNMENTAL AND REGULATORY APPROVALS. Other than compliance with the
federal securities laws and applicable securities laws of the States of
California, Oregon, Virginia, Connecticut, Florida, Nevada, Ohio, Texas,
Michigan, Pennsylvania, North Carolina and New York, Accessity is not aware of
any governmental or regulatory approvals required for consummation of the Share
Exchange.
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NO DISSENTERS' RIGHTS FOR SHAREHOLDERS OF PEI
Because the Share Exchange is a voluntary offer by Accessity to holders of
shares of PEI common stock to exchange their shares of PEI common stock for
restricted shares of Accessity common stock and to holders of options and
warrants to acquire shares of PEI common stock to exchange their options and
warrants for warrants to acquire shares of Accessity common stock, and because
the former shareholders of PEI would comprise holders of a substantial majority
(approximately 83% on a fully-diluted basis) of the shares of Accessity common
stock after giving effect to the Share Exchange (without giving effect to the
acquisition by Accessity of Kinergy and ReEnergy pursuant to the Share
Exchange), the transaction would not constitute a statutory merger or
reorganization which would make dissenters' rights available to holders of PEI
common stock under applicable state law.
However, the proposed reincorporation of Accessity in the State of
Delaware to be consummated immediately preceding the consummation of the Share
Exchange, if the Share Exchange is approved by the Accessity shareholders, will
give rise to dissenters' rights for Accessity's shareholders. See "Proposal
7--Approval of Delaware Reincorporation Proposal--Dissenters' Rights."
NO DISSENTERS' RIGHTS FOR MEMBERS OF KINERGY OR REENERGY
Because the Share Exchange is a voluntary offer by Accessity to the
respective limited liability company members of Kinergy and ReEnergy to exchange
their limited liability company membership interests in Kinergy and ReEnergy for
restricted shares of Accessity common stock, the transaction would not
constitute a statutory conversion, merger or reorganization which would give
rise to dissenters' rights under applicable state law.
However, the proposed reincorporation of Accessity in the State of
Delaware to be consummated immediately preceding the consummation of the Share
Exchange, if the Share Exchange is approved by the Accessity shareholders, will
give rise to dissenters' rights for Accessity's shareholders. See "Proposal
5--Approval of Delaware Reincorporation Proposal--Dissenters' Rights."
RESTRICTIONS ON RESALE OF ACCESSITY COMMON STOCK
Shares of Accessity common stock issued in connection with the Share
Exchange will be "restricted securities" within the meaning of Rule 144
promulgated under the Securities Act, as amended, and are not freely
transferable and are subject to certain restrictions on resale. In general,
under Rule 144, as currently in effect, a person who owns shares that were
acquired from Accessity or an affiliate of Accessity at least one year prior to
the proposed sale is entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the number of shares of
Accessity common stock then outstanding, which will equal approximately 227,816
shares immediately after the Share Exchange or (ii) the average weekly trading
volume of the Accessity common stock during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about
Accessity. Rule 144 also provides that affiliates of Accessity who sell shares
of Accessity common stock that are not restricted shares must nonetheless comply
with the same restrictions applicable to restricted shares with the exception of
the holding period requirement.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
Accessity for purposes of the Securities Act, at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any prior owner other
than affiliates of Accessity, is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
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Holders of approximately 1,252,200 shares of Accessity common stock who
were holders of shares of PEI common stock prior to the consummation of the
Share Exchange, will have certain rights to require Accessity to register the
shares of Accessity common stock held by them for resale pursuant to a
registration statement filed under the Securities Act with the SEC.
NASDAQ SMALLCAP MARKET LISTING
Accessity expects to apply for the listing of all shares of the Combined
Company's common stock (including those share of Accessity common stock to be
issued in connection with the Share Exchange) on The Nasdaq SmallCap Market
under the symbol "PEIX." No assurance can be given that the Combined
Company will be successful in obtaining this listing on The Nasdaq SmallCap
Market. See "Risk Factors."
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THE SHARE EXCHANGE AGREEMENT
GENERAL
The following is a summary of the material provisions of the Share
Exchange Agreement, a copy of which is attached as APPENDIX A to this proxy
statement and is incorporated herein by reference. However, the following is not
a complete statement of all provisions of the Share Exchange Agreement and
related agreements. Statements made in this proxy statement with respect to the
terms of the Share Exchange Agreement and such related agreements are qualified
in their respective entireties by reference to the more detailed information set
forth in the Share Exchange Agreement and such related agreements. Capitalized
terms used in this summary but not defined in this proxy statement shall have
the meanings ascribed to them in the Share Exchange Agreement.
The Share Exchange Agreement provides for the exchange of shares of
Accessity common stock for all of the issued and outstanding shares of PEI
common stock and limited liability company membership interests of Kinergy and
ReEnergy and cancellation of all issued and outstanding options and warrants to
acquire shares of PEI common stock in consideration of the issuance to the
holders thereof of warrants to acquire shares of Accessity common stock on the
same terms and conditions. Each of PEI, Kinergy and ReEnergy will continue to
exist as of the consummation of the Share Exchange, but each will become a
wholly-owned subsidiary of Accessity and the former shareholders, option holders
and warrant holders of PEI and the former limited liability company members of
each of Kinergy and ReEnergy will become shareholders of Accessity. Immediately
prior to the consummation of the Share Exchange, Accessity will reincorporate
into Delaware pursuant to the merger of Accessity with and into a newly-formed
wholly-owned subsidiary of Accessity named Pacific Ethanol, Inc., which newly
formed company will be the surviving corporation in such reincorporation merger.
Accordingly, Accessity (as Pacific Ethanol, Inc., a Delaware corporation) will
retain all of its purposes, objects, rights, privileges, powers and franchises
unaffected by the reincorporation merger. The reincorporation merger will become
effective upon the filing of articles of merger and related certificates of
approval with the Secretary of State of the State of New York and the Secretary
of State of Delaware. Such filings are to be made as promptly as practicable
prior to the consummation of the Share Exchange closing. It is currently
anticipated that the effective time of the Share Exchange and the Delaware
Reincorporation will occur during first quarter of 2005. There can be no
assurance, however, that the conditions to the Share Exchange will be satisfied
by such time, or at all, or that the Share Exchange Agreement will not be
terminated. See "--Conditions to the Share Exchange."
SHARE EXCHANGE CONSIDERATION
PEI COMMON STOCK. At the closing of the Share Exchange, each share of PEI
common stock then outstanding will be exchanged for one share of Accessity
common stock. The 1:1 exchange ratio was determined by Accessity and PEI
pursuant to negotiation and was not based on any particular valuation or other
financial data with respect to either company or a comparison of comparable
companies or transactions.
OPTIONS AND WARRANTS TO ACQUIRE PEI COMMON STOCK. At the closing of the
Share Exchange, all options and warrants to acquire shares of PEI common stock
will be cancelled in consideration for the issuance by Accessity to the holders
of such options and warrants of warrants to acquire the same number of shares of
Accessity common stock at the same exercise price and on the same terms and
conditions as provided for pursuant to the cancelled options and warrants to
acquire shares of PEI common stock.
NO FRACTIONAL SHARES. No fractional shares of Accessity common stock will
be issued in connection with the Share Exchange, and no certificates for any
such fractional shares will be issued. In lieu of such fractional shares, any
shares of PEI common stock that represent a fractional share will be rounded up
to
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the nearest whole share and the holder of such shares will receive a whole
number of shares of Accessity common stock pursuant to the Share Exchange.
LIMITED LIABILITY COMPANY INTERESTS OF KINERGY. At the closing of the
Share Exchange, the sole limited liability company member of Kinergy will assign
and transfer to Accessity all of the limited liability company interests in
Kinergy in consideration for the issuance to such member of 3,875,000 shares of
Accessity common stock, or 38,750 for each 1% limited liability company
membership interest in Kinergy. This exchange ratio was determined by Accessity
and Kinergy pursuant to negotiation and was not based on any particular
valuation or other financial data with respect to either company or a comparison
of comparable companies or transactions.
LIMITED LIABILITY COMPANY INTERESTS OF REENERGY. At the closing of the
Share Exchange, the limited liability company members of ReEnergy will assign
and transfer to Accessity all of the limited liability company interests in
ReEnergy in consideration for the issuance to such members of 1,250 shares of
Accessity common stock for each 1% limited liability company membership interest
in Kinergy. This exchange ratio was determined by Accessity and ReEnergy
pursuant to negotiation and was not based on any particular valuation or other
financial data with respect to either company or comparison of comparable
companies or transactions.
INDEMNIFICATION
The representations and warranties made by PEI, Kinergy and ReEnergy and
the holders of ownership interests in such companies in the Share Exchange
Agreement shall expire on the second anniversary of the closing date unless a
claim for recovery based on an alleged inaccuracy or breach of any of such
representations or warranties is made prior to the second anniversary of the
closing date, in which case, such representation or warranty shall survive the
second anniversary of the closing until such time as such claim is fully and
finally resolved (except for the representations and warranties made with
respect to taxes and tax returns, title to properties and encumbrances,
intellectual property, compliance with laws and environmental matters, which in
each case will survive until the expiration of the applicable statute of
limitations for the underlying cause of action plus six months). The Acquired
Companies shall, severally and not jointly, indemnify Accessity and its
officers, directors, shareholders, successors and assigns against any damages to
the extent arising from, relating to or otherwise in respect of (i) any
inaccuracy in or breach of any representation or warranty made by such Acquired
Company or (ii) any failure of such Acquired Company to perform any agreements
or covenants of such Acquired Company contained in the Share Exchange Agreement.
Similarly, the representations and warranties made by Accessity in the
Share Exchange shall expire on the second anniversary of the closing date unless
a claim for recovery based on an alleged inaccuracy or breach of any of such
representations or warranties is made prior to the earlier of the second
anniversary of the closing date, in which case, such representation or warranty
shall survive the second anniversary of the closing until such time as such
claim is fully and finally resolved. Accessity shall indemnify each of the
Acquired Companies and their respective owners, warrant holders and option
holders, officers, directors, shareholders, successors and assigns against any
damages to the extent arising from, relating to or otherwise in respect of (i)
any inaccuracy in or breach of any representation or warranty made by Accessity
or (ii) any failure of Accessity to perform any agreements or covenants of
Accessity contained in the Share Exchange Agreement.
No indemnification payment shall be required to be made until the total of
all damages that have been suffered or incurred exceeds $25,000 in the
aggregate, at which point the indemnified party is entitled to be indemnified
for the entire amount of such damages.
In the event the Share Exchange Agreement is approved by the Accessity
shareholders and the holders of PEI common stock and holders of options and
warrants to acquire PEI common stock execute
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the Share Exchange Agreement, Ryan Turner will be appointed as the shareholder
representative, initial agent and attorney-in-fact for each shareholder, option
holder and warrant holder of PEI that executes the Share Exchange Agreement. The
shareholder representative will be authorized to act for and on behalf of the
shareholders, option holders and warrant holders of PEI to, among other things,
give and receive notices and communications and agree to, negotiate and enter
into amendments of the Share Exchange Agreement. Decisions, acts, consents or
instructions of the shareholder representative will constitute decisions of all
of the shareholders, option holders and warrant holders of PEI that execute the
Share Exchange Agreement and be final, binding and conclusive upon each of such
shareholders, option holders and warrant holders.
STOCK OWNERSHIP FOLLOWING THE SHARE EXCHANGE
Based upon the number of shares of PEI common stock issued and outstanding
as of November 30, 2004, an aggregate of approximately 13,433,866 shares of
Accessity common stock will be issued to security holders of PEI, an aggregate
of 3,875,000 shares of Accessity common stock will be issued to Neil Koehler,
the sole limited liability company member of Kinergy and an aggregate of 125,000
shares of Accessity common stock will be issued to the limited liability company
members of ReEnergy. Based upon the number of shares of Accessity common stock
issued and outstanding as of the Accessity record date (assuming no exercise of
outstanding options, warrants or other rights to purchase Accessity common
stock), the former holders of PEI common stock and the former limited liability
company members of Kinergy and ReEnergy would hold in the aggregate, on a
fully-diluted basis, and have voting power with respect to approximately 86% of
the total issued and outstanding shares of Accessity common stock after
consummation of the Share Exchange.
STOCK CERTIFICATES
At the closing of the Share Exchange, the transfer agent will deliver to
the holders of PEI common stock (subject to their delivery of stock certificates
representing their ownership of shares of PEI common stock, accompanied by stock
powers separate from such stock certificate duly executed by such holder) and
the former limited liability company members of Kinergy and ReEnergy valid
certificates representing shares of Accessity common stock. No fractional shares
of Accessity common stock will be issued in connection with the Share Exchange,
and no certificates for any fractional shares will be issued. See "--Share
Exchange Consideration-No Fractional Shares."
If any PEI stock certificate has been lost, stolen or destroyed, Accessity
may require the owner of such lost, stolen or destroyed PEI stock certificate to
provide an appropriate affidavit and to deliver a bond as indemnity against any
claim that may be made against the transfer agent, Accessity or PEI with respect
to such PEI stock certificate.
CORPORATE MATTERS
In connection with the consummation of the Delaware Reincorporation
immediately prior to the consummation of the Share Exchange, holders of
Accessity common stock will not be required to exchange their stock certificates
for new stock certificates of the surviving Delaware corporation. The stock
certificates representing shares of Accessity common stock will continue to
represent and evidence their ownership of the same number of shares of the
surviving Delaware corporation. However, shareholders may exchange their
certificates if they so choose.
As a result of the Delaware Reincorporation, the articles of incorporation
and bylaws of the Delaware Reincorporation Subsidiary as in effect immediately
prior to the effective time will become the controlling charter documents of
Accessity. The certificate of incorporation and bylaws of the surviving Delaware
Reincorporation Subsidiary, Pacific Ethanol, Inc., are included as APPENDIX D
AND E to this proxy statement, respectively. Immediately after the effective
time of the Delaware Reincorporation, the
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directors of the surviving corporation will be Neil Koehler, Ryan Turner, Frank
Greinke, John Pimentel, William Lyles and Kenneth J. Friedman and the executive
officers of the surviving corporation will be Neil Koehler, Tom Koehler, Ryan
Turner, Maria Tharpe and Doug Dickson. See "Operation, Management and Business
of Accessity After the Share Exchange."
CONDITIONS TO THE SHARE EXCHANGE
ACCESSITY. Accessity will complete the Share Exchange only if a number of
conditions are either satisfied by the Acquired Companies or waived by
Accessity, some of which include:
o the representations and warranties of each of the Acquired Companies
and the owners thereof made in the Share Exchange Agreement and in all
certificates and other documents delivered by such Acquired Company
are true and accurate;
o PEI has raised an additional $7 million in equity capital since
October 1, 2004 and prior to closing;
o each of the Acquired Companies performs and complies in all material
respects with all agreements, obligations and conditions contained in
the Share Exchange Agreement;
o holders of at least 95% of PEI's common stock, all of the holders of
options and warrants to acquire shares of PEI common stock and all of
the limited liability company members of each of Kinergy and ReEnergy
sign the Share Exchange Agreement;
o the Accessity shareholders approve the Share Exchange pursuant to the
Share Exchange Agreement and the consummation of the transactions
contemplated thereby and, if the Share Exchange is approved by the
shareholders, each of the other proposals to be voted on at the annual
meeting is also approved;
o Accessity receives all required consents, approvals, authorizations,
filings, notices and recordations of third parties;
o Accessity enters into a consulting and noncompetition agreement with
each of Barry Siegel, the Chairman of the Board, President and Chief
Executive Officer of Accessity, and with Philip Kart, the Chief
Financial Officer of Accessity;
o Accessity enters into noncompetition and nonsolicitation agreements
with Ryan Turner, Neil Koehler, William Jones, Andrea Jones and Tom
Koehler.
o Accessity is not required to issue to the holders of PEI common stock
and the respective limited liability company members of Kinergy and
ReEnergy or any other person more than 21,700,000 shares of Accessity
common stock on a fully-diluted basis;
o Accessity has completed its financial and legal due diligence
investigation of each of the Acquired Companies with results thereof
satisfactory to Accessity in its sole discretion;
o Accessity receives a fairness opinion regarding the Subsidiary
Transfer;
o there is no material adverse change to the business, financial
condition, operations or financial performance of any of the Acquired
Companies;
o this proxy statement is not subject to any proceedings commenced or
threatened by the SEC; and
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o there are no restraining orders, injunctions and other orders
preventing the consummation of the Share Exchange.
PEI, KINERGY AND REENERGY. Each of the Acquired Companies will complete
the Share Exchange only if a number of conditions are satisfied by Accessity or
waived by each of the Acquired Companies, some of which include:
o the representations and warranties of Accessity made in the Share
Exchange Agreement and in all certificates and other documents
delivered by Accessity are true and accurate;
o Accessity performs and complies in all material respects with all
agreements, obligations and conditions contained in the Share Exchange
Agreement;
o holders of at least 95% of PEI's common stock, all of the holders of
options and warrants to acquire shares of PEI common stock and all of
the limited liability company members of each of Kinergy and ReEnergy
sign the Share Exchange Agreement;
o the Accessity shareholders approve the Share Exchange pursuant to the
Share Exchange Agreement and the consummation of the transactions
contemplated thereby and, if the Share Exchange is approved by the
shareholders, each of the other proposals to be voted on at the annual
meeting (other than the election of a Class III director and the
Corporate Name Change) is approved;
o each Acquired Company receives all required consents, approvals,
authorizations, filings, notices and recordations of third parties;
o the Acquired Companies receive written resignations of all officers
and directors of Accessity as of the consummation of the Share
Exchange, other than the resignation of Kenneth J. Friedman;
o the shares of Accessity common stock to be issued pursuant to the
Share Exchange are validly issued, fully paid and nonassessable under
applicable law and have been duly issued in a non-public offering in
compliance with all applicable federal and state securities laws;
o at the time of the closing, Accessity has at least the same cash
balance as reported in its Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2004 filed with the SEC, subject to certain
agreed upon adjustments;
o Accessity has not more than 2,800,000 shares of capital stock issued
and outstanding on a fully-diluted basis immediately preceding the
closing of the Share Exchange and there are no shares of preferred
stock outstanding;
o the Subsidiary Transfer is completed and each of Barry Siegel and
Philip Kart has waived the change in control provisions set forth in
his respective employment agreement with Accessity;
o the Subsidiary Sale is completed;
o Accessity has adopted the 2004 Plan;
o Accessity has established an escrow account into which Accessity will
deposit the net proceeds from a recovery from the current arbitration
proceedings with Presidion Solutions, Inc. to be used solely to fund
the legal fees, expenses and disbursements incurred in connection with
the Mercator Action;
103
o Accessity has completed its financial and legal due diligence
investigation of each of the Acquired Companies with results thereof
satisfactory to Accessity in its sole discretion;
o Accessity has received a fairness opinion regarding the Subsidiary
Transfer;
o there is no material adverse change to the business, financial
condition, operations or financial performance of any of the Acquired
Companies;
o this proxy statement is not subject to any proceedings commenced or
threatened by the SEC; and
o there are no restraining orders, injunctions and other orders
preventing the consummation of the Share Exchange.
REPRESENTATIONS AND WARRANTIES
The Share Exchange Agreement contains certain representations and
warranties, including, without limitation, representations and warranties by
each of the Acquired Companies as to:
o due organization, standing, and power to conduct business and
subsidiaries;
o the articles of incorporation and the bylaws of PEI and the articles
of organization and operating agreement of each of Kinergy and
ReEnergy;
o authority and binding nature of the Share Exchange Agreement;
o capitalization;
o financial statements;
o absence of certain changes;
o title to assets;
o receivables;
o equipment and leaseholds;
o intellectual property;
o contracts;
o liabilities;
o compliance with applicable laws and legal requirements;
o governmental authorizations;
o tax matters;
o employee and labor matters and benefit plans;
o environmental matters;
104
o insurance;
o legal proceedings and orders;
o suppliers and customers;
o the authority and binding nature of the Share Exchange Agreement;
o non-contravention and consents;
o disclosure; and
o brokers, finders and investment bankers and their fees or commissions.
The Share Exchange Agreement also contains representations and warranties
by the holders of PEI common stock and the limited liability company members of
Kinergy and ReEnergy as to:
o due power and authority to enter into and perform the Share Exchange
Agreement;
o title to their shares of PEI common stock or limited liability company
membership interests, as the case may be;
o non-contravention and consents; and
o compliance with applicable securities laws (including their status as
an "accredited investor" as such term is defined in Rule 501 of
Regulation D promulgated under the rules and regulations of the
Securities Act).
The Share Exchange Agreement contains further representations and
warranties by Accessity as to:
o due organization, standing and power to conduct business;
o absence of certain changes;
o filings with the SEC and financial statements;
o authority and binding nature of the Share Exchange Agreement;
o valid issuance of the Accessity common stock to be issued pursuant to
the Share Exchange;
o compliance with applicable laws and legal requirements;
o non-contravention and consents; and
o disclosure.
COVENANTS
COVENANTS OF ACCESSITY. During the pre-closing period, Accessity shall:
o provide each of PEI, Kinergy and ReEnergy and their respective
representatives with reasonable access during normal business hours to
Accessity's properties, books, records and personnel in
105
order that they and their respective representatives may have the
opportunity to make such reasonable investigations as they shall
desire to make of the affairs of Accessity;
o conduct its business and operations in the ordinary course of business
consistent with past practices;
o maintain its properties and assets in good condition and repair and
not dispose of any assets;
o keep in full force all of its insurance policies;
o not borrow any money, except for amounts that are not in the aggregate
material to its financial condition;
o use its commercially reasonable efforts to keep available the services
of present employees;
o not declare, set aside or pay any dividend or distribution;
o maintain and preserve the goodwill of its suppliers and customers;
o not lend any amount to anyone, other than advances for travel and
expenses which are incurred in the ordinary course of business;
o not guarantee or act as a surety for any material obligation;
o not waive or release any right or claim except in the ordinary course
of business consistent with past practices;
o not issue or sell any shares of its capital stock (except upon the
exercise of outstanding options, warrants or other rights to acquire
such capital stock or upon conversion of any outstanding securities)
or any warrants or other rights to acquire its capital stock, or
accelerate the vesting of any options;
o not split, recapitalize or combine the outstanding shares of its
capital stock;
o not form, merge, consolidate or reorganize with, or acquire, any
entity (other than in connection with the Delaware Reincorporation);
o not amend its articles of incorporation or bylaws (except in
connection with the Delaware Reincorporation);
o prepare and cause to be filed with the SEC this proxy statement and
call and hold the Accessity annual meeting to which this proxy
statement relates;
o comply with all regulatory approvals and provisions of any applicable
governmental body to ensure that the issued shares of the Accessity
common stock in connection with the Share Exchange will be exempted
from registration or qualification under the securities laws of every
jurisdiction of the United States in which any shareholder of PEI or
any limited liability company member of Kinergy or ReEnergy has an
address of record; and
o distribute to the shareholders of PEI and the limited liability
company members of Kinergy and ReEnergy a copy of the Share Exchange
Agreement (together with the disclosure schedules thereto) for
execution, together with a copy of this proxy statement.
106
COVENANTS OF PEI, KINERGY AND REENERGY. The Share Exchange Agreement also
requires that during the same period, each of PEI, Kinergy and ReEnergy shall:
o provide Accessity and its representatives with reasonable access
during normal business hours to its properties, books, records and
personnel in order that Accessity and its representatives may have the
opportunity to make such reasonable investigations as they shall
desire to make of such company;
o deliver disclosure schedules relating to its representations and
warranties in the Share Exchange Agreement as soon as practicable and,
in any event, a reasonable time prior to the closing of the Share
Exchange;
o conduct its business and operations in the ordinary course of business
consistent with past practices;
o maintain its properties and assets in good condition and repair and
not dispose of any assets;
o keep in full force all of its insurance policies;
o not borrow any money, except for amounts that are not in the aggregate
material to its financial condition;
o use its commercially reasonable efforts to keep available the services
of present employees;
o not declare, set aside or pay any dividend or distribution;
o maintain and preserve the goodwill of its suppliers and customers;
o not lend any amount to anyone, other than advances for travel and
expenses which are incurred in the ordinary course of business;
o not guarantee or act as a surety for any material obligation;
o not waive or release any right or claim except in the ordinary course
of business consistent with past practices;
o not split, recapitalize or combine the outstanding shares of its
capital stock;
o not form, merge, consolidate or reorganize with, or acquire, any
entity; and
o not amend its articles of incorporation, operating agreement or
bylaws.
During the pre-closing period, each of Accessity, PEI, Kinergy and
ReEnergy shall promptly notify the others in writing, after receipt by it, of:
o any notice of, or other communication relating to, any default or
event which, with notice or the lapse of time or both, would be
reasonably likely to become a default under any indenture, instrument
or agreement material to it or its operations, condition (financial or
otherwise), or to which it is a party or by which it or its assets or
properties are bound; and
o any notice or other communication from or to any third party alleging
or stating that the consent of such third party is or may be required
in connection with the transactions contemplated by the Share Exchange
Agreement.
107
NON-SOLICITATION. Pursuant to the Share Exchange Agreement, each of
Accessity, PEI, Kinergy and ReEnergy has agreed that it will not, directly or
indirectly, contact, initiate or enter into or conduct discussions or
negotiations with any person with respect to the sale of all or any part of its
assets or a merger or consolidation with any other person (other than in
connection with the Delaware Reincorporation), except to the extent otherwise
required in the exercise of the fiduciary duties of its board of directors or
managers, as the case may be, to its shareholders or limited liability company
members, as the case may be, if it shall have received a Superior Proposal from
a third party or third parties.
A "Superior Proposal" means a bona fide, unsolicited written proposal made
by a third party which is (a)(i) for a sale, exchange, transfer or other
disposition of more than 50% of its assets, taken as a whole, in a single
transaction or a series of related transactions, or (ii) for the acquisition,
directly or indirectly, by such third party of beneficial ownership of more than
50% of its stock or limited liability company membership interests, as the case
may be, whether by merger, reorganization, consolidation, share exchange or
purchase, business combination, recapitalization, liquidation, dissolution or
similar transaction, and which is (b) otherwise on terms which the board or
managers of the company, as the case may be, in good faith has concluded (after
consultation with its financial advisors and legal counsel), taking into
account, among other things, all legal, financial, regulatory and other aspects
of the proposal and the third party making the proposal (x) that the proposal
would, if consummated, result in a transaction that is more favorable to its
shareholders (in their capacity as shareholders) or members (in their capacity
as members), as the case may be, from a financial point of view, than the
transactions contemplated by the Share Exchange Agreement and (y) that the
proposal is reasonably capable of being consummated.
CONDITIONS RELATING TO STOCK OPTIONS AND WARRANTS. For a description of
the treatment of stock options and warrants to purchase PEI common stock, see
the caption above entitled " --Options and Warrants to Acquire PEI Common
Stock." There are no outstanding options, warrants or other rights to acquire
any limited liability company membership interests of Kinergy or ReEnergy.
FORM S-8 FILINGS. Pursuant to the Share Exchange Agreement, Accessity has
agreed to file a registration statement on Form S-8 in regard to the shares of
Accessity common stock issuable to Barry Siegel and Philip Kart and to file a
registration statement on Form S-8 in regard to the 2004 Plan.
NONCOMPETITION AND NONSOLICITATION AGREEMENTS
Upon consummation of the Share Exchange, and as a condition precedent to
the obligation of Accessity to consummate the Share Exchange, Accessity and each
of Neil Koehler, Ryan Turner, William Jones, Andrea Jones and Tom Koehler will
enter into mutually acceptable noncompetition and nonsolicitation agreements
providing for, among other things, the agreement by each person not to compete
with Accessity nor solicit the employment of any then current employees of
Accessity for a stated period of time after the consummation of the Share
Exchange.
TERMINATION
The Share Exchange Agreement can be terminated at any time prior to the
closing:
o by the mutual consent of Accessity and each of the Acquired Companies;
o by either Accessity or any of the Acquired Companies, upon written
notice, if there has been a material misrepresentation or any breach
on the part of a party hereto in the representations, warranties or
covenants contained in this Agreement which is not cured within ten
business days;
108
o by either Accessity or the Acquired Companies if the closing has not
occurred on or before January 7, 2005;
o by Accessity, if the shareholders of Accessity shall not have approved
the Share Exchange Agreement and each of the other proposals;
o by Accessity, if the Board of Directors of Accessity shall have
received a Superior Proposal;
o by either Accessity or any of the Acquired Companies, upon written
notice, if Accessity or such Acquired Company, as the case may be,
shall have determined in good faith not to proceed with the closing on
the basis of the results of its financial and legal due diligence
investigation of the other parties to this Agreement;
o by either Accessity or any of the Acquired Companies, if all the
conditions for closing shall not have been satisfied or waived on or
before the Final Date other than as a result of a breach of this
Agreement by the terminating party;
o by either Accessity or any of the Acquired Companies, if a permanent
injunction or other order by any federal or state court which would
make illegal or otherwise restrain or prohibit the consummation of the
Share Exchange or the other transactions contemplated hereby shall
have been issued and shall have become final and nonappealable; or
o by either Accessity or any of the Acquired Companies, if holders of 1%
or more of the common stock of Accessity exercise their dissenters'
rights in connection with the proposed Delaware Reincorporation.
EXPENSES AND TERMINATION FEES
Pursuant to the Share Exchange Agreement, all fees and expenses incurred
in connection with the Share Exchange Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses, whether
or not the Share Exchange is consummated. However, if Accessity receives a
Superior Proposal and terminates the Share Exchange Agreement, then Accessity is
required to pay the reasonable fees and expenses of each of PEI, Kinergy and
ReEnergy up to an aggregate maximum amount of $150,000 for all such companies.
109
HISTORIC AND PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of Accessity, PEI,
Kinergy and ReEnergy as of September 30, 2004, and the pro forma capitalization
of the Combined Company after giving effect to the Share Exchange, Subsidiary
Transfer and Subsidiary Sale. This table should be read in conjunction with the
"Unaudited Pro Forma Condensed Combined Financial Statements" included elsewhere
in this proxy statement, and the Accessity, PEI, Kinergy and ReEnergy historical
financial statements, including the notes thereto, set forth in APPENDIX F.
AS OF SEPTEMBER 30, 2004
-------------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------------------------- COMBINED
ACCESSITY PEI KINERGY REENERGY COMPANY
----------- ----------- ----------- ----------- -----------
Current maturities of long term debt ............ $ -- $ -- $ -- $ -- $ --
Long-term debt, excluding current portion........ -- 3,967,544 -- -- 3,967,544
Total stockholders' equity ...................... 4,024,830 1,841,830 1,826,326 89,268 25,478,683
Total capitalization ............................ 4,024,830 5,809,374 1,826,326 89,268 29,446,237 ]
110
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY
Accessity common stock is quoted on The Nasdaq SmallCap Market under the
symbol "ACTY." The table below sets forth for the quarters indicated, the
reported high and low closing sales prices of Accessity common stock as reported
on The Nasdaq SmallCap Market. Such prices are inter-dealer quotations without
retail markups, markdowns or commissions, and may not represent actual
transactions.
HIGH LOW
-------- --------
YEAR ENDED DECEMBER 31, 2002
First Quarter ................................. $ 10.00 $ 6.25
Second Quarter ................................ 7.35 3.80
Third Quarter ................................. 5.70 3.50
Fourth Quarter ................................ 3.80 1.55
YEAR ENDED DECEMBER 31, 2003
First Quarter ................................. $ 5.05 $ 1.35
Second Quarter ................................ 2.80 1.80
Third Quarter ................................. 2.90 1.75
Fourth Quarter ................................ 3.90 2.35
YEAR ENDING DECEMBER 31, 2004
First Quarter ................................. $ 2.61 $ 1.70
Second Quarter ................................ 6.09 1.62
Third Quarter.................................. 5.71 4.50
Fourth Quarter (through December 10, 2004)..... 6.00 4.48
As of the record date, there were approximately 342 record holders of
Accessity common stock. As of the record date, there were approximately 72
record holders of PEI common stock. As PEI is a privately held company, no
public market exists for PEI common stock. Neither Accessity nor PEI has ever
paid cash dividends on their respective common stock. The policies of Accessity
and PEI are to retain earnings, if any, for use in their respective businesses.
As of the record date, there was one limited liability company member of
Kinergy. As of the record date, there were four limited liability company
members of ReEnergy. As each of Kinergy and ReEnergy is a limited liability
company, all net income (or net loss) has been allocated to the members of such
companies each year.
The following table sets forth the closing price per share of Accessity
common stock as reported on The Nasdaq SmallCap Market and the equivalent per
share price, as explained below, of PEI common stock on May 13, 2004 (the last
day of trading before the day the Share Exchange was announced), on October 29,
2004, the record date, and on December 10, 2004, the date of this proxy
statement.
ACCESSITY EQUIVALENT PEI
COMMON STOCK PER SHARE
PER SHARE PRICE PRICE(1)
May 13, 2004..................................... $2.84 $2.84
October 29, 2004................................. 4.92 4.92
December 10, 2004................................ 6.00 6.00
__________________
(1) The equivalent PEI price represents the price of one share of Accessity
common stock.
The sole limited liability company member of Kinergy will have the right
to receive 38,750 shares of Accessity common stock for each 1% of outstanding
limited liability company interest he owns. Accordingly, the equivalent value
for each 1% of outstanding limited liability company interests of Kinergy owned
by the sole limited liability company member of Kinergy on May 13, 2004 (the
last day of trading before the day the Share Exchange was announced), on October
29, 2004, the record date, and
111
December 10, 2004, the date of this proxy statement, were $110,500, $190,650 and
$232,500, respectively.
The limited liability company members of ReEnergy will have the right to
receive 1,250 shares of Accessity common stock for each 1% of outstanding
limited liability company interests they own. Accordingly, the equivalent value
for each 1% of outstanding limited liability company interests owned by the
limited liability company members of ReEnergy on May 13, 2004 (the last day of
trading before the day the Share Exchange was announced), on October 29, 2004,
the record date, and December 10, 2004 the date of this proxy statement, were
$3,550, $6,150 and $7,500, respectively.
The actual prices of Accessity or Combined Company common stock prior to,
at the time of or subsequent to the Share Exchange is consummated cannot be
guaranteed or predicted. If the Share Exchange is consummated, Accessity will
transfer both of Accessity's existing operating subdivision to Barry Siegel, the
current Chairman of the Board, President and Chief Executive Officer of
Accessity, and the businesses conducted to date by Accessity will no longer be
conducted by Accessity or the Combined Company. Thus, historical prices of
Accessity's common stock will have little or no bearing on the future prices of
Accessity's or the Combined Company's common stock.
112
UNAUDITED PRO FORMA CONDENSED
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined consolidated
financial statements are based upon the consolidated financial statements of
Accessity and PEI and the financial statements of Kinergy and ReEnergy, combined
and adjusted to give effect to the Share Exchange, Subsidiary Transfer and
Subsidiary Sale.
The following unaudited pro forma combined condensed statements of
operations for the nine months ended September 30, 2004 and for the year ended
December 31, 2003 give effect to the Share Exchange, Subsidiary Transfer and
Subsidiary Sale as if each had occurred at the beginning of each period
presented. The unaudited pro forma combined condensed statements of operations
for the nine months ended September 30, 2004 was prepared based upon the
unaudited statements of operations of each of Accessity, PEI, Kinergy and
ReEnergy for the nine months ended September 30, 2004. The unaudited pro forma
combined condensed statement of operations for the year ended December 31, 2003
was prepared based upon the audited statements of operations of each of
Accessity, Kinergy and ReEnergy for the year ended December 31, 2003 and of PEI
for the period from January 30, 2003 (inception) to December 31, 2003.
The following unaudited pro forma combined condensed balance sheet at
September 30, 2004 gives effect to the Share Exchange, Subsidiary Transfer and
Subsidiary Sale as if each had occurred on such date, and was prepared based
upon the unaudited balance sheet of each of Accessity, PEI, Kinergy and ReEnergy
as of September 30, 2004.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with each of the Accessity, PEI, Kinergy and ReEnergy
audited financial statements and unaudited interim financial statements,
including any notes to each of the above, which are set forth in this proxy
statement at APPENDIX F.
The unaudited pro forma combined condensed financial information is not
necessarily indicative of the results of operations or financial position of the
Combined Company that would have occurred had the Share Exchange, Subsidiary
Transfer and Subsidiary Sale occurred at the beginning of each period presented
or on the date indicated, nor are they necessarily indicative of future
operating results or financial position.
The unaudited pro forma adjustments are based upon information set forth
in this proxy statement, and certain assumptions included in the notes to the
unaudited pro forma combined condensed financial statements. Each of Accessity,
PEI, Kinergy and ReEnergy believes the pro forma assumptions are reasonable
under the circumstances.
Since the Share Exchange Agreement specifies that the business operations
of Accessity will be either sold, terminated or transferred to Barry Siegel,
with the business operations and management of the Acquired Companies becoming
the remaining businesses, and with PEI as the controlling entity in the Share
Exchange, the pro forma adjustments eliminate all of the operating businesses of
Accessity (i.e., Sentaur and DriverShield), as well as a substantial portion of
its overhead expenses at the Coral Springs, Florida location, which will not be
part of the continuing operations of PEI, Kinergy and ReEnergy. Further, the pro
forma financial data reflects PEI as the accounting acquirer, with this
transaction reflected as a reverse acquisition and, accordingly, goodwill is not
recorded in conjunction with the shares issued by Accessity to PEI. However,
goodwill has been recorded relating to the shares being issued to Kinergy and
ReEnergy as those separate businesses are also being acquired at the closing of
the Share Exchange by the accounting acquiror, PEI. Upon consummation of the
Share Exchange, the financial statements issued will reflect the operating
results of PEI, Kinergy and ReEnergy.
113
In conjunction with eliminating the current operating expenses of
Accessity, the officers and employee salaries and benefits, and much of the
other operating expenses relating to the activities of Accessity's offices at
12514 West Atlantic Boulevard in Coral Springs, Florida, were considered
material nonrecurring costs of the continuing entity, and are eliminated from
the pro forma results based on specific contractual arrangements of the Share
Exchange Agreement. The Share Exchange Agreement requires the
termination/resignation of those individuals, and the shut down of activities in
Coral Springs, Florida, or the transfer of most other costs to Sentaur. However,
up to a maximum of $50,000 of the occupancy costs of the building in Coral
Springs, Florida were retained in the pro forma combined statement of operations
in accordance with a specific provision of the Share Exchange Agreement. This
building has been offered for sale and these retained costs will not be
recurring once the property is sold. Certain other costs of Accessity which are
on-going in nature, and typical for the business of the public company, and not
directly associated with the transaction, have also been retained in the pro
forma statements of operations. These retained costs include such items as
directors' and officers' insurance, Nasdaq fees, audit fees, all legal fees,
record retention, 401(k) administrative expenses and EDGAR filing costs. It
should be noted that Accessity incurred a very high level of legal fees in both
calendar 2003 and the nine months ended September 30, 2004 predominantly
associated with due diligence on numerous other acquisition candidates, and
defending a breach of an agreement with one of those candidates. This level of
legal costs may not recur for PEI but were required to be retained in the pro
forma expenses pursuant to the rules relating to their preparation.
The pro forma presentation also includes an adjustment in both 2003 and
2004 for new management compensation arrangements of PEI officers, which are
contingent on the closing of the Share Exchange. This level of management and
its expense may not have been appropriate in those prior periods presented for a
private, smaller size organization. Finally, the allocation of the purchase
price for Kinergy and ReEnergy is based on the valuation by an independent
valuation firm and its determination of the excess consideration given allocated
between the identifiable assets and goodwill.
114
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
BALANCE SHEETS
September 30, 2004
PEI Accessity
Pacific Accessity Pro Forma Pro Forma Pro Forma
ReEnergy Kinergy Ethanol, Inc Corp. Adjustments Adjustments Combined
----------- ----------- ------------ ----------- ----------- ----------- -----------
ASSETS (Note 1) (Note 2) (Note 3)
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,895 $ 337,040 $ 220,908 $ 361,480 $(1,915,594)(b)$ (55,524)(a)
7,000,000 (b)$ 5,951,205
Accounts receivable -- 1,602,874 8,637 91,124 (91,124)(a) 1,611,511
Related party notes receivable -- -- 5,223 -- -- 5,223
Investments 3,369,437 3,369,437
Inventories, net -- 651,155 1,734 -- 652,889
Prepaid expenses -- 318,071 552,736 86,487 (1,911)(a) 955,383
Business acquisition costs -- -- 265,217 -- (265,217)(a) --
Restricted funds 300,000 300,000
Security deposits 22,098 22,098
Other receivables -- -- 80,880 -- -- -- 80,880
----------- ----------- ------------ ----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 2,895 2,909,140 1,135,335 4,230,626 (2,180,811) 6,851,441 12,948,626
PROPERTY AND EQUIPMENT, net of
accumulated depreciation 86,373 2,124 6,294,046 241,972 (241,972)(a) 6,382,543
INTANGIBLE ASSETS 8,836,000 (c) 8,836,000
GOODWILL 265,217 (a) 2,275,503 (c)
420,000 (e) 2,960,720
Consulting and non-compete
contracts 1,265,000 (d) 1,265,000
DEBT ISSUANCE COSTS, net of
accumulated amortization -- -- 73,333 -- -- 73,333
Other assets -- -- 1,826 -- -- 1,826
----------- ----------- ------------ ----------- ----------- ----------- -----------
TOTAL ASSETS $ 89,268 $ 2,911,264 $ 7,502,714 $ 4,474,424 $(1,915,594) $19,405,972 $32,468,048
=========== =========== ============ =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable -- 1,084,938 964,873 75,252 (14,723)(a) 2,110,340
Accrued expenses and other
current liabilities -- -- 728,467 374,342 (191,328)(a) 911,481
Related party payable -- -- -- -- --
Capital lease obligation -- -- -- -- -- -- --
----------- ----------- ------------ ----------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES -- 1,084,938 1,693,340 449,594 -- (206,051) 3,021,821
RELATED-PARTY NOTE PAYABLE -- -- 3,967,544 3,967,544
STOCKHOLDERS' EQUITY:
Member's Equity 89,268 1,826,326 (1,915,594)(b) --
Common stock -- -- 3,381,554 37,821 (37,821)(b)
237,483 (b)
60,000 (c)
2,250 (e)
9,000 (d)
(3,346,371)(f)
343,916
Additional paid in capital 1,380,000 11,107,158 (184,480)(a)
(11,107,158)(b)
11,051,503 (c)
417,750 (e)
10,787,347 (b)
3,346,371 (f)
1,256,000 (d) 28,054,491
Due from stockholders -- -- (68,100) (68,100)
Accumulated other comprehensive loss 3,406 (3,406)(b) --
Accumulated deficit -- -- (2,851,624) (5,394,113) -- 5,394,113 (b) (2,851,624)
----------- ----------- ------------ ----------- ----------- ----------- -----------
89,268 1,826,326 1,841,830 5,754,272 (1,915,595) 17,882,581 25,478,683
Less common shares held in treasury,
at cost -- -- -- (1,729,442) -- 1,729,442 (b) --
----------- ----------- ------------ ----------- ----------- ----------- -----------
Total stockholders' equity 89,268 1,826,326 1,841,830 4,024,830 (1,915,594) 19,612,023 25,478,683
Total Liabilities and Stockholders'
Equity 89,268 2,911,264 7,502,714 4,474,424 (1,915,595) 19,405,972 32,468,048
=========== =========== ============ =========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED CONSOLIDATED BALANCE SHEETS
115
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2004
NOTE 1: Reflects the unaudited financial data reported in Accessity's Form
10-QSB for the nine months ended September 30, 2004.
NOTE 2: PEI PRO FORMA ADJUSTMENTS
(a) To reclassify business acquisition costs to goodwill.
(b) To reflect distribution out to the owners of ReEnergy and Kinergy of
the amount of the net worth of their respective businesses, through the
issuance of cash, in accordance with the terms of the Share Exchange
Agreement.
NOTE 3: ACCESSITY PRO FORMA ADJUSTMENTS
(a) To eliminate the accounts of Sentaur (which will be sold to Barry
Siegel) and the accrued royalty amounts related to DriverShield, along
with the assets related to the DriverShield business and other personal
property, and those used for the Sentaur and other corporate
businesses, which are being conveyed or sold to Barry Siegel, in part,
in lieu of cash severance payments pursuant to his employment
agreement.
(b) To record the issuance of 13,332,200 shares of Accessity common stock
to shareholders of PEI in connection with the reverse acquisition,
based on PEI's outstanding shares at September 30, 2004, and record the
estimated 2,500,000 shares to be issued upon the completion of PEI's $7
million private placement, now in process, which is a condition
precedent to the consummation of the Share Exchange. These funds are to
be used for general corporate purposes after the closing. This entry
also eliminates the net worth of Accessity as part of the
recapitalization transaction. The accounts which will be reflected are
those of the accounting acquirer, which is PEI. No goodwill is recorded
for the issuance of these shares, as PEI is acquiring monetary assets
of Accessity at their stated value.
(c) To record the acquisitions of ReEnergy and Kinergy through the issuance
125,000 shares and 3,875,000 shares respectively, at their valuation
values, with an allocation between goodwill and other intangible
assets.
(d) To record the value of 850,000 shares (comprising 600,000 new shares
and 250,000 shares sold by existing PEI shareholders) granted at $2.80
per share for consulting and non-competition agreements, with former
officers of Accessity. Of the total $2,380,000 amount, $1,115,000 is a
cost of the former Accessity company and, accordingly, is not shown as
a pro forma adjustment reflecting the equivalent cash payment which
would have been made to two individuals pursuant to their employment
contracts. The remaining amount of $1,265,000 will be amortized over
the life of the consulting and non-compete contracts. The price per
share used to record the value represents the share price of Accessity
common stock on the date immediately preceding the announcement of the
Share Exchange Agreement. Management believes that this price, rather
than the current market price, is more reflective of the fair value of
Accessity's common shares to be issued as it is a close approximation
of Accessity's cash and investment securities which are being
transferred in connection this transaction.
(e) To record the value of 150,000 shares granted as finders' fees, in
connection with the Share Exchange Agreement, to a consultant based on
$2.80 per share of Accessity common stock. The shares are to be issued
contingent on the consummation of the Share Exchange. See 3(e) for
discussion of the price per share. This $420,000 amount has been
reflected as a capital cost of the transaction.
116
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2004 (CONT'D)
(f) To reclassify amounts so that the common stock of the recapitalized
company reflects the total shares outstanding at the par value per
share of Accessity of $0.015.
117
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
PACIFIC ACCESSITY PRO FORMA PRO FORMA
REENERGY KINERGY ETHANOL, INC CORP. ADJUSTMENTS COMBINED
-------- ----------- ------------ ----------- ------------- -----------
(NOTE 1) (NOTE 2)
NET SALES $ - $56,529,115 $ 16,832 $ 622,398 $ (622,398)(a) $56,545,947
COST OF GOODS SOLD - 54,211,629 10,789 - - 54,222,418
-------- ----------- ----------- ----------- ---------- -----------
GROSS PROFIT - 2,317,486 6,043 622,398 (622,398) 2,323,529
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,000 167,314 714,730 1,949,465 (1,561,992)(a)
420,000 (h)
521,750 (e) 2,216,267
NON-CASH CONSULTING FEES - - 862,500 - 172,500 (f)
- - - - 189,750 (g) 1,224,750
-------- ----------- ----------- ----------- ---------- -----------
OPERATING LOSS (5,000) 2,150,172 (1,571,187) (1,327,067) (569,406) (1,117,488)
OTHER INCOME (EXPENSE):
Other income - - 2,368 311,505 - (b) 313,873
Other expense - - - -
Interest expense - (1,888) (415,726) - - (417,614)
-------- ----------- ----------- ----------- ---------- -----------
Total other income (expense) - (1,888) (413,358) 311,505 - (103,741)
-------- ----------- ----------- ----------- ---------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (5,000) 2,148,284 (1,984,545) (1,015,562) (569,406) (1,221,229)
PROVISION FOR INCOME TAXES 800 800 8,400 (11,525) - (i) (1,525)
-------- ----------- ----------- ----------- ---------- -----------
NET INCOME ( LOSS) $ (5,800) $ 2,147,484 $(1,992,945) $(1,004,037) $ (569,406) $(1,219,704)
======== =========== =========== =========== ========== ===========
EARNINGS (LOSS) PER SHARE
Basic $(0.45) $(0.05)
Diluted $(0.45) $(0.05)
Weighted average number of common
shares 2,245,539 20,582,200 (c) 22,827,739
Weighted average number of diluted
common shares 2,245,539 20,582,200 (d) 22,827,739
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Consolidated
Statements of Operations for the Nine Months Ended September 30, 2004
118
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
1. Reflects the unaudited financial data as reported in Accessity's Form
10-QSB for the nine months ended September 30, 2004.
2. (a) The pro forma adjustments eliminate the operating results of Accessity
subsidiaries, Sentaur, and the royalties from the former auto insurance
business, DriverShield. These businesses are being disposed of or
transferred to Barry Siegel in lieu of certain cash payments which
would otherwise be required pursuant to his employment contract. In
addition, it removes salaries of all personnel and related costs in
accordance with the Share Exchange Agreement, which requires the
termination of Accessity employees. Occupancy costs for the premises in
Florida are also removed, as they are being paid by Barry Siegel or
Sentaur until the building is sold except for $50,000 of expenses to be
retained by the Combined Company. The personal property and related
depreciation has been eliminated as those are being transferred with
Sentaur. Certain amounts for the administration of the 401(k) plan,
file retention of historic data, and Nasdaq fees, audit expenses, all
legal costs (excluding direct costs of this transaction), directors'
and officers' insurance and others have also been retained.
(b) No adjustment to interest income has been made since all marketable
securities held by Accessity will be retained by the Combined Company.
(c) Reflects 16,412,200 shares to be issued to shareholders and members,
as the case may be, of Pacific Ethanol, Kinergy and ReEnergy pursuant
to the Share Exchange Agreement, 600,000 total new shares to be issued
to Mr. Siegel and Mr. Kart in lieu of their cash payout requirements
of their employment agreement and for consulting and noncompete
agreements, 2,500,000 shares to be issued in PEI's private placement
which is a condition precedent to the closing of the transaction,
150,000 shares to be issued to a consultant to the transaction as a
finder's fee and 920,000 shares that were issued upon exercise of a
warrant by a consulting company.
(d) Would reflect the items in 2(c) above, plus all options, warrants and
convertible securities of all the entities that would be considered
common share equivalents and be dilutive, aggregating 1,606,154.
However, because the use of these would be anti-dilutive and result in
a lower loss per share, the presentation uses the same shares as for
basic loss per share.
(e) To reflect compensation arrangements for the new management which are
contingent upon the consummation of the Share Exchange Agreement.
(f) To record options granted to a consultant for public and investor
relations during 2004, directly associated with the Share Exchange
Agreement, and amortize the non-cash charges for the nine months
through September 30, 2004.
(g) To record the non-cash amortization of consulting and non-compete
agreements with former officers.
(h) To record the amortization of certain acquired intangible assets
relating to customer relationships, over their estimated ten year life.
(i) No pro forma tax provision is established as the operating results of
the Combined Company would be a taxable loss for 2003. In addition,
Accessity has net operating loss carryforwards totaling $3.8 million,
which currently have a valuation reserve for the entire amount since
the company has determined that its utilization is uncertain. While it
is believed that PEI and subsidiaries will be profitable in the future,
Accessity cannot determine at this time the extent or timing.
Accordingly, the complete valuation allowance has been retained for
purpose of this presentation.
119
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
PACIFIC ACCESSITY PRO FORMA PRO FORMA
DRAFT SUBJECT TO CHANGE REENERGY KINERGY ETHANOL, INC CORP. ADJUSTMENTS COMBINED
--------- ----------- ------------ ---------- ------------- -----------
(Note 1) (Note 1) (Note 1) (Note 1) (Note 2)
Net Sales $ - $35,539,636 $1,016,594 657,543 $ (657,543)(a) $36,556,230
Cost of Goods Sold - 33,982,527 946,012 - - 34,928,539
--------- ----------- ---------- ----------- ---------- -----------
Gross Profit - 1,557,109 70,582 657,543 (657,543) 1,627,691
Selling, General and
Administrative Expenses - 169,582 647,731 2,731,339 (2,144,504)(a)
- - - - 560,000 (j)
- - - - 799,000 (f) 2,743,148
Non-cash Consulting Fees - - - - 1,380,000 (h)
- - - - 253,000 (g) 1,633,000
--------- ----------- ---------- ----------- ---------- -----------
Operating loss - 1,387,527 (577,149) (2,073,796) (565,837) (2,748,457)
Other Income (Expense):
Interest income - 267 - 226,608 - (b) 226,875
Miscellaneous income - - 1,292 - 1,292
Other expense (10,000) (10,000)
Interest expense - - (281,222) (4,504) 4,504 (c) (281,222)
--------- ----------- ---------- ----------- ---------- -----------
Total other income (expense) - (9,733) (279,930) 222,104 4,504 (63,055)
--------- ----------- ---------- ----------- ---------- -----------
Loss From Continuing Operations,
before taxes - 1,377,794 (857,079) (1,851,692) (561,333) (2,811,512)
Provision for Income Taxes 800 800 1,600 - - (i) 3,200
--------- ----------- ---------- ----------- ---------- -----------
Net Income ( Loss) $ (800) $ 1,376,994 $ (858,679) $(1,851,692) $ (561,333) $(2,814,712)
========= =========== ========== =========== ========== ===========
Earnings (Loss) per Share from
Continuing Operations
Basic $ (0.84) $ (0.12)
Diluted $ (0.84) $ (0.12)
Weighted average number of
common shares 2,195,519 20,582,200 (d) 22,777,719
Weighted average number of
diluted common shares 2,195,519 20,582,200 (e) 22,777,719
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Consolidated
Statement of Operations for the Year Ended December 31, 2003
120
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
1. Reflects the audited financial results as reported in Accessity's Form
10-KSB for the year ended December 31, 2003 and the audited results of
Kinergy and ReEnergy for the year ended December 31, 2003 and the audited
results of PEI for the period from January 30, 20003 (inception) through
December 31, 2003. Discontinued operating results in the historic
presentation have been excluded from the pro forma combined income statement
pursuant to Regulation S-X, Article II.
2. (a) The pro forma adjustments eliminate the operating results of Accessity
subsidiaries and Sentaur, and the royalties from the former auto
insurance business, DriverShield. DriverShield is being transferred to
Barry Siegel in lieu of certain cash payments which would otherwise be
required pursuant to his employment contract, and Sentaur is being sold
to him. In addition, it removes salaries of all personnel and related
costs in accordance with the Share Exchange Agreement, which requires
the termination of Accessity employees. Occupancy costs for the
premises in Florida are also removed, as they are being paid by Barry
Siegel or Sentaur until the building is sold except for $50,000 of
expenses to be retained by the Combined Company. The personal property
and related depreciation has been eliminated, as those are being
transferred with Sentaur. Certain amounts for the administration of the
401(k) plan, file retention of historic data, and Nasdaq fees, audit
expenses, all legal costs (excluding direct costs of this transaction),
directors' and officers' insurance and others have also been retained.
(b) No adjustment to interest income has been made since all marketable
securities held by Accessity will be retained by PEI.
(c) Excludes interest on capitalized leases that will be retained through
Sentaur.
(d) Reflects 16,412,200 shares to be issued to shareholders and members,
as the case may be, of PEI, Kinergy and ReEnergy pursuant to the Share
Exchange Agreement, 600,000 total new shares to be issued to Mr.
Siegel and Mr. Kart in lieu of the cash payout requirements of their
employment agreements and for consulting and non-compete agreements,
2,500,000 shares to be issued in PEI's private placement which is a
condition precedent to the closing of the transaction, 150,000 shares
to be issued to a consultant to the transaction as a finder's fee and
920,000 shares that were issued upon exercise of a warrant by a
consulting company.
(e) Would reflect the items in 2(d) above, plus all options, warrants and
convertible securities of all the entities that would be considered
common share equivalents aggregating 1,606,154 shares. However, because
the use of these would be anti-dilutive and result in a lower loss per
share, the presentation uses the same shares as for basic loss per
share.
(f) To reflect compensation and bonus arrangements for the new management
which are contingent upon the consummation of the Share Exchange
Agreement. These contracts may not have been granted or be appropriate
for a private company of this size.
(g) To record the non-cash amortization of consulting and noncompete
agreements with former officers.
(h) To record options granted to a consultant during 2004, directly
associated with the Share Exchange Agreement, and amortize the non-cash
charges over the one-year life of the contract.
(i) Non-pro forma tax provision is established, as the operating results of
the combined entities would be a taxable loss for 2003. In addition,
Accessity has net operating loss carryforwards totaling approximately
$3.8 million, which currently have a valuation reserve for the entire
121
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 (CONT'D)
amount since Accessity has determined that its utilization is
uncertain. While it is believed that PEI and subsidiaries will be
profitable in the future, Accessity cannot determine at this time the
extent or timing. Accordingly, the complete valuation allowance has
been retained for purpose of this presentation.
(j) To record the amortization of certain acquired intangible assets
relating to customer relationships, over their estimated ten year life.
122
OPERATION, MANAGEMENT AND BUSINESS OF ACCESSITY
AFTER THE SHARE EXCHANGE
BUSINESS OF ACCESSITY
From and after the consummation of the Share Exchange, each of PEI,
Kinergy and ReEnergy will operate as wholly-owned subsidiaries of Accessity.
Accessity will consolidate the operations of each of the Acquired Companies in
order to take advantage of efficiencies presented by the combination of the
companies and to provide cost-effective services. As a condition to the
consummation of the Share Exchange, all of the officers, directors (other than
Kenneth J. Friedman) and employees of Accessity are required to resign.
Accessity expects that decisions as to the continuing employment of PEI, Kinergy
and ReEnergy officers, managers and employees will be made on a case-by-case
basis after the consummation of the Share Exchange based upon Accessity's
evaluation of the combined operations of the constituent companies. See
"Information Relating to PEI," "Information Relating to Kinergy" and
"Information Relating to ReEnergy."
EXECUTIVE OFFICERS AND DIRECTORS
Upon consummation of the Share Exchange, the following individuals will be
the executive officers and directors of the Combined Company:
NAME AGE POSITION
---- --- --------
Neil Koehler................ 46 Chief Executive Officer, President,
Chairman of the Board and Director
Ryan Turner ................ 30 Chief Operating Officer and Director
Maria Tharpe................ 49 Chief Financial Officer
Doug Dickson................ 51 President, PAP Products, LLC
Tom Koehler................. 44 Vice President, Public Policy and Markets
Frank P. Greinke ........... 49 Director
John Pimentel............... 38 Director
William Lyles............... 45 Director
Kenneth J. Friedman......... 50 Director
NEIL KOEHLER has been the Chief Executive Officer of PEI since January
2003 and the Chairman of the Board and a director since March 2004. For more
information concerning Mr. Koehler, see "Information Relating to PEI--Management
of PEI."
RYAN TURNER has been the Chief Operating Officer and a director of PEI
since January 2003. For more information concerning Mr. Turner, see "Information
Relating to PEI--Management of PEI."
MARIA THARPE has been the Chief Financial Officer of PEI since November
2004. For more information concerning Ms. Tharpe, see "Information Relating to
PEI--Management of PEI."
DOUG DICKSON has been the President of PAP, a subsidiary of PEI, since its
inception in June 2003. For more information concerning Mr. Dickson, see
"Information Relating to PEI--Management of PEI."
TOM KOEHLER has been the Vice President, Public Policy and Markets of PEI
since January 2003. For more information concerning Mr. Koehler, see
"Information Relating to PEI--Management of PEI."
FRANK P. GREINKE has been a director of PEI since October 2003. For more
information concerning Mr. Greinke, see "Information Relating to PEI--Management
of PEI."
123
JOHN PIMENTEL has been a director of PEI since April 2004. For more
information concerning Mr. Pimentel, see "Information Relating to
PEI--Management of PEI."
WILLIAM LYLES has been a director of PEI since October 2004. For more
information concerning Mr. Lyles, see "Information Relating to PEI--Management
of PEI."
KENNETH J. FRIEDMAN has been a director of Accessity since October 1998.
Mr. Friedman has for more than five years served as President of the Primary
Group, Inc., an executive search consultant.
DESCRIPTION OF CAPITAL STOCK OF ACCESSITY
The authorized capital stock of Accessity consists of 30,000,000 shares of
common stock, $0.015 par value per share, and 1,000,000 shares of preferred
stock, $0.01 par value per share, of which 1,000 shares have been designated as
Series A Convertible Preferred Stock (the "Series A Preferred Stock") and
200,000 shares have been designated as Junior Participating Preferred Stock.
ACCESSITY COMMON STOCK. As of November 30, 2004, there were 2,339,414
shares of Accessity common stock outstanding held of record by approximately 342
shareholders and no shares of preferred stock outstanding. Accessity common
stock is listed on The Nasdaq SmallCap Market under the symbol "ACTY." Accessity
common stock is subject to all of the rights, privileges, preferences and
priorities of the Accessity preferred stock as set forth in the certificate or
certificates of designation filed to establish the respective series of
preferred stock. Each share of Accessity common stock has the same relative
rights as and is identical in all respects to each other share of common stock.
Each holder of shares of Accessity common stock entitled to attend all
special and annual meetings of the stockholders of Accessity and, share for
share and without regard to class, together with the holders of all other
classes of stock entitled to attend such meeting and to vote (except any class
or series of stock having special voting rights), to cast one vote for each
outstanding share of common stock so held upon any matter or thing (including,
without limitation, the election of one or more directors) properly considered
and acted upon by the stockholders, except as otherwise provided in the
certificate of incorporation or by applicable law.
Whenever there shall have been paid or declared and set aside for payment,
to the holder of shares of any class of stock having preference over the
Accessity common stock as to the payment of dividends, the full amount of
dividends and of sinking fund or retirement payments, if any, to which such
holders are respectively entitled in preference to the common stock, then the
holders of record of the common stock and any class or series of stock entitled
to participate therewith as to dividends, shall be entitled to receive
dividends, when, as, and if declared by the Accessity board of directors, out of
any assets legally available for the payment of dividends thereon. In the event
of any dissolution, liquidation or winding up, whether voluntary or involuntary,
the holders of record of the Accessity common stock then outstanding, and all
holders of any class or series of stock entitled to participate in the
distribution of any assets of Accessity remaining after Accessity shall have
paid, or set aside for payment, to the holders of any class of stock having
preference over the common stock in the event of dissolution, liquidation or
winding up, the full preferential amount (if any) to which they are entitled,
and shall have paid or provided for payment of all debts and liabilities of
Accessity.
Holders of Accessity common stock have no preemptive rights and no right
to convert their Accessity common stock into any other securities. There are no
redemption or sinking fund provision applicable to Accessity common stock. All
outstanding shares of Accessity common stock are, and all shares of Accessity
common stock to be outstanding after the completion of the Share Exchange will
be, validly issued, fully paid and nonassessable.
124
ACCESSITY PREFERRED STOCK. Accessity has 1,000,000 shares of authorized
preferred stock, 1,000 of which have been designated as Series A Preferred
Stock, of which none are currently outstanding, and 200,000 of which have been
designated as Junior Participating Preferred Stock, of which none are currently
outstanding. The board of directors has the authority to issue up to 1,000,000
shares of preferred stock, including the Series A Preferred Stock already
designated, in one or more series, and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued and
undesignated shares of preferred stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the shareholders. The board of directors, without shareholder
approval, can issue preferred stock with voting and conversion rights which
could adversely affect the voting power or other rights of the holders of
Accessity common stock. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Accessity.
SERIES A CONVERTIBLE PREFERRED STOCK. The initial value of each share of
Series A Preferred Stock (the "Series A Initial Value") is $1,000, subject to
adjustment for stock dividends, combinations, splits, recapitalizations and the
like with respect to the Series A Preferred Stock. Each share of Series A
Preferred Stock is entitled to receive dividends in an amount equal to dividends
declared and paid, if any, with respect to that number of shares of Accessity
common stock into which one share of Series A Preferred Stock is then
convertible, which dividends are payable as and when paid to holders of
Accessity common stock. Each holder of shares of Series A Preferred Stock is
entitled to one vote for each share of Accessity common stock into which each
share of Series A Preferred Stock could be converted, assuming a conversion
price of $10.00, and with respect to that vote, each holder has full voting
rights and powers equal to the voting rights and powers of the holders of
Accessity common stock and is entitled to vote, together with holders of
Accessity common stock and not as a separate class (except as required by law),
with respect to any question upon which holders of common stock have the right
to vote.
Each share of Series A Preferred Stock is convertible at the option of the
holder into a number of fully paid and nonassessable shares of Accessity common
stock determined by dividing the Series A Initial Value by the conversion price
for the Series A Preferred Stock (the "Conversion Price") in effect on the date
the certificate is surrendered for conversion. The current Conversion Price is
$10.00 and is subject to adjustment under certain circumstances.
Upon occurrence of a liquidation, dissolution, or winding up of Accessity,
whether voluntary or involuntary (any such event, a "Liquidating Event"), each
holder of shares of Series A Preferred Stock will be entitled to receive out of
the remaining assets of Accessity available for distribution to stockholders,
before any distribution of assets is made to holders of Accessity common stock
or any other stock of Accessity ranking junior to the Series A Preferred Stock
as to dividends or liquidation rights, including without limitation the Junior
Participating Preferred Stock, an amount per share of Series A Preferred Stock
(this amount, the "Series A Liquidation Amount") equal to 125% of the Series A
Initial Value plus an amount equal to all accumulated and unpaid dividends
(whether or not declared by the board of directors) on each share up to the date
fixed for distribution. After payment of the full Series A Liquidation Amount,
holders of shares of Series A Preferred Stock will not be entitled to
participate any further in any distribution of assets by Accessity. If upon
occurrence of a Liquidating Event the assets of Accessity available for
distribution to its stockholders are insufficient to pay the holders of the
Series A Preferred Stock the full Series A Liquidation Amount, holders of Series
A Preferred Stock will share ratably in any distribution of assets so that each
such holder receives, per share, the same percentage of the Series A Liquidation
Amount. A reorganization, consolidation or merger of Accessity or a sale or
other disposition of all or substantially all the assets of Accessity will, at
the election of holders of a majority of the then-outstanding shares of Series A
Preferred Stock, constitute a Liquidating Event.
Without the approval of the holders of a majority of the issued and
outstanding shares of Series A Preferred Stock, Accessity may not: (i) amend,
alter, or repeal any provision of Accessity's certificate of incorporation or
bylaws if that amendment, alteration, or repeal would affect the rights, powers,
or preferences of holders of Series A Preferred Stock in their capacity as such;
(ii) authorize or issue any
125
equity or debt security on a parity with or having preference or priority over
the Series A Preferred Stock as to liquidation preferences, dividend rights,
voting rights, or otherwise (including any additional shares of Series A
Preferred Stock); (iii) declare and pay, or set aside funds for the payment of,
any dividend with respect to, or redeem, repurchase, or otherwise acquire for
value (or pay into or set aside for a sinking fund for that purpose), any shares
of capital stock, except for repurchase shares of Accessity common stock from
employees or consultants of Accessity at the original purchase price thereof
pursuant to vesting agreements approved by the board of directors; (iv)
authorize or issue any equity or debt security with a liquidation preference in
excess of the amount paid for that security; or (v) incur, or cause any
affiliate of Accessity to incur, any indebtedness for borrowed money, or assume
or guarantee, or cause any affiliate of Accessity to assume or guarantee, the
indebtedness of any other person, in excess of $5,000,000 in the aggregate.
Accessity is required to send to each holder of shares of Series A
Preferred Stock annual audited financial statements and quarterly unaudited
financial statements, annual budgets, any notice of shareholder meetings
required by New York law, and such other information as holders of a majority of
outstanding shares of Series A Preferred Stock reasonably request. On a
quarterly basis, Accessity shall send to each holder of shares of Series A
Preferred Stock notice of any sale of shares of additional capital stock during
the previous quarter, which notice must include the price paid for, and the
terms of, that additional capital stock. In addition, each holder of one or more
shares of Series A Preferred Stock is entitled to purchase that holder's pro
rata portion of any new securities that Accessity from time to time issues, with
certain exceptions (such as Accessity common stock issued pursuant to options
granted under Accessity's stock option plans).
RIGHTS ASSOCIATED WITH COMMON STOCK. On December 28, 1998, the Accessity
board of directors authorized the issuance of one preferred share purchase right
(a "Right") to each holder of record as of December 28, 1998 for each
outstanding share of Accessity common stock held by such holder, and with
respect to all shares of Accessity common stock that become outstanding after
such date and prior to the earliest of the Distribution Date (as defined below),
the redemption of the Rights or December 28, 2008. Each Right entitles the
registered holder to purchase from Accessity one two-hundredth (1/200th) of a
share of Junior Participating Preferred Stock at an exercise price of $137.50
per one two-hundredth (1/200th) of a share of Junior Participating Preferred
Stock, subject to adjustment under certain circumstances. The administration of
the Rights is governed by the terms of a Rights Agreement between Accessity and
North American Transfer Co., as Rights Agent, dated as of December 28, 1998.
Until the earlier to occur of (i) a public disclosure that a person or group has
acquired or obtained the right to acquire (an "Acquiring Person") beneficial
ownership of 20% or more (or 10% or more, in the case of certain "Adverse
Persons" as defined in the Rights Agreement) of the outstanding Accessity common
stock (the "Stock Acquisition Date") or (ii) the tenth business day after the
date (the "Tender Offer Date") of the commencement or public disclosure of a
tender offer in which any person or group could acquire beneficial ownership of
20% or more (or 10% or more, in the case of certain "Adverse Persons" as defined
in the Rights Agreement) of the outstanding Accessity common stock (the earlier
of such dates being called the "Distribution Date"), the Rights are evidenced by
the shares of Accessity Common Stock and not by separate certificates. Following
the Distribution Date, separate certificates evidencing the Rights will be
mailed to the holders of record of the Accessity common stock as of the close of
business on the Distribution Date. The Rights are first exercisable on the Stock
Acquisition Date (unless sooner redeemed or exchanged). The Rights expire on
December 28, 2008 unless earlier redeemed or exchanged. At any time prior to the
public disclosure that a person or group has become an Acquiring Person, the
Accessity board of directors may redeem the Rights in whole, but not in part, at
a price of $.05 per Right, payable in cash, shares of Accessity common stock or
any other form of consideration deemed appropriate by the Accessity board of
directors.
JUNIOR PARTICIPATING PREFERRED STOCK. The Junior Participating Preferred
Stock shall rank, with respect to the payment of dividends and the distribution
of assets upon liquidation, dissolution or winding up of Accessity, junior to
all other series of preferred stock and to all other classes of preferred or
special
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stock, and all series of any thereof, and senior to the Accessity common stock.
The shares of Junior Participating Preferred Stock are not redeemable.
Subject to the prior and superior rights of the holders of any shares of
any series of preferred stock and of any shares of any other class of preferred
or special stock, and any series of any thereof, ranking prior and superior to
the shares of Junior Participating Preferred Stock with respect to dividends,
the holders of shares of Junior Participating Preferred Stock, in preference to
the holders of Accessity common stock and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Accessity Board of
Directors out of funds legally available for that purpose, quarterly dividends
payable in cash on the fifteenth day of March, June, September and December in
each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Junior Participating
Preferred Stock, in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $500.00 and (b) the sum of (i) the Adjustment Number (as
defined below) times the aggregate per share amount of all cash dividends, and
(ii) the Adjustment Number times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Accessity common stock or a subdivision of the outstanding
shares of Accessity common stock (by reclassification or otherwise), declared on
the Accessity common stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Junior
Participating Preferred Stock. The "Adjustment Number" shall be 200, as adjusted
from time to time in the event Accessity shall at any time after December 28,
1998 (i) declare or pay any dividend on the Accessity common stock payable in
shares of Accessity common stock, (ii) subdivide the outstanding Accessity
common stock into a greater number of shares, or (iii) combine the outstanding
Accessity common stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Accessity common stock outstanding immediately
after such event and the denominator of which is the number of shares of
Accessity common stock that were outstanding immediately prior to such event.
Accessity shall declare a dividend or distribution on the Junior
Participating Preferred Stock immediately after it declares a dividend or
distribution on the Accessity common stock (other than a dividend payable in
like shares of Accessity common stock); provided that, in the event no dividend
or distribution shall have been declared on the Accessity common stock during
the period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $500.00 per share on the Junior
Participating Preferred Stock shall, when, as and if declared by the Accessity
Board of Directors out of funds legally available for such purpose, nevertheless
be payable on such subsequent Quarterly Dividend Payment Date.
Dividends shall begin to accrue and be cumulative on outstanding shares of
Junior Participating Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares of Junior Participating
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Junior
Participating Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Junior Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Accessity board of directors may fix a
record date for the determination of holders of shares of Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
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Each share of Junior Participating Preferred Stock shall entitle the
holder thereof to a number of votes equal to the Adjustment Number on all
matters submitted to a vote of the shareholders of Accessity. Except as
otherwise provided herein, in the certificate of incorporation or bylaws of
Accessity, the holders of shares of Junior Participating Preferred Stock and the
holders of shares of Accessity common stock shall vote together as one class on
all matters submitted to a vote of shareholders of Accessity.
Except as set forth herein, holders of Junior Participating Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of
Accessity common stock as set forth herein) for taking any corporate action.
Whenever quarterly dividends or other dividends or distributions payable on the
Junior Participating Preferred Stock are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared, on
shares of Junior Participating Preferred Stock outstanding shall have been paid
in full, Accessity shall not: (i) declare or pay dividends on, or make any other
distributions on, any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Junior Participating
Preferred Stock; (ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Junior Participating
Preferred Stock, except dividends paid ratably on the Junior Participating
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled; (iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Junior Participating Preferred
Stock, provided that Accessity may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
Accessity ranking junior (as to dividends and upon dissolution, liquidation or
winding up) to the Junior Participating Preferred Stock; or (iv) purchase or
otherwise acquire for consideration any shares of Junior Participating Preferred
Stock, or any shares of stock ranking on a parity with the Junior Participating
Preferred Stock, except in accordance with a purchase offer made in writing or
by publication (as determined by the Accessity board of directors) to all
holders of such shares upon such terms as the Accessity board of directors,
after consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the respective
series or classes.
Upon any liquidation, dissolution or winding up of Accessity, no
distribution shall be made (i) to the holders of Accessity common stock or
shares of other stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Junior Participating Preferred
Stock unless, prior thereto, the holders of shares of Junior Participating
Preferred Stock shall have received per share an amount equal to the Adjustment
Number times $5.00, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment, or
(ii) to the holders of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Junior Participating Preferred
Stock, except distributions made ratably on the Junior Participating Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up.
In case Accessity shall enter into any consolidation, merger, combination
or other transaction in which the shares of Accessity common stock are exchanged
for or changed into other stock or securities, cash and/or any other property,
then in any such case the shares of Junior Participating Preferred Stock then
outstanding shall at the same time be similarly exchanged or changed in an
amount per share equal to the Adjustment Number times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Accessity common stock is changed
or exchanged.
WARRANTS. Accessity has warrants outstanding to purchase an aggregate of
25,000 shares of common stock. The exercise price for 5,000 of the shares
subject to such outstanding warrants which expire in
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September 2006 is $4.35 per share and the exercise price for the remaining
20,000 of the shares subject to such outstanding warrants which expire in
January 2006 is $2.65 per share.
OPTIONS. Accessity has options outstanding to purchase an aggregate of up
to 389,667 shares of common stock. The exercise price for the shares subject to
outstanding options ranges from $1.56 to $10.65 per share. Each of the
outstanding options expires ten years after the date of grant, however, employee
options expire ninety days after the termination of their employment, such
termination would occur as a precedent of the Share Exchange Agreement.
LISTING OF ACCESSITY COMMON STOCK
The Accessity common stock is currently listed for trading on The Nasdaq
SmallCap Market under the symbol "ACTY." Accessity, PEI, Kinergy and ReEnergy
intend and currently anticipate that the shares of Accessity (as Pacific
Ethanol, Inc., a Delaware corporation, the surviving corporation pursuant to the
Delaware Reincorporation), will continue to be listed for trading on The Nasdaq
SmallCap Market after giving effect to the Share Exchange and upon consummation
of the Delaware Reincorporation, subject to the receipt of approval from Nasdaq
for the initial listing application to be made by Accessity (or Pacific Ethanol,
Inc., a Delaware corporation) in connection with the Share Exchange and the
Delaware Reincorporation. No assurance can be given that the Accessity common
stock will continue to trade on The Nasdaq SmallCap Market. See "Risk Factors."
TRANSFER AGENT
The Transfer Agent for the Accessity common stock is North American
Transfer Co., 147 West Merrick Road, Freeport, New York 11520, and its telephone
number is (516) 379-8501.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
OF ACCESSITY AFTER THE SHARE EXCHANGE
The following table sets forth the anticipated beneficial ownership of
Accessity common stock as of November 30, 2004, as adjusted to reflect the
consummation of the Share Exchange, Subsidiary Transfer and Subsidiary Sale by:
o each designated director of Accessity;
o each designated executive officer of Accessity;
o each person who is projected to own beneficially more than 5% of the
outstanding shares of Accessity common stock; and
o all designated officers and directors of Accessity as a group.
The percentage of share ownership indicated below is based on 22,873,280
shares of Accessity common stock outstanding on November 30, 2004, as adjusted
to reflect the consummation of the Share Exchange and Subsidiary Transfer
(including the issuance of 400,000 shares of Accessity common stock to Barry
Siegel and 200,000 shares of Accessity common stock to Philip Kart pursuant to
consulting and noncompetition agreements to be executed by Accessity and Messrs.
Siegel and Kart as a condition to the Share Exchange) and the issuance of
2,500,000 shares of PEI common stock in connection with a proposed $7 million
capital raise by PEI to be completed prior to closing of the Share Exchange.
The beneficial ownership numbers and percentages indicated below are
calculated based on requirements of the SEC. All shares of Accessity common
stock subject to options and/or warrants and convertible debt currently
exercisable or convertible, as the case may be, either currently or within 60
days after November 30, 2004, as adjusted to reflect the consummation of the
Share Exchange, Subsidiary Transfer, Subsidiary Sale and the transfer of an
aggregate of 250,000 shares of PEI common stock by William Jones, Andrea Jones
and Ryan Turner to Barry Siegel, are deemed to be outstanding for the purpose of
computing the percentage of ownership of the person holding the options and/or
warrants and convertible debt, but are not deemed to be outstanding for the
purpose of computing the percentage of ownership of any other person.
Unless otherwise indicated below, each shareholder named in the following
table will have sole voting and investment power with respect to all shares of
Accessity common stock beneficially owned, subject to applicable community
property laws. The address of each of the following shareholders, unless
otherwise indicated below, is c/o Accessity at 5711 N. West Avenue, Fresno,
California 93711.
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SHARES BENEFICIALLY OWNED
--------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
------------------- --------- ---------
William "Bill" Jones...................... 4,150,000 18.22%
Frank P. Greinke(2)....................... 1,500,000 6.58%
Andrea Jones.............................. 1,210,000 5.31%
Ryan Turner............................... 1,155,833 5.07%
Cagan-McAfee Capital Partners, LLC(3)..... 1,064,167 4.67%
William Lyles (4)......................... 2,000,000 8.47%
John Liviakis(5).......................... 939,167 4.12%
Neil Koehler.............................. 3,884,792 17.04%
Tom Koehler............................... 41,771 *
John Pimentel............................. -- --
Kenneth J. Friedman(6).................... 73,399 *
Doug Dickson ............................. -- --
Maria Tharpe.............................. -- --
All directors and executive officers
as a group (9 persons)(7).............. 8,655,795 37.99%
-----------------------
* Less than 1%.
(1) Messrs. Turner, Neil Koehler, Tom Koehler and Dickson and Ms. Tharpe will
be executive officers of Accessity. Messrs. Greinke, Turner, Pimentel,
Neil Koehler, Lyles and Friedman will be directors of Accessity.
(2) Represents shares of common stock held by SC Fuels, Inc. Mr. Greinke is
the CEO and sole owner of SC Fuels, Inc. and has sole voting and sole
investment power over the shares of common stock held by SC Fuels, Inc.
The address of SC Fuels, Inc. is 1800 W. Katella, Suite 400, Orange,
California 92863.
(3) The address of Cagan-McAfee Capital Partners, LLC is 10600 N. DeAnza
Boulevard, Suite 250, Cupertino, California 95014. Mr. Pimentel, a
director of PEI, is a Principal of Cagan-McAfee Capital Partners, LLC.
(4) Consists of 1,170,000 shares of common stock and 830,000 shares of common
stock underlying a convertible note held by LDI. Mr. Lyles is the Vice
President of Construction of LDI and has sole voting and sole investment
power over the shares of common stock held by LDI. The address of LDI is
1210 W. Olive, Fresno, California 93728.
(5) Consists of 920,000 shares of common stock and 19,167 shares of common
stock underlying warrants held by Liviakis Financial Communications, Inc.
Mr. Liviakis is the President of Liviakis Financial Communications, Inc.
and has sole voting power and sole investment power over the shares of
common stock held by Liviakis Financial Communications, Inc. The address
of Liviakis Financial Communications, Inc. is 655 Redwood Highway, Suite
395, Mill Valley, California 94941.
(6) Includes 16,000 shares of common stock underlying options.
(7) Includes 830,000 shares of common stock underlying a convertible note held
by LDI and 16,000 shares of common stock underlying options held by Mr.
Friedman.
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COMPARISON OF SECURITIES
DESCRIPTION OF SECURITIES OF ACCESSITY
See "Operation, Management and Business of Accessity After the Share
Exchange--Description of Securities of Accessity" above for a description of the
capital stock of Accessity.
Pursuant to the consummation of the Delaware Reincorporation immediately
preceding the consummation of the Share Exchange, the Rights Agreement dated
December 28, 1998 between Accessity and North American Transfer Co., as Rights
Agent, will be terminated and, as provided in the certificate of incorporation
and bylaws of Pacific Ethanol, Inc., the surviving corporation in the
reincorporation merger, copies of which are included with this proxy statement
as APPENDIX D AND E, respectively, no shares of preferred stock shall be
designated as either Series A Preferred Stock or Junior Participating Preferred
Stock.
DESCRIPTION OF SECURITIES OF PACIFIC ETHANOL, INC. (DELAWARE)
Following consummation of the Delaware Reincorporation, the authorized
capital stock of the surviving corporation in the reincorporation merger,
Pacific Ethanol, Inc., a Delaware corporation ("Pacific Ethanol, Inc.
(Delaware)"), will consist of 100,000,000 shares of common stock, $0.001 par
value per share, and 10,000,000 shares of preferred stock, $0.001 par value per
share.
PACIFIC ETHANOL, INC. (DELAWARE) COMMON STOCK. Pacific Ethanol, Inc.
(Delaware) common stock is subject to all of the rights, privileges, preferences
and priorities of the Pacific Ethanol, Inc. (Delaware) preferred stock as set
forth in the certificate or certificates of designation filed to establish the
respective series of preferred stock. Each share of common stock of Pacific
Ethanol, Inc. (Delaware) shall have the same relative rights as and be identical
in all respects to all the other shares of common stock. Each holder of shares
of common stock of Pacific Ethanol, Inc. (Delaware) shall be entitled to attend
all special and annual meetings of the stockholders of Pacific Ethanol, Inc.
(Delaware) and, share for share and without regard to class, together with the
holders of all other classes of stock entitled to attend such meeting and to
vote (except any class or series of stock having special voting rights), to cast
one vote for each outstanding share of common stock so held upon any matter or
thing (including, without limitation, the election of one or more directors)
properly considered and acted upon by the stockholders, except as otherwise
provided in this certificate of incorporation or by applicable law. Holders of
common stock of Pacific Ethanol, Inc. (Delaware) have no preemptive rights and
no right to convert their common stock of Pacific Ethanol, Inc. (Delaware) into
any other securities. There are no redemption or sinking fund provision
applicable to the common stock of Pacific Ethanol, Inc. (Delaware).
PACIFIC ETHANOL, INC. (DELAWARE) PREFERRED STOCK. Pacific Ethanol, Inc.
(Delaware) will have 10,000,000 shares of authorized preferred stock, none of
which will have been designated upon consummation of the Delaware
Reincorporation immediately prior to the consummation of the Share Exchange. The
board of directors of Pacific Ethanol, Inc. (Delaware) will have the authority
to issue up to 10,000,000 shares of preferred stock, in one or more series and
to fix the rights, preferences, privileges and restrictions granted to or
imposed upon any unissued and undesignated shares of preferred stock and to fix
the number of shares constituting any series and the designation of such series,
without any further vote or action by the shareholders. The board of directors
of Pacific Ethanol, Inc. (Delaware), without shareholder approval, can issue
preferred stock with voting and conversion rights which could adversely affect
the voting power or other rights of the holders of shares of common stock of
Pacific Ethanol, Inc. (Delaware). The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of Pacific
Ethanol, Inc. (Delaware).
PACIFIC ETHANOL, INC. (DELAWARE) WARRANTS. Immediately following
consummation of the Delaware Reincorporation and the Share Exchange, Pacific
Ethanol, Inc. (Delaware) will have warrants outstanding to purchase up to an
aggregate of 119,387 shares of common stock. The exercise price for the shares
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subject to outstanding warrants range from $1.50 per share (with respect to
warrants to acquire up to 44,387 shares of common stock) to $4.35 per share
(with respect to warrants to acquire up to 5,000 shares of common stock) and
expire at various times through May 2013.
PACIFIC ETHANOL, INC. (DELAWARE) OPTIONS. Immediately following
consummation of the Delaware Reincorporation and the Share Exchange, Pacific
Ethanol, Inc. (Delaware) will have options outstanding to purchase up to an
aggregate of 50,000 shares of common stock. The exercise price for the shares
subject to outstanding options ranges from $0.01 to $4.65 per share. Each of the
outstanding options expires ten years after the date of grant.
PACIFIC ETHANOL, INC. (DELAWARE) CONVERTIBLE DEBT. After giving effect to
the Delaware Reincorporation and pursuant to the consummation of the Share
Exchange, holders of convertible debt of Pacific Ethanol, Inc, (Delaware) will
have the right to convert up to $1,260,000 of debt that is owed by PEI as of
October 29, 2004 to such holders into shares of common stock of Pacific Ethanol,
Inc. (Delaware) at a conversion rate of $1.50 per share.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the
common stock of Pacific Ethanol, Inc. (Delaware) is expected to be North
American Transfer Co., 147 West Merrick Road, Freeport, New York 11520, and its
telephone number is (516) 379-8501.
DESCRIPTION OF SECURITIES OF PEI
The authorized capital stock of PEI consists of 30,000,000 shares of
common stock, without par value, and 30,000,000 shares of preferred stock,
without par value.
PEI COMMON STOCK. As of November 30, 2004, there were 13,433,866 shares of
PEI common stock outstanding and held of record by 75 shareholders. Holders of
PEI common stock are entitled to one vote per share on all matters to be voted
upon by the shareholders. The holders of PEI common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the board of directors out of funds legally available thereof. In the event of a
liquidation, dissolution or winding up of PEI, holders of PEI common stock are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of PEI common stock have no preemptive rights and no right to convert
their PEI common stock into any other securities. There are no redemption or
sinking fund provisions applicable to PEI common stock. All outstanding shares
of PEI common stock are, and all shares of PEI common stock to be outstanding
after the completion of the Share Exchange will be, validly issued, fully-paid
and nonassessable.
PEI PREFERRED STOCK. PEI has 30,000,000 shares of authorized preferred
stock, and no shares are outstanding. The board of directors has the authority
to issue up to 30,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued and undesignated shares of preferred stock and to fix the
number of shares constituting any series and the designation of such series,
without any further vote or action by the shareholders. The PEI board of
directors, without shareholder approval, can issue preferred stock with voting
and conversion rights which could adversely affect the voting power or other
rights of the holders of Accessity common stock. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in control of
PEI. Assuming that the Share Exchange is consummated, the PEI board of directors
presently has no intention to issue any shares of preferred stock.
WARRANTS. As of November 30, 2004, PEI had outstanding warrants to acquire
up to an aggregate of 93,487 shares of common stock at exercise prices of $1.50
per share (with respect to warrants to acquire up to 230,00043,487 shares of PEI
common stock) to $2.00 per share (with respect to warrants to acquire up to
50,000 shares of PEI common stock). In addition, as of November 30, 2004, PEI
had outstanding warrants to acquire 230,000 shares of PEI common stock at an
exercise price of $.0001 per share. These warrants vest ratably over a period of
two years commencing upon the closing of the Share Exchange.
133
OPTIONS. As of November 30, 2004, PEI had options outstanding to purchase
an aggregate of 25,000 shares of common stock. The purchase price for the shares
is $0.01 per share. The options will expire one year after the consummation of
the Share Exchange.
CONVERTIBLE DEBT. In June 2003, PEI obtained a loan in the principal
amount of $5.1 million in order to acquire a 137-acre parcel of real property in
Madera County, California, on which it intends to construct an ethanol
production facility, pursuant to the terms and conditions of a Term Loan
Agreement dated as of June 16, 2003, by and between LDI and PEI (the "Loan
Agreement"). The Loan Agreement provides for an interest rate of 5% per annum
through June 19, 2004 and, thereafter, a rate per annum equal to THE WALL STREET
JOURNAL Prime Rate plus 2% from June 20, 2004 until June 20, 2008, which is
based on a 365-day year and compounded monthly. The first payment, consisting of
interest only, was due June 19, 2004, after which interest is due and payable
monthly. Principal payments are due annually in three equal installments
beginning June 20, 2006 and ending June 20, 2008. PEI is also required to prepay
the outstanding principal of the loan if (i) the construction cost for the
ethanol production facility is less than $42.6 million (in which case PEI is
required to prepay an amount of principal equal to the difference between the
actual construction cost and $42.6 million) or (ii) PEI obtains construction
funding to construct a second ethanol production facility in California (in
which case PEI is required to prepay all of the outstanding principal and all
accrued and unpaid interest thereon). A late payment charge equal to 5% of the
amount past due may be assessed and be immediately payable if any payment of
principal or interest, or any portion thereof, is not paid in accordance with
the terms of the Loan Agreement. Pursuant to the Loan Agreement, LDI has the
right to convert up to $1,500,000 of the principal amount of the loan into
shares of common stock of PEI (or, if such conversion occurs after consummation
of the Share Exchange, into shares of Accessity common stock) at a fixed rate of
$1.50 per share at any time up to and including March 31, 2005. As of November
30, 2004, the remaining outstanding principal amount of the loan was $4,845,000.
The repayment of the loan is secured by a deed of trust granting to LDI a
first lien security interest on the Madera County, California property and any
debt financing obtained by PEI which is secured by a deed of trust on the Madera
County, California property, is required to be subordinated to the repayment
obligations of PEI to LDI and to the security interest of LDI. In addition, the
repayment of the loan is guaranteed by William "Bill" Jones, a principal
shareholder of PEI and the former Chairman of the Board of PEI, in an amount not
to exceed $1.0 million pursuant to the terms of a continuing guaranty executed
by Mr. Jones.
DESCRIPTION OF KINERGY LIMITED LIABILITY COMPANY MEMBERSHIP INTERESTS
All of the limited liability company membership interests of Kinergy are
owned by Neil Koehler, the current Chief Executive Officer of PEI. As the sole
limited liability company member, the net loss or net profit of Kinergy for each
fiscal year is allocated to Mr. Koehler, and Kinergy is treated for tax purposes
in the same manner as a partnership. Subject to and in accordance with the terms
of the operating agreement of Kinergy and applicable law regarding limited
liability companies, Mr. Koehler has the sole authority to manage the business
and affairs of Kinergy.
DESCRIPTION OF REENERGY LIMITED LIABILITY COMPANY MEMBERSHIP INTERESTS
All of the limited liability company membership interests of ReEnergy are
owned by Kinergy Resources, LLC, Kent Kaulfuss, Flin-Mac, Inc. and Tom Koehler.
As limited liability company members, the net loss or net profit for each fiscal
year is allocated to Kinergy Resources, LLC, Kent Kaulfuss, Flin-Mac, Inc. and
Tom Koehler, and ReEnergy is treated for tax purposes in the same manner as a
partnership. Subject to and in accordance with the terms of the operating
agreement of ReEnergy and applicable law regarding limited liability companies,
the managers of ReEnergy have the authority to manage the business and affairs
of ReEnergy.
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COMPARISON OF SHAREHOLDERS' RIGHTS
Upon consummation of the Share Exchange, the holders of PEI common stock
will become holders of Accessity common stock. As such, the holders of PEI
common stock will no longer be shareholders of PEI, a California corporation,
but will become shareholders of Accessity, a New York corporation, the rights
and privileges of which are governed by New York law. However, if the Delaware
reincorporation is approved by the shareholders of Accessity, then immediately
prior to the consummation of the Share Exchange, Accessity will reincorporate in
the State of Delaware pursuant to the consummation of the Delaware
Reincorporation. Accordingly, the holders of Accessity common stock (including
the former holders of PEI common stock) will become shareholders of Pacific
Ethanol, Inc., a Delaware corporation, the rights and privileges of which are
governed by Delaware law. Appraisal and dissenters' rights are not available to
shareholders of PEI with respect to the Delaware Reincorporation. See "Proposal
6--Approval of Delaware Reincorporation-Delaware and New York Corporate Law" for
a more complete description of the rights of shareholders of a New York
corporation compared to the rights of shareholders of a Delaware corporation.
Pursuant to the consummation of the Delaware Reincorporation, the Rights
Agreement dated December 28, 1998 between Accessity and North American Transfer
Co., as Rights Agent, will be terminated and, as provided in the certificate of
incorporation and bylaws of Pacific Ethanol, Inc. (Delaware), the surviving
corporation in the reincorporation merger, copies of which are included with
this proxy statement as APPENDIX D AND E, respectively, no shares of preferred
stock shall be designated as either Series A Preferred Stock or Junior
Participating Preferred Stock.
Upon consummation of the Share Exchange, the limited liability company
members of Kinergy and ReEnergy will also become holders of Accessity common
stock. As such, Neil Koehler will no longer be the sole limited liability
company member of Kinergy and Kinergy Resources, LLC, Kent Kaulfuss, Flin-Mac,
Inc. and Tom Koehler will no longer be limited liability company members of
ReEnergy, but will become shareholders of Accessity, a New York corporation, the
rights and privileges of which are governed by New York law. However, if the
Delaware reincorporation is approved by the shareholders of Accessity,
immediately prior to the consummation of the Share Exchange, Accessity will
reincorporate in the State of Delaware pursuant to the consummation of the
Delaware Reincorporation. Accordingly, the holders of Accessity common stock
(including the former holders of the limited liability company membership
interests of Kinergy and ReEnergy) will become shareholders of Pacific Ethanol,
Inc., a Delaware corporation, the rights and privileges of which are governed by
Delaware law. Appraisal and dissenters' rights are not available to the limited
liability company members of Kinergy and ReEnergy with respect to the Delaware
Reincorporation. See "Proposal 6--Approval of Delaware Reincorporation--Delaware
and New York Corporate Law" for a more complete description of the rights of
shareholders of a New York corporation compared to the rights of shareholders of
a Delaware corporation.
In addition, certain other rights and privileges of PEI shareholders and
the limited liability company members of Kinergy and ReEnergy will change as a
result of the Share Exchange. Upon completion of the Share Exchange, the
percentage ownership of Accessity by each former PEI shareholder will be less
than his, her or its current percentage ownership of PEI and the percentage
ownership of Accessity by each former limited liability company member of
Kinergy and ReEnergy will be substantially less than his, her or its current
percentage ownership of Kinergy and ReEnergy, respectively. Accordingly, former
PEI shareholders will have a somewhat smaller voting influence over the affairs
of Accessity than they currently enjoy over the affairs of PEI and the former
limited liability company members of Kinergy and ReEnergy will have a
substantially smaller voting influence over the affairs of Accessity than they
currently enjoy over the affairs of Kinergy and ReEnergy, respectively.
As wholly-owned subsidiaries of Accessity, the business and affairs of
PEI, Kinergy and ReEnergy will be subject to the management and direction of the
directors of Accessity. Accordingly, the former
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management of each of PEI, Kinergy and ReEnergy will no longer have ultimate
authority and control over the business and affairs of PEI, Kinergy and
ReEnergy, respectively.
THE BOARD OF DIRECTORS OF ACCESSITY UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE SHARE EXCHANGE PROPOSAL PURSUANT TO THE
SHARE EXCHANGE AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY.
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PROPOSAL 3
APPROVAL OF SUBSIDIARY TRANSFER
GENERAL
The disinterested directors of Accessity, without any influence from Barry
Siegel, have unanimously approved the Subsidiary Transfer, subject to the
approval by the shareholders of Accessity of the Share Exchange, and recommends
that the shareholders approve and adopt the Subsidiary Transfer proposal, if the
Share Exchange is approved. In determining whether to approve the Subsidiary
Transfer, Accessity obtained a fairness opinion from BearingPoint. See
"--Fairness Opinion."
The affirmative vote of the holders of a majority of the outstanding
shares of Accessity common stock as of the record date will be required to
approve the Subsidiary Transfer proposal. For purposes of this vote, abstentions
and broker non-votes will be counted as votes "AGAINST" the Subsidiary Transfer
proposal.
As a condition to the consummation of the Share Exchange by Accessity, the
parties have agreed that Accessity shall effect the Subsidiary Transfer.
Elements of the Subsidiary Transfer include: (i) the transfer of DriverShield to
Barry Siegel pursuant to a written agreement, the form and substance of which
must be reasonably satisfactory to the Acquired Companies, (ii) the issuance of
an aggregate of 600,000 shares of Accessity common stock to Barry Siegel and
Philip Kart, and (iii) the execution of mutually acceptable consulting and
noncompetition agreements between Accessity and each of Messrs. Siegel and Kart.
The transfer of DriverShield to Barry Siegel, the issuance of shares of
Accessity common stock to each of Messrs. Siegel and Kart and the execution of
the consulting and noncompetition agreements with each of Messrs. Siegel and
Kart are in full consideration for the agreement of each of Messrs. Siegel and
Kart to relinquish cash payments that otherwise would be due to each of them
under their respective employment agreements with Accessity as a result of the
consummation of the Share Exchange.
The landlord of the Coral Springs, Florida premises currently has the
property listed for sale, and Accessity has agreed to terminate the lease upon
sale of the building. As part of the disposition of DriverShield to Mr. Siegel,
until the landlord of the present Accessity headquarters located in Coral
Springs, Florida sells the building, Mr. Siegel or an entity owned or controlled
by Mr. Siegel (which may include Sentaur) with the consent of the lessor under
the existing lease agreement for such facilities, on terms and conditions
reasonably satisfactory to the Acquired Companies, will contribute the sum of
$3,500 toward the monthly rent obligation. However, once the Acquired Companies
have made lease payments of $50,000 under the lease, Mr. Siegel will make all
lease payments until the building is sold. In addition, the personal property at
the facilities of Accessity located in Coral Springs, Florida will be
transferred to Mr. Siegel or an entity owned or controlled by Mr. Siegel (which
may include Sentaur), and Accessity will pay Barry Siegel or Sentaur $20,000 for
moving expenses. Upon consummation of the Share Exchange, the principal
executive and business offices of Accessity will be the principal executive and
business offices of PEI located at 5711 N. West Avenue, Fresno, California
93711.
FAIRNESS OPINION
The following summary of BearingPoint's fairness opinion is qualified in
its entirety by reference to the full text of the opinion as set forth in
APPENDIX H. The preparation of a fairness opinion involves various
determinations as to the most relevant quantitative methods of financial
analysis and the application of those methods to particular circumstances.
Therefore, considering any portion of such analysis, without considering all
such analyses, could create an incomplete view of the processes.
In performing its analysis, BearingPoint: (i) made numerous assumptions
with respect to industry performance, business and other matters, many of which
are beyond the control of Accessity or DriverShield; and (ii) relied, without
assuming responsibility for verification, upon discussions with the
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management of Accessity and ClaimsNet, the operator of DriverShield, and upon
the accuracy and completeness of all of the financial and other information and
projections reviewed by BearingPoint for purposes of its opinion. The analyses
performed by BearingPoint are not necessarily indicative of actual values or
future results, and do not purport to be appraisals.
In conducting its analysis and arriving at its opinion that the Subsidiary
Transfer is fair, from a financial point of view, to Accessity and its
shareholders, BearingPoint: (i) held discussions with the management of each of
Accessity and ClaimsNet concerning the business, financial statements,
operations and prospects of DriverShield; (ii) reviewed the terms of the
Subsidiary Transfer; (iii) reviewed budgets, historical financial statements and
performance, projections, material contracts, internal analyses and all other
relevant documentation provided by Accessity concerning DriverShield; (iv)
reviewed publicly available information about Accessity; (v) reviewed internal
analyses about DriverShield; and (vi) reviewed the proposed acquisition terms
and the Share Exchange Agreement. BearingPoint used such valuation methods as it
deemed appropriate, including a discounted cash flow valuation. This methodology
seeks to determine the value of a business today, based on the amount it may
generate in cash over future periods. Typically, cash flows are projected over a
defined period, often five years, and a remaining or residual amount is
estimated for the values beyond the defined initial years of projections. These
future amounts are then individually discounted to the present by a discount
rate, and their amounts are summed to determine the total present value. The
discount rate is determined based on the inherent risk associated with the
stream of projected cash flows.
Accessity selected BearingPoint because BearingPoint is engaged in the
consulting business and regularly engages in the valuation of businesses in
connection with mergers and acquisitions and other activities. Accessity
selected BearingPoint to serve as its financial advisor based on BearingPoint's
qualifications and expertise. The terms of BearingPoint's engagement to
Accessity are set forth in an engagement letter dated July 26, 2004.
BearingPoint's role was limited to rendering an opinion that the principal terms
of the Subsidiary Transfer are fair, from a financial point of view, to
Accessity and the shareholders of Accessity. As compensation for its services,
BearingPoint will receive a fee of $69,000, plus reimbursement of its reasonable
out-of-pocket expenses, including reasonable fees and disbursements of counsel.
Accessity has also agreed to indemnify BearingPoint, its affiliates and related
partnerships and associations, partners, principals, employees, legal counsel,
agents and controlling persons (within the meaning of the federal securities
laws), to the full extent lawful, from and against any losses, claims, damages
or liabilities related to or arising out of BearingPoint's engagement or its
role in connection therewith (other than those that result primarily from such
person's bad faith or gross negligence) and shall reimburse any such indemnified
person for all expenses incurred in connection with investigating, defending or
preparing to defend any such action or claim.
THE DISINTERESTED MEMBERS OF THE BOARD OF DIRECTORS OF ACCESSITY
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE SUBSIDIARY
TRANSFER PROPOSAL.
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PROPOSAL 4
APPROVAL OF SUBSIDIARY SALE
GENERAL
The disinterested directors of Accessity, without any influence from Barry
Siegel, have unanimously approved the Subsidiary Sale, subject to the approval
by the shareholders of Accessity of the Share Exchange, and recommends that the
shareholders approve and adopt the Subsidiary Sale proposal, if the Share
Exchange is approved.
The affirmative vote of the holders of a majority of the outstanding
shares of Accessity common stock as of the record date will be required to
approve the Subsidiary Sale proposal. For purposes of this vote, abstentions and
broker non-votes will be counted as votes "AGAINST" the Subsidiary Sale
proposal.
TERMS OF SUBSIDIARY SALE
In late 2002, Accessity established a new business unit, Sentaur, to
diversify from the automobile repair industry. Sentaur provides hospitals the
opportunity to recoup discounts improperly taken by insurance companies and
other institutional payors of medical treatments. This business unit contracts
with hospitals and, upon analytic review of their internal records and
contracts, isolates those payors who have improperly discounted the fees they
have paid and seeks appropriate recovery. Sentaur's fee income from the
hospitals is earned upon the successful collection of the receivable by the
hospital. Sentaur currently has a number of hospitals under signed contracts.
For the nine month period ending September 30, 2004, Sentaur recorded total
revenues of approximately $480,000 and a net loss of approximately $46,000.
These results only reflect Sentaur's direct costs and exclude any costs of
overhead for rent, telephone, utilities, accounting and other administrative
services, officer salary and insurance. Inclusion of these additional expenses
would substantially increase the loss recorded for this period.
In light of the foregoing, Accessity's Board of Directors has determined
that the financial performance of Sentaur over a two-year period does not
warrant continuing Sentaur's operations after the closing of the Share Exchange.
Management of the Acquired Companies has concurred with Accessity and has
advised Accessity that they intend to terminate operations of Sentaur
immediately following consummation of the Share Exchange. Rather than
discontinuing the operations of Sentaur upon the consummation of the Share
Exchange, the disinterested members of Accessity's board of directors
unanimously decided to entertain offers from interested parties willing to pay
Accessity a nominal purchase price for Sentaur.
Therefore, Barry Siegel has offered to purchase Sentaur from Accessity for
the sum of $5,000 and will attempt to operate Sentaur for his own benefit. Mr.
Siegel will purchase all of the capital stock of Sentaur thereby acquiring all
of Sentaur's assets and liabilities. Mr. Siegel and Accessity have agreed to
execute a Stock Purchase Agreement that is mutually agreeable to both parties.
THE DISINTERESTED MEMBERS OF THE BOARD OF DIRECTORS OF ACCESSITY
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE SUBSIDIARY
SALE PROPOSAL.
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PROPOSAL 5
APPROVAL OF 2004 PLAN
Accessity's board of directors has unanimously approved the 2004 Plan,
subject to the approval by the shareholders of the Share Exchange, and
recommends that the shareholders approve and adopt the 2004 Plan proposal, if
the Share Exchange is approved. The 2004 Plan is included as APPENDIX B to this
proxy statement.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the annual meeting will be required
to approve the 2004 Plan proposal. For purposes of this vote abstentions and
broker non-votes will not be counted "FOR" or "AGAINST" this proposal.
PURPOSE
The 2004 Plan was adopted to provide a means by which employees of
Accessity (and any subsidiary of Accessity designated by the Accessity board of
directors to participate in the 2004 Plan) may be given an opportunity to
acquire shares of Accessity common stock.
ADMINISTRATION
The board of directors of Accessity or a committee composed of two or more
members of the board, is authorized to administer the 2004 Plan. If
administration is delegated to a committee, such committee will have, in
connection with the administration of the 2004 Plan, the powers possessed by the
board. As used herein with respect to the 2004 Plan, the "board" refers to the
committee as well as the board itself.
Notwithstanding the foregoing, a subcommittee of the committee composed
solely of two (2) or more "outside directors," as such term is defined under
Section 162(m) of the Code and the regulations thereunder, shall make all grants
of awards to eligible persons who are "covered employees" as such term is
defined in Section 162(m) of the Code. References to the board or the committee
include the subcommittee.
The board has the power to construe and interpret the 2004 Plan and,
subject to the provisions of the 2004 Plan, to determine the persons to whom and
the dates on which options will be granted, what type of option will be granted,
the number of shares to be subject to each option, the time or times during the
term of each option within which all or a portion of such option may be
exercised, the exercise price, the type of consideration, in addition to cash,
that may be used to pay the purchase price upon exercise of the option, and
other terms of the option.
SHARES SUBJECT TO THE 2004 PLAN
Pursuant to the 2004 Plan, the common stock underlying the options that
may be issued pursuant to awards under the 2004 Plan shall not exceed in the
aggregate 2,500,000 shares of Accessity's common stock. If any option is
surrendered (except surrender for shares of common stock) or for any other
reason ceases to be exercisable, in whole or in part, without having been
exercised in full, the stock not purchased under such option will revert to and
again become available for issuance under the 2004 Plan.
ELIGIBILITY
Incentive stock options may be granted only to employees (including
officers and directors who are employees). Non-statutory stock options may be
granted to employees, directors, officers, independent contractors, and
consultants. All of Accessity's executive officers, employees, consultants and
directors are eligible to receive grants under the 2004 Plan. Immediately after
consummation of the Share
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Exchange, Accessity and its subsidiaries will have approximately 11 executive
officers, employees and directors.
No person is eligible for the grant of an incentive stock option, if at
the time of grant, such person owns stock possessing more than 10% of the total
combined voting power of all classes of stock of Accessity (a "10% Shareholder")
unless the exercise price of such option is at least 110% of the fair market
value of such common stock subject to the option at the date of grant and the
option is not exercisable after the expiration of five years from the date of
grant. The aggregate fair market value, determined. at the time of grant, of the
shares of common stock with respect to which incentive stock options are
exercisable for the first time during any calendar year (under all such plans of
Accessity and its affiliates) may not exceed $100,000 dollars. In addition, no
person shall be eligible to be granted options covering more than 250,000 shares
of Accessity's common stock in any calendar year.
TERMS OF OPTIONS
TERM. No option is exercisable after the expiration of ten (10) years from
the date it was granted.
EXERCISE/PURCHASE PRICE. The exercise price of each option will not be
less than 100% of the fair market value of the common stock on the date of
grant.
CONSIDERATION. The purchase price of stock acquired pursuant to an option
is paid either in cash at the time the option is exercised or at the discretion
of the committee, (i) by delivery of already owned common stock of Accessity or
by withholding common stock otherwise deliverable upon exercise of the
discretionary option, (ii) by delivery on a form prescribed by the committee of
an irrevocable direction to a securities broker approved by the Committee to
sell shares of stock and deliver all or a portion of the proceeds to Accessity
in payment for the stock, (iii) by delivery of the optionee's promissory note
with such provisions as the committee determines appropriate, or (iv) any
combination of the foregoing (including cash). If the exercise price of an
option is paid by withholding common stock otherwise deliverable upon exercise
of the option, the committee may issue the optionee an additional option to
purchase a number of shares of common stock equal to the number of shares
withheld. This additional option shall have the same terms as the option that
was exercised except that its exercise price shall be the fair market value of
the common stock on the date of grant of the additional option.
The committee may, in its sole discretion, authorize the surrender of all
or part of an unexercised option (excluding non-discretionary options described
below) and authorize a payment thereof of an amount equal to the difference
between the aggregate fair market value of the common stock subject to such
option and the aggregate option price of such common stock. Such payment may be
made in cash, shares of common stock (using the fair market value on the date of
surrender), or some combination thereof.
TRANSFERABILITY. An incentive stock option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the incentive stock option
is granted only by such person. A non-statutory stock option shall be
transferable to the extent permitted by the option agreement covering the
option.
VESTING. The vesting schedule of each stock option granted under the 2004
Plan will be determined by the committee. If any option ceases to be exercisable
in whole or in part, the shares which were subject to such option but as to
which the option had not been exercised shall continue to be available under the
Plan.
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EFFECT OF CERTAIN CORPORATE EVENTS
If any change is made in the common stock subject to the 2004 Plan or
subject to any option granted under the 2004 Plan through merger, consolidation,
reorganization, recapitalization, reincorporation, stock split, stock dividend
or other change in the capital structure of Accessity, appropriate adjustments
shall be made by the committee in order to preserve but not increase the
benefits to the individual, including adjustments to the number and kind of
shares and the price per share subject to outstanding options.
A stock option agreement may provide for accelerated vesting in the event
of certain changes in control (all grants to non-employee directors shall so
provide). If a stock option agreement contains a change in control provision, it
will also provide that the stock option will remain exercisable for the
remainder of its term except that it will terminate upon the effective date of a
change in control in which Accessity is not the surviving entity, or in which
all or substantially all assets of the company are disposed of, sold or
transferred, or upon the complete liquidation or dissolution of Accessity.
AMENDMENT OF PLAN AND GRANTS
The board at any time, and from time to time, may amend the 2004 Plan.
However, no amendment will be effective without the consent of shareholders then
sufficient to approve the 2004 Plan in the first instance where the amendment
will increase the maximum number of shares subject to stock options issued under
the 2004 Plan or change the designation or class of persons eligible to receive
incentive stock options under the 2004 Plan.
The board may amend the terms of any outstanding option. However, any
amendment which would adversely affect the optionee's rights under an
outstanding option shall not be made without optionee's written consent.
Notwithstanding the foregoing, the board may, without written consent, cancel
any outstanding option or accept any outstanding option in exchange for a new
option.
TERMINATION OF PLAN
The board may suspend or terminate the 2004 Plan at any time or from time
to time. Unless sooner terminated by the board, the 2004 Plan will terminate on
October 25, 2014.
FEDERAL INCOME TAX INFORMATION
INCENTIVE STOCK OPTIONS. Options granted under the 2004 Plan which are
designated as incentive stock options are intended to be eligible for the
favorable federal income tax treatment accorded "incentive stock options" under
Section 422 of the Code.
There generally are no federal income tax consequences to the optionee or
Accessity by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be capital gain or loss. Generally, if the optionee disposes of the
stock before the expiration of either of these holding periods (a "disqualifying
disposition"), at the time of disposition, the optionee will realize taxable
ordinary income equal to the lesser of (a) the excess of the stock's fair market
value on the date of exercise over the exercise price, or (b) the optionee's
actual gain, if any, on the purchase and sale. The optionee's additional gain,
or any loss, upon the disqualifying disposition will be a capital gain or loss,
which will be long-term or short-term depending on how long the optionee holds
the stock. Capital gains
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are generally subject to lower tax rates than ordinary income. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16 of the Exchange Act.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, Accessity will generally be entitled (subject to the
requirement of reasonableness, the provision of 162(m) of the Code, and the
satisfaction of a tax reporting obligation) to a corresponding business expense
deduction in the tax year in which the disqualifying disposition occurs.
NON-STATUTORY STOCK OPTIONS. Options granted under the 2004 Plan which are
not designated as incentive stock options are "non-statutory stock options"
which generally have the federal income tax consequences described below:
There are no tax consequences to the optionee or Accessity by reason of
the grant of a non-statutory stock option. Upon exercise of a non-statutory
stock option, the optionee normally will recognize taxable ordinary income equal
to the excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, Accessity is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) of the Code, and the
satisfaction of a tax reporting obligation, Accessity will generally be entitled
to a business expense deduction equal to the taxable ordinary income realized by
the optionee. Upon disposition of the stock, the optionee will recognize a
capital gain or loss equal to the difference between the selling price and the
sum of the amount paid for such stock plus any amount recognized as ordinary
income upon exercise of the option. Such gain or loss will be long-term or
short-term depending on how long the optionee holds the stock. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16 of the Exchange Act.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. Section 162(m) of the Code
denies a deduction to any publicly held corporation for compensation paid to
certain employees in a taxable year to the extent that compensation exceeds $1
million for a covered employee. It is possible that compensation attributable to
awards granted under the 2004 Plan, when combined with all other types of
compensation received by a covered employee from Accessity, may cause this
limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m) of the Code,
compensation attributable to stock options will qualify as performance-based
compensation, provided that the option is granted by a compensation committee
comprised solely of "outside directors" and either: (i) the stock option plan
contains a per-employee limitation on the number of shares for which stock
options may be granted during a specified period, the per-employee limitation is
approved by the shareholders and the exercise price of the option is no less
than the fair market value of the stock on the date of grant; or (ii) the option
is granted (or exercisable) only upon the achievement (as certified in writing
by the compensation committee) of an objective performance goal established in
writing by the compensation committee while the outcome is substantially
uncertain and the option is approved by shareholders. Stock options granted
under the 2004 Plan are intended to qualify for the exemption for
performance-based compensation.
POSSIBLE ANTI-TAKEOVER EFFECTS
Although not intended as an anti-takeover measure by Accessity's board of
directors, one of the possible effects of the 2004 Plan could be to place
additional shares, and to increase the percentage of the total number of shares
outstanding, in the hands of directors and key employees. These persons may be
viewed as part of, or friendly to, incumbent management and may, therefore,
under certain circumstances
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be expected to make investment and voting decisions in response to a hostile
takeover attempt that may serve to discourage or render more difficult the
accomplishment of an attempt.
NEW PLAN BENEFITS
As stated above, the committee has the authority to determine the amounts,
terms and grant dates of options to be granted in the future to eligible
employees or eligible directors or consultants under the 2004 Plan. To date, no
such determinations have been made and, as a result, it is not possible to state
such information.
EQUITY COMPENSATION PLAN INFORMATION
Information regarding securities authorized for issuance under Accessity's
existing equity compensation plans is included under the heading "Information
Relating to Accessity- Equity Compensation Plan Information."
THE BOARD OF DIRECTORS OF ACCESSITY UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THE 2004 PLAN PROPOSAL.
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PROPOSAL 6
APPROVAL OF DELAWARE REINCORPORATION
The board of directors of Accessity has unanimously approved the Delaware
Reincorporation, subject to the approval by the Accessity shareholders of the
Share Exchange, and recommends that the Accessity shareholders approve and adopt
the related articles of merger and the resulting reincorporation of Accessity in
the State of Delaware, if the Share Exchange is approved. The Delaware
Reincorporation proposal will be effected by merging Accessity with and into
Pacific Ethanol, Inc., which will be a newly formed wholly-owned subsidiary of
Accessity incorporated in the State of Delaware, pursuant to articles of merger
to be entered into by and between Accessity and such wholly-owned subsidiary,
and Pacific Ethanol, Inc. (Delaware) will be the corporation surviving the
merger. The address of the principal executive offices of the surviving
corporation will be the address of the principal executive offices of PEI
located at 5711 N. West Ave., Fresno, California 93711. The form of Agreement
and Plan of Merger are included as APPENDIX C to this proxy statement.
The affirmative vote of the holders of a majority of the outstanding
shares of Accessity common stock as of the record date will be required to
approve the Delaware Reincorporation proposal. For purposes of this vote,
abstentions and broker non-votes will be counted as votes "AGAINST" the Delaware
Reincorporation proposal.
REASONS FOR THE DELAWARE REINCORPORATION
Accessity's board of directors believes that the reincorporation in
Delaware will provide added flexibility for both the management and business of
Accessity. Delaware is recognized both domestically and internationally as a
favorable legal and regulatory environment within which to operate a corporate
business. This environment should enhance Accessity's operations and its ability
to effect future acquisitions and other transactions. For many years, Delaware
has followed a policy of encouraging incorporation in that state and, in
furtherance of that policy, has adopted comprehensive, modern and flexible
corporate laws which are periodically updated and revised to meet changing
business needs. In addition, the Delaware courts have developed considerable
expertise in dealing with corporate issues, and a substantial body of case law
has developed in the construction of Delaware law, resulting in greater
predictability with respect to corporate legal affairs. As such, various major
companies have either incorporated or have subsequently reincorporated in
Delaware.
In addition, the reincorporation in Delaware will allow for what
Accessity's board of directors believes to be a much needed increase in
authorized shares of common stock of Accessity. As discussed below, in
connection with the reincorporation merger every outstanding share of common
stock of Accessity will be automatically converted into one share of common
stock of Pacific Ethanol, Inc. (Delaware). The certificate of incorporation of
Pacific Ethanol, Inc. (Delaware) authorizes the issuance of up to 100,000,000
shares of common stock. Accordingly, as a result of the reincorporation, the
amount of authorized common stock increases from 30,000,000 shares to
100,000,000. An increase in the amount of authorized but unissued shares of
common stock is critical to Accessity in light of the need to obtain additional
equity financing in order to fund the construction of one or more ethanol plants
and for other general working capital purposes.
THE REINCORPORATION MERGER
The Delaware Reincorporation will be effected through the reincorporation
merger. As a result of the reincorporation merger, Accessity will be merged with
and into Pacific Ethanol, Inc. (Delaware), which will succeed to all of the
rights, properties, assets and liabilities of Accessity. The terms and
conditions of the reincorporation merger are set forth in the Agreement and Plan
of Merger, and the summary of the terms and conditions of the reincorporation
merger set forth below is qualified by reference to the full text of the
Agreement and Plan of Merger included as APPENDIX C to this proxy statement.
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Following the reincorporation, the composition of the board of directors
of Accessity will be as described above, and the rights of stockholders and
Accessity's corporate affairs will be governed by the Delaware General
Corporation Law (the "DGCL") and the certificate of incorporation and bylaws of
Pacific Ethanol, Inc. (Delaware) rather than by the New York Business
Corporation Law (the "NYBCL") and the articles of incorporation, as amended, and
bylaws of Accessity. Set forth below, under the heading "Delaware and New York
Corporate Laws," is a comparison of the material rights of shareholders and
matters of corporate governance before and after the reincorporation in
Delaware.
The form of certificate of incorporation and form of bylaws of Pacific
Ethanol, Inc. (Delaware) are included as APPENDIX D AND E to this proxy
statement, respectively. The summary of the certificate of incorporation and
bylaws of Pacific Ethanol, Inc. (Delaware) set forth below is qualified by
reference to the full text of the certificate of incorporation and bylaws
attached to this proxy statement. The articles of incorporation, as amended, and
bylaws of Accessity are available for inspection by shareholders of Accessity at
the principal offices of Accessity located at 12514 West Atlantic Boulevard,
Coral Springs, Florida 33071.
Upon the effectiveness of the reincorporation merger, and without any
action on the part of Accessity or the holder of any securities of Accessity,
except for shares held by a dissenting shareholder, every outstanding share of
common stock of Accessity will be automatically converted into one share of
common stock of Pacific Ethanol, Inc. (Delaware). Each outstanding certificate
representing shares of common stock of Accessity will represent the same number
of shares of common stock of Pacific Ethanol, Inc. (Delaware), and such
certificates will be deemed for all corporate purposes to evidence ownership of
shares of common stock of Pacific Ethanol, Inc. (Delaware).
IT WILL NOT BE NECESSARY FOR ACCESSITY'S SHAREHOLDERS TO EXCHANGE THEIR
EXISTING STOCK CERTIFICATES FOR STOCK CERTIFICATES UPON CONSUMMATION OF THE
DELAWARE REINCORPORATION. However, shareholders may exchange their certificates
if they so choose.
The common stock of Accessity currently trades on The Nasdaq SmallCap
Market under the symbol "ACTY." Upon consummation of the reincorporation merger,
subject to the approval of the initial listing application of Pacific Ethanol,
Inc. (Delaware) by The Nasdaq Stock Market, the common stock of Pacific Ethanol,
Inc. (Delaware) will trade under the symbol "PEIX" on The Nasdaq SmallCap
Market, without interruption, and delivery of existing stock certificates of
Accessity will constitute "good delivery" of stock certificates representing
shares of common stock in stock transactions effected after the reincorporation
merger.
Except for the filing of the articles of merger and a certificate of
merger in New York and Delaware, respectively, and the approval of the listing
application with The Nasdaq Stock Market, there are no state or federal
regulatory requirements or approvals necessary to consummate the reincorporation
merger.
Consummation of the reincorporation merger is subject to the approval of
Accessity's shareholders. The affirmative vote of the holders of a majority of
the issued and outstanding shares of common stock of Accessity as of the record
date will be required to approve the Delaware Reincorporation proposal. The
reincorporation merger is expected to become effective immediately prior to
consummation of the Share Exchange (subject to approval of the Accessity
shareholders) if all other conditions to the reincorporation merger have been
satisfied, including the receipt of all consents, orders and approvals necessary
for consummation of the reincorporation merger. Prior to its effectiveness,
however, the reincorporation merger may be abandoned by Accessity's board of
directors if, for any reason, the Accessity board of directors determines that
consummation of the reincorporation merger is no longer in the best interest of
Accessity and its shareholders or if Accessity receives demands for exercise of
dissenters' rights from holders of common stock of Accessity representing more
than 1% of its issued and outstanding shares of common stock.
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DISSENTERS' RIGHTS
Accessity shareholders have rights under New York law to dissent from the
Delaware Reincorporation and to demand appraisal of, and to receive payment in
cash of, the fair value of their shares of common stock. The following is a
brief summary of the statutory procedures to be followed by a holder of shares
of Accessity common stock who does not wish to accept the per share
consideration pursuant to the Delaware Reincorporation in order to dissent from
the Delaware Reincorporation and perfect dissenters' rights under New York law.
THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SECTIONS 623 AND 910 OF THE NYBCL, THE TEXT OF WHICH IS
SET FORTH IN APPENDIX G TO THIS PROXY STATEMENT. ANY SHAREHOLDER CONSIDERING
DEMANDING APPRAISAL IS ADVISED TO CONSULT LEGAL COUNSEL. DISSENTERS' RIGHTS WILL
NOT BE AVAILABLE UNLESS AND UNTIL THE DELAWARE REINCORPORATION IS CONSUMMATED.
A holder of shares of common stock who desires to exercise his dissenters'
rights must fully satisfy the following conditions. Dissenters' rights of
appraisal will be lost and waived if the procedural requirements of Section 623
of the NYBCL are not fully and precisely satisfied. If dissenters' rights are
lost and waived, the shareholder will be entitled to receive the consideration
provided for in the Delaware Reincorporation agreement.
HOW TO EXERCISE DISSENTERS' RIGHTS
Any holder of common stock who elects to exercise dissenters' rights with
respect to the Delaware Reincorporation must file with Accessity, before the
annual meeting, or at the annual meeting but before the vote, written objection
to the Delaware Reincorporation. The objection must include a notice of his
election to dissent, his name and residence address, the number of shares of
common stock as to which he dissents and a demand for payment of the fair value
of his shares of common stock if the Delaware Reincorporation is completed. Such
objection is not required from any shareholder to whom Accessity did not give
notice of the meeting in accordance with the NYBCL. A vote against the Delaware
Reincorporation will not itself constitute an objection. Within 10 days after
the shareholders' authorization date, which term as used in Section 623 of the
NYBCL means the date on which the shareholders' vote authorizing the Delaware
Reincorporation is taken, Accessity must give written notice of such
authorization by registered mail to each shareholder who filed written objection
or from whom written objection was not required. However, written notice of such
authorization will not be sent to any shareholder who voted for the Delaware
Reincorporation because he will be deemed to have elected not to enforce his
right to receive payment for his shares. The failure to vote against the
Delaware Reincorporation will not itself constitute a waiver of a shareholder's
dissenters' rights.
Within 20 days after the giving of notice to him, any shareholder from
whom written objection was not required and who elects to dissent must file with
the corporation a written notice of such election, stating his name and
residence address, the number of shares of common stock as to which he dissents
and a demand for payment of the fair value of such shares.
A shareholder may not dissent as to less than all the shares of common
stock as to which he has a right of dissent, held by him of record and that he
owns beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all the shares of common stock of such owner,
as to which such nominee or fiduciary has a right to dissent, held of record by
such nominee or fiduciary. Furthermore, if the shares of common stock are owned
of record in a fiduciary capacity, such as by a trustee, guardian or custodian,
the demand should be made in that capacity, and if the shares of common stock
are owned of record by more than one person, as in a joint tenancy or tenancy in
common, the demand should be made by or for all owners of record.
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All demands for appraisal should be delivered before the vote on the
Delaware Reincorporation is taken at the annual meeting. All demands for
appraisal and notices of election to dissent should be addressed to the:
Corporate Secretary
Accessity Corp.
12514 West Atlantic Blvd
Coral Springs, Florida 33071
At the time of filing a notice of election to dissent or within one month
thereafter, a dissenting shareholder must submit all of his certificates
representing shares of common stock to Accessity or its transfer agent for
notation thereon of the election to dissent, after which such certificates will
be returned to the shareholder. Failure to submit such certificates may result
in the loss of dissenters' rights.
PROCEDURE FOR APPRAISAL PROCEEDING
Within 15 days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within 15 days
after the effective date of the Delaware Reincorporation, whichever is later,
Accessity is required to make a written offer, by registered mail to each
shareholder who has filed a notice of election to dissent, to pay for such
holder's shares of common stock at a specified price which Accessity considers
to be their fair value. Such offer will be accompanied by a statement setting
forth the aggregate number of shares of common stock with respect to which such
notices of election to dissent from the Delaware Reincorporation have been
received and the aggregate number of holders of such shares of common stock.
If the Delaware Reincorporation has been completed at the time such offer
is made, such offer will also be accompanied by (i) advance payment to each
dissenting shareholder who has submitted his certificates for notation thereon
of the election to dissent of an amount equal to 80% of the amount of such offer
or (ii) as to each dissenting shareholder who has not yet submitted his
certificates for notation thereon, a statement that advance payment to such
shareholder of an amount equal to 80% of the amount of such offer will be made
promptly upon submission of his certificates. Acceptance of such advance payment
by a dissenting shareholder will not constitute a waiver of his dissenter's
rights.
If within 30 days after the making of such written offer, the surviving
corporation and any dissenting shareholder agree upon the price to be paid for
such holder's shares of common stock, payment therefore will be made within 60
days after the making of such offer or the effective date of the Delaware
Reincorporation, whichever is later, upon the surrender of the certificates
representing such shares of common stock. If Accessity fails to make such an
offer within the 15-day period described above, or if it makes an offer but
Accessity and a dissenting shareholder do not agree within 30 days of its making
of the offer upon the price to be paid for such shareholder's shares of common
stock, Accessity must, within 20 days of such 15-or 30-day period, as the case
may be, institute a special proceeding in the Supreme Court of New York to
determine the rights of dissenting shareholders and fix the fair value of their
shares of common stock.
The fair value of the shares of common stock shall be the fair value as of
the close of business on the day before the shareholders' authorization date. In
fixing the fair value of the shares, the court will consider the nature of the
Delaware Reincorporation and its effects on Accessity and its shareholders, the
concepts and methods then customary in the relevant securities and financial
markets for determining fair value of shares of a corporation engaging in a
similar transaction under comparable circumstances and all other relevant
factors. If Accessity does not institute such a proceeding within the 20-day
period, any dissenting shareholder may, within 30 days after such 20-day period,
institute a proceeding for the same. If such proceeding is not instituted within
such 30-day period, any dissenting shareholders who have not
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agreed with Accessity as to the price to be paid for their shares of common
stock will lose their dissenters' rights, unless the court, for good cause
shown, otherwise directs.
Within 60 days after the completion of any such court proceeding,
Accessity must pay to each dissenting shareholder the amount found to be due
him, with interest thereon at such rate as the court finds to be equitable, from
the effective date of the Delaware Reincorporation to the date of payment, upon
surrender by such shareholder of the certificates representing such shares of
common stock. If the court finds that the refusal of any dissenting shareholder
to accept Accessity's offer was arbitrary, vexatious or otherwise not in good
faith, no interest will be allowed to such shareholder.
The parties to such court proceeding will bear their own costs and
expenses, including the fees and expenses of their counsel and any experts
employed by them, except that the court, in its discretion and under certain
conditions, may apportion and assess all or any part of the costs, expenses and
fees incurred by dissenting shareholders against the surviving corporation or
may apportion and assess all or any part of the costs, expenses and fees
incurred by the surviving corporation against any dissenting shareholders,
including any dissenting shareholders who have withdrawn their notices of
election to dissent from the Delaware Reincorporation, who the court finds were
arbitrary, vexatious or otherwise not acting in good faith in refusing
Accessity's offer of payment. Any shareholder who has filed a notice of election
to dissent will not, after the effective date of the Delaware Reincorporation,
have any of the rights of a shareholder with respect to his shares of common
stock other than the right to be paid the fair value of such shares of common
stock under the NYBCL.
Any notice of election to dissent may be withdrawn by a dissenting
shareholder at any time before the acceptance in writing of an offer by
Accessity, but in no case later than 60 days after the effective date of the
Delaware Reincorporation unless Accessity consents in writing. However, if
Accessity fails to make a timely offer to pay such shareholder the fair value of
his shares of common stock as provided above, the dissenting shareholder may
withdraw his election to dissent at any time within 60 days after any date such
an offer is made.
TERMINATION OF RIGHTS AGREEMENT AND ELIMINATION OF JUNIOR PARTICIPATING
PREFERRED STOCK
Pursuant to the consummation of the Delaware Reincorporation immediately
prior to the consummation of the Share Exchange, the Rights Agreement dated
December 28, 1998 between Accessity and North American Transfer Co., as Rights
Agent, will be terminated and, as provided in the forms of certificate of
incorporation and bylaws of Pacific Ethanol, Inc. (Delaware), the surviving
corporation in the reincorporation merger, copies of which are included with
this proxy statement as APPENDIX D AND E, respectively, no shares of preferred
stock shall be designated as either Series A Preferred Stock or Junior
Participating Preferred Stock.
ACCOUNTING TREATMENT OF THE DELAWARE REINCORPORATION
The Delaware Reincorporation will have no accounting implications on the
historical financial statements of Accessity.
ACCELERATION OF OUTSTANDING OPTIONS
Accessity's 1995 Incentive Stock Plan provides that in the event of
a merger in which Accessity is not the surviving corporation, any outstanding
options granted under that plan which have not vested shall vest and become
exercisable in full. Accordingly, upon the consummation of the Delaware
Reincorporation, all unvested outstanding options under the 1995 Incentive Stock
Plan (which aggregate 173,333 shares of Accessity common stock as of November
30, 2004) will have their vesting accelerated as of the date of the closing of
the Delaware Reincorporation.
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FEDERAL INCOME TAX CONSEQUENCES OF THE DELAWARE REINCORPORATION
Subject to the limitations, qualifications and exceptions described
herein, and assuming the reincorporation merger qualifies as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, the following tax consequences generally should result:
o A holder of Accessity common stock should not recognize gain or loss
upon receipt of Pacific Ethanol, Inc. (Delaware) common stock pursuant
to the reincorporation.
o The aggregate tax basis of the Pacific Ethanol, Inc. (Delaware) common
stock received pursuant to the reincorporation should be equal to the
aggregate tax basis of the Accessity common stock surrendered in
exchange therefor.
o The holding period of the Pacific Ethanol, Inc. (Delaware) common
stock should include the period during which such shareholder held the
corresponding share of Accessity common stock prior to the
reincorporation, provided such shareholder held the corresponding
share as a capital asset at the time of the reincorporation.
In addition, Accessity should not, prior to or after the reincorporation,
recognize gain or loss as a result of the reincorporation, and the tax
attributes of Accessity will remain the same after the reincorporation.
The foregoing summary of material federal income tax consequences is
included for general information only and does not address all income tax
consequences to all of Accessity's shareholders. This summary does not purport
to be complete and does not address the tax consequences to holders that are
subject to special tax rules, such as banks, insurance companies, regulated
investment companies, personal holding companies, foreign entities, nonresident
alien individuals, broker-dealers and tax-exempt entities. This summary is based
on the Internal Revenue Code of 1986, as amended, Treasury regulations and
proposed regulations, court decisions and current administrative rulings and
pronouncements of the Internal Revenue Service, all of which are subject to
change, possibly with retroactive effect. HOLDERS OF ACCESSITY COMMON STOCK ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED DELAWARE REINCORPORATION IN LIGHT OF THEIR PERSONAL
CIRCUMSTANCES AND THE CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN TAX LAWS.
NO CHANGE IN REPORTING STATUS
The proposed reincorporation of Accessity as a Delaware corporation will
have no effect upon Accessity's status as a reporting company for federal
securities law purposes.
BOARD OF DIRECTORS RESERVATION OF RIGHTS
The board of directors of Accessity reserves the right, notwithstanding
shareholder approval and without further action by the shareholders, to elect
not to proceed with the Delaware Reincorporation merger if, for any reason, the
board of directors of Accessity determines that consummation of the Delaware
Reincorporation is no longer in the best interest of Accessity and its
shareholders or if Accessity receives demands for the exercise of dissenters'
rights from holders of shares of Accessity common stock representing more than
1% of Accessity's issued and outstanding shares of common stock. In addition,
the board of directors of Accessity reserves the right to consummate the
Delaware Reincorporation merger for up to twelve months following shareholder
approval thereof at the annual meeting. However, at the present time, the board
of directors intends to proceed with the reincorporation of Accessity with and
into Pacific Ethanol, Inc. (Delaware), as presented herein without delay.
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DELAWARE AND NEW YORK CORPORATE LAWS
The following discussion includes a summary of the material differences
between the rights of Accessity's shareholders before and after the Delaware
Reincorporation. In most cases, the rights of shareholders before and after the
Delaware Reincorporation are substantially similar, with changes having been
made to the corporate charter documents to maintain this substantial similarity.
In other cases, there are differences that might be considered material, and
these differences may be understood from the following comparison.
BOARD OF DIRECTORS
ACCESSITY. Accessity's bylaws provide that the board of directors shall
consist of at least three and no more than seven directors, with the exact
number to be set by the board of directors. The current number is set at five.
The board is divided into three classes of directors: Class I, Class II and
Class III. The term of office of each class of directors is three years, with
one class expiring each year at Accessity's annual meeting of shareholders. The
classified board is intended to serve as an anti-takeover defense because it
operates to slow a change in control of Accessity's board of directors by
limiting the number of directors that are elected annually.
Currently, the board of directors consists of three directors, with two
vacancies. Each director is entitled to serve until his successor is elected and
qualified. Directors may be removed for or without cause by an affirmative vote
of a majority of the shares entitled to vote at a special or annual meeting of
the shareholders.
PACIFIC ETHANOL, INC. (DELAWARE). The certificate of incorporation of
Pacific Ethanol, Inc. (Delaware) provides that the number of directors which
shall constitute the board of directors of Pacific Ethanol, Inc. (Delaware) will
be fixed from time to time by, or in the manner provided in, the bylaws of
Pacific Ethanol, Inc. (Delaware) or in an amendment thereof duly adopted by the
board of directors or the stockholders of Pacific Ethanol, Inc. (Delaware).
Pacific Ethanol, Inc. (Delaware)'s bylaws provide that the board of directors
shall consist of seven members. This number may be changed by a duly adopted
amendment to the certificate of incorporation or by an amendment to the bylaws
duly adopted by the vote or written consent of the holders of a majority of the
stock issued and outstanding and entitled to vote or by resolution of a majority
of the board of directors, except as may be otherwise specifically provided by
statute or by the restated certificate of incorporation. No reduction of the
authorized number of directors shall have the effect of removing any director
before that director's term of office expires. Each director is entitled to
serve until his successor is elected and qualified or until his earlier death,
resignation or removal. Directors may be removed for or without cause by a
majority of the stockholders entitled to vote at a special or annual meeting of
the stockholders.
If the shareholders approve and adopt the Delaware Reincorporation
proposal, all members of the board of directors immediately prior to the
Delaware Reincorporation merger shall continue as members of the board of
directors of Pacific Ethanol, Inc. (Delaware). The term of such directors will
expire upon the election and qualification of each such director's successor at
the 2005 annual meeting of stockholders of Pacific Ethanol, Inc. (Delaware).
Pacific Ethanol, Inc. (Delaware) will not have a classified board and,
therefore, will not have the benefit or burden of any anti-takeover effect
relating to a classified board.
AUTHORIZED SHARES
ACCESSITY. Accessity's current certificate of incorporation authorizes
30,000,000 shares of common stock, $0.015 par value per share, and 1,000,000
shares of preferred stock, $0.01 par value per share, of which 1,000 shares have
been designated as Series A Convertible Preferred Stock (the "Series A Preferred
Stock") and 200,000 shares have been designated as Junior Participating
Preferred Stock. As of November 30, 2004, there were 2,339,414 shares of common
stock issued and outstanding, no shares of
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Series A Preferred Stock issued and outstanding, and no shares of Junior
Participating Preferred Stock outstanding.
PACIFIC ETHANOL, INC. (DELAWARE). The certificate of incorporation of
Pacific Ethanol, Inc. (Delaware) authorizes 110,000,000 shares of capital stock
consisting of 100,000,000 shares of common stock, par value $0.001 per share,
and 10,000,000 shares of preferred stock, par value $0.001 per share. Prior to
the consummation of the reincorporation merger, Pacific Ethanol, Inc. (Delaware)
will issue 100 shares of common stock to Accessity. Upon consummation of the
reincorporation merger, the 100 issued shares will be cancelled.
LIMITATION OF DIRECTOR LIABILITY
ACCESSITY. Article Ninth of Accessity's articles of incorporation, as
amended, provides that no provision of the articles of incorporation is intended
by the corporation to be construed as limiting, prohibiting, denying or
abrogating any of the general or specific powers or rights conferred under the
New York Business Corporation Law upon Accessity and upon its directors in
particular, the power of the Corporation to furnish indemnification to directors
in their capacities as are conferred by the NYBCL. Additionally, under Section
717 of the NYBCL, directors are required to discharge their duties, including
his duties as a member of any committee of the board upon which they may serve,
in good faith and with that degree of care which an ordinarily prudent person in
a like position would use under similar circumstances.
PACIFIC ETHANOL, INC. (DELAWARE). The certificate of incorporation of
Pacific Ethanol, Inc. (Delaware) provides that directors of Pacific Ethanol,
Inc. (Delaware) will not be liable personally to Pacific Ethanol, Inc.
(Delaware) or the stockholders of Pacific Ethanol, Inc. (Delaware) for monetary
damages for breach of fiduciary duty as a director except for liability: (a) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174 of
the DGCL for unlawful payment of a dividend or approval of an unlawful stock
redemption or repurchase, or (d) for any transaction from which the director
derived any improper personal benefit. Additionally, if the DGCL is subsequently
amended, then the liability of a director of Pacific Ethanol, Inc. (Delaware)
shall be eliminated or limited to the fullest extent permitted by the DGCL, as
so amended. This provision, which is substantially similar to Section 719 of the
NYBCL that is currently applicable to Accessity, protects directors of Pacific
Ethanol, Inc. (Delaware) against personal liability for monetary damages from
breaches of their duty of care. Under Delaware law, absent adoption of this
provision in the certificate of incorporation of Pacific Ethanol, Inc.
(Delaware), directors can be held liable for gross negligence in connection with
decisions made on behalf of the corporation in the performance of their duty of
care, but may not be liable for simple negligence.
INDEMNIFICATION
ACCESSITY. Sections 722 and 726 et seq., of the NYBCL provide that
Accessity has the right to indemnify, to purchase indemnity insurance for, and
to pay and advance expenses to directors, officers and other persons who are
eligible for, or entitled to, such indemnification, payments or advances, by
being made or threatened to be made a party to an action or a proceedings,
whether criminal, civil, administrative or investigative by reason of the fact
that he is or was a director, officer or employee of Accessity, or served any
other enterprise as director or officer or employee at the request of Accessity.
PACIFIC ETHANOL, INC. (DELAWARE). Under Section 145 of the DGCL,
directors, officers, employees and other individuals may be indemnified against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with specified actions, suits or proceedings, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation, including a derivative action, a "Corporation
Action") if they acted in good faith and in a manner they
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reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, regarding any criminal action or proceeding, had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of Corporation Actions, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with the defense or
settlement of such actions. The DGCL further requires court approval before
there can be any indemnification where the person seeking indemnification has
been found liable to the corporation. To the extent that a director or officer
is otherwise eligible to be indemnified is successful on the merits of any claim
or defense described above, indemnification for expenses (including attorneys'
fees) actually and reasonably incurred is mandated by the DGCL.
The provisions regarding indemnification in the bylaws of Pacific Ethanol,
Inc. (Delaware) are substantially similar to those in the Accessity bylaws. The
certificate of incorporation and bylaws of Pacific Ethanol, Inc. (Delaware) also
provides that Pacific Ethanol, Inc. (Delaware) may indemnify, in addition to a
person who is or was a director, officer, employee or agent of Pacific Ethanol,
Inc. (Delaware), or is or was serving at the request of Pacific Ethanol, Inc.
(Delaware) as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, a person who is or was a
director, officer, employee or agent of any resulting corporation or any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger with Pacific Ethanol, Inc. (Delaware) which, if its
separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued. The
right to indemnification is not exclusive of any other right which any person
may have or acquire under any statute, any provision of the certificate of
incorporation or bylaws of Pacific Ethanol, Inc. (Delaware), or otherwise.
ANTI-TAKEOVER STATUTES/PROVISIONS
ACCESSITY. Section 912 of the NYBCL prohibits, in general, any business
combination, such as a merger or consolidation, between a New York corporation
and an "interested shareholder" (which is defined generally as any owner of 20%
or more of the corporation's outstanding voting stock) for five years after the
date on which such shareholder became an interested shareholder unless the
business combination or the stock acquisition which caused the person to become
an interested shareholder was approved in advance by the corporation's board of
directors. This provision of the NYBCL is effective even if all parties should
subsequently decide that they wish to engage in the business combination.
Following the five-year moratorium period, the New York corporation may engage
in certain business combinations with an interested shareholder only if, among
other things, (a) the business combination is approved by the affirmative vote
of the holders of a majority of the outstanding voting shares not beneficially
owned by the interested shareholder proposing the business combination, or (b)
the business combination meets certain criteria designed to ensure that the
remaining shareholders receive fair consideration for their shares.
Neither Accessity's articles of incorporation, as amended, nor bylaws
specifically address the foregoing. Accessity has not opted out of any of the
foregoing anti-takeover provisions.
PACIFIC ETHANOL, INC. (DELAWARE). Section 203 of the DGCL is similar, but
not identical, to Section 912 of the NYBCL. Section 203 of the DGCL, which
applies to Pacific Ethanol, Inc. (Delaware), regulates transactions with major
stockholders after they become major stockholders. Section 203 of the DGCL
prohibits a Delaware corporation from engaging in mergers, dispositions of ten
percent or more of its assets, certain issuances of stock and other transactions
("business combinations") with a person or group that owns 15% or more of the
voting stock of the corporation (an "interested stockholder") for a
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period of three years after the interested stockholder crosses the 15%
threshold. These restrictions on transactions involving an interested
stockholder do not apply if (a) before the interested stockholder owned 15% or
more of the voting stock, the board of directors approved the business
combination or the transaction that resulted in the person or group becoming an
interested stockholder, (b) in the transaction that resulted in the person or
group becoming an interested stockholder, the person or group acquired at least
85% of the voting stock other than stock owned by directors who are also
officers and certain employee stock plans, or (c) after the person or group
became an interested stockholder, the board of directors and at least two-thirds
of the voting stock other than stock owned by the interested stockholder
approves the business combination at a meeting.
The restrictions contained in Section 203 of the DGCL do not apply to
Pacific Ethanol, Inc. (Delaware) in connection with the reincorporation merger
because, under Section 203(b)(4) of the DGCL, such restrictions generally do not
apply where a corporation does not have a class of voting stock that is (i)
listed on a national securities exchange, (ii) authorized for quotation on The
Nasdaq Stock Market, or (iii) held of record by more than 2,000 stockholders.
PREFERRED STOCK
ACCESSITY. Accessity's articles of incorporation, as amended, authorize
the board of directors to issue preferred stock. Section 502 of the NYBCL
provides that if more than one class of shares is authorized by the articles of
incorporation, the articles of incorporation must prescribe the number of shares
in each class and a distinguishing designation for each class and before the
issuance of shares of a class, the preferences, limitations, and relative rights
of each class must be described in the articles of incorporation. All shares of
a class must have preferences, limitations, and relative rights identical with
those of other shares of the same class except to the extent otherwise permitted
by the NYBCL.
PACIFIC ETHANOL, INC. (DELAWARE). The certificate of incorporation of
Pacific Ethanol, Inc. (Delaware) authorizes the board of directors of Pacific
Ethanol, Inc. (Delaware) to issue up to 10,000,000 shares of preferred stock and
to determine the preferences, limitations and relative rights of any class or
series of Pacific Ethanol, Inc. (Delaware) preferred stock prior to issuance.
CUMULATIVE VOTING
Section 618 of the NYBCL and Section 214 of the DGCL provide that
cumulative voting rights, in respect of the election of directors, will only
exist if provided for in the corporation's articles/certificate of
incorporation. Neither Accessity's articles of incorporation, as amended, nor
the certificate of incorporation of Pacific Ethanol, Inc. (Delaware) provide for
cumulative voting rights in the election of directors.
ACTION WITHOUT A MEETING
ACCESSITY. Under Section 615 of the NYBCL, any action required or
permitted to be taken at a shareholders' meeting may be taken without a meeting
only by the unanimous written consent signed by all of the shareholders entitled
to vote on such action.
PACIFIC ETHANOL, INC. (DELAWARE). Section 228 of the DGCL permits any
action required or permitted to be taken at a stockholders' meeting to be taken
by written consent signed by the holders of the number of shares that would have
been required to effect the action at an actual meeting of the stockholders at
which all shares were present and voted. Section 228 of the DGCL will govern
stockholders rights in Pacific Ethanol, Inc. (Delaware).
154
ANNUAL MEETINGS
ACCESSITY. Section 602 of the NYBCL requires that a corporation hold an
annual meeting of its shareholders. Accessity's bylaws provide that an annual
meeting of its shareholders shall be held five months following the close of the
company's fiscal year to elect directors and transaction such other business as
may be properly come before the meeting.
PACIFIC ETHANOL, INC. (DELAWARE). Section 211(d) of the DGCL authorizes
the board of directors or those persons authorized by the corporation's
certificate of incorporation or bylaws to call an annual meeting of the
corporation's stockholders. The bylaws of Pacific Ethanol, Inc. (Delaware)
provide that an annual meeting may be called by the board of directors, the
chairman of the board, the president, the secretary, any two officers of Pacific
Ethanol, Inc. (Delaware), and by the secretary of Pacific Ethanol, Inc.
(Delaware) at the request of not less than 10% of the total voting power of all
outstanding securities of Pacific Ethanol, Inc. (Delaware) then entitled to vote
or as otherwise may be required by law.
VOTING, APPRAISAL RIGHTS AND CORPORATE REORGANIZATIONS
ACCESSITY. The NYBCL generally requires a majority vote of shareholders to
approve a plan of merger or share exchange unless the articles of incorporation
or board requires a greater vote. Section 910 of the NYBCL does not provide for
dissenters' rights for a merger or plan of share exchange by a corporation the
shares of which are listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc.
PACIFIC ETHANOL, INC. (DELAWARE). The DGCL generally requires a majority
vote of stockholders to approve a merger, sale of assets or similar
reorganization transaction. Section 262 of the DGCL does not provide for
dissenters' rights of appraisal for (a) the sale, lease or exchange of all or
substantially all of the assets of a corporation, (b) a merger by a corporation,
the shares of which are either listed on a national securities exchange or held
by more than 2,000 stockholders if such stockholders receive shares of the
surviving corporation or of a listed or widely held corporation, or (c) certain
mergers not requiring stockholder approval.
AMENDMENT TO CERTIFICATE/ARTICLES OF INCORPORATION
ACCESSITY. Except as otherwise provided in the NYBCL, an amendment to the
articles of incorporation must be approved by (a) a majority of the votes cast
when a quorum is present, unless shareholders have dissenters' rights on the
amendment, and (b) a majority of the outstanding shares entitled to vote, if
shareholders have dissenters' rights on the amendment.
PACIFIC ETHANOL, INC. (DELAWARE). The DGCL provides that an amendment to
the certificate of incorporation must be approved by a majority of the
outstanding stock entitled to vote. The certificate of incorporation of Pacific
Ethanol, Inc. (Delaware) reserves the right of Pacific Ethanol, Inc. (Delaware)
to amend, alter, change or repeal any provision contained in its certificate of
incorporation, in the manner now or hereafter prescribed by statute.
AMENDMENT TO BYLAWS
ACCESSITY. Article IX, Section 1 of Accessity's bylaws provides that the
bylaws may be amended by an affirmative vote of two-thirds of all shares
eligible to be cast on such amendment or, if the board of directors recommends
such an amendment, then only a majority of all shares eligible to be cast on
such amendment is required.
PACIFIC ETHANOL, INC. (DELAWARE). Section 109 of the DGCL places the power
to adopt, amend or repeal bylaws in the corporation's stockholders, but permits
the corporation, in its certificate of
155
incorporation, also to vest such power in the board of directors. Although the
board of directors is vested with such authority pursuant to the certificate of
incorporation of Pacific Ethanol, Inc. (Delaware), the stockholders' power to
make, repeal, alter, amend and rescind bylaws will remain unrestricted.
PREEMPTIVE RIGHTS
ACCESSITY. NYBCL Section 622 provides that the shareholders of a
corporation do not have a preemptive right to acquire a corporation's unissued
shares except to the extent the articles of incorporation so provide.
Accessity's articles of incorporation, as amended, do not provide Accessity's
shareholders with preemptive rights.
PACIFIC ETHANOL, INC. (DELAWARE). Under Section 102 of the DGCL, no
statutory preemptive rights will exist, unless a corporation's certificate of
incorporation specifies otherwise. The certificate of incorporation of Pacific
Ethanol, Inc. (Delaware) does not provide for any such preemptive rights.
DIVIDEND RIGHTS
ACCESSITY. The NYBCL does not permit dividend distributions if, after
giving effect to the proposed dividend, (a) the corporation would be unable to
pay its debts as they become due in the usual course of business, or (b) the
corporation's total assets would be less than the sum of its total liabilities
plus (unless the articles of incorporation permit otherwise) the amount that
would be needed, if the corporation were to be dissolved at the time of
distribution, to satisfy the preferential rights (if any) of shareholders whose
preferential rights are superior to those of shareholders receiving the
distribution.
PACIFIC ETHANOL, INC. (DELAWARE). Delaware corporations may pay dividends
out of the excess of the net assets of the corporation (the "Surplus") less the
consideration received by the corporation for any shares of its capital stock
(the "Capital") or, if there is no Surplus, out of net profits for the fiscal
year in which declared and/or the preceding fiscal year. Section 170 of the DGCL
also provides that dividends may not be paid out of net profits if, after the
payment of the dividend, Capital is less than the Capital represented by the
outstanding stock of all classes having a preference upon the distribution of
assets.
THE BOARD OF DIRECTORS OF ACCESSITY UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THE DELAWARE REINCORPORATION PROPOSAL.
156
PROPOSAL 7
APPROVAL OF CORPORATE NAME CHANGE
The board of directors of Accessity has unanimously approved the amendment
of the articles of incorporation of Accessity to change the name of Accessity to
"Pacific Ethanol, Inc." under the circumstances described below. The Accessity
board of directors selected this new name because it believes this new name
would be appropriately descriptive of the business to be conducted by the
Combined Company if the Share Exchange is consummated.
The corporate name change would be effective upon filing with the
Secretary of State of New York an appropriate amendment to the articles of
incorporation of Accessity immediately prior to the consummation of the Share
Exchange, but only if Accessity shareholders approve both the Share Exchange
proposal and the corporate name change proposal, and if the Delaware
Reincorporation does not occur. Circumstances under which the Delaware
Reincorporation would not occur include a failure by Accessity shareholders to
approve the Delaware Reincorporation proposal and also include a decision by the
Accessity board of directors not to proceed with the Delaware Reincorporation.
Accessity's board of directors may elect not to proceed with the Delaware
Reincorporation if the board of directors determines that consummation of the
Delaware Reincorporation is no longer in the best interest of Accessity and its
shareholders or if Accessity receives demands for exercise of dissenters' rights
that exceed 1% of the outstanding shares of Accessity common stock.
The affirmative vote of the holders of a majority of the outstanding
shares of Accessity common stock as of the record date will be required to
approve the corporate name change proposal. For purposes of this vote,
abstentions and broker non-votes will be counted as votes "AGAINST" the
corporate name change proposal.
THE BOARD OF DIRECTORS OF ACCESSITY UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE CORPORATE NAME CHANGE PROPOSAL.
157
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 of the Exchange Act, proposals by shareholders
which are intended for inclusion in Accessity's proxy statement and proxy and to
be presented at Accessity's 2005 annual shareholders meeting must be received by
Accessity no later than 120 calendar days in advance of the one-year anniversary
of the date of this proxy statement in order to be considered for inclusion in
Accessity's proxy materials relating to Accessity's 2005 annual shareholders
meeting. Such proposals should be addressed to Accessity's secretary and may be
included in next year's annual shareholders' meeting proxy materials if they
comply with rules and regulations of the SEC governing shareholder proposals.
For all other proposals by shareholders to be timely, a shareholder's notice
must be delivered to, or mailed and received at, Accessity's principal executive
offices not later than August 28, 2005. If a shareholder fails to notify
Accessity of any such proposal prior to that date, Accessity's management will
be allowed to use its discretionary voting authority with respect to proxies
held by management when the proposal is raised at the annual meeting, without
any discussion of the matter in Accessity's proxy statement.
SOLICITATION AND OTHER MATTERS
The cost of soliciting proxies will be paid by Accessity. In addition to
solicitations by mail, some directors, officers and regular employees of
Accessity, without extra remuneration, may conduct solicitations by telephone,
facsimile and personal interview. Accessity will reimburse brokerage firms and
other custodians, nominees and fiduciaries for reasonable expenses incurred by
them in sending proxy material to the beneficial owners of common stock.
Accessity has no present plans to hire special employees or paid solicitors to
assist in obtaining proxies, but Accessity reserves the right to do so if
Accessity believes it is necessary to secure a quorum. As of the date of this
proxy statement, the board of directors of Accessity has no knowledge of any
matters to be presented for consideration at the annual meeting other than those
referred to above. However, persons named in the accompanying form of proxy will
have the authority to vote such proxy as to any other matters which do properly
come before the meeting and as to matters incidental to the conduct of the
meeting, according to their discretion.
158
ACCESSITY CORP.
PROXY/VOTING INSTRUCTION CARD
12514 WEST ATLANTIC BOULEVARD
CORAL SPRINGS, FLORIDA 33071
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 2004 ANNUAL MEETING ON DECEMBER 28, 2004
The undersigned hereby appoints Barry Siegel and Philip Kart, and
each or any of them as the attorney, agent and proxy holder of the undersigned,
with full power of substitution, to vote all shares of Accessity Corp. common
stock entitled to be voted by the undersigned for Proposals 1, 2, 3, 4, 5, 6 and
7 referred to on the reverse side of this Proxy Card and described in the proxy
statement, and on any other business as properly may come before the annual
meeting of shareholders of Accessity Corp. on December 28, 2004, or any
adjournment or postponement thereof.
This proxy will be voted as directed. If no direction is given, this
proxy will be voted FOR the Proposals indicated.
PLEASE SIGN AND DATE ON THE REVERSE SIDE
AND MAIL PROMPTLY IN THE ENCLOSED ENVELOPE.
SEE REVERSE SIDE
__________________
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/\ FOLD AND DETACH HERE /\
YOUR VOTE IS IMPORTANT
Please sign, date and return your proxy
in the enclosed envelope.
159
PLEASE MARK YOUR
[X] VOTES AS IN
THIS EXAMPLE.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder(s). If no direction is made, this proxy
will be voted FOR all Proposals. The board of directors recommends a vote FOR
each of the following Proposals.
1. To elect Bruce S. Udell as a Class III director to serve a three-year
term.
[ ] FOR the nominee listed above. [ ] WITHHOLD AUTHORITY to vote for
the nominee listed above
2. To approve the Share Exchange pursuant to the Share Exchange Agreement and
the consummation of the transactions contemplated thereby.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve the transfer of DriverShield to Barry Siegel, if the Share
Exchange is approved.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To approve the sale of Sentaur to Barry Siegel, if the Share Exchange is
approved.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To approve the 2004 Stock Option Plan of Accessity, if the Share Exchange
is approved.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. To approve the reincorporation of Accessity in the State of Delaware, if
the Share Exchange is approved.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. To approve the change in the name of Accessity to Pacific Ethanol, Inc.,
if the Share Exchange is approved and the Delaware reincorporation does
not occur.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Please sign exactly as name appears at left. When signing as
attorney, executor, administrator, trustee, or guardian, please give full title
as such. If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name by
authorized person. Note: Please sign name exactly as your name appears on the
Stock Certificate. When signing as attorney, executor, administrator, trustee,
or guardian, please give full title. If more than one trustee, all should sign.
All joint owners must sign.
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Signature (if held jointly) Date
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/\ FOLD AND DETACH HERE /\
The board of directors recommends a vote
FOR ALL PROPOSALS
160
APPENDIX A
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT (this "Agreement") is made and entered
into as of May 14, 2004, by and among Accessity Corp., a New York corporation
("Accessity"); Pacific Ethanol, Inc., a California corporation ("PEI"); Kinergy
Marketing, LLC, an Oregon limited liability company ("Kinergy"); Reenergy, LLC,
a California limited liability company ("Reenergy," and together with PEI and
Kinergy, the "Acquired Companies"); each of the shareholders of PEI identified
on the signature pages hereof (collectively, the "PEI Shareholders"); each of
the holders of options or warrants to acquire shares of common stock of PEI
identified on the signature pages hereof (collectively, the "PEI
Warrantholders"); each of the limited liability company members of Kinergy
identified on the signature pages hereof (collectively, the "Kinergy Members");
each of the limited liability company members of Reenergy identified on the
signature pages hereof (collectively, the "Reenergy Members").
R E C I T A L S
A. PEI is in the business of developing a large-scale ethanol plant
(the "PEI Business"). Kinergy is in the business of marketing ethanol throughout
the Western United States (the "Kinergy Business"). Reenergy is in the business
of developing a large-scale ethanol plant (the "Reenergy Business"). The PEI
Business, Kinergy Business and Reenergy Business are sometimes collectively
referred to herein as the "Businesses."
B. The PEI Shareholders are the holders of all of the issued and
outstanding capital stock of PEI (collectively, the "PEI Stock"); the PEI
Warrantholders are the holders of all of the issued and outstanding options and
warrants to acquire shares of PEI Stock (collectively, the "PEI Warrants");
Kinergy Members are the holders of all of the outstanding limited liability
company membership interests of Kinergy (collectively, the "Kinergy Interests");
and the Reenergy Members are the holders of all of the outstanding limited
liability company membership interests of Reenergy (collectively, the "Reenergy
Interests").
C. Accessity desires to acquire the PEI Stock from the PEI
Shareholders, and the PEI Shareholders desire to transfer the PEI Stock to
Accessity, in exchange for shares of Common Stock of Accessity ("Accessity
Exchange Shares"), subject to and in accordance with the terms and conditions
set forth herein; Accessity desires to have the PEI Warrants cancelled in
exchange for the issuance to the PEI Warrantholders of warrants to acquire
shares of common stock of Accessity, subject to and in accordance with the terms
and conditions set forth herein; Accessity desires to acquire the Kinergy
Interests from the Kinergy Members, and the Kinergy Members desire to transfer
the Kinergy Interests to Accessity, in exchange for Accessity Exchange Shares,
subject to and in accordance with the terms and conditions set forth herein; and
Accessity desires to acquire the Reenergy Interests from the Reenergy Members,
and the Reenergy Members desire to transfer the Reenergy Interests to Accessity,
in exchange for Accessity Exchange Shares, subject to and in accordance with the
terms and conditions set forth herein.
D. This Agreement is being entered into by the parties as part of a
unified plan for the exchange of stock that is intended by the parties to
qualify for non-recognition treatment under Section 351 of the Internal Revenue
Code of 1986, as amended (the "Code").
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
respective promises of the parties set forth herein, the parties hereto agree as
follows:
A-1
ARTICLE I
DEFINITIONS
For purposes of this Agreement, in addition to the other capitalized
terms defined elsewhere in this Agreement, the following terms shall have the
meanings specified or referred to in this Article 1:
"Action" or "Actions" shall mean any litigation, suits, actions, causes
of actions, and proceedings or investigations, collectively.
"Affiliate" shall mean, with respect to any individual, partnership,
corporation, limited liability company, association, business trust, joint
venture, governmental entity or other entity of any nature ("Person"), any
Person that controls, is controlled by, or is under common control with, such
Person.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Environmental, Health, and Safety Liabilities" shall mean any cost,
damages, expense, liability, obligation, or other responsibility arising from or
under Environmental Law or Occupational Safety and Health Law and consisting of
or relating to:
(a) any environmental, health, or safety matters or conditions
(including on-site or off-site contamination, occupational safety and health,
and regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, remedial, or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law;
(c) financial responsibility under Environmental Law or
Occupational Safety and Health Law for cleanup costs or corrective action,
including any investigation, cleanup, removal, containment, or other remediation
or response actions ("Cleanup") required by applicable Environmental Law or
Occupational Safety and Health Law (whether or not such Cleanup has been
required or requested by any Governmental Body or any other Person) and for any
natural resource damages; or
(d) any other compliance, corrective, investigative, or
remedial measures required under Environmental Law or Occupational Safety and
Health Law.
The terms "removal," "remedial," and "response action" include but are
not limited to the types of activities covered by the United States
Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C.
Section 9601 et seq., as amended ("CERCLA").
"Environmental Laws" shall mean any federal, state and local
environmental laws, rules, regulations, standards and requirements, including,
without limitation, those respecting hazardous materials and substances
(including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. sec. 9601, ET. SEQ.; the
Resource Conservation and Recovery Act, as amended, 42 U.S.C. sec. 6901. ET.
SEQ.; the Federal Water Pollution Control Act, as amended, 33 U.S.C sec. 1251,
ET. SEQ.; the Toxic Substances Control Act, as amended, 15 U.S.C. sec. 9601, ET.
SEQ.; the Emergency Planning and Community Right to Know Act, 42 U.S.C. sec.
11001, ET. SEQ.; the Safe Drinking Water Act, 42 U.S.C. sec. 300f, ET. SEQ.; the
Solid Waste Disposal Act, as amended; and all comparable state and local laws;
and any common law (including without limitation common law that may impose
strict liability) that may impose liability or obligations for injuries or
damages to, or threatened as a result of, the present of or exposure to any
hazardous materials or substances).
A-2
"ERISA" shall mean the Employee Retirement Income Security Act of 1974
or any successor law, and regulations and rules issued pursuant to that Act or
any successor law.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor law, and regulations and rules issued pursuant to that
Act or any successor law
"GAAP" shall mean generally accepted United States accounting
principles, applied on a basis consistent with the basis.
"Governmental Body" shall mean any:
(a) nation, state, county, city, town, village, district, or
other jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other
government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(d) multi-national organization or body; or (e) body
exercising, or entitled to exercise, any administrative, executive, judicial,
legislative, police, regulatory, or taxing authority or power of any nature.
"Legal Requirement" shall mean any federal, state, local, municipal,
foreign, international, multinational, or other administrative order,
constitution, law, ordinance, principle of common law, regulation, statute, or
treaty.
"Liability" or "Liabilities" shall mean debts, liabilities, commitments
or obligations of any nature, absolute, accrued, contingent or otherwise.
"Lien" or "Liens" shall mean any mortgage, pledge, security interest,
conditional sale or other title retention agreement, encumbrance, lien,
easement, claim, right, covenant, restriction, right of way, warrant, option or
charge of any kind.
"Occupational Safety and Health Law" shall mean any Legal Requirement
designed to provide safe and healthful working conditions and to reduce
occupational safety and health hazards, and any program, whether governmental or
private (including those promulgated or sponsored by industry associations and
insurance companies), designed to provide safe and healthful working conditions.
"Owners" shall mean the PEI Shareholders, the Kinergy Members and the
Reenergy Members, collectively.
"Permit" or "Permits" shall mean any licenses, permits, authorizations,
approvals, consents, franchises and orders required for the conduct and
operation of business as presently conducted.
"Permitted Liens" shall mean any (i) Liens for taxes not yet due and
payable or for taxes that are being contested in good faith through appropriate
proceedings, (ii) Liens for purchase money security interests and Liens securing
rental payments under capital lease arrangements, (iii) other Liens arising in
the ordinary course of business and not incurred in connection with the
borrowing of money, and (iv) Liens described on Schedules 4.13, 6.13 and 8.13.
"SEC" shall mean the Securities and Exchange Commission.
A-3
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Share Exchange" shall mean the PEI Exchange, the Kinergy Exchange and
the Reenergy Exchange, collectively.
ARTICLE II
EXCHANGE OF OWNERSHIP INTERESTS
2.1 EXCHANGE OF PEI STOCK. Subject to the terms and conditions of this
Agreement, each PEI Shareholder hereby agrees to assign, transfer and deliver to
Accessity the shares of PEI Stock owned by the PEI Shareholder free and clear of
all liens, claims, encumbrances, pledges, options, security interests and any
other adverse interests of any kind or nature whatsoever, and Accessity hereby
agrees to accept delivery of the PEI Stock from each of the PEI Shareholders. In
consideration for the assignment and transfer of the PEI Stock to Accessity by
the PEI Shareholders, Accessity shall issue to each of the PEI Shareholders one
(1) Accessity Exchange Share for each one (1) share of PEI Stock ("PEI Exchange
Ratio"), as set forth on Exhibit A (the "PEI Exchange"). No fractional shares
shall be issued and in the event that the conversion results in a fraction, the
number of Accessity Exchange Shares to be issued shall be rounded up to the
nearest whole number.
2.2 CANCELLATION AND REPLACEMENT OF PEI WARRANTS. Subject to the terms
and conditions of this Agreement, each PEI Warrantholder hereby agrees that the
PEI Warrants which such PEI Warrantholder has to acquire shares of common stock
of PEI shall be cancelled on and as of the Closing Date in consideration for the
issuance by Accessity to such PEI Warrantholder of warrants to acquire the same
number of shares of Accessity Common Stock at the same exercise price and on the
same terms and conditions as provided for in the PEI Warrants of such PEI
Warrantholder (the "Accessity Replacement Warrants").
2.3 EXCHANGE OF KINERGY INTERESTS. Subject to the terms and conditions
of this Agreement, each Kinergy Member hereby agrees to assign, transfer and
deliver to Accessity the Kinergy Interests owned by each of the Kinergy Members
free and clear of all Liens and any other adverse interests of any kind or
nature whatsoever, and Accessity hereby agrees to accept delivery of the Kinergy
Interests from each of the Kinergy Members. In consideration for the assignment
and transfer of the Kinergy Interests to Accessity by the Kinergy Members,
Accessity shall issue 1,875,000 Accessity Exchange Shares to Neil Koehler, the
sole Kinergy Member, for 100% of the Kinergy Interests ("Kinergy Exchange
Ratio"), as set forth on Exhibit A (the "Kinergy Exchange"). No fractional
shares shall be issued and in the event that the conversion results in a
fraction, the number of Accessity Exchange Shares to be issued shall be rounded
up to the nearest whole number.
2.4 EXCHANGE OF REENERGY INTERESTS. Subject to the terms and conditions
of this Agreement, each Reenergy Member hereby agrees to assign, transfer and
deliver to Accessity the Reenergy Interests owned by each of the Reenergy
Members free and clear of all liens, claims, encumbrances, pledges, options,
security interests and any other adverse interests of any kind or nature
whatsoever, and Accessity hereby agrees to accept delivery of the Reenergy
Interests from each of the Reenergy Members. In consideration for the assignment
and transfer of the Reenergy Interests to Accessity by the Reenergy Members,
Accessity shall issue to each of the Reenergy Members 21,250 Accessity Exchange
Shares for each one percent (1%) of Reenergy Interests ("Reenergy Exchange
Ratio"), as set forth on Exhibit A (the "Reenergy Exchange"). No fractional
shares shall be issued and in the event that the conversion results in a
fraction, the number of Accessity Exchange Shares to be issued shall be rounded
up to the nearest whole number.
2.5 SHARE EXCHANGE. The parties intend to adopt this Agreement and
consummate the Share Exchange as part of a unified plan for the exchange of
stock that is qualified for non-recognition
A-4
treatment under Section 351 of the Code. The Accessity Exchange Shares issued in
the PEI Exchange will be issued solely in exchange for shares of PEI Stock, the
Accessity Exchange Shares issued in the Kinergy Exchange will be issued solely
in exchange for the Kinergy Interests, and the Accessity Exchange Shares issued
in the Reenergy Exchange will be issued solely in exchange for the Reenergy
Interests, and no other transaction other than the Share Exchange represents,
provides for or is intended to be an adjustment to the consideration given for
the PEI Stock, the Kinergy Interests and the Reenergy Interests. No
consideration that could constitute "other property or money" within the meaning
of Section 351(b) of the Code is being transferred by Accessity for the PEI
Stock, the Kinergy Interests or the Reenergy Interests. The parties shall not
take a position on any tax return inconsistent with this Section 2.5. In
addition, the parties represent that, as of the Closing Date and after giving
effect to the transactions contemplated by this Agreement, the Owners of the
Acquired Companies shall be "in control" of Accessity within the meaning of
Section 351(a) of the Code.
ARTICLE III
CLOSING
3.1 CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement will be held at 10:00 a.m. at the offices of
Rutan & Tucker, LLP, 611 Anton Boulevard, Suite 1400, Costa Mesa, California
92626, on such date as the parties hereto shall mutually agree upon, or at such
other time, date or location as the parties hereto may mutually agree upon (the
"Closing Date").
3.2 DELIVERIES BY ACCESSITY. At the Closing, Accessity shall deliver:
(a) to each PEI Shareholder, a stock certificate evidencing
his or her ownership of the number of Accessity Exchange Shares set forth
opposite his or her name as set forth on Exhibit B; to each PEI Warrantholder,
an Accessity Replacement Warrant evidencing such PEI Warrantholder's right to
acquire the number of shares of Accessity Common Stock set forth opposite his or
her name as set forth on Exhibit B and otherwise providing for the same terms
and conditions as provided for in the PEI Warrants of such PEI Warrantholder; to
each Kinergy Member, a stock certificate evidencing his or her ownership of the
number of Accessity Exchange Shares set forth opposite his or her name as set
forth on Exhibit C; and to each Reenergy Member, a stock certificate evidencing
his or her ownership of the number of Accessity Exchange Shares set forth
opposite his or her name as set forth on Exhibit D;
(b) a copy of the Articles of Incorporation and Bylaws of
Accessity, each as amended to date, and the resolutions adopted by the Board of
Directors of Accessity approving, authorizing and directing the execution of
this Agreement and the transactions contemplated thereby, each certified by the
Secretary of Accessity as being in full force and effect on and as of the
Closing Date;
(c) a certificate of the Secretary of State of Delaware to the
effect that Accessity is a validly existing corporation in good standing under
the laws of the State of Delaware and a certificate from the Secretary of State
of each other state in which the character of its properties owned or leased or
the nature of its activities requires qualification as a foreign corporation
doing business in such state to the effect that Accessity (as a New York
corporation) is a foreign corporation in good standing under the laws of such
state;
(d) the written resignations of each of Barry Siegel, Barry J.
Spiegel, Kenneth J. Friedman and Bruce S. Udell as directors of Accessity dated
as of the Closing Date, in form and substance reasonably acceptable to each of
PEI, Kinergy and Reenergy; provided, that one current director may temporarily
remain for the sole purpose of confirming said resignations and appointing one
individual designated by Accessity as a Class II director (thereby holding such
board seat until the annual meeting of Accessity shareholders to be held in the
fourth calendar quarter of 2005) pursuant to a unanimous written consent of such
remaining sole director, in form and substance reasonably acceptable to PEI,
Kinergy and Reenergy, to be delivered by Accessity at the Closing; and the
written resignation of
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such remaining sole director dated as of the Closing Date effective immediately
after the effectiveness of such appointment, in form and substance reasonably
acceptable to each of PEI, Kinergy and Reenergy;
(e) a certificate of the president or chief executive officer
of Accessity certifying that the representations and warranties by Accessity set
forth in this Agreement and in any certificate or document delivered pursuant to
the provisions of this Agreement are true and accurate, on and as of the Closing
Date, and that Accessity has performed and complied in all material respects
with all agreements, obligations and conditions required by this Agreement to be
performed or complied with by it on or prior to the Closing Date.
(f) the written resignation of each executive of Accessity who
has entered into an employment agreement with Accessity (including, without
limitation, a confirmation of the voluntary termination by such individual of
his or her existing employment agreement with Accessity), including but not
limited to Barry Siegel and Philip Kart, dated as of the Closing Date, in form
and substance reasonably acceptable to each of PEI, Kinergy and Reenergy.
(g) an opinion of legal counsel to Accessity to the effect
that: (i) Accessity is a corporation duly incorporated, validly existing and in
good standing under the laws of New York and is duly qualified as a foreign
corporation in each state in which the character of its properties owned or
leased or the nature of its activities requires qualification as a foreign
corporation doing business in such state, except where the failure to be so
qualified would not have a material adverse effect on Accessity; (ii) this
Agreement and each related agreement to which Accessity is a party has been duly
authorized, executed and delivered by Accessity and each of this Agreement and
each such related agreement constitutes the valid and binding obligation of
Accessity enforceable against Accessity in accordance with its terms, except (x)
as the same may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws now or hereafter in effect relating to creditors' rights
generally and (y) that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought;
(iii) Accessity, through its Board of Directors and shareholders, has taken all
corporate action necessary for the approval of the execution, delivery and
performance of this Agreement by Accessity; (iv) the Accessity Exchange Shares
when issued to the Owners in exchange for the PEI Stock, Kinergy Interests and
Reenergy Interests, will be duly and validly issued, fully paid and
nonassessable; (v) except as otherwise disclosed in any Accessity SEC Documents
(as defined below), to the knowledge of such legal counsel, there are no pending
or threatened claims or litigation against Accessity; and (vi) neither the
execution of this Agreement, nor the consummation of the Share Exchange and the
other transactions contemplated hereby or any announcement of the execution of
this Agreement or the consummation of the Share Exchange and the other
transactions contemplated hereby constitutes or shall constitute a "Triggering
Event" or a "Business Combination" as such terms are defined and used in that
certain Rights Agreement dated as of December 28, 1998, between Accessity
(formerly First Priority Group, Inc.) and North American Transfer Co., as Rights
Agent.
(h) an original stock certificate evidencing the ownership by
GV Capital Corp. of 150,000 shares of common stock of Accessity, together with a
letter from Larry Kaplan confirming that issuance of such shares to GV Capital
Corp. shall constitute full payment of a finder's fee for introducing Accessity
to PEI and the other Acquired Companies;
(i) evidence, in form and substance reasonably acceptable to
each of PEI, Kinergy and Reenergy, that each of the conditions precedent set
forth in Article XIII below have been satisfied; and
(j) any and all consents, approvals, notices, filings or
recordations of third parties required with respect to the execution and
delivery of this Agreement or the transactions contemplated hereby or by any of
the agreements, documents or instruments referred to herein.
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3.3 DELIVERIES BY ACQUIRED COMPANIES AND OWNERS.
(a) PEI. At the Closing, PEI and the PEI Shareholders and PEI
Warrantholders shall deliver to Accessity:
(i) the original PEI Warrants and the original stock
certificates representing the PEI Stock, accompanied by stock powers separate
from such stock certificates duly executed in blank by the PEI Shareholders
evidencing the transfer of PEI Stock to Accessity and, for each married PEI
Shareholder that is a resident of California or a resident of any other
community property state, a Consent of Spouse in the form attached hereto duly
executed by the spouse of such PEI Shareholder;
(ii) any and all consents, approvals, notices,
filings or recordations of third parties required with respect to the execution
and delivery of this Agreement or the transactions contemplated hereby or by any
of the agreements, documents or instruments referred to herein;
(iii) evidence, in form and substance reasonably
satisfactory to Accessity, that any and all shareholder agreements or similar
agreements to which PEI and the PEI Shareholders, or any of them, are a party or
to which they or any of them may be subject have been duly terminated;
(iv) a certificate of the president or chief
executive officer of PEI certifying that the representations and warranties by
PEI set forth in this Agreement and in any certificate or document delivered
pursuant to the provisions of this Agreement are true and accurate, on and as of
the Closing Date, and that PEI has performed and complied in all material
respects with all agreements, obligations and conditions required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date;
(v) a copy of the Articles of Incorporation and
Bylaws of PEI, each as amended to date, and the resolutions adopted by the Board
of Directors of PEI approving, authorizing and directing the execution of this
Agreement and the transactions contemplated thereby, each certified by the
Secretary of PEI as being in full force and effect on and as of the Closing
Date;
(vi) a certificate of the Secretary of State of
California to the effect that PEI is a validly existing corporation in good
standing under the laws of the State of California and a certificate from the
Secretary of State of each other state in which the character of its properties
owned or leased or the nature of its activities requires qualification as a
foreign corporation doing business in such state to the effect that PEI is a
foreign corporation in good standing under the laws of such state; and
(vii) an opinion of legal counsel to PEI to the
effect that: (i) PEI is a corporation duly incorporated, validly existing and in
good standing under the laws of California and is duly qualified as a foreign
corporation in each state in which the character of its properties owned or
leased or the nature of its activities requires qualification as a foreign
corporation doing business in such state, except where the failure to be so
qualified would not have a material adverse effect on PEI; (ii) this Agreement
and each related agreement to which PEI is a party has been duly authorized,
executed and delivered by PEI and each of this Agreement and each such related
agreement constitutes the valid and binding obligation of PEI enforceable
against PEI in accordance with its terms, except (x) as the same may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to creditors' rights generally and (y) that the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought; and (iii) PEI, through its
Board of Directors and shareholders, has taken all corporate action necessary
for the approval of the execution, delivery and performance of this Agreement by
PEI.
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(b) Kinergy. At the Closing, Kinergy and the Kinergy Members
shall deliver to Accessity:
(i) original certificates, if any have been issued,
representing the Kinergy Interests, accompanied by assignments of interest duly
executed in blank by the Kinergy Members evidencing the transfer of the Kinergy
Interests to Accessity and, for each married Kinergy Member that is a resident
of California or a resident of any other community property state, a Consent of
Spouse in the form attached hereto as Exhibit E, duly executed by the spouse of
such Kinergy Member;
(ii) any and all consents, approvals, notices,
filings or recordations of third parties required with respect to the execution
and delivery of this Agreement or the transactions contemplated hereby or by any
of the agreements, documents or instruments referred to herein;
(iii) evidence, in form and substance reasonably
satisfactory to Accessity, that any and all member agreements or similar
agreements to which Kinergy and the Kinergy Members, or any of them, are a party
or to which they or any of them may be subject have been duly terminated;
(iv) a certificate of the Managers or Managing
Members of Kinergy certifying that the representations and warranties by Kinergy
set forth in this Agreement and in any certificate or document delivered
pursuant to the provisions of this Agreement are true and accurate, on and as of
the Closing Date, and that Kinergy has performed and complied in all material
respects with all agreements, obligations and conditions required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date;
(v) a copy of the Articles of Organization and
Operating Agreement of Kinergy, each as amended to date, and the resolutions
adopted by the Managers or Managing Members of Kinergy and the Kinergy Members
approving, authorizing and directing the execution of this Agreement and the
transactions contemplated thereby, each certified by the Managers or Managing
Members of Kinergy as being in full force and effect on and as of the Closing
Date;
(vi) a certificate of the Secretary of State of
Oregon to the effect that Kinergy is a validly existing limited liability
company in good standing under the laws of the State of Oregon and a certificate
from the Secretary of State of each other state in which the character of its
properties owned or leased or the nature of its activities requires
qualification as a foreign limited liability company doing business in such
state to the effect that Kinergy is a foreign limited liability company in good
standing under the laws of such state; and
(vii) an opinion of legal counsel to Kinergy to the
effect that: (i) Kinergy is a limited liability company duly organized, validly
existing and in good standing under the laws of California and is duly qualified
as a foreign limited liability company in each state in which the character of
its properties owned or leased or the nature of its activities requires
qualification as a foreign limited liability company doing business in such
state, except where the failure to be so qualified would not have a material
adverse effect on Kinergy; (ii) this Agreement and each related agreement to
which Kinergy is a party has been duly authorized, executed and delivered by
Kinergy and each of this Agreement and each such related agreement constitutes
the valid and binding obligation of Kinergy enforceable against Kinergy in
accordance with its terms, except (x) as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws now or hereafter in
effect relating to creditors' rights generally and (y) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought; and (iii) Kinergy, through its Managers
or Managing Members and the Kinergy Members, has taken all limited liability
company action necessary for the approval of the execution, delivery and
performance of this Agreement by Kinergy.
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(c) Reenergy. At the Closing, Reenergy and the Reenergy
Members shall deliver to Accessity:
(i) original certificates, if any have been issued,
representing the Reenergy Interests, accompanied by assignments of interest duly
executed in blank by the Reenergy Members evidencing the transfer of the
Reenergy Interests to Accessity and, for each married Reenergy Member that is a
resident of California or a resident of any other community property state, a
Consent of Spouse in the form attached hereto as Exhibit E duly executed by the
spouse of such Reenergy Member;
(ii) any and all consents, approvals, notices,
filings or recordations of third parties required with respect to the execution
and delivery of this Agreement or the transactions contemplated hereby or by any
of the agreements, documents or instruments referred to herein;
(iii) evidence, in form and substance reasonably
satisfactory to Accessity, that any and all member agreements or similar
agreements to which Reenergy and the Reenergy Members, or any of them, are a
party or to which they or any of them may be subject have been duly terminated;
(iv) a certificate of the Managers or Managing
Members of Reenergy certifying that the representations and warranties by
Reenergy set forth in this Agreement and in any certificate or document
delivered pursuant to the provisions of this Agreement are true and accurate, on
and as of the Closing Date, and that Reenergy has performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement to be performed or complied with by it on or prior to the Closing
Date;
(v) a copy of the Articles of Organization and
Operating Agreement of Reenergy, each as amended to date, and the resolutions
adopted by the Managers or Managing Members of Reenergy and the Reenergy Members
approving, authorizing and directing the execution of this Agreement and the
transactions contemplated thereby, each certified by the Managers or Managing
Members of Reenergy as being in full force and effect on and as of the Closing
Date;
(vi) a certificate of the Secretary of State of
California to the effect that Reenergy is a validly existing limited liability
company in good standing under the laws of the State of California and a
certificate from the Secretary of State of each other state in which the
character of its properties owned or leased or the nature of its activities
requires qualification as a foreign limited liability company doing business in
such state to the effect that Reenergy is a foreign limited liability company in
good standing under the laws of such state; and
(vii) an opinion of legal counsel to Reenergy to the
effect that: (i) Reenergy is a limited liability company duly organized, validly
existing and in good standing under the laws of Oregon and is duly qualified as
a foreign limited liability company in each state in which the character of its
properties owned or leased or the nature of its activities requires
qualification as a foreign limited liability company doing business in such
state, except where the failure to be so qualified would not have a material
adverse effect on Reenergy; (ii) this Agreement and each related agreement to
which Reenergy is a party has been duly authorized, executed and delivered by
Reenergy and each of this Agreement and each such related agreement constitutes
the valid and binding obligation of Reenergy enforceable against Reenergy in
accordance with its terms, except x) as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws now or hereafter in
effect relating to creditors' rights generally and (y) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought; and (iii) Reenergy, through its Managers
or Managing Members and the Reenergy Members, has taken all limited liability
company action necessary for the approval of the execution, delivery and
performance of this Agreement by Reenergy.
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3.4 FURTHER ASSURANCES. From time to time after the Closing, and
without further consideration, each of the Acquired Companies and Owners shall
execute and deliver such other instruments of conveyance, assignment, transfer
and delivery, and take such other actions as Accessity may reasonably request in
order to more effectively transfer to Accessity, and to place Accessity in
possession or control of, the Acquired Companies and to reasonably assist in the
collection of any and all such rights, properties and assets, and to enable
Accessity to exercise and enjoy all of the rights and benefits with respect
thereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PEI
PEI hereby represents and warrants to Accessity that the following
representations and warranties are true and correct on and as of the date
hereof:
4.1 ORGANIZATION AND GOOD STANDING. PEI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, has the power and authority to own, operate and lease its properties
and to carry on its business as now conducted, and is duly qualified to do
business and is in good standing in each jurisdiction where the character of its
properties owned or leased or the nature of its activities make such
qualification necessary (each such jurisdiction being listed on Schedule 4.1),
except where the failure to be so qualified would not have a material adverse
effect on PEI.
4.2 CAPITALIZATION. The authorized capital stock of PEI consists solely
of 20,000,000 shares of common stock, without par value, and 30,000,000 shares
of Preferred Stock, without par value. There are no shares of Preferred Stock
issued and outstanding as of the date of this Agreement. A total of 12,252,200
shares of PEI Stock are issued and outstanding as of the date of this Agreement,
all of which are held of record and owned by the PEI Shareholders as set forth
in Exhibit B. No equity securities of PEI are issued and outstanding as of the
date of this Agreement other than the shares of PEI Stock set forth on Exhibit
B. Exhibit B sets forth the number of shares of PEI Stock that are held by each
PEI Shareholder as of the date of this Agreement. All issued and outstanding
shares of PEI Stock have been duly authorized and validly issued, are fully paid
and nonassessable, are not subject to any right of rescission and have been
offered, issued, sold and delivered by PEI in compliance with all requirements
of applicable laws.
4.3 POWER AND AUTHORITY. PEI has full power and authority to enter into
this Agreement, to perform its obligations hereunder and to carry out the
transactions contemplated hereby. The execution and delivery of this Agreement,
the performance by PEI of its obligations hereunder and the consummation of the
transactions contemplated hereby have been duly authorized by all corporate,
shareholder and other actions on the part of PEI required by applicable law,
PEI's Articles of Incorporation or its Bylaws. This Agreement constitutes the
legal, valid and binding obligation of PEI, enforceable against it in accordance
with its terms.
4.4 OPTIONS/RIGHTS. Except as set forth in Exhibit B or in Schedule
4.4, there are no (i) stock appreciation rights, options, warrants, calls,
rights, commitments, conversion privileges or preemptive or other rights or
agreements outstanding to purchase or otherwise acquire any shares of PEI,
specifically including the PEI Stock (collectively, "PEI Capital Stock"), (ii)
securities or debt convertible into or exchangeable for PEI Capital Stock or
obligating PEI to grant, extend or enter into any such option, warrant, call,
commitment, conversion privileges or preemptive or other right or agreement, or
(iii) voting agreements, registration rights, rights of first refusal,
preemptive rights, co-sale rights, or other restrictions applicable to any
outstanding securities of PEI.
4.5 SUBSIDIARIES. Except as set forth in Schedule 4.5, PEI does not
have any subsidiaries or any equity interest, direct or indirect, in, or loans
to, any corporation, partnership, joint venture, limited liability company or
other business entity.
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4.6 NO VIOLATION. Neither the execution and delivery of this Agreement
nor the performance by PEI of its obligations hereunder nor the consummation of
the transactions contemplated hereby will (a) contravene any provision of the
Articles of Incorporation or Bylaws of PEI; (b) violate, be in conflict with,
constitute a default under, permit the termination of, cause the acceleration of
the maturity of any debt or obligation of PEI under, require (except as
disclosed on Schedule 4.6 hereto) the consent of any other party to, constitute
a breach of, create a loss of a material benefit under, or result in the
creation or imposition of any Lien, upon any property or assets of PEI under,
any mortgage, indenture, lease, contract, agreement, instrument or commitment to
which PEI is a party or by which it or he or any of its or his respective assets
or properties may be bound; (c) to the knowledge of PEI, violate any statute or
law or any judgment, decree, order, regulation or rule of any court or
Governmental Body to which PEI or the PEI Business is subject or by which PEI,
any of its assets or properties are bound; or (d) result in the loss of any
license, privilege or certificate benefiting PEI or the PEI Business.
4.7 CONSENTS AND APPROVALS. Except as set forth on Schedule 4.7 hereto,
no consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory authority or any other third party is
required to be made or obtained by PEI in connection with the execution,
delivery or performance of this Agreement.
4.8 LITIGATION. There are no Actions to which PEI is a party,
including, without limitation, Actions for personal injury, products liability,
wrongful death or other tortious conduct, or breach of warranty arising from or
relating to materials, commodities, products or goods used, transferred,
processed, manufactured, sold, distributed or shipped by PEI (a) involving or
relating to PEI or any of its assets, properties or rights, or (b) pending, or,
to PEI's knowledge, threatened, against PEI, or any of their respective assets,
properties or rights, before any court, arbitrator or administrative or
Governmental Body which, if adversely resolved, would have a material adverse
effect on the PEI Business.
4.9 PEI FINANCIAL STATEMENTS. PEI has previously delivered to Accessity
the unaudited balance sheet of PEI as of December 31, 2003 and the related
statements of income and changes in financial position or cash flows, as
appropriate, for the period then ended (the "Unaudited 2003 PEI Financial
Statements"), together with an unaudited balance sheet of PEI as of March 31,
2004 and the related statements of income and changes in financial position or
cash flows, as appropriate, for the period then ended and, subsequent to the
date hereof, PEI will deliver to Accessity the audited balance sheet of PEI as
of December 31, 2003 and the related statements of income and changes in
financial position or cash flows, as appropriate, for the period then ended (the
"Audited 2003 PEI Financial Statements") (all such financial statements,
excluding, upon delivery to Accessity of the Audited 2003 PEI Financial
Statements, the Unaudited 2003 PEI Financial Statements, are hereinafter
collectively referred to as the "PEI Financial Statements"). The PEI Financial
Statements, together with the notes thereto, (i) were compiled from the books
and records of PEI regularly maintained by management and used to prepare the
financial statements of PEI, (ii) were prepared in accordance with GAAP
consistently applied throughout the period then ended and all periods prior to
that period; and (iii) present fairly and accurately the financial condition of
PEI for the period or as of the dates thereof, subject, where appropriate, to
normal year-end audit adjustments, in each case in accordance with GAAP
consistently applied during the period covered.
4.10 NO UNDISCLOSED LIABILITIES. PEI has, and on the Closing Date will
have, no Liabilities other than those which (a) are fully reflected reserved
against in the PEI Financial Statements, (b) have been incurred since March 31,
2004 in the ordinary course of business in amounts and for terms consistent,
individually and in the aggregate, with the past practice of PEI or (c) have
been specifically disclosed in the Schedules hereto by reference to the specific
section of this Agreement to which such disclosure relates.
4.11 TAXES AND TAX RETURNS. All of the tax returns and reports of PEI
required by applicable law to be filed prior to the date hereof have been duly
filed and all taxes shown as due thereon have been
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paid. There are in effect no waivers of the applicable statutes of limitations
for any federal, state, local or foreign taxes for any period. No liability for
any federal, state, local or foreign income, sales, use, withholding, payroll,
franchise, real property or personal property taxes is pending, and there is no
proposed liability for any such taxes to be imposed upon the properties or
assets of PEI. PEI does not have any liability for any federal, state, local or
foreign income, sales, use, withholding, payroll, franchise, real property or
personal property taxes, assessments, amounts, interest or penalties of any
nature whatsoever other than as shown on the March 31, 2004 PEI Financial
Statements and there is no basis for any additional claim or assessment other
than with respect to liabilities for taxes which may have accrued since the date
of the March 31, 2004 PEI Financial Statements in the ordinary course of
business and reserved against on the books and records of PEI compiled in
accordance with generally accepted accounting principles which have been
consistently applied to the Closing Date. The provisions for taxes reflected in
the March 31, 2004 PEI Financial Statements are adequate for federal, state,
county and local taxes for the period ended on December 31, 2003 and for all
prior periods, whether disputed or undisputed. There are no present disputes
about taxes of any nature payable by PEI. PEI has never filed, and will not file
on or before the Closing Date, any consent under section 341(f) of the Code.
PEI's tax returns have never been audited by any taxation authority.
4.12 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule 4.12,
since December 31, 2003, PEI has conducted the PEI Business only in the ordinary
course and consistent with prior practices and has not:
(a) suffered any material adverse change in its condition
(financial or otherwise), results of operations, assets, liabilities, reserves,
the PEI Business, or operations;
(b) suffered any damage, destruction or loss, whether covered
by insurance or not, materially adversely affecting the PEI Business,
operations, assets, or condition (financial or otherwise);
(c) paid, discharged or satisfied any Liability or other
expenses, other than the payment, discharge or satisfaction of the Liabilities
described in Section 4.10 at the time the same were due and payable and in the
ordinary course of business;
(d) paid or otherwise made any contribution to any
profit-sharing or pension plan or other Employee Benefit Plan (as defined in
Section 4.17 below);
(e) mortgaged or pledged, or permitted the imposition of any
Lien upon, any of its properties or assets (real, personal or mixed, tangible or
intangible), other than those incurred in the ordinary course of business or
otherwise listed on Schedule 4.12 hereto;
(f) cancelled or compromised any debts, or waived or permitted
to lapse any material claims or rights, or sold, assigned, transferred or
otherwise disposed of, other than in the ordinary course, any of its properties
or assets (real, personal or mixed, tangible or intangible);
(g) disposed of or permitted to lapse any rights to the use of
any patent, registered trademark, service mark, trade name or copyright, or
disposed of or disclosed to any person any trade secret, formula, process or
know-how material to the PEI Business not theretofore a matter of public
knowledge;
(h) except as disclosed on Schedule 4.12, granted any increase
in the compensation of any officer, employee or consultant of PEI (including any
such increase pursuant to any bonus, pension, profit-sharing or other plan or
commitment) or any increase in the compensation payable or to become payable to
any officer, employee or consultant;
A-12
(i) other than commitments, transactions and expenditures in
connection with engineering work and other preliminary site work at the site of
the ethanol plant currently being developed by PEI, the anticipated expenditures
for which are set forth on Schedule 4.12, and commitments, transactions and
expenditures in connection with the repair of the grain facility of PEI located
in Madera, California due to the fire that occurred at such facility in the
first quarter of 2004, the expenditures for which are anticipated to be
reimbursed under applicable insurance coverage, entered into any commitment or
transaction not in the ordinary course of business or made any capital
expenditure or commitment for any additions to property, plant or equipment,
except commitments, transactions or capital expenditures which do not in any
single case exceed $25,000 or in the aggregate exceed $50,000;
(j) made any change in any method of accounting or accounting
practice (including, without limitation, any change in depreciation or
amortization policies or rates);
(k) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement or arrangement with,
any of its officers, directors, employees, shareholders, or any family member or
Affiliate of any of its officers, directors, employees or shareholders, or any
officer, director, employee or shareholder of any such Affiliate;
(l) declared, set aside, paid or made any dividend or other
distribution or payment in respect of the capital stock of PEI, or any direct or
indirect redemption, purchase or other acquisition of any of its shares of
capital stock;
(m) knowingly waived or released any right or claim of PEI;
(n) received a commencement notice or, to the knowledge of
PEI, received any threat of commencement, of any civil or criminal litigation,
investigation or proceeding against PEI;
(o) experienced any labor trouble or, to the knowledge of PEI,
received any claim of wrongful discharge or worker's compensation claim;
(p) agreed, whether in writing or otherwise, to take any
action referred to in and prohibited by this Section 4.12; or
(q) become aware of any other event or condition that has had
or would reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), results of operations, assets, liabilities,
reserves, the PEI Business, the PEI Intellectual Property (as defined below) or
the operations of PEI.
4.13 TITLE TO PROPERTIES; ENCUMBRANCES.
(a) PEI has good and marketable title to all of its properties
and assets (real, personal or mixed, tangible or intangible), including without
limitation the PEI Intellectual Property. None of PEI's properties or assets is
subject to any Lien, except Permitted Liens (including the Liens set forth on
Schedule 4.13), none of which adversely affects the PEI Business or the
continued operations of PEI.
(b) All material property and assets (real, personal or mixed,
tangible or intangible) used or required by PEI in the conduct of the PEI
Business are fully owned by PEI (except to the extent of any Permitted Liens).
All such property and assets, or the leases or licenses thereof, constitute all
property, assets and contractual rights necessary for the conduct of the PEI
Business as presently conducted.
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4.14 LEASES.
(a) Schedule 4.14 contains a true and complete list of:
(i) all leases pursuant to which PEI leases or
subleases any real property interests, whether as lessor, lessee, sublessor or
sublessee;
(ii) all leases pursuant to which PEI leases any type
of personal property;
(iii) all leases pursuant to which PEI leases any
vehicles or related equipment; and
(iv) all leases pursuant to which PEI leases to
others any type of property.
(b) Each such lease described on Schedule 4.14 is the legal,
valid and binding obligation of PEI and, to the knowledge of PEI, the other
parties thereto, enforceable in accordance with their respective terms, and is
in full force and effect. PEI is not in default under any such lease, and PEI
has not received any notice from any person or entity asserting that PEI is in
default under any such lease, and no events or circumstances exist which, with
notice or the passage of time or both, would constitute a default under any such
lease.
4.15 INTELLECTUAL PROPERTY. PEI owns all right, title and interest in,
or has the right to use, sell or license all patent applications, patents,
trademark applications, trademarks, service marks, trade names, copyright
applications, copyrights, trade secrets, know-how, technology, customer lists,
proprietary processes and formulae, all source and object code, algorithms,
inventions, development tools and all documentation and media constituting,
describing or relating to the above, including, without limitation, manuals,
memoranda and records and other intellectual property and proprietary rights
used in or reasonably necessary or required for the conduct of its respective
business as presently conducted (collectively, the "PEI Intellectual Property").
4.16 COMPLIANCE WITH LAWS. PEI has not been charged with, and, to PEI's
knowledge, PEI is not threatened with or under any investigation with respect
to, any charge concerning any violation of any provision of any federal, state,
local or foreign law, regulation, ordinance, order or administrative ruling
affecting the PEI Business or PEI, and PEI is not in default with respect to any
order, writ, injunction or decree of any court, agency or instrumentality
affecting the PEI Business or PEI. To PEI's knowledge, PEI is not in violation
of any federal, state, local or foreign law, ordinance or regulation or any
other requirement of any Governmental Body or regulatory body, court or
arbitrator applicable to the PEI Business or PEI which would have a material
adverse effect on PEI or the PEI Business. Without limiting the generality of
the foregoing, PEI is in compliance in all material respects with all
Occupational Safety and Health Laws, including those rules and regulations
promulgated by OSHA, except where such non-compliance would not have a material
adverse effect on PEI or the PEI Business.
4.17 EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.17 contains a true and complete list and
description of each pension, retirement, severance, welfare, profit-sharing,
stock purchase, stock option, vacation, deferred compensation, bonus or other
incentive plan, or other employee benefit program, arrangement, agreement or
understanding, or medical, vision, dental or other health plan, or life
insurance or disability plan, retiree medical or life insurance plan or any
other employee benefit plans, including, without limitation, any "employee
benefit plan" (as defined in Section 3(3) of ERISA), to which PEI contributes or
is a party or by which it is bound or under which it may have liability and
under which employees or former employees of PEI (or their beneficiaries) are
eligible to participate or derive a benefit. Each employee benefit plan which is
a "group health plan" (as such term is defined in Section 5000(b)(i) of the
Code)
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satisfies the applicable requirements of Section 4980B of the Code. Except as
described on Schedule 4.17, PEI has no formal plan or commitment, whether
legally binding or not, to create any additional plan, practice or agreement or
modify or change any existing plan, practice or agreement that would affect any
of its employees or terminated employees. Benefits under all employee benefit
plans are as represented and have not been and will not be increased subsequent
to the date copies of such plans have been provided.
(b) PEI does not contribute to or have any obligation to
contribute to, has not at any time contributed to or had an obligation to
contribute to, sponsor or maintain, and has not at any time sponsored or
maintained, a "multi-employer plan" (within the meaning of Section 3(37) of
ERISA) for the benefit of employees or former employees of PEI.
(c) PEI has, in all material respects, performed all
obligations, whether arising by operation of law, contract, or past custom,
required to be performed under or in connection with the employee benefit plans
disclosed on Schedule 4.17 (individually, a "PEI Employee Benefit Plan" and,
collectively, the "PEI Employees Benefit Plans"), and PEI has no knowledge of
any default or violation by any other party with respect thereto.
(d) There are no Actions, suits or claims (other than routine
claims for benefits) pending, or, to PEI's knowledge, threatened, against any
PEI Employee Benefit Plan or against the assets funding any PEI Employee Benefit
Plan. (e) PEI neither maintains nor contributes to any "employee welfare
benefit" (as such term is defined in Section 3(i) of ERISA) plan which provides
any benefits to retirees or former employees of PEI.
4.18 EMPLOYMENT LAW MATTERS.
(a) PEI (i) is in material compliance with all applicable laws
respecting employment, employment practices, terms and conditions of employment
and wages and hours; (ii) is in material compliance with all applicable laws and
regulations relating to the employment of aliens or similar immigration matters;
and (iii) is not engaged in any unfair labor practice, including, but not
limited to, discrimination or wrongful discharge.
(b) PEI has not at anytime had, nor to PEI's knowledge, is
there now threatened, a strike, picket, work stoppage, work slowdown or other
labor trouble, against or directly affecting PEI that had or would reasonably be
expected to have a material adverse effect on the PEI Business or PEI.
(c) None of the employees of PEI is represented by a labor
union, and no petition has been filed or proceedings instituted by any employee
or group of employees with any labor relations board seeking recognition of a
bargaining representative. PEI is not a party to any multi-employer collective
bargaining agreement covering any of its employees.
(d) There are no controversies or disputes (including any
union grievances or arbitration proceeding) pending, or, to PEI's knowledge,
threatened, between PEI and any employees of PEI (or any union or other
representative of such employees). No unfair labor practice complaints have been
filed against PEI with the National Labor Relations Board or any other
Governmental Body or administrative body, and PEI has not received any written
notice or communication reflecting an intention or a threat to file any such
complaint.
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4.19 CONTRACTS AND COMMITMENTS.
(a) Together with the leases set forth on Schedule 4.14, the
insurance policies set forth on Schedule 4.23, and the PEI Employee Benefit
Plans and commitments set forth on Schedule 4.17, Schedule 4.19 contains a true
and complete list and description (stated without duplication), of:
(i) all contracts (including, without limitation,
letters of credit, and obligations for borrowed money) and commitments of PEI
which are material to the operations, business, prospects or condition
(financial or otherwise) of PEI;
(ii) all consulting agreements (whether written or
oral), regardless of amounts or duration;
(iii) all material contracts or commitments (whether
written or oral) with distributors, brokers, manufacturer's representatives,
sales representatives, service or warranty representatives, customers and other
persons, firms, corporations or other entities engaged in the sale,
distribution, service or repair of PEI's products;
(iv) all contracts relating to
construction-in-progress of capital assets; and
(v) all joint venture, licensing, profit sharing,
royalty or similar agreements or arrangements to which PEI is a party in any way
associated with the manufacture, marketing, sale or distribution of any products
or provision of any services of PEI.
(b) PEI has delivered to Accessity true and complete copies of
all of the documents identified on Schedule 4.19 (collectively, the "PEI
Material Contracts") and shall deliver true and complete copies of all such
other agreements, instruments and documents as Accessity may reasonably request
relating to the operation, ownership or conduct of the PEI Business.
(c) PEI is not a party to any written agreement that would
restrict it from carrying on the PEI Business anywhere in the world.
(d) PEI is not a party to any "take-or-pay" contracts.
(e) Except as identified on Schedule 4.19, PEI is not a party
to any employment agreements, arrangements and commitments, including severance
or termination arrangements and commitments (whether written or oral), between
PEI and any employees of PEI.
(f) PEI is not, and to the knowledge of PEI and the PEI
Majority Shareholders, no other party is, in default under or in breach or
violation of, nor has PEI received notice of any asserted claim of default by
PEI or by any other party under, or a breach or violation of, any of the PEI
Material Contracts.
4.20 NO BROKERS. Except as disclosed on Schedule 4.20, PEI is not
obligated for the payment of fees or expenses of any investment banker, broker
or finder in connection with the origin, negotiation or execution of this
Agreement in connection with any exchange of stock transaction provided for
herein.
4.21 ENVIRONMENTAL MATTERS. PEI is in compliance in all material
respects with all Environmental Laws. There is no Action pending before any
court, Governmental Body or board or other forum or threatened by any person or
entity (i) for noncompliance by PEI with any Environmental Law (ii) relating to
the release into the environment by PEI of any pollutant, toxic or hazardous
material or waste generated by PEI, whether or not occurring at or on a site
owned, leased or operated by PEI. There has not been by PEI, nor to the
knowledge of PEI has there been at all, any past, storage, disposal,
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generation, manufacture, refinement, transportation, production or treatment of
any hazardous materials or substances at, upon or from the facilities occupied
or used by PEI and any other real property presently or formerly owned by, used
by or leased to or by PEI, any predecessor of PEI (collectively, the "PEI
Property"). To the knowledge of PEI, neither PEI nor any properties owned or
operated by PEI has been or is in violation or is otherwise liable under, any
Environmental Law. To the knowledge of PEI, there are no asbestos-containing
materials, underground storage tanks or polychlorinated biphenyls (PCBs) located
on the PEI Property. To the knowledge of PEI, there has been no spill,
discharge, leak, emission, injection, disposal, escape, dumping or release of
any kind on, beneath or above the PEI Property or into the environment
surrounding such PEI Property of any hazardous materials or substances in
violation of any Environmental Law or requiring any remedial action. To the
knowledge of PEI, PEI has all permits, registrations, approvals and licenses
required by any Governmental Body under any Environmental Law to be obtained by
PEI in connection with the conduct of the business of PEI as presently
conducted.
4.22 BANK ACCOUNTS. Schedule 4.22 sets forth the names and locations of
all banks, trust companies, savings and loan associations, and other financial
institutions at which PEI maintains accounts of any nature and the names of all
persons authorized to draw thereon or make withdrawals therefrom.
4.23 INSURANCE. Schedule 4.23 sets forth a true and complete list and
description of (a) all of PEI's self-insurance practices and items covered by
such self-insurance and (b) all policies of fire, liability, worker's
compensation and other forms of insurance owned or held by PEI. No installment
premiums are due under the policies set forth on Schedule 4.23 or, if
installment premiums shall be due and owing under such policies prior to the
Closing Date, such premiums shall have been paid up-to-date prior to the Closing
Date. All such policies are in full force and effect, insure against risks and
liabilities to the extent and in the manner deemed appropriate and sufficient by
PEI in its reasonable business judgment, and, other than the receipt of a notice
of nonrenewal of a general liability insurance policy expiring in June 2004
applicable to the grain facility of PEI located in Madera, California due to a
fire that occurred at such facility in the first quarter of 2004, PEI has not
received any notice of cancellation with respect thereto. To PEI's knowledge,
PEI is not in default with respect to any provision contained in any such policy
and has not failed to give any notice or present any claim under any such policy
in a timely fashion.
4.24 SUPPLIERS AND CUSTOMERS. PEI does not have any knowledge that any
supplier or customer or group of related suppliers or customers of PEI has
canceled or otherwise terminated or threatened to cancel or otherwise terminate,
its relationship with PEI, which termination would have a material adverse
effect on the PEI Business or PEI, or that any such supplier or customer or
group of related suppliers or customers expects to reduce its business with PEI
by reason of the transactions contemplated by this Agreement or for any other
reason whatsoever.
4.25 LICENSES, PERMITS AND AUTHORIZATIONS. PEI has all necessary
Permits for the use and ownership or leasing of its properties and assets as
currently operated, used, owned or leased (including, without limitation, the
operation of a plant to produce up to 40 million gallons of ethanol per year),
except for such Permits as to which the lack thereof does not and would not have
a material adverse effect on PEI or the PEI Business and except for certain
non-discretionary grading, foundation and building Permits to be obtained by PEI
in connection with the construction of an ethanol plant, as more particularly
described on Schedule 4.25. All of the Permits are valid, in full force and
effect and in good standing. Schedule 4.25 contains a true and complete list and
description of all the Permits. There is no claim or Action pending, or, to
PEI's knowledge, threatened, which disputes the validity of any such Permit or
threatens to revoke, cancel, suspend or limit any such Permit.
4.26 ACCOUNTS RECEIVABLE. All accounts receivable of PEI shown on the
PEI Financial Statements and all accounts receivable created after March 31,
2004, subject to reserves created in the ordinary course of business on a basis
consistent with the past practices and policies of PEI and otherwise in
accordance with generally accepted accounting principles, (a) have been
collected or (b) to PEI's
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knowledge, are valid and enforceable, arose from bona-fide sales to third
parties in the ordinary course of business, and are collectible at the aggregate
recorded amounts thereof on the books of PEI.
4.27 CONDITION OF TANGIBLE ASSETS. Except as disclosed on Schedule
4.12, PEI's facilities and tangible assets, including, without limitation,
machinery, equipment, vehicles, furniture, plants and buildings, are in good
operating condition and repair (ordinary wear and tear excepted) and are
adequate for the uses to which they have been put by PEI in the ordinary course
of business, except for parts or repairs of an immaterial nature in the
aggregate, and PEI has not received any notice that any of such facilities or
assets is in need of substantial maintenance or repair.
4.28 DISCLOSURE. No representation or warranty of PEI in this Agreement
(including, without limitation, the Schedules of PEI hereto) contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary to make the statements herein or therein not
misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PEI SHAREHOLDERS
Each of the PEI Shareholders, severally and not jointly, hereby
represents and warrants to Accessity that the following representations and
warranties are true and correct on and as of the date hereof:
5.1 POWER AND AUTHORITY. Such PEI Shareholder has full power and
authority to enter into this Agreement, perform its respective obligations
hereunder, and carry out the transactions contemplated hereby. This Agreement
constitutes the legal, valid and binding obligation of such PEI Shareholder,
enforceable against such PEI Shareholder in accordance with its terms.
5.2 NO VIOLATION. Neither the execution and delivery of this Agreement
nor the performance by such PEI Shareholder of its respective obligations
hereunder nor the consummation of the transactions contemplated hereby will
violate, or be in conflict with, or constitute a default under, any mortgage,
indenture, lease, or any agreement, instrument or commitment to which such PEI
Shareholder is a party.
5.3 TITLE; CONSENTS AND APPROVALS; NO CLAIMS. Such PEI Shareholder is
the owner, beneficially and of record, of its shares of PEI Stock, free and
clear of all Liens. To such PEI Shareholder's knowledge, no consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority or any other third party is required to be made or
obtained by such PEI Shareholder in connection with the execution, delivery or
performance of this Agreement. To such PEI Shareholder's knowledge, there is no
claim, action, litigation, suit, cause of action or other proceeding pending or
threatened before any federal, state or local court, governmental agency or
regulatory body against such PEI Shareholder which seeks or may seek, directly
or indirectly, (a) to invalidate or set aside, in whole or in part, this
Agreement, (b) to restrain, prohibit, invalidate or set aside, in whole or in
part, the consummation of the transactions contemplated hereby or (c) to obtain
substantial damages in connection therewith.
5.4 SECURITIES LAW COMPLIANCE.
(a) Such PEI Shareholder has a net worth sufficient to bear
the economic risk (including the entire loss) of its investment made in the
Accessity Exchange Shares;
(b) Such PEI Shareholder is an "accredited investor," as such
term is defined in Rule 501 of Regulation D promulgated under the rules and
regulations of the Securities Act;
(c) Such PEI Shareholder has adequate means of providing for
its current cash needs and personal contingencies and has no need for liquidity
in this investment in the Accessity Exchange
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Shares and has no reason to anticipate any change in its personal circumstances,
financial or otherwise, which may cause or require any sale or distribution by
such PEI Shareholder or all or any part of the Accessity Exchange Shares
acquired by it herein;
(d) by reason of such PEI Shareholder's business or financial
experience or the business or financial experience of such PEI Shareholder's
professional advisor(s) who are unaffiliated with and who are not compensated by
Accessity or any affiliate or selling agent of Accessity, directly or
indirectly, such PEI Shareholder has the capacity to protect its own interests
in connection with an investment in the Accessity Exchange Shares;
(e) Such PEI Shareholder understands that the he, she or it is
acquiring Accessity Exchange Shares without being furnished any prospectus or
offering circular, other than a copy of this Agreement, a copy of the Proxy
Statement (as defined in Section 11.6 below) and a copy of the Owner Disclosure
Document (as defined in Section 11.7 below);
(f) No representations or warranties have been made to such
PEI Shareholder by Accessity or any employee or agent of Accessity and in
entering into this Agreement, such PEI Shareholder is not relying on any
information, other than as a result of the independent investigation of
Accessity by such PEI Shareholder, and no guarantee of any profit or return on
its investment made in the Accessity Exchange Shares has been made to such PEI
Shareholder;
(g) In evaluating the merits and risk of this investment, such
PEI Shareholder has relied on the advice of its personal tax advisor, investment
advisor and/or legal counsel;
(h) Such PEI Shareholder is aware that the Accessity Exchange
Shares have not been registered or qualified, nor is registration or
qualification contemplated (except where such PEI Shareholder is a party to a
Registration Rights Agreement with PEI, to the extent provided for therein),
with the SEC under the Securities Act or any state securities law. Accordingly,
the Accessity Exchange Shares may be sold or otherwise transferred or
hypothecated only if they are subsequently registered or qualified under the
Securities Act or applicable laws or if, in the opinion of counsel, an exemption
from registration or qualification thereunder is available and the transaction
will not jeopardize the availability of the exemptions under applicable federal
and state securities laws relied upon by Accessity in connection with the
offering in which such PEI Shareholder acquired its Accessity Exchange Shares;
(i) Such PEI Shareholder acknowledges that the Accessity
Exchange Shares were not offered by means of any general solicitation or
advertising;
(j) Such PEI Shareholder is acquiring its Accessity Exchange
Shares solely for its own account, for investment purposes only, and not with an
intent to sell, or for resale in connection with any distribution of all or any
portion of the Accessity Exchange Shares within the meaning of the Securities
Act; and
(k) The address of such PEI Shareholder set forth on the
signature pages hereto is the principal residence of such PEI Shareholder, if
such PEI Shareholder is an individual, or the principal business address of such
PEI Shareholder, if such PEI Shareholder is a business or other entity, and that
all offers to such PEI Shareholder have been made only in the state specified in
such address.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF KINERGY
Kinergy hereby represents and warrants to Accessity that the following
representations and warranties are true and correct on and as of the date
hereof:
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6.1 ORGANIZATION AND GOOD STANDING. Kinergy is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Oregon, has the power and authority to own, operate and lease its
properties and to carry on its business as now conducted, and is duly qualified
to do business and is in good standing in each jurisdiction where the character
of its properties owned or leased or the nature of its activities make such
qualification necessary (each such jurisdiction being listed on Schedule 6.1),
except where the failure to be so qualified would not have a material adverse
effect on Kinergy.
6.2 CAPITALIZATION. The limited liability company membership interests
of Kinergy are owned by the Kinergy Members as set forth in Exhibit C. No
limited liability company membership interests of Kinergy are outstanding as of
the date of this Agreement other than the Kinergy Interests set forth on Exhibit
C. The Kinergy Interests have been duly authorized and validly issued, are fully
paid and nonassessable, are not subject to any right of rescission and have been
offered, issued, sold and delivered by Kinergy in compliance with all
requirements of applicable laws.
6.3 POWER AND AUTHORITY. Kinergy has full power and authority to enter
into this Agreement, to perform its obligations hereunder and to carry out the
transactions contemplated hereby. The execution and delivery of this Agreement,
the performance by Kinergy of its obligations hereunder and the consummation of
the transactions contemplated hereby have been duly authorized by the Managers
or the Managing Members and the Kinergy Members as required by applicable law,
Kinergy's Articles of Organization or its Operating Agreement. This Agreement
constitutes the legal, valid and binding obligation of Kinergy, enforceable
against it in accordance with its terms.
6.4 OPTIONS/RIGHTS. Except as set forth in Schedule 6.4, there are no
(i) options, warrants, calls, rights, commitments, conversion privileges or
preemptive or other rights or agreements outstanding to purchase or otherwise
acquire any limited liability company membership interests of Kinergy, (ii)
securities or debt convertible into or exchangeable for Kinergy limited
liability company membership interests or obligating Kinergy to grant, extend or
enter into any such option, warrant, call, commitment, conversion privileges or
preemptive or other right or agreement, or (iii) voting agreements, rights of
first refusal, preemptive rights, co-sale rights, or other restrictions
applicable to any outstanding limited liability company membership interests of
Kinergy.
6.5 SUBSIDIARIES. Kinergy does not have any subsidiaries or any equity
interest, direct or indirect, in, or loans to, any corporation, partnership,
joint venture, limited liability company or other business entity.
6.6 NO VIOLATION. Neither the execution and delivery of this Agreement
nor the performance by Kinergy of its obligations hereunder nor the consummation
of the transactions contemplated hereby will (a) contravene any provision of the
Articles of Organization or Operating Agreement of Kinergy; (b) violate, be in
conflict with, constitute a default under, permit the termination of, cause the
acceleration of the maturity of any debt or obligation of Kinergy under, require
(except as disclosed on Schedule 6.6 hereto) the consent of any other party to,
constitute a breach of, create a loss of a material benefit under, or result in
the creation or imposition of any Lien, upon any property or assets of Kinergy
under, any mortgage, indenture, lease, contract, agreement, instrument or
commitment to which Kinergy is a party or by which it or any of its assets or
properties may be bound; (c) to the knowledge of Kinergy, violate any statute or
law or any judgment, decree, order, regulation or rule of any court or
Governmental Body to which Kinergy or the Kinergy Business is subject or by
which Kinergy, any of its assets or properties are bound; or (d) result in the
loss of any license, privilege or certificate benefiting Kinergy or the Kinergy
Business.
6.7 CONSENTS AND APPROVALS. Except as set forth on Schedule 6.7 hereto,
no consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory
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authority or any other third party is required to be made or obtained by Kinergy
in connection with the execution, delivery or performance of this Agreement.
6.8 LITIGATION. There are Actions to which Kinergy is a party,
including, without limitation, Actions for personal injury, products liability,
wrongful death or other tortious conduct, or breach of warranty arising from or
relating to materials, commodities, products or goods used, transferred,
processed, manufactured, sold, distributed or shipped by Kinergy (a) involving
or relating to Kinergy, or any its assets, properties or rights, or (b) pending,
or, to Kinergy's knowledge, threatened, against Kinergy, or any of its assets,
properties or rights, before any court, arbitrator or administrative or
Governmental Body which, if adversely resolved, would have a material adverse
effect on the Kinergy Business.
6.9 KINERGY FINANCIAL STATEMENTS. Kinergy has previously delivered to
Accessity the unaudited balance sheet of Kinergy as of December 31, 2003 and the
related statements of income and changes in financial position or cash flows, as
appropriate, for the period then ended (the "Unaudited 2003 Kinergy Financial
Statements"), together with an unaudited balance sheet of Kinergy as of March
31, 2004 and the related statements of income and changes in financial position
or cash flows, as appropriate, for the period then ended and, subsequent to the
date hereof, Kinergy will deliver to Accessity the audited balance sheet of
Kinergy as of December 31, 2003 and the related statements of income and changes
in financial position or cash flows, as appropriate, for the period then ended
(the "Audited 2003 Kinergy Financial Statements") (all such financial
statements, excluding, upon delivery to Accessity of the Audited 2003 Kinergy
Financial Statements, the Unaudited 2003 Kinergy Financial Statements, are
hereinafter collectively referred to as the "Kinergy Financial Statements"). The
Kinergy Financial Statements, together with the notes thereto, (i) were compiled
from the books and records of Kinergy regularly maintained by management and
used to prepare the financial statements of Kinergy, (ii) were prepared in
accordance with GAAP consistently applied throughout the period then ended and
all periods prior to that period; and (iii) present fairly and accurately the
financial condition of Kinergy for the period or as of the dates thereof,
subject, where appropriate, to normal year-end audit adjustments, in each case
in accordance with GAAP consistently applied during the period covered.
6.10 NO UNDISCLOSED LIABILITIES. Kinergy has, and on the Closing Date
will have, no Liabilities other than those which (a) are fully reflected
reserved against in the Kinergy Financial Statements, (b) have been incurred
since March 31, 2004 in the ordinary course of business in amounts and for terms
consistent, individually and in the aggregate, with the past practice of Kinergy
or (c) have been specifically disclosed in the Schedules hereto by reference to
the specific section of this Agreement to which such disclosure relates.
6.11 TAXES AND TAX RETURNS. All of the tax returns and reports of
Kinergy required by applicable law to be filed prior to the date hereof have
been duly filed and all taxes shown as due thereon have been paid. There are in
effect no waivers of the applicable statutes of limitations for any federal,
state, local or foreign taxes for any period. No liability for any federal,
state, local or foreign income, sales, use, withholding, payroll, franchise,
real property or personal property taxes is pending, and there is no proposed
liability for any such taxes to be imposed upon the properties or assets of
Kinergy. Kinergy does not have any liability for any federal, state, local or
foreign income, sales, use, withholding, payroll, franchise, real property or
personal property taxes, assessments, amounts, interest or penalties of any
nature whatsoever other than as shown on the March 31, 2004 Kinergy Financial
Statements and there is no basis for any additional claim or assessment other
than with respect to liabilities for taxes which may have accrued since the date
of the March 31, 2004 Kinergy Financial Statements in the ordinary course of
business and reserved against on the books and records of Kinergy compiled in
accordance with generally accepted accounting principles which have been
consistently applied to the Closing Date. The provisions for taxes reflected in
the March 31, 2004 Kinergy Financial Statements are adequate for federal, state,
county and local taxes for the period ended on December 31, 2003 and for all
prior periods, whether disputed or undisputed. There are no present disputes
about taxes of any nature payable by Kinergy.
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Kinergy has never filed, and will not file on or before the Closing Date, any
consent under section 341(f) of the Code. Kinergy's tax returns have never been
audited by any taxation authority.
6.12 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule 6.12,
since December 31, 2003, Kinergy has conducted the Kinergy Business only in the
ordinary course and consistent with prior practices and has not:
(a) suffered any material adverse change in its condition
(financial or otherwise), results of operations, assets, liabilities, reserves,
the Kinergy Business, or operations;
(b) suffered any damage, destruction or loss, whether covered
by insurance or not, materially adversely affecting the Kinergy Business,
operations, assets, or condition (financial or otherwise);
(c) paid, discharged or satisfied any Liability or other
expenses, other than the payment, discharge or satisfaction of the Liabilities
described in Section 6.10 at the time the same were due and payable and in the
ordinary course of business;
(d) paid or otherwise made any contribution to any
profit-sharing or pension plan or other Employee Benefit Plan (as defined in
Section 6.17 below);
(e) mortgaged or pledged, or permitted the imposition of any
Lien upon, any of its properties or assets (real, personal or mixed, tangible or
intangible), other than those incurred in the ordinary course of business or
otherwise listed on Schedule 6.12 hereto;
(f) cancelled or compromised any debts, or waived or permitted
to lapse any material claims or rights, or sold, assigned, transferred or
otherwise disposed of, other than in the ordinary course, any of its properties
or assets (real, personal or mixed, tangible or intangible);
(g) disposed of or permitted to lapse any rights to the use of
any patent, registered trademark, service mark, trade name or copyright, or
disposed of or disclosed to any person any trade secret, formula, process or
know-how material to the Kinergy Business not theretofore a matter of public
knowledge;
(h) except as disclosed on Schedule 6.12, granted any increase
in the compensation of any officer, employee or consultant of Kinergy (including
any such increase pursuant to any bonus, pension, profit-sharing or other plan
or commitment) or any increase in the compensation payable or to become payable
to any officer, employee or consultant;
(i) entered into any commitment or transaction not in the
ordinary course of business or made any capital expenditure or commitment for
any additions to property, plant or equipment, except commitments, transactions
or capital expenditures which do not in any single case exceed $25,000 or in the
aggregate exceed $50,000;
(j) made any change in any method of accounting or accounting
practice (including, without limitation, any change in depreciation or
amortization policies or rates);
(k) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement or arrangement with,
any of its officers, employees, members, or any family member or Affiliate of
any of its officers, employees or members, or any officer, employee or member of
any such Affiliate;
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(l) declared, set aside, paid or made any distribution or
payment in respect of the limited liability company membership interests of
Kinergy, or any direct or indirect redemption, purchase or other acquisition of
any of its limited liability company membership interests;
(m) knowingly waived or released any right or claim of
Kinergy;
(n) received a commencement notice or, to the knowledge of
Kinergy, received any threat of commencement, of any civil or criminal
litigation, investigation or proceeding against Kinergy;
(o) experienced any labor trouble or, to the knowledge of
Kinergy, received any claim of wrongful discharge or worker's compensation
claim;
(p) agreed, whether in writing or otherwise, to take any
action referred to in and prohibited by this Section 6.12; or
(q) become aware of any other event or condition that has had
or would reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), results of operations, assets, liabilities,
reserves, the Kinergy Business, the Kinergy Intellectual Property (as defined
below) or the operations of Kinergy.
6.13 TITLE TO PROPERTIES; ENCUMBRANCES.
(a) Kinergy has good and marketable title to all of its
properties and assets (real, personal or mixed, tangible or intangible),
including without limitation the Kinergy Intellectual Property. None of
Kinergy's properties or assets is subject to any Lien, except for Permitted
Liens (including the Liens set forth on Schedule 6.13), none of which adversely
affects the Kinergy Business or the continued operations of Kinergy.
(b) All material property and assets (real, personal or mixed,
tangible or intangible) used or required by Kinergy in the conduct of the
Kinergy Business are fully owned by Kinergy (except to the extent of any
Permitted Liens). All such property and assets, or the leases or licenses
thereof, constitute all property, assets and contractual rights necessary for
the conduct of the Kinergy Business as presently conducted.
6.14 LEASES.
(a) Schedule 6.14 contains a true and complete list of:
(i) all leases pursuant to which Kinergy leases or
subleases any real property interests, whether as lessor, lessee, sublessor or
sublessee;
(ii) all leases pursuant to which Kinergy leases any
type of personal property;
(iii) all leases pursuant to which Kinergy leases any
vehicles or related equipment; and
(iv) all leases pursuant to which Kinergy leases to
others any type of property.
(b) Each such lease described on Schedule 6.14 is the legal,
valid and binding obligation of Kinergy and, to the knowledge of Kinergy, the
other parties thereto, enforceable in accordance with their respective terms,
and is in full force and effect. Kinergy is not in default under any
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such lease, and Kinergy has not received any notice from any person or entity
asserting that Kinergy is in default under any such lease, and no events or
circumstances exist which, with notice or the passage of time or both, would
constitute a default under any such lease.
6.15 INTELLECTUAL PROPERTY. Kinergy owns all right, title and interest
in, or has the right to use, sell or license all patent applications, patents,
trademark applications, trademarks, service marks, trade names, copyright
applications, copyrights, trade secrets, know-how, technology, customer lists,
proprietary processes and formulae, all source and object code, algorithms,
inventions, development tools and all documentation and media constituting,
describing or relating to the above, including, without limitation, manuals,
memoranda and records and other intellectual property and proprietary rights
used in or reasonably necessary or required for the conduct of its respective
business as presently conducted (collectively, the "Kinergy Intellectual
Property").
6.16 COMPLIANCE WITH LAWS. Kinergy has not been charged with, and, to
Kinergy's knowledge, Kinergy is not threatened with or under any investigation
with respect to, any charge concerning any violation of any provision of any
federal, state, local or foreign law, regulation, ordinance, order or
administrative ruling affecting the Kinergy Business or Kinergy, and Kinergy is
not in default with respect to any order, writ, injunction or decree of any
court, agency or instrumentality affecting the Kinergy Business or Kinergy. To
Kinergy's knowledge, Kinergy is not in violation of any federal, state, local or
foreign law, ordinance or regulation or any other requirement of any
Governmental Body or regulatory body, court or arbitrator applicable to the
Kinergy Business or Kinergy which would have a material adverse effect on
Kinergy or the Kinergy Business. Without limiting the generality of the
foregoing, Kinergy is in compliance in all material respects with all
Occupational Safety and Health Laws, including those rules and regulations
promulgated by OSHA, except where such non-compliance would not have a material
adverse effect on Kinergy or the Kinergy Business.
6.17 EMPLOYEE BENEFIT PLANS.
(a) Schedule 6.17 contains a true and complete list and
description of each pension, retirement, severance, welfare, profit-sharing,
stock purchase, stock option, vacation, deferred compensation, bonus or other
incentive plan, or other employee benefit program, arrangement, agreement or
understanding, or medical, vision, dental or other health plan, or life
insurance or disability plan, retiree medical or life insurance plan or any
other employee benefit plans, including, without limitation, any "employee
benefit plan" (as defined in Section 3(3) of ERISA), to which Kinergy
contributes or is a party or by which it is bound or under which it may have
liability and under which employees or former employees of Kinergy (or their
beneficiaries) are eligible to participate or derive a benefit. Each employee
benefit plan which is a "group health plan" (as such term is defined in Section
5000(b)(i) of the Code) satisfies the applicable requirements of Section 4980B
of the Code. Except as described on Schedule 6.17, Kinergy has no formal plan or
commitment, whether legally binding or not, to create any additional plan,
practice or agreement or modify or change any existing plan, practice or
agreement that would affect any of its employees or terminated employees.
Benefits under all employee benefit plans are as represented and have not been
and will not be increased subsequent to the date copies of such plans have been
provided.
(b) Kinergy does not contribute to or have any obligation to
contribute to, has not at any time contributed to or had an obligation to
contribute to, sponsor or maintain, and has not at any time sponsored or
maintained, a "multi-employer plan" (within the meaning of Section 3(37) of
ERISA) for the benefit of employees or former employees of Kinergy.
(c) Kinergy has, in all material respects, performed all
obligations, whether arising by operation of law, contract, or past custom,
required to be performed under or in connection with the employee benefit plans
disclosed on Schedule 6.17 (individually, a "Kinergy Employee Benefit Plan"
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and, collectively, the "Kinergy Employees Benefit Plans"), and Kinergy has no
knowledge of any default or violation by any other party with respect thereto.
(d) There are no Actions, suits or claims (other than routine
claims for benefits) pending, or, to Kinergy's knowledge, threatened, against
any Kinergy Employee Benefit Plan or against the assets funding any Kinergy
Employee Benefit Plan.
(e) Kinergy neither maintains nor contributes to any "employee
welfare benefit" (as such term is defined in Section 3(i) of ERISA) plan which
provides any benefits to retirees or former employees of Kinergy.
6.18 EMPLOYMENT LAW MATTERS.
(a) Kinergy (i) is in material compliance with all applicable
laws respecting employment, employment practices, terms and conditions of
employment and wages and hours; (ii) is in material compliance with all
applicable laws and regulations relating to the employment of aliens or similar
immigration matters; and (iii) is not engaged in any unfair labor practice,
including, but not limited to, discrimination or wrongful discharge.
(b) Kinergy has not at anytime during the last three (3) years
had, nor to Kinergy's knowledge, is there now threatened, a strike, picket, work
stoppage, work slowdown or other labor trouble, against or directly affecting
Kinergy that had or would reasonably be expected to have a material adverse
effect on the Kinergy Business or Kinergy.
(c) None of the employees of Kinergy is represented by a labor
union, and no petition has been filed or proceedings instituted by any employee
or group of employees with any labor relations board seeking recognition of a
bargaining representative. Kinergy is not a party to any multi-employer
collective bargaining agreement covering any of its employees.
(d) There are no controversies or disputes (including any
union grievances or arbitration proceeding) pending, or, to Kinergy's knowledge,
threatened, between Kinergy and any employees of Kinergy (or any union or other
representative of such employees). No unfair labor practice complaints have been
filed against Kinergy with the National Labor Relations Board or any other
Governmental Body or administrative body, and Kinergy has not received any
written notice or communication reflecting an intention or a threat to file any
such complaint.
6.19 CONTRACTS AND COMMITMENTS.
(a) Together with the leases set forth on Schedule 6.14, the
insurance policies set forth on Schedule 6.23, and the Kinergy Employee Benefit
Plans and commitments set forth on Schedule 6.17, Schedule 6.19 contains a true
and complete list and description (stated without duplication), of:
(i) all contracts (including, without limitation,
letters of credit, and obligations for borrowed money) and commitments of
Kinergy which are material to the operations, business, prospects or condition
(financial or otherwise) of Kinergy;
(ii) all consulting agreements (whether written or
oral), regardless of amounts or duration;
(iii) all material contracts or commitments (whether
written or oral) with distributors, brokers, manufacturer's representatives,
sales representatives, service or warranty representatives, customers and other
persons, firms, corporations or other entities engaged in the sale,
distribution, service or repair of Kinergy's products;
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(iv) all contracts relating to
construction-in-progress of capital assets; and
(v) all joint venture, licensing, profit sharing,
royalty or similar agreements or arrangements to which Kinergy is a party in any
way associated with the manufacture, marketing, sale or distribution of any
products or provision of any services of Kinergy.
(b) Kinergy has delivered to Accessity true and complete
copies of all of the documents identified on Schedule 6.19 (collectively, the
"Kinergy Material Contracts") and shall deliver true and complete copies of all
such other agreements, instruments and documents as Accessity may reasonably
request relating to the operation, ownership or conduct of the Kinergy Business.
(c) Kinergy is not a party to any written agreement that would
restrict it from carrying on the Kinergy Business anywhere in the world.
(d) Kinergy is not a party to any "take-or-pay" contracts.
(e) Except as identified on Schedule 6.19, Kinergy is not a
party to any employment agreements, arrangements and commitments, including
severance or termination arrangements and commitments (whether written or oral),
between Kinergy and any employees of Kinergy.
(f) Kinergy is not, and to the knowledge of Kinergy, no other
party is, in default under or in breach or violation of, nor has Kinergy
received notice of any asserted claim of default by Kinergy or by any other
party under, or a breach or violation of, any of the Kinergy Material Contracts.
6.20 NO BROKERS. Except as disclosed on Schedule 6.20, Kinergy is not
obligated for the payment of fees or expenses of any investment banker, broker
or finder in connection with the origin, negotiation or execution of this
Agreement in connection with any exchange of stock transaction provided for
herein.
6.21 ENVIRONMENTAL MATTERS. Kinergy is in compliance in all material
respects with all Environmental Laws. There is no Action pending before any
court, Governmental Body or board or other forum or threatened by any person or
entity (i) for noncompliance by Kinergy with any Environmental Law (ii) relating
to the release into the environment by Kinergy of any pollutant, toxic or
hazardous material or waste generated by Kinergy, whether or not occurring at or
on a site owned, leased or operated by Kinergy. There has not been by Kinergy,
nor to the knowledge of Kinergy has there been at all, any past, storage,
disposal, generation, manufacture, refinement, transportation, production or
treatment of any hazardous materials or substances at, upon or from the
facilities occupied or used by Kinergy and any other real property presently or
formerly owned by, used by or leased to or by Kinergy, any predecessor of
Kinergy (collectively, the "Kinergy Property"). To the knowledge of Kinergy,
neither Kinergy nor any properties owned or operated by Kinergy has been or is
in violation or is otherwise liable under, any Environmental Law. To the
knowledge of Kinergy, there are no asbestos-containing materials, underground
storage tanks or polychlorinated biphenyls (PCBs) located on the Kinergy
Property. To the knowledge of Kinergy, there has been no spill, discharge, leak,
emission, injection, disposal, escape, dumping or release of any kind on,
beneath or above the Kinergy Property or into the environment surrounding such
Kinergy Property of any hazardous materials or substances in violation of any
Environmental Law or requiring any remedial action. To the knowledge of Kinergy,
Kinergy has all permits, registrations, approvals and licenses required by any
Governmental Body under any Environmental Law to be obtained by Kinergy in
connection with the conduct of the business of Kinergy as presently conducted.
6.22 BANK ACCOUNTS. Schedule 6.22 sets forth the names and locations of
all banks, trust companies, savings and loan associations, and other financial
institutions at which Kinergy maintains
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accounts of any nature and the names of all persons authorized to draw thereon
or make withdrawals therefrom.
6.23 INSURANCE. Schedule 6.23 sets forth a true and complete list and
description of (a) all of Kinergy's self-insurance practices and items covered
by such self-insurance and (b) all policies of fire, liability, worker's
compensation and other forms of insurance owned or held by Kinergy. No
installment premiums are due under the policies set forth on Schedule 6.23 or,
if installment premiums shall be due and owing under such policies prior to the
Closing Date, such premiums shall have been paid up-to-date prior to the Closing
Date. All such policies are in full force and effect, insure against risks and
liabilities to the extent and in the manner deemed appropriate and sufficient by
Kinergy in its reasonable business judgment, and Kinergy has not received any
notice of cancellation with respect thereto. To Kinergy's knowledge, Kinergy is
not in default with respect to any provision contained in any such policy and
has not failed to give any notice or present any claim under any such policy in
a timely fashion.
6.24 SUPPLIERS AND CUSTOMERS. Kinergy does not have any knowledge that
any supplier or customer or group of related suppliers or customers of Kinergy
has canceled or otherwise terminated or threatened to cancel or otherwise
terminate, its relationship with Kinergy, which termination would have a
material adverse effect on the Kinergy Business or Kinergy, or that any such
supplier or customer or group of related suppliers or customers expects to
reduce its business with Kinergy by reason of the transactions contemplated by
this Agreement or for any other reason whatsoever.
6.25 LICENSES, PERMITS AND AUTHORIZATIONS. Kinergy has all necessary
Permits for the use and ownership or leasing of its properties and assets as
currently operated, used, owned or leased, except for such Permits as to which
the lack thereof does not and would not have a material adverse effect on
Kinergy or the Kinergy Business. All of the Permits are valid, in full force and
effect and in good standing. Schedule 6.25 contains a true and complete list and
description of all the Permits and Kinergy has previously delivered to Accessity
true and complete copies of all such Permits identified in Schedule 6.25 and in
effect as of the date hereof. There is no claim or Action pending, or, to
Kinergy's knowledge, threatened, which disputes the validity of any such Permit
or threatens to revoke, cancel, suspend or limit any such Permit.
6.26 ACCOUNTS RECEIVABLE. All accounts receivable of Kinergy shown on
the Kinergy Financial Statements and all accounts receivable created after March
31, 2004, subject to reserves created in the ordinary course of business on a
basis consistent with the past practices and policies of Kinergy and otherwise
in accordance with generally accepted accounting principles, (a) have been
collected or (b) to Kinergy's knowledge, are valid and enforceable, arose from
bona-fide sales to third parties in the ordinary course of business, and are
collectible at the aggregate recorded amounts thereof on the books of Kinergy.
6.27 CONDITION OF TANGIBLE ASSETS. Kinergy's facilities and tangible
assets, including, without limitation, machinery, equipment, vehicles,
furniture, plants and buildings, are in good operating condition and repair
(ordinary wear and tear excepted) and are adequate for the uses to which they
have been put by Kinergy in the ordinary course of business, except for parts or
repairs of an immaterial nature in the aggregate, and Kinergy has not received
any notice that any of such facilities or assets is in need of substantial
maintenance or repair.
6.28 DISCLOSURE. No representation or warranty of Kinergy in this
Agreement (including, without limitation, the Schedules of Kinergy hereto)
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make the statements herein or
therein not misleading.
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ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF THE KINERGY MEMBERS
Each of the Kinergy Members, severally and not jointly, hereby
represents and warrants to Accessity that the following representations and
warranties are true and correct on and as of the date hereof:
7.1 POWER AND AUTHORITY. Such Kinergy Member has full power and
authority to enter into this Agreement, perform its respective obligations
hereunder, and carry out the transactions contemplated hereby. This Agreement
constitutes the legal, valid and binding obligation of such Kinergy Member,
enforceable against such Kinergy Member in accordance with its terms.
7.2 NO VIOLATION. Neither the execution and delivery of this Agreement
nor the performance by such Kinergy Member of its respective obligations
hereunder nor the consummation of the transactions contemplated hereby will
violate, or be in conflict with, or constitute a default under, any mortgage,
indenture, lease, or any agreement, instrument or commitment to which such
Kinergy Member is a party.
7.3 TITLE; CONSENTS AND APPROVALS; NO CLAIMS. Such Kinergy Member is
the owner, beneficially and of record, of its Kinergy Interests, free and clear
of all liens, encumbrances, security agreements, options, claims, charges and
restrictions. To such Kinergy Member's knowledge, no consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority or any other third party is required to be made or
obtained by such Kinergy Member in connection with the execution, delivery or
performance of this Agreement. To such Kinergy Member's knowledge, there is no
claim, action, litigation, suit, cause of action or other proceeding pending or
threatened before any federal, state or local court, governmental agency or
regulatory body against such Kinergy Member which seeks or may seek, directly or
indirectly, (a) to invalidate or set aside, in whole or in part, this Agreement,
(b) to restrain, prohibit, invalidate or set aside, in whole or in part, the
consummation of the transactions contemplated hereby or (c) to obtain
substantial damages in connection therewith.
7.4 SECURITIES LAW COMPLIANCE.
(a) Such Kinergy Member has a net worth sufficient to bear the
economic risk (including the entire loss) of its investment made in the
Accessity Exchange Shares;
(b) Such Kinergy Member is an "accredited investor," as such
term is defined in Rule 501 of Regulation D promulgated under the rules and
regulations of the Securities Act;
(c) Such Kinergy Member has adequate means of providing for
its current cash needs and personal contingencies and has no need for liquidity
in this investment in the Accessity Exchange Shares and has no reason to
anticipate any change in its personal circumstances, financial or otherwise,
which may cause or require any sale or distribution by such Kinergy Member or
all or any part of the Accessity Exchange Shares acquired by it herein;
(d) by reason of such Kinergy Member's business or financial
experience or the business or financial experience of such Kinergy Member's
professional advisor(s) who are unaffiliated with and who are not compensated by
Accessity or any affiliate or selling agent of Accessity, directly or
indirectly, such Kinergy Member has the capacity to protect its own interests in
connection with an investment in the Accessity Exchange Shares;
(e) Such Kinergy Member understands that he, she or it is
acquiring Accessity Exchange Shares without being furnished any prospectus or
offering circular, other than a copy of this
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Agreement, a copy of the Proxy Statement (as defined in Section 11.6 below) and
a copy of the Owner Disclosure Document (as defined in Section 11.7 below);
(f) No representations or warranties have been made to such
Kinergy Member by Accessity or any employee or agent of Accessity and in
entering into this Agreement, such Kinergy Member is not relying on any
information, other than as a result of the independent investigation of
Accessity by such Kinergy Member, and no guarantee of any profit or return on
its investment made in the Accessity Exchange Shares has been made to such
Kinergy Member;
(g) In evaluating the merits and risk of this investment, such
Kinergy Member has relied on the advice of its personal tax advisor, investment
advisor and/or legal counsel;
(h) Such Kinergy Member is aware that the Accessity Exchange
Shares have not been registered or qualified, nor is registration or
qualification contemplated, with the SEC under the Securities Act or any state
securities law. Accordingly, the Accessity Exchange Shares may be sold or
otherwise transferred or hypothecated only if they are subsequently registered
or qualified under the Securities Act or applicable laws or if, in the opinion
of counsel, an exemption from registration or qualification thereunder is
available and the transaction will not jeopardize the availability of the
exemptions under applicable federal and state securities laws relied upon by
Accessity in connection with the offering in which such Kinergy Member acquired
its Accessity Exchange Shares;
(i) Such Kinergy Member acknowledges that the Accessity
Exchange Shares were not offered by means of any general solicitation or
advertising;
(j) Such Kinergy Member is acquiring its Accessity Exchange
Shares solely for its own account, for investment purposes only, and not with an
intent to sell, or for resale in connection with any distribution of all or any
portion of the Accessity Exchange Shares within the meaning of the Securities
Act; and
(k) The address of such Kinergy Member furnished by such
Kinergy Member at the end of this Agreement is the principal residence of such
Kinergy Member, if such Kinergy Member is an individual, or the principal
business address of such Kinergy Member, if such Kinergy Member is a business or
other entity, and that all offers to such Kinergy Member have been made only in
the state specified in such address.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF REENERGY
Reenergy hereby represents and warrants to Accessity that the following
representations and warranties are true and correct on and as of the date
hereof:
8.1 ORGANIZATION AND GOOD STANDING. Reenergy is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of California, has the power and authority to own, operate and lease
its properties and to carry on its business as now conducted, and is duly
qualified to do business and is in good standing in each jurisdiction where the
character of its properties owned or leased or the nature of its activities make
such qualification necessary (each such jurisdiction being listed on Schedule
8.1), except where the failure to be so qualified would not have a material
adverse effect on Reenergy.
8.2 CAPITALIZATION. The limited liability company membership interests
of Reenergy are owned by the Reenergy Members as set forth in Exhibit D. No
limited liability company membership interests of Reenergy are outstanding as of
the date of this Agreement other than the Reenergy Interests set forth on
Exhibit D. The Reenergy Interests have been duly authorized and validly issued,
are fully
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paid and nonassessable, are not subject to any right of rescission and have been
offered, issued, sold and delivered by Reenergy in compliance with all
requirements of applicable laws.
8.3 POWER AND AUTHORITY. Reenergy has full power and authority to enter
into this Agreement, to perform its obligations hereunder and to carry out the
transactions contemplated hereby. The execution and delivery of this Agreement,
the performance by Reenergy of its obligations hereunder and the consummation of
the transactions contemplated hereby have been duly authorized by Reenergy and
the Reenergy Majority Members as required by applicable law, Reenergy's Articles
of Organization or Operating Agreement. This Agreement constitutes the legal,
valid and binding obligation of Reenergy, enforceable against it in accordance
with its terms.
8.4 OPTIONS/RIGHTS. Except as set forth in Schedule 8.4, there are no
(i) options, warrants, calls, rights, commitments, conversion privileges or
preemptive or other rights or agreements outstanding to purchase or otherwise
acquire any limited liability company membership interests of Reenergy, (ii)
securities or debt convertible into or exchangeable for Reenergy limited
liability company membership interests or obligating Reenergy to grant, extend
or enter into any such option, warrant, call, commitment, conversion privileges
or preemptive or other right or agreement, or (iii) voting agreements, rights of
first refusal, preemptive rights, co-sale rights, or other restrictions
applicable to any outstanding limited liability company membership interests of
Reenergy.
8.5 SUBSIDIARIES. Reenergy does not have any subsidiaries or any equity
interest, direct or indirect, in, or loans to, any corporation, partnership,
joint venture, limited liability company or other business entity.
8.6 NO VIOLATION. Neither the execution and delivery of this Agreement
nor the performance by Reenergy of its obligations hereunder nor the
consummation of the transactions contemplated hereby will (a) contravene any
provision of the Articles of Organization or Operating Agreement of Reenergy;
(b) violate, be in conflict with, constitute a default under, permit the
termination of, cause the acceleration of the maturity of any debt or obligation
of Reenergy under, require (except as disclosed on Schedule 8.6 hereto) the
consent of any other party to, constitute a breach of, create a loss of a
material benefit under, or result in the creation or imposition of any Lien,
upon any property or assets of Reenergy under, any mortgage, indenture, lease,
contract, agreement, instrument or commitment to which Reenergy is a party or by
which it or he or any of its or his respective assets or properties may be
bound; (c) to the knowledge of Reenergy, violate any statute or law or any
judgment, decree, order, regulation or rule of any court or Governmental Body to
which Reenergy or the Reenergy Business is subject or by which Reenergy, any of
its assets or properties are bound; or (d) result in the loss of any license,
privilege or certificate benefiting Reenergy or the Reenergy Business.
8.7 CONSENTS AND APPROVALS. Except as set forth on Schedule 8.7 hereto,
no consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory authority or any other third party is
required to be made or obtained by Reenergy in connection with the execution,
delivery or performance of this Agreement by Reenergy.
8.8 LITIGATION. There are Actions to which Reenergy is a party,
including, without limitation, Actions for personal injury, products liability,
wrongful death or other tortious conduct, or breach of warranty arising from or
relating to materials, commodities, products or goods used, transferred,
processed, manufactured, sold, distributed or shipped by Reenergy (a) involving
or relating to Reenergy, or any its assets, properties or rights, or (b)
pending, or, to Reenergy's knowledge, threatened, against Reenergy or any of its
assets, properties or rights, before any court, arbitrator or administrative or
Governmental Body which, if adversely resolved, would have a material adverse
effect on the Reenergy Business.
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8.9 REENERGY FINANCIAL STATEMENTS. Reenergy has previously delivered to
Accessity the unaudited balance sheet of Reenergy as of December 31, 2003 and
the related statements of income and changes in financial position or cash
flows, as appropriate, for the period then ended (the "Unaudited 2003 Reenergy
Financial Statements"), together with an unaudited balance sheet of Reenergy as
of March 31, 2004 and the related statements of income and changes in financial
position or cash flows, as appropriate, for the period then ended and,
subsequent to the date hereof, Reenergy will deliver to Accessity the audited
balance sheet of Reenergy as of December 31, 2003 and the related statements of
income and changes in financial position or cash flows, as appropriate, for the
period then ended (the "Audited 2003 Reenergy Financial Statements") (all such
financial statements, excluding, upon delivery to Accessity of the Audited 2003
Reenergy Financial Statements, the Unaudited 2003 Reenergy Financial Statements,
are hereinafter collectively referred to as the "Reenergy Financial
Statements"). The Reenergy Financial Statements, together with the notes
thereto, (i) were compiled from the books and records of Reenergy regularly
maintained by management and used to prepare the financial statements of
Reenergy, (ii) were prepared in accordance with GAAP consistently applied
throughout the period then ended and all periods prior to that period; and (iii)
present fairly and accurately the financial condition of Reenergy for the period
or as of the dates thereof, subject, where appropriate, to normal year-end audit
adjustments, in each case in accordance with GAAP consistently applied during
the period covered.
8.10 NO UNDISCLOSED LIABILITIES. Reenergy has, and on the Closing Date
will have, no Liabilities other than those which (a) are fully reflected
reserved against in the Reenergy Financial Statements, (b) have been incurred
since March 31, 2004 in the ordinary course of business in amounts and for terms
consistent, individually and in the aggregate, with the past practice of
Reenergy or (c) have been specifically disclosed in the Schedules hereto by
reference to the specific section of this Agreement to which such disclosure
relates.
8.11 TAXES AND TAX RETURNS. All of the tax returns and reports of
Reenergy required by applicable law to be filed prior to the date hereof have
been duly filed and all taxes shown as due thereon have been paid. There are in
effect no waivers of the applicable statutes of limitations for any federal,
state, local or foreign taxes for any period. No liability for any federal,
state, local or foreign income, sales, use, withholding, payroll, franchise,
real property or personal property taxes is pending, and there is no proposed
liability for any such taxes to be imposed upon the properties or assets of
Reenergy. Reenergy does not have any liability for any federal, state, local or
foreign income, sales, use, withholding, payroll, franchise, real property or
personal property taxes, assessments, amounts, interest or penalties of any
nature whatsoever other than as shown on the March 31, 2004 Reenergy Financial
Statements and there is no basis for any additional claim or assessment other
than with respect to liabilities for taxes which may have accrued since the date
of the March 31, 2004 Reenergy Financial Statements in the ordinary course of
business and reserved against on the books and records of Reenergy compiled in
accordance with generally accepted accounting principles which have been
consistently applied to the Closing Date. The provisions for taxes reflected in
the March 31, 2004 Reenergy Financial Statements are adequate for federal,
state, county and local taxes for the period ended on December 31, 2003 and for
all prior periods, whether disputed or undisputed. There are no present disputes
about taxes of any nature payable by Reenergy. Reenergy has never filed, and
will not file on or before the Closing Date, any consent under section 341(f) of
the Code. Reenergy's tax returns have never been audited by any taxation
authority.
8.12 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule 8.12,
since December 31, 2003, Reenergy has conducted the Reenergy Business only in
the ordinary course and consistent with prior practices and has not:
(a) suffered any material adverse change in its condition
(financial or otherwise), results of operations, assets, liabilities, reserves,
the Reenergy Business, or operations;
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(b) suffered any damage, destruction or loss, whether covered
by insurance or not, materially adversely affecting the Reenergy Business,
operations, assets, or condition (financial or otherwise);
(c) paid, discharged or satisfied any Liability or other
expenses, other than the payment, discharge or satisfaction of the Liabilities
described in Section 8.10 at the time the same were due and payable and in the
ordinary course of business;
(d) paid or otherwise made any contribution to any
profit-sharing or pension plan or other Employee Benefit Plan (as defined in
Section 8.17 below);
(e) mortgaged or pledged, or permitted the imposition of any
Lien upon, any of its properties or assets (real, personal or mixed, tangible or
intangible), other than those incurred in the ordinary course of business or
otherwise listed on Schedule 8.12 hereto;
(f) cancelled or compromised any debts, or waived or permitted
to lapse any material claims or rights, or sold, assigned, transferred or
otherwise disposed of, other than in the ordinary course, any of its properties
or assets (real, personal or mixed, tangible or intangible);
(g) disposed of or permitted to lapse any rights to the use of
any patent, registered trademark, service mark, trade name or copyright, or
disposed of or disclosed to any person any trade secret, formula, process or
know-how material to the Reenergy Business not theretofore a matter of public
knowledge;
(h) except as disclosed on Schedule 8.12, granted any increase
in the compensation of any officer, employee or consultant of Reenergy
(including any such increase pursuant to any bonus, pension, profit-sharing or
other plan or commitment) or any increase in the compensation payable or to
become payable to any officer, employee or consultant;
(i) entered into any commitment or transaction not in the
ordinary course of business or made any capital expenditure or commitment for
any additions to property, plant or equipment, except commitments, transactions
or capital expenditures which do not in any single case exceed $25,000 or in the
aggregate exceed $50,000;
(j) made any change in any method of accounting or accounting
practice (including, without limitation, any change in depreciation or
amortization policies or rates);
(k) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets (real, personal or mixed,
tangible or intangible) to, or entered into any agreement or arrangement with,
any of its officers, employees, members, or any family member or Affiliate of
any of its officers, employees or members, or any officer, employee or member of
any such Affiliate;
(l) declared, set aside, paid or made any distribution or
payment in respect of the limited liability company membership interests of
Reenergy, or any direct or indirect redemption, purchase or other acquisition of
any of its limited liability company membership interests;
(m) knowingly waived or released any right or claim of
Reenergy;
(n) received a commencement notice or, to the knowledge of
Reenergy, received any threat of commencement, of any civil or criminal
litigation, investigation or proceeding against Reenergy;
(o) experienced any labor trouble or, to the knowledge of
Reenergy, received any claim of wrongful discharge or worker's compensation
claim;
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(p) agreed, whether in writing or otherwise, to take any
action referred to in and prohibited by this Section 8.12; or
(q) become aware of any other event or condition that has had
or would reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), results of operations, assets, liabilities,
reserves, the Reenergy Business, the Reenergy Intellectual Property (as defined
below) or the operations of Reenergy.
8.13 TITLE TO PROPERTIES; ENCUMBRANCES.
(a) Reenergy has good and marketable title to all of its
properties and assets (real, personal or mixed, tangible or intangible),
including without limitation the Reenergy Intellectual Property. None of
Reenergy's properties or assets is subject to any Lien, except Permitted Liens
(including the Liens set forth on Schedule 8.13), none of which adversely
affects the Reenergy Business or the continued operations of Reenergy.
(b) All material property and assets (real, personal or mixed,
tangible or intangible) used or required by Reenergy in the conduct of the
Reenergy Business are fully owned by Reenergy (except to the extent of any
Permitted Liens). All such property and assets, or the leases or licenses
thereof, constitute all property, assets and contractual rights necessary for
the conduct of the Reenergy Business.
8.14 LEASES.
(a) Schedule 8.14 contains a true and complete list of:
(i) all leases pursuant to which Reenergy leases or
subleases any real property interests, whether as lessor, lessee, sublessor or
sublessee;
(ii) all leases pursuant to which Reenergy leases any
type of personal property;
(iii) all leases pursuant to which Reenergy leases
any vehicles or related equipment; and
(iv) all leases pursuant to which Reenergy leases to
others any type of property.
(b) Each such lease described on Schedule 8.14 is the legal,
valid and binding obligation of Reenergy and, to the knowledge of Reenergy, the
other parties thereto, enforceable in accordance with their respective terms,
and is in full force and effect. Reenergy is not in default under any such
lease, and Reenergy has not received any notice from any person or entity
asserting that Reenergy is in default under any such lease, and no events or
circumstances exist which, with notice or the passage of time or both, would
constitute a default under any such lease.
8.15 INTELLECTUAL PROPERTY. Reenergy owns all right, title and interest
in, or has the right to use, sell or license all patent applications, patents,
trademark applications, trademarks, service marks, trade names, copyright
applications, copyrights, trade secrets, know-how, technology, customer lists,
proprietary processes and formulae, all source and object code, algorithms,
inventions, development tools and all documentation and media constituting,
describing or relating to the above, including, without limitation, manuals,
memoranda and records and other intellectual property and proprietary rights
used in or reasonably necessary or required for the conduct of its respective
business as presently conducted (collectively, the "Reenergy Intellectual
Property").
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8.16 COMPLIANCE WITH LAWS. Reenergy has not been charged with, and, to
Reenergy's knowledge, Reenergy is not threatened with or under any investigation
with respect to, any charge concerning any violation of any provision of any
federal, state, local or foreign law, regulation, ordinance, order or
administrative ruling affecting the Reenergy Business or Reenergy, and Reenergy
is not in default with respect to any order, writ, injunction or decree of any
court, agency or instrumentality affecting the Reenergy Business or Reenergy. To
Reenergy's knowledge, Reenergy is not in violation of any federal, state, local
or foreign law, ordinance or regulation or any other requirement of any
Governmental Body or regulatory body, court or arbitrator applicable to the
Reenergy Business or Reenergy which would have a material adverse effect on
Reenergy or the Reenergy Business. Without limiting the generality of the
foregoing, Reenergy is in compliance in all material respects with all
Occupational Safety and Health Laws, including those rules and regulations
promulgated by OSHA, except where such non-compliance would not have a material
adverse effect on Reenergy or the Reenergy Business.
8.17 EMPLOYEE BENEFIT PLANS.
(a) Schedule 8.17 contains a true and complete list and
description of each pension, retirement, severance, welfare, profit-sharing,
stock purchase, stock option, vacation, deferred compensation, bonus or other
incentive plan, or other employee benefit program, arrangement, agreement or
understanding, or medical, vision, dental or other health plan, or life
insurance or disability plan, retiree medical or life insurance plan or any
other employee benefit plans, including, without limitation, any "employee
benefit plan" (as defined in Section 3(3) of ERISA), to which Reenergy
contributes or is a party or by which it is bound or under which it may have
liability and under which employees or former employees of Reenergy (or their
beneficiaries) are eligible to participate or derive a benefit. Each employee
benefit plan which is a "group health plan" (as such term is defined in Section
5000(b)(i) of the Code) satisfies the applicable requirements of Section 4980B
of the Code. Except as described on Schedule 8.17, Reenergy has no formal plan
or commitment, whether legally binding or not, to create any additional plan,
practice or agreement or modify or change any existing plan, practice or
agreement that would affect any of its employees or terminated employees.
Benefits under all employee benefit plans are as represented and have not been
and will not be increased subsequent to the date copies of such plans have been
provided.
(b) Reenergy does not contribute to or have any obligation to
contribute to, has not at any time contributed to or had an obligation to
contribute to, sponsor or maintain, and has not at any time sponsored or
maintained, a "multi-employer plan" (within the meaning of Section 3(37) of
ERISA) for the benefit of employees or former employees of Reenergy.
(c) Reenergy has, in all material respects, performed all
obligations, whether arising by operation of law, contract, or past custom,
required to be performed under or in connection with the employee benefit plans
disclosed on Schedule 8.17 (individually, a "Reenergy Employee Benefit Plan"
and, collectively, the "Reenergy Employees Benefit Plans"), and Reenergy has no
knowledge of any default or violation by any other party with respect thereto.
(d) There are no Actions, suits or claims (other than routine
claims for benefits) pending, or, to Reenergy's knowledge, threatened, against
any Reenergy Employee Benefit Plan or against the assets funding any Reenergy
Employee Benefit Plan.
(e) Reenergy neither maintains nor contributes to any
"employee welfare benefit" (as such term is defined in Section 3(i) of ERISA)
plan which provides any benefits to retirees or former employees of Reenergy.
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8.18 EMPLOYMENT LAW MATTERS.
(a) Reenergy (i) is in material compliance with all applicable
laws respecting employment, employment practices, terms and conditions of
employment and wages and hours; (ii) is in material compliance with all
applicable laws and regulations relating to the employment of aliens or similar
immigration matters; and (iii) is not engaged in any unfair labor practice,
including, but not limited to, discrimination or wrongful discharge.
(b) Reenergy has not at anytime during the last three (3)
years had, nor to Reenergy's knowledge, is there now threatened, a strike,
picket, work stoppage, work slowdown or other labor trouble, against or directly
affecting Reenergy that had or would reasonably be expected to have a material
adverse effect on the Reenergy Business or Reenergy.
(c) None of the employees of Reenergy is represented by a
labor union, and no petition has been filed or proceedings instituted by any
employee or group of employees with any labor relations board seeking
recognition of a bargaining representative. Reenergy is not a party to any
multi-employer collective bargaining agreement covering any of its employees.
(d) There are no controversies or disputes (including any
union grievances or arbitration proceeding) pending, or, to Reenergy's
knowledge, threatened, between Reenergy and any employees of Reenergy (or any
union or other representative of such employees). No unfair labor practice
complaints have been filed against Reenergy with the National Labor Relations
Board or any other Governmental Body or administrative body, and Reenergy has
not received any written notice or communication reflecting an intention or a
threat to file any such complaint.
8.19 CONTRACTS AND COMMITMENTS.
(a) Together with the leases set forth on Schedule 8.14, the
insurance policies set forth on Schedule 8.23, and the Reenergy Employee Benefit
Plans and commitments set forth on Schedule 8.17, Schedule 8.19 contains a true
and complete list and description (stated without duplication), of:
(i) all contracts (including, without limitation,
letters of credit, and obligations for borrowed money) and commitments of
Reenergy which are material to the operations, business, prospects or condition
(financial or otherwise) of Reenergy;
(ii) all consulting agreements (whether written or
oral), regardless of amounts or duration;
(iii) all material contracts or commitments (whether
written or oral) with distributors, brokers, manufacturer's representatives,
sales representatives, service or warranty representatives, customers and other
persons, firms, corporations or other entities engaged in the sale,
distribution, service or repair of Reenergy's products;
(iv) all contracts relating to
construction-in-progress of capital assets; and
(v) all joint venture, licensing, profit sharing,
royalty or similar agreements or arrangements to which Reenergy is a party in
any way associated with the manufacture, marketing, sale or distribution of any
products or provision of any services of Reenergy.
(b) Reenergy has delivered to Accessity true and complete
copies of all of the documents identified on Schedule 8.19 (collectively, the
"Reenergy Material Contracts") and shall deliver
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true and complete copies of all such other agreements, instruments and documents
as Accessity may reasonably request relating to the operation, ownership or
conduct of the Reenergy Business.
(c) Reenergy is not a party to any written agreement that
would restrict it from carrying on the Reenergy Business anywhere in the world.
(d) Reenergy is not a party to any "take-or-pay" contracts.
(e) Except as identified on Schedule 8.19, Reenergy is not a
party to any employment agreements, arrangements and commitments, including
severance or termination arrangements and commitments (whether written or oral),
between Reenergy and any employees of Reenergy.
(f) Reenergy is not, and to the knowledge of Reenergy, no
other party is, in default under or in breach or violation of, nor has Reenergy
received notice of any asserted claim of default by Reenergy or by any other
party under, or a breach or violation of, any of the Reenergy Material
Contracts.
8.20 NO BROKERS. Except as disclosed on Schedule 8.20, Reenergy is not
obligated for the payment of fees or expenses of any investment banker, broker
or finder in connection with the origin, negotiation or execution of this
Agreement in connection with any exchange of stock transaction provided for
herein.
8.21 ENVIRONMENTAL MATTERS. Reenergy is in compliance in all material
respects with all Environmental Laws. There is no Action pending before any
court, Governmental Body or board or other forum or threatened by any person or
entity (i) for noncompliance by Reenergy with any Environmental Law (ii)
relating to the release into the environment by Reenergy of any pollutant, toxic
or hazardous material or waste generated by Reenergy, whether or not occurring
at or on a site owned, leased or operated by Reenergy. There has not been by
Reenergy, nor to the knowledge of Reenergy has there been at all, any past,
storage, disposal, generation, manufacture, refinement, transportation,
production or treatment of any hazardous materials or substances at, upon or
from the facilities occupied or used by Reenergy and any other real property
presently or formerly owned by, used by or leased to or by Reenergy, any
predecessor of Reenergy (collectively, the "Reenergy Property"). To the
knowledge of Reenergy, neither Reenergy nor any properties owned or operated by
Reenergy has been or is in violation or is otherwise liable under, any
Environmental Law. To the knowledge of Reenergy, there are no
asbestos-containing materials, underground storage tanks or polychlorinated
biphenyls (PCBs) located on the Reenergy Property. To the knowledge of Reenergy,
there has been no spill, discharge, leak, emission, injection, disposal, escape,
dumping or release of any kind on, beneath or above the Reenergy Property or
into the environment surrounding such Reenergy Property of any hazardous
materials or substances in violation of any Environmental Law or requiring any
remedial action. To the knowledge of Reenergy, Reenergy has all permits,
registrations, approvals and licenses required by any Governmental Body under
any Environmental Law to be obtained by Reenergy in connection with the conduct
of the business of Reenergy as presently conducted.
8.22 BANK ACCOUNTS. Schedule 8.22 sets forth the names and locations of
all banks, trust companies, savings and loan associations, and other financial
institutions at which Reenergy maintains accounts of any nature and the names of
all persons authorized to draw thereon or make withdrawals therefrom.
8.23 INSURANCE. Schedule 8.23 sets forth a true and complete list and
description of (a) all of Reenergy's self-insurance practices and items covered
by such self-insurance and (b) all policies of fire, liability, worker's
compensation and other forms of insurance owned or held by Reenergy. No
installment premiums are due under the policies set forth on Schedule 8.23 or,
if installment premiums shall be due and owing under such policies prior to the
Closing Date, such premiums shall have been paid
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up-to-date prior to the Closing Date. All such policies are in full force and
effect, insure against risks and liabilities to the extent and in the manner
deemed appropriate and sufficient by Reenergy in its reasonable business
judgment, and Reenergy has not received any notice of cancellation with respect
thereto. To Reenergy's knowledge, Reenergy is not in default with respect to any
provision contained in any such policy and has not failed to give any notice or
present any claim under any such policy in a timely fashion.
8.24 SUPPLIERS AND CUSTOMERS. Reenergy does not have any knowledge that
any supplier or customer or group of related suppliers or customers of Reenergy
has canceled or otherwise terminated or threatened to cancel or otherwise
terminate, its relationship with Reenergy, which termination would have a
material adverse effect on the Reenergy Business or Reenergy, or that any such
supplier or customer or group of related suppliers or customers expects to
reduce its business with Reenergy by reason of the transactions contemplated by
this Agreement or for any other reason whatsoever.
8.25 LICENSES, PERMITS AND AUTHORIZATIONS. Reenergy has all necessary
Permits for the use and ownership or leasing of its properties and assets as
currently operated, used, owned or leased, except for such Permits as to which
the lack thereof does not and would not have a material adverse effect on
Reenergy or the Reenergy Business. All of the Permits are valid, in full force
and effect and in good standing. Schedule 8.25 contains a true and complete list
and description of all the Permits. There is no claim or Action pending, or, to
Reenergy's knowledge, threatened, which disputes the validity of any such Permit
or threatens to revoke, cancel, suspend or limit any such Permit.
8.26 ACCOUNTS RECEIVABLE. All accounts receivable of Reenergy shown on
the Reenergy Financial Statements and all accounts receivable created after
March 31, 2004, subject to reserves created in the ordinary course of business
on a basis consistent with the past practices and policies of Reenergy and
otherwise in accordance with generally accepted accounting principles, (a) have
been collected or (b) to Reenergy's knowledge, are valid and enforceable, arose
from bona-fide sales to third parties in the ordinary course of business, and
are collectible at the aggregate recorded amounts thereof on the books of
Reenergy.
8.27 CONDITION OF TANGIBLE ASSETS. Reenergy's facilities and tangible
assets, including, without limitation, machinery, equipment, vehicles,
furniture, plants and buildings, are in good operating condition and repair
(ordinary wear and tear excepted) and are adequate for the uses to which they
have been put by Reenergy in the ordinary course of business, except for parts
or repairs of an immaterial nature in the aggregate, and Reenergy has not
received any notice that any of such facilities or assets is in need of
substantial maintenance or repair.
8.28 DISCLOSURE. No representation or warranty of Reenergy in this
Agreement (including, without limitation, the Schedules of Reenergy hereto)
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make the statements herein or
therein not misleading.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF THE REENERGY MEMBERS
Each of the Reenergy Members, severally and not jointly, hereby
represents and warrants to Accessity that the following representations and
warranties are true and correct on and as of the date hereof:
9.1 POWER AND AUTHORITY. Such Reenergy Member has full power and
authority to enter into this Agreement, perform its respective obligations
hereunder, and carry out the transactions contemplated hereby. This Agreement
constitutes the legal, valid and binding obligation of such Reenergy Member,
enforceable against such Reenergy Member in accordance with its terms.
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9.2 NO VIOLATION. Neither the execution and delivery of this Agreement
nor the performance by such Reenergy Member of its respective obligations
hereunder nor the consummation of the transactions contemplated hereby will
violate, or be in conflict with, or constitute a default under, any mortgage,
indenture, lease, or any agreement, instrument or commitment to which such
Reenergy Member is a party.
9.3 TITLE; CONSENTS AND APPROVALS; NO CLAIMS. Such Reenergy Member is
the owner, beneficially and of record, of its Reenergy Interests, free and clear
of all liens, encumbrances, security agreements, options, claims, charges and
restrictions. To such Reenergy Member's knowledge, no consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority or any other third party is required to be made or
obtained by such Reenergy Member in connection with the execution, delivery or
performance of this Agreement. To such Reenergy Member's knowledge, there is no
claim, action, litigation, suit, cause of action or other proceeding pending or
threatened before any federal, state or local court, governmental agency or
regulatory body against such Reenergy Member which seeks or may seek, directly
or indirectly, (a) to invalidate or set aside, in whole or in part, this
Agreement, (b) to restrain, prohibit, invalidate or set aside, in whole or in
part, the consummation of the transactions contemplated hereby or (c) to obtain
substantial damages in connection therewith.
9.4 SECURITIES LAW COMPLIANCE.
(a) Such Reenergy Member has a net worth sufficient to bear
the economic risk (including the entire loss) of its investment made in the
Accessity Exchange Shares;
(b) Such Reenergy Member is an "accredited investor," as such
term is defined in Rule 501 of Regulation D promulgated under the rules and
regulations of the Securities Act (except in regard to Celilo Group, a member of
Kinergy Resources, LLC, and Tom Koehler, a Reenergy Member, each of whom shall
be provided with an Owner Disclosure Document (as defined in Section 11.7 below)
that is in compliance with paragraph (b)(2) of Rule 502 of Regulation D
promulgated under the Securities Act);
(c) Such Reenergy Member has adequate means of providing for
its current cash needs and personal contingencies and has no need for liquidity
in this investment in the Accessity Exchange Shares and has no reason to
anticipate any change in its personal circumstances, financial or otherwise,
which may cause or require any sale or distribution by such Reenergy Member or
all or any part of the Accessity Exchange Shares acquired by it herein;
(d) by reason of such Reenergy Member's business or financial
experience or the business or financial experience of such Reenergy Member's
professional advisor(s) who are unaffiliated with and who are not compensated by
Accessity or any affiliate or selling agent of Accessity, directly or
indirectly, such Reenergy Member has the capacity to protect its own interests
in connection with an investment in the Accessity Exchange Shares;
(e) Such Reenergy Member understands that he, she or it is
acquiring Accessity Exchange Shares without being furnished any prospectus or
offering circular, other than a copy of this Agreement, a copy of the Proxy
Statement (as defined in Section 11.6 below) and a copy of the Owner Disclosure
Document (as defined in Section 11.7 below);
(f) No representations or warranties have been made to such
Reenergy Member by Accessity or any employee or agent of Accessity and in
entering into this Agreement, such Reenergy Member is not relying on any
information, other than as a result of the independent investigation of
Accessity by such Reenergy Member, and no guarantee of any profit or return on
its investment made in the Shares has been made to such Reenergy Member;
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(g) In evaluating the merits and risk of this investment, such
Reenergy Member has relied on the advice of its personal tax advisor, investment
advisor and/or legal counsel;
(h) Such Reenergy Member is aware that the Accessity Exchange
Shares have not been registered or qualified, nor is registration or
qualification contemplated, with the SEC under the Securities Act or any state
securities law. Accordingly, the Accessity Exchange Shares may be sold or
otherwise transferred or hypothecated only if they are subsequently registered
or qualified under the Securities Act or applicable laws or if, in the opinion
of counsel, an exemption from registration or qualification thereunder is
available and the transaction will not jeopardize the availability of the
exemptions under applicable federal and state securities laws relied upon by
Accessity in connection with the offering in which such Reenergy Member acquired
its Accessity Exchange Shares;
(i) Such Reenergy Member acknowledges that the Accessity
Exchange Shares were not offered by means of any general solicitation or
advertising;
(j) Such Reenergy Member is acquiring its Accessity Exchange
Shares solely for its own account, for investment purposes only, and not with an
intent to sell, or for resale in connection with any distribution of all or any
portion of the Accessity Exchange Shares within the meaning of the Securities
Act; and
(k) The address of such Reenergy Member furnished by such
Reenergy Member at the end of this Agreement is the principal residence of such
Reenergy Member, if such Reenergy Member is an individual, or the principal
business address of such Reenergy Member, if such Reenergy Member is a business
or other entity, and that all offers to such Reenergy Member have been made only
in the state specified in such address.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF ACCESSITY
Accessity hereby represents and warrants that, except as disclosed
herein or set forth on its Schedules attached hereto:
10.1 DUE ORGANIZATION, AUTHORIZATION AND VALIDITY. Accessity is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation and has all necessary power, legal capacity
and authority to (i) conduct its business in the manner in which its business is
currently being conducted and to own and use its assets in the manner in which
its assets are currently owned and used and (ii) enter into and perform its
obligations under this Agreement and under all contracts, agreements and
instruments to which it is a party or by which it or its assets or properties
are subject or bound. This Agreement and the consummation of the transactions
contemplated hereby has been duly and validly approved by the Board of Directors
of Accessity. This Agreement constitutes the legal, valid and binding obligation
of Accessity, enforceable against it in accordance with its terms.
10.2 ABSENCE OF CERTAIN CHANGES. Since December 31, 2003, there has not
been any change in the financial condition, properties, assets, liabilities,
business or results of operations of Accessity, which change by itself or in
conjunction with all other such changes, whether or not arising in the ordinary
course of business, has had or can reasonably be expected to have a material
adverse effect on Accessity.
10.3 NO BROKERS. Accessity is not obligated for the payment of fees or
expenses of any investment banker, broker or finder in connection with the
origin, negotiation or execution of this Agreement in connection with the
exchange of stock transaction provided for herein.
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10.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Accessity has delivered to each of the Acquired Companies
accurate and complete copies (excluding copies of exhibits) of each report,
registration statements (on a form other than Form S-8) and definitive proxy
statement required to be filed with the SEC by Accessity with the SEC between
January 1, 2002 and the date of this Agreement (collectively, the "Accessity SEC
Documents"). As of the time it was filed with the SEC (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing): (i) each of the Accessity SEC Documents complied in all material
respects with the applicable requirements of the Securities Act or the Exchange
Act (as the case may be); and (ii) none of the Accessity SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. All of the Accessity SEC Documents were timely filed, unless a
filing under Rule 12b-25 of the Exchange Act was timely filed, in which case the
applicable filing was made within the time period prescribed in Rule 12b-25.
(b) The consolidated financial statements contained in the
Accessity SEC Documents: (i) complied as to form in all material respect with
the then applicable accounting requirements and with the published rules and
regulations of the SEC applicable thereto; (ii) were prepared in accordance with
GAAP throughout the periods covered, except as may be indicated in the notes to
such financial statements and (in the case of unaudited statements) as permitted
by Form 10-Q or Form 10-QSB, as applicable, and except that unaudited financial
statements may not contain footnotes and are subject to year-end audit
adjustments; and (iii) fairly present the consolidated financial position of
Accessity and its subsidiaries as of the respective dates thereof and the
consolidated results of operations of Accessity and its subsidiaries for the
period covered thereby.
10.5 VALID ISSUANCE. The Accessity Exchange Shares to be issued in the
Share Exchange will, when issued in accordance with the provisions of this
Agreement, be validly issued, fully paid and nonassessable.
10.6 DISCLOSURE. None of the information in the Proxy Statement (as
defined in Section 11.6 below) will contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Proxy Statement will comply as
to form in all material respects with the provisions of the Exchange Act and the
rules and regulations promulgated by the SEC thereunder, except that no
representation or warranty is made by Accessity with respect to statements made
therein based on information supplied by any of the Acquired Companies for
inclusion in the Proxy Statement.
10.7 COMPLIANCE WITH APPLICABLE LAWS. The business of Accessity and the
businesses of the Accessity Subsidiaries (as defined below) are not being
conducted in violation of any law, ordinance, regulation, rule or order of any
Governmental Body where such violation would have a material adverse effect.
Accessity has not been notified by any Governmental Body that any investigation
or review with respect to Accessity or any of the Accessity Subsidiaries is
pending or threatened, nor has any Governmental Body notified Accessity of its
intention to conduct the same. Accessity and the Accessity Subsidiaries Exchange
Shares to be issued in the Share Exchange will, when issued in accordance with
the provisions of this Agreement, be validly issued, fully paid and
nonassessable.
10.8 NO CONFLICT. Neither the execution, delivery and performance of
this Agreement nor the consummation of the transactions contemplated hereby or
thereby nor compliance with the provisions hereof or thereof will: (i) conflict
with, or result in any violations of, or cause a default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination,
amendment, cancellation or acceleration of any obligation contained in, or the
loss of any material benefit under, or result in the
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creation of any lien, security interest, charge or encumbrance upon any of the
material properties or assets of Accessity or any of the Accessity Subsidiaries
under, any term, condition or provision of (x) the articles of incorporation or
bylaws of Accessity or any of the Accessity Subsidiaries or (y) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other material
agreement, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Accessity or any of the Accessity Subsidiaries or their respective
properties or assets, other than any such conflicts, violations, defaults,
losses, liens, security interests, charges, or encumbrances which, individually
or in the aggregate, would not have a material adverse effect on Accessity or
the business of Accessity; or (ii) require the affirmative vote of the holders
of greater than a majority of the issued and outstanding shares of the common
stock of Accessity.
10.9 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Body, is required to be obtained by Accessity in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for: (i) the filing with the SEC of (x) the Proxy
Statement relating to the Accessity Shareholders' Meeting (as defined in Section
11.6 below), and (y) such reports and information under the Exchange Act and the
rules and regulations promulgated by the SEC thereunder, as may be required in
connection with this Agreement and the transactions contemplated hereby; (ii)
such filings, authorizations, orders and approvals as may be required under
state "control share acquisition," "anti-takeover" or other similar statutes and
regulations (collectively, "State Takeover Laws"); (iii) such filings,
authorizations, order and approvals as may be required under foreign laws, state
securities laws and the Bylaws of the National Association of Securities
Dealers, Inc. ("NASD"); (iv) such filings and notifications (if any) as may be
necessary under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended ("HSR Act"); and (v) where the failure to obtain such consents,
approvals, etc., would not prevent or delay the consummation of the Share
Exchange or otherwise prevent Accessity from performing its obligations under
this Agreement and would not reasonably be expected to have a material adverse
effect on Accessity or the business of Accessity.
ARTICLE XI
CERTAIN OBLIGATIONS OF THE PARTIES PRIOR TO CLOSING
Accessity and the Acquired Companies hereby covenant as follows:
11.1 ACCESS TO ACCESSITY PRIOR TO CLOSING. Accessity shall afford the
Acquired Companies and their respective counsel, accountants, investment
bankers, investors and other authorized agents and representatives (their
"Advisors") reasonable access during normal business hours to Accessity's
properties, books, records and personnel in order that the Acquired Companies
and their respective Advisors may have the opportunity to make such reasonable
investigations as they shall desire to make of the affairs of Accessity.
Accessity shall furnish, or shall cause its accountants to furnish, such
additional financial and operating data and other information as any of the
Acquired Companies or any of their Advisors shall from time to time reasonably
request, including, without limitation, all financial and operating data as
shall be necessary for verification of the accuracy of the financial statements
of Accessity. Accessity shall, upon the reasonable request of any of the
Acquired Companies, assist the Acquired Companies and their respective Advisors
in contacting and communicating with suppliers, customers, employees and
Advisors of Accessity.
11.2 ACCESS TO ACQUIRED COMPANIES PRIOR TO CLOSING. Each Acquired
Company shall afford Accessity and the other Acquired Companies and their
respective Advisors reasonable access during normal business hours to such
Acquired Company's properties, books, records and personnel in order that
Accessity and the other Acquired Companies and their respective Advisors may
have the opportunity to make such reasonable investigations as they shall desire
to make of the affairs of such Acquired Company. Each Acquired Company shall
furnish, or shall cause its accountants to furnish, such additional financial
and operating data and other information as Accessity or any of the other
Acquired
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Companies or any of their respective Advisors shall from time to time reasonably
request, including, without limitation, all financial and operating data as
shall be necessary for verification of the accuracy of the financial statements
of such Acquired Company. Such Acquired Company shall, upon the reasonable
request of Accessity or any of the other Acquired Companies, assist Accessity
and the Acquired Companies and their respective Advisors in contacting and
communicating with suppliers, customers, employees and Advisors of such Acquired
Company.
11.3 CONFIDENTIALITY PRIOR TO CLOSING. Except as required by law or any
securities exchange, and subject to Section 17.1 below, each party hereto shall,
and shall cause its officers and Advisors to, hold in strict confidence, and not
disclose to others (except its Advisors) for any reason whatsoever, without the
prior written consent of the other party, any nonpublic information received by
it from the other party in connection with the transactions contemplated hereby
and will not use such information for any purpose in the event that no Closing
occurs under this Agreement. No party hereto shall communicate, directly or
indirectly, to any third party other than their respective employees, agents and
Advisors any of the terms, conditions and other aspects of this Agreement and
the negotiation and preparation hereof until the Closing has occurred or the
negotiations between the parties has terminated.
11.4 CONDUCT PRIOR TO CLOSING DATE. Except as otherwise contemplated by
this Agreement, prior to the Closing Date:
(a) PEI shall:
(i) conduct the PEI Business and operations of PEI
only in the ordinary course, including, without limitation, maintaining
inventories at levels not in excess of those consistent with past practices;
(ii) maintain the properties and assets of PEI in
good condition and repair and not dispose of any of its assets except in the
ordinary course of business consistent with past practices, perform its
obligations under all agreements to which it is a party or by which it or any of
its assets or properties are bound and maintain all of its Permits in good
standing;
(iii) continue in effect the policies of insurance
(or similar coverage) referred to in Section 4.23;
(iv) not borrow any money except for amounts that are
not in the aggregate material to the financial condition of PEI;
(v) use its commercially reasonable efforts to keep
available the services of the present employees of PEI;
(vi) not declare, set aside or pay any cash or stock
dividend or other distribution in respect of capital stock, or redeem or
otherwise acquire any of its capital stock;
(vii) maintain and preserve the goodwill of the
suppliers, customers and others having business relations with PEI;
(viii) not lend any amount to any person or entity,
other than advances for travel and expenses which are incurred in the ordinary
course of business consistent with past practices, not material in amount and
documented by receipts for the claim amounts;
(ix) not guarantee or act as a surety for any
obligation except for obligations in amounts that are not material;
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(x) not waive or release any right or claim except
for the waiver or release of non-material claims in the ordinary course of
business consistent with past practices;
(xi) not issue or sell any shares of its capital
stock of any class (except upon the exercise of a bona fide option, warrant or
other right to acquire such capital stock currently outstanding or conversion of
any currently outstanding securities which are by their terms convertible in
shares of its capital stock), or any other of its securities, or issue or create
any warrants, obligations, subscriptions, options, convertible securities or
other commitments to issue shares of capital stock, or accelerate the vesting of
any outstanding option or other security;
(xii) not split or combine the outstanding shares of
its capital stock of any class or enter into any recapitalization or agreement
affecting the number or rights of outstanding shares of its capital stock of any
class or affecting any other of its securities;
(xiii) not form, merge, consolidate or reorganize
with, or acquire, any entity; or
(xiv) not amend its articles of incorporation or
bylaws.
(b) Kinergy shall:
(i) conduct the Kinergy Business and operations of
Kinergy only in the ordinary course, including, without limitation, maintaining
inventories at levels not in excess of those consistent with past practices;
(ii) maintain the properties and assets of Kinergy in
good condition and repair and not dispose of any of its assets except in the
ordinary course of business consistent with past practices, perform its
obligations under all agreements to which it is a party or by which it or any of
its assets or properties are bound and maintain all of its Permits in good
standing;
(iii) continue in effect the policies of insurance
(or similar coverage) referred to in Section 6.23;
(iv) not borrow any money except for amounts that are
not in the aggregate material to the financial condition of Kinergy;
(v) use its commercially reasonable efforts to keep
available the services of the present employees of Kinergy;
(vi) not declare, set aside or pay any cash or
dividend or other distribution in respect of its limited liability company
membership interests, or redeem or otherwise acquire any of its limited
liability company membership interests; provided, however, that effective the
close of business on the day preceding the Closing Date, the Managers or
Managing Members of Kinergy shall distribute to the Members of Kinergy in the
form of cash, a promissory note or a combination of cash and a promissory note,
the dollar amount of Kinergy's net worth as set forth on Kinergy's balance sheet
dated as of such date, which balance sheet shall have been prepared in
accordance with GAAP;
(vii) maintain and preserve the goodwill of the
suppliers, customers and others having business relations with Kinergy;
(viii) not lend any amount to any person or entity,
other than advances for travel and expenses which are incurred in the ordinary
course of business consistent with past practices, not material in amount and
documented by receipts for the claim amounts;
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(ix) not guarantee or act as a surety for any
obligation except for obligations in amounts that are not material;
(x) not waive or release any right or claim except
for the waiver or release of non-material claims in the ordinary course of
business consistent with past practices;
(xi) not issue or sell any limited liability company
membership interests, or any other of its securities, or issue or create any
warrants, obligations, subscriptions, options, convertible securities or other
commitments to issue limited liability company membership interests, or
accelerate the vesting of any outstanding option or other security;
(xii) not enter into any recapitalization or
agreement affecting the number or rights of outstanding limited liability
company membership interests or affecting any other of its securities;
(xiii) not form, merge, consolidate or reorganize
with, or acquire, any entity; or
(xiv) not amend its articles of organization or
operating agreement.
(c) Reenergy shall:
(i) conduct the Reenergy Business and operations of
Reenergy only in the ordinary course, including, without limitation, maintaining
inventories at levels not in excess of those consistent with past practices;
(ii) maintain the properties and assets of Reenergy
in good condition and repair and not dispose of any of its assets except in the
ordinary course of business consistent with past practices, perform its
obligations under all agreements to which it is a party or by which it or any of
its assets or properties are bound and maintain all of its Permits in good
standing;
(iii) continue in effect the policies of insurance
(or similar coverage) referred to in Section 8.23;
(iv) not borrow any money except for amounts that are
not in the aggregate material to the financial condition of Reenergy;
(v) use its commercially reasonable efforts to keep
available the services of the present employees of Reenergy;
(vi) not declare, set aside or pay any cash or
dividend or other distribution in respect of its limited liability company
membership interests, or redeem or otherwise acquire any of its limited
liability company membership interests; provided, however, that effective the
close of business on the day preceding the Closing Date, the Managers or
Managing Members of Reenergy shall distribute to the Members of Reenergy in the
form of cash, a promissory note or a combination of cash and a promissory note,
the dollar amount of Reenergy's net worth as set forth on Reenergy's balance
sheet dated as of such date, which balance sheet shall have been prepared in
accordance with GAAP;
(vii) maintain and preserve the goodwill of the
suppliers, customers and others having business relations with Reenergy;
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(viii) not lend any amount to any person or entity,
other than advances for travel and expenses which are incurred in the ordinary
course of business consistent with past practices, not material in amount and
documented by receipts for the claim amounts;
(ix) not guarantee or act as a surety for any
obligation except for obligations in amounts that are not material;
(x) not waive or release any right or claim except
for the waiver or release of non-material claims in the ordinary course of
business consistent with past practices;
(xi) not issue or sell any limited liability company
membership interests, or any other of its securities, or issue or create any
warrants, obligations, subscriptions, options, convertible securities or other
commitments to issue limited liability company membership interests, or
accelerate the vesting of any outstanding option or other security;
(xii) not enter into any recapitalization or
agreement affecting the number or rights of outstanding limited liability
company membership interests or affecting any other of its securities;
(xiii) not form, merge, consolidate or reorganize
with, or acquire, any entity; or
(xiv) not amend its articles of organization or
operating agreement.
(d) Accessity shall:
(i) conduct the business and operations of Accessity
only in the ordinary course, including, without limitation, maintaining
inventories at levels not in excess of those consistent with past practices;
(ii) maintain the properties and assets of Accessity
in good condition and repair and not dispose of any of its assets except in the
ordinary course of business consistent with past practices, perform its
obligations under all agreements to which it is a party or by which it or any of
its assets or properties are bound and maintain all of its Permits in good
standing;
(iii) not change any insurance coverage;
(iv) not borrow any money except for amounts that are
not in the aggregate material to the financial condition of Accessity;
(v) use its commercially reasonable efforts to keep
available the services of the present employees of Accessity, except as
otherwise provided for herein;
(vi) not declare, set aside or pay any cash or stock
dividend or other distribution in respect of capital stock, or redeem or
otherwise acquire any of its capital stock;
(vii) maintain and preserve the goodwill of the
suppliers, customers and others having business relations with Accessity;
(viii) not lend any amount to any person or entity,
other than advances for travel and expenses which are incurred in the ordinary
course of business consistent with past practices, not material in amount and
documented by receipts for the claim amounts;
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(ix) not guarantee or act as a surety for any
obligation except for obligations in amounts that are not material;
(x) not waive or release any right or claim except
for the waiver or release of non-material claims in the ordinary course of
business consistent with past practices;
(xi) not issue or sell any shares of its capital
stock of any class (except upon the exercise of a bona fide option, warrant or
other right to acquire such capital stock currently outstanding or conversion of
any currently outstanding securities which are by their terms convertible in
shares of its capital stock), or any other of its securities, or issue or create
any warrants, obligations, subscriptions, options, convertible securities or
other commitments to issue shares of capital stock, or accelerate the vesting of
any outstanding option or other security;
(xii) not split or combine the outstanding shares of
its capital stock of any class or enter into any recapitalization or agreement
affecting the number or rights of outstanding shares of its capital stock of any
class or affecting any other of its securities;
(xiii) not form, merge, consolidate or reorganize
with, or acquire, any entity (other than in connection with the reincorporation
of Accessity in Delaware); or
(xiv) not amend its articles of incorporation or
bylaws (except as may be necessary in connection with the reincorporation of
Accessity in Delaware).
11.5 ACCESSITY SPECIAL SHAREHOLDERS' MEETING. Accessity shall, in
accordance with its articles of incorporation and bylaws and the applicable
requirements of New York law, call and hold a special meeting of its
shareholders as promptly as practicable for the purpose of permitting them to
consider and to vote upon and approve the Share Exchange and the transactions
contemplated by this Agreement, the reincorporation of Accessity in the State of
Delaware referred to in Section 13.6 below, the sale or other disposition of the
Accessity Subsidiaries (as defined below) to Barry Siegel referred to in Section
13.11 below, the adoption of an Amended and Restated 1995 Incentive Stock Plan
of Accessity, in form and substance reasonably acceptable to the Acquired
Companies, and the adoption of a new stock option plan referred to in Section
13.16 below, in form and substance reasonably acceptable to the Acquired
Companies) (the "Accessity Special Shareholders' Meeting"). As soon as
permissible under all applicable Legal Requirements, Accessity shall cause a
copy of the Proxy Statement (as defined in Section 11.6 below) to be delivered
to each shareholder of Accessity who is entitled to vote on such matter under
its articles of incorporation and bylaws and the applicable requirements of New
York law.
11.6 PROXY STATEMENT. Following delivery to Accessity of the audited
balance sheets as of December 31, 2003 and the related statements of income and
changes in financial position or cash flows, as appropriate, for the period then
ended for each of the Acquired Companies and subject to the reasonable
satisfaction of Accessity with same and with the results of its due diligence
investigation of the Acquired Companies as of such time, promptly thereafter,
Accessity shall prepare and cause to be filed with the SEC a Proxy Statement
with respect to the Accessity Special Shareholders' Meeting (the "Proxy
Statement") and any other documents required by the Securities Act, the Exchange
Act or any other federal, foreign or state Blue Sky or related laws in
connection with the Share Exchange and the transactions contemplated by this
Agreement (collectively, "Other Filings"). Accessity will notify each of the
Acquired Companies of any comments from the SEC or its staff or any other
Governmental Body and of any request by the SEC or its staff or any other
Governmental Body for amendments to the Proxy Statement or any Other Filings or
for additional information and will supply each of the Acquired Companies with
copies of all correspondence between Accessity and any of its Advisors or
representatives, on the one hand, and the SEC or its staff or any other
Governmental Body, on the other hand, with respect to the Proxy Statement, any
Other Filings or the Share Exchange. Accessity shall use all commercially
reasonable efforts to cause the Proxy Statement and any Other Filings to comply
with
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the rules and regulations promulgated by the SEC and to respond promptly to any
comments of the SEC or its staff or any other Governmental Body. Accessity will
use all reasonable efforts to cause the Proxy Statement to be mailed to
Accessity's shareholders, as promptly as practicable after the Proxy Statement
is permitted to be mailed under the rules and regulations promulgated by the
SEC. Each of the Acquired Companies shall promptly furnish to Accessity all
information concerning such Acquired Company and such Acquired Company's
shareholders that may be required or reasonably requested in connection with any
action contemplated by this Section 11.6.
11.7 NONPUBLIC OFFERING; PREPARATION OF DISCLOSURE DOCUMENT. Prior to
the Closing Date, Accessity shall use all commercially reasonable efforts to
obtain or comply with all regulatory approvals and provisions of any and all
applicable Governmental Bodies to ensure that the Accessity Exchange Shares to
be issued in the Share Exchange will be exempted from registration or
qualification under the securities law of every jurisdiction of the United
States in which any Owner has an address of record as set forth on the signature
pages hereto; provided, that Accessity shall not be required (i) to qualify to
do business as a foreign corporation in any jurisdiction in which it is not now
qualified or (ii) file a general consent to service of process in any
jurisdiction in which it has not already filed a general consent to service of
process. As soon as practicable after the execution of this Agreement, Accessity
shall have prepared a document containing certain disclosures, risk factors and
disclaimers in regard to Accessity, PEI, Kinergy and Reenergy and the Share
Exchange for distribution to the Owners and the PEI Warrantholders prior to the
Closing, subject to the review, comment and approval of each of PEI, Kinergy and
Reenergy prior to such distribution (the "Owner Disclosure Document").
11.8 COOPERATION. Each party shall use its best efforts to cause the
transactions contemplated by this Agreement to be consummated, and without
limiting the generality of the foregoing, to obtain all consents and
authorizations of any Governmental Body and third parties listed on Schedules
4.7, 6.7, and 8.7, and to make all filings with and give all notices to
government agencies and third parties which may be necessary or reasonably
required in order to consummate the transactions contemplated by this Agreement.
Each party shall give prompt notice to Accessity and the Acquired Companies,
after receipt thereof by such party, of (i) any notice of, or other
communication relating to, any default or event which, with notice or the lapse
of time or both, would be reasonably likely to become a default under any
indenture, instrument or agreement material to any of the Acquired Companies or
Accessity or the operations, condition (financial or otherwise) of any of the
Acquired Companies or Accessity, or to which any of the Acquired Companies or
Accessity is a party or by which any of the Acquired Companies or Accessity or
their respective assets or properties are bound and (ii) any notice or other
communication from or to any third party alleging or stating that the consent of
such third party is or may be required in connection with the transactions
contemplated by this Agreement.
11.9 NO NEGOTIATIONS, ETC. Prior to the Closing Date, neither Accessity
nor any of the Acquired Companies or the Owners shall, directly or indirectly,
in any way contact, initiate, enter into or conduct any discussions or
negotiations, or enter into any agreements, whether written or oral, with any
Person with respect to the sale of all or any part of the assets of any of the
Acquired Companies or Accessity or a merger or consolidation of any of the
Acquired Companies or Accessity with any other person (other than in connection
with the reincorporation of Accessity in Delaware), except, by the Board of
Directors of Accessity or PEI or the managers of any of the Acquired Companies
to the extent otherwise required in the exercise of its fiduciary duties to its
shareholders or members, as the case may be, if it shall have received a
Superior Proposal after the date hereof from a third party or parties. As used
in this Agreement, the defined term "Superior Proposal" shall mean a bona fide
unsolicited written proposal made by a third party which is (a)(i) for a sale,
exchange, transfer or other disposition of more than 50% of the assets of the
company, taken as a whole, in a single transaction or a series of related
transactions, or (ii) for the acquisition, directly or indirectly, by such third
party of beneficial ownership of more than 50% of the stock or limited liability
company membership interests of the company, as the case may be, whether by
merger, reorganization, consolidation, share exchange or purchase, business
combination, recapitalization, liquidation, dissolution or similar transaction,
and which and is (b)
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otherwise on terms which the Board of Directors or managers of the company, as
the case may be, in good faith has concluded (after consultation with its
financial advisors and legal counsel), taking into account, among other things,
all legal, financial, regulatory and other aspects of the proposal and the third
party making the proposal (x) that the proposal would, if consummated, result in
a transaction that is more favorable to its shareholders (in their capacity as
shareholders) or members (in their capacity as members), as the case may be,
from a financial point of view, than the transactions contemplated by this
Agreement and (y) that the proposal is reasonably capable of being consummated.
11.10 DELIVERY OF DISCLOSURE SCHEDULES. The respective disclosure
schedules relating to the representations and warranties of Accessity and each
of the Acquired Companies in this Agreement shall be delivered as soon as
practicable after such execution and, in any event, a reasonable time prior to
the Closing.
11.11 DISTRIBUTION TO OWNERS AND PEI WARRANTHOLDERS. As soon as
practicable after delivery of the respective disclosures schedules relating to
the representations and warranties of the Acquired Companies in this Agreement
and completion of the Owner Disclosure Document and the Proxy Statement, each of
the Acquired Companies shall distribute to its respective Owners (and PEI will
also distribute to the PEI Warrantholders) for execution a copy of this
Agreement, together with a copy of such disclosure schedules, a copy of the
Owner Disclosure Document and a copy of the Proxy Statement.
ARTICLE XII
CONDITIONS TO ACCESSITY'S OBLIGATIONS
Each and every obligation of Accessity under this Agreement to be
performed on or before the Closing Date shall be subject to the satisfaction, on
or before the Closing Date, of each of the following conditions:
12.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of each of the Acquired Companies and the Owners contained herein, in
the Schedules and Exhibits hereto and in all certificates and other documents
delivered by each of the Acquired Companies and the Owners to Accessity pursuant
hereto or in connection with the transactions contemplated hereby shall be true
and accurate as of the date of this Agreement and as of the Closing Date with
the same effect as if made on and as of the Closing Date.
12.2 PERFORMANCE. Each of the Acquired Companies shall have performed
and complied in all material respects with all agreements, obligations and
conditions required by this Agreement to be performed or complied with by it on
or prior to the Closing Date, including, without limitation, those referred to
in Article XI above.
12.3 PERMITS. The Acquired Companies shall have obtained all such
Permits (other than nondiscretionary Permits issued upon completion of
construction of the proposed ethanol plant) from federal, state and local
Governmental Bodies as are required by applicable law for the Acquired Companies
to conduct each of the PEI Business, the Kinergy Business and the Reenergy
Business (including, without limitation, the commencement of construction of a
plant to produce up to 40 million gallons of ethanol per year), unless the
failure to obtain any such Permit would not have an adverse effect on the
assets, properties, business, condition (financial or otherwise) or prospects of
Accessity or any of the Acquired Companies or the transactions contemplated
hereby.
12.4 GOVERNMENTAL CONSENTS. There shall have been obtained on or before
the Closing such material permits or authorizations, and there shall have been
taken such other action, as may be required to consummate the Share Exchange and
the other transactions contemplated hereby by any Governmental Body having
jurisdiction over the parties and the actions herein proposed to be taken,
including but not
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limited to requirements under applicable federal and state securities laws and
the compliance with, and expiration of any applicable waiting period for, the
HSR Act.
12.5 DOCUMENTS AND ACTIONS. Each of Acquired Companies shall have
executed and delivered to Accessity this Agreement and the other agreements,
documents and instruments and shall have taken the actions contemplated by
Section 3.3 hereof.
12.6 THIRD PARTY APPROVALS AND CONSENTS. Each Acquired Company shall
have received any and all consents, approvals, notices, filings or recordations
of third parties required with respect to the execution and delivery of this
Agreement or the transactions contemplated hereby or by any of the agreements,
documents or instruments referred to herein.
12.7 NO LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Share Exchange or any of the transactions contemplated hereby shall have
been issued by any Federal or state court and remain in effect, nor shall any
proceeding initiated by any Governmental Body seeking any of the foregoing be
pending.
12.8 NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the business, financial condition, operations or financial
performance of any of the Acquired Companies since the date of this Agreement.
12.9 CONSULTING AGREEMENTS. Accessity shall have entered into a
consulting agreement with Barry Siegel for advisory services, in form and
substance mutually acceptable to the Acquired Companies, Accessity and Barry
Siegel (the "Siegel Consulting Agreement"). The Siegel Consulting Agreement
shall include payment to Barry Siegel on the Closing Date of compensation (a) in
the form of the number of shares of Common Stock of Accessity equal to the
excess, if any, of 400,000 shares of the Common Stock of Accessity over the
number of shares of Siegel Common Stock determined in accordance with Section
13.11 of this Agreement and (b) allocated between compensation for consulting
services and a covenant not to compete, each in such amounts as shall be
mutually acceptable to the Acquired Companies, Accessity and Barry Siegel.
Accessity shall also have entered into a consulting agreement with Philip Kart
for advisory services, in form and substance mutually acceptable to the Acquired
Companies, Accessity and Philip Kart (the "Kart Consulting Agreement"). The Kart
Consulting Agreement shall include payment to Philip Kart on the Closing Date of
compensation (a) in the amount of 200,000 shares of the Common Stock of
Accessity and (b) allocated between compensation for consulting services and a
covenant not to compete, in such amounts as shall be mutually acceptable to the
Acquired Companies, Accessity and Philip Kart.
12.10 PROXY STATEMENT. The Proxy Statement shall on the Closing Date
not be subject to any proceedings commenced or threatened by the SEC.
12.11 AUDITED FINANCIAL STATEMENTS. Each of the Acquired Companies
shall have delivered to Accessity the audited balance sheet of such Acquired
Company as of December 31, 2003 and the related statements of income and changes
in financial position or cash flows, as appropriate, for the period then ended.
12.12 EXECUTION OF AGREEMENT BY PEI SHAREHOLDERS, PEI WARRANTHOLDERS,
KINERGY MEMBERS AND REENERGY MEMBERS. All or substantially all (representing at
least 95% of the issued and outstanding shares of PEI Stock as of the Closing)
of the PEI Shareholders, all of the PEI Warrantholders, all of Kinergy Members
and all of the Reenergy Members shall have executed and delivered to PEI,
Kinergy or Reenergy, respectively, a copy of this Agreement and, in any event, a
sufficient number of PEI Shareholders shall have executed a copy of this
Agreement such that, after giving effect to the Share Exchange, the PEI
Shareholders, the Kinergy Members and the Reenergy Members shall beneficially
own in the aggregate at least 80% of the issued and outstanding common stock of
Accessity.
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12.13 APPROVAL BY ACCESSITY SHAREHOLDERS. The shareholders of Accessity
shall have approved the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby (including, without
limitation, the reincorporation of Accessity in the State of Delaware referred
to in Section 13.6 below, the sale or other disposition of the Accessity
Subsidiaries (as defined below) to Barry Siegel referred to in Section 13.13
below, the adoption of an Amended and Restated 1995 Incentive Stock Plan of
Accessity, in form and substance reasonably acceptable to the Acquired
Companies, and the adoption of a new stock option plan referred to in Section
13.16 below, in form and substance reasonably acceptable to the Acquired
Companies)).
12.14 LIMITATION OF OUTSTANDING CAPITAL STOCK. As of the Closing Date,
giving effect to the transactions contemplated hereby, Accessity shall not be
obligated to issue to the PEI Shareholders, the Kinergy Members and the Reenergy
Members or any other Person(s), more than 18,800,000 Accessity Exchange Shares
in connection with the Share Exchange and the consummation of the transactions
contemplated hereby on a fully-diluted basis (including shares of capital stock
issuable upon exercise of any and all options, calls, warrants, claims,
convertible debt and any other rights to acquire shares of capital stock of any
of the Acquired Companies, whether accrued or contingent (including shares
issuable upon exercise of the Accessity Replacement Warrants).
12.15 COMPLETION OF DUE DILIGENCE; DISCLOSURE SCHEDULES. Accessity
shall have completed its financial and legal due diligence investigation of each
of the Acquired Companies with results thereof satisfactory to Accessity in its
sole discretion (including, without limitation, satisfaction with matters
related to Security Markets (as defined in Section 14.4 below) and litigation
and any and all disclosures contained in the respective disclosure schedules).
In this regard, each of Accessity and the Acquired Companies acknowledge and
agree that the respective disclosure schedules relating to the representations
and warranties of Accessity and the Acquired Companies in this Agreement are not
required to be delivered as of the time of execution of this Agreement by
Accessity and the Acquired Companies, but are required to be delivered as soon
as practicable after such execution and, in any event, a reasonable time prior
to the Closing, to permit the parties to review, evaluate and approve the
disclosures made therein as a part of their due diligence investigation.
Notwithstanding the absence of such disclosure schedules as of the time of
execution of this Agreement, each of Accessity and the Acquired Companies
acknowledge and agree the representations and warranties made herein by
Accessity and the Acquired Companies shall not be deemed false or misleading or
deemed to contain untrue statements of material fact or to have omitted to state
material facts solely because of the absence of such disclosure schedules as of
the time of execution of this Agreement.
12.16 FAIRNESS OPINION. Accessity shall have received a fairness
opinion regarding the sale or otherwise disposition of its two subsidiaries,
DriverShield CRM Corp., a Delaware corporation, and Sentaur Corp., a Florida
corporation (collectively, the "Accessity Subsidiaries"), in consideration of
the waiver by Barry Siegel of the change in control provisions set forth in the
employment agreement between Accessity and Barry Siegel that expires on December
31, 2004.
ARTICLE XIII
CONDITIONS TO THE ACQUIRED COMPANIES', PEI WARRANTHOLDERS' AND
OWNERS' OBLIGATIONS
Each and every obligation of the Acquired Companies, each of the PEI
Warrantholders and each of the Owners under this Agreement to be performed on or
before the Closing Date shall be subject to the satisfaction, on or before the
Closing Date, of each of the following conditions:
13.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Accessity contained herein and in all certificates and other
documents delivered by Accessity to each of the Acquired Companies or the Owners
pursuant hereto or in connection with the transactions
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contemplated hereby shall be true and accurate on and as of the Closing Date
with the same effect as if made on and as of the Closing Date.
13.2 PERFORMANCE. Accessity shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be
performed or complied with by it on or prior to the Closing Date, including,
without limitation, those referred to in Article XI above.
13.3 DOCUMENTS AND ACTIONS. Accessity shall have executed and delivered
to the each of the Acquired Companies and each of the Owners the agreements,
documents and instruments and shall have taken the actions contemplated by
Section 3.2.
13.4 APPROVAL BY ACCESSITY SHAREHOLDERS. The shareholders of Accessity
shall have approved the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby (including, without
limitation, the reincorporation of Accessity in the State of Delaware referred
to in Section 13.6 below, the sale or other disposition of the Accessity
Subsidiaries (as defined below) to Barry Siegel referred to in Section 13.11
below, the adoption of an Amended and Restated 1995 Incentive Stock Plan of
Accessity, in form and substance reasonably acceptable to the Acquired
Companies, and the adoption of a new stock option plan referred to in Section
13.16 below, in form and substance reasonably acceptable to the Acquired
Companies)).
13.5 RESIGNATIONS OF OFFICERS AND DIRECTORS. At Closing, all of the
directors of Accessity and the officers of Accessity identified in subsection
(f) of Section 3.2 shall have resigned in writing from their positions as
officers and employees of Accessity, effective upon the appointment of the
individuals identified in subsection (d) of Section 3.2 above to the Board of
Directors of Accessity.
13.6 REINCORPORATION IN DELAWARE; AUTHORIZED CAPITAL. Accessity shall
have reincorporated, changed its name to Pacific Ethanol, Inc. and become duly
organized, validly existing and in good standing under the laws of the State of
Delaware in compliance with all applicable federal, state and applicable laws,
rules and regulations and shall have sufficient shares of its capital stock
authorized for issuance in order to complete the Share Exchange and the
transactions contemplated hereby.
13.7 VALID ISSUANCE OF ACCESSITY EXCHANGE SHARES. The shares of
restricted Accessity common stock to be issued to the PEI Shareholders, the
Kinergy Members and the Reenergy Members at Closing will be validly issued,
fully paid and nonassessable under applicable law and will have been duly issued
in a non-public offering in compliance with all applicable federal and state
securities laws.
13.8 THIRD PARTY APPROVALS AND CONSENTS. Each Acquired Company shall
have received any and all consents, approvals, notices, filings or recordations
of third parties required with respect to the execution and delivery of this
Agreement or the transactions contemplated hereby or by any of the agreements,
documents or instruments referred to herein.
13.9 CASH BALANCE. As of the Closing Date, Accessity shall have at
least the same Cash Balance as reported in its Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2004 filed with the SEC (approximately
$4,360,000), subject to adjustment as set forth on Schedule 13.9 hereto, and
Accessity shall have delivered to the Acquired Companies a certificate of the
president or chief executive officer of Accessity certifying to the foregoing.
As used herein, the defined term "Cash Balance" shall mean the sum of (i) the
amount of cash in Accessity's operating and disbursement bank accounts at
JPMorgan-Chase Bank, (ii) the amount of Accessity funds invested in highly
liquid investments in fixed income mutual funds at Solomon Smith Barney (with
available liquidity on a next-day basis) and (iii) a $300,000 restricted
certificate of deposit with Bank Atlantic in Coral Springs, Florida established
in connection with the lease agreement referred to in Section 13.11 below (which
is to be released in $100,000 increments in the 36th, 48th and 60th months of
such lease agreement), excluding any cash received from the exercise of any
outstanding options or warrants.
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13.10 LIMITATION OF OUTSTANDING CAPITAL STOCK. As of the Closing Date,
without giving effect to the transactions contemplated hereby, Accessity shall
have no more than 2,638,081 of capital stock issued and outstanding on a
fully-diluted basis (including shares of capital stock issuable upon exercise of
any and all options, calls, warrants, claims and any other rights to acquire
shares of capital stock of Accessity, whether accrued or contingent, other than
an aggregate of 600,000 shares of common stock of Accessity to be issued and
beneficially owned by Barry Siegel and Philip Kart and up to 100,000 shares of
common stock of Accessity issuable upon conversion of the issued and outstanding
shares of Series A Convertible Preferred Stock of Accessity).
13.11 DISPOSITION OF ACCESSITY SUBSIDIARIES AND WAIVER OF CHANGE OF
CONTROL PROVISIONS BY BARRY SIEGEL AND PHILIP KART. Prior to Closing, Accessity
shall have (a) sold or otherwise disposed of its two subsidiaries, DriverShield
CRM Corp., a Delaware corporation, and Sentaur Corp., a Florida corporation
(collectively, the "Accessity Subsidiaries"), pursuant to a written agreement
between Accessity and Barry Siegel, in form and substance reasonably
satisfactory to PEI, Kinergy and Reenergy, and (b) issued a certain number of
shares of Common Stock of Accessity (the "Siegel Common Stock"), not to exceed
400,000 shares, in consideration of the waiver by Barry Siegel of the change in
control provisions set forth in the employment agreement between Accessity and
Barry Siegel that expires on December 31, 2004, as the same would be applicable
to the consummation of the transactions contemplated by this Agreement
(including, but not limited to, the provisions that require Accessity to pay to
Barry Siegel (i) a severance payment of 300% of his average annual salary for
the past five years, less $100; (ii) the cash value of his outstanding but
unexercised stock options; and (iii) for any and all other perquisites in the
event that he is terminated for various reasons specified in such agreement
following a change of control (as defined in such agreement)). The number of
shares of Siegel Common Stock to be issued shall be such number, which shall not
exceed 400,000 shares of Common Stock of Accessity, as shall be equal to a
fraction, the numerator of which is the excess of the value of the waived
severance payment over the combined fair market value of the Accessity
Subsidiaries, both determined as of the Closing Date, and the denominator of
which is the closing price per share of the Common Stock of Accessity on the
business day before the Closing Date. Without in any way limiting the foregoing,
as part of the disposition of the Accessity Subsidiaries to Barry Siegel, the
facilities of Accessity located in Coral Springs, Florida shall have been duly
subleased to Barry Siegel or an entity owned or controlled by Barry Siegel
(which may be Sentaur Corp.) with the consent of the lessor under the existing
lease agreement for such facilities, on terms and conditions reasonably
satisfactory to the Acquired Companies. The parties acknowledge and agree that
the personal property at the facilities of Accessity located in Coral Springs,
Florida shall also be transferred to Barry Siegel or an entity owned or
controlled by Barry Siegel (which may be Sentaur Corp.). Prior to Closing,
Accessity shall also have obtained from Philip Kart, in consideration for the
execution and delivery by Accessity of the Kart Consulting Agreement described
in Section 12.9 of this Agreement. the waiver by Philip Kart of the change in
control provisions set forth in the employment agreement between Accessity and
Philip Kart that expires on December 31, 2004, as the same would be applicable
to the consummation of the transactions contemplated by this Agreement
(including, but not limited to, the provisions that require Accessity to pay to
Philip Kart (i) a severance payment of 100% of his annual salary on a date
specified in such agreement; (ii) the cash value of his outstanding but
unexercised stock options; and (iii) for any and all other perquisites in the
event that he is terminated for various reasons specified in such agreement
following a change of control (as defined in such agreement)).
13.12 GOVERNMENTAL CONSENTS. There shall have been obtained on or
before the Closing such material permits or authorizations, and there shall have
been taken such other action, as may be required to consummate the Share
Exchange and the other transactions contemplated hereby by any Governmental Body
having jurisdiction over the parties and the actions herein proposed to be
taken, including but not limited to requirements under applicable federal and
state securities laws.
13.13 NO LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Share Exchange or any of the transactions
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contemplated hereby shall have been issued by any Federal or state court and
remain in effect, nor shall any proceeding initiated by any Governmental Body
seeking any of the foregoing be pending.
13.14 NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the business, financial condition, operations or financial
performance of Accessity since the date of this Agreement.
13.15 PROXY STATEMENT. The Proxy Statement shall on the Closing Date
not be subject to any proceedings commenced or threatened by the SEC.
13.16 STOCK OPTION PLAN. Prior to Closing, Accessity shall have adopted
a new stock option plan in the manner requested by PEI.
13.17 RETIREMENT OR CONVERSION OF PREFERRED STOCK OF ACCESSITY. Prior
to Closing, Accessity shall have retired all of the issued and outstanding
shares of Series A Convertible Preferred Stock of Accessity, on terms and
conditions that are reasonably acceptable to PEI, Kinergy and Reenergy, or all
of the issued and outstanding shares of Series A Convertible Preferred Stock of
Accessity shall have been duly converted into shares of common stock of
Accessity in accordance with the terms and provisions set forth in the
Certificate of Incorporation of Accessity.
13.18 EXECUTION OF AGREEMENT BY PEI SHAREHOLDERS, PEI WARRANTHOLDERS,
KINERGY MEMBERS AND REENERGY MEMBERS. All or substantially all (representing at
least 95% of the issued and outstanding shares of PEI Stock as of the Closing)
of the PEI Shareholders, all of the PEI Warrantholders, all of Kinergy Members
and all of the Reenergy Members shall have executed and delivered to PEI,
Kinergy or Reenergy, respectively, a copy of this Agreement and, in any event, a
sufficient number of PEI Shareholders shall have executed a copy of this
Agreement such that, after giving effect to the Share Exchange, the PEI
Shareholders, the Kinergy Members and the Reenergy Members shall beneficially
own in the aggregate at least 80% of the issued and outstanding common stock of
Accessity.
13.19 ESTABLISHMENT OF ESCROW RELATING TO MERCATOR ACTION. Prior to
Closing, Accessity shall have established an escrow account with an escrow agent
mutually acceptable to PEI and Accessity into which Accessity will deposit the
net proceeds from a recovery from the current arbitration proceeding with
Presidion Solutions, Inc., which shall thereafter be used solely to fund the
legal fees, expenses and disbursements incurred in connection with the Mercator
Action. After full and final settlement or other final resolution of the
Mercator Action, Accessity shall cause the net proceeds from the Mercator Action
received from the law firms representing Accessity in the Mercator Action (i.e.,
after retention by the law firms representing Accessity in this action, of the
additional fees and expenses pursuant to the engagement agreement between the
law firms and Accessity and an amount equal to twenty-five percent (25%) of the
gross proceeds from the Mercator Action as full payment for these law firms'
representation of Accessity in the Mercator Action) to be deposited into such
escrow account and thereafter to be distributed on a pro rata basis, to the
fullest extent permitted under applicable law, to the holders of record of
shares of Accessity common stock as of the date immediately prior to the Closing
Date (for further distribution to the beneficial owners of shares of Accessity
common stock as of such date, as applicable), after payment of any and all other
fees and expenses in connection with the Mercator Action and with respect to
such escrow arrangement, including, without limitation, a fee in an amount equal
to one-third of the net proceeds from the Mercator Action received from the law
firms representing Accessity in the Mercator Action which shall be paid to
Accessity prior to such distribution.
13.20 COMPLETION OF DUE DILIGENCE; DISCLOSURE SCHEDULES. Each of the
Acquired Companies shall have completed its financial and legal due diligence
investigation of Accessity and each of the other Acquired Companies with results
thereof satisfactory to such Acquired Company in its sole discretion (including,
without limitation, satisfaction with matters related to Security Markets (as
defined in Section 14.4 below), and litigation and any and all disclosures
contained in the respective disclosure schedules).
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In this regard, each of Accessity and the Acquired Companies acknowledge and
agree that the respective disclosure schedules relating to the representations
and warranties of Accessity and the Acquired Companies in this Agreement are not
required to be delivered as of the time of execution of this Agreement by
Accessity and the Acquired Companies, but are required to be delivered as soon
as practicable after such execution and, in any event, a reasonable time prior
to the Closing, to permit the parties to review, evaluate and approve the
disclosures made therein as a part of their due diligence investigation.
Notwithstanding the absence of such disclosure schedules as of the time of
execution of this Agreement, each of Accessity and the Acquired Companies
acknowledge and agree that the representations and warranties made herein by
Accessity and the Acquired Companies shall not be deemed false or misleading or
deemed to contain untrue statements of material fact or to have omitted to state
material facts solely because of the absence of such disclosure schedules as of
the time of execution of this Agreement.
ARTICLE XIV
POST-CLOSING COVENANTS
14.1 CERTAIN REPORTING MATTERS. Upon consummation of the Closing,
Accessity shall timely file with the SEC a Current Report on Form 8-K with
respect to the Share Exchange and the consummation of the transactions
contemplated hereby.
14.2 STANDARD AND POORS. Upon consummation of the Closing, to the
extent required or otherwise deemed advisable by the Majority Parties, Accessity
shall apply for listing with Standard and Poors Information Service and Blue Sky
filings.
14.3 BOOKS AND RECORDS. Unless otherwise consented to in writing by
Accessity, neither the Acquired Companies nor any of the Owners shall destroy,
alter or otherwise dispose of any original books or records of any of the
Acquired Companies prior to the Closing Date without first offering to surrender
such books and records to Accessity and shall maintain such books and records in
good condition in a reasonably accessible location.
14.4 LISTING. If the shares of common stock of Accessity are listed on
the Nasdaq SmallCap Market of the Nasdaq Stock Market, the Nasdaq National
Market of the Nasdaq Stock Market, the American Stock Exchange or the New York
Stock Exchange (these securities markets collectively referred to as the
"Security Markets" and, individually as a Security Market") as of the Closing
Date, Accessity shall use its commercially reasonable efforts to maintain a
listing on a Security Market for a period of one (1) year after the Closing
Date.
14.5 GRANT OF STOCK OPTIONS AND WARRANTS. Upon consummation of the
Closing and for a period of one (1) year after the Closing Date, Accessity shall
not grant or issue any security, stock option or warrant (other than stock
options contemplated to be issued pursuant to the new stock option plan referred
to in Section 13.16 above, which would not be exercisable until one (1) year
after the Closing Date) that may be sold in the Security Markets after having
been registered under the Securities Act or traded pursuant to an exemption
under the Securities Act, except (i) as otherwise contemplated by this
Agreement; (ii) the sale of securities by Accessity pursuant to equity and/or
debt financings to provide funds for working capital purposes; (iii) the
Accessity Replacement Warrants; and (iv) the Accessity Exchange Shares which are
subject to registration rights of certain PEI Shareholders pursuant to the terms
of the various Registration Rights Agreement between PEI and such PEI
Shareholders.
14.6 BOARD SEAT. As provided in subsection (d) of Section 3.2 above,
immediately prior to the Closing, the Board of Directors of Accessity shall have
designated an individual to serve on the Board of Directors of Accessity as a
Class II director (thereby holding such board seat until the annual meeting of
Accessity shareholders to be held in the fourth calendar quarter of 2005).
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14.7 CONTINUATION AND PROSECUTION OF LAWSUIT.
(a) Upon consummation of the Closing, Accessity shall continue
to use its commercially reasonable efforts to vigorously prosecute the lawsuit
previously filed against Mercator Group, LLC, Mercator Advisory Group, LLC,
Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP and Mercator Focus
Fund, LP, Taurus Global, LLC and the action that was previously filed, dismissed
without prejudice and may be re-filed against John W. Burcham, II, Craig A.
Vanderburg, James E. Baiers and MediaBus Networks, Inc. n/k/a Presidion Corp.,
in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County,
Florida, Case No. 03-30243 CA 15, or as removed or re-filed in such other venue,
as the case may be (the "Mercator Action"). The Mercator Action shall not be
settled, to the fullest extent permitted by applicable law, without the express
written consent (which consent shall not be unreasonably withheld or delayed)
of: (i) the individual sitting on the Board of Directors and designated as the
Accessity Board Member or (ii) should such Accessity Board Member no longer
serve on the Board of Directors, then by the unanimous written consent of all
the independent members of the Board of Directors of Accessity. The proceeds
from any recovery or settlement in the Mercator Action shall be allocated as
provided in Section 13.19 above.
(b) Upon consummation of the Closing, Accessity shall continue
to use its commercially reasonable efforts to vigorously collect an arbitration
award that it may have received from the American Arbitration Association
against Presidion Solutions, Inc. The proceeds of any recovery from Presidion
Solutions, Inc. shall be deposited into the escrow account pursuant to Section
13.19 above.
14.8 REIMBURSEMENT OF COSTS PAID BY REENERGY MEMBERS. As soon as
practicable after the Closing Date, PEI shall pay to the Reenergy Members or
shall otherwise have caused the Reenergy Members to be paid an amount equal to
$150,000, as payment and reimbursement for the services, costs and expenses of
the Reenergy Members in connection with the development of the Visalia project.
ARTICLE XV
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
15.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding (a)
the making of this Agreement or any related agreement, (b) any examination made
by or on behalf of the parties hereto and (c) the Closing hereunder, (x) the
representations and warranties of the Acquired Companies, the Owners and
Accessity contained in this Agreement, or in any document delivered pursuant to
the provisions of this Agreement, shall survive the Closing for a period of
twenty-four (24) months, except for the representations and warranties made in
Sections 4.11, 6.11, and 8.11 (Taxes and Tax Returns), Sections 4.13, 6.13, and
8.13 (Title to Properties; Encumbrances), Sections 4.15, 6.15, and 8.15
(Intellectual Property), Sections 4.16, 6.16, and 8.16 (Compliance with Laws),
and Sections 4.21, 6.21 and 8.21 (Environmental Matters), which in each case
shall survive until the expiration of the applicable statute of limitations for
the underlying cause of action plus six (6) months and (y) the covenants and
agreements required to be performed after the Closing or pursuant to Article XI
of this Agreement (unless noncompliance with those covenants contained in
Article XI was waived in writing at the Closing) shall survive until fully
performed or fulfilled. No action may be brought with respect thereto after such
date; provided, however, that if, prior to such date, one party has notified the
other party of a claim for indemnity under this Article XV (whether or not
formal legal action shall have been commenced based upon such claim), such claim
shall continue to be subject to indemnification in accordance with this Article
XV.
15.2 INDEMNIFICATION. The parties shall indemnify each other as set
forth below:
(a) Subject to Section 15.1 above, from and after the Closing,
(x) each of the Acquired Companies shall, severally and not jointly, indemnify
and save harmless Accessity and its officers, directors, shareholders,
successors and assigns from and against any loss, claim, liability,
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damage, complaint, action or causes of action, suits, proceedings,
investigations, punitive damages, remedial costs, civil and criminal penalties
or expenses, costs or other damages of any kind or nature, including reasonable
attorneys' fees incurred in connection with any of the foregoing (collectively,
the "Damages"), to the extent arising from, relating to or otherwise in respect
of (i) the inaccuracy or breach of any representation or warranty of such
Acquired Company contained in this Agreement (as of the date hereof, or as of
the Closing Date) or of any representation, warranty or statement made in any
schedule, certificate, document or instrument delivered by the Acquired Company,
and (ii) the failure of such Acquired Company to perform any agreements or
covenants of such Acquired Company contained in this Agreement; provided,
however, that such Acquired Company shall not be responsible for any Damages
with respect to any such matters until the cumulative aggregate amount of such
Damages exceeds $25,000, in which event such Acquired Company shall then be
liable for all such cumulative aggregate Damages, including the first $25,000;
and (y) Accessity shall indemnify and save harmless each of the Owners, the PEI
Warrantholders and the Acquired Companies and their respective officers,
directors, shareholders, successors and assigns from and against any Damages to
the extent arising from, relating to or otherwise in respect of (i) the
inaccuracy or breach of any representation or warranty of Accessity contained in
this Agreement (as of the date hereof, or as of the Closing Date) or of any
representation, warranty or statement made in any schedule, certificate,
document or instrument delivered by Accessity, and (ii) the failure of Accessity
to perform any agreements or covenants of Accessity contained in this Agreement;
provided, however, that Accessity shall not be responsible for any Damages with
respect to any such matters until the cumulative aggregate amount of such
Damages exceeds $25,000, in which event Accessity shall then be liable for all
such cumulative aggregate Damages, including the first $25,000. As used in this
Section 15.2, any Person entitled to indemnification pursuant to the provisions
of this Section 15.2 shall be referred to herein as an "Indemnified Party" and
any Person required to indemnify any Indemnified Party pursuant to the
provisions of this Section 15.2 shall be referred to herein as an "Indemnifying
Party."
(b) The Indemnified Parties shall notify each of the
Indemnifying Parties within a reasonable period of time after becoming aware of,
and shall provide to each of the Indemnifying Parties as soon as practicable
thereafter all information and documentation necessary to support and verify,
any matter which the Indemnified Party shall have determined has given rise to a
claim for indemnification hereunder, and the Indemnifying Parties shall be given
reasonable access to all books and records in the possession or under the
control of the Indemnified Party which the Indemnifying Parties reasonably
determine to be related to such claim. The failure by any Indemnified Party to
so notify the Indemnifying Parties or any indemnification claim hereunder shall
not relieve the relevant Indemnifying Party from any liability which such
Indemnifying Party may have to such Indemnified Party under this Agreement,
except to the extent that such claim for indemnification involves the claim of a
third party against the Indemnified Party and the Indemnifying Party shall have
been actually prejudiced by such failure. If any Indemnifying Party does not
notify the Indemnified Parties within 30 calendar days following receipt by it
of such notice that such Indemnifying Parties disputes its liability to the
Indemnified Parties under this Agreement, such claim specified by such
Indemnified Party in such notice shall be conclusively deemed a liability of
such Indemnifying Parties under this Agreement and such Indemnifying Parties
shall pay the amount of such liability to such Indemnified Party on demand or,
in the case of any notice in which the amount of the claim (or any portion
thereof) is estimated, on such later date when the amount of such claim (or
portion thereof) becomes finally determined. If an Indemnifying Party has timely
disputed its liability with respect to such claim, as provided above, such
Indemnifying Party and the Indemnified Party or Parties shall proceed in good
faith to negotiate a resolution of such dispute and, if not resolved through
such negotiations, such dispute shall be resolved by litigation in accordance
with the terms of this Agreement.
(c) All claims for indemnity under this Article XV shall be
paid by the Indemnifying Parties on demand in immediately available funds in
U.S. dollars.
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(d) With respect to any third party claim or action that could
give rise to indemnity under this Agreement, the Indemnifying Party shall be
entitled to assume the defense thereof with counsel satisfactory to the
Indemnified Party, provided, however, that upon the request of the Indemnified
Party, the Indemnifying Party provide reasonable evidence of its ability to
perform its obligations under this Section 15.2. After notice from the
Indemnifying Party to the Indemnified Party of their election so to assume the
defense thereof, the Indemnifying Party shall not be liable to the Indemnified
Party under the foregoing indemnity agreement for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof other than (i) those relating to investigation or the furnishing of
documents or witnesses and (ii) all reasonable fees and expenses of separate
counsel retained by such Indemnified Party if (A) the Indemnifying Party and the
Indemnified Party shall have agreed to the retention of such counsel or (B)
counsel to the Indemnified Party shall have concluded reasonably that the
representation of the Indemnifying Party and the Indemnified Party by the same
counsel would be inappropriate due to actual or potential differing interests
between them in the conduct of the defense of such action.
(e) Whenever the Indemnifying Party controls the defense of a
third party claim, the Indemnifying Party may only settle or compromise the
matter subject to indemnification without the consent of the Indemnified Party
if such settlement includes a complete release of all Indemnified Parties as to
the matters in dispute and relates solely to money damages. An Indemnified Party
will not unreasonably withhold consent to any settlement or compromise that
requires its consent.
(f) In the event the Indemnifying Party fails to timely
defend, contest or otherwise protect the Indemnified Party against any such
claim or suit, the Indemnified Party may, but will not be obligated to, depend,
contest or otherwise protect against the same, and make any compromise or
settlement thereof, and in such event, or in the case where the Indemnified
Party jointly controls such claim or suit, the Indemnified Party shall be
entitled to recover its costs thereof from the Indemnifying Party, including
without limitation, attorneys' fees, disbursements and all amounts paid as a
result of such claim or the compromise or settlement thereof.
(g) Each Indemnified Party shall cooperate and provide such
assistance as the Indemnifying Party may reasonably request in connection with
the defense of the matter subject to indemnification and in connection with
recovering from any third parties amounts that the Indemnifying Party may pay or
be required to pay by way of indemnification hereunder.
ARTICLE XVI
TERMINATION
16.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date (whether before or after approval of this Agreement and the
consummation of the transactions contemplated hereby by the shareholders of
Accessity):
(a) by the mutual consent of Accessity and the Acquired
Companies;
(b) by either Accessity or any of the Acquired Companies, upon
written notice, if there has been a material misrepresentation or any breach on
the part of a party hereto in the representations, warranties or covenants
contained in this Agreement which is not cured within ten (10) business days
after such breaching party (and Accessity and the Acquired Companies) has been
notified of the intent to terminate this Agreement pursuant to this subsection
(b);
(c) by either Accessity or the Acquired Companies if the
Closing has not occurred on or before July 30, 2004 (the "Final Date");
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(d) by Accessity, upon written notice, if the shareholders of
Accessity shall not have approved the Agreement and the consummation of the
transactions contemplated hereby (including, without limitation, with respect to
the approval by the shareholders of Accessity, the appointment of the
individuals identified in subsection (d) of Section 3.2 above to the Board of
Directors of Accessity, the reincorporation of Accessity in the State of
Delaware referred to in Section 13.6 above, the sale or other disposition of the
Accessity Subsidiaries (as defined below) to Barry Siegel referred to in Section
13.13 above, the adoption of an Amended and Restated 1995 Incentive Stock Plan
of Accessity, in form and substance reasonably acceptable to the Acquired
Companies, and the adoption of a new stock option plan as referred to in Section
13.16 above, in form and substance reasonably acceptable to the Acquired
Companies) prior to the Closing Date;
(e) by Accessity, if the Board of Directors of Accessity shall
have received a Superior Proposal;
(f) by either Accessity or any of the Acquired Companies, upon
written notice, if Accessity or such Acquired Company, as the case may be, shall
have determined in good faith not to proceed with the Closing on the basis of
the results of its financial and legal due diligence investigation of the other
parties to this Agreement (including, without limitation, satisfaction with
matters related to Security Markets (as defined in Section 14.4 above) and
litigation);
(g) by either Accessity or any of the Acquired Companies, if
all the conditions for Closing shall not have been satisfied or waived on or
before the Final Date other than as a result of a breach of this Agreement by
the terminating party; or
(h) by either Accessity or any of the Acquired Companies, if a
permanent injunction or other order by any federal or state court which would
make illegal or otherwise restrain or prohibit the consummation of the Share
Exchange or the other transactions contemplated hereby shall have been issued
and shall have become final and nonappealable.
16.2 EFFECT OF TERMINATION. If this Agreement is terminated as
expressly permitted under Section 16.1, such termination shall be the sole
remedy and this Agreement shall forthwith become void (except for Section 11.2
and Section 17.3) and there shall be no liability on the part of the Acquired
Companies, the Owners, the PEI Warrantholders, or Accessity or any of their
respective Affiliates; provided, however, that if such termination shall result
from the breach by a party hereto of its obligations under this Agreement, such
party shall be fully liable for any and all damages, costs and expenses
sustained or incurred by the other parties as a result of such breach; and
provided, further, that if such termination shall result from the receipt by
Accessity of a Superior Proposal, such party shall be liable for and shall pay
to the other the termination fee provided for in Section 16.3 below. If this
Agreement is terminated without a Closing, the Acquired Companies shall return
promptly to Accessity all documents, work papers and other materials of
Accessity furnished or made available to the Owners, the PEI Warrantholders, the
Acquired Companies or their respective Advisors, and all copies thereof, and no
such information, documents, work papers or other materials received by the
Owners, the PEI Warrantholders or the Acquired Companies shall be revealed to
any third party or used for the advantage of the Owners, the PEI Warrantholders
or the Acquired Companies or any other party; and Accessity shall return
promptly to each of the Acquired Companies, respectively, all documents, work
papers and other material of the Acquired Companies furnished or made available
to Accessity or its Advisors, and all copies thereof, and no such information,
documents, work papers or other materials received by Accessity shall be
revealed to any third party or used for the advantage of Accessity or any other
party.
16.3 TERMINATION FEE. If Accessity, prior to termination of this
Agreement, receives any Superior Proposal, and this Agreement is thereafter
terminated pursuant to Section 16.1(e) above as a result of the receipt of such
Superior Proposal, then Accessity shall promptly pay to each of the Acquired
Companies the reasonable fees and expenses of each such Acquired Company
incurred by it prior to
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termination, up to a maximum of $150,000 for all of the Acquired Companies
(which, if the combined aggregate amount of such fees and expenses exceeds
$150,000 for all of the Acquired Companies, shall be allocated to each Acquired
Company based on proportion that the aggregate number of Accessity Exchange
Shares that the Owners of such Acquired Company would receive if the Share
Exchange were consummated pursuant to the terms of this Agreement bears to the
aggregate number of Accessity Exchange Shares that all of the Owners of all of
the Acquired Companies would receive if the Share Exchange were consummated
pursuant to the terms of this Agreement, provided, that if such allocation for
any Acquired Company exceeds the amount of actual fees and expenses of such
Acquired Company incurred by it prior to termination, the excess shall be
allocated to the other Acquired Companies and divided based on the relative
number of Accessity Exchange Shares that the Owners of the other Acquired
Companies would receive if the Share Exchange were consummated pursuant to the
terms of this Agreement). Notwithstanding anything to the contrary, the
foregoing termination fee, if paid in the full amount set forth above, shall
constitute liquidated damages and shall constitute the non-terminating party's
sole remedy.
ARTICLE XVII
MISCELLANEOUS PROVISIONS
17.1 PUBLIC ANNOUNCEMENTS. Upon the execution of this Agreement by all
parties, Accessity, PEI, Kinergy and Reenergy promptly will issue a joint press
release approved by Accessity and the Acquired Companies announcing the
execution of this Agreement. Thereafter, Accessity may issue such press
releases, and make such other disclosures regarding the proposed Share Exchange,
as it determines (after consultation with legal counsel and after having given
PEI, Kinergy and Reenergy and their respective legal counsel the opportunity to
review and comment on such disclosure) are required under applicable state and
federal securities laws or the rules and regulations of the NASD. Subject to the
foregoing, except as the Acquired Companies and Accessity shall authorize in
writing, the parties hereto shall not, and shall cause their respective
officers, directors, employees, Affiliates and Advisors not to, disclose any
matter or matters relating to this transaction to any person not an officer,
director, employee, Affiliate or Advisor of such party.
17.2 AMENDMENT; WAIVER. Neither this Agreement, nor any of the terms or
provisions hereof, may be amended, modified, supplemented or waived, except by a
written instrument signed by the parties hereto (or, in the case of a waiver, by
the party granting such waiver). No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver. No failure of either party hereto to insist upon strict compliance by
the other party with any obligation, covenant, agreement or condition contained
in this Agreement shall operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Whenever this Agreement requires or permits consent
by or on behalf of any party hereto, such consent shall be given in a manner
consistent with the requirements for a waiver of compliance as set forth in this
Section 17.2. For purposes of this Section 17.2, each of the PEI Shareholders
and each of the PEI Warrantholders hereby appoints Ryan Turner as his, her or
its agent and attorney-in-fact to make and execute and any all such amendments,
modifications, supplements and waivers and hereby acknowledge and agree that a
decision by Ryan Turner shall be final, binding and conclusive on such PEI
Shareholder or PEI Warrantholder, as the case may be, and that Accessity,
Kinergy, Reenergy and the other Owners may rely upon any act, decision, consent
or instruction of Ryan Turner.
17.3 FEES AND EXPENSES. Except as otherwise provided in this Agreement,
each of the parties hereto shall bear and pay its own costs and expenses
incurred in connection with the origin, preparation, negotiation, execution and
delivery of this Agreement and the agreements, instruments, documents and
transactions referred to in or contemplated by this Agreement (whether or not
such transactions are consummated) including, without limitation, any fees,
expenses or commissions of any of its Advisors, attorneys, accountants, agents,
finders or brokers. Accessity shall indemnify the Owners and the PEI
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Warrantholders against any claims of third parties for any brokerage, finder's,
agent's or similar fees or commissions in connection with the transactions
contemplated hereby insofar as such claims are alleged to be based on
arrangements or contacts made by, to or with Accessity or its Advisors or
representatives. The Acquired Companies shall indemnify Accessity against all
such claims insofar as they are alleged to be based on arrangements or contacts
made by, to or with any of the Owners, the PEI Warrantholders or the Acquired
Companies or their respective Advisors or representatives.
17.4 NOTICES.
(a) All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing (including
telefax, telegraphic, telex or cable communication) and mailed, telefaxed,
telegraphed, telexed, cabled or delivered:
(i) If to the Owners or the PEI Warrantholders, to
the respective address for each such Owner or PEI Warrantholder set forth on the
signature pages hereto.
(ii) If to PEI, to:
Pacific Ethanol, Inc.
5711 N. West Avenue
Fresno, CA 93711
Attn: Jeff Manternach
Facsimile no.: (559) 435-1478
with a copy to:
Rutan & Tucker, LLP
611 Anton Blvd., 14th Floor
Costa Mesa, California 92626
Attn: Larry A. Cerutti, Esq.
Facsimile no.: (714) 546-9035
(iii) If to Kinergy, to:
Kinergy Marketing, LLC
1260 Lake Blvd., Suite 225
Davis, CA 95616
Attn: Neil Koehler
Facsimile no.: (530) 750-3019
(iv) If to Reenergy, to:
Reenergy, LLC
225 SE 59th Avenue
Portland, OR 97215
Attn: Tom Koehler
Facsimile no.: (530) 226-7917
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(v) If to Accessity, to:
Accessity Corp.
12514 West Atlantic Blvd.
Coral Springs, FL 33071
Attn: Barry Siegel
Facsimile no.: (954) 752-6544
with a copy to:
Meritz & Muenz, LLP
Three Hughes Place
Dix Hills, NY 11746
Attn: Lawrence A. Muenz, Esq.
Facsimile no.: (631) 242-6715
(b) All notices and other communications required or permitted
under this Agreement which are addressed as provided in this Section 17.4 (i) if
delivered personally against proper receipt or by confirmed telefax or telex,
shall be effective upon delivery and (ii) if delivered (A) by certified or
registered mail with postage prepaid, or (B) by Federal Express or similar
courier service with courier fees paid by the sender upon receipt. Either party
may from time to time change its address for the purpose of notices to that
party by a similar notice specifying a new address, but no such change shall be
deemed to have been given until it is actually received by the party sought to
be charged with its contents.
17.5 ASSIGNMENT. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder may be assigned by any party
hereto without the prior written consent of the other parties; provided,
however, that Accessity may assign its rights and obligations under this
Agreement to any entity who by merger, consolidation, purchase or sale
subsequently becomes an Affiliate without the prior consent of the Owners or any
of the Acquired Companies. Any assignment which contravenes this Section 17.5
shall be void ab initio.
17.6 GOVERNING LAW. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with (i) with
respect to matters arising prior to the Closing Date, the internal laws of the
State of New York, without giving effect to the conflicts of laws principles
thereof, and (ii) with respect to matters arising on and after the Closing Date,
the internal laws of the State of Delaware, without giving effect to the
conflicts of laws principles thereof.
17.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument. This Agreement will
become binding when one or more counterparts hereof, individually or taken
together, will bear the signatures of all the parties reflected hereon as
signatories.
17.8 HEADINGS. The headings contained in this Agreement are for
convenience of reference only and shall not constitute a part hereof or define,
limit or otherwise affect the meaning of any of the terms or provisions hereof.
17.9 ENTIRE AGREEMENT. This Agreement (which defined term includes the
Schedules and Exhibits to this Agreement) embodies the entire agreement and
understanding among the parties hereto with respect to the subject matter of
this Agreement and supersedes all prior agreements, commitments, arrangements,
negotiations or understandings, whether oral or written, between the parties
with respect thereto. There are no agreements, covenants, undertakings,
representations or warranties with respect to
A-61
the subject matter of this Agreement other than those expressly set forth or
referred to herein. This is an integrated agreement.
17.10 SEVERABILITY. Each term and provision of this Agreement
constitutes a separate and distinct undertaking, covenant, term and/or provision
hereof. In the event that any term or provision of this Agreement shall be
determined to be unenforceable, invalid or illegal in any respect, such
unenforceability, invalidity or illegality shall not affect any other term or
provision of this Agreement, but this Agreement shall be construed as if such
unenforceable, invalid or illegal term or provision had never been contained
herein. Moreover, if any term or provision of this Agreement shall for any
reason be held to be excessively broad as to time, duration, activity or
subject, it shall be construed, by limiting and reducing it, so as to be
enforceable to the extent permitted under applicable law as it shall then exist.
17.11 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy will not preclude the exercise of any other.
17.12 ABSENCE OF THIRD PARTY RIGHTS. No provisions of this Agreement
are intended, nor will be interpreted, to provide or create any third party
beneficiary rights or any other rights of any kind in any client, customer,
Affiliate, shareholders, or partner of any party hereto or any other person or
entity unless specifically provided otherwise herein, and, except as so
provided, all provisions hereof will be personal solely between the parties to
this Agreement.
17.13 CONSTRUCTION OF AGREEMENT. The Agreement has been negotiated by
the respective parties hereto and their attorneys and the language hereof will
not be construed for or against either party. A reference to a Section or an
Exhibit will mean a Section in, or Exhibit to, this Agreement unless otherwise
explicitly set forth herein.
17.14 ATTORNEYS' FEES. In the event that any action or proceeding is
commenced by any party hereto for the purpose of enforcing any provision of this
Agreement, the parties to such action or proceeding may receive as part of any
award, judgment, decision or other resolution of such action or proceeding their
costs and reasonable attorneys' fees as determined by the person or body making
such award, judgment, decision or resolution. Should any claim hereunder be
settled short of the commencement of any such action or proceeding, the parties
in such settlement shall be entitled to include as part of the damages alleged
to have been incurred reasonable costs of attorneys or other professionals in
investigation or counseling on such claim.
17.15 NO JOINT VENTURE. Nothing contained in this Agreement will be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. Except to the extent provided in Article XVI and Section
17.2 above and Section 17.16 below, no party is by virtue of this Agreement
authorized as an agent, employee or legal representative of any other party and
no party will have the power or authority to control the activities and
operations of any other or to bind or commit any other. The status of the
parties hereto is, and at all times will continue to be, that of independent
contractors with respect to each other.
17.16 FURTHER ASSURANCES. On and after the Closing Date, the Owners
shall take such other steps and actions as may be necessary to put Accessity in
actual possession and operating control of PEI, Kinergy and Reenergy as may be
reasonably requested by Accessity. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
[SIGNATURES CONTAINED ON THE FOLLOWING PAGES]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
"ACCESSITY": ACCESSITY CORP.
By: /S/ BARRY SIEGEL
------------------------
Print Name: Barry Siegel
----------------------
Title: Chairman and Chief Executive Officer
------------------------------------
"ACQUIRED COMPANIES": PACIFIC ETHANOL, INC.
By: /S/ RYAN TURNER
-----------------------
Print Name: Ryan Turner
------------------------
Title: Chief Operating Officer
-----------------------------
KINERGY MARKETING, LLC
By: /S/ NEIL M. KOEHLER
-------------------------
Print Name: Neil M. Koehler
----------------------
Title: President
----------------
REENERGY, LLC
By: /S/ FRANK L. LINDBLOOM
----------------------------
Print Name: Frank L. Lindbloom
------------------------
Title: Member/Owner
---------------------
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PEI SHAREHOLDER
SIGNATURE PAGE
TO
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
By:________________________
Name:______________________
Title:_____________________
Name of PEI Shareholder
(if other than individual):
___________________________
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PEI WARRANTHOLDER
SIGNATURE PAGE
TO
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
By:________________________
Name:______________________
Title:_____________________
Name of PEI Warrantholder
(if other than individual):
___________________________
A-65
KINERGY MEMBER
SIGNATURE PAGE
TO
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
______________________________
Neil Koehler
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REENERGY MEMBER
SIGNATURE PAGE
TO
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
By:_________________________
Name:_______________________
Title:______________________
Name of Reenergy Member (if
other than individual):
____________________________
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EXHIBIT A
Exchange Ratios
PEI Exchange Ratio:
1.0 (1-to-1)
Kinergy Exchange Ratio:
18,750 (18,750 shares per 1% Kinergy Interest)
Reenergy Exchange Ratio:
21,250 (21,250 shares per 1% Reenergy Interest)
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EXHIBIT B
PEI Shareholders and Accessity Exchange Shares to be Received
-------------------------------------------------------------
No. of Shares of No. of Accessity
Name of Shareholder PEI Stock Owned Exchange Shares
------------------- --------------- ---------------
William Jones 4,800,000 4,800,000
SC Fuels, Inc. 1,500,000 1,500,000
Ryan Turner 1,243,333 1,243,333
Jeannine Campos 6,667 6,667
Tony Campos 100,000 100,000
Cagan McAfee Capital Partners, LLC 1,000,000 1,000,000
Andrea Jones 1,350,000 1,350,000
Bradley Rotter 66,666.67 66,667
Turner Family Trust 20,000 20,000
Clark and Patti Abramson 20,000 20,000
Rogene Scott Turner, as Trustee for 3,000 3,000
the Rogene Scott Turner Trust dated
9/10/91
W. Denman Zirkle 126,666 126,666
Luise Bettina Zirkle Garcia 16,667 16,667
Sigrid Anne Zirkle Carroll 16,667 16,667
William Wade Zirkle 16,667 16,667
Anne Pendleton Zirkle 3,333 3,333
Janet Dumper 5,000 5,000
Robert Dumper 5,000 5,000
Joseph Childrey 40,000 40,000
Micaela Zirkle Shaugnesy 20,000 20,000
Illiquid Assets Trust, FBO Peter H. 16,666.67 16,667
Koehler (Jon W. Nickel, Trustee)
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No. of Shares of No. of Accessity
Name of Shareholder PEI Stock Owned Exchange Shares
------------------- --------------- ---------------
Roger Manternach 16,666.67 16,667
Barry Fay 35,000 35,000
James and Bernice Campbell 2,000 2,000
John Burke 5,000 5,000
McDonald Investments, Inc., FBO 10,000 10,000
Michael Frangopoulos
Samuel Kozasky 2,000 2,000
Dermot Fallon 8,000 8,000
James Burkdoll 4,000 4,000
Howard Kaplan 10,000 10,000
Jay Scott 8,000 8,000
Gregg Mullery 10,000 10,000
Richard DeSousa 4,000 4,000
R. V. Edwards, Jr. 17,000 17,000
Louis Lyras 7,000 7,000
John and Anne Fallon 8,000 8,000
Venkata Kollipara (as Custodian for 10,000 10,000
Priya Kollipara)
Venkata Kollipara (as Custodian for 10,000 10,000
Puneet Kollipara)
Robert and Rosalie Dettle Living 10,000 10,000
Trust (Robert E. Dettle, Trustee)
Michael Kemp 14,000 14,000
Daniel Yates 10,000 10,000
Alex and Lisa Jachno 10,000 10,000
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No. of Shares of No. of Accessity
Name of Shareholder PEI Stock Owned Exchange Shares
------------------- --------------- ---------------
Barbara LaCosse 3,400 3,400
Lakshmana Madala 13,400 13,400
Edward Muransky 7,000 7,000
Alex and Luba Jachno 2,000 2,000
Katharine Moore 7,000 7,000
Armen Arzoomanian 10,000 10,000
David DeSilva 35,000 35,000
Steve Elefter 4,000 4,000
Tom McFaul 3,400 3,400
Elizabeth Reed 17,000 17,000
Venkata Kollipara 10,000 10,000
Kennon White 7,000 7,000
Teixeira Investments, L.P. 34,000 34,000
David Jessen 4,000 4,000
Henry Mauz 8,000 8,000
Lyles Diversified, Inc. 1,000,000 1,000,000
Linden Growth Partners 250,000 250,000
Dan Hollis 250,000 250,000
TOTAL 12,252,200 12,252,200
========== ==========
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PEI Warrantholders and Warrants to Acquire Accessity Common Stock
-----------------------------------------------------------------
No. of Shares Subject to Exercise Price
Name of PE Warrantholder Accessity Replacement Warrants per Share
------------------------ ------------------------------ ---------
Cagan-McAfee Capital Partners 14,167 $1.50
Prima Capital Group, Inc. 28,320 $1.50
Frank Siefert 1,000 $1.50
Cagan-McAfee Capital Partners 50,000 $2.00
Jeffrey Manternach 25,000 $0.01
Liviakis Group 1,150,000 $0.0001
--------- -------
1,268,487 $ .0001 - $2.00
========= ===============
Convertible Debt
----------------
Lyles Diversified, Inc.* 1,000,000* 1,000,000*
---------- ----------
* Lyles Diversified, Inc. ("LDI") may receive up to 1,000,000 shares of PEI
Stock pursuant to the conversion of a portion of the currently outstanding debt
owed by PEI to LDI, which conversion is at the option of LDI. Accordingly, the
number of Accessity Exchange Shares to be received by LDI shall be equal to the
product of (i) the number of shares of PEI Stock received upon conversion (at a
conversion rate of $1.50 per share) of such portion of such debt, multiplied by
(ii) the PEI Exchange Ratio. The parties acknowledge and agree that Accessity
Exchange Shares will be directly issued to LDI (without any preceding issuance
of shares of PEI Stock) if such conversion occurs after the Closing Date.
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EXHIBIT C
Kinergy Members and Accessity Exchange Shares to be Received
------------------------------------------------------------
Kinergy No. of Accessity
Name of Member Percentage Interest Exchange Shares
-------------- ------------------- ---------------
Neil Koehler 100% 1,875,000
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EXHIBIT D
Reenergy Members and Accessity Exchange Shares to be Received
-------------------------------------------------------------
Reenergy No. of Accessity
Name of Member Percentage Interest Exchange Shares
-------------- ------------------- ---------------
Kinergy Resources, LLC 23.5% 499,375
Kent Kaulfuss 23.5% 499,375
Flin-Mac, Inc. 23.5% 499,375
Tom Koehler 29.5% 626,875
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EXHIBIT E
Form of Spousal Consent
-----------------------
The undersigned, as the spouse of __________________, hereby signs and
consents to the foregoing "Share Exchange Agreement" for the purpose of binding
and consenting to the commitment of the marital community property of
_____________________ and the undersigned as assets available for the
satisfaction of the undersigned's obligations under the foregoing "Share
Exchange Agreement" and any other documents, agreements or instruments
referenced therein, and for the purpose of acknowledging and agreeing that (i)
no consent of the undersigned shall be required for any future modification of
the foregoing "Share Exchange Agreement" or any other document, agreement or
instrument referenced therein, and (ii) any community property of
____________________ and the undersigned which shall hereafter be transmuted
into separate property of the undersigned shall be available for satisfaction of
obligations under the foregoing "Share Exchange Agreement" and any other
documents, agreements or instruments referenced therein.
By:______________________________________
(Signature)
Name:____________________________________
(Please print)
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AMENDMENT NO. 1 TO SHARE EXCHANGE AGREEMENT
THIS AMENDMENT NO. 1 TO SHARE EXCHANGE AGREEMENT (this "Amendment") is
made and entered into as of July 29, 2004, by and among Accessity Corp., a New
York corporation ("Accessity"); Pacific Ethanol, Inc., a California corporation
("PEI"); Kinergy Marketing, LLC, an Oregon limited liability company
("Kinergy"); Reenergy, LLC, a California limited liability company ("Reenergy,"
and together with PEI and Kinergy, the "Acquired Companies"); each of the
shareholders of PEI identified on the signature pages hereof (collectively, the
"PEI Shareholders"); each of the holders of options or warrants to acquire
shares of common stock of PEI identified on the signature pages hereof
(collectively, the "PEI Warrantholders"); each of the limited liability company
members of Kinergy identified on the signature pages hereof (collectively, the
"Kinergy Members"); each of the limited liability company members of Reenergy
identified on the signature pages hereof (collectively, the "Reenergy Members").
WHEREAS, Accessity, PEI, Kinergy, and Reenergy have executed a Share
Exchange Agreement dated as of May 14, 2004 (the "Exchange Agreement"); and
WHEREAS, Accessity, PEI, Kinergy and Reenergy desire to amend certain
provisions of the Share Exchange Agreement.
NOW THEREFORE, in consideration of the foregoing premises and the
respective promises and agreements of the parties set forth herein, the parties
hereto agree as follows:
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings ascribed thereto in the Exchange
Agreement.
2. AMENDMENTS.
(a) Section 2.5 of the Exchange Agreement is hereby amended by deleting
in its entirety the next-to-last sentence of said Section 2.5 which reads: "The
parties shall not take a position on any tax return inconsistent with this
Section 2.5." and inserting in its place the following new next-to-last sentence
of Section 2.5 which shall read in its entirety as follows:
"The parties shall not take a position on any tax return inconsistent
with this Section 2.5 and shall not take any action or omit to take any
action which will or which could reasonably be expected to result in
the disqualification of the Share Exchange as part of a unified plan
for the exchange of stock entitled to non-recognition treatment under
Section 351 of the Code."
(b) Section 4.8 of the Exchange Agreement is hereby amended by
inserting the phrase "Except as set forth on Schedule 4.8," at the beginning of
Section 4.8.
(c) Section 6.8 of the Exchange Agreement is hereby amended by
inserting the word "no" before the word "Actions" in the first line of said
Section 6.8, so that the first portion of the first sentence of Section 6.8 up
to the first comma therein reads:
"There are no Actions to which Kinergy is a party, ...."
(d) Section 8.8 of the Exchange Agreement is hereby amended by
inserting the word "no" before the word "Actions" in the first line of said
Section 8.8, so that the first portion of the first sentence of Section 8.8 up
to the first comma therein reads:
"There are no Actions to which Reenergy is a party, ...."
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(e) Section 11.11 of the Exchange Agreement is hereby amended by
deleting the period at the end of Section 11.11 and adding the following
additional language at the end of Section 11.11 as so modified:
"; provided, that, in lieu of preparing (pursuant to Section 11.7
above) and distributing the Owner Disclosure Document, the documents
required to be furnished pursuant to Rule 502(b)(ii) of Regulation D
promulgated under the rules and regulations of the Securities Act of
1933, as amended, may instead be distributed."
(f) Subsection (a) of Section 3.2 of the Exchange Agreement is hereby
amended by deleting said subsection in its entirety and inserting in its place
the following new subsection (a) of Section 3.2, which shall read in its
entirety as follows:
"(a)to each PEI Warrantholder, an Accessity Replacement Warrant
evidencing such PEI Warrantholder's right to acquire the number of
shares of Accessity Common Stock set forth opposite his or her name as
set forth on Exhibit B and otherwise providing for the same terms and
conditions as provided for in the PEI Warrants of such PEI
Warrantholder; and, if the transfer agent is able to provide such stock
certificates by the Closing Date or, if not, as soon as the transfer
agent is able to provide such stock certificates after the Closing
Date, to each PEI Shareholder, a stock certificate evidencing his or
her ownership of the number of Accessity Exchange Shares set forth
opposite his or her name as set forth on Exhibit B; to each Kinergy
Member, a stock certificate evidencing his or her ownership of the
number of Accessity Exchange Shares set forth opposite his or her name
as set forth on Exhibit C; and to each Reenergy Member, a stock
certificate evidencing his or her ownership of the number of Accessity
Exchange Shares set forth opposite his or her name as set forth on
Exhibit D;"
(g) Subsection (c) of Section 16.1 of the Exchange Agreement is hereby
amended by deleting said subsection in its entirety and inserting in its place
the following new subsection (c), which shall read in its entirety as follows:
"(c) by either Accessity or the Acquired Companies if the
Closing has not occurred on or before October 29, 2004 (the "Final
Date");"
(h) Section 16.1 of the Exchange Agreement is hereby further amended by
deleting the word "or" set forth at the end of subsection (g) of Section 16.1,
by deleting the period and inserting the word "; or" at the end of subsection
(h) of Section 16.1, and by adding a new subsection (i) to Section 16.1 which
shall read in its entirety as follows:
"(i) by either Accessity or any of the Acquired Companies, if
holders of one percent (1%) or more of the common stock of Accessity
exercise their dissenters' rights in connection with the proposed
reincorporation of Accessity in the State of Delaware as contemplated
by Section 13.6 above."
(i) Exhibit B to the Exchange Agreement is hereby amended by deleting
the information in the last row of the table entitled "PEI Shareholders and
Accessity Exchange Shares to be Received" on Exhibit B that reads: "Dan Hollis
250,000 250,000" and inserting in its place the following new information:
A-77
"Barry Uphoff 12,500 12,500
Andrew Hoffman 25,000 25,000
Stephen George 12,500 12,500
Bradley Rotter 150,000 150,000
Michael Peterson 37,500 37,500
James George 12,500 12,500"
(j) Exhibit B to the Exchange Agreement is hereby further amended by
deleting the name "Liviakis Group" set forth immediately above the TOTAL line in
the table entitled "PEI Warrantholders and Warrants to Acquire Accessity Common
Stock" on Exhibit B and inserting in its place the name "Liviakis Financial
Communications, Inc."
(k) Section 4.2 of the Exchange Agreement is hereby amended by deleting
the number "20,000,000" and replacing it with "30,000,000".
3. MISCELLANEOUS. Except as modified and amended pursuant to this
Amendment, the Exchange Agreement shall remain in full force and effect. This
Amendment may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument. This Amendment will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
all the parties reflected hereon as signatories.
[SIGNATURES CONTAINED ON THE FOLLOWING PAGE]
A-78
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
"ACCESSITY": ACCESSITY CORP.
By: /S/ BARRY SIEGEL
---------------------------------
Barry Siegel, Chairman and CEO
"ACQUIRED COMPANIES": PACIFIC ETHANOL, INC.
By: /S/ RYAN TURNER
---------------------------------
Ryan Turner, Director and COO
KINERGY MARKETING, LLC
By: /S/ NEIL M. KOEHLER
---------------------------------
Neil M. Koehler, President
REENERGY, LLC
By: /S/ FRANK L. LINDBLOOM
---------------------------------
Frank R. Lindbloom, Member/Owner
A-79
PEI SHAREHOLDER AND PEI WARRANTHOLDER
SIGNATURE PAGE
TO
AMENDMENT NO. 1 TO
SHARE EXCHANGE AGREEMENT
Pursuant to the authority granted to the undersigned in Section 17.2 of
the Exchange Agreement, by execution of this Amendment below by the undersigned,
the PEI Shareholders and PEI Warrantholders have executed this Amendment as of
the day and year first above written.
By: ______________________
Ryan Turner,
Attorney-in-Fact
A-80
KINERGY MEMBER
SIGNATURE PAGE
TO
AMENDMENT NO. 1 TO
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
______________________________
Neil M. Koehler
A-81
REENERGY MEMBER
SIGNATURE PAGE
TO
AMENDMENT NO. 1 TO
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
KINERGY RESOURCES, LLC
By: _______________________________
Neil M. Koehler, Member
FLIN-MAC, INC.
By: _______________________________
Frank R. Lindbloom, President
___________________________
Kent Kaulfuss
___________________________
Tom Koehler
A-82
AMENDMENT NO. 2 TO SHARE EXCHANGE AGREEMENT
THIS AMENDMENT NO. 2 TO SHARE EXCHANGE AGREEMENT (this "Amendment") is
made and entered into as of October 1, 2004, by and among Accessity Corp., a New
York corporation ("Accessity"); Pacific Ethanol, Inc., a California corporation
("PEI"); Kinergy Marketing, LLC, an Oregon limited liability company
("Kinergy"); ReEnergy, LLC, a California limited liability company ("ReEnergy,"
and together with PEI and Kinergy, the "Acquired Companies"); each of the
shareholders of PEI (collectively, the "PEI Shareholders"); each of the holders
of options or warrants to acquire shares of common stock of PEI (collectively,
the "PEI Warrantholders"); each of the limited liability company members of
Kinergy identified on the signature pages hereof (collectively, the "Kinergy
Members"); each of the limited liability company members of ReEnergy identified
on the signature pages hereof (collectively, the "ReEnergy Members").
WHEREAS, Accessity, PEI, Kinergy, and ReEnergy have executed a Share
Exchange Agreement dated as of May 14, 2004, as amended by that certain
Amendment No. 1 to Share Exchange Agreement dated as of July 29, 2004 (as so
amended, the "Exchange Agreement"); and
WHEREAS, Accessity, PEI, Kinergy and ReEnergy desire to amend certain
provisions of the Share Exchange Agreement.
NOW THEREFORE, in consideration of the foregoing premises and the
respective promises and agreements of the parties set forth herein, the parties
hereto agree as follows:
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings ascribed thereto in the
Exchange Agreement.
2. AMENDMENTS.
(a) Section 2.3 of the Exchange Agreement is hereby amended by
replacing the reference to "1,875,000 Accessity Exchange Shares" with "3,875,000
Accessity Exchange Shares."
(b) Section 2.4 of the Exchange Agreement is hereby amended by
replacing the reference to "21,250 Accessity Exchange Shares" with "1,250
Accessity Exchange Shares."
(c) Section 3.2(d) of the Exchange Agreement is hereby amended by
deleting said Section 3.2(d) in its entirety and inserting in its place the
following new Section 3.2(d) which shall read in its entirety as follows:
"(d) the written resignations of each of the current directors
of Accessity other than Kenneth J. Friedman (Barry Siegel and Bruce S.
Udell), dated as of the Closing Date, in form and substance reasonably
acceptable to each of PEI, Kinergy and ReEnergy (and Kenneth J.
Friedman shall thereafter remain as a Class II director (thereby
holding such board seat until the annual meeting of Accessity
shareholders to be held in the fourth calendar quarter of 2005) and
shall confirm said resignations and appoint Neil M. Koehler and William
Lyles as Class I directors of Accessity, John Pimentel as a Class II
director of Accessity and Ryan Turner and Frank P. Greinke as Class III
directors of Accessity to fill the vacant director positions and serve
as directors of Accessity upon and after the Closing);"
(d) Section 4.2 of the Exchange Agreement is hereby amended by deleting
the number "12,252,200" appearing in the fourth line of said section and
inserting in its place the number "13,332,200."
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(e) Clause (xi) of Section 11.4(a) of the Exchange Agreement is hereby
amended by adding the following additional language at the end of clause (xi) as
so modified:
",provided, however, that PEI may issue shares of its common
stock in a private placement transaction provided that in connection
with such private placement transaction all but $500,000 of the
offering proceeds must be held in an escrow account and not released
until on or after the Closing Date;"
(f) Section 11.5 of the Exchange Agreement is hereby amended by
deleting said Section 11.5 in its entirety and inserting in its place the
following new Section 11.5 which shall read in its entirety as follows:
"11.5 ACCESSITY ANNUAL SHAREHOLDERS' MEETING. Accessity shall,
in accordance with its articles of incorporation and bylaws and the
applicable requirements of New York law, call and hold an annual
meeting of its shareholders as promptly as practicable for the purpose
of permitting them to consider and to vote upon and approve the Share
Exchange and the transactions contemplated by this Agreement, the
reincorporation of Accessity in the State of Delaware referred to in
Section 13.6 below, the Subsidiary Transfer and the Subsidiary Sale
referred to in Section 13.11 below, and the adoption of a new stock
option plan referred to in Section 13.16 below, in form and substance
reasonably acceptable to the Acquired Companies) (the "Accessity Annual
Shareholders' Meeting"). As soon as permissible under all applicable
Legal Requirements, Accessity shall cause a copy of the Proxy Statement
(as defined in Section 11.6 below) to be delivered to each shareholder
of Accessity who is entitled to vote on such matter under its articles
of incorporation and bylaws and the applicable requirements of New York
law."
(g) Section 12.9 of the Exchange Agreement is hereby amended by
deleting said Section 12.9 in its entirety and inserting in its place the
following new Section 12.9 which shall read in its entirety as follows:
"12.9 CONSULTING AND NONCOMPETITION AGREEMENTS. Accessity shall
have entered into a consulting and noncompetition agreement with Barry
Siegel in regard to advisory services to be rendered by Mr. Siegel, in
form and substance mutually acceptable to the Acquired Companies,
Accessity and Barry Siegel (the "Siegel Consulting and Noncompetition
Agreement"). The Siegel Consulting and Noncompetition Agreement shall
include payment to Barry Siegel on the Closing Date of compensation (a)
in the form of the number of shares of Common Stock of Accessity equal
to the excess, if any, of 400,000 shares of the Common Stock of
Accessity over the number of shares of Siegel Common Stock determined
in accordance with Section 13.11 of this Agreement and (b) allocated
between compensation for consulting services and a covenant not to
compete, each in such amounts as shall be mutually acceptable to the
Acquired Companies, Accessity and Barry Siegel. Accessity shall also
have entered into a consulting and noncompetition agreement with Philip
Kart in regard to advisory services to be rendered by Mr. Kart, in form
and substance mutually acceptable to the Acquired Companies, Accessity
and Philip Kart (the "Kart Consulting and Noncompetition Agreement").
The Kart Consulting and Noncompetition Agreement shall include payment
to Philip Kart on the Closing Date of compensation (a) in the amount of
200,000 shares of the Common Stock of Accessity and (b) allocated
between compensation for consulting services and a covenant not to
compete, in such amounts as shall be mutually acceptable to the
Acquired Companies, Accessity and Philip Kart."
A-84
(h) Section 12.13 of the Exchange Agreement is hereby amended by
deleting said Section 12.13 in its entirety and inserting in its place the
following new Section 12.13 which shall read in its entirety as follows: :
"12.13 APPROVAL BY ACCESSITY SHAREHOLDERS. The shareholders of
Accessity shall have approved the execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated
hereby (including, without limitation, the reincorporation of Accessity
in the State of Delaware referred to in Section 13.6 below, the
Subsidiary Transfer and the Subsidiary Sale referred to in Section
13.11 below, and the adoption of a new stock option plan referred to in
Section 13.16 below, in form and substance reasonably acceptable to the
Acquired Companies)). "
(i) Section 12.14 of the Exchange Agreement is hereby amended by
deleting the number "18,800,000" appearing in the fourth line of said section
and inserting in its place the number "21,700,000."
(j) Section 12.16 of the Exchange Agreement is hereby amended by
deleting said Section 12.16 in its entirety and inserting in its place the
following new Section 12.16 which shall read in its entirety as follows: :
"12.16 FAIRNESS OPINION. Accessity shall have received a
fairness opinion regarding the Subsidiary Transfer referred to in
Section 13.11 below. "
(k) Article XII of the Exchange Agreement is hereby amended by adding
at the end thereof a new Section 12.17 which shall read in its entirety as
follows:
"12.17 RECEIPT OF ADDITIONAL EQUITY CAPITAL BY PEI. PEI shall
have raised an additional $7.0 million in equity capital pursuant to
the private placement of securities of PEI between October 1, 2004 and
the Closing Date (which securities shall also be exchanged for
securities of Accessity pursuant to the Share Exchange, subject to the
other terms and conditions set forth in this Agreement)."
(l) Article XII of the Exchange Agreement is hereby amended by adding
at the end thereof a new Section 12.18 which shall read in its entirety as
follows:
"12.18 NONCOMPETITION AND NONSOLICITATION AGREEMENTS. Each of
Neil M. Koehler, William Jones, Andrea Jones, Ryan Turner and Tom
Koehler shall have entered into a Noncompetition and Nonsolicitation
Agreement with Accessity in a form mutually agreeable to the parties."
(m) Section 13.4 of the Exchange Agreement is hereby amended by
deleting said Section 13.4 in its entirety and inserting in its place the
following new Section 13.4 which shall read in its entirety as follows:
"13.4 APPROVAL BY ACCESSITY SHAREHOLDERS. The shareholders of
Accessity shall have approved the execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated
hereby (including, without limitation, the reincorporation of Accessity
in the State of Delaware referred to in Section 13.6 below, the
Subsidiary Transfer and the Subsidiary Sale referred to in Section
13.11 below, and the adoption of a new stock option plan referred to in
Section 13.16 below, in form and substance reasonably acceptable to the
Acquired Companies)). "
A-85
(n) Section 13.10 of the Exchange Agreement is hereby amended by
deleting said Section 13.10 in its entirety and inserting in its place the
following new Section 13.10 which shall read in its entirety as follows: :
"13.10 LIMITATION OF OUTSTANDING CAPITAL STOCK. As of the
Closing Date, without giving effect to the transactions contemplated
hereby, Accessity shall have no more than 2,800,000 of capital stock
issued and outstanding on a fully-diluted basis (including shares of
capital stock issuable upon exercise of any and all options, calls,
warrants, claims and any other rights to acquire shares of capital
stock of Accessity, whether accrued or contingent, other than an
aggregate of 600,000 shares of common stock of Accessity to be issued
and beneficially owned by Barry Siegel and Philip Kart)."
(o) Section 13.11 of the Exchange Agreement is hereby amended by
deleting said Section 13.11 in its entirety and inserting in its place the
following new Section 13.11 which shall read in its entirety as follows: :
A-86
"13.11 SUBSIDIARY TRANSFER, SUBSIDIARY SALE AND WAIVER OF
CHANGE OF CONTROL PROVISIONS BY BARRY SIEGEL AND PHILIP KART.. Prior to
Closing, Accessity shall have (a) transferred its subsidiary
DriverShield CRM Corp., a Delaware corporation, to Barry Siegel
pursuant to a written agreement between Accessity and Barry Siegel, in
form and substance reasonably satisfactory to PEI, Kinergy and ReEnergy
(the "Subsidiary Transfer"), and sold its other subsidiary, Sentaur
Corp., a Florida corporation, to Barry Siegel pursuant to a written
agreement between Accessity and Barry Siegel, in form and substance
reasonably satisfactory to PEI, Kinergy and ReEnergy (the "Subsidiary
Sale"), and (b) issued a certain number of shares of Common Stock of
Accessity (the "Siegel Common Stock"), not to exceed 400,000 shares, in
consideration of the waiver by Barry Siegel of the change in control
provisions set forth in the employment agreement between Accessity and
Barry Siegel that expires on December 31, 2004, as the same would be
applicable to the consummation of the transactions contemplated by this
Agreement (including, but not limited to, the provisions that require
Accessity to pay to Barry Siegel (i) a severance payment of 300% of his
average annual salary for the past five years, less $100; (ii) the cash
value of his outstanding but unexercised stock options; and (iii) for
any and all other perquisites in the event that he is terminated for
various reasons specified in such agreement following a change of
control (as defined in such agreement)). The number of shares of Siegel
Common Stock to be issued shall be such number, which shall not exceed
400,000 shares of Common Stock of Accessity, as shall be equal to a
fraction, the numerator of which is the excess of the value of the
waived severance payment over the fair market value of DriverShield CRM
Corp. determined as of the Closing Date, and the denominator of which
is the closing price per share of the Common Stock of Accessity on the
business day before the Closing Date. Without in any way limiting the
foregoing, as part of the Subsidiary Sale, until the landlord of the
present Accessity headquarters in Coral Springs, Florida sells the
building, Mr. Siegel or an entity owned or controlled by Mr. Siegel
(which may include Sentaur) with the consent of the lessor under the
existing lease agreement for such facilities, on terms and conditions
reasonably satisfactory to the Acquired Companies, will contribute the
sum of $3,500 toward the monthly rent obligation; provided, however,
that once the Acquired Companies have made lease payments of $50,000
under the lease, Mr. Siegel shall make all lease payment until the
building is sold. The parties acknowledge and agree that the personal
property at the facilities of Accessity located in Coral Springs,
Florida shall also be transferred to Barry Siegel or an entity owned or
controlled by Barry Siegel (which may be Sentaur Corp.) and Accessity
shall pay Barry Siegel or Sentaur Corp. $20,000 for moving expenses.
Prior to Closing, Accessity shall also have obtained from Philip Kart,
in consideration for the execution and delivery by Accessity of the
Kart Consulting and Non-Competition Agreement described in Section 12.9
of this Agreement, the waiver by Philip Kart of the change in control
provisions set forth in the employment agreement between Accessity and
Philip Kart that expires on December 31, 2004, as the same would be
applicable to the consummation of the transactions contemplated by this
Agreement (including, but not limited to, the provisions that require
Accessity to pay to Philip Kart (i) a severance payment of 100% of his
annual salary on a date specified in such agreement; (ii) the cash
value of his outstanding but unexercised stock options; and (iii) for
any and all other perquisites in the event that he is terminated for
various reasons specified in such agreement following a change of
control (as defined in such agreement)). Immediately prior to the
Closing, Accessity shall file with the SEC a Form S-8 covering the
Siegel Common Stock and the 200,000 shares of the Common Stock of
Accessity issuable to Philip Kart pursuant to Section 12.9."
(p) Section 13.17 of the Exchange Agreement is hereby amended by
deleting said Section 13.17 in its entirety and inserting in its place the
following: "[Intentionally omitted]."
A-87
(q) Section 14.6 of the Exchange Agreement is hereby amended by
deleting said Section 14.6 in its entirety and inserting in its place the
following: "[Intentionally omitted]."
(r) Subsection (b) of Section 14.7 of the Exchange Agreement is hereby
amended by deleting said subsection (b) in its entirety and inserting in its
place the following: "(b) [Intentionally omitted]."
(s) Subsections (c) and (d) of Section 16.1 of the Exchange Agreement
are hereby amended by deleting said subsections in their entirety and inserting
in their place the following new subsections (c) and (d), which shall read in
their entirety as follows:
"(c) by either Accessity or the Acquired Companies if the
Closing has not occurred on or before January 7, 2005 (the "Final
Date");
(d) by Accessity, upon written notice, if the shareholders of
Accessity shall not have approved the Agreement and the consummation of
the transactions contemplated hereby (including, without limitation,
with respect to the approval by the shareholders of Accessity, the
appointment of the individuals identified in subsection (d) of Section
3.2 above to the Board of Directors of Accessity, the reincorporation
of Accessity in the State of Delaware referred to in Section 13.6
above, the Subsidiary Transfer and the Subsidiary Sale referred to in
Section 13.11 above, the adoption of a new stock option plan as
referred to in Section 13.16 above, in form and substance reasonably
acceptable to the Acquired Companies) prior to the Closing Date;"
(t) The Exchange Agreement is hereby amended to replace all references
to "Reenergy" with "ReEnergy."
(u) Exhibit A to the Exchange Agreement is hereby amended by deleting
each reference to "18,750" and "21,250" and replacing each with "38,750" and
"1,250," respectively.
(v) Exhibit B to the Exchange Agreement is hereby amended by deleting
the row of the table entitled "PEI Shareholders and Accessity Exchange Shares to
be Received" on Exhibit B that reads: "Lyles Diversified, Inc. 1,000,000
1,000,000" and inserting in its place the following new information:
"Lyles Diversified, Inc. 1,160,000 1,160,000"
(w) Exhibit B to the Exchange Agreement is hereby amended by deleting
the last row of the table entitled "PEI Shareholders and Accessity Exchange
Shares to be Received" on Exhibit B that reads:
"TOTAL 12,252,200 12,252,200" and inserting in its place the following new
========== ==========
information:
"Liviakis Financial Communications, Inc. 920,000 920,000
TOTAL 13,332,200 13,332,200"
========== ==========
(x) Exhibit B to the Exchange Agreement is hereby further amended by
deleting the table entitled name "PEI Warrantholders and Warrants to Acquire
Accessity Common Stock" in its entirety and replacing said table with the
following new table which shall read in its entirety as follows:
A-88
PEI Warrantholders and Warrants to Acquire Accessity Common Stock
-----------------------------------------------------------------
No. of Shares Subject to Exercise Price
Name of PE Warrantholder Accessity Replacement Warrants per Share
Cagan-McAfee Capital Partners 14,167 $1.50
Prima Capital Group, Inc. 28,320 $1.50
Frank Siefert 1,000 $1.50
Cagan-McAfee Capital Partners 50,000 $2.00
Jeffrey Manternach 25,000 $0.01
Liviakis Financial Communications 230,000 $0.0001
------- -------
348,487 $0.0001 - $2.00
======= ---------------
(y) Exhibit B to the Exchange Agreement is hereby further amended by
deleting the table entitled name "Convertible Debt" in its entirety and
replacing said table with the following new table which shall read in its
entirety as follows:
"Convertible Debt
-----------------
Lyles Diversified, Inc.* 840,000* 840,000*
------- -------
-------------
* Lyles Diversified, Inc. ("LDI") may receive up to 840,000 shares of
PEI Stock pursuant to the conversion of a portion of the currently
outstanding debt owed by PEI to LDI, which conversion is at the option
of LDI. Accordingly, the number of Accessity Exchange Shares to be
received by LDI shall be equal to the product of (i) the number of
shares of PEI Stock received upon conversion (at a conversion rate of
$1.50 per share) of such portion of such debt, multiplied by (ii) the
PEI Exchange Ratio. The parties acknowledge and agree that Accessity
Exchange Shares will be directly issued to LDI (without any preceding
issuance of shares of PEI Stock) if such conversion occurs after the
Closing Date."
(z) Exhibit C to the Exchange Agreement is hereby amended by deleting
the reference to "1,875,000" and replacing it with "3,875,000."
(aa) Exhibit D to the Exchange Agreement is hereby amended by deleting
the references to "499,375" and "626,875" and replacing each with "29,375" and
"36,875," respectively.
3. MISCELLANEOUS. Except as modified and amended pursuant to this
Amendment, the Exchange Agreement shall remain in full force and effect. This
Amendment may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument. This Amendment will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
all the parties reflected hereon as signatories.
[SIGNATURES CONTAINED ON THE FOLLOWING PAGE]
A-89
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
"ACCESSITY": ACCESSITY CORP.
By: /S/ BARRY SIEGEL
---------------------------------
Barry Siegel, Chairman and CEO
"ACQUIRED COMPANIES": PACIFIC ETHANOL, INC.
By: /S/ RYAN TURNER
---------------------------------
Ryan Turner, Director and COO
KINERGY MARKETING, LLC
By: /S/ NEIL M. KOEHLER
---------------------------------
Neil M. Koehler, President
REENERGY, LLC
By: /S/ FRANK R. LINDBLOOM
---------------------------------
Frank R. Lindbloom, Member/Owner
A-90
PEI SHAREHOLDER AND PEI WARRANTHOLDER
SIGNATURE PAGE
TO
AMENDMENT NO. 2 TO
SHARE EXCHANGE AGREEMENT
Pursuant to the authority granted to the undersigned in Section 17.2 of
the Exchange Agreement, by execution of this Amendment below by the undersigned,
the PEI Shareholders and PEI Warrantholders have executed this Amendment as of
the day and year first above written.
By: __________________________
Ryan Turner,
Attorney-in-Fact
A-91
KINERGY MEMBER
SIGNATURE PAGE
TO
AMENDMENT NO. 2 TO
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
___________________________
Neil M. Koehler
A-92
REENERGY MEMBER
SIGNATURE PAGE
TO
AMENDMENT NO. 2 TO
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
KINERGY RESOURCES, LLC
By: _________________________________
Neil M. Koehler, Member
FLIN-MAC, INC.
By: ________________________________
Frank R. Lindbloom, President
_____________________________
Kent Kaulfuss
_____________________________
Tom Koehler
A-93
APPENDIX B
ACCESSITY CORP.
2004 STOCK OPTION PLAN
----------------------
1. PURPOSE OF THE PLAN. The purpose of this 2004 Stock Option Plan (the
"Plan") of Accessity Corp., a New York corporation (the "Company"), is to
provide the Company with a means of attracting and retaining the services of
highly motivated and qualified directors and key personnel. The Plan is intended
to advance the interests of the Company by affording to directors and key
employees, upon whose skill, judgment, initiative and efforts the Company is
largely dependent for the successful conduct of its business, an opportunity for
investment in the Company and the incentives inherent in stock ownership in the
Company. In addition, the Plan contemplates the opportunity for investment in
the Company by consultants that do business with the Company. For purposes of
this Plan, the term Company shall include subsidiaries, if any, of the Company.
2. LEGAL COMPLIANCE. It is the intent of the Plan that all options
granted under it ("Options") shall be either "Incentive Stock Options" ("ISOs"),
as such term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended ("Code"), or non-qualified stock options ("NQOs"); provided, however,
that ISOs shall be granted only to employees of the Company. An Option shall be
identified as an ISO or an NQO in writing in the document or documents
evidencing the grant of the Option. All Options that are not so identified as
ISOs are intended to be NQOs. In addition, the Plan provides for the grant of
NQOs to consultants that do business with the Company. It is the further intent
of the Plan that it conform in all respects with the requirements of Rule 16b-3
of the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended ("Rule 16b-3"). To the extent that any aspect of the Plan or
its administration shall at any time be viewed as inconsistent with the
requirements of Rule 16b-3 or, in connection with ISOs, the Code, such aspect
shall be deemed to be modified, deleted or otherwise changed as necessary to
ensure continued compliance with such provisions.
3. ADMINISTRATION OF THE PLAN.
3.1 PLAN COMMITTEE. The Plan shall be administered by a committee
("Committee"). The members of the Committee shall be appointed from time to time
by the Board of Directors of the Company ("Board") and shall consist of not less
than two nor more than five persons. Such persons shall be directors of the
Company. Notwithstanding the foregoing, the Board may act as the Committee at
any time or from time to time.
3.2 GRANTS OF OPTIONS BY THE COMMITTEE. In accordance with the
provisions of the Plan, the Committee, by resolution, shall select those
eligible persons to whom Options shall be granted ("Optionees"); shall determine
the time or times at which each Option shall be granted, whether an Option is an
ISO or an NQO and the number of shares to be subject to each Option; and shall
fix the time and manner in which the Option may be exercised, the Option
exercise price, and the Option period. The Committee shall determine the form of
option agreement to evidence the foregoing terms and conditions of each Option,
which need not be identical, in the form provided for in Section 7. Such option
agreement may include such other provisions as the Committee may deem necessary
or desirable consistent with the Plan, the Code and Rule 16b-3.
3.3 COMMITTEE PROCEDURES. The Committee from time to time may adopt
such rules and regulations for carrying out the purposes of the Plan as it may
deem proper and in the best interests of the Company. The Committee shall keep
minutes of its meetings and records of its actions. A majority of the members of
the Committee shall constitute a quorum for the transaction of any business by
the
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Committee. The Committee may act at any time by an affirmative vote of a
majority of those members voting. Such vote may be taken at a meeting (which may
be conducted in person or by any telecommunication medium) or by unanimous
written consent of Committee members without a meeting.
3.4 FINALITY OF COMMITTEE ACTION. The Committee shall resolve all
questions arising under the Plan and option agreements entered into pursuant to
the Plan. Each determination, interpretation, or other action made or taken by
the Committee shall be final and conclusive and binding on all persons,
including, without limitation, the Company, its stockholders, the Committee and
each of the members of the Committee, and the directors, officers and employees
of the Company, including Optionees and their respective successors in interest.
3.5 NON-LIABILITY OF COMMITTEE MEMBERS. No Committee member shall be
liable for any action or determination made by him or her in good faith with
respect to the Plan or any Option granted under it.
4. BOARD POWER TO AMEND, SUSPEND, OR TERMINATE THE PLAN. The Board may,
from time to time, make such changes in or additions to the Plan as it may deem
proper and in the best interests of the Company and its stockholders. The Board
may also suspend or terminate the Plan at any time, without notice, and in its
sole discretion. Notwithstanding the foregoing, no such change, addition,
suspension, or termination by the Board shall (i) materially impair any option
previously granted under the Plan without the express written consent of the
optionee; or (ii) increase the number of shares subject to the Plan, materially
increase the benefits accruing to optionees under the Plan, materially modify
the requirements as to eligibility to participate in the Plan or alter the
method of determining the option exercise price described in Section 8, without
stockholder approval.
5. SHARES SUBJECT TO THE PLAN. For purposes of the Plan, the Committee is
authorized to grant Options for up to 2,500,000 shares of the Company's common
stock ("Common Stock"), or the number and kind of shares of stock or other
securities which, in accordance with Section 13, shall be substituted for such
shares of Common Stock or to which such shares shall be adjusted. The Committee
is authorized to grant Options under the Plan with respect to such shares. Any
or all unsold shares subject to an Option which for any reason expires or
otherwise terminates (excluding shares returned to the Company in payment of the
exercise price for additional shares) may again be made subject to grant under
the Plan.
6. OPTIONEES. Options shall be granted only to officers, directors or key
employees of the Company or consultants that do business with the Company
designated by the Committee from time to time as Optionees. Any Optionee may
hold more than one option to purchase Common Stock, whether such option is an
Option held pursuant to the Plan or otherwise. An Optionee who is an employee of
the Company ("Employee Optionee") and who holds an Option must remain a
continuous full or part-time employee of the Company from the time of grant of
the Option to him until the time of its exercise, except as provided in Section
10.3.
7. GRANTS OF OPTIONS. The Committee shall have the sole discretion to
grant Options under the Plan and to determine whether any Option shall be an ISO
or an NQO. The terms and conditions of Options granted under the Plan may differ
from one another as the Committee, in its absolute discretion, shall determine
as long as all Options granted under the Plan satisfy the requirements of the
Plan. Upon determination by the Committee that an Option is to be granted to an
Optionee, a written option agreement evidencing such Option shall be given to
the Optionee, specifying the number of shares subject to the Option, the Option
exercise price, whether the Option is an ISO or an NQO, and the other individual
terms and conditions of such Option. Such option agreement may incorporate
generally applicable provisions from the Plan, a copy of which shall be provided
to all Optionees at the time of their initial grants under the Plan. The Option
shall be deemed granted as of the date specified in the grant
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resolution of the Committee, and the option agreement shall be dated as of the
date specified in such resolution. Notwithstanding the foregoing, unless the
Committee consists solely of non-employee directors, any Option granted to an
executive officer, director or 10% beneficial owner for purposes of Section 16
of the Securities Exchange Act of 1934, as amended ("Section 16 of the 1934
Act"), shall either be (a) conditioned upon the Optionee's agreement not to sell
the shares of Common Stock underlying the Option for at least six months after
the date of grant or (b) approved by the entire Board or by the stockholders of
the Company.
8. OPTION EXERCISE PRICE. The price per share to be paid by the Optionee
at the time an ISO is exercised shall not be less than 100% of the Fair Market
Value (as hereinafter defined) of one share of the optioned Common Stock on the
date as of which the Option is granted. No ISO may be granted under the Plan to
any person who, at the time of such grant, owns (within the meaning of Section
424(d) of the Code) stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any parent thereof, unless
the exercise price of such ISO is at least equal to 110% of Fair Market Value on
the date of grant. The price per share to be paid by the Optionee at the time an
NQO is exercised shall not be less than 85% of the Fair Market Value on the date
as of which the NQO is granted, as determined by the Committee. For purposes of
the Plan, the "Fair Market Value" of a share of the Company's Common Stock as of
a given date shall be:
(a) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, or if the
Common Stock is traded on the OTC Bulletin Board(R) or its successor, the Fair
Market Value shall be the closing sale price for such stock (or the closing bid,
if no sales were reported) as quoted on such exchange, system or board on the
day immediately preceding the given date, as reported in The Wall Street Journal
or such other source as the Committee deems reliable;
(b) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the day immediately preceding the given date, as
reported in The Wall Street Journal or such other source as the Committee
reliable; or
(c) In the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the Committee.
In addition, with respect to any ISO, the Fair Market Value on any given date
shall be determined in a manner consistent with any regulations issued by the
Secretary of the Treasury for the purpose of determining fair market value of
securities subject to an ISO plan under the Code.
9. CEILING OF ISO GRANTS. The aggregate Fair Market Value (determined at
the time any ISO is granted) of the Common Stock with respect to which an
Optionee's ISOs, together with incentive stock options granted under any other
plan of the Company and any parent, are exercisable for the first time by such
Optionee during any calendar year shall not exceed $100,000. If an Optionee
holds such incentive stock options that become first exercisable (including as a
result of acceleration of exercisability under the Plan) in any one year for
shares having a Fair Market Value at the date of grant in excess of $100,000,
then the most recently granted of such ISOs, to the extent that they are
exercisable for shares having an aggregate Fair Market Value in excess of such
limit, shall be deemed to be NQOs.
10. DURATION, EXERCISABILITY, AND TERMINATION OF OPTIONS.
10.1 OPTION PERIOD. The option period shall be determined by the
Committee with respect to each Option granted. In no event, however, may the
option period exceed ten years from the
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date on which the Option is granted, or five years in the case of a grant of an
ISO to an Optionee who is a 10% stockholder at the date as of which the Option
is granted as described in Section 8.
10.2 EXERCISABILITY OF OPTIONS. Each Option shall be exercisable in
whole or in consecutive installments, cumulative or otherwise, during its term
as determined in the discretion of the Committee; provided, however, that each
Option granted to an Optionee who is not an officer, director or consultant of
the Company or a Company affiliate shall provide for the right to exercise at
the rate of at least 20% per year over five years from the date the Option is
granted, subject to reasonable conditions such as continued employment.
10.3 TERMINATION OF OPTIONS DUE TO TERMINATION OF EMPLOYMENT,
DISABILITY, OR DEATH OF OPTIONEE; TERMINATION FOR "CAUSE," OR RESIGNATION IN
VIOLATION OF AN EMPLOYMENT AGREEMENT. All Options granted under the Plan to any
Employee Optionee shall terminate and may no longer be exercised if the Employee
Optionee ceases, at any time during the period between the grant of the Option
and its exercise, to be an employee of the Company; provided, however, that the
Committee may alter the termination date of the Option if the Optionee transfers
to an affiliate of the Company. Notwithstanding the foregoing, (i) if the
Employee Optionee's employment with the Company shall have terminated for any
reason (other than involuntary dismissal for "cause" or voluntary resignation in
violation of any agreement to remain in the employ of the Company, including,
without limitation, any such agreement pursuant to Section 14), he may, at any
time before the expiration of three months after such termination or before
expiration of the Option, whichever shall first occur, exercise the Option (to
the extent that the Option was exercisable by him on the date of the termination
of his employment); (ii) if the Employee Optionee's employment shall have
terminated due to disability (as defined in Section 22(e)(3) of the Code and
subject to such proof of disability as the Committee may require), such Option
may be exercised by the Employee Optionee (or by his guardian(s), or
conservator(s), or other legal representative(s)) before the expiration of
twelve months after such termination or before expiration of the Option,
whichever shall first occur (to the extent that the Option was exercisable by
him on the date of the termination of his employment); (iii) in the event of the
death of the Employee Optionee, an Option exercisable by him at the date of his
death shall be exercisable by his legal representative(s), legatee(s), or
heir(s), or by his beneficiary or beneficiaries so designated by him, as the
case may be, within twelve (12) months after his death or before the expiration
of the Option, whichever shall first occur (to the extent that the Option was
exercisable by him on the date of his death); and (iv) if the Employee
Optionee's employment is terminated for "cause" or in violation of any agreement
to remain in the employ of the Company, including, without limitation, any such
agreement pursuant to Section 14, his Option shall terminate immediately upon
termination of employment, and such Option shall be deemed to have been
forfeited by the Optionee. For purposes of the Plan, "cause" may include,
without limitation, any illegal or improper conduct (1) which injures or impairs
the reputation, goodwill, or business of the Company; or (2) which involves the
misappropriation of funds of the Company, or the misuse of data, information, or
documents acquired in connection with employment by the Company that results in
material harm to the Company. A termination for cause may also include any
resignation in anticipation of discharge for cause or resignation accepted by
the Company in lieu of a formal discharge for cause.
11. MANNER OF OPTION EXERCISE; RIGHTS AND OBLIGATIONS OF OPTIONEES.
11.1 WRITTEN NOTICE OF EXERCISE. An Optionee may elect to exercise an
Option in whole or in part, from time to time, subject to the terms and
conditions contained in the Plan and in the agreement evidencing such Option, by
giving written notice of exercise to the Company at its principal executive
office.
11.2 CASH PAYMENT FOR OPTIONED SHARES. If an Option is exercised for
cash, such notice shall be accompanied by a cashier's or personal check, or
money order, made payable to the Company for the full exercise price of the
shares purchased.
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11.3 STOCK SWAP FEATURE. At the time of the Option exercise, and
subject to the discretion of the Committee to accept payment in cash only, the
Optionee may determine whether the total purchase price of the shares to be
purchased shall be paid solely in cash or by transfer from the Optionee to the
Company of previously acquired shares of Common Stock, or by a combination
thereof. If the Optionee elects to pay the total purchase price in whole or in
part with previously acquired shares of Common Stock, the value of such shares
shall be equal to their Fair Market Value on the date of exercise, determined by
the Committee in the same manner used for determining Fair Market Value at the
time of grant for purposes of Section 8.
11.4 INVESTMENT REPRESENTATION FOR NON-REGISTERED SHARES AND LEGALITY
OF ISSUANCE. The receipt of shares of Common Stock upon the exercise of an
Option shall be conditioned upon the Optionee (or any other person who exercises
the Option on his or her behalf as permitted by Section 10.3) providing to the
Committee a written representation that, at the time of such exercise, it is the
intent of such person(s) to acquire the shares for investment only and not with
a view toward distribution. The certificate for unregistered shares issued for
investment shall be restricted by the Company as to transfer unless the Company
receives an opinion of counsel satisfactory to the Company to the effect that
such restriction is not necessary under then pertaining law. The providing of
such representation and such restrictions on transfer shall not, however, be
required upon any person's receipt of shares of Common Stock under the Plan in
the event that, at the time of grant of the Option relating to such receipt or
upon such receipt, whichever is the appropriate measure under applicable federal
or state securities laws, the shares subject to the Option shall be (i) covered
by an effective and current registration statement under the Securities Act of
1933, as amended, and (ii) either qualified or exempt from qualification under
applicable state securities laws. The Company shall, however, under no
circumstances be required to sell or issue any shares under the Plan if, in the
opinion of the Committee, (i) the issuance of such shares would constitute a
violation by the Optionee or the Company of any applicable law or regulation of
any governmental authority, or (ii) the consent or approval of any governmental
body is necessary or desirable as a condition of, or in connection with, the
issuance of such shares.
11.5 STOCKHOLDER RIGHTS OF OPTIONEE. Upon exercise, the Optionee (or
any other person who exercises the Option on his behalf as permitted by Section
10.3) shall be recorded on the books of the Company as the owner of the shares,
and the Company shall deliver to such record owner one or more duly issued stock
certificates evidencing such ownership. No person shall have any rights as a
stockholder with respect to any shares of Common Stock covered by an Option
granted pursuant to the Plan until such person shall have become the holder of
record of such shares. Except as provided in Section 13, no adjustments shall be
made for cash dividends or other distributions or other rights as to which there
is a record date preceding the date such person becomes the holder of record of
such shares.
11.6 HOLDING PERIODS FOR TAX PURPOSES. The Plan does not provide that
an Optionee must hold shares of Common Stock acquired under the Plan for any
minimum period of time. Optionees are urged to consult with their own tax
advisors with respect to the tax consequences to them of their individual
participation in the Plan.
12. SUCCESSIVE GRANTS. Successive grants of Options may be made to any
Optionee under the Plan.
13. ADJUSTMENTS.
(a) If the outstanding Common Stock shall be hereafter increased or
decreased, or changed into or exchanged for a different number or kind of shares
or other securities of the Company or of another corporation, by reason of a
recapitalization, reclassification, reorganization, merger, consolidation, share
exchange, or other business combination in which the Company is the surviving
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parent corporation, stock split-up, combination of shares, or dividend or other
distribution payable in capital stock or rights to acquire capital stock,
appropriate adjustment shall be made by the Committee in the number and kind of
shares for which options may be granted under the Plan. In addition, the
Committee shall make appropriate adjustment in the number and kind of shares as
to which outstanding and unexercised options shall be exercisable, to the end
that the proportionate interest of the holder of the option shall, to the extent
practicable, be maintained as before the occurrence of such event. Such
adjustment in outstanding options shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the exercise price per share.
(b) In the event of the dissolution or liquidation of the Company,
any outstanding and unexercised options shall terminate as of a future date to
be fixed by the Committee.
(c) In the event of a Reorganization (as hereinafter defined), then,
(i) If there is no plan or agreement with respect to the
Reorganization ("Reorganization Agreement"), or if the Reorganization Agreement
does not specifically provide for the adjustment, change, conversion, or
exchange of the outstanding and unexercised options for cash or other property
or securities of another corporation, then any outstanding and unexercised
options shall terminate as of a future date to be fixed by the Committee; or
(ii) If there is a Reorganization Agreement, and the
Reorganization Agreement specifically provides for the adjustment, change,
conversion, or exchange of the outstanding and unexercised options for cash or
other property or securities of another corporation, then the Committee shall
adjust the shares under such outstanding and unexercised options, and shall
adjust the shares remaining under the Plan which are then available for the
issuance of options under the Plan if the Reorganization Agreement makes
specific provisions therefor, in a manner not inconsistent with the provisions
of the Reorganization Agreement for the adjustment, change, conversion, or
exchange of such options and shares.
(d) The term "Reorganization" as used in this Section 13 shall mean
any reorganization, merger, consolidation, share exchange, or other business
combination pursuant to which the Company is not the surviving parent
corporation after the effective date of the Reorganization, or any sale or lease
of all or substantially all of the assets of the Company. Nothing herein shall
require the Company to adopt a Reorganization Agreement, or to make provision
for the adjustment, change, conversion, or exchange of any options, or the
shares subject thereto, in any Reorganization Agreement which it does adopt.
(e) The Committee shall provide to each optionee then holding an
outstanding and unexercised option not less than 30 calendar days' advanced
written notice of any date fixed by the Committee pursuant to this Section 13
and of the terms of any Reorganization Agreement providing for the adjustment,
change, conversion, or exchange of outstanding and unexercised options. Except
as the Committee may otherwise provide, each optionee shall have the right
during such period to exercise his option only to the extent that the option was
exercisable on the date such notice was provided to the optionee.
Any adjustment to any outstanding ISO pursuant to this Section
13, if made by reason of a transaction described in Section 424(a) of the Code,
shall be made so as to conform to the requirements of that Section and the
regulations thereunder. If any other transaction described in Section 424(a) of
the Code affects the Common Stock subject to any unexercised ISO theretofore
granted under the Plan (hereinafter for purposes of this Section 13 referred to
as the "old option"), the Board of Directors of the Company or of any surviving
or acquiring corporation may take such action as it deems appropriate, in
conformity with the requirements of that Code Section and the regulations
thereunder, to
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substitute a new option for the old option, in order to make the new option, as
nearly as may be practicable, equivalent to the old option, or to assume the old
option.
(f) No modification, extension, renewal, or other change in any
option granted under the Plan may be made, after the grant of such option,
without the optionee's consent, unless the same is permitted by the provisions
of the Plan and the option agreement. In the case of an ISO, optionees are
hereby advised that certain changes may disqualify the ISO from being considered
as such under Section 422 of the Code, or constitute a modification, extension,
or renewal of the ISO under Section 424(h) of the Code.
(g) All adjustments and determinations under this Section 13 shall be
made by the Committee in good faith in its sole discretion.
14. CONTINUED EMPLOYMENT. As determined in the sole discretion of the
Committee at the time of grant and if so stated in a writing signed by the
Company, each Option may have as a condition the requirement of an Employee
Optionee to remain in the employ of the Company, or of its affiliates, and to
render to it his or her exclusive service, at such compensation as may be
determined from time to time by it, for a period not to exceed the term of the
Option, except for earlier termination of employment by or with the express
written consent of the Company or on account of disability or death. The failure
of any Employee Optionee to abide by such agreement as to any Option under the
Plan may result in the termination of all of his or her then outstanding Options
granted pursuant to the Plan. Neither the creation of the Plan nor the granting
of Option(s) under it shall be deemed to create a right in an Employee Optionee
to continued employment with the Company, and each such Employee Optionee shall
be and shall remain subject to discharge by the Company as though the Plan had
never come into existence.
15. TAX WITHHOLDING. The exercise of any Option granted under the Plan is
subject to the condition that if at any time the Company shall determine, in its
discretion, that the satisfaction of withholding tax or other withholding
liabilities under any federal, state or local law is necessary or desirable as a
condition of, or in connection with, such exercise or a later lapsing of time or
restrictions on or disposition of the shares of Common Stock received upon such
exercise, then in such event, the exercise of the Option shall not be effective
unless such withholding shall have been effected or obtained in a manner
acceptable to the Company. When an Optionee is required to pay to the Company an
amount required to be withheld under applicable income tax laws in connection
with the exercise of any Option, the Optionee may, subject to the approval of
the Committee, which approval shall not have been disapproved at any time after
the election is made, satisfy the obligation, in whole or in part, by electing
to have the Company withhold shares of Common Stock having a value equal to the
amount required to be withheld. The value of the Common Stock withheld pursuant
to the election shall be determined by the Committee, in accordance with the
criteria set forth in Section 8, with reference to the date the amount of tax to
be withheld is determined. The Optionee shall pay to the Company in cash any
amount required to be withheld that would otherwise result in the withholding of
a fractional share. The election by an Optionee who is an officer of the Company
within the meaning of Section 16 of the 1934 Act, to be effective, must meet all
of the requirements of Section 16 of the 1934 Act.
16. TERM OF PLAN.
16.1 EFFECTIVE DATE. Subject to stockholder approval, the Plan was
adopted by the Board as of October 25, 2004. The Board intends to obtain
stockholder approval for the Plan as soon as practicable.
16.2 TERMINATION DATE. Except as to options granted and outstanding
under the Plan prior to such time, the Plan shall terminate at midnight on
October 25, 2014, and no Option shall be granted after that time. Options then
outstanding may continue to be exercised in accordance with their
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terms. The Plan may be suspended or terminated at any earlier time by the Board
within the limitations set forth in Section 4.
17. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended
to amend, modify, or rescind any previously approved compensation plans,
programs or options entered into by the Company. This Plan shall be construed to
be in addition to and independent of any and all such other arrangements.
Neither the adoption of the Plan by the Board nor the submission of the Plan to
the stockholders of the Company for approval shall be construed as creating any
limitations on the power or authority of the Board to adopt, with or without
stockholder approval, such additional or other compensation arrangements as the
Board may from time to time deem desirable.
18. GOVERNING LAW. The Plan and all rights and obligations under it shall
be construed and enforced in accordance with the laws of the State of Delaware.
19. INFORMATION TO OPTIONEES. Optionees under the Plan who do not
otherwise have access to financial statements of the Company will receive the
Company's financial statements at least annually.
20. TRANSFERABILITY OF OPTIONS. Options granted under the Plan are
nontransferable other than by will, by the laws of descent and distribution, by
instrument to an inter vivos or testamentary trust in which the Options are to
be passed to beneficiaries upon the death of the trustor (settlor), or by gift
to immediate family. The term "immediate family" means any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, and
also includes adoptive relationships.
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APPENDIX C
AGREEMENT AND PLAN OF MERGER
OF
ACCESSITY CORP.
AND
PACIFIC ETHANOL, INC.
This AGREEMENT AND PLAN OF MERGER (this "Agreement and Plan of Merger"),
dated as of ______________, 2004, between Pacific Ethanol, Inc., a Delaware
corporation ("Pacific Ethanol"), and Accessity Corp., a New York corporation
("Accessity"), pursuant to Section 253 of the Delaware General Corporation Law
(the "DGCL") and Section __________ of the New York Business Corporation Law
(the "NYBCL").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Pacific Ethanol is a corporation duly organized and in good
standing under the laws of the State of Delaware;
WHEREAS, Accessity a corporation duly organized and in good standing under
the laws of the State of New York;
WHEREAS, Pacific Ethanol is the wholly-owned subsidiary of Accessity; and
WHEREAS, the Board of Directors of Pacific Ethanol and the Board of
Directors of Accessity have determined that it is advisable and in the best
interests of each of them that Accessity merge with and into Pacific Ethanol
upon the terms and subject to the conditions herein provided.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, the parties hereto agree as follows:
ARTICLE 1
MERGER
------
Upon the filing of a Certificate of Merger with the Secretary of State of
the State of Delaware and the Articles of Merger with the Secretary of the State
of New York (the "Effective Time"), Accessity shall be merged with and into
Pacific Ethanol (the "Merger"), and Pacific Ethanol shall be the corporation
surviving the Merger (hereinafter referred to as, the "Surviving Corporation").
ARTICLE 2
DIRECTORS, OFFICERS AND GOVERNING DOCUMENTS
-------------------------------------------
The directors of the Surviving Corporation from and after the Effective
Time shall be Neil Koehler, Ryan Turner, Frank P. Greinke, John Pimentel and
Kenneth H. Friedman. The officers of the Surviving Corporation immediately after
the Effective Time shall be as follows:
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Name Position
---- --------
Neil Koehler Chief Executive Officer and President
Ryan Turner Chief Operating Officer
Maria Tharpe Chief Financial Officer
Tom Koehler Vice President Public Policy and Markets
These officers and directors shall hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation. The
Certificate of Incorporation and Bylaws of the Surviving Corporation as in force
and effect at the effective time and date of the Merger will be the Certificate
of Incorporation and Bylaws of said Surviving Corporation and will continue in
full force and effect until changed, altered, or amended as therein provided and
in the manner prescribed by the provisions of the laws of the State of Delaware
of said Surviving Corporation.
ARTICLE 3
NAME
----
The name of the Surviving Corporation shall be: Pacific Ethanol, Inc.
ARTICLE 4
EFFECT OF MERGER ON SHARES OF STOCK OF ACCESSITY
------------------------------------------------
At the Effective Time, except shares held by dissenting shareholders, every
share of common stock, par value $0.015 per share, of Accessity immediately
prior to the Effective Time shall be converted into and become one (1) share of
common stock, par value $0.001 per share, of the Surviving Corporation. At the
Effective Time, each issued and outstanding share of stock of the Surviving
Corporation held by Accessity shall be canceled, without the payment of
consideration therefor.
ARTICLE 5
EFFECT OF THE MERGER
--------------------
The Merger shall have the effect set forth in Section 259 of the DGCL.
ARTICLE 6
APPROVAL
--------
This Agreement and Plan of Merger, as made and approved, shall be submitted
to the shareholders of Accessity for their approval or rejection in the manner
prescribed by the provisions of the NYBCL and shall be approved in the manner
prescribed by the DGCL.
ARTICLE 7
AUTHORIZATION
-------------
The Board of Directors and the proper officers of Accessity and of the
Surviving Corporation are hereby authorized, empowered, and directed to do any
and all acts and things, and to make, execute, deliver, file, and/or record any
and all instruments, papers, and documents which shall be or become necessary,
proper, or convenient to carry out or put into effect any of the provisions of
this Agreement and Plan of Merger or of the Merger herein provided for.
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ARTICLE 8
FURTHER ASSURANCES
------------------
From time to time, as and when required by the Surviving Corporation or by
its successors and assigns, there shall be executed and delivered on behalf of
Accessity such deeds and other instruments, and there shall be taken or caused
to be taken by the Surviving Corporation all such further and other actions, as
shall be appropriate or necessary in order to vest, perfect or confirm in the
Surviving Corporation the title to and possession of all property, interests,
assets, rights, privileges, immunities, powers and authority of Accessity, and
otherwise to carry out the purposes of this Agreement and Plan of Merger. The
officers and directors of the Surviving Corporation are fully authorized, on
behalf of the Surviving Corporation or Accessity, to take any and all such
actions and to execute and deliver any and all such deeds, documents and other
instruments.
ARTICLE 9
RESERVATION OF RIGHTS
---------------------
The Board of Directors of Accessity reserves the right, notwithstanding
shareholder approval and without further action by the shareholders, to elect
not to proceed with the Merger, if at any time prior to consummating such
Merger, the Board of Directors, in its sole discretion, determines that it is no
longer in the best interests of Accessity and its shareholders. The Board of
Directors may also elect not the proceed with the reincorporation if it receives
demands for the exercise of dissenters' rights from holders of shares of common
stock representing more than one percent (1%) of its issued and outstanding
shares of common stock. In addition, the Board of Directors reserves the right
to consummate the Merger for up to twelve (12) months following shareholder
approval thereof. However, at the present time, the board of directors intends
to proceed with the Merger, as presented herein without delay.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement and Plan
of Merger as of the date first above written.
ACCESSITY CORP.,
a New York corporation
By: ________________________
Name: ______________________
Title: _____________________
PACIFIC ETHANOL, INC.,
a Delaware corporation
By: ________________________
Name: ______________________
Title: _____________________
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APPENDIX D
CERTIFICATE OF INCORPORATION
OF
PACIFIC ETHANOL, INC.,
A DELAWARE CORPORATION
FIRST: The name of the corporation is:
PACIFIC ETHANOL, INC.
SECOND: The address of the corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
by the corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH: The corporation is authorized to issue one class of capital stock
to be designated "Common Stock" and another class of capital stock to be
designated "Preferred Stock." The total number of shares of Common Stock that
the corporation is authorized to issue is one hundred million (100,000,000),
with a par value of $.001 per share. The total number of shares of Preferred
Stock that the corporation is authorized to issue is ten million
(10,000,000)with a par value of $.001 per share.
Except as otherwise provided by law, the shares of stock of the
corporation, regardless of class, may be issued by the corporation from time to
time in such amounts, for such consideration and for such corporate purposes as
the board of directors may from time to time determine. A description of the
different classes and series of the corporation's capital stock and a statement
of the designations and the relative rights, preferences and limitations of the
shares of each class and series of capital stock are as follows:
Common Stock. Except as otherwise provided by the General Corporation
Law of the State of Delaware or in this Article FOURTH (or in any certificate of
designation establishing a series of Preferred Stock), the holders of Common
Stock shall exclusively posses all voting power of the corporation. Each share
of Common Stock shall be equal in all respects to every other share of Common
Stock. Each holder of record of issued and outstanding Common Stock shall be
entitled to one (1) vote on all matters for each share so held. Subject to the
rights and preferences, if any, of the holders of Preferred Stock, each issued
and outstanding share of Common Stock shall entitle the record holder thereof to
receive dividends and distributions out of funds legally available therefor,
when, as and if declared by the board of directors, in such amounts and at such
times, if any, as the board of directors shall determine, ratably in proportion
to the number of shares of Common Stock held by each such record holder. Upon
any voluntary or involuntary liquidation, dissolution or winding up of the
corporation, after there shall have been paid to or set aside for the holders of
any class of capital stock having preference over the Common Stock in such
circumstances the full preferential amounts to which they are respectively
entitled, the holders of the Common Stock, and of any class or series of capital
stock entitled to participate in whole or in part therewith as to the
distribution of assets, shall be entitled, after payment or provision for the
payment of all debts and liabilities of the corporation, to receive the
remaining assets of the corporation available for distribution, in cash or in
kind, ratably in proportion to the number of shares of Common Stock held by each
such holder.
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Preferred Stock. The board of directors is authorized by resolution or
resolutions, from time to time adopted, to provide for the issuance of Preferred
Stock in one or more series and to fix and state the voting powers,
designations, preferences and relative participating, optional or other special
rights of the shares of each series and the qualifications, limitations and
restrictions thereof, including, but not limited to, determination of one or
more of the following:
(i) the distinctive designations of each such series and the
number of shares which shall constitute such series, which number may be
increased (except where otherwise provided by the board of directors in creating
such series) or decreased (but not below the number of shares thereof then
outstanding) from time to time by the board of directors;
(ii) the annual rate or amount of dividends payable on shares of
such series, whether such dividends shall be cumulative or non-cumulative, the
conditions upon which and the dates when such dividends shall be payable, the
date from which dividends on cumulative series shall accrue and be cumulative on
all shares of such series issued prior to the payment date for the first
dividend of such series, the relative rights of priority, if any, of payment of
dividends on the shares of that series, and the participating or other special
rights, if any, with respect to such dividends;
(iii) whether such series will have any voting rights in addition
to those prescribed by law and, if so, the terms and conditions of the exercise
of such voting rights;
(iv) whether the shares of such series will be redeemable or
callable and, if so, the prices at which, and the terms and conditions on which,
such shares may be redeemed or called, which prices may vary under different
conditions and at different redemption or call dates;
(v) the amount or amounts payable upon the shares of such series
in the event of voluntary or involuntary liquidation, dissolution or winding up
of the corporation, and the relative rights of priority, if any, of payment of
shares of such series;
(vi) whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which such shares
may be redeemed or purchased through the application of such fund;
(vii) whether the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of capital stock of the
corporation, and if so convertible or exchangeable, the conversion price or
prices, or the rate or rates of exchange, and the adjustments thereof, if any,
at which such conversion or exchange may be made, and any other terms of such
conversion or exchange;
(viii) whether the shares of such series that are redeemed or
converted shall have the status of authorized but unissued shares of Preferred
Stock and whether such shares may be reissued as shares of the same or any other
series of stock;
(ix) the conditions and restrictions, if any, on the payment of
dividends or on the making of other distributions on, or the purchase,
redemption or other acquisition by the corporation, or any subsidiary thereof,
of, the Common Stock or any other class (or other series of the same class)
ranking junior to the shares of such series as to dividends or upon liquidation,
dissolution or winding up of the corporation; and
(x) the conditions and restrictions, if any, on the creation of
indebtedness of the corporation, or any subsidiary thereof, or on the issue of
any additional stock ranking on parity with or
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prior to the shares of such series as to dividends or upon liquidation,
dissolution or winding up of the corporation.
All shares within each series of Preferred Stock shall be alike in
every particular, except with respect to the dates from which dividends, if any,
shall commence to accrue.
FIFTH: The number of directors which constitute the whole Board of
Directors shall be fixed exclusively by one or more resolutions adopted from
time to time by the Board of Directors in accordance with the Bylaws of the
corporation. Except as otherwise required by the General Corporation Law of the
State of Delaware, (i) newly created directorships resulting from any increase
in the number of directors and any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other cause shall be
filled by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors, or by a sole
remaining director; (ii) any director elected in accordance with the preceding
clause (i) shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified; and (iii)
no decreased in the number of directors constituting the Board of Directors
shall shorten the term of any incumbent director. The manner by which a director
of the corporation may be removed from office shall be as provided in the Bylaws
of the corporation. Advance notice of new business and stockholder nominations
for the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the corporation. Elections of directors need not be by
written ballot unless the Bylaws of the corporation shall so provide.
SIXTH: The corporation may, to the fullest extent to which it is empowered
to do so and under the circumstances permitted by the General Corporation Law of
the State of Delaware or any other applicable laws, as they may from time to
time be in effect, indemnify any person who was made or is threatened to be made
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director or officer of the corporation, or is or was serving
at the specific request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise (including,
without limitation, any employee benefit plan), against all expenses (including
attorneys' fees), judgments, fines and amounts incurred by him or her in
connection with such action, suit or proceeding, and may take such steps as may
be deemed appropriate by the board of directors, including purchasing and
maintain insurance, entering into contracts (including, without limitation,
contracts of indemnification between the corporation and its directors and
officers), creating a trust fund, granting security interests or using other
means (including, without limitation, a letter of credit) to ensure the payment
of such amounts as may be necessary to effect such indemnification.
SEVENTH: To the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or as it may hereafter by amended, a
director of the corporation shall not be personally liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director; provided, that in no event will the liability of any director of this
corporation be eliminated or otherwise limited (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the General Corporation Law
of the State of Delaware; or (iv) for any transaction from which the director
derived any improper personal benefit. If the General Corporation Law of the
State of Delaware is amended to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
Any repeal or modification of the foregoing paragraph, or the adoption
of any provision of this certificate of incorporation inconsistent with the
foregoing paragraph, shall not eliminate, reduce or otherwise adversely affect
any right or protection of a director of the corporation existing at the time of
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such repeal or modification in respect of any matter occurring, or any cause of
action, suit or proceeding that, but for the foregoing paragraph, would accrue
or arise, prior to such repeal, modification or adoption of an inconsistent
provision.
EIGHTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by law, and all rights conferred upon the
stockholders herein are granted pursuant to this reservation.
NINTH: The corporation is to have perpetual existence.
TENTH: Meetings of the stockholders of the corporation may be held within
or without the State of Delaware, as the Bylaws may provide. The books of the
corporation may be kept (subject to any provision contained in the Bylaws)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws of the corporation.
ELEVENTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation unless and to the extent the General
Corporation Law of the State of Delaware shall provide otherwise.
TWELFTH: The name and address of the sole incorporator of the corporation
is:
Ryan Turner
5711 N. West Avenue
Fresno, CA 93711
THIRTEENTH: The provisions of Section 203 of the General Corporation Law of
the State of Delaware shall be applicable to this corporation.
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this ____ day of _____________, 2004.
By: ______________________________
Ryan Turner, Sole Incorporator
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APPENDIX E
BYLAWS
OF
PACIFIC ETHANOL, INC.
a Delaware corporation
PREAMBLE
These bylaws are subject to, and governed by, the General Corporation
Law of the State of Delaware (the "Delaware General Corporation Law") and the
certificate of incorporation, as it may be amended from time to time, of PACIFIC
ETHANOL, INC., a Delaware corporation (the "Corporation") . In the event of a
direct conflict between the provisions of these bylaws and the mandatory
provisions of the Delaware General Corporation Law or the provisions of the
certificate of incorporation, such provisions of the Delaware General
Corporation Law or the certificate of incorporation of the Corporation, as the
case may be, will be controlling.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the Corporation shall be at Corporation Trust
Center, 1209 Orange Street, in the City of Wilmington, County of New Castle,
State of Delaware. The name of the registered agent of the Corporation at such
location is The Corporation Trust Company. The registered office of the
Corporation may be changed from time to time by the board of directors in the
manner provided by law and need not be identical to the principal place of
business of the Corporation.
1.2 OTHER OFFICES
The Corporation may also maintain or establish an office or offices at
such other place or places, within or without the State of Delaware, as the
board of directors may from time to time determine by resolution.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. The board of
directors may, in its sole discretion, determine that a meeting of stockholders
shall not be held at any place, but may instead be held solely by means of
remote communication as authorized by Section 211(a)(2) of the Delaware General
Corporation Law. In the absence of any such designation, meetings of
stockholders shall be held at the principal office of the Corporation.
2.2 ANNUAL MEETING
The annual meeting of the stockholders shall be held each year at such
place within or without the State of Delaware and on a date and at a time as may
be designated from time to time by the board of
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directors, for the purpose of electing directors and for the transaction of any
and all such other business as may properly be brought before the meeting. Any
and all business of any nature or character whatsoever may be transacted, and
action may be taken thereon, at any annual meeting, except as otherwise provided
by law or by these bylaws.
2.3 SPECIAL MEETING
Special meetings of the stockholders for any purpose or purposes,
unless otherwise prescribed by law, may be called by the board of directors, the
chairman of the board, the chief executive officer or president (in the absence
of a chief executive officer), and shall be called by the secretary of the
Corporation at the request in writing by holders of not less than 10% of the
total voting power of all outstanding securities of the Corporation then
entitled to vote. Each special meeting of stockholders shall be held,
respectively, at any place within or without the State of Delaware as determined
by the board of directors, or as designated in a waiver of notice signed by all
of the stockholders then entitled to vote.
If a special meeting is called by any person or persons other than the
board of directors, chief executive officer, president or the chairman of the
board, then the request shall be in writing, specifying the time of such meeting
and the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the secretary of the Corporation. The secretary shall
cause notice to be promptly given to the stockholders entitled to vote, in
accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a
meeting will be held at the time requested by the person or persons calling the
meeting. No business may be transacted as such special meeting other than the
business specified in such notice to stockholders. Nothing contained in this
paragraph of this Section 2.3 shall be construed as limiting, fixing or
affecting the time when a meeting of stockholders called by action of the board
of directors may be held.
2.4 NOTICE OF MEETINGS OF STOCKHOLDERS
All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.5 or Section 9.1 of
these bylaws not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting. The
notice shall specify the place, date, and hour of the meeting, the means of
remote communication, if any, by which stockholders and proxy holders may be
deemed to be present in person and vote at such meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation or,
if electronically transmitted, as provided in Article IX of these bylaws. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business, except where otherwise provided by statute, the certificate of
incorporation or these bylaws. Any shares, the voting of which at such meeting
has been enjoined, or which for any reason cannot be lawfully voted at such
meeting, shall not be counted to determine a quorum at such meeting. Any meeting
at which a quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the certificate of incorporation or
these bylaws, all action taken by holders of a majority
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of the voting power represented at any meeting at which a quorum is present
shall be valid and binding upon the corporation.
2.7 ADJOURNED MEETING; NOTICE
If a quorum is not present or represented at any meeting of the
stockholders, then either (i) the chairperson of the meeting or (ii) the
stockholders holding a majority of the shares represented thereat in person or
by proxy shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present or
represented. When a meeting is adjourned to another time or place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time, place if any thereof, and the means of remote communications if any by
which stockholders and proxy holders may be deemed to be present in person and
vote at such adjourned meeting are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the Corporation may transact any
business that might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Section 217 of the Delaware General Corporation Law
(relating to voting rights of fiduciaries, pledgors and joint owners of stock)
and Section 218 of the Delaware General Corporation Law (relating to voting
trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation
or these bylaws, each stockholder shall be entitled to one vote for each share
of capital stock held by such stockholder.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
Delaware General Corporation Law or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice, or a
waiver by electronic transmission by the person entitled to notice, whether
before or after the time of the event for which notice is to be given, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice or any waiver by electronic transmission unless so required by
the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any
action required to be taken at any annual or special meeting of stockholders of
the Corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken and bearing the dates of signature of the stockholders who
signed the consent or consents, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
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Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing and who, if the action had been taken at a
meeting, would have been entitled to notice of the meeting if the record date
for such meeting had been the date that written consents signed by a sufficient
number of holders to take the action were delivered to the Corporation as
provided in Section 228 of the Delaware General Corporation Law. In the event
that the action which is consented to is such as would have required the filing
of a certificate under any provision of the Delaware General Corporation Law, if
such action had been voted on by stockholders at a meeting thereof, the
certificate filed under such provision shall state, in lieu of any statement
required by such provision concerning any vote of stockholders, that written
consent has been given in accordance with Section 228 of the Delaware General
Corporation Law. Any action taken pursuant to such written consent or consents
of the stockholders shall have the same force and effect as if taken by the
stockholders at a meeting thereof.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the board of directors, and shall not be more than sixty (60) nor
less than ten (10) days before the date of such meeting, nor more than ten (10)
days after the date upon which the resolution fixing the record date for a
written consent is adopted by the board of directors, nor more than sixty (60)
days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is delivered to the Corporation as provided in Section 213(b) of
the Delaware General Corporation Law.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by proxy authorized by an
instrument in writing or by a transmission permitted by law filed in accordance
with the procedure established for the meeting, but no such proxy shall be voted
or acted upon after three years from its date, unless the proxy provides for a
longer period. The revocability of a proxy that states
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on its face that it is irrevocable shall be governed by the provisions of
Section 212 of the Delaware General Corporation Law.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. The Corporation shall not
be required to include electronic mail addresses or other electronic contact
information on such list. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either: (i) on a
reasonably accessible electronic network, provided that the information required
to gain access to such list is provided with the notice of the meeting; or (ii)
during ordinary business hours, at the Corporation's principal executive office;
or (iii) if not so specified, at the place where the meeting is to be held. In
the event the Corporation determines to make the list available on an electronic
network, the Corporation may take reasonable steps to ensure that such
information is available only to stockholders of the Corporation. If the meeting
is to be held at a place, then the list shall be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected by
any stockholder who is present. If the meeting is to be held solely by means of
remote communication, then the list shall also be open to the examination of any
stockholder during the whole time of the meeting on a reasonably accessible
electronic network, and the information required to access such list shall be
provided with the notice of the meeting. Such list shall presumptively determine
the identity of the stockholders entitled to vote at the meeting and the number
of shares held by each of them.
2.14 NOMINATIONS AND PROPOSALS
Nominations of persons for election to the board of directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at any meeting of stockholders only (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the board of
directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in these bylaws, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 2.14; provided that stockholder nominations of persons for
election to the board of directors of the Corporation at a special meeting may
only be made if the board of directors has determined that directors are to be
elected at the special meeting.
For nominations or other business to be properly brought before a
meeting of stockholders by a stockholder pursuant to clause (c) of the preceding
sentence, the stockholder must have given timely notice thereof in writing to
the secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice must
be delivered to the secretary of the Corporation not later than: (A) in the case
of an annual meeting, the close of business on the forty-fifth (45th) day before
the first anniversary of the date on which the Corporation first mailed its
proxy materials for the prior year's annual meeting of stockholders; provided,
however, that if the date of the meeting has changed more than thirty (30) days
from the date of the prior year's meeting, then in order for the stockholder's
notice to be timely it must be delivered to the secretary of the Corporation a
reasonable time before the Corporation mails its proxy materials for the current
year's meeting; provided further, that for purposes of the preceding sentence, a
"reasonable time" shall conclusively be deemed to coincide with any adjusted
deadline publicly announced by the Corporation pursuant to Rule 14a-5(f) or
otherwise; and (B) in the case of a special meeting, the close of business on
the seventh (7th) day following the day on which public announcement is first
made of the date of the special meeting. In no event shall the public
announcement of an adjournment of a meeting of stockholders commence a new time
period for the giving of a stockholder's notice as described above.
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Such stockholder's notice shall set forth (a) as to each person whom
the stockholder proposes to nominate for election or reelection as a director
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (or any successor thereto, "Exchange Act") and
Rule 14a-11 thereunder (or any successor thereto) (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made, the text of the proposal or business (including the text of any
resolutions proposed for consideration and in the event that such business
includes a proposal to amend the bylaws of the Corporation, the language of the
proposed amendment); and (c) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made (i)
the name and address of such stockholder, as they appear on the Corporation's
books, and of such beneficial owner, (ii) the class and number of shares of the
Corporation that are owned beneficially and of record by such stockholder and
such beneficial owner, (iii) a representation that the stockholder is a holder
of record of stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to propose such business
or nomination, and (iv) a representation whether the stockholder or the
beneficial owner, if any, intends or is part of a group that intends (X) to
deliver a proxy statement and/or form of proxy to holders of at least the
percentage of the Corporation's outstanding capital stock required to approve or
adopt the proposal or elect the nominee and/or (Y) otherwise to solicit proxies
from stockholders in support of such proposal or nomination.
The Corporation may require any proposed nominee to furnish such other
information as it may reasonably require to determine the eligibility of such
proposed nominee to serve as a director of the Corporation. Notwithstanding any
provision of these bylaws to the contrary, no business shall be conducted at a
meeting of stockholders except in accordance with the procedures set forth in
this Section 2.14.
For purposes of this Section 2.14, "public announcement" shall include
disclosure in a press release reported by the Dow Jones News Service, Associated
Press, Reuters, Market Wire or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this Section 2.14, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 2.14. Nothing in this Section 2.14 shall be deemed to
affect any rights (1) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act, if
applicable to the Corporation, or (2) of the holders of any series of preferred
stock to elect directors pursuant to any applicable provisions of the
certificate of incorporation.
Except as otherwise provided by law, the chairperson of the meeting
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this Section 2.14 and, if any
proposed nomination or business was not made or proposed in compliance with this
Section 2.14, to declare that such nomination shall be disregarded or that such
proposed business shall not be transacted.
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ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Delaware General Corporation Law and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The authorized number of directors of the Corporation shall be seven
until changed by resolution of the board of directors. No reduction of the
authorized number of directors shall have the effect of removing any director
before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
All elections of directors shall be by written ballot, unless otherwise
provided in the certificate of incorporation. If authorized by the board of
directors, such requirement of a written ballot shall be satisfied by a ballot
submitted by electronic transmission, provided that any such electronic
transmission must be either set forth or be submitted with information from
which it can be determined that the electronic transmission was authorized by
the stockholder or proxy holder.
Notwithstanding the foregoing provisions of this Section 3.3, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation or removal. No decrease in the number of
directors constituting the board of directors shall shorten the term of any
incumbent director.
No person entitled to vote at an election for directors may cumulate
votes to which such person is entitled, unless, at the time of such election,
the Corporation is subject to Section 2115(b) of the California General
Corporation Law. During such time or times that the Corporation is subject to
Section 2115(b) of the California General Corporation Law, every stockholder
entitled to vote at an election for directors may cumulate such stockholder's
votes and give one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which such stockholder's
shares are otherwise entitled, or distribute the stockholder's votes on the same
principle among as many candidates as such stockholder thinks fit. No
stockholder, however, shall be entitled to so cumulate such stockholder's votes
unless: (i) the names of such candidate or candidates have been placed in
nomination prior to the voting; and (ii) the stockholder has given notice at the
meeting, prior to the voting, of such stockholder's intention to cumulate such
stockholder's votes. If any stockholder has given proper notice to cumulate
votes, all stockholders may cumulate their votes for any candidates who have
been properly placed in nomination. Under cumulative voting, the candidates
receiving the highest number of votes, up to the number of directors to be
elected, are elected.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon notice given in writing or by
electronic transmission to the secretary of the Corporation. When one or more
directors so resigns and the resignation is effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in this Section in the filling
of other vacancies.
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Any vacancies on the board of directors resulting from death,
resignation, disqualification, removal, newly created directorships or other
causes shall, except as otherwise provided by the Delaware General Corporation
Law or by the certificate of incorporation, be filled only by the affirmative
vote of a majority of the remaining directors then in office, even though less
than a quorum of the board of directors, or by a sole remaining director, and
not by the stockholders. Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected and
qualified.
At any time or times that the Corporation is subject to Section 2115(b)
of the California General Corporation Law, if, after the filling of any vacancy,
the directors then in office who have been elected by stockholders shall
constitute less than a majority of the directors then in office, then: (i) any
holder or holders of an aggregate of five percent (5%) or more of the total
number of shares at the time outstanding having the right to vote for those
directors may call a special meeting of the stockholders; or (ii) the Superior
Court of the proper county shall, upon application of such stockholder or
stockholders, summarily order a special meeting of the stockholders, to elect
the entire board of directors, all in accordance with Section 305(c) of the
California General Corporation Law. The term of office of any director shall
terminate upon that election of the director's successor.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the Corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these bylaws, members of the board of directors, or any committee designated by
the board of directors, may participate in a meeting of the board of directors,
or any committee, by means of conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
at such time and at such place as shall from time to time be determined by
resolution of the board.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors may be called by the
chairman of the board or the chief executive officer or the president or the
secretary or by any two directors. Notice of the time and place of special
meetings shall be delivered either personally by hand, by courier or by
telephone, sent by United States first-class mail, postage prepaid, sent by
facsimile or sent by electronic mail, directed to each director at that
director's address, telephone number, facsimile number or electronic mail
address, as the case may be, as shown on the Corporation's records.
If the notice is (i) delivered personally by hand, by courier or by
telephone, (ii) sent by facsimile or (iii) sent by electronic mail, it shall be
delivered or sent at least twenty-four (24) hours before the time of the holding
of the meeting. If the notice is sent by United States mail, it shall be
deposited in the United States mail at least four (4) days before the time of
the holding of the meeting. Any oral notice may be communicated to the director.
The notice need not specify the place or the meeting (if the meeting
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is to be held at the Corporation's principal executive office) nor the purpose
of the meeting. It shall not be necessary that the same method of giving notice
be employed in respect of all directors, but one permissible method may be
employed in respect of any one or more, and any other permissible method or
methods may be employed in respect of any other or others.
3.8 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
Delaware General Corporation Law or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice, or a
waiver by electronic transmission by the person entitled to notice, whether
before or after the time of the event for which notice is to be given, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice or any waiver by electronic transmission unless so required by
the certificate of incorporation or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or
these bylaws, any action required or permitted to be taken at any meeting of the
board of directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing or by electronic transmission and the writing or writings or electronic
transmission or transmissions are filed with the minutes of proceedings of the
board or committee. Such filing shall be in paper form if the minutes are
maintained in paper form and shall be in electronic form if the minutes are
maintained in electronic form.
3.11 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or
these bylaws, the board of directors shall have the authority to fix the
compensation of directors.
3.12 APPROVAL OF LOANS TO OFFICERS OR EMPLOYEES
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiary, including any officer or employee who is a director of the
Corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
Corporation and is not prohibited by applicable laws, rules or regulations. The
loan, guaranty or other assistance may be with or without interest and may be
unsecured, or secured in such manner as the board of directors shall approve,
including, without limitation, a pledge of shares of stock of the Corporation.
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3.13 REMOVAL OF DIRECTORS
Assuming the Corporation is not subject to Section 2115 of the
California General Corporation Law, notwithstanding any other provisions of the
Corporation's certificate of incorporation, or these bylaws (and notwithstanding
the fact that some lesser percentage may be specified by the Delaware General
Corporation Law, the certificate of incorporation or these bylaws, any director,
or the entire board of directors of the Corporation may be removed at any time,
but only for cause. The removal shall be accomplished by the affirmative vote,
at a special meeting of stockholders called for that purpose in the manner
provided in these bylaws, of the holders of at least a majority of the
outstanding shares entitled to vote at an election for directors.
During such time or times that the Corporation is subject to Section
2115(b) of the California General Corporation Law, the board of directors of any
individual director may be removed from office at any time without cause by the
affirmative vote of the holders of at least a majority of the outstanding shares
entitled to vote on such removal; provided, however, that unless the entire
board of directors is removed, no individual director may be removed when the
votes cast against such director's removal, or not consenting in writing to such
removal, would be sufficient to elect that director if voted cumulatively at an
election at which the same total number of votes were cast (of, if such action
is taken by written consent, all shares entitled to vote were voted) and the
entire number of directors authorized at the time of such director's most recent
election were then being elected. No reduction of the authorized number of
directors shall have the effect of removing any director prior to the expiration
of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the Corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the Corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the Delaware General
Corporation Law, fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation), (ii) approve or adopt, or recommend to
the stockholders, any matter expressly required by the Delaware General
Corporation Law to be submitted to stockholders for approval, (iii) adopt, amend
or repeal any bylaw of the Corporation or (iv) declare any dividend.
The board of directors may at any time increase or decrease the number
of members of a committee or terminate the existence of a committee. The board
of directors may at any time and for any reason remove any individual committee
member or fill any committee vacancy created by death, resignation, removal or
increase in the number of members of a committee.
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4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.6 (regular
meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum),
Section 3.9 (waiver of notice), Section 3.10 (adjournment and notice of
adjournment), and Section 3.11 (action without a meeting), with such changes in
the context of those bylaws as are necessary to substitute the committee and its
members for the board of directors and its members; provided, however, that the
time of regular meetings of committees and special meetings of committees may
also be called by resolution of the board of directors and that notice of
special meetings of committees shall also be given to all alternate members, who
shall have the right to attend all meetings of the committee. The board of
directors may adopt rules for the government of any committee not inconsistent
with the provisions of these bylaws.
4.4 ADVISORY COMMITTEES
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more advisory committees, with each committee to
consist of one or more of the directors of the Corporation or any other such
persons as the board may appoint. The board may designate one or more persons as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. Members who are not board members shall
not have the responsibilities or obligations of board members nor be deemed
directors of the Corporation for any other purpose.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the Corporation shall be a chief executive officer, a
secretary, and a chief financial officer. The Corporation may also have, at the
discretion of the board of directors, a chairman of the board, a vice chairman
of the board, a treasurer, one or more presidents, one or more vice presidents,
one or more assistant vice presidents, assistant secretaries, assistant
treasurers, and any such other officers as may be appointed in accordance with
the provisions of these bylaws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS
The board of directors shall appoint the officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Sections 5.3 or 5.5 of these bylaws, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the chief executive
officer or, in the absence of a chief executive officer, one or more presidents,
to appoint, such other officers and agents as the business of the Corporation
may require, each of whom shall hold office for such period, have such
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
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5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board, by any officer upon whom such power of removal may be conferred by the
board of directors.
Any officer may resign at any time by giving written notice to the
board of directors or secretary of the Corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the Corporation under any
contract to which the officer is a party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the Corporation shall be filled
by the board of directors or as provided in Section 5.2.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no chief
executive officer or president, then the chairman of the board shall also be the
chief executive officer of the Corporation and shall have the powers and duties
prescribed in Section 5.7 of these bylaws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, if there be such an officer,
the chief executive officer of the Corporation shall, subject to the control of
the board of directors, have general supervision, direction, and control of the
business and affairs of the Corporation and shall report directly to the board
of directors. All other officers, officials, employees and agents shall report
directly or indirectly to the chief executive officer. The chief executive
officer shall see that all orders and resolutions of the board of directors are
carried into effect. He shall serve as the chairperson and preside at all
meetings of the stockholders and, in the absence or nonexistence of a chairman
of the board, at all meetings of the board of directors. He shall have the
general powers and duties of management usually vested in the chief executive
officer of a corporation, and shall have such other powers and duties as may be
prescribed by the board of directors or these bylaws.
5.8 PRESIDENT
The president may assume and perform the duties of the chief executive
officer in the absence or disability of the chief executive officer or whenever
the office of the chief executive officer is vacant. When acting as the chief
executive officer, a president shall have all the powers of, and be subject to
all the restrictions upon, the chief executive officer. The president of the
Corporation shall exercise and perform such powers and duties as may from time
to time be assigned to him by the board of directors, the chairman of the board,
the chief executive officer or as may be prescribed by these bylaws. The
president shall have authority to execute in the name of the Corporation bonds,
contracts, deeds, leases and other written instruments to be executed by the
Corporation. In the absence or nonexistence of the chairman of the board and
chief executive officer, he shall preside at all meetings of the stockholders
and, in the absence or nonexistence of a Chairman of the board of directors and
chief executive officer, at all
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meetings of the board of directors and shall perform such other duties as the
board of directors may from time to time determine.
5.9 VICE PRESIDENTS
In the absence or disability of the chief executive officer and any
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of a president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, a
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors, these bylaws, the chairman of the board, the chief executive
officer or, in the absence of a chief executive officer, one or more of the
presidents.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the Corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at meetings of the
board of directors or committees, the number of shares present or represented at
meetings of stockholders, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these bylaws. He or she shall keep the seal of the Corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all monies and other
valuables in the name and to the credit of the Corporation with such
depositories as the board of directors may designate. The chief financial
officer shall disburse the funds of the Corporation as may be ordered by the
board of directors, shall render to the chief executive officer or, in the
absence of a chief executive officer, any president and directors, whenever they
request it, an account of all his or her transactions as chief financial officer
and of the financial condition of the Corporation, and shall have such other
powers and perform such other duties as may be prescribed by the board of
directors or these bylaws. The chief financial officer may be the treasurer of
the Corporation.
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5.12 TREASURER
The treasurer shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties
and business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director.
The treasurer shall deposit all monies and other valuables in the name
and to the credit of the Corporation with such depositories as the board of
directors may designate. The treasurer shall disburse the funds of the
Corporation as may be ordered by the board of directors, shall render to the
chief executive officer or, in the absence of a chief executive officer, any
president and directors, whenever they request it, an account of all his or her
transactions as treasurer and of the financial condition of the Corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or these bylaws.
5.13 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.14 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.15 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall, to the fullest extent and in the manner
permitted by the Delaware Corporation General Law as it presently exists or may
hereafter be amended, indemnify and hold harmless each of its directors and
officers who was or is made or is threatened to be made a party or is otherwise
involved in any action, suit or proceeding, whether civil, criminal or
administrative or investigative (a "proceeding") by reason of the fact that he
or she, or a person for whom he or she is the legal representative, is or was a
director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, non-profit entity or
other enterprise, including service with respect to employee benefit plans,
against all liability and loss suffered and expenses reasonably incurred by such
person in connection with any such action, suit, or proceeding. The Corporation
shall be required to
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indemnify a person in connection with a proceeding initiated by such person only
if the proceeding was authorized by the board of directors.
6.2 INDEMNIFICATION OF OTHERS
The Corporation shall have the power, to the fullest extent and in the
manner permitted by the Delaware General Corporation Law as it presently exists
or may hereafter be amended, to indemnify and hold harmless, each of its
employees and agents who was or is made or is threatened to be made a party or
is otherwise involved in any action, suit or proceeding, whether civil, criminal
or administrative or investigative (a "proceeding") by reason of the fact that
he or she, or a person for whom he or she is the legal representative, is or was
an employee or agent of the Corporation or is or was serving at the request of
the Corporation as an employee or agent of another corporation, partnership,
joint venture, trust, non-profit entity or other enterprise, including service
with respect to employee benefit plans, against all liability and loss suffered
and expenses reasonably incurred by such person in connection with any such
action, suit, or proceeding.
6.3 INSURANCE
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation or its subsidiaries as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of the Delaware General Corporation Law.
6.4 EXPENSES
The Corporation shall pay the expenses incurred by any officer or
director of the Corporation, and may pay the expenses incurred by any employee
or agent of the Corporation, in defending any proceeding in advance of its final
disposition; provided, however, that the payment of expenses incurred by a
person in advance of the final disposition of the proceeding shall be made only
upon receipt of an undertaking by the person to repay all amounts advanced if it
should ultimately be determined that he is not entitled to be indemnified by the
Corporation under this Article VI or otherwise. Such expenses incurred by other
employees and agents described in Section 6.2 of this Article VI may be so paid
upon such terms and conditions, if any, as the board of directors deems
appropriate.
6.5 OTHER INDEMNIFICATION
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding such office. However, the
Corporation's obligation, if any, to indemnify a person who was or is serving at
its request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, non-profit entity or other enterprise shall
be reduced by any amount such person may collect as indemnification from such
other corporation, partnership, joint venture, trust, non-profit entity or other
enterprise.
E-15
6.6 AMENDMENT OR REPEAL
Any repeal or modification of the foregoing provisions of this Article
VI shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
6.7 MERGER OR CONSOLIDATION
For purposes of this Article VI, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, non-profit entity or other enterprise, shall
stand in the same position under this Article VI with respect to the resulting
or surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
6.8 SEVERABILITY
The invalidity or unenforceability of any provision of this Article VI
shall not affect the validity or enforceability of the remaining provisions of
this Article VI.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal executive
office.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court of Chancery may summarily order
the Corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court of Chancery may, in its discretion, prescribe any limitations or
conditions with reference to the inspection, or award such other and further
relief as the Court may deem just and proper.
E-16
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, the chief
financial officer or any other person authorized by the board of directors or
the chief executive officer, is authorized to vote, represent, and exercise on
behalf of the Corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of the Corporation. The
authority granted herein may be exercised either by such person directly or by
any other person authorized to do so by proxy or power of attorney duly executed
by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, agent or employee, no officer, agent or employee shall have
any power or authority to bind the Corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of the Corporation shall be represented by certificates,
provided that the board of directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the board of directors, or a president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of the
Corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the Corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
E-17
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the Delaware General Corporation
Law, in lieu of the foregoing requirements there may be set forth on the face or
back of the certificate that the Corporation shall issue to represent such class
or series of stock a statement that the Corporation will furnish without charge
to each stockholder who so requests the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and canceled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
The directors of the Corporation, subject to any restrictions contained
in either the Delaware General Corporation Law or the Certificate of
Incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
Corporation's capital stock.
The directors of the Corporation may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the Corporation shall end on December 31 of each
year until changed by the board of directors.
E-18
8.9 SEAL
The Corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the board of directors. The Corporation may use the
corporate seal by causing it or a facsimile thereof to be impressed or affixed
or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The Corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the Corporation to restrict the transfer of shares of stock of the Corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
8.12 REGISTERED STOCKHOLDERS
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
NOTICE BY ELECTRONIC TRANSMISSION
9.1 NOTICE BY ELECTRONIC TRANSMISSION
Without limiting the manner by which notice otherwise may be given
effectively to stockholders pursuant to the Delaware General Corporation Law,
the certificate of incorporation or these bylaws, any notice to stockholders
given by the Corporation under any provision of the Delaware General Corporation
Law, the certificate of incorporation or these bylaws shall be effective if
given by a form of electronic transmission consented to by the stockholder to
whom the notice is given. Any such consent shall be revocable by the stockholder
by written notice to the Corporation. Any such consent shall be deemed revoked
if: (i) the Corporation is unable to deliver by electronic transmission two
consecutive notices given by the Corporation in accordance with such consent;
and (ii) such inability becomes known to the secretary or an assistant secretary
of the Corporation or to the transfer agent, or other person responsible for the
giving of notice. However, the inadvertent failure to treat such inability as a
revocation shall not invalidate any meeting or other action.
Any notice given pursuant to the preceding paragraph shall be deemed
given: (i) if by facsimile telecommunication, when directed to a number at which
the stockholder has consent to receive notice; (ii) if by electronic mail, when
directed to an electronic mail address at which the stockholder has consented to
receive notice; (iii) if by a posting on an electronic network together with
separate notice to the stockholder of such specific posting, upon the later of
(A) such posting and (B) the giving of such separate notice; and (iv) if by any
other form of electronic transmission, when directed to the stockholder. An
affidavit of the secretary or an assistant secretary or of the transfer agent or
other agent of the
E-19
Corporation that the notice has been given by a form of
electronic transmission shall, in the absence of fraud, be prima facie evidence
of the facts stated therein. Notice by a form of electronic transmission shall
not apply to Sections 164, 296, 311, 312 or 324 of the Delaware General
Corporation Law.
An "electronic transmission" means any form of communication, not
directly involving the physical transmission of paper, that creates a record
that may be retained, retrieved, and reviewed by a recipient thereof, and that
may be directly reproduced in paper form by such a recipient through an
automated process.
ARTICLE X
AMENDMENTS
These bylaws may be amended, altered or repealed, and new bylaws may be
adopted, by the stockholders entitled to vote. However, the Corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
bylaws upon the board of directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend, alter or repeal bylaws.
E-20
CERTIFICATE OF SECRETARY
OF
PACIFIC ETHANOL, INC.
(a Delaware corporation)
I hereby certify that I am the duly elected and acting secretary of Pacific
Ethanol, Inc., a Delaware corporation, and that the foregoing Bylaws, comprising
21 pages, including this page, constitute the Bylaws of the Corporation as duly
adopted by the board of directors thereof by action taken without a meeting on
__________ ____, 2004.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
____ day of ______, 2004.
/s/ ________________________
_________________, Secretary
E-21
APPENDIX F
FINANCIAL STATEMENTS
OF
ACCESSITY CORP.,
PACIFIC ETHANOL, INC.,
KINERGY MARKETING, LLC
AND
REENERGY, LLC
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ACCESSITY CORP.
Report of Independent Registered Public Accounting Firm......................F-4
Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2004
(Unaudited)...........................................................F-5
Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Nine Months Ended September 30, 2004 and 2003
(Unaudited)...........................................................F-6
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and 2003 (Unaudited)..................F-7
Consolidated Balance Sheets as of December 31, 2003 and 2002..........F-8
Consolidated Statements of Operations for the Years Ended December
31, 2003 and 2002.....................................................F-9
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2003 and 2002...........................................F-10
Consolidated Statements of Cash Flows for the Years Ended December
31, 2003 and 2002....................................................F-11
Notes to the Financial Statements....................................F-12
PACIFIC ETHANOL, INC.
Report of Independent Registered Public Accounting Firm.....................F-41
Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and September
30, 2004 (Unaudited).................................................F-42
Consolidated Statements of Operations for the Period from January
30, 2003 (Inception) to December 31, 2003, the Period from January
30, 2003 (Inception) to September 30, 2003 (Unaudited) and the Nine
Months Ended September 30, 2004 (Unaudited)..........................F-43
Consolidated Statements of Stockholders' Equity for the Period from
January 30, 2003 (Inception) to December 31, 2003 and the Nine Months
Ended September 30, 2004 (Unaudited).................................F-44
Consolidated Statements of Cash Flows for the Period from January
30, 2003 (Inception) to December 31, 2003, the Period from January
30, 2003 (Inception) to September 30, 2003 (Unaudited) and the Nine
Months Ended September 30, 2004 (Unaudited)..........................F-45
Notes to the Financial Statements....................................F-46
KINERGY MARKETING, LLC
Report of Independent Registered Public Accounting Firm.....................F-58
F-2
Financial Statements
Balance Sheets as of December 31, 2003 and 2002 and September 30,
2004 (Unaudited).....................................................F-59
Statements of Income for the Years Ended December 31, 2002 and 2003
and the Nine Months Ended September 30, 2003 and 2004 (Unaudited)....F-60
Statements of Cash Flows for the Years Ended December 31, 2002 and
2003 and the Nine Months Ended September 30, 2003 and 2004
(Unaudited)..........................................................F-61
Notes to the Financial Statements....................................F-62
REENERGY, LLC
Independent Auditors' Report................................................F-67
Financial Statements
Balance Sheets as of December 31, 2003 and 2002 and September 30,
2004 (Unaudited).....................................................F-68
Statements of Income For the Years Ended December 31, 2003 and
2002 and for the Nine Months Ended September 30, 2003 and 2004
(Unaudited)..........................................................F-69
Statements of Members' Equity (Deficit) for the Years Ended December
31, 2003 and 2002 and for the Nine Months Ended September 30, 2004
(Unaudited)..........................................................F-70
Statements of Cash Flows For the Year Ended December 31, 2003 and
2002 and for the Nine Months Ended September 30, 2003 and 2004
(Unaudited)..........................................................F-71
Notes to the Financial Statements....................................F-71
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Accessity Corp.
Coral Springs, Florida
We have audited the accompanying consolidated balance sheets of Accessity Corp.
and subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosure in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Accessity Corp. and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
March 4, 2004
F-4
ACCESSITY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
SEPTEMBER 30,
2004
------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 361,480
Accounts receivable 91,124
Investments 3,369,437
Prepaid expenses and other current assets 86,487
Restricted funds 300,000
Security deposits 22,098
------------
Total current assets 4,230,626
Property and equipment, net of accumulated depreciation 241,972
Other assets 1,826
------------
TOTAL ASSETS $ 4,474,424
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 75,252
Accrued expenses and other current liabilities 374,342
------------
Total current liabilities 449,594
------------
SHAREHOLDERS' EQUITY:
Common stock, $.015 par value, authorized 30,000,000 shares;
issued 2,521,398 37,821
Additional paid-in capital 11,107,158
Accumulated other comprehensive income,
unrealized holding gain on investment securities 3,406
Deficit (5,394,113)
------------
5,754,272
Less common stock held in treasury, at cost,
181,984 shares 1,729,442
------------
TOTAL SHAREHOLDERS' EQUITY 4,024,830
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,474,424
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-5
ACCESSITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS (UNAUDITED)
SEPTEMBER 30, 2004 AND 2003
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2004 2003
------------ ------------
REVENUES:
Collision repairs, fees and royalties $ 142,335 $ 219,624
Hospital fees 480,063 227,725
------------ ------------
Total revenues 622,398 447,349
------------ ------------
OPERATING EXPENSES:
Collision repair expenses -- 102,052
Sales and marketing 321,689 354,157
General and administrative 1,426,859 1,321,660
Depreciation and amortization 200,917 237,116
------------ ------------
Total operating expenses 1,949,465 2,014,985
------------ ------------
(1,327,067) (1,567,636)
INVESTMENT AND OTHER INCOME, NET OF INTEREST EXPENSE
(NOTE 5 AND 11) 311,505 141,125
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES (1,015,562) (1,426,511)
PROVISION FOR INCOME (TAX) BENEFIT 11,525 --
------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,004,037) (1,426,511)
------------ ------------
DISCONTINUED OPERATIONS (NOTE 7):
Income from affinity services subsidiary (no tax effect) -- 214,711
Gain on disposal of affinity services subsidiary (no tax effect) -- 10,000
------------ ------------
INCOME FROM DISCONTINUED OPERATIONS -- 224,711
------------ ------------
NET LOSS (1,004,037) (1,201,800)
OTHER COMPREHENSIVE INCOME OR LOSS - UNREALIZED GAIN
(LOSS) ON MARKETABLE SECURITIES (NOTE 11) 3,406 (49,765)
------------ ------------
COMPREHENSIVE LOSS $ (1,000,631) $ (1,251,565)
============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations (0.45) (0.65)
Discontinued operations 0.00 0.10
------------ ------------
Total $ (0.45) $ (0.55)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,245,539 2,178,119
============ ============
EFFECT OF DILUTIVE SECURITIES, STOCK OPTIONS AND WARRANTS -- --
------------ ------------
WEIGHTED AVERAGE DILUTIVE COMMON SHARES OUTSTANDING 2,245,539 2,178,119
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-6
ACCESSITY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SEPTEMBER 30, 2004 AND 2003
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2004 2003
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (1,004,037) $ (1,201,800)
------------ ------------
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization (including bond premium
amortization in 2003) 200,917 256,746
Loss on sale of investments 44,418 14,919
Impairment losses on marketable securities 40,002 --
Options granted for services -- 8,955
Changes in assets and liabilities:
Accounts receivable 64,972 (23,638)
Prepaid expenses and other assets 57,439 243,664
Accounts payable 23,055 (207,948)
Accrued expenses and other current liabilities (44,557) (521,566)
------------ ------------
Total adjustments 386,246 (228,868)
------------ ------------
Net cash provided by (used in) operating activities (617,791) (1,430,668)
============ ============
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment (3,867) (28,693)
Proceeds from sale of investments 2,270,340 6,349,183
Purchase of investments (1,369,891) (5,393,699)
------------ ------------
Net cash provided by (used in) investing activities 896,582 926,791
============ ============
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments under capital lease (20,386) (23,621)
Proceeds from sale of common stock 7,500 78,750
------------ ------------
Net cash provided by (used in) financing activities (12,886) 55,129
============ ============
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 265,905 (448,748)
CASH AND CASH EQUIVALENTS, at beginning of period $ 95,575 $ 908,655
============ ============
CASH AND CASH EQUIVALENTS, at end of period $ 361,480 $ 459,907
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 29 $ 3,733
============ ============
RECLASSIFICATION OF PREFERRED STOCK FROM LIABILITY TO
COMMON STOCK RESULTING FROM CONVERSION $ 350,000 $ --
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-7
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
DECEMBER 31,
---------------------------------
2003 2002
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 95,575 $ 908,655
Accounts receivable 156,096 149,685
Investments 4,313,114 5,309,481
Prepaid expenses and other current assets 114,301 334,719
------------ ------------
Total current assets 4,679,086 6,702,540
Property and equipment, net 449,295 708,976
Restricted certificate of deposit 300,000 300,000
Security deposits and other assets 53,549 57,979
------------ ------------
TOTAL ASSETS $ 5,481,930 $ 7,769,495
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 52,197 $ 299,215
Accrued expenses and other current liabilities 429,172 859,315
Current portion of capital lease obligation 20,386 31,968
------------ ------------
Total current liabilities 501,755 1,190,498
------------ ------------
Obligations under capital lease, net of current portion -- 20,415
------------ ------------
SHAREHOLDERS' EQUITY (NOTE 1):
Common stock, $.015 par value, authorized 30,000,000 shares;
issued 2,419,398 shares in 2003 and 2,349,398 in 2002 36,291 35,241
Preferred stock, all series, $.01 par value, authorized
1,000,000 shares; 1,000 issued and outstanding 10 10
Additional paid-in capital 11,101,178 10,977,648
Accumulated other comprehensive income (loss),
unrealized holding gain (loss) on investment securities (37,785) 14,204
Deficit (4,390,077) (2,764,039)
6,709,617 8,263,064
Less common stock held in treasury, at cost,
181,984 shares in 2003 and 175,584 shares in 2002 1,729,442 1,704,482
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,980,175 6,558,582
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,481,930 $ 7,769,495
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-8
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2003 AND 2002
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002
------------ ------------
REVENUES:
Collision repairs, fees and royalties $ 279,734 $ 2,895,001
Hospital fees 377,809 --
------------ ------------
Total revenues 657,543 2,895,001
------------ ------------
OPERATING EXPENSES (INCOME):
Collision repair expenses 102,052 2,499,570
Sales and marketing 478,562 951,764
General and administrative 1,851,617 3,235,057
Non-cash compensation -- (131,666)
Depreciation and amortization 299,108 400,626
------------ ------------
Total operating expenses 2,731,339 6,955,351
------------ ------------
(2,073,796) (4,060,350)
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 226,608 402,820
Interest expense (4,504) (88,503)
------------ ------------
Total other income 222,104 314,317
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR
INCOME TAXES: (1,851,692) (3,746,033)
PROVISION FOR INCOME TAX BENEFIT -- (2,276,619)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,851,692) (1,469,414)
------------ ------------
DISCONTINUED OPERATIONS:
Gain on disposal of fleet subsidiary (net of income taxes of
$3,690,886) -- 2,391,482
Income from discontinued fleet subsidiary (net of income taxes
of $26,533) -- 17,192
Income from affinity services subsidiary (net of income taxes
of $-0- in 2003 and $482,830 in 2002) 215,654 308,694
Gain on disposal of affinity services subsidiary (no tax effect) 10,000 --
------------ ------------
INCOME FROM DISCONTINUED OPERATIONS 225,654 2,717,368
------------ ------------
NET INCOME (LOSS) $ (1,626,038) $ 1,247,954
============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
(NOTE 1):
Continuing operations (0.84) (0.67)
Discontinued operations 0.10 1.24
------------ ------------
Net earnings (loss) $ (0.74) $ 0.57
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,195,519 2,180,062
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-9
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2003 AND 2002
ACCUMULATED
COMMON STOCK PREFERRED STOCK ADDITIONAL OTHER
--------------------------- --------------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS)
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2002 2,303,331 $ 34,550 -- $ -- $ 9,930,444 $ 680
Net income -- -- -- -- -- --
Unrealized holding gain -- -- -- -- -- 13,524
Comprehensive income -- -- -- -- -- --
Issuance of preferred stock -- -- 1,000 10 999,990 --
Shares tendered upon exercise
of stock options 46,067 691 -- -- 128,060 --
Treasury shares purchased -- -- -- -- -- --
Non-cash compensation
(credit) recorded for
variable priced options -- -- -- -- (131,666) --
Options granted for services -- -- -- -- 50,820 --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 2,349,398 35,241 1,000 10 10,977,648 14,204
Net loss -- -- -- -- -- --
Add reclassification
adjustment for realized
losses included in net
income -- -- -- -- -- 14,919
Unrealized holding loss -- -- -- -- -- (66,908)
Comprehensive loss -- -- -- -- -- --
Exercise of stock options 63,600 954 -- -- 89,711 --
Shares tendered upon exercise
of stock options 6,400 96 -- -- 24,864 --
Options granted for services -- -- -- -- 8,955 --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 2,419,398 $ 36,291 1,000 $ 10 $ 11,101,178 $ (37,785)
============ ============ ============ ============ ============ ============
TOTAL
SHAREHOLDERS'
DEFICIT SHARES AMOUNT EQUITY
------------ ------------ ------------ ------------
Balance, January 1, 2002 $ (4,011,993) 143,934 $ (1,483,034) $ 4,470,647
------------
Net income 1,247,954 -- -- 1,247,954
Unrealized holding gain -- -- -- 13,524
------------
Comprehensive income -- -- -- 1,261,478
Issuance of preferred stock -- -- -- 1,000,000
Shares tendered upon exercise
of stock options -- 13,005 (128,751) --
Treasury shares purchased -- 18,645 (92,697) (92,697)
Non-cash compensation
(credit) recorded for
variable priced options -- -- -- (131,666)
Options granted for services -- -- -- 50,820
------------ ------------ ------------ ------------
Balance, December 31, 2002 (2,764,039) 175,584 (1,704,482) 6,558,582
------------
Net loss (1,626,038) -- -- (1,626,038)
Add reclassification
adjustment for realized
losses included in net
income -- -- -- 14,919
Unrealized holding loss -- -- -- (66,908)
------------
Comprehensive loss -- -- -- (1,678,027)
Exercise of stock options -- -- -- 90,665
Shares tendered upon exercise -- 6,400 (24,960) --
of stock options
Options granted for services -- -- -- 8,955
------------ ------------ ------------ ------------
Balance, December 31, 2003 $ (4,390,077) 181,984 $ (1,729,442) $ 4,980,175
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-10
ACCESSITY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 2003 AND 2002
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002
------------ ------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) $ (1,626,038) $ 1,247,954
------------ ------------
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization (including bond premium
amortization) 318,837 488,934
Non-cash compensation -- (131,666)
Options granted for services 8,955 50,820
Gain on sale of subsidiaries (10,000) (6,082,368)
Loss on sale of investments 14,919 --
Deferred tax asset -- 1,900,000
Changes in assets and liabilities:
Accounts receivable (6,411) (13,235)
Prepaid expenses and other current assets 220,418 (167,118)
Security deposits and other assets 4,430 (30,416)
Investment in net assets of discontinued operations -- (60,022)
Accounts payable (247,018) 143,885
Accrued expenses and other current liabilities (430,143) 425,519
------------ ------------
Total adjustments (126,013) (3,475,667)
------------ ------------
Net cash used in operating activities (1,752,051) (2,227,713)
------------ ------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchases of property and equipment (39,793) (433,853)
Proceeds from sales of subsidiaries, net 10,000 6,174,389
Purchase of investments (5,439,087) (8,396,026)
Proceeds from investments 6,349,183 4,929,000
Purchase of restricted certificate of deposit -- (300,000)
------------ ------------
Net cash provided by investing activities 880,303 1,973,510
============ ============
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments under capital lease (31,997) (9,853)
Proceeds from exercise of stock options 90,665 --
Proceeds from issuance of preferred stock -- 1,000,000
Purchase of treasury stock -- (92,697)
------------ ------------
Net cash provided by financing activities 58,668 897,450
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (813,080) 643,247
CASH AND CASH EQUIVALENTS, at beginning of year 908,655 265,408
============ ============
CASH AND CASH EQUIVALENTS, at end of year $ 95,575 $ 908,655
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ -- $ 23,533
============ ============
Cash paid during the year for interest $ 4,504 $ 2,313
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
During 2002, the Company purchased computer equipment costing $82,719,
of which $62,236 was financed.
During 2003 and 2002, the Company acquired 6,400 and 13,005 shares of
treasury stock with shares tendered upon the exercise of stock options
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-11
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The information contained in the condensed consolidated financial
statements for the nine months ended September 30, 2004 and 2003 is
unaudited, but includes all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair
presentation of the financial position and the results of operations
for these periods.
The financial statements and notes are presented in accordance with the
requirements of Form 10-QSB, and do not contain certain information
included in the Company's annual statements and notes. These financial
statements should be read in conjunction with the Company's annual
financial statements as reported in its most recent annual report on
Form 10-KSB.
In May 2004 the Company signed a definitive agreement, characterized as
a share exchange transaction, which if approved by our shareholders
would change the business model of the Company to the business of the
acquired company and require the resignation of the present officers
and directors. See Note 3.
Upon approval from its shareholders at the December 15, 2003 annual
shareholders meeting, the Company effected a one-for-five reverse
common stock split. The effective date of the stock split was January
7, 2004. All references to common shares, options, warrants or other
issues convertible into common shares have been adjusted to reflect
this stock split on a retroactive basis. The number of authorized
common shares and the par value were not changed.
On August 1, 2003, the Company sold its affinity service automobile
business (see Note 7). The accompanying financial statements reflect
the results of this business as Discontinued Operations.
This report may contain forward-looking statements that involve certain
risks and uncertainties. Factors may arise, including those identified
in this Company's Form 10-KSB for the year ended December 31, 2003,
which could cause the Company's operating results to differ materially
from those contained in any forward-looking statement.
2. BUSINESS OF THE COMPANY
-----------------------
THE FOLLOWING INFORMATION IS PROVIDED AS BACKGROUND RELATED TO THE
HISTORIC AND CURRENT BUSINESS ACTIVITIES OF THE COMPANY. AS INDICATED
IN NOTE 3, HOWEVER, THE COMPANY IS CURRENTLY ENGAGED IN A TRANSACTION
WHICH, IF CONCLUDED, WOULD CHANGE ITS BUSINESS MODEL AND DIRECTORS AND
OFFICERS, RENDERING THIS INFORMATION NO LONGER RELEVANT.
The Company, a New York corporation, has been engaged in automotive
repair and collision management from its inception in 1983, but has
exited the automotive market and entered into a medical billing
recovery business. It divested its original automotive business in
February 2002, which provided collision repair and fleet management
services primarily for numerous Fortune 500 companies.
F-12
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
The Company also offered collision repair management services during
early 2003 for the insurance industry through a website on the
Internet. Revenues for such services commenced in December 2001.
However, under a strategic partnership agreement, effective January 2,
2003 (see Note 6), the Company transferred the operating
responsibilities and management of this business to a third party and,
currently, is no longer engaged in collision repair management. During
the early part of 2003 it completed certain in-process repairs that had
been initiated by its customers in late 2002. It remains liable for
warranties of auto repairs it provided, however warranty costs have
historically not been significant.
In addition, the Company also sold its remaining automotive business,
effective August 1, 2003, that provided automobile affinity services
for individuals. A definitive agreement was completed for the sale of
all of the outstanding shares of its wholly owned subsidiary to the
president of the business (see Note 7). The Company believes that it
operated its automotive-related businesses in one operating segment.
During the 2003 period presented, the Company provided collision and
general repair programs and appraisal services, for the insurance
industry and insurance carriers. The Company facilitated the repair
process for insurance carriers by installing its internet-based
software at customer sites, which permitted them to enter new claims
and to monitor the Company's activities. Once a claim was initiated on
the website, the Company commenced its efforts. This included the audit
of repair estimates, negotiation of the repair price with one of its
suppliers selected from its network of approximately 2,000 providers,
management of time for completion of repair, selection or approval of
part specifications, and obtaining third party appraisals if required.
The Company assumed the risks and responsibilities of the vehicle
repair process, from commencement to completion, for its insurance
clients. It warranted all repairs completed through its network of
repair facilities, for periods up to as long as the driver owned the
vehicles and issued warranty certificates for claims processed through
its supplier network. The Company recorded revenues gross in these
circumstances, having acted as the principal in the transaction. As
described in Note 5, this business is now managed by ClaimsNet, Inc.
("ClaimsNet").
During the third quarter of 2002, the Company began a new business,
Sentaur Corp. ("Sentaur") engaged in medical billing recovery, a new
business segment. The business provides benefits to the hospital
segment of the healthcare industry by recouping inappropriate discounts
taken from hospital billings by institutional or insurance payors.
Sentaur began generating revenue during the second quarter of 2003.
Billings have been increasing, along with the number of contracts it
has received from hospitals. The Company records revenues net for this
business, having acted as an agent of the hospitals.
Three of the Company's customers currently accounted for approximately
68% of its 2004 continuing revenues to date; of those three, the
Company receives funds from one entity in the automotive segment as
described in Note 6. Three medical segment customers accounted for
approximately 95% of its outstanding trade receivables at September 30,
2004.
F-13
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
3. DEFINITIVE AGREEMENT SIGNED FOR POTENTIAL ACQUISITIONS, CHANGE OF
-----------------------------------------------------------------
CONTROL AND CHANGE IN BUSINESS MODEL
------------------------------------
On May 17, 2004 the Company signed a definitive agreement ("the Share
Exchange Agreement") with Pacific Ethanol Inc., a California company,
Kinergy Marketing, LLC, an Oregon limited liability company, and
Re-Energy, LLC, a California company, (collectively hereinafter
referred to as the "PEI Group") all of which are geographically located
in California, to acquire those companies in exchange for a maximum of
18.8 million shares on a fully-diluted basis (of which approximately
1.5 million shares would be reserved to replace existing PEI Group
options and for its convertible debt, if converted) of Accessity common
stock to the then current shareholders of those companies. As noted
below, Pacific Ethanol is now attempting to raise approximately $7
million, and this would result in 2.5 million additional shares being
issued when completed. The transaction is structured as a
stock-for-stock share exchange; with Accessity continuing as the
surviving parent company and the PEI Group entities becoming wholly
owned subsidiaries of Accessity. Pacific Ethanol, Inc. is to receive
the largest block of shares and would become the accounting acquirer in
this transaction.
Privately held PEI Group, has developed a strategy aimed at becoming
the first vertically integrated producer and marketer of ethanol in
California, the nation's most populous state with the highest ethanol
demand in the United States. Effective January 1, 2004 the State of
California mandated the elimination of MTBE as a gasoline additive and
required the use of ethanol as its replacement to improve air quality
resulting from auto emissions. The California ethanol market is
currently estimated to be annually approximately 900 million gallons,
based on published market reports, and approximately $1 billion
dollars. At present, through Kinergy Marketing LLC, PEI Group is
presently a re-seller of ethanol and its unaudited results indicated
that it generated approximately $56 million in revenue in the nine
months ended September 30, 2004. PEI Group owns land and a grain
processing facility and has received the critical permits to begin
construction of a 35 million gallon ethanol plant on its property in
Madera, California when all funding is in place. PEI Group is
attempting to raise $7 million in equity now, as a condition precedent
to the Share Exchange Agreement, and would use those funds and the cash
it receives from Accessity to provide funding for working capital, and
the publicly traded common stock of Accessity Corp., for strategic
acquisitions when the transaction is complete. Funding for the Madera
production facility and its working capital requirements is expected to
be sought after the initial acquisitions in part through bank lending,
and equity. The $7 million equity financing, when completed, will
require approximately 2.5 million additional shares (plus underwriter's
warrants) to be issued to the shareholders of Pacific Ethanol.
Under the terms of the Share Exchange Agreement, which is subject to
satisfactory completion of due diligence and shareholder approval, the
existing directors, officers and employees of the Company would
terminate their positions with Accessity. The existing business
operations of Sentaur, including the related personal property in use
at the Coral Springs Florida location, will be sold to CEO and founder
Barry Siegel. The stock of DriverShield CRM, whose operations consists
of its royalty stream from ClaimsNet (see Note 6), will be transferred
to Barry Siegel in lieu of a portion of the cash payments required
under his employment contract. Mr. Siegel will also retain some costs
associated with the lease of the Coral Springs, Florida building in the
event its sale has not concluded by the closing of the Share Exchange
Agreement (see Note 14).
F-14
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
Thereafter, having shut down all activities in Florida, the management
of Accessity would be transferred to the management of the PEI Group,
which is located in California. The present Accessity Board of
Directors will have the right to nominate one director with a term that
expires until the 2005 Accessity shareholders meeting. The remaining
assets, including all of the Company's cash and investment funds,
certain prepaid and other assets and selected liabilities, would be
retained under the control of the new management of the PEI Group. In
addition, the Share Exchange Agreement requires Accessity to prosecute
the lawsuit against Presidion's investment bankers, the Mercator Group
LLC, Global Taurus LLC, et al, for in excess of $100 million, as
described in the Company's December 31, 2003 Form 10-KSB (also see Note
5). The proceeds, if any, from a successful outcome of this suit, after
the payment of legal fees, will be distributed to current Accessity
shareholders, on the date of closing of the transaction with the PEI
Group, two-thirds of any recovery from this suit with the remaining
one-third being paid the Company. In the event Accessity terminates the
Share Exchange Agreement for a Superior Proposal, as defined in the
Share Exchange Agreement, Accessity will pay the expenses of the other
parties up to a maximum amount of $150,000.
The Company has filed its preliminary proxy with the Securities and
Exchange Commission and, upon completion, will forward the proxy to its
shareholders and schedule a shareholder meeting to vote for approval of
the transaction. The Company has also been in communication with the
Nasdaq Stock Market which has deemed this proposed transaction with the
PEI Group as a "Reverse Merger" and therefore, would require the
Company to file an Initial Listing Application for continued listing of
the Company's stock on the Nasdaq SmallCap Stock Market subsequent to
the closing of this transaction.
The Company has signed two amendments to the Share Exchange Agreement
dated July 29 and October 1, 2004, revising the date upon which the
Share Exchange Agreement will terminate should the contemplated
transaction not close on October 29, 2004 and January 7, 2005,
respectively. Additionally, Amendment No. 2 to the Share Exchange
Agreement provided for revision to the following material terms: (i)
subject to shareholder approval, Accessity will sell the Sentaur Corp.
subsidiary to Barry Siegel for the sum of $5,000 (ii) an additional
condition to closing was added requiring PEI to raise at least $7
million in new equity, with all but $500,000 being held in escrow
subject to consummation of the Share Exchange.
4. PREFERRED STOCK
---------------
In connection with the sale of the Company's former 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) in February 2002 and, pursuant to the Preferred Stock
Purchase Agreement, PHH acquired 1,000 shares of the Company's Series A
Convertible Preferred Stock (the "Preferred Shares") for $1.0 million.
The Preferred Shares provided for conversion, at the holder's
discretion, into 100,000 shares of the Company's common stock (subject
to adjustments for stock splits, re-capitalization and anti-dilution
provisions), and has a preference in liquidation, as defined, of
$1,250,000.
F-15
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
Effective May 13, 2004, in exchange for certain mutual releases and the
amendment of the Stock Purchase Agreement dated October 29, 2001
resulting in the extension of certain non-compete clauses in favor of
PHH, the Company and PHH entered into a Stock Repurchase Agreement
providing the Company, or its assigns, with the right to repurchase
these Preferred Shares for $350,000. Pursuant to the terms of the Stock
Repurchase Agreement, the Company was required to repurchase the
Preferred Shares only in the event that the arbitration matter between
the Company and Presidion Solutions, Inc. (Note 5) was successfully
concluded in favor of the Company, and the award has been fully
collected. In June 2004 the arbitrator ruled in favor of the Company,
and during the third quarter the Company collected the full amount due
in a series of payments. On September 9, 2004 an unrelated individual
assumed the obligations of the Company and repurchased the preferred
shares and immediately thereafter converted them into 100,000 common
shares.
During the quarter ended June 30, 2004 the Company had reclassified its
preferred stock out of the equity section, and into a liability
account, at fair value, $350,000, since the redemption of its preferred
stock was outside the control of the Company. Upon its repurchase and
conversion into common stock, it was reclassified into equity.
5. AWARD GRANTED TO COMPANY IN ARBITRATION MATTER
----------------------------------------------
During June 2004 the Company received notice that the arbitration
proceedings under the auspices of the American Arbitration Association
had concluded that the Company was entitled to the $250,000 break-up
fee set forth in the Memorandum of Understanding ("MOU") between the
Company and Presidion Solutions, Inc. ("Presidion"), as well as its
share of the costs of the arbitration and interest from the date of the
termination of that agreement by Presidion, aggregating approximately
$30,000. As described more fully in the Company's Form 10-KSB for the
year ended December 31, 2003, the Company and Presidion had entered
into a MOU with the contemplation of merging Presidion into the
Company. Subsequently, Presidion breached the MOU and the Company filed
for arbitration. According to the arbitration terms, Presidion was
provided thirty days to make the payment. As an accommodation, the
Company accepted an initial payment of $98,332 on June 28, 2004, and an
interest-bearing promissory note, in the aggregate amount of $181,358,
comprising two payments of approximately similar amounts to be made on
July 28 and August 27, 2004. The Company received both payments on a
timely basis. The arbitration award for the break-up fee and interest
is included in Investment and Other Income in the accompanying
Condensed Consolidated Statement of Operations and Comprehensive Loss.
6. STRATEGIC PARTNERSHIP FOR INSURANCE BUSINESS
--------------------------------------------
In December 2002, the Company entered into a Strategic Partnership
Agreement (the "Partnership Agreement"), effective January 2, 2003,
with ClaimsNet, a wholly-owned subsidiary of the CEI Group, Inc.
("CEI"), a Pennsylvania corporation, in which ClaimsNet assumed the
responsibilities of servicing the operations and management of
DriverShield CRM, the business that provided insurance carriers with
collision repair management for their insureds. During 2003 the Company
processed only those claims that were initiated prior to the effective
date, and ClaimsNet has assumed responsibility for new repairs. The
Company granted an exclusive license
F-16
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
of its technology, including its website software, that enables
insurance customers to access the vehicle claims management system via
the Internet, and a non-transferable license of its network of repair
facilities, as well as training of its processing methodologies, in
order for ClaimsNet to fulfill its obligations under the Partnership
Agreement. As consideration, ClaimsNet remits a share of the profits to
the Company equivalent to 25% of vendor referral fees for repairs
initiated and completed, beginning in March 2003, and 50% of
administrative fees, as defined, on all existing customers, beginning
in February 2003, as well as 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 is for a five
year period with a two year renewal. The contract also grants ClaimsNet
an option to purchase this business, pursuant to a formula, beginning
January 1, 2007.
For the nine months ended September 30, 2004 and 2003 the Company
recorded fees from ClaimsNet of $142,000 and $82,000, respectively.
7. DISCONTINUED OPERATIONS OF AUTOMOBILE AFFINITY SERVICES BUSINESS AND
--------------------------------------------------------------------
SALE TO RELATED PARTY
---------------------
Upon approval of its board of directors, the Company negotiated a Stock
Purchase Agreement ("the ADS Agreement"), effective August 1, 2003, for
the sale of all of the outstanding shares of its wholly owned
subsidiary, DriverShield ADS Corp. ("ADS") to an employee who is the
president of this business. Under the terms of the ADS Agreement the
Company received a one-time fee of $10,000 on September 30, 2003, plus
it received reimbursement for its legal fees of approximately $10,000
incurred for this sale. As a component of the transaction, the
individual purchaser also agreed to forego all future rights to receive
compensation and other benefits associated with his employment
contract, which was to expire in December 2004, but terminated on July
31, 2003. All of the employees and related costs of the ADS business
were borne by the purchaser as of the effective date, and the Company
has no continuing management of, or responsibility for, the operations.
The net liabilities of the business at the closing date, of
approximately $31,000, consisting of primarily accounts receivable and
payable, were retained by the Company.
The purchaser of the ADS business, Barry J. Spiegel, was one of the
four members of the Board of Directors of the Company, and a
significant shareholder, who retained his seat on the Board of
Directors until he resigned in May, 2004. With the completion of this
transaction, the Company had exited from all operating activities of
its various automotive businesses.
The operating results of the affinity services business have been
presented as discontinued operations in the accompanying financial
statements. The Company recorded a net gain of $10,000 on the
transaction in the quarter ended September 30, 2003.
F-17
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
Operating results during the three and nine months ended September 30,
2003, for the discontinued affinity services operations were as
follows:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
Revenues $ 41,000 $ 419,000
Cost of sales, selling, general and (15,000) (204,000)
administrative expenses
----------------- -----------------
Income from discontinued operations, pre-tax $ 26,000 $ 215,000
----------------- -----------------
8. EARNINGS (LOSS) PER SHARE
-------------------------
Basic earnings (loss) per common share is computed by dividing earnings
(loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect the potential
dilution that could occur if common stock equivalents, such as
preferred stock, stock options and warrants, were exercised. For the
nine months ended September 30, 2004 and 2003, respectively,
approximately 415,000 and 700,000 of potentially dilutive common stock
equivalents were excluded from the earnings per share calculations, as
their inclusion would have been anti-dilutive.
9. STOCK BASED COMPENSATION PLANS
------------------------------
The Company issues stock options to its employees and outside directors
pursuant to stockholder-approved stock option programs, and accounts
for stock-based compensation plans under the intrinsic value method of
accounting as defined by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
No stock-based employee compensation cost is reflected in net income
(loss) for the three and nine months ended September 30, 2004 and 2003,
as all options granted under these plans had an exercise price equal to
the fair market value of the underlying common stock on the date of
grant. See Note 10 for variable priced stock options. For pro forma
disclosures, the estimated fair value of the option is amortized over
the vesting period, which range from immediate vesting to three years.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if we had accounted for our stock option and
stock purchase plans under the fair value method of accounting under
Statement 123, as amended by Statement 148:
F-18
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss), as reported $ (434,733) $ (279,959) $ (1,004,037) $ (1,201,800)
Deduct: Total stock-based employee
compensation expense
determined under fair value-
based method for all awards,
net of related tax effects $ (85,753) $ (133,054) $ (257,259) $ (408,735)
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (520,486) $ (413,013) $ (1,261,296) $ (1,610,535)
------------ ------------ ------------ ------------
Net income (loss) per share:
Basic, as reported $ (0.19) $ (0.13) $ (0.45) $ (0.55)
Basic, pro forma $ (0.23) $ (0.19) $ (0.56) $ (0.74)
Diluted, as reported $ (0.19) $ (0.13) $ (0.45) $ (0.55)
Diluted, pro forma $ (0.23) $ (0.19) $ (0.56) $ (0.74)
10. NON-CASH COMPENSATION FOR VARIABLE PRICED OPTIONS
-------------------------------------------------
In October 1999 the Company repriced certain options previously granted
to employees and third parties, representing the right to acquire
440,000 shares of common stock. The original grants gave holders the
right to purchase common shares at prices ranging from $5.00 to $6.20;
these were repriced to prices ranging from $3.75 to $4.15 per share. At
the date of the repricing, the new exercise price was equal to the fair
market value of the shares (110% of the fair market value in the case
of an affiliate). In addition, in September 2002 the Company granted a
five-year extension to the life of certain fully vested options that
had expired. Pursuant to FASB Interpretation No. 44, the Company
accounts for these as variable from the date of the modification until
they are exercised, forfeited or expired, and records the intrinsic
value of such grants. During the year ended December 31, 2003 all of
these options, except for 6,667, were either forfeited or expired.
There was no charge or credit during 2004, or comparable period in
2003.
11. INVESTMENTS
-----------
Investments at September 30, 2004 consist of available-for-sale
securities that had a fair market value of $3,369,000.
The Company evaluates its individual securities holdings to determine
whether it believes that a decline in investment value may be permanent
or other-than-temporary. In the quarter ended June 30, 2004 the Company
recognized an impairment, characterized as other-than-temporary, of
approximately $73,000, which included the unrealized losses previously
reported as the sole component of comprehensive losses, and most of the
decrease in value in the current quarter. While the total return for
each of its income securities covering the most recent twelve month
F-19
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
period has been positive, the Company considered that the increasing
interest rate environment, which has resulted in decreasing prices for
each of the fixed income mutual funds that the Company held at June 30,
2004, would continue. Further, in order to support its current
operating losses, the Company periodically sells some portion of its
investment holdings which may preclude its ability to hold securities
sufficiently to realize its initial investment. In July 2004 the
Company made the decision to sell one of its investment positions,
which represented $33,000 of the impairment amount noted above,
concluding that its total return no longer justified the market risk
environment and recording that amount of the impairment as a realized
loss.
The investment balance, shown above, is valued at quoted market prices
and accordingly already reflects the impairment and realized loss.
12. PRO FORMA INFORMATION
---------------------
Pro forma information, assuming that the disposal of ADS occurred at
the beginning of the earliest quarterly period presented, has not been
presented since the disposal has been accounted for as discontinued
operations, and such amounts have been reclassified from continuing
operations.
13. INCOME TAXES
------------
At December 31, 2003, the Company had operating loss carry forwards of
approximately $3,800,000 and had established a valuation allowance for
the full amount of its deferred tax asset as it is more likely that the
Company will not be able to realize the tax benefits. To the extent the
Company is profitable in the future periods such carry forwards may be
available to offset future taxable earnings. To the extent the Company
is not profitable it would not be able to realize this benefit. In the
event that the transaction with the PEI Group is consummated, there may
be limitations on the amount of the net operating loss carryforward
which may be utilized pursuant to the Internal Revenue Code.
14. FLORIDA OFFICE LEASE AND RELATED PARTY TRANSACTION AND ACCELERATION OF
----------------------------------------------------------------------
LEASEHOLD IMPROVEMENTS
----------------------
The 7,300 square foot building in Coral Springs, Florida which the
Company leases for its headquarters is owned and operated by B & B
Lakeview Realty Corp., whose three shareholders, Barry Siegel, Barry
Spiegel and Ken Friedman, are members of the Company's board of
directors. In accordance with the terms of the lease the Company paid
required rentals to B & B Lakeview Realty of approximately $36,000 in
the current quarter and $108,000 during the 2004 Period. Pursuant to
the lease agreement, the Company is also required to pay various
building maintenance, insurance and other specified charges, as
incurred, to other unrelated vendors. It was also required to establish
a restricted depositary account, in the amount of $300,000, as
described in the Liquidity and Capital Resources section of Managements
Discussion and Analysis or Plan of Operation.
In connection with the Share Exchange transaction described in Note 3,
above, B & B Lakeview Realty Corp has informed the Company that it had
listed the property for sale and has accepted an
F-20
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
offer, subject to certain closing conditions which are required to be
met prior to the anticipated closing date, currently scheduled for
early January 2005. Upon consummation of the sale of the building, the
Company will terminate its lease and rental obligations, and the
restricted funds of $300,000 would be returned to the Company, assuming
no other defaults exist. As a result of the foregoing, and the
landlord's intent to dispose of the building thereby terminating the
Company's office lease arrangement, such restricted funds, and its
security deposit, have been reclassified to a current asset. Upon
consummation of the Share Exchange transaction, in the event the
property sale has not been concluded with the purchaser taking
possession of the premises, Sentaur or Barry Siegel, will contribute
$3,500 per month for building costs and expenses, and the Pacific
Ethanol Group will pay the excess up to a maximum of $50,000.
Thereafter, either Sentaur or Barry Siegel will pay the entire amount.
In light of the related considerations noted above, the Company
reviewed the net asset value and amortization schedule of its leasehold
improvements in the Coral Springs, Florida building and has determined
that it is appropriate to accelerate the amortization period to
coincide with the anticipated sale of the building. Accordingly, it
increased the amortization in the three months ended September 30, 2004
to $52,000 from $8,000. A comparable amount will be recorded in the
fourth quarter, at which time the leaseholds will be fully amortized.
15. SEGMENT INFORMATION
-------------------
The Company currently reports two segments, medical and automotive. As
described in Note 6, however, the Company participates in the
automotive segment only through a profit-sharing arrangement; it no
longer operates, or has liability for, the current activities of the
automotive segment, which function under the managerial autonomy of
ClaimsNet, pursuant to its contractual arrangement with the Company.
The Company manages these segments separately since each serves
different markets and users, as described in Note 2.
All of the Company's sales are made within the domestic United States.
Segment information follows.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
Medical $ 150,000 $ 165,000 $ 480,000 $ 228,000
Automotive 47,000 29,000 142,000 219,000
------------ ------------ ------------ ------------
Consolidated total $ 197,000 194,000 $ 622,000 447,000
Segment profit (loss):
Medical(1) $ (20,000) $ 25,000 $ (46,000) $ (156,000)
Automotive(1) 32,000 3,000 79,000 (24,000)
Other/corporate(1) (447,000) (344,000) (1,037,000) (1,246,000)
------------ ------------ ------------ ------------
Consolidated total $ (435,000) $ (316,000) $ (1,004,000) $ (1,426,000)
F-21
ACCESSITY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
Segment profit or (loss) reflects continuing operations before
provision for income taxes (benefit).
Identifiable assets at September 30, 2004:
Medical $ 106,000
Automotive 56,000
Other, corporate 4,312,000
-----------
Consolidated total $ 4,474,000
(1) The Company does not allocate taxes, other income, interest income or
expense, or its corporate general and administrative expenses to its
individual segments. The segment profit (loss) shown above reflects
those costs that are directly and specifically identifiable with the
operating activities of the segment.
F-22
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Accessity Corp. and its wholly-owned subsidiaries (collectively
referred to as the "Company"). All material intercompany balances and
transactions have been eliminated.
DISCONTINUED OPERATIONS
On February 7, 2002, the Company sold its fleet services business (see
Note 3) and on August 1, 2003, the Company sold its affinity services
business (see Note 5). The Company's consolidated statements of
operations for the years ended December 31, 2003 and 2002 reflect the
results of these businesses as discontinued operations. Prior to 2002,
the fleet service business comprised the vast majority of the Company's
business. Although the Company only reported as one business segment,
the Company operated as distinct businesses with separate major lines
of businesses and classes of customers. Accordingly, upon their sales,
the Company determined that the fleet business and affinity services
business should be reported as discontinued operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides
depreciation for machinery and equipment and for furniture and fixtures
by the straight-line method over the estimated useful lives of the
assets, principally five years. Leasehold improvements are amortized on
a straight-line basis over their estimated useful lives or the
remaining term of the lease, whichever is less. Website development
costs are amortized over their estimated useful life of three years on
a straight-line basis. For the year ended December 31, 2002, website
development costs capitalized amounted to $76,226, of which $42,750
represented employee salary and related costs. There were no additional
website development costs in 2003.
COMMON STOCK SPLIT
Upon approval from its shareholders at the December 15, 2003 annual
shareholders' meeting, the Company effected a one-for-five reverse
common stock split. This reduced, by a factor of five, all outstanding
common shares, and all options, warrants or other issues convertible
into common stock. Commensurately, the price per share of its common
stock traded on the Nasdaq SmallCap exchange, and the effective
conversion price per share of any common shares equivalents, increased
by a factor of five. The Company and its shareholders effected this
transaction in order to comply with the continued listing requirements
of the Nasdaq SmallCap exchange which mandates a $1 price per share.
The Company has been advised that it is now in compliance with the
listing requirements. The effective date of the stock split was January
7, 2004. All references to common share amounts have been adjusted to
reflect this stock split on a retroactive basis. The number of
authorized common shares and the par value per share were not changed.
F-23
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
INVESTMENTS
Investments consist of securities available for sale, which are carried
at fair value with unrealized gains or losses reported in a separate
component of shareholders' equity. Realized gains or losses are
determined based on the specific identification method.
REVENUE RECOGNITION
The Company recognizes revenue for its collision repairs, fees and
royalties at the time of customer approval and completion of repair
services. The Company warrants such services for varying periods
ranging up to the period that the driver owns or operates the vehicle.
Such warranty expense is borne by both the Company and the repair
facilities; resulting from its management of the repair process, and
the selection of facilities, warranty expense has not been material to
the Company. The Company recognizes revenue for its medical billings
recovery business at the time it receives notification that funds are
collected by its hospital customers.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
In order to record the Company's accounts receivable at their net
realizable value, the Company must assess their collectibility. A
considerable amount of judgment is required in order to make this
assessment, including an analysis of historical bad debts and other
adjustments, a review of the aging of the Company's receivables, and
the current creditworthiness of the Company's customers.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. Significant estimates relate to the income tax
valuation allowance and conclusions regarding the impairment of
long-lived assets. Actual results could differ from those estimates,
and any difference between the amounts recorded and amounts ultimately
realized or paid will be adjusted prospectively as new facts become
known.
FAIR VALUE OF FINANCIAL INSTRUMENTS
o CASH AND CASH EQUIVALENTS
The carrying amounts approximate fair value due to the short
maturity of the investments.
F-24
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
o INVESTMENTS
Investment securities that are available for sale are stated
at fair value as measured by quoted market price.
o CAPITAL LEASE OBLIGATION
The carrying amount of the Company's capital lease obligation
approximates fair value.
ADVERTISING EXPENSE
Advertising expenditures, which are expensed as incurred, amounted to
approximately $42,000 and $196,000 in 2003 and 2002.
STOCK COMPENSATION PLAN
The Company accounts for its stock option plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" under which no compensation expense is recognized. The
Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123) for
disclosure purposes; accordingly, no compensation expense has been
recognized in the results of operations for its stock option plan.
Under the plan, the Company may grant options to its employees,
directors and consultants for up to 1,200,000 shares of common stock.
Incentive stock options may be granted at no less than the fair market
value of the Company's stock on the date of grant, and in the case of
an optionee who owns directly or indirectly more than 10% of the
outstanding voting stock ("an Affiliate"), 110% of the market price on
the date of grant. The maximum term of an option is ten years, except
for incentive stock options granted to an Affiliate, in which case the
maximum term is five years. As of December 31, 2003, approximately
808,000 options remain available for future grants.
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted in 2003 and 2002, respectively: annual dividends of
$-0- for both years, expected volatility of 146% and 136%, risk-free
interest rate of 1.13% and 1.67%, and expected life of five years for
all grants. The weighted-average fair value of stock options granted in
2003 and 2002 was $1.77 and $1.01, respectively
Under the above model, the total value of stock options granted in 2003
and 2002 was $70,763 and $1,767,498, respectively, which would be
amortized ratably on a pro forma basis over the related vesting
periods, which range from immediate vesting to five years. Had
compensation cost been determined based upon the fair value of the
stock options at grant date for all awards, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
F-25
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
Net income (loss), as reported $(1,626,038) $ 1,247,954
Stock-based compensation cost, net of
related tax effects in 2002, that would have
been included in the determination of net
income if the fair value based method had
been applied to all awards $ (562,745) $ (624,269)
----------- -----------
Pro forma $(2,188,783) $ 623,685
=========== ===========
Basic and diluted earnings (loss) per share:
As reported $ (0.74) $ 0.57
Pro forma $ (1.00) $ 0.29
Stock-based employee compensation
cost, net of related tax effects, included
in the determination of net income
as reported $ -0- $ -0-
RECENT ACCOUNT PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which is effective for exit or disposal activities
initiated after December 31, 2002. SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and that the initial measurement of a
liability be at fair value. The Company elected the early adoption of
SFAS 146 during 2002, and the adoption did not have a material impact
on its consolidated results of operations and financial position.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which is effective for
fiscal years ending after December 15, 2002. The provisions of this
statement provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation, and requires disclosure about the
effects on reported net income of an entity's accounting policy
decisions with respect to stock-based compensation. The Company did not
change its accounting method for stock-based employee compensation and,
accordingly, the provisions of this new standard did not have a
material impact on its consolidated results of operations and financial
position.
In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 requires
consolidation by the reporting entity of variable interest entities
which have certain characteristics as described therein when the
reporting entity will absorb a majority of the variable interest
entity's expected losses, receive a majority of the variable interest
entity's expected residual returns, or both. If applicable, the Company
would be required to apply the provisions of FIN 46 as of December 31,
2004. The Company has not made an initial determination as to whether
its June 2002 leasing agreement for Florida office space
F-26
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
with a related party, (See Note 14), represents an interest in a
variable interest entity, and has not determined the effect, if any, on
its financial statements.
2. DESCRIPTION OF BUSINESS AND CONCENTRATIONS
------------------------------------------
The Company, through its fleet services subsidiary, had been, since its
inception, engaged in automotive fleet management and administration of
automotive repairs for major, nationally recognized corporate clients
throughout the United States. It offered its clients a cost-effective
method for repairing their vehicles by arranging for repair of the
vehicles through its nationwide network of independently owned
contracted facilities, and it also offered subrogation, salvage and
appraisal services. This business was sold in 2002 (see Note 3).
The Company offered collision repair management services during 2002
for the insurance industry through a website on the Internet. Revenues
for such services commenced in December 2001. However, under a
strategic partnership, effective January 2, 2003 (see Note 4), the
Company transferred the operating responsibilities and management of
this business to a third party and, upon the completion of active or
in-process claims that were the Company's responsibility during the
first half of 2003, it is no longer engaged in collision repair
management, but will remain in the business through the licensing
described in Note 4. The Company's remaining automotive business that
provided automobile affinity services for individuals was sold to the
president of that subsidiary (see Note 5). The Company believes that it
operated its automotive-related businesses in one operating segment.
In the third quarter of 2002, the Company began a new business engaged
in medical billing recovery which is managed as a separate segment. The
business seeks to recoup inappropriate discounts taken from hospital
billings by institutional or insurance payors. The Company has signed
contracts with a number of hospitals throughout the United States, and
during 2003, collected in excess of $1 million on their behalf. Costs
associated with this business are expensed as incurred.
The Company is subject to credit risk through trade receivables. The
Company does not obtain collateral or other security for its
receivables. Such risk is minimized through contractual arrangements
with its customers, as well as the size and financial strength of its
customers. Based upon the Company's continuing operations, four
customers accounted for substantially all of the Company's sales in
2003 and its receivables at December 31, 2003. Two customers accounted
for 26% and 59%, respectively, of the Company's sales in 2002 and 6%
and 39% of its receivables, respectively, at December 31, 2002.
The Company is also subject to credit risk through investments which
are held at one brokerage firm and are not fully insured by the
Securities Investor Protection Corporation. The Company has no
financial instruments with significant off-balance-sheet risk.
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
F-27
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
services business, to PHH Vehicle Management Services, LLC d/b/a PHH
Arval ("PHH"), a subsidiary of the Cendant Corporation (NYSE symbol
"CD") for $6.3 million in cash, in accordance with a Stock Purchase
Agreement (the "Purchase Agreement") dated October 29, 2001 and,
pursuant to the Preferred Stock Purchase Agreement of the same date,
approved the sale of $1.0 million of the Company's convertible
preferred stock to PHH, comprising 1,000 shares (see Note 12). These
transactions were consummated on February 7, 2002. The Company recorded
a pre-tax gain on the sale of FS of approximately $6.1 million.
The accompanying consolidated statements of operations have been
presented to reflect the sale of the fleet business as discontinued
operations. Operating results of the discontinued fleet services
operations for the year ended December 31, 2002, to the date of sale,
are summarized as follows:
2002
------------
Revenues $ 1,087,658
Cost of Sales (878,776)
Selling, general and administrative (165,157)
------------
Income from discontinued operations, pre-tax $ 43,725
============
4. STRATEGIC PARTNERSHIP FOR INSURANCE BUSINESS
--------------------------------------------
In December 2002, the Company entered into a Strategic Partnership
Agreement (the "Partnership Agreement"), effective January 2, 2003,
with ClaimsNet, Inc. ("ClaimsNet"), a wholly-owned subsidiary of the
CEI Group, Inc. ("CEI"), a Pennsylvania corporation, in which ClaimsNet
assumed the responsibilities of operations and management of
DriverShield CRM, the business that provided insurance carriers with
collision repair management for their insureds. During 2003, the
Company processed those claims that were initiated prior to the
effective date, and ClaimsNet assumed responsibility for new repairs.
The Company granted an exclusive license of its technology, including
its website software, which enables insurance customers to access the
vehicle claims management system via the Internet, and a
non-transferable license of its network of repair facilities, as well
as training of its processing methodologies, in order for ClaimsNet to
fulfill its obligations under the Partnership Agreement. ClaimsNet
agreed to pay royalties to the Company equivalent to 25% of vendor
referral fees and 50% of administrative fees, as defined, on all
existing customers, beginning in March and February 2003, respectively,
and 15% of all administrative and vendor referral fees for all new
customers that use the licensed technology to have their vehicles
repaired. The term of the Partnership Agreement is for a five-year
period, with a two-year renewal, unless terminated ninety days prior to
the end of the then-current term.
Additionally, ClaimsNet has an option to purchase the business
commencing on January 1, 2007 for a purchase price equal to the total
royalties paid for the previous twenty-four months. Upon completion of
those repairs that the Company processed during the first part of 2003,
the Company is no longer directly responsible for auto repairs, but
remains liable for automobile
F-28
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
repair warranties provided. Historically, warranty costs have not been
significant. Total royalties earned by the Company during 2003 amounted
to $162,693.
As of December 31, 2003, the net book value of the website development
costs amounted to approximately $104,000, and the Company has
determined that such costs are not impaired due to the anticipated cash
flows from the Partnership Agreement.
5. DISCONTINUED OPERATIONS OF AUTOMOBILE AFFINITY SERVICES BUSINESS AND
--------------------------------------------------------------------
SALE TO RELATED PARTY
---------------------
Upon approval of its board of directors, the Company negotiated a Stock
Purchase Agreement ("the ADS Agreement"), effective August 1, 2003, for
the sale of all of the outstanding shares of its wholly owned
subsidiary, DriverShield ADS Corp. ("ADS") to an employee who is the
president of this business. Under the terms of the ADS Agreement, the
Company received a one-time fee of $10,000 on September 30, 2003, plus
it received reimbursement for its legal fees of approximately $10,000
incurred for this sale. As a component of the transaction, the
individual purchaser also agreed to forego all future rights to receive
compensation and other benefits associated with his employment
contract, which was to expire in December 2004, but terminated on July
31, 2003. All of the employee and related costs of the ADS business
were borne by the purchaser as of the effective date, and the Company
has no continuing management of, or responsibility for, the operations.
The net liabilities of the business at the closing date, of
approximately $31,000, consisting of primarily accounts receivable and
payable, were retained by the Company.
The purchaser of the ADS business is one of four directors of the
Company, and a significant shareholder.
The operating results of the affinity services business have been
presented as discontinued operations in the accompanying financial
statements. The Company recorded a net gain of $10,000 on the
transaction in the quarter ended September 30, 2003.
Operating results during the periods ended December 31, 2003 and 2002,
for the discontinued affinity services operations, through the date of
its sale on August 1, 2003, were as follows:
2003 2002
---------- ----------
Revenues $ 419,417 $1,123,436
Cost of sales, selling general
and administrative expenses 203,763 331,912
---------- ----------
Income from discontinued affinity
services subsidiary, pre-tax $ 215,654 $ 791,524
========== ==========
F-29
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
6. INVESTMENTS
-----------
AT DECEMBER 31, 2003:
UNREALIZED
FAIR HOLDING
COST VALUE LOSS
---------- ---------- ----------
Fixed income mutual funds $4,350,899 $4,313,114 $ (37,785)
AT DECEMBER 31, 2002:
UNREALIZED
FAIR HOLDING
COST VALUE GAIN
---------- ---------- ----------
Fixed income mutual funds $1,984,759 $1,985,362 $ 603
Corporate debt securities 3,310,518 3,324,119 13,601
---------- ---------- ----------
$5,295,277 $5,309,481 $ 14,204
========== ========== ==========
7. PROPERTY AND EQUIPMENT AND ASSET IMPAIRMENT
-------------------------------------------
PROPERTY AND EQUIPMENT
2003 2002
---------- ----------
Machinery and equipment $ 500,090 $ 630,564
Furniture and fixtures 35,594 142,769
Leasehold improvements 140,855 143,746
Website development costs 291,654 615,642
---------- ----------
968,193 1,532,721
Less accumulated depreciation
and amortization 518,898 823,745
---------- ----------
$ 449,295 $ 708,976
========== ==========
During 2003 and 2002, the Company wrote off certain fully depreciated
property and equipment aggregating $586,899 and $630,710.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
forecasted net undiscounted cash flows expected to be generated by the
asset. If such assets are determined to be impaired, the impairment to
be recognized is measured by the
F-30
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
amount by which the carrying amount of the assets exceeds the
discounted cash flows or appraised values, depending upon the nature of
the assets.
8. CAPITAL LEASE OBLIGATION
------------------------
In August 2002, the Company entered into a lease agreement containing a
bargain purchase option for computer equipment. Obligations under the
capital lease have been recorded in the accompanying financial
statements at the present value of future minimum lease payments,
discounted at an interest rate of 12.96%. The remaining capital lease
obligation of $20,386 is payable during 2004 and presented as a current
obligation in the financial statements at December 31, 2003.
9. EARNINGS (LOSS) PER COMMON SHARE
--------------------------------
Basic earnings (loss) per common share are computed by dividing the
earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common share
reflects the potential dilution that could occur if common stock
equivalents, such as stock options and warrants, were exercised. The
computation of diluted earnings (loss) per common share in 2003 and
2002 excludes the effect of the assumed exercise of approximately
517,000 and 920,000 stock options and warrants, and the assumed
conversion of preferred stock that was outstanding as of December 31,
2003 and 2002 because the effect would be anti-dilutive.
Basic and diluted earnings (loss) per common share is calculated as
follows:
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
2003 - Net Loss $ (1,626,038) 2,195,519 $ (0.74)
2002 - Net Income $ 1,247,954 2,180,062 $ .57
10. STOCK OPTIONS
-------------
VARIABLE PRICED OPTIONS
In October 1999, the Company repriced certain options granted to
employees and third parties, representing the right to purchase 440,000
shares of common stock. The grants gave the holders the right to
purchase common stock at prices ranging from $5.00 to $6.20 per share.
The options were repriced at prices ranging from $3.75 to $4.15 per
share. At the date of the repricing, the new exercise price was equal
to the fair market value of the shares (110% of the fair market value
in the case of an affiliate). Pursuant to FASB Interpretation No. 44,
the Company accounts for these modified option awards as variable from
the date of the modification to the date the awards are exercised,
forfeited, or expire unexercised. As of December 31, 2003, all of these
options, except for 33,334, were either forfeited or expired. There was
no charge or credit for the year ended December 31, 2003 as the price
per share of common stock remained below the exercise
F-31
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
price. For the year ended December 31, 2002, $132,000 in non-cash
compensation credits (income) were recorded, resulting from a decrease
in the price per share.
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
Average
Number Exercise Exercise
of Shares Price Range Price
--------- ----------- -----
Options outstanding, January 1, 2002 644,733 $1.56 - $18.75 $4.40
Options granted 356,000 $2.55 - $ 9.00 $7.15
Options canceled (239,333) $1.56 - $15.95 $6.20
Options exercised (46,067) $1.56 - $ 3.75 $2.80
Options outstanding, December 31, 2002 715,333 $1.51 - $18.75 $5.35
Options granted 40,000 $ 6.25 $6.25
Options canceled (293,000) $1.56 - $18.75 $5.37
Options exercised (70,000) $1.56 - $ 1.72 $1.65
Options outstanding, December 31, 2003 392,333 $1.56 - $10.65 $6.00
Options exercisable, December 31, 2002 384,666 $1.56 - $18.75 $4.15
Options exercisable, December 31, 2003 219,000 $1.56 - $10.65 $5.15
The following table summarizes information about options outstanding
and exercisable at December 31, 2003:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
--------------- ----------- ------------ ----- ----------- -----
$1.56-$5.00 111,666 2.00 $3.26 108,333 $3.24
$5.50-$7.45 167,667 3.49 $6.42 71,000 $6.38
$8.00-$10.65 113,000 3.03 $8.07 39,667 $8.20
------- -------
392,333 219,000
======= =======
F-32
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
11. COMMON STOCK AND STOCK WARRANTS
-------------------------------
In July 2001, the Company issued 20,000 shares of its common stock to
an individual in consideration of a consulting agreement covering a
one-year period ending June 30, 2002. The Company recorded the cost of
the services based on the price per share of its common stock at the
date of their issuance, aggregating $150,000, and amortized the cost
over the term of the contract.
During 2001, the Company granted warrants to acquire 20,000 shares of
its common stock at $2.65 per share, and an additional 5,000 warrants
to acquire 5,000 shares of its common stock at $4.35 per share (the
fair market values at the dates of the grants) in consideration for
certain consulting services. The warrants expire in 2006. The Company
recorded consulting expense in the amount of $9,000, which was equal to
the value of the services provided.
In December 1997, the Company raised $2,330,813 through the private
placement issuance of 116,250 units at $20.05 per unit. Each unit
included one warrant. In 2002, these warrants expired unexercised.
A $10 million equity funding commitment, which provided the Company the
option of drawing equity financing against an available line, expired
in November 2001, and was unused during its twelve- month duration. The
financing source was provided warrants to purchase 13,794 of the
Company's common stock, at $10.85 per share, in exchange for providing
this line. In 2002, these warrants expired unexercised.
On June 27, 2002, the Company's Board of Directors authorized a common
stock repurchase program whereby up to 100,000 shares of the Company's
common stock may be purchased in open market transactions over the
following 24 months. As of December 31, 2002, 18,645 shares had been
repurchased under the program for amounts aggregating $92,697.
12. PREFERRED STOCK AND PREFERRED STOCK PURCHASE RIGHTS
---------------------------------------------------
Pursuant to the Preferred Stock Purchase Agreement between the Company
and PHH as part of its purchase of the fleet business in February 2002
(Note 3), PHH invested $1.0 million to acquire 1,000 shares of the
Company's Series A convertible preferred stock, par value of $.01 per
share (the "Preferred Shares"). The Preferred Shares can be converted,
at the holder's discretion, into 100,000 shares of the Company's common
stock (subject to adjustments for stock splits, recapitalization and
anti-dilution provisions). Other key terms of the Preferred Shares
include voting rights, together with the common shareholders, on all
matters, and separately on certain specified matters; a liquidation
preference equal to 125% of their initial investment paid only in the
event of dissolution of the Company; the nomination of one board
member; certain pre-emptive rights and registration rights; and the
approval of Preferred Shares for certain corporate actions. PHH has not
exercised its right to nominate a board member.
On December 28, 1998, the Board of Directors authorized the issuance of
up to 200,000 shares of non-redeemable Junior Participating Preferred
Stock ("JPPS"). The JPPS shall rank junior to all other series of
preferred stock (but senior to the common stock) with respect to
payment of dividends and any other distributions. Among other rights,
the holders of the JPPS shall be
F-33
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
entitled to receive, when and if declared, quarterly dividends per
share equal to the greater of (a) $100 or (b) the sum of 1,000 (subject
to adjustment) times the aggregate per share of all cash and non cash
dividends (other than dividends payable in common stock of the Company
and other defined distributions). Each share of JPPS shall entitle the
holders to voting rights equal to 1,000 votes per share. The holders of
JPPS shall vote together with the common stockholders. No shares of
JPPS have been issued.
On December 28, 1998, the Board of Directors also adopted a Rights
Agreement ("the Agreement"). Under the Agreement, each share of the
Company's common stock carries with it one preferred share purchase
right ("Rights"). The Rights themselves will at no time have voting
power or pay dividends. The Rights become exercisable (1) when a person
or group acquires 20% or more of the Company's common stock (10% in the
case of an Adverse Person as defined) and an additional 1% or more in
the case of acquisitions by any shareholder with beneficial ownership
of 20% or more on the record date (10% in the case of an Adverse Person
as defined) or (2) on the tenth business day after a person or group
announces a tender offer to acquire 20% or more of the Company's common
stock (10% in the case of an Adverse Person as defined). When
exercisable, each Right entitles the holder to purchase 1/1000 of a
share of the JPPS at an exercise price of $137.50 per 1/1000 of a
share, subject to adjustment.
13. EMPLOYEE BENEFIT PLAN
---------------------
The Company has a 401(k) profit sharing plan for the benefit of all
eligible employees as defined in the plan documents. The plan provides
for voluntary employee salary contributions not to exceed the statutory
limitation provided by the Internal Revenue Code. The Company may, at
its discretion, match within prescribed limits, the contributions of
the employees or, in certain circumstances, may make additional
contributions in order to retain the tax exempt status of the plan.
Employer contributions to the plan amounted to approximately $11,000 in
2003 and $14,000 in 2002.
14. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
------------------------------------------------------------
OPERATING LEASES
The Company's lease of office space that it formerly occupied in New
York, and in its new headquarters in Florida, require minimum rentals
as well as common area maintenance and other expenses including
property insurance and real estate taxes. Until the lease terminated in
June 2002, a portion of its New York premises was under a sublease
agreement. Sublease income was approximately $22,000 in 2002.
In May 2002, the Company signed a five and a half year lease to occupy
a new 7,300 square foot building in Coral Springs, Florida. This
property is owned and operated by B&B Lakeview Realty Corp., whose
three shareholders, Barry Siegel, Barry Spiegel and Ken Friedman, are
members of the Company's Board of Directors. The terms of the lease
require net rental payments plus property insurance and real estate
taxes. The lease term commenced in October 2002. The Company and the
property owners each expended approximately $140,000 to complete the
interior space. In addition, during July 2002, the Company established
a $300,000 interest-
F-34
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
bearing certificate of deposit with a Florida bank (the mortgage lender
to B&B Lakeview Realty Corp.) as collateral for its future rental
commitments. The certificate of deposit declines to $200,000 after the
36th month, $100,000 after the 48th month, and to zero after 60 months,
as the balance of the rent commitment declines. During 2003, the
Company paid rental costs of approximately $127,000 to this related
party, and accrued an additional $20,000 as reimbursement for facility
expenses paid by the related party. The Company has a security deposit
of $22,000 held by the related party.
Occupancy expense under the rental arrangements, including common area
maintenance, property insurance and real estate taxes, was $177,000 in
2003 and $180,000 in 2002.
The Company's future minimum rental commitments payable to the related
party are as follows:
2004 $137,000
2005 146,000
2006 157,000
2007 168,000
Thereafter 44,000
--------
$652,000
========
CAPITAL LEASE
The Company leases certain computer equipment with a lease term through
2004. Obligations under the capital lease have been recorded in the
accompanying financial statements at the present value of future
minimum lease payments. The capitalized cost included in property and
equipment is $82,719. Accumulated depreciation on the equipment at
December 31, 2003 was $16,544.
The future minimum lease payments under the capital lease are as
follows:
December 31, 2004 $ 21,750
Less amount representing
interest and fees $ 1,364
-----------
Present value of future minimum
lease payments $ 20,386
===========
EMPLOYMENT CONTRACTS
At December 31, 2003, the Company has employment contracts with its two
principal officers, which expire on December 31, 2004. The agreements
provide minimum annual salaries of $300,000 to the Chief Executive
Officer ("CEO"), and $155,000 to the Chief Financial Officer ("CFO").
The CEO's contract also specified a one-time bonus award of $250,000
plus 50,000 additional stock options in recognition of the sale of the
fleet business in February 2002. In connection with these employment
contracts, 140,000 options were granted in February 2002. In addition,
another subsidiary of the Company has an employment agreement with its
President that
F-35
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
commenced on September 3, 2002, and expires on December 31, 2004,
providing a base salary of $175,000 plus performance bonus, and he has
been granted 50,000 stock options. During 2003, employment contracts
with the Company's former President and another subsidiary President
were terminated.
The CEO's employment contract provides that, in the event of
termination of the employment within three years after a change in
control of the Company, then the Company would be liable to pay a
lump-sum severance payment of three years' salary (average of last five
years), less $100, in addition to the cash value of any outstanding but
unexercised stock options. The other employment contracts of the
principal officers provide that, in the event of termination of the
employment of the officer within one year after a change in control of
the Company, then the Company would be liable to pay a lump sum
severance payment of one year's salary, as determined on the date of
termination or the date on which a change in control occurs, whichever
is greater. In no event would the maximum amount payable exceed the
amount deductible by the Company under the provisions of the Internal
Revenue Code.
LITIGATION
In January 2003, the Company was served with a complaint filed by Mr.
Gerald Zutler, its former President and Chief Operating Officer,
alleging, among other things, that the Company breached his employment
contract, that there was fraudulent concealment of the Company's
intention to terminate its employment agreement with Mr. Zutler, and
discrimination on the basis of age and aiding and abetting violation of
the New York State Human Rights Law. Mr. Zutler is seeking damages
aggregating $2.25 million, plus punitive damages and reasonable
attorney's fees. Management believes that the Company properly
terminated Mr. Zutler's employment for cause, and intends to vigorously
defend this suit. Answer to the complaint was served by the Company on
February 28, 2003. In 2003, Mr. Zutler filed a motion to have our
attorney removed from the case on the basis that he would call our
attorney as a witness. The motion was granted by the court, but the
Company has appealed that ruling and the action is stayed pending
determination of the appeal. The Company has filed a claim with its
insurance carrier under its directors and officers and employment
practices' liability policy. The carrier has agreed to cover certain
portions of the claim as they relate to Mr. Siegel.
The policy has a $50,000 deductible and a liability limit of $3,000,000
per policy year. At the present time, the carrier has agreed to cover
the portion of the claim that relates to Mr. Siegel and has agreed to a
fifty percent allocation of expenses.
Therefore, the Company must incur $100,000 of legal expenses to satisfy
the policy deductible before the carrier commences reimbursing the
Company for fifty percent of the legal defense and/or any possible
recovery in favor of the plaintiff.
The Company filed a Demand for Arbitration against Presidion Solutions,
Inc., ("Presidion"), alleging that Presidion breached the terms of the
Memorandum of Understanding (the "Memorandum") between the Company and
Presidion, dated January 17, 2003. The Company is seeking a break-up
fee of $250,000 pursuant to the terms of the Memorandum, alleging that
Presidion breached the Memorandum by wrongfully terminating the
Memorandum. Additionally,
F-36
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
the Company is seeking its out-of-pocket costs of due diligence,
amounting to approximately $37,000. Presidion has filed a counterclaim
against the Company, alleging that the Company had breached the
Memorandum and, therefore, owes Presidion a break-up fee of $250,000.
The Company believes that the claim alleged by Presidion is without
merit. The case was heard before the American Arbitration Association
in Broward County, Florida in late February 2004. A decision is
expected during the second quarter of 2004.
No provision for any loss has been made with respect to either of the
above matters.
In addition, the Company has filed a lawsuit seeking damages in excess
of $100,000,000 as a result of discovery conducted in connection with
the Presidion matter described above, against Presidion's investment
bankers, Mercator Group, LLC and related parties ("Mercator") and
Taurus Global LLC ("Taurus"), ("the defendants"), alleging that these
parties tortuously interfered in the transaction between the Company
and Presidion. Mercator has made a motion to dismiss this action with a
hearing pending some time in the future. The Company has obtained a
default judgment against Taurus and intends to enforce this judgment.
The final outcome of the Mercator action will most likely take an
indefinite time to resolve. The Company currently has limited
information regarding the financial condition of the defendants and the
extent of their insurance coverage. Therefore, it is possible that the
Company may prevail but may not be able to collect the judgment.
15. CLOSURE OF NEW YORK OFFICE
--------------------------
In conjunction with relocating its office within New York, and then to
Florida during the fourth quarter of 2002, the Company incurred an
aggregate expense of $386,000, including $216,000 relating to one-time
employee termination benefits, and the remainder for relocation
expenses. Such amounts are included in general and administrative
expenses in the consolidated statement of operations.
16. SEGMENT INFORMATION
-------------------
The Company currently reports two segments, medical and automotive. As
described in Note 4, however, the Company participates in the
automotive segment only through a profit-sharing arrangement; it no
longer operates, or has liability for, the current activities of the
automotive segment, which is under the managerial autonomy of ClaimsNet
pursuant to its contractual arrangement with the Company. The Company
manages these segments separately since each services different markets
and users.
F-37
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
All of the Company's revenues are derived from customers within the
continental United States. Segment information as of and for the years
ended December 31, 2003 and 2002, follows:
2003 2002
------------ ------------
Revenue:
Automotive $ 280,000 $ 2,895,000
Medical 378,000 --
------------ ------------
Consolidated total $ 658,000 $ 2,895,000
Segment profit (loss):
Automotive $ 8,000 $ (760,000)
Medical (195,000) (182,000)
Other, corporate (1,665,000) (2,804,000)
------------ ------------
Consolidated total $ (1,852,000) $ (3,746,000)
============ ============
Segment profit (loss) is from continuing operations before provision
for income taxes (benefit).
2003 2002
------------ ------------
Identifiable assets:
Automotive $ 130,000 $ 303,000
Medical 145,000 3,000
Other, corporate 5,207,000 7,463,000
------------ ------------
Consolidated total $ 5,482,000 $ 7,769,000
============ ============
The Company does not allocate taxes, investment and other income,
interest expense, or general and administrative expenses to its
individual segments. The segment profit (loss) shown above reflects
those costs that are directly and specifically identifiable with the
operating activities of the segment.
2003 2002
------------ ------------
Capital expenditures:
Automotive $ -- $ 114,000
Medical 17,000 --
Other, corporate 23,000 382,000
------------ ------------
Consolidated total $ 40,000 $ 496,000
============ ============
Depreciation and amortization:
Automotive $ 155,000 $ 201,000
Medical 2,000 --
Other, corporate 142,000 200,000
------------ ------------
Consolidated total $ 299,000 $ 401,000
============ ============
F-38
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
17. INCOME TAXES
------------
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards (SFAS) 109, "Accounting for
Income Taxes". Under the liability method specified by SFAS 109,
deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in
effect when these differences reverse.
At December 31, 2003 and 2002, the Company has a net operating loss
carryforward of approximately $3,600,000 and $2,000,000. At December
31, 2003 and 2002, the Company has provided a valuation allowance for
the full amount of its deferred tax asset since it is more likely than
not that the Company will not realize the benefit.
At December 31, 2003, the Company's net operating loss carryforwards
are scheduled to expire as follows:
Year ended December 31,
2018 $642,000
2019 946,000
2021 439,000
2023 1,573,000
----------
$3,600,000
==========
Income tax expense (benefit) was allocated as follows:
2003 2002
------------ ------------
Loss from continuing operations $ -- $ (2,276,619)
Income from discontinued operations -- 4,200,249
------------ ------------
Income tax expense -- $ 1,923,630
============ ============
Income tax expense (benefit) from continuing operations was comprised
of the following:
2003 2002
------------ ------------
Current tax expense, state and local $ -- $ 23,630
------------ ------------
Deferred benefit:
Federal -- (1,955,211)
State and local -- (345,038)
------------ ------------
-- (2,300,249)
------------
Income tax (benefit) -- $ (2,276,619)
============ ============
F-39
ACCESSITY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
A reconciliation of U.S. statutory federal income tax expense (benefit)
to income tax expense (benefit) on earnings (loss) from continuing
operations is as follows:
2003 2002
------------------------------ ------------------------------
AMOUNT % AMOUNT %
------------ ------------ ------------ ------------
Expected tax (benefit) at U.S.
statutory rate $ (629,575) (34%) $ (1,273,651) (34.0%)
State taxes, net of federal effect -- -- 6,471 0.2
Intraperiod allocation to adjust
effective tax rate -- -- (1,009,439) (26.9)
Operating losses generating no
current tax benefit 629,575 34.0 -- --
------------ ------------ ------------ ------------
Income tax expense (benefit) $ -- -- $ (2,276,619) (60.7%)
============ ============ ============ ============
Deferred tax assets and liabilities consist of the following:
2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 1,350,000 750,000
Deferred compensation -- 40,000
Other 10,000 --
------------ ------------
Income tax (benefit) 1,360,000 790,000
Deferred tax liability, other -- (20,000)
------------ ------------
1,360,000 770,000
Valuation allowance (1,360,000) (770,000)
------------ ------------
Deferred tax asset $ -- $ --
============ ============
F-40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
May 20, 2004
To the Stockholders and Board of Directors
Pacific Ethanol, Inc.
Fresno, California
We have audited the consolidated balance sheet of Pacific Ethanol, Inc. (the
"Company") as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity and cash flows from January 30, 2003
(inception) to December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided 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 Pacific
Ethanol, Inc., as of December 31, 2003 and the consolidated results of its
operations and its cash flows for the period from January 30, 2003 (inception)
through December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations and has an
accumulated deficit, that raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ HEIN & ASSOCIATES LLP
F-41
PACIFIC ETHANOL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
------------ ------------
2003 2004
------------ ------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 249,084 $ 220,908
Accounts receivable 24,188 8,637
Inventories 1,734 1,734
Prepaid expenses 21,677 552,736
Related party notes receivable 205,035 5,223
Business acquisition costs -- 265,217
Other receivables 305,370 80,880
------------ ------------
Total current assets 807,088 1,135,335
PROPERTY AND EQUIPMENT, net 5,664,213 6,294,046
DEBT ISSUANCE COSTS, net 88,333 73,333
------------ ------------
TOTAL ASSETS $ 6,559,634 $ 7,502,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 745,978 964,873
Accrued payroll 13,359 9,780
Accrued interest payable 152,180 20,606
Other accrued liabilities 253,147 698,081
------------ ------------
Total liabilities 1,164,664 1,693,340
RELATED-PARTY NOTE PAYABLE 4,027,142 3,967,544
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 30,000,000 shares authorized,
no shares issued and outstanding as of December 31, 2003
and September 30, 2004 -- --
Common stock, no par value; 30,000,000 shares authorized,
11,733,200 and 13,332,200 shares issued and outstanding as
of December 31, 2003 and September 30, 2004, respectively 2,227,507 3,381,554
Additional paid-in capital -- 1,380,000
Due from stockholders (1,000) (68,100)
Accumulated deficit (858,679) (2,851,624)
------------ ------------
Total stockholders' equity 1,367,828 1,841,830
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,559,634 $ 7,502,714
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
F-42
PACIFIC ETHANOL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
From January 30, From January 30, Nine months
2003 (inception) 2003 (inception) ended
to December 31, to September 30, September 30,
------------ ------------ ------------
2003 2003 2004
------------ ------------ ------------
(Unaudited) (Unaudited)
NET SALES $ 1,016,594 $ 923,985 $ 16,832
COST OF GOODS SOLD 946,012 822,412 10,789
------------ ------------ ------------
GROSS PROFIT 70,582 101,573 6,043
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 647,731 403,914 714,730
NONCASH COMPENSATION FOR CONSULTING FEES -- -- 862,500
------------ ------------ ------------
OPERATING INCOME (577,149) (302,341) (1,571,187)
OTHER INCOME (EXPENSE)
Other income 1,292 -- 2,368
Interest expense (281,222) (154,135) (415,726)
------------ ------------ ------------
Total other income (expense) (279,930) (154,135) (413,358)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (857,079) (456,476) (1,984,545)
PROVISION FOR INCOME TAXES 1,600 1,600 8,400
------------ ------------ ------------
NET LOSS $ (858,679) $ (458,076) $ (1,992,945)
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
F-43
PACIFIC ETHANOL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 30, 2003 (INCEPTION) TO DECEMBER 31, 2003 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
Series A Redeemable
Convertible
Preferred Stock Common Stock Additional Due from
------------------ ----------------------- Paid-In Stock- Accumulated
Shares Amount Shares Amount Capital holders Deficit Total
---- ---------- ---------- ---------- ---------- -------- ----------- -----------
BALANCE, January 30, 2003
(inception) -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
to the founders -- -- 10,000,000 1,000 -- (1,000) -- --
Issuance of common stock
for note payable -- -- 1,000,000 1,202,682 -- -- -- 1,202,682
Issuance of common stock
to friends and family,
net offering costs of
$75,975 -- -- 733,200 1,023,825 -- -- -- 1,023,825
Net loss -- -- -- -- -- -- (858,679) (858,679)
---- ---------- ---------- ---------- ---------- -------- ----------- -----------
BALANCE, December 31, 2003 -- -- 11,733,200 2,227,507 -- (1,000) (858,679) 1,367,828
Issuance of common stock
to friends and family,
net offering costs of
$7,127 (unaudited) -- -- 19,000 21,373 -- -- -- 21,373
Issuance of warrants to
purchase 920,000 shares
of common stock for
noncash compensation to
nonemployee for services
(unaudited) -- -- -- -- 1,380,000 -- -- 1,380,000
Exercise of
Warrants (unaudited) -- -- 920,000 92 -- -- -- 92
Collection of shareholder
receivable (unaudited) -- -- -- -- -- 400 -- 400
Issuance of common stock
in working capital round,
net offering costs of
$107,418 (unaudited) -- -- 500,000 892,582 -- (67,500) -- 825,082
Conversion of LDI debt
(unaudited) -- -- 160,000 240,000 -- -- -- 240,000
Net loss (unaudited) -- -- -- -- -- -- (1,992,945) (1,992,945)
---- ---------- ---------- ---------- ---------- -------- ----------- -----------
BALANCE, September 30, 2004
(unaudited) -- $ -- 13,332,200 $3,381,554 $1,380,000 $(68,100) $(2,851,624) $ 1,841,830
==== ========== ========== ========== ========== ======== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
F-44
PACIFIC ETHANOL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
From January 30, From January 30, Nine months
2003 (inception) 2003 (inception) ended
to December 31, to September 30, September 30,
------------ ------------ ------------
2003 2003 2004
------------ ------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (858,679) $ (458,076) $ (1,992,945)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 46,684 28,395 58,894
Amortization of debt issuance costs 11,667 6,667 15,000
Interest expense relating to amortization of debt
discount on related party note payable 129,824 69,195 180,402
Non cash compensation for consulting services -- -- 862,500
Changes in operating assets and liabilities:
Accounts receivable (24,188) (128,642) 15,551
Other receivable (305,370) (1,000) 224,490
Inventories (1,734) (12,270) --
Prepaid expenses (21,677) (18,039) (13,558)
Accounts payable 745,978 582,537 218,894
Interest payable 152,180 84,031 (131,574)
Payroll taxes payable 13,359 12,575 (3,579)
Accrued liabilities 253,147 51,811 444,934
------------ ------------ ------------
Net cash provided by (used in) operating activities 141,191 217,184 (120,991)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (610,897) (70,511) (688,727)
Issuance of related party notes receivable (205,035) -- --
Payments received on related party notes receivable -- -- 199,812
Costs associated with business acquisition -- -- (265,217)
------------ ------------ ------------
Net cash used in investing activities (815,932) (70,511) (754,132)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock, net 1,023,825 724,050 846,855
Proceeds from exercise of warrants -- -- 92
Payments of debt issuance costs (100,000) (100,000) --
------------ ------------ ------------
Net cash provided by financing activities 923,825 624,050 846,947
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 249,084 770,723 (28,176)
CASH AND CASH EQUIVALENTS, beginning of period -- -- 249,084
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 249,084 $ 770,723 $ 220,908
============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 487 $ 108 $ 297,149
============ ============ ============
Income taxes paid $ 1,600 $ 1,600 $ 8,400
============ ============ ============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Purchase of grain facility with note payable $ 5,100,000 $ 5,100,000 $ --
============ ============ ============
Issuance of stock for receivable $ 1,000 $ 1,000 $ 68,100
============ ============ ============
Issuance of warrants for future consulting services $ -- $ -- $ 1,380,000
============ ============ ============
Conversion of debt to equity $ -- $ -- $ 240,000
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
F-45
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------
Pacific Ethanol, Inc. (the "Company") was incorporated in California on
January 30, 2003 to construct an ethanol production facility and
manufacture and distribute ethanol fuel in California.
On June 11, 2003, the Company and an individual formed Pacific Ag
Products, LLC (Pacific Ag Products), which was organized in the State
of California, as a limited liability company to market and sell the
by-product (Distillers Grain) of ethanol production to dairies. The
Company acquired a 90% interest in Pacific Ag Products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
LIQUIDITY AND FINANCIAL CONDITION - The accompanying financial
statements have been prepared in conformity with accounting principles
generally accepted in the United States, which contemplate continuation
of the Company as a going concern. However, the Company is subject to
the risks and uncertainties associated with a new business, has no
established source of revenue and there is no guarantee that the
Company can execute its plans. These matters raise substantial doubt
about the Company's ability to continue as a going concern. These
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company intends
to fund its future cash needs, primarily through capital raises
assisted by the reverse merger into a public shell, and through taking
on additional debt (see Note 8).
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the company and its subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
STOCK-BASED COMPENSATION - Stock or other equity-based compensation for
non-employees is accounted for under the fair-value method as required
by SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18,
ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN
EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR
SERVICES. Under this method, the resulting compensation is measured at
the fair value of the equity instrument on the date of vesting and
recognized as a charge to operations over the service period, which is
usually the vesting period.
CASH AND CASH EQUIVALENTS - For financial statement purposes, the
Company considers all highly liquid investments with an original
maturity of three months or less, to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability
of its customers to make required payments. The allowance is determined
through an analysis of the aging of accounts receivable and assessments
of risk that are based on historical trends and an evaluation of the
impact of current and projected economic conditions. The Company
evaluates the past-due status of its accounts receivable based on
contractual terms of sale. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. At
September 30, 2004, management of the Company believes that all
receivables are collectible, and thus an allowance for bad debt has not
been established. The
F-46
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
Company had no bad debt expense for the period from January 30, 2003
(inception) to September 30, 2004.
INVENTORIES - In connection with the acquisition of the grain facility
in June 2003 (see note 4), the Company acquired inventory, primarily
representing whole and rolled corn for a total of $770,298. During
2003, the majority of the inventory acquired was sold and the remaining
balance at September 30, 2004 represents the unsold balance.
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company provides inventory reserves for estimated
obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated realizable value based upon
assumptions about future demand and market conditions.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Depreciation is computed using the straight-line method
over the following estimated useful lives:
Facilities 10 - 25 years
Equipment and vehicles 7 years
Office furniture, fixtures and equipment 5 - 10 years
The cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of
the asset. The cost of fixed assets sold, or otherwise disposed of, and
the related accumulated depreciation or amortization are removed from
the accounts, and any resulting gains or losses are reflected in
current operations.
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and
circumstances indicate that the cost of long-lived assets used in
operations might be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated undiscounted
cash flows estimated to be generated by those assets would be compared
to their carrying amounts to determine if a write-down to market value
or discounted cash flows is required.
REVENUE RECOGNITION - During 2003, the Company sold corn from inventory
acquired in the purchase of a grain facility (see inventories above),
and during 2003 and for the nine months ended September 30, 2004,
received a handling fee from its trans-loading capabilities. Revenue
from the sale of grains was recognized upon shipment to customers.
Revenue from trans-loading services was recognized when unloading the
rail cars, thus indicating that the service was completed.
INCOME TAXES - Income taxes are accounted for under Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
basis of assets and liabilities, and are measured using enacted tax
rates and laws that are expected to be in effect when the differences
reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
USE OF ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates
F-47
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments are determined at discrete points in time based
on relevant market information. These estimates involve uncertainties
and cannot be determined with precision.
The following methods and assumptions were used in estimating the
indicated fair values of the Company's financial instruments:
Cash and cash equivalents, accounts receivable, notes
receivable, accounts payable and other short term liabilities:
The carrying amounts approximate fair value because of the
short maturity of those instruments.
Debt: The fair value of the Company's debt is estimated based
on current rates offered to the Company for similar debt and
approximates carrying value.
CONCENTRATIONS OF CREDIT RISK - Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in
economic or other conditions described below.
Financial instruments that subject the Company to credit risk consist
of cash balances maintained in excess of federal depository insurance
limits and accounts receivable, which have no collateral or security.
The accounts maintained by the Company at the financial institution are
insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000. At December 31, 2003, the uninsured balance was $65,446 and
at September 30, 2004, the uninsured balance was $110,402. The Company
has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash.
During 2003, the Company sold corn from inventory acquired in the
purchase of a grain facility, and in 2003 and 2004, received a handling
fee from its trans-loading capabilities. The Company's three largest
customers accounted for 96% of net sales from January 30, 2003
(inception) to December 31, 2003, and 95% and 94% for the period from
January 30, 2003 (inception) to September 30, 2003 and for the nine
months ended September 30, 2004, respectively. The Company also had
receivables of approximately $22,479 and $7,158 from these three
customers, representing 100% and 87% of total accounts receivable as of
December 31, 2003 and September 30, 2004, respectively. The Company
does not require collateral of its customers and as of December 31,
2003 and September 30, 2004, has not incurred significant credit
losses.
INTERIM FINANCIAL INFORMATION -The September 30, 2003 and 2004
financial statements have been prepared by the Company without audit.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the Company's financial
position as of September 30, 2004 and the results of their operations
and cash flows for the period from January 30, 2003 (inception) to
September 30, 2003 and for the nine month period ended September 30,
2004. The results of operations for the period from January 30, 2003
(inception) to September 30, 2003 and for the nine month period ended
F-48
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
September 30, 2004 are not necessarily indicative of those that will be
obtained for the entire fiscal year.
3. RELATED PARTY NOTES RECEIVABLE:
------------------------------
On November 5, 2003, the Company issued a short-term note in the amount
of $200,000 to Kinergy Marketing, LLC, which is owned by an officer and
director of the Company. The short-term note was due and payable
January 4, 2004, with interest at a rate of 5% per annum. As of
December 31, 2003, interest income relating to this note was not
significant. Payment of the principal and all accrued interest was
received in January 2004.
On November 10, 2003, the Company issued a short-term note in the
amount of $5,000 to Doug Dickson, an individual who holds a minority
interest in the Pacific Ag Products. The short-term note is due and
payable November 9, 2004, with interest at a rate of 5% per annum. As
of December 31, 2003 and September 30, 2004, interest income relating
to this note was not significant.
4. PROPERTY AND EQUIPMENT:
----------------------
In June 2003, the Company acquired a grain facility in Madera,
California for approximately $5,100,000 from bankruptcy proceedings of
Coast Grain Company. The Company intends to construct an ethanol plant
at the grain facility. In July 2003, the Company entered into a
design-build contract with W. M. Lyles Co., a subsidiary of Lyles
Diversified, Inc., for the design and construction of the ethanol
plant, which will be billed at its standard time and material rates.
Lyles Construction Group will discount its normal construction
management fee by 5% from its standard rates. The Company's cost for
the construction of the facility has been estimated to be approximately
$50,000,000. In addition, should the Company build a second ethanol
plant W. M. Lyles Co. will be engaged for the design and construction
of the facility. (See Note 5).
In July 2004, the Company received from W. M. Lyles Co. a turnkey bid
for a total construction price of $45,600,000 which is guaranteed until
November 1, 2004.
As of December 31, 2003 and September 30, 2004, the Company had
incurred costs of $558,748 and $1,255,189 under the design-build
contract planning phase, which has been included in construction in
progress at December 31, 2003 and September 30, 2004, respectively.
Included in this amount is a total of $229,078 and $439,085 related to
the construction management fee of W. M. Lyles Co., of which $217,066
and $222,739 had not been paid at December 31, 2003 and September 30,
2004, respectively.
F-49
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
Property and equipment consist of the following:
December 31, September 30,
2003 2004
------------ ------------
Land $ 515,298 $ 515,298
Facilities 4,234,703 4,234,703
Equipment and vehicles 350,000 350,000
Office furniture, fixtures and equipment 32,737 44,435
------------ ------------
5,132,738 5,144,436
Accumulated depreciation (46,684) (105,579)
------------ ------------
5,086,054 5,038,857
Construction in progress 578,159 1,255,189
------------ ------------
$ 5,664,213 $ 6,294,046
============ ============
As of December 31, 2003 and September 30, 2004, property and equipment
totaling $3,897,328 had not been placed in service. Depreciation
expense was $46,684 from January 30, 2003 (inception) to December 31,
2003. Depreciation expense for the period from January 30, 2003
(inception) to September 30, 2003 and for the for the nine months ended
September 30, 2004 was $28,395 and $58,894 respectively.
5. RELATED PARTY NOTE PAYABLE:
---------------------------
In connection with the acquisition of the grain facility, in March
2003, the Company issued a convertible promissory note in the amount of
$5,100,000 to Lyles Diversified, Inc. ("LDI"). The loan bears interest
at a fixed rate of 5% through June 19, 2004, at which time it converted
to a variable rate based on the Wall Street Journal Prime Rate plus 2%.
The first payment, consisting of interest only, was due June 19, 2004,
after which interest is due and payable monthly. Principal payments are
due annually in three equal installments beginning June 20, 2006 and
ending June 20, 2008. Should the construction costs of the ethanol
plant cost less than $42,600,000, the Company must prepay principal
owing under the term equal to the difference between the actual
construction cost and $42,600,000. In addition, should the Company
obtain construction funding for a second ethanol plant, all principal
and accrued interest outstanding at the time becomes due. The note is
collateralized by a first deed of trust on the grain facility and a
personal guarantee for up to a maximum of $1,000,000 by an individual
shareholder. LDI has the option to convert up to $1,500,000 of the debt
into the Company's common stock at a purchase price of $1.50 per share
until March 31, 2005. On July 31, 2004 and September 24, 2004, LDI
converted $150,000 and $90,000 of debt into 100,000 and 60,000 shares
of common stock at purchase price of $1.50 per share. (See Note 7).
As part of the note, W. M. Lyles Co., a subsidiary of LDI, shall supply
construction services to the Company for the construction of the
ethanol plant. (See Note 4).
In partial consideration for the above loan, the Company issued
1,000,000 common shares of the Company's stock to LDI. The fair value
of the common stock on the date of issuance, $1,202,682, was recorded
as a debt discount and is being amortized over the life of the loan and
recorded as interest expense. As of December 31, 2003 and September 30,
2004, the unamortized debt discount was $1,072,858 and $892,456,
respectively. The Company also incurred fees to
F-50
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
obtain the loan in the amount of $100,000, which is also being expensed
over the life of the loan. These fees were paid to Cagan McAfee Capital
Partners, ("Cagan McAfee") a founding shareholder of the Company.
The aggregate maturities of the note at December 31, 2003 are as
follows:
2004 $ --
2005 --
2006 1,700,000
2007 1,700,000
2008 1,700,000
----------
5,100,000
Less: Unamortized original issuance discount (1,072,858)
----------
$4,027,142
==========
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
---------------------------------------
The Company has 30,000,000 shares of no par preferred stock authorized.
The holders of the Series A 8% Cumulative Convertible Redeemable
Preferred Stock will (i) have equal ratable rights to dividends from
funds legally available therefore at the rate of 8% per annum payable
in cash or "Paid-in-Kind" stock, accrued from the closing of this
Offering, per Share, cumulative, payable pro rata; (ii) be entitled to
preference in all of the assets of the Company available for
distribution to holders of Preferred Stock upon liquidation,
dissolution, or winding up of the affairs of the Company; and (iii)
have rights to convert, at the Company's option, at any time after
December 31, 2005, Preferred Stock into fully-paid and non-assessable
Common Stock at the ratio of one (1) share of Common Stock for every
one (1) share of Series A Cumulative Convertible Redeemable Preferred
Stock (shares of Common Stock are reserved for any such conversion).
No dividends accrue on the Shares until after the closing of the Series
A Cumulative Convertible Redeemable Preferred. Thereafter, dividends
accrue, whether or not earned or declared, and become payable
commencing January 15, 2005 and on each January 15 thereafter; provided
that such dividends shall only be paid upon a determination by the
Board of Directors of the Company that funds are legally available
therefore and that payment is in the best interests of the Company. The
Shares are non-participating with regard to dividends, if any, which
may be declared and paid to the holders of any other classes of the
Company's stock. As of September 30, 2004, the Board of Directors had
not declared any dividends.
No Preferred Shares have been issued, but any Preferred Shares issued
may at the sole and exclusive option of Management be redeemed at any
time, and from time to time, during the four (4) years following the
issuance thereof, for a price per Share of the original Offering price
thereof of Six Dollars and Fifty Cents ($6.50) per Share plus Ten
Percent (10%) per annum. Any redemption shall be applied ratably among
all Shares outstanding at the time of redemption.
F-51
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
In the event of any liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary, holders of the Series A
Preferred Stock shall be entitled to receive a distribution of $6.50
per Share out of assets of the Company, prior to any distribution of
assets with respect to any other Shares of capital stock of the Company
as a result of such liquidation, distribution, or winding up of the
Company. If, in the case of any such liquidation, dissolution, or
winding up of the Company, the assets of the Company or proceeds
thereof shall be insufficient to make the full liquidation payment of
$6.50 per Share, then such assets and proceeds shall be distributed
ratably among the holders of the Series A Cumulative Convertible
Redeemable Preferred Stock. A consolidation or merger of the Company
with or into one or more corporations, or a sale of all or
substantially all of the assets of the Company in consideration for the
issuance of equity securities of another corporation shall be deemed to
be a liquidation, dissolution, or winding up of the Company.
7. COMMON STOCK:
-------------
In February 2003, the Company issued 10,000,000 shares of common stock
to the founders of the company a $0.0001 per share.
From August through December 2003, the Company sold 733,200 shares of
common stock to friends and family of the Company's management at $1.50
per share for net proceeds of $1,023,825. In connection with the sale
of these shares, the Company paid offering costs of $75,975, including
a finder's fee of $21,250 to Cagan McAfee. As payment of commissions
earned in connection with the sale of these shares, the Company issued
41,587 warrants to purchase common stock at an exercise price of $1.50
per share and an expiration date nine years from the date of issuance.
Of the total warrants issued, 14,167 were issued to Cagan McAfee.
From January 2004 through February 2004, the Company sold an additional
19,000 shares of common stock to friends and family of the Company's
management at $1.50 per share for net proceeds of $21,373. In
connection with the sale of these shares, the Company paid offering
costs of $7,127, including a finder's fee of $2,850 to Prima Capital
Group, Inc. As payment of commissions earned in connection with the
sale of these shares, the Company authorized 1,900 warrants to purchase
common stock at an exercise price of $1.50 per share and an expiration
date nine years from the date of issuance.
From April 2004 through June 2004, the Company sold 500,000 shares of
common stock in a second working capital round at $2.00 per share for
net proceeds of $892,582 as of September 30, 2004. (Of this amount,
$67,500 is included in subscriptions receivable in the equity section.)
In connection with the sale of these shares, the Company paid offering
costs of $107,418, including a finder's fee of $100,000 to Cagan
McAfee. As payment of commissions earned in connection with the sale of
these shares, the Company issued 50,000 warrants to purchase common
stock at an exercise price of $2.00 per share and an expiration date
nine years from the date of issuance. All of the warrants issued, were
issued to Cagan McAfee.
On July 31, 2004 and September 24, 2004, LDI converted $150,000 and
$90,000 of debt into 100,000 and 60,000 shares of common stock at a
purchase price of $1.50 per share. (See Note 5).
On September 29, 2004, a consulting company exercised 920,000 shares of
the Company's common stock at an exercise price of $92. (See Note 8).
STOCK OPTIONS - On December 10, 2003, the Company authorized the
issuance of stock options to a certain individual in management to
acquire 25,000 shares of the Company's common stock at an exercise
price of $0.01 per share. In February 2004, the Board approved the
options, which are contingent upon the Company's success in closing
escrow on the stock-for-stock Share Exchange Agreement with Accessity
Corp. (See Note 8).
F-52
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES:
------------------------------
OPERATING LEASES - The Company leases office space in Fresno,
California on a month-to-month basis at $1,956 per month. Rent expense
was $5,600 and $3,600 and $17,648 for the period from January 30, 2003
(inception) to December 31, 2003, for the period from January 30, 2003
(inception) to September 30, 2003 and for the nine months ended
September 30, 2004, respectively.
SETTLEMENT OF CORN CONTRACTS - In July and August 2003, the Company,
through its subsidiary entered into contracts to sell corn to two
customers at fixed rates. At the same time, the Company entered into
contracts to purchase corn from a vendor at fixed rates. These purchase
and sale contracts contained shipping periods ranging from October 2003
to September 2004. In the fourth quarter of 2003, the Company cancelled
the contracts and settled them based on the net settlement provisions
standard in the grain industry. At December 31, 2003 the Company has
recorded a receivable related to the settlement of the corn contracts
in the amount of $274,259, which is reflected in other receivables in
the consolidated balance sheet. There were no receivables at September
30, 2004. In addition, the Company has recorded a payable related to
the settlement of the corn contract in the amount of $204,811 and
$90,539, as of December 31, 2003 and September 30, 2004, respectively,
which is reflected in accrued liabilities in the consolidated balance
sheets.
A party to one of the sales agreements did not perform according to the
net settlement provisions standard in the grain industry and thus
continued to engage in contracts without the consent or approval of the
Company. The Company has attempted to settle with the entity with no
success. On September 22, 2004, R.A. Davis Commodities, LLC filed a
complaint for breach of contract, promissory estoppel and negligence in
the Superior Court of the State of California for the County of Fresno
against the Company. The complaint seeks actual and consequential
damages in the amount of approximately $700,000 based on the Company's
alleged breach of certain rolled corn purchase contracts. The Company
is in the process of responding to the complaint. The Company believes
that the claims made in the complaint are without merit and expects to
vigorously defend this lawsuit.
ADVISORY FEE - The Company entered into an agreement with Cagan McAfee
to help raise funding for an ethanol production facility. After raising
a minimum of $15,000,000 the Company will pay Cagan McAfee a fee,
through that date, equal to $10,000 per month starting from April 15,
2003. Once the $15,000,000 has been raised they are to receive payments
of $20,000 per month for a minimum of 12 months.
In a separate agreement, certain founders have agreed to sell 500,000
of their own shares to Cagan McAfee, at founder share pricing, if
funding is secured by the end of 2004. If Cagan McAfee is unsuccessful,
then 400,000 of those shares will be made available for purchase to the
owner of Kinergy Marketing, LLC, who is also an officer of the Company,
at a purchase price of $400.
CASUALTY LOSS - In January 2004, canola stored in one of the silos at
the Madera facility caught on fire. The facility is fully insured with
$10 million of general liability. The canola belonged to a third party
who was also insured. The insurance company paid $925,000 to date and
is estimating an additional $725,000 of payments to the Company for
the reconstruction of the facility.
ACQUISITIONS - On October 1, 2003 a letter of intent was entered into
by the Company and Kinergy Marketing, LLC, for the acquisition of
Kinergy Marketing by the Company. Under the proposed
F-53
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
acquisition terms, the Company shall acquire all of the outstanding
membership interests in Kinergy in exchange for the issuance of two
million five hundred thousand (2,500,000) shares of common stock in the
Company to members of Kinergy. In May 2004, this agreement was
cancelled when the Company entered into a new Share Exchange Agreement.
On October 1, 2003 a letter of intent was entered into by the Company
and ReEnergy, LLC, ("ReEnergy") for the acquisition of ReEnergy by the
Company. Under the proposed acquisition terms, the Company shall
acquire all of the outstanding membership interests in ReEnergy in
exchange for the issuance of five hundred thousand (500,000) shares of
common stock in the Company to members of ReEnergy. In conjunction with
the acquisition of Re-Energy and the satisfactory negotiation of
consulting or employment agreements, the Company has agreed to issue to
several individuals, an aggregate sum of 1,000,000 stock options to
purchase shares of the Company's common stock at $0.02 per share,
vested on the first day of ethanol production, and exercisable for ten
years from the date of acquisition In May 2004, this agreement was
cancelled when the Company entered into a new Share Exchange Agreement.
On May 14, 2004, the Company entered into a stock-for-stock Share
Exchange Agreement with Accessity Corp. (ACTY), Kinergy Marketing, LLC
and ReEnergy, LLC. Upon consummation of the Agreement, each of the
acquired companies will become wholly-owned subsidiaries of ACTY and
ACTY will re-incorporate in the State of Delaware and change its name
to Pacific Ethanol, Inc. ACTY will issue approximately 18.8 million
shares to acquire all the companies in this transaction. It is
contemplated that the Combined Company will have approximately 22
million shares of common stock outstanding, on a fully-diluted basis,
should all options and warrants be exercised following consummation of
the share exchange transaction. The Agreement is subject to
satisfaction of due diligence investigations by all of the parties,
approval by a majority of ACTY's shareholders and certain other
additional conditions to closing including completion of audits of
Pacific Ethanol, Kinergy Marketing, LLC and Re-Energy LLC. As a further
condition to the completion of the acquisitions, the current management
of ACTY will resign and the current management of the Company will
assume management of the combined companies. The Share Exchange
Agreement was revised to extend the termination date to January 7,
2005.
FINANCING - On January 22, 2004, the Company signed an acceptance
letter with CoBank for a proposed $20,000,000 term loan and $5,000,000
revolver. The terms for financing are conditional upon the Company
receiving $24,000,000 in equity offering. The Term Loan will bear
interest at the "prime rate" plus 1% and will require monthly interest
only payment through November 20, 2005, with quarterly principal
payments of $700,000 due thereafter and a final payment of all
remaining principal due on August 20, 2012. The Revolver will bear
interest at the "prime rate" plus 1%, and will require monthly interest
only payments until six months following repayment of the Term Loan,
with semi-annual payments of $1,250,000 thereafter via a reduction in
the total commitment amount. Such semi-annual payments are to begin no
later than March 1, 2013 with the final payment due no later than
September 1, 2014. The terms of this agreement were based on a closing
date of June 30, 2004. The Company was not able to meet certain terms
of the acceptance letter and is currently negotiating with CoBank to
extend and revise certain terms.
NON-CASH COMPENSATION - On February 12, 2004, the Company entered into
a consulting agreement with an unrelated party to represent the Company
in investors' communications and public relations with existing
shareholders, brokers, dealers and other investment professionals as
F-54
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
to the Company's current and proposed activities. As compensation for
such services, the Company issued warrants to the consultant to
purchase 920,000 shares of the Company's common stock. These warrants
vested upon the effective date of the agreement. Based on the fair
value of these warrants on the date of issuance, prepaid consulting
fees were recorded in the amount of $1,380,000. The Company recorded
non-cash expense of $862,500 for consulting services during the nine
months ended September 30, 2004. Contingent upon completing a merger,
acquisition or share exchange with a public company by February 12,
2005, the Company will issue warrants to purchase up to 230,000
additional shares of common stock that will vest over a period of two
years. On September 29, 2004, the consulting company exercised warrants
to purchase 920,000 shares of the Company's common stock at an exercise
price of $92.
9. INCOME TAXES:
-------------
For the year ended December 31, 2003, the provision for income taxes
differs from that computed by applying federal statutory rates to
income (loss) before income taxes, as follows:
Provision (benefit) computed at the statutory rate $ (299,978)
Increase (reduction) resulting from:
Valuation allowance 300,538
State taxes, net of federal benefit 1,040
------------
Income tax expense $ 1,600
============
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Components of the Company's deferred tax assets (liabilities)
at December 31, 2003 are as follows:
Long-term deferred tax assets (liabilities)
Net operating loss carryforward $ 356,569
Depreciation (10,519)
------------
Net deferred non-current deferred liabilities 346,050
Valuation allowance (346,050)
------------
Net deferred current tax assets (liabilities) $ --
============
As of December 31, 2003, the Company had federal and California net
operating loss carry forwards of approximately $893,000 and $502,000,
respectively, available to reduce future taxable income, which expire
beginning in the years 2024 for federal and in 2014 for state purposes.
Under Section 382 of the Internal Revenue Code, the utilization of the
net operating loss carry forwards can be limited based on changes in
the percentage of ownership of the Company.
F-55
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
10. RELATED PARTY TRANSACTIONS:
---------------------------
The Company entered into a consulting contract with a shareholder of
the Company for consulting services related to the development of the
ethanol plant at $6,000 per month. The Company paid a total of $54,000
and $12,000 and $60,000 for the year ended December 31, 2003, the
period from January 30, 2003 (inception) to September 30, 2003 and the
nine months ended September 30, 2004, respectively.
In 2003, the Company sold various cattle feed products totaling
$109,698, at market rates, to a business owned by a shareholder. Of
this amount, $76,903 was sold to the shareholder's business during the
the period from January 30, 2003 (inception) to September 30, 2003.
There were no such sales made during the nine months ended September
30, 2004.
The Company reimbursed a stockholder for expenses paid on behalf of the
Company. The total amount reimbursed from January 30, 2003 (inception)
to December 31, 2003 was $200,000. There were no such expenses paid
during the period from January 30, 2003 (inception) to September 30,
2003 and the nine months ended September 30, 2004.
The Company entered into a consulting agreement for $3,000 per month
with a company owned by a member of ReEnergy, LLC for consulting
services related to environmental regulations and permitting. The
Company paid a total of $34,542 for the nine months ended September 30,
2004.
On October 27, 2003, certain founders of the Company entered into an
agreement with an unrelated third party to sell 1,500,000 shares of the
Company's common stock that they were personally holding at $1.50 per
share for total proceeds of $2,250,000. In addition, under the terms of
the agreement, the founders involved in the transaction agreed to vote
a certain number of their existing shares in favor of the entity's
principal be elected to the Board of Directors of the Company.
11. SUBSEQUENT EVENTS (UNAUDITED):
------------------------------
Certain shareholders of the Company are selling 250,000 shares of their
own stock to the Chief Executive Officer of ACTY if he ensures the deal
is closed by the end of the year. This sale would then take place prior
to the share exchange.
A certain shareholder is selling 400,000 of his personal shares to the
individual members of ReEnergy contingent upon the transaction with
ACTY closing, to compensate them for allowing the Company to change the
allocation of shares.
On September 22, 2004, R.A. Davis Commodities, LLC filed a complaint
for breach of contract, promissory estoppel and negligence in the
Superior Court of the State of California for the County of Fresno
against the Company. The complaint seeks actual and consequential
damages in the amount of approximately $700,000 based on the Company's
alleged breach of certain rolled corn purchase contracts. The Company
is in the process of responding to the complaint. The Company believes
that the claims made in the complaint are without merit and expects to
vigorously defend this lawsuit.
F-56
PACIFIC ETHANOL, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
On November 8, 2004, Insurance Corporation of Hanover and Kruse
Investments dba Western Milling, LLC (collectively, the "Plaintiffs")
filed a complaint for damages in the Superior Court of the State of
California for the County of Madera against the Company. The complaint
seeks actual and consequential damages in the amount of approximately
$960,800 based on the Company's alleged breach of contract and
negligence in connection with losses suffered by Plaintiffs arising out
of damage caused to Western Milling's canola meal that was stored at
the Company's grain silos located at the Company's Madera County
facility, which facility was the subject of a grain silo fire on
January 12, 2004. The Company is in the process of responding to the
complaint. The Company believes that the claims made in the complaint
are without merit, are covered by insurance and expects to vigorously
defend this lawsuit.
On November 15, 2004, LDI converted $15,000 of debt into 10,000 shares
of the Company's common stock at a purchase price of $1.50 per share.
(See Note 5).
F-57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
June 11, 2004
To the Member
Kinergy Marketing, LLC
Davis, California
We have audited the balance sheets of Kinergy Marketing, LLC (the "Company") as
of December 31, 2002 and 2003, and the related statements of income and member's
equity (deficit) and cash flows for each of 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects , the financial position of Kinergy Marketing, LLC as of
December 31, 2002 and 2003, and the results of its operations and its cash flows
for the years then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ HEIN & ASSOCIATES LLP
F-58
KINERGY MARKETING, LLC.
BALANCE SHEETS
December 31, September 30,
------------------------------ ------------
2002 2003 2004
------------ ------------ ------------
ASSETS (unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents $ 231,682 $ -- $ 337,040
Accounts receivable 411,854 2,583,287 1,602,874
Inventories, net 119,126 474,388 651,155
Prepaid expenses -- -- 318,071
------------ ------------ ------------
Total current assets 762,662 3,057,675 2,909,140
PROPERTY, PLANT AND EQUIPMENT, net 3,017 2,124 2,124
------------ ------------ ------------
TOTAL ASSETS $ 765,679 $ 3,059,799 $ 2,911,264
============ ============ ============
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
-----------------------------------------
CURRENT LIABILITIES:
Bank overdraft $ -- $ 59,668 $ --
Accounts payable 781,421 1,710,879 1,084,938
Payable to related party -- 200,000 --
------------ ------------ ------------
Total liabilities 781,421 1,970,547 1,084,938
COMMITMENTS AND CONTINGENCIES
(Notes 4 and 6)
MEMBER'S EQUITY (DEFICIT): (15,742) 1,089,252 1,826,326
------------ ------------ ------------
TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT) $ 765,679 $ 3,059,799 $ 2,911,264
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-59
KINERGY MARKETING, LLC.
STATEMENTS OF INCOME AND MEMBER'S EQUITY (DEFICIT)
For the years ended For the nine months ended
December 31, September 30,
------------------------------ ------------------------------
2002 2003 2003 2004
------------ ------------ ------------ ------------
(unaudited) (unaudited)
NET SALES $ 15,280,424 $ 35,539,636 $ 18,691,650 $ 56,529,115
COST OF GOODS SOLD 14,945,170 33,982,527 17,893,024 54,211,629
------------ ------------ ------------ ------------
GROSS PROFIT 335,254 1,557,109 798,626 2,317,486
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 93,725 169,582 102,794 167,314
------------ ------------ ------------ ------------
OPERATING INCOME 241,529 1,387,527 695,832 2,150,172
OTHER INCOME (EXPENSE):
Interest income (expense) 4,815 267 261 (1,888)
Other income (expense) (1,550) (10,800) (10,800) (800)
------------ ------------ ------------ ------------
Total other income (expense) 3,265 (10,533) (10,539) (2,688)
------------ ------------ ------------ ------------
NET INCOME 244,794 1,376,994 685,293 2,147,484
MEMBER'S EQUITY (DEFICIT),
beginning of period 199,464 (15,742) (15,742) 1,089,252
MEMBER'S DISTRIBUTIONS (460,000) (272,000) (236,000) (1,410,410)
------------ ------------ ------------ ------------
MEMBER'S EQUITY (DEFICIT), end of period $ (15,742) $ 1,089,252 $ 433,551 $ 1,826,326
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-60
KINERGY MARKETING, LLC.
STATEMENTS OF CASH FLOWS
For the years ended For the nine months ended
December 31, September 30,
------------------------------ ------------------------------
2002 2003 2003 2004
------------ ------------ ------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 244,794 $ 1,376,994 $ 685,293 $ 2,147,484
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 627 893 -- --
Changes in operating assets and liabilities:
Accounts receivable 17,531 (2,171,433) (495,041) 980,413
Inventories (60,411) (355,262) (10,504) (176,767)
Prepaid expenses -- -- -- (318,071)
Bank overdraft -- 59,668 -- (59,668)
Accounts payable (190,605) 929,458 42,321 (625,941)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities 11,936 (159,682) 222,069 1,947,450
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,204) -- -- --
------------ ------------ ------------ ------------
Net cash used in investing activities (2,204) -- -- --
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party note payable -- 200,000 -- --
Payments on related party note payable -- -- -- (200,000)
Distributions to member (460,000) (272,000) (236,000) (1,410,410)
------------ ------------ ------------ ------------
Net cash used in financing activities (460,000) (72,000) (236,000) (1,610,410)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (450,268) (231,682) (13,931) 337,040
CASH AND CASH EQUIVALENTS,
beginning of period 681,950 231,682 231,682 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 231,682 $ -- $ 217,751 $ 337,040
============ ============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ -- $ -- $ -- $ 2,164
============ ============ ============ ============
Income taxes paid $ 2,400 $ 800 $ 800 $ 800
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-61
KINERGY MARKETING, LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------
Kinergy Marketing, LLC, (the "Company") was incorporated as a limited
liability company on September 13, 2000, under the laws of the state of
Oregon, to acquire and distribute ethanol fuel in California, Nevada,
Arizona and Oregon. The Company is located in Davis, California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
CASH AND CASH EQUIVALENTS - For financial statement purposes, the
Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability
of its customers to make required payments. The allowance is determined
through an analysis of the aging of accounts receivable and assessments
of risk that are based on historical trends and an evaluation of the
impact of current and projected economic conditions. The Company
evaluates the past-due status of its accounts receivable based on
contractual terms of sale. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. At
December 31, 2002 and 2003, and September 30, 2004, management of the
Company believes that all receivables are collectible, and thus an
allowance for bad debt has not been established. The Company had no bad
debt expense for the years ended December 31, 2002 and 2003 and for the
nine months ended September 30, 2003 and 2004.
INVENTORY - Inventory consists of bulk ethanol fuel and is valued at
the lower of cost or market; cost being determined on a first-in
first-out basis. Shipping and handling costs are classified as a
component of cost of goods sold in the accompanying statements of
income and member's equity.
PROPERTY, PLANT AND EQUIPMENT - Property and equipment is recorded at
cost. Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives from 3 to 5 years.
The cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of
the asset. The cost of fixed assets sold, or otherwise disposed of, and
the related accumulated depreciation or amortization are removed from
the accounts, and any resulting gains or losses are reflected in
current operations.
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and
circumstances indicate that the cost of long-lived assets used in
operations might be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated undiscounted
cash flows estimated to be generated by those assets would be compared
to their carrying amounts to determine if a write-down to market value
or discounted cash flows is required.
REVENUE RECOGNITION - The Company recognizes revenue upon delivery of
ethanol to the customers designated ethanol tank. Shipments are made to
customers both directly from suppliers and from the Company's
inventory. Shipment modes are by truck or rail. Ethanol that is shipped
by rail originates primarily in the Midwest and takes from 10 to 14
days from shipment to be delivered to the customer or to one of four
terminals in California and Oregon. Trucks are for local deliveries and
are delivered the same day as shipment.
F-62
KINERGY MARKETING, LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
INCOME TAXES - As a limited liability company, the Company is generally
not subject to federal and state income taxes directly. Rather, each
member is subject to federal and state income taxes based on its share
of the Company's income or loss.
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments are determined at discrete points in time based
on relevant market information. These estimates involve uncertainties
and cannot be determined with precision.
The following methods and assumptions were used in estimating the
indicated fair values of the Company's financial instruments:
Cash and cash equivalents, accounts receivable and accounts
payable: The carrying amounts approximate fair value because
of the short maturity of those instruments.
Debt: The fair value of the Company's debt is estimated based
on current rates offered to the Company for similar debt and
approximates carrying value.
CONCENTRATION OF CREDIT RISK - Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in
economic or other conditions described below.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable, which
have no collateral or security. The Company sells ethanol fuel on
account to select companies located in California, Nevada, Arizona and
Oregon. The Company performs periodic credit evaluations of its ongoing
customers and generally does not require collateral. Credit losses have
traditionally been minimal and such losses have been within
management's expectations. The Company's five largest individual
customers accounted for 84% and 67% of net sales in 2002 and 2003,
respectively, and 73% and 59% for the nine months ended September 30,
2003 and 2004, respectively. The Company had receivables of
approximately $338,256 and $1,721,990 and $752,592, from these five
customers, representing 82% and 67% and 47% of total accounts
receivable as of December 31, 2002 and 2003 and as of September 30,
2004, respectively.
RISKS AND UNCERTAINTIES - The Company purchases ethanol fuel from
companies located primarily in the Midwest. The Company's three largest
individual vendors accounted for 97% and 86% and 89% and 66% of net
purchases in 2002 and 2003, and for the nine months ended September 30,
2003 and 2004, respectively.
LIMITATION ON LIABILITY - Members are generally not liable for the
debts, obligations or liabilities of the Company.
F-63
KINERGY MARKETING, LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
INTERIM FINANCIAL INFORMATION - The September 30, 2003 and 2004
financial statements have been prepared by the Company without audit.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the Company's financial
position as of September 30, 2004 and the results of their operations
and cash flows for the nine month periods ended September 30, 2003 and
2004. The results of operations for the nine month periods ended
September 30, 2003 and 2004 are not necessarily indicative of those
that will be obtained for the entire fiscal year.
3. RELATED PARTY NOTE PAYABLE:
---------------------------
On November 5, 2003, the Company entered into an agreement with Pacific
Ethanol, Inc. ("PEI") for an unsecured note payable in the amount of
$200,000, which bears an annual interest of 5%. The note and related
accrued interest is due in one payment on January 4, 2004. On January
23, 2004, the Company paid the principal balance plus accrued interest
on the note payable to related party. The sole member of the Company is
an officer and director of PEI.
4. COMMITMENTS AND CONTINGENCIES:
------------------------------
OPEN LETTERS-OF-CREDIT - On June 3, 2002, as amended on September 30,
2003, the Company was issued an Irrevocable Standby Letter of Credit by
Bank of Portland, for any sum not to exceed a total of $200,000. The
designated beneficiary is Archer Daniels Midland Co., a vendor of the
Company, and the letter is valid through March 31, 2004. On March 31,
2004, the Company was issued an Irrevocable Standby Letter of Credit by
Washington Mutual Bank, FA, for any sum not to exceed a total of
$200,000. The designated beneficiary is Archer Daniels Midland Co., a
vendor of the Company, and the letter was valid through September 30,
2004. On October 1, 2004, the Company was issued an Irrevocable Standby
Letter of Credit by Comerica Bank, which is valid through March 31,
2005. See Note 6.
On December 4, 2002, as amended on September 30, 2003, the Company was
issued an Irrevocable Standby Letters of Credit by Bank of Portland,
for any sum not to exceed a total of $200,000. The designated
beneficiary is Chief Ethanol Fuels, Inc., a vendor of the Company, and
the letter is valid through March 31, 2004. On March 31, 2004, the
Company was issued an Irrevocable Standby Letter of Credit by
Washington Mutual Bank, FA, for any sum not to exceed a total of
$300,000. The designated beneficiary is Chief Ethanol Fuels, Inc., a
vendor of the Company, and the letter was valid through September 30,
2004. On October 1, 2004, the Company was issued an Irrevocable Standby
Letter of Credit by Comerica Bank, which is valid through March 31,
2005. See Note 6.
At December 31, 2002 and 2003, and June 30, 2003 and 2004, there was no
debt outstanding related to the letters.
LINE OF CREDIT - On March 22, 2004, the Company entered into a
$2,000,000 revolving line of credit with Washington Mutual Bank, FA
which expires June 1, 2005. The line is collateralized by inventory,
receivables and general intangibles of the Company. The line of credit
is personally guaranteed by Neil Koehler, member of the Company.
F-64
KINERGY MARKETING, LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
On September 24, 2004, the Company entered into a $2,000,000 revolving
line of credit with Comerica Bank which expires October 5, 2005. This
line replaces the Washington Mutual Bank line and is collateralized by
inventory, receivables and general intangibles of the Company. The line
of credit is personally guaranteed by Neil Koehler, sole member of the
Company.
TERMINAL CONTRACT: - The Company is party to four terminal contracts
relating to the storage of ethanol. The contracts expire on different
dates, ranging from March 31, 2004 through October 31, 2004, and are
renewable on a year-to-year basis at end of the term. All four
agreements are cancelable by either party at the end of the base term,
or with 30 - 90 days notice prior to the end of any extended term. Fees
associated with these contracts vary, and are dependent either on the
volume of product in storage or on the volume of product delivered. One
of the terminals charges a minimum monthly charge of $990 in addition
to the variable rate. Storage fees paid to these terminals were $12,590
and $24,742 and $2,967 and $28,517 for December 31, 2002 and 2003 and
for the nine months ended September 30, 2003 and 2004, respectively,
and are recorded as cost of goods sold in the accompanying statements
of income and member's equity (deficit).
PURCHASE COMMITMENTS - During 2002, 2003 and for the nine months ended
September 30, 2003 and 2004, the Company entered into six-month
purchase contracts with its major vendors to acquire a certain quantity
of ethanol, at a specified price. The contracts run from April through
September, and from October through March. As of September 30, 2004,
there were no outstanding balances on these contracts. On October 1,
2004, the contracts were renewed and renegotiated to extend through
March 31, 2005. The outstanding balance on the new contracts was
$44,973,180 at October 1, 2004.
SALES COMMITMENTS - During 2002, 2003 and for the nine months ended
September 30, 2003 and 2004, the Company entered into six-month sales
contracts with its major customers to sell a certain quantity of
ethanol, at a specified price. The terms are similar to the purchase
contracts. As of September 30, 2004, there were no outstanding balances
on these contracts. On October 1, 2004, the contracts were renewed and
renegotiated to extend through March 31, 2005. The outstanding balance
on the new contracts was $45,512,100 at October 1, 2004.
OPERATING LEASES - The Company leases office space in Davis,
California. The lease is currently on a month-to-month basis. Total
rent paid for the years ended December 31, 2002 and 2003 and the nine
months ended September 30, 2003 and 2004 was $2,890 and $3,070 and
$2,250 and $2,280, respectively.
SALE OF COMPANY - On October 1, 2003 a Letter of Intent was entered
into by the Company and Pacific Ethanol, Inc., for the acquisition of
the Company by Pacific Ethanol, Inc. Under the proposed acquisition
terms, Pacific Ethanol, Inc. shall acquire all of the outstanding
membership interests in the Company in exchange for the issuance of two
million five hundred thousand (2,500,000) shares of common stock in
Pacific Ethanol, Inc. to the member of the Company. In May 2004, this
agreement was cancelled when the Company entered into a new Share
Exchange Agreement.
On May 14, 2004, the Company entered into a stock-for-stock Share
Exchange Agreement with Accessity Corp. (ACTY), Pacific Ethanol, Inc.,
and ReEnergy, LLC. Upon consummation of the Agreement, each of the
acquired companies will become wholly-owned subsidiaries of ACTY and
ACTY will re-incorporate in the State of Delaware and change its name
to Pacific Ethanol,
F-65
KINERGY MARKETING, LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
Inc. ACTY will issue approximately 18.8 million shares to acquire all
the companies in this transaction. It is contemplated that the combined
company will have approximately 22 million shares of common stock
outstanding, on a fully-diluted basis, should all options and warrants
be exercised following consummation of the share exchange transaction.
The Agreement is subject to satisfaction of due diligence
investigations by all of the parties, approval by a majority of ACTY's
shareholders and certain other additional conditions to closing
including completion of audits of Pacific Ethanol, Kinergy Marketing,
LLC and Re-Energy LLC. As a further condition to the completion of the
acquisitions, the current management of ACTY will resign and the
current management of Pacific Ethanol, Inc. will assume management of
the combined companies. The Share Exchange Agreement was revised to
extend the termination date to January 7, 2005.
5. RELATED PARTY TRANSACTIONS:
---------------------------
During the year ended December 31, 2003, the Company paid consulting
fees of approximately $10,000 to Kinergy Resources, LLC, an entity
owned in part by the Company's sole member. There were no consulting
fees paid for the year ended December 31, 2002 and the nine months
ended September 30, 2003 and 2004.
During the years ended December 31, 2002 and 2003, and the nine months
ended September 30, 2003 and 2004, the Company paid accounting fees
totaling $32,000 and $24,000 and $20,284 and $15,198, respectively, to
Kinergy, LLC, a company owned by a relative of the Company's sole
member.
The Company paid consulting fees related to market development, sales
support, regulatory and governmental affairs of $15,000 and $45,000 to
a relative of the Company's sole member for the year ended December 31,
2003 and the nine months ended June 30, 2004, respectively. There were
no fees paid for the year ended December 31, 2002 and the nine months
ended September 30, 2003.
On August 31, 2004, the Company reimbursed Pacific Ethanol, Inc., a
related party, for audit fees paid on behalf of the Company.
6. SUBSEQUENT EVENTS (UNAUDITED):
------------------------------
On October 1, 2004, the Company was issued an Irrevocable Standby
Letter of Credit by Comerica Bank, for any sum not to exceed a total of
$300,000. The designated beneficiary is Archer Daniels Midland Co., a
vendor of the Company, and the letter is valid through March 31, 2005.
See Note 4.
On October 1, 2004, the Company was issued an Irrevocable Standby
Letter of Credit by Comerica Bank, for any sum not to exceed a total of
$300,000. The designated beneficiary is Chief Ethanol Fuels, Inc., a
vendor of the Company, and the letter is valid through March 31, 2005.
See Note 4.
F-66
INDEPENDENT AUDITORS' REPORT
The Board of Directors
REENERGY LLC
We have audited the accompanying balance sheets of ReEnergy LLC as of December
31, 2002 and 2003, and the related statements of income, members' equity and
cash flows for the years ended December 31, 2002 and 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of ReEnergy LLC as of December 31,
2002 and 2003, and the results of its operation and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/S/ BLANKENSHIP & COMPANY
May 24, 2004
F-67
REENERGY LLC
BALANCE SHEETS
December 31, September 30,
----------------------------- ------------
2002 2003 2004
------------ ------------ ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash $ 42,770 $ 12,739 $ 2,895
CONSTRUCTION IN PROGRESS (Note 3) 33,026 81,829 86,373
------------ ------------ ------------
TOTAL ASSETS $ 75,796 $ 94,568 $ 89,268
============ ============ ============
LIABILITIES AND MEMBERS' EQUITY ( DEFICIT)
------------------------------------------
ACCOUNTS PAYABLE $ 10,428 $ -- $ --
LONG TERM LIABILITIES -- -- --
COMMITMENT (Note 5)
MEMBERS' EQUITY (DEFICIT)
Members' Equity 65,368 94,568 89,268
------------ ------------ ------------
TOTAL LIABILITIES AND MEMBERS'
EQUITY (DEFICIT) $ 75,796 $ 94,568 $ 89,268
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-68
REENERGY LLC
STATEMENTS OF OPERATIONS
For the years ended For the nine months ended
December 31, September 30,
------------------------------ ------------------------------
2002 2003 2003 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
NET SALES $ -- $ -- $ -- $ --
COST OF SALES -- -- -- --
------------ ------------ ------------ ------------
GROSS PROFIT -- -- -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 387 -- -- 5,000
------------ ------------ ------------ ------------
OPERATING LOSS (387) -- -- (5,000)
OTHER INCOME (EXPENSE)
Provision for Income Taxes (800) (800) (800) (800)
------------ ------------ ------------ ------------
NET LOSS $ (1,187) $ (800) $ (800) $ (5,800)
------------ ------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-69
REENERGY LLC
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
Members
------------------------------------------------------------------------------------
Kinergy
Flin-Mac, Resources Kent Tom
Inc. LLC Kaulfus Koehler Total
------------ ------------ ------------ ------------ ------------
Beginning balance,
January 1, 2002 $ 2,077 $ 2,078 $ -- $ -- $ 4,155
Contributions 31,200 31,200 -- -- 62,400
Net loss (594) (593) -- -- (1,187)
------------ ------------ ------------ ------------ ------------
Ending balance,
December 31, 2002 32,683 32,685 -- -- 65,368
Contributions 15,000 15,000 -- -- 30,000
Net loss (267) (266) (267) -- (800)
------------ ------------ ------------ ------------ ------------
Ending balance,
December 31, 2003 47,416 47,419 (267) -- 94,568
Contributions (unaudited) -- -- -- 500 500
Net loss (unaudited) (1,363) (1,363) (1,363) (1,711) (5,800)
------------ ------------ ------------ ------------ ------------
Ending balance,
September 30, 2004 (unaudited) $ 46,053 $ 46,056 $ (1,630) $ (1,211) $ 89,268
============ ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-70
REENERGY LLC
STATEMENTS OF CASH FLOWS
For the years ended For the nine months ended
December 31, September 30,
------------------------------ ------------------------------
2002 2003 2003 2004
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
Net loss $ (1,187) $ (800) $ (800) $ (5,800)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Changes in operating assets and liabilities:
Accounts Payable 10,428 (10,428) (10,428) --
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 9,241 (11,228) (11,228) (5,800)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction in progress (30,332) (48,804) (48,317) (4,544)
------------ ------------ ------------ ------------
Net cash used in
investing activities (30,332) (48,804) (48,317) (4,544)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital 62,400 30,000 30,000 500
------------ ------------ ------------ ------------
Net cash provided by
financing activities 62,400 30,000 30,000 500
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 41,309 (30,032) (29,545) (9,844)
CASH AND CASH EQUIVALENTS,
beginning of period 1,461 42,770 42,770 12,739
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 42,770 $ 12,738 $ 13,225 $ 2,895
============ ============ ============ ============
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 800 $ 800 $ 800 $ 800
============ ============ ============ ============
F-71
REENERGY LLC
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 2003 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------
ReEnergy LLC ("the Company"), a California limited liability
corporation, was formed on October 4, 2001. ReEnergy LLC is a project
development company formed to evaluate the feasibility of building an
ethanol production facility in California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
BASIS OF ACCOUNTING - The Company presents its financial statements on
the accrual basis of accounting in accordance with generally accepted
accounting principles.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
PROPERTY AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method for
financial reporting purposes. For federal and state income tax purposes
depreciation is computed under the straight-line and modified
accelerated cost recovery system.
CASH EQUIVALENTS - For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. As of December
31, 2002 and 2003 and September 30, 2003 and 2004, there were no cash
equivalents.
INCOME TAXES - No provision for federal income taxes has been made in
the financial statements since the Company's profit and losses are
reported on the individual members' tax returns. The state tax for the
years ended December 31, 2002 and 2003 and for the nine months ended
September 30, 2003 and 2004 was $800.
INTERIM FINANCIAL INFORMATION - The September 30, 2003 and 2004
financial statements have been prepared by the Company without audit.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the Company's financial
position as of September 30, 2004 and the results of their operations
and cash flows for the nine month periods ended September 30, 2003 and
2004. The results of operations for the nine month periods ended
September 30, 2003 and 2004 are not necessarily indicative of those
that will be obtained for the entire fiscal year.
F-72
3. CONSTRUCTION IN PROGRESS:
-------------------------
Amortization December 31, December 31, September 30,
Period 2002 2003 2004
------ ------- ------- -------
Work in process on plant 40 years $33,026 $81,829 $86,373
Less: accumulated amortization -- -- --
------- ------- -------
Net book value $33,026 $81,829 $86,373
======= ======= =======
4. RELATED PARTY TRANSACTIONS:
---------------------------
The Company has entered into a lease agreement with a member along with
an option on 89 acres of land that is owned personally by this member.
The member has received a 33.33% interest in ReEnergy for this option
and his expertise in the bio-product area. The property has been
appraised and if the option is exercised the member will receive fair
market value for his property based on the appraised value. As of May
2004, the member's interest was changed to 23.5%.
In May 2004, Tom Kohler, as an individual, acquired a 29.5% Membership
interest in ReEnergy. Tom also holds a membership interest through his
ownership in Kinergy Resources, LLC.
5. COMMITMENT:
-----------
The Company entered into a stock-for-stock Share Exchange Agreement
with Accessity Corp. (ACTY), Pacific Ethanol, Inc. and Kinergy
Marketing, LLC on May 14, 2004. Upon consummation of the Agreement,
each of the acquired companies will become wholly-owned subsidiaries of
ACTY and ACTY will re-incorporate in the State of Delaware and change
its name to Pacific Ethanol, Inc. ACTY will issue approximately 18.8
million shares to acquire all the companies in this transaction. It is
contemplated that the combined company will have approximately 22
million shares of common stock outstanding, on a fully-diluted basis,
should all options and warrants be exercised following consummation of
the share exchange transaction. The Agreement is subject to
satisfaction of due diligence investigations by all of the parties,
approval by a majority of ACTY's shareholders and certain other
additional conditions to closing including completion of audits of
Pacific Ethanol, the Company and Kinergy Marketing, LLC. As a further
condition to the completion of the acquisitions, the current management
of ACTY will resign and the current management of Pacific Ethanol, Inc.
will assume management of the combined companies. The Share Exchange
Agreement was revised to extend the termination date to January 7,
2005.
F-73
APPENDIX G
NEW YORK
BUSINESS CORPORATION LAW
SS. 623. PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT FOR SHARES
(a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which
term as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation
of domestic and foreign corporations) or from a share exchange under paragraph
(g) of section 913 (Share exchanges) shall file a written notice of such
election to dissent within twenty days after the giving to him of a copy of the
plan of merger or exchange or an outline of the material features thereof under
section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares,
as to which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall
cease to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenters' rights, he
G-1
shall not have the right to receive payment for his shares and he shall be
reinstated to all his rights as a shareholder as of the consummation of the
corporate action, including any intervening preemptive rights and the right to
payment of any intervening dividend or other distribution or, if any such rights
have expired or any such dividend or distribution other than in cash has been
completed, in lieu thereof, at the election of the corporation, the fair value
thereof in cash as determined by the board as of the time of such expiration or
completion, but without prejudice otherwise to any corporate proceedings that
may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within
one month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within
which shareholders may file their notices of election to dissent, or within
fifteen days after the proposed corporate action is consummated, whichever is
later (but in no case later than ninety days from the shareholders'
authorization date), the corporation or, in the case of a merger or
consolidation, the surviving or new corporation, shall make a written offer by
registered mail to each shareholder who has filed such notice of election to pay
for his shares at a specified price which the corporation considers to be their
fair value. Such offer shall be accompanied by a statement setting forth the
aggregate number of shares with respect to which notices of election to dissent
have been received and the aggregate number of holders of such shares. If the
corporate action has been consummated, such offer shall also be accompanied by
(1) advance payment to each such shareholder who has submitted the certificates
representing his shares to the corporation, as provided in paragraph (f), of an
amount equal to eighty percent of the amount of such offer, or (2) as to each
shareholder who has not yet submitted his certificates a statement that advance
payment to him of an amount equal to eighty percent of the amount of such offer
will be made by the corporation promptly upon submission of his certificates. If
the corporate action has not been consummated at the time of the making of the
offer, such advance payment or statement as to advance payment shall be sent to
each shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree
G-2
upon the price to be paid for his shares, payment therefor shall be made within
sixty days after the making of such offer or the consummation of the proposed
corporate action, whichever is later, upon the surrender of the certificates
[fig 1] for any such shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to
make such offer within such period of fifteen days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the
expiration of whichever is applicable of the two periods last mentioned,
institute a special proceeding in the supreme court in the judicial district in
which the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in the
case of merger or consolidation, the surviving or new corporation is a foreign
corporation without an office in this state, such proceeding shall be brought in
the county where the office of the domestic corporation, whose shares are to be
valued, was located.
(2) If the corporation fails to institute such proceeding within
such period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the expiration
of such twenty day period. If such proceeding is not instituted within such
thirty day period, all dissenters' rights shall be lost unless the Supreme
Court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided
in paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting
shareholder, as to whom the corporation requests the court to make such
determination, is entitled to receive payment for his shares. If the corporation
does not request any such determination or if the court finds that any
dissenting shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as of
the close of business on the day prior to the shareholders' authorization date.
In fixing the fair value of the shares, the court shall consider the nature of
the transaction giving rise to the shareholder's right to receive payment for
shares and its effects on the corporation and its shareholders, the concepts and
methods then customary in the relevant securities and financial markets for
determining fair value of shares of a corporation engaging in a similar
transaction under comparable circumstances and all other relevant factors. The
court shall determine the fair value of the shares without a jury and without
referral to an appraiser or referee. Upon application by the corporation or by
any shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law and
rules.
(5) The final order in the proceeding shall be entered against
the corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at
such rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest
G-3
which the corporation would have had to pay to borrow money during the pendency
of the proceeding. If the court finds that the refusal of any shareholder to
accept the corporate offer of payment for his shares was arbitrary, vexatious or
otherwise not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty days after final determination of the
proceeding, the corporation shall pay to each dissenting shareholder the amount
found to be due him, upon surrender of the certificates [fig 1] for any such
shares represented by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event
be deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and,
if it is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders, and if
it is not liquidated, retain his right to be paid for his shares, which right
the corporation shall be obliged to satisfy when the restrictions of this
paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment
for his shares in the manner provided herein shall exclude the enforcement by
such shareholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in paragraph (e), and except that
this section shall not exclude the right of such shareholder to bring or
maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is unlawful or fraudulent as to him.
G-4
(l) Except as otherwise expressly provided in this section, any
notice to be given by a corporation to a shareholder under this section shall be
given in the manner provided in section 605 (Notice of meetings of
shareholders).
(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of section 907 (Merger or consolidation of
domestic and foreign corporations).
SS.910. RIGHT OF SHAREHOLDER TO RECEIVE PAYMENT FOR SHARES UPON MERGER OR
CONSOLIDATION, OR SALE, LEASE, EXCHANGE OR OTHER DISPOSITION OF ASSETS, OR SHARE
EXCHANGE
(a) A shareholder of a domestic corporation shall, subject to and by
complying with section 623 (Procedure to enforce shareholder's right to receive
payment for shares), have the right to receive payment of the fair value of his
shares and the other rights and benefits provided by such section, in the
following cases:
(1) Any shareholder entitled to vote who does not assent to the
taking of an action specified in clauses (A), (B) and (C).
(A) Any plan of merger or consolidation to which the
corporation is a party; except that the right to receive payment of the fair
value of his shares shall not be available:
(i) To a shareholder of the parent corporation in a
merger authorized by section 905 (Merger of parent and subsidiary corporations),
or paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations); or (ii) To a shareholder of the surviving corporation in a merger
authorized by this article, other than a merger specified in subclause (i),
unless such merger effects one or more of the changes specified in subparagraph
(b) (6) of section 806 (Provisions as to certain proceedings) in the rights of
the shares held by such shareholder; or (iii) Notwithstanding subclause (ii) of
this clause, to a shareholder for the shares of any class or series of stock,
which shares or depository receipts in respect thereof, at the record date fixed
to determine the shareholders entitled to receive notice of the meeting of
shareholders to vote upon the plan of merger or consolidation, were listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc.
(B) Any sale, lease, exchange or other disposition of all
or substantially all of the assets of a corporation which requires shareholder
approval under section 909 (Sale, lease, exchange or other disposition of
assets) other than a transaction wholly for cash where the shareholders'
approval thereof is conditioned upon the dissolution of the corporation and the
distribution of substantially all of its net assets to the shareholders in
accordance with their respective interests within one year after the date of
such transaction.
(C) Any share exchange authorized by section 913 in which
the corporation is participating as a subject corporation; except that the right
to receive payment of the fair value of his shares shall not be available to a
shareholder whose shares have not been acquired in the exchange or to a
shareholder for the shares of any class or series of stock, which shares or
depository receipt in respect thereof, at the record date fixed to determine the
shareholders entitled to receive notice of the meeting of shareholders to vote
upon the plan of exchange, were listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.
(2) Any shareholder of the subsidiary corporation in a merger
authorized by section 905 or paragraph (c) of section 907, or in a share
exchange authorized by paragraph (g) of section 913, who files with the
corporation a written notice of election to dissent as provided in paragraph (c)
of section 623.
(3) Any shareholder, not entitled to vote with respect to a plan
of merger or consolidation to which the corporation is a party, whose shares
will be cancelled or exchanged in the merger or consolidation for cash or other
consideration other than shares of the surviving or consolidated corporation or
another corporation.
G-5
APPENDIX H
BEARINGPOINT
8725 W. Higgins Road
Chicago, IL 60631
Tel: +1.773.867.6200
Fax: +1.773.867.4670
WWW.BEARINGPOINT.COM
--------------------
October 9, 2004
PRIVATE & CONFIDENTIAL
Board of Directors
Accessity Corp.
C/O Mr. Philip B. Kart
Chief Financial Officer
12514 West Atlantic Boulevard
Coral Springs, FL 33071
Dear Members of the Board of Directors:
We understand that Accessity Corp. ("Accessity" or the "Company"), related to
its definitive agreement to acquire Pacific Ethanol, Inc., Kinergy Marketing,
LLC and Re-Energy, LLC in a stock-for-stock share exchange, is contemplating a
transaction (the "Transaction") in the following structure:
a. 100 percent of the common stock of DriverShield CRM Corp.
("DriverShield CRM"), the beneficiary of the stream of royalties from
ClaimsNet relating to the DriverShield CRM, the former collision
repair business for insurance industry, will be transferred to Barry
Siegel. This transfer shall take place pursuant to a written agreement
between Accessity and Barry Siegel;
b. Barry Siegel will receive a certain number of shares of Accessity's
stock, not to exceed 400,000, which will be determined by the
following formula: the excess of the value of the waived severance
payment over the fair market value of Drivershield CRM divided by the
closing price per share of the common stock of Accessity on the
business day before the closing date of the Transaction; and,
c. (a) and (b) will occur in consideration of the waiver by Barry Siegel
of the change in control provisions set forth in the employment
agreement between Accessity and Barry Siegel that expires December 31,
2004 (including the provisions that require Accessity to pay to Barry
Siegel (i) a severance payment of 300% of his average annual salary
for the past five years, less $100; (ii) the cash value of his
outstanding but unexercised stock options; and (iii) for any and all
other perquisites in the event that he is terminated for various
reasons specified in such agreement following a change of control (as
defined in such agreement).
H-1
BEARINGPOINT
Board of Directors
Accessity Corp.
Page 2
BearingPoint, Inc. ("BearingPoint") has been engaged to render an
opinion to the Board of Directors of Accessity (the "Board") as to:
The fairness from a financial point of view (the "Opinion") of
the consideration to be received by Barry Siegel as outlined in
Items (a) and (b) in lieu of the waiver of the change in control
provisions as outlined in Item (c) of the Transaction. We
understand that our Opinion is being requested by Accessity
management for use by the Board.
In the course of our analyses for rendering this opinion, we have:
1. REVIEWED the Share Exchange Agreement dated as of May 12, 2004
and amended as of July 29, 2004 and as of October 1, 2004 (the
"Transaction Documents");
2. REVIEWED Barry Siegel's employment agreement as of January 30,
2002, which expires on December 31, 2004;
3. REVIEWED the Company's audited financial statements for the
fiscal years ended December 31, 2002 and 2003 and the unaudited
financial statements for the six month period ended June 30,
2004;
4. REVIEWED Drivershield CRM's unaudited income statement for the
fiscal year ended December 31, 2003 and the six month period
ended June 30, 2004, as prepared by Company management;
5. REVIEWED the Strategic Partnership Agreement entered into by the
Company and ClaimsNet, which defines the terms of the agreement
for ClaimsNet to operate Drivershield CRM;
6. REVIEWED certain operating and financial information, including
the financial projections, prepared by Company management
relating to Drivershield CRM's business and prospects;
7. INTERVIEWED certain members and senior and operating management
of ClaimsNet and Drivershield CRM regarding its operations,
financial statements and future prospects;
8. INTERVIEWED senior management of the Company regarding the
strategic rationale for the Transaction;
9. CONDUCTED such other studies, analyses, inquiries and
investigations, as we deemed appropriate.
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy, completeness and fair
presentation of all financial and other information that was available
to us from public sources and all the financial and other information
provided to us by the Company and its representatives. We have further
relied upon the assurances and representations of management that they
are unaware of any facts that would make the information provided to
us incomplete or misleading.
With respect to the financial projections supplied to us, we assumed
that, as of the date supplied to us, they were reasonably prepared on
a basis reflecting the best available estimates and judgments of the
management of the Company as to the future operating and financial
performance of Drivershield CRM. In arriving at our opinion, we have
not performed any independent appraisal of the assets of the Company.
H-2
BEARINGPOINT
Board of Directors
Accessity Corp.
Page 3
We have relied as to certain legal matters on the advice of the
Company's outside legal counsel.
Our opinion is necessarily based on economic, market, financial and
other conditions, as they exist and on the information made available
to us, as of the date of this letter. It should be understood that,
although developments subsequent to the date hereof may affect it, we
do not have any obligation to update, revise or reaffirm this opinion.
Based on the foregoing, it is our opinion that the consideration to be
received by Barry Siegel as outlined in Items (a) and (b) in lieu of
the waiver of the change in control provisions as outlined in Item (c)
of the Transaction is fair from a financial point of view to the
shareholders of the Company.
The Opinion expressed herein is provided for the information and
assistance of the Board of the Company in connection with the proposed
Transaction. Our Opinion, as expressed herein, does not constitute a
recommendation as to whether or not to vote in favor of the
Transaction.
Very truly yours,
/s/ BEARINGPOINT
H-3