SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23903
eAUTOCLAIMS.COM, INC.
(Exact name of registrant as specified in charter)
Nevada 95-4583945
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
110 E. Douglas Road, Oldsmar, Florida 34677
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 749-1020
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ __ ]
State issuer's revenues for its most recent reporting period (July 31, 2003)
......$34,061,072.
Aggregate market value of the voting stock held by non-affiliates of the
registrant at September 30, 2003 was $9,416,880.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
as of September 30, 2003 was 23,542,200.
Transitional Small Business Disclosure Format: [ ] Yes [ X ] No
FORM 10-KSB - Index
PART I
Page
Item 1. Description of Business..........................................2
Item 2. Description of Property.........................................16
Item 3. Legal Proceedings...............................................16
Item 4. Submission of Matters to a Vote of Security Holders.............16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........17
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................20
Item 7. Financial Statements and Supplementary Data.....................25
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures..............................26
Item 8A Controls and Procedures ........................................26
PART III
Item 9. Directors and Executive Officers................................26
Item 10. Executive Compensation..........................................30
Item 11. Security Ownership of Certain Beneficial Owners and Management..36
Item 12. Certain Relationships and Related Transactions..................38
Item 13. Exhibits, Lists and Reports on Form 8-K.........................39
Item 14. Principal Accounting Fees and Services..........................41
Signatures.................................................................42
Certifications.............................................................43
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This Annual Report on Form 10-KSB and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and assumptions made by
management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
EAutoclaims is a Nevada corporation which provides Internet based vehicle
collision claims services for insurance companies, managing general agents (MGA)
and third party claims administrators (TPA) and self-insured automobile fleet
management companies. We accept assignment of claims from our customers, and
provide vehicle repairs through a network of repair shops. We also provide
online systems to connect clients with service providers of estimates, audits
and claims administration services for claims for which we do not perform the
repair.
Our business strategy is to use the Internet to streamline and lower the overall
costs of automobile repairs and the claims adjustment expenses of our clients.
We believe that our proprietary web-based software products and services make
the management of collision repairs more efficient by controlling the cost of
the repair and by facilitating the gathering and distribution of information
required in the automobile repair process.
EAutoclaims controls the vehicle repair process from the reporting of the
accident through the satisfactory repair of damage. We bring together and
coordinate the activities of the insurance company, its insured, and the various
parties involved in evaluating a claim, negotiating the cost of the repair, and
performing necessary repair services. We have contracted with approximately
2,400 body shops throughout the United States to repair vehicles. These shops,
referred to as our "provider network," provide us 10% to 15% discount on the
vehicle repair because of the volume of repairs we provide to them. Since we
audit every line of every repair estimate and because we share a portion of the
volume discount with our customer, we are able to lower the average cost being
paid by our customer.
We derive our revenues by accepting assignments of auto repair claims from our
customers and having them repaired through our network of contracted repair
shops. Once we accept these claims, we also accept the risk that the repair will
not be done properly. Additionally, we derive revenue from fees for processing
and coordinating claims that do not go through our network of body shops.
During the year ended July 31, 2003, we derived 58% and 14% of our revenues from
two customers. We have recently received information that the largest customer
has sold one-half of their U.S. auto physical damage business and will possibly
sell the other half. There is no assurance that the Company will continue to
process the claims from the portion of the business that has been sold. If not,
the impact of the change is not expected to start until January 2004, at which
time the Company would expect one-twelfth of that portion of the business to
decrease, or a decrease of approximately 2.4% of the Company's gross revenue
each month, until the total decrease is approximately 29% by December of 2004.
Currently, new customers are being rolled out on the Company's application,
which will start to mitigate the loss of business before the Company feels the
effect of the change. The Company's management expects that additional customers
that are currently testing the Company's outsourcing solution will come on board
and make up for the lost business from this customer. Because of the competitive
nature of our business and the uncertainty of bring on enough business to offset
the loss of business, we may be unable to replace revenues quickly enough to
sustain profitability. However, the company's management will cut expenses in
the event we are unable to sustain profitability.
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Products and Services
Our latest product, eJusterSuiteTM, expands our potential customer base as well
as provides significant new features to our current customer base. This product
provides both outsourcing and ASP (application service provider) solutions. The
outsourcing solution requires eAuto personnel to audit and coordinate the
vehicle repair. The ASP solution allows the customer to use our technology
independent of our personnel; thereby, providing a solution for the largest
insurance companies that already have the staff to process and control the
claims process, while paying us a fee for every transaction that is run through
our system. The ASP model will provide margin without the associated personnel
and operating costs.
eJusterSuite also builds in service partners that can provide the needed
services such as independent adjustors, car rentals, tow trucks and accident
reporting by merely clicking an Icon that is added to the screen of the
customer's desktop in the current system. The system automatically provides the
service partner the information already in our system via the Internet. The
service partner will systematically provided the requested services and pay us a
fee for each assignment they receive through our system. This process
significantly reduces the customers' time and cost to process claims as well as
reduces the number of mistakes that occur in a manual process. In most cases it
also reduces the cost of the service partner to obtain and process the
transaction, even after paying our transaction fee. This added revenue provides
additional margin without the additional personnel and operating costs.
For our outsourcing customers, we approve all repair shops for inclusion in our
network and determine which repair shop will ultimately perform the repairs. We
receive a discount, ranging from 10% to 15%, from repair facilities that are
members of our provider network. The revenues generated from the vehicle repair
facilities through our provider network accounts for 92% of the revenue for the
fiscal year ended July 31, 2003. We are paid on a per claims basis from all our
customers for each claim that we process through our system. These fees vary
from $10 to $60 per claim depending upon the level of service required. For the
fiscal year ended July 31, 2003, 8% of the revenue has been received from claims
processing fees and other income.
Outsourcing Solutions:
In our outsourcing solution we handle the entire collision repair function for
our customers from the time of reporting of the accident through the vehicle's
satisfactory repair. Through our network of parts and repair service providers,
we are frequently able to obtain parts and services at lower costs than
otherwise available. We monitor and audit all repair work to help assure that
the proper repair work is performed at the negotiated price. In most cases,
digital photographs of the damaged vehicle are transmitted to us via the
Internet to assist us in monitoring repairs.
We strive to provide our customers with ways to control costs associated with
processing collision claims. These services include:
1. Centralized accident reporting.
2. Copies of accident reports.
3. Identifying the appropriate network repair facility and directing the
policyholder to such facility.
4. Deliver repair estimates and photographs/digital images of damage to any
location overnight or same day upload.
5. Audit of every claim by our in-house physical damage experts.
6. Assignment of independent field appraiser, when necessary.
7. Expedited deliver of part and materials as needed.
8. Computerized tracking and follow-up system to minimize repair time.
9. Replacement rental vehicles.
10. A lifetime guarantee from our network of repair shops (for as long as
the insured owns the vehicle) on all physical damage body repairs and
administration of manufacturer or installer's warranty on replacement parts.
We help our clients monitor their automobile claims losses by providing the
following:
o Technology - We built one of the first customized web-based vehicle claim
assignment and delivery systems for insurance companies and corporate
fleets. We use state-of-the-art technology and security for the
transmission of files and records. In addition, we utilize digital cameras,
Internet communication, advanced data storage and scanners for auto repair
shops that are not equipped with digital cameras, to create a defined audit
trail and high capacity digital storage. We provide these applications to
our clients with their own private label that includes their corporate
colors and logos, which makes the claims process transparent to both
insurance company personnel and the insured.
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o Online, real time reporting - We provide our customers with online,
real-time reports of the most critical information used in their
operations. These reports include a comparison of their average paid losses
(cost to repair a vehicle), cycle time (time to complete an estimate of the
damage), and lost adjustment expense (cost of the repair estimate or
appraisal) between the eAutoclaims network, independent appraisers and
staff appraisers. This comparison allows them to see the cost saving they
realize while using our outsourcing solution.
o Audit Trail - We audit every claim that comes into our network. This
helps us deliver the lowest available audited cost to out clients on every
repair.
Our system produces financial benefits for our customers as follows:
o Our audit process reduces the average paid loss per vehicle.
o We share a portion of the discounts obtained from the body shops with our
clients based on their submitted volume.
o With lower average paid losses, insurance companies are able to establish
lower loss claims reserves. This, in turn, frees up capital and surplus
allowing for additional premiums at lower premium rates.
o Technology efficiencies reduce their cost of processing each file.
o Our typically faster settlement time reduces the days and cost of rental
cars and increases customer satisfaction.
o Our process of claims investigation helps reduces fraudulent claims.
Application Service Provider (ASP):
With the introduction of eJusterSuiteTM we now have the capability to provide
the largest insurance companies with an ASP solution that fits into their
current environment. Our ASP solution allows these insurance companies to
utilize our advanced technology while continuing to use their staff and network
of body shops. We host the data on our servers while their staff and body shop
network processes the claims based on their current operating procedures and
shop relationships. Under this solution, the customer pays us a click fee for
each transaction they process through our system.
Additionally, the service partners described above can also be plugged into the
ASP solution, whereby we are paid a fee for each referral being made to the
service partner.
Turnkey solution:
Also introduced with eJusterSuiteTM was a turnkey solution that allows an
insurance company that likes the ASP model to plug into our network of body
shops. This provides a solution for insurance companies that have their own
claims coordinators, but that need to use our network of body shops. By using
our body shops they receive approximately a 10% discount on the repair work. We
receive a click fee for each transaction.
Customers
Our customers consist primarily of insurance companies, MGAs, TPAs and managers
of self-insured automobile fleets. The most recent addition is a category of
customers that services the insurance market. We have found interest from
providers that have requested proposals from eAutoclaims to build an application
to meet their unique needs or in some cases to allow them to transact business
using the eJusterSuite application.
Contracts with existing clients are typically from one to five years and the
first phase of the rollout of a new client starts with a 90-day pilot contract.
This initial phase allows the customer to experience the reductions in appraisal
expenses and realize the efficiencies offered by the eJusterSuite application
and utilization of the eAutoclaims Guaranteed Repair Network (GRN). Most of our
customers are on a one to five-year contract. That contract specifies that we
take responsibility for repairing the vehicle, and liability to pay for the
repairs performed in our network of body and glass repair providers. As a
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general rule, within seven days of the assignment of the vehicle to the body
shop, our insurance and TPA customers pay us the completed audited repair price,
before the shop discount, less the customer's volume discount. Our fleet and
glass customers generally pay us within 30 days of the repair. If a vehicle
owner decides not to have the vehicle repaired at the eAutoclaims network shop,
we are paid a file-handling fee only.
Integration of service partners in the eJusterSuite application continues. In
addition to a larger offering of service partners our auto glass network
administration services have also increased as a value added service to our
collision management clients.
Sales and Marketing
A strong sales and marketing organization is essential to effectively
market our services. We have made significant progress over the past year in
establishing our brand name, eJusterSuite, and recognition of our corporate
identity and service offering through direct mail, promotion activities, web
site presence, tradeshow participation and other media events. We recently
completed an initiative to modernize our web site and logo. Our most recent
marketing campaign focused on what we believe is one of our most recognizable
competitive advantages, the ability to effectively integrate service partners in
the eJusterSuite application. This joint sales initiative with these service
partners is producing additional leads for viable prospects that will eventually
use the eJusterSuite application and the GRN and glass services.
Because our collision management services require considerable customer
education and post-sales support, we have chosen to solicit prospective
customers through a direct sales force. As of July 31, 2003, we had five
personnel in our sales and marketing department. In connection with our recent
internal restructuring aimed at lowering expenses and improving sales, our CEO,
Eric Seidel, has taken a more active role in our sales and marketing efforts and
Reed Mattingly, our former Chief Operating Officer, has agreed to lead the sales
and marketing department.
Competition
The auto collision claims service industry is highly
competitive and has low barriers to entry. We are aware of several other
companies that offer internet-based services similar to ours. Several of these
competitors serve the insurance industry although most tend to focus on either
the fleet or insurance segments of the market. We are aware of one competitor
that offers collision repair services through a network of collision repair
providers, online connectivity with those providers, and the estimate review
service combined with a share of the volume discount with the customer that is
provided by the repair facility.
Several of our competitors offer application services (Application
Service Provider models) along with electronic auditing capabilities. Even
though most of our competitors have either changed their targeted marketing
efforts or narrowed their focus to the insurance arena, the majority of these
competitors have been in business longer than we have. Several of these
competitors have significantly greater assets and financial resources than
currently available to us. We expect competition to continue to intensify in the
on-line claims management segment of this industry as current non-Internet
competitors expand their market into the Internet and new competitors enter the
market utilizing the Internet.
We cannot assure you that we will be able to compete successfully
against current or future competitors. Competitive pressures could force us to
reduce our prices and may make it more difficult for us to attract new customers
and retain current customers. As competition in our industry increases, it is
likely that many of our competitors will have access to greater resources than
are currently available to us, including financial, employee, customer
relations, technology, and expertise in developing and implementing new
technologies as the industry evolves.
The principal factors that help us to maintain and grow our market
share are:
o Continuous implementation of new technology to streamline the claims
processing workflow for insurance adjusters;
o Maintain attractive processing cycle time for claims; o Quality of repair
shop services; o Ability to offer nationwide access to repair facilities; o
Processing of claims/assignment fees and charges;
o Ability to offer new services and efficiencies while incorporating
technological change into existing services;
o Access to claim status 24/7;
o The increase in the volume of vehicles that a repair facility can expect
to repair as part of our network;
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Customer Service
Our continued growth will be dependent upon our ability to consistently
deliver customer centered service at competitive prices. Our eJusterSuite system
is designed to ensure that the claims process flows smoothly and seamlessly. The
Company's follow-up on claims assignments helps to ensure that all details of
the claim will be verified to our quality standards.
We have implemented a "Customer Service Professional" certification as part
of our Associate Development Program to ensure that our employees are fully
trained in the latest in customer service techniques and to help us in attaining
our objective of becoming known as one of the best customer service
organizations in the industry.
Employees
As of September 30, 2003, eAutoclaims, Inc. had 80 full-time employees.
There is no union contract relating to any of our employees nor does the company
anticipate there to be unionization of its employees. We believe that our
relationship with our employees is generally good.
Intellectual Property
We rely on various intellectual property laws and contractual restrictions
to protect our proprietary rights in products and services. These include
confidentiality, invention assignment and nondisclosure agreements with our
employees, contractors, suppliers and strategic partners. The confidentiality
and nondisclosure agreements with employees, contractors and suppliers are in
perpetuity. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our intellectual property without our
authorization. In addition, we intend to pursue the registration of our
trademarks and service marks in the U.S.
We have filed for and have been granted the fictitious name EAUTOCLAIMS in
the State of Florida. We also own seventy-four (74) URL Internet domain names,
including Premier Express Claims.com and eAutoFleet.com. We maintain a website
located at www.eautoclaims.com. We are not incorporating by reference any
information on our website and information on our website should not be
considered part of this Form 10-K.
On January 19, 2001, we were notified by our trademark counsel that
although the trademark examiner did not find any similar or pending marks which
would prevent registration of "eAutoclaims.com", she refused registration of
this mark on the principal register because the service mark "eAutoclaims.com"
is merely descriptive of our service since we combined the letter "e" with the
word "Autoclaims". Our trademark counsel has advised us that there is some merit
to the trademark examiner's position. Based upon the advice of our trademark
counsel, we amended the application for registration on the "supplemental
register" which is reserved for those marks which have a descriptive quality,
but have not achieved the degree of use or secondary meaning necessary to
establish distinctiveness, which is a requirement for registration on the
principal register. Our application for registration and the supplemental
registration for the mark eAutoclaims.com(R) was granted in October 2001.
Registration on the supplemental register is valid for 10 years but does not
prevent other parties from use of a similar mark.
We have pending trademark and service mark applications for eAudit,
eAutoclaims, eJusterSuite, Ejuster Transfer and eProperty Suite. Each of these
products is in various stages of development. There is no assurance we will be
successful in registering these marks. Furthermore, we are exposed to the risk
that other parties may claim we infringe their rights on these marks, which
could result in us ceasing use of these marks, licensing the marks or becoming
involved in costly and protracted litigation. In July 2003, we entered into a
Settlement Agreement with IBM regarding the use and scope of the "e" logo/mark
which precedes various of our trademarks and service marks. IBM takes the
position it is the owner of the "e" logo relating to computer hardware and
software and that our use of "e" logo infringed on their rights. The Settlement
Agreement allows us to continue using, in a limited fashion, the use of the "e"
logo in a manner not objectionable to IBM. We do not believe that the
limitations imposed by the IBM Settlement Agreement will adversely affect our
business.
There can be no assurance that other parties will not claim
infringement by us with respect to our current or future technologies. We expect
that participants in our markets will be increasingly subject to infringement
claims as the number of services and competitors in our industry segment grows.
Any such claim, with or without merit, could be time-consuming, result in costly
litigation, cause service upgrade delays or require us to enter to royalty or
licensing agreements. Such royalty or licensing agreements might not be
available on terms acceptable to us, or at all. As a result, any such claim of
infringement against us could have a material adverse effect upon our business,
results of operations and financial condition.
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Operations and Technology
EAutoclaims' flagship product, eJusterSuite, contains the functionality and
the ability for client customization that accommodates Fleet, Commercial, and
Consumer insurance claims processing markets. eJustersuite has been coded using
the philosophy of `code globally, implement locally' to ensure that the features
our customers need are available globally and can be implemented locally with
the flip of a bit, literally.
The only requirements for use of our product are that the customer has
Microsoft Internet Explorer 5.5 SP2 or higher installed on their system and that
they have Internet access. We have a couple of applets that are used for
uploading estimate files and optimizing images that act as browser plug-ins. We
have no components that operate outside the browser environment that need to be
installed on the clients system.
Behind our flagship product eJusterSuite, resides a complex infrastructure
of intranet applications that assist each department in effectively managing the
claim processes. EAutoclaims continually refines its operational processes to
ensure maximum efficiency. These operational refinements are achieved in part by
modification of our internal software applications. eAutoclaims uses programming
practices to assist us in the rapid application development process. Based on
points of functionality, over 95% of all code used by eAutoclaims and our client
to process claims was written internally at our Oldsmar, Florida facility.
As an additional compliment to our eJusterSuite product, eAutoclaims has
both the internal and external ability to take First Notice Of Loss (FNOL)
assignments. This functionality allows our backroom system to pre-populate
eJusterSuite with all the information needed by the insurance company adjuster.
This functionality can also be used by our external customers through the use of
our innovative technology called CAsE (Customizable Assignment Entry). With CAsE
the client can create their own forms based on a comprehensive collection of
data elements.
The hardware that eAutoclaims operates is highly scalable and reliable.
Each aspect of the operation has redundancies built in to ensure high
availability of systems by our customers. As of the end of FY2002 we have
replaced and upgraded all mission critical servers.
Security and protection of customer data is also a paramount concern for
our enterprise. We have in place Intrusion Detection Systems (IDS) that alert us
to attempts to breach our security. We vigorously keep our operating systems
updated with the most current security patches as well as keep our Antivirus
software patterns updated and deployed to all systems within the organization.
We have diverse data communications circuits that are used to access the
Internet. We have circuits terminating in Orlando and circuits terminating in
Tampa. This provision of two separate Points of Presence (POP) help ensure no
interruption of service should an accidental fiber cut occur. As a backup,
eAutoclaims also uses dedicated coaxial cable access to the Tampa POP.
Our production environment is segregated from our development environment
and as a result all code modifications occurs on development platforms. From
development all code changes are tested on a staging server that is a replica of
production. After successful testing the changes are scheduled for deployment to
production. Our version control software tracks all changes and changes are
deployed to all customers at the same time. Customers are always notified of
changes through a flashing icon on their screens that details any changes in
appearance or functionality of the application.
Prevention of Access to Data by Unauthorized Personnel
Our technology systems are designed to address important security concerns.
Only personnel in our Information and Technology Department are allowed access
to stored data. Our Information and Technology Department provides indirect
access to our clients via controlled program code. Notwithstanding such
safeguards and procedures, like with all online systems providers, a successful
unauthorized access to sensitive data or a virus attack on systems such as ours
is possible. A malicious unauthorized access or effective virus could adversely
affect our business
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Protection from Catastrophic Events
EAutoclaims takes the following precautions to help assure continuous
service in the event of catastrophic events such as fire, water intrusion or
loss of power:
o All data and program code is backed up nightly to a magnetic tape. One
month of historical data is maintained with the previous weeks backups
stored in an off site location that is rated as a Category 5 Shelter.
o An additional copy of historical data is stored on a development server
outside of the production server area nightly to provide further redundancy
protection.
o Our Network Operation Center is separately housed within the facility and
has a dedicated power supply and air-handling unit.
o All units are on UPS (Uninterruptible Power Supplies) in the event of a
momentary loss of power. o Our fire suppression system is computer
friendly. o We have a diesel powered backup generator that will keep us up
and running for a minimum of three days in case the power were to fail for
any reason. Assuming we have access to additional diesel fuel, it will keep
us running indefinitely. o We have redundant Internet circuits with
separate fiber paths to our building
Notwithstanding these precautions, a catastrophic event could interrupt our
service for a substantial period of time, which would adversely affect our
business prospects.
We anticipate that we will continue to devote significant resources to
product development in the future as we add new features and functionality to
our Web site and services. Rapidly changing technology, evolving industry
standards, and changing customer demands characterize the market in which we
compete. Accordingly, our future success will depend on our ability to:
o Adapt to rapidly changing technologies;
o Adapt our services to evolving industry standards;
o Continually improve the performance, features and reliability of our
service in response to competitive service and product offerings and
evolving demands of the marketplace.
Our failure to adapt to such changes would have a material adverse effect
on our business, results of operations and financial condition. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial
expenditures by us to modify or adapt our services or infrastructure. This could
have a material adverse effect on our business, results of operations and
financial condition.
Governmental Regulation
From time to time we receive inquiries from state regulators relating to
licensing and qualification requirements as an insurance claims adjuster,
appraiser or legality of a direct repair network under the laws of that
particular jurisdiction. We also received inquiries regarding compliance with
steering laws of certain jurisdictions. To date, we have been successful in
either demonstrating to the appropriate state regulators that we do not violate
the jurisdiction laws, that qualification is not required or we have agreed to
register certain of our personnel or the entity, as appropriate, as a licensed
insurance claims adjuster in that jurisdiction.
Certain jurisdictions could adopt laws directed at the auto insurance
industry, which could affect our business in an unforeseen and adverse manner.
Several states have pending or proposed legislation which, if adopted, could
adversely affect our business model. To date, industry trade associations have
been successful in preventing the passage of unfavorable legislation.
It is possible that a number of laws and regulations may be adopted with
respect to the Internet. These laws may cover issues such as user privacy,
freedom of expression, pricing, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Furthermore, the growth of electronic commerce may prompt calls for more
stringent information gathered online or require online services to establish
privacy policies. The Federal Trade Commission has also initiated actions
against online service providers regarding the manner in which personal
information regarding the manner in which personal information is collected from
users and provided to third parties. We do not currently provide personal
information regarding our users to third parties. However, the adoption of such
consumer protection laws could create uncertainty in Web usage and reduce the
demand for our products and services.
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We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of such laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies. Changes in laws
intended to address such issues could create uncertainty in the Internet market
place. Such uncertainty could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs.
In addition, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we are
required to qualify to do business in each such state or foreign country. We are
incorporated in Nevada and are currently only required to be qualified as a
foreign corporation authorized to do business in the State of Florida because
our offices and employees are located in Oldsmar, Florida. Changes in the laws
affecting the Internet or the automobile insurance repair industry may require
us to quality in additional jurisdictions. Our failure to qualify in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. It could also hamper our ability to enforce contracts in such
jurisdictions. The application of laws or regulations from jurisdictions whose
laws do not currently apply to our business could have a material adverse effect
on our business, results of operations and financial condition.
Special Considerations
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us may also adversely
impact our business operations. If any of the following risks actually occur,
our business, financial condition, or operating results could be negatively
affected.
Risks Related to Our Business
Our limited operating history makes evaluating our business and prospects
difficult.
We have been involved in the Internet based automobile collision insurance
claims business since May 2000. Our limited operating history in this industry
makes an evaluation of our future prospects very difficult. Although we achieved
profitability during the last half of fiscal 2003, we cannot be certain that we
will sustain or increase such profitability on a quarterly or annual basis. You
should carefully consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. There is a risk that we will not be able to accomplish our objectives.
Failure to achieve any of our objectives could negatively affect our business,
financial condition and results of operations.
We have all the risks of a principal in the automobile repair process.
We receive revenue from insurance companies for repairs completed by
members of our network of repair shops. We approve all repair shops for
inclusion in our network and determine which repair shop will perform the
repairs. We are responsible for collecting our revenue directly from the
insurance company. We therefore act as a principal in the transaction.
If the repairs are not completed correctly, and the vehicle must be sent to
another repair shop for repairs to be performed, we must pay for the repairs to
be completed again. This cost is not passed on to the insurance company but is a
risk that we bear. We control this risk by monitoring work performed by the
repair shops, monitoring customer complaints, reviewing the repair shop history
and actual site visits to repair shops. We add or remove repair shops from our
network based on our review of the repair shop's performance. We eliminate
repair shops that we feel are not providing repair work up to its standards.
Repairs are approved by customers upon retrieval of their vehicle. We constantly
review and revise our network to determine if repair shops included should be
removed. We have the risks and rewards of ownership such as the risk of loss for
collection, delivery or returns.
All our fees are negotiated between us and the insurance company, and the
negotiation does not include any repair shop. We must pay the repair shop a fee
negotiated between us and the repair shop, and the negotiation does not include
any insurance company. The amount owed to the repair shop is owed directly by us
and is not guaranteed, directly or indirectly, by any insurance company. We are
not acting as an agent or broker (including performing services, in substance,
as an agent broker) with compensation on a commission or fee basis.
To date, additional repairs that our repair shops have to provide after a
vehicle has been returned to its user have not been material. We have not
experienced any material bad debts or collection difficulties from our
customers. However, because we act as the principal in the automobile repair
process, we are subject to the risks of poor repair work and accounts receivable
write-offs from our customers due to dissatisfaction with our services.
9
There is no assurance we will continue our recent trend of profitability.
In the last two quarters of our fiscal year ended July 31, 2003 we were
profitable. However, for the year ended July 31, 2003, we had a net loss of
$1,184,253. We will need to continue generating significant revenues from new
and existing clients to offset potential loss of sales from our largest client
in order to maintain profitable results. Although management is committed to
sustain profitability through increased revenues and additional cost cutting
measures, if necessary, there is no assurance that we will stay profitable.
We are dependent on only a few customers for a substantial portion of our
revenues.
During the year ended July 31, 2003, we derived 58% and 14% of our revenues
from two customers. We have recently received information that the largest
customer has sold one-half of their U.S. auto physical damage business and will
possibly sell the other half. There is no assurance that the Company will
continue to process the claims from the portion of the business that has been
sold. If not, the impact of the change is not expected to start until January
2004, at which time the Company would expect one-twelfth of that portion of the
business to decrease, or a decrease of approximately 2.4% of the Company's gross
revenue each month, until the total decrease is approximately 29% by December of
2004. Currently, new customers are being rolled out on the Company's
application, which will start to mitigate the loss of business before the
Company feels the effect of the change. The Company's management expects that
additional customers that are currently testing the Company's outsourcing
solution will come on board and make up for the lost business from this
customer. . Because of the competitive nature of our business and the
uncertainty of bring on enough business to offset the loss of business, we may
be unable to replace revenues quickly enough to sustain profitability. However,
the company's management will cut expenses in the event we are unable to sustain
profitability.
We depend upon independently owned and operated repair shops to provide services
to our customers.
We have agreements with a network of independently owned and operated
vehicle repair facilities to provide services to our customers. Either we or the
repair facility can terminate our contracts at will. Our business could suffer
if a significant number of these repair shops terminate their agreements with us
or fail to provide the quality of service expected by our customers.
We may not be indemnified for all losses resulting from our vehicle repair
business.
We require that all repair shops in our network indemnify us from claims
relating to their negligent acts or breach of their agreement with us, maintain
a specified amount of liability insurance coverage, and name us as an additional
insured under their liability policy. This coverage may not, however, cover all
liabilities to which we may be subject, and our business could suffer if we need
to draw significant funds from operating revenue to pay claims that are not
covered or that exceed the limits of our coverage.
The market for insurance auto collision claims services is extremely
competitive.
Because the auto collision claims service industry is highly competitive
and has low barriers to entry, we cannot assure you that we will be able to
compete effectively. We are aware of one other company that offers
internet-based services similar to ours. These competitors provide their
services primarily to the fleet management industry. All of these competitors
have been in business longer than we have and have significantly greater assets
and financial resources than currently available to us. We expect competition to
intensify in the Internet-based segment of this industry as current non-Internet
competitors expand their market into the Internet and new competitors enter the
market utilizing the Internet. We cannot assure you that we will be able to
compete successfully against current or future competitors. Competitive
pressures could force us to reduce our prices and may make it more difficult for
us to attract new customers and retain current customers. The principal
competitive factors for our services are:
o turn around time for claims processing;
o quality of repair shop services;
o ability to offer nationwide access to repair facilities;
o claims processing fees and charges;
o ability to offer new services and incorporate technological change into
existing services; o 24/7 access to status of claim; o volume of repair
claims a repair facility can expect to support discount amounts.
As competition in our industry increases, it is likely that many of our
competitors will have access to greater resources than are currently available
10
to us, including financial, employee, customer relations, technology, and
expertise in developing and implementing new technologies as the industry
evolves. In addition, competitors may be able to develop services that are
superior to our service, that achieve greater customer acceptance or that
significantly improves functionality as compared to our existing and future
products and services.
The use of the Internet to provide collision claims administration services
is a recent development and the extent of customer acceptance is not yet known.
Internet-based collision claims administration is a relatively new and
evolving industry. As such, there is no clearly defined business model that has
a lengthy history of customer acceptance and profitability. For the industry to
be successful, insurance companies must be willing to obtain collision
administration services over the Internet. There is no way to be sure that a
sufficient number of customers will utilize our services to enable us to remain
profitable.
We depend on key personnel and will need to recruit new personnel as we grow.
Because we are a small company, we are currently dependent on the efforts
of a limited number of management personnel. We believe that given the
development stage of our business and the large amount of responsibility being
placed on each member of our management team, the loss of the services of any
member of this team at the present time would harm our business. Each member of
our management team supervises the operation and growth of one or more integral
parts of our business.
If we are successful in expanding our customer base, we will need to add
additional key personnel as we continue to grow. If we cannot attract and retain
enough qualified and skilled staff, the growth of our business may be limited.
Our ability to provide services to clients and expand our business depends, in
part, on our ability to attract and retain staff with professional experiences
that are relevant to technology development and other functions we perform.
Competition for personnel with these skills is intense. Some technical job
categories are under conditions of severe shortage in the United States. In
addition, restrictive immigration quotas could prevent us from recruiting
skilled staff from outside the United States. We may not be able to recruit or
retain the caliber of staff required to carry out essential functions at the
pace necessary to sustain or expand our business.
We believe our future success will depend in part on the following:
o the continued employment and performance of our senior management,
o our ability to retain and motivate our officers and key employees, and
o our ability to identify, attract, hire, train, retain, and motivate other
highly skilled technical, managerial, marketing, and customer service
personnel.
Our business will suffer if our independent automobile collision repair shops
do not provide good service.
We currently have relationships with over 2,400 independently owned and
operated body shops upon which we depend to perform quality repair services at a
reasonable cost and in a timely manner. Although we monitor the quality and
timeliness of their services and can terminate our relationship with those shops
that do not meet our standards, we do not have meaningful control over the
quality of their services. Poor workmanship or service by any of these shops can
adversely affect our relationships with customers and could cause them to stop
dealing with us or reduce the amount of business that they do with us. In
addition, because we assume the responsibility for the quality of repairs, poor
workmanship and inferior work can negatively affect our financial position
because of the additional costs we incur in properly repairing an automobile.
We are dependent on third parties and certain relationships to fulfill our
obligations to our customers.
We are heavily dependent upon the collision repair shops and support
facilities which are members of our Preferred Provider Network to adequately and
promptly service our customers' needs. eAuto is dependent upon its ability to
enter into agreements with collision repair shops, glass shops and other
providers of services who provide quality service at the negotiated prices.
11
If we fail to adequately protect our trademarks and proprietary rights, our
business could be harmed. Our rights to our servicemarks are uncertain.
The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade secrets and similar
intellectual property as critical to our success. We rely on trademark and
copyright law, trade secret protection and confidentiality or license agreements
with our employees, customers, partners and others to protect our proprietary
rights. Although we were granted supplemental registration rights for
eAutoclaims.com(R), our service mark applications for eAutoclaims.com and Bricks
to Clicks on the primary federal register were rejected, however this product is
no longer in service and has been replaced by our latest product eJusterSuite.
There is no assurance our pending trademark and service mark applications for
eAudit, eAutoclaims, eJusterSuite, eJuster Transfer, and eProperty Suite will be
approved. We have been involved in litigation regarding the rights to use the
name eAutoclaims.com. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which we may in the
future offer our products and services. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary right is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights.
We may not be able to protect our proprietary technology.
Despite any precautions we may take, a third party may be able to copy or
otherwise obtain and use our software or other proprietary information without
authorization or develop similar software independently. We cannot assure you
that the steps we have taken or will take will prevent misappropriation of our
technology. Litigation may be necessary in the future to determine the validity
and scope of the proprietary rights of others, or defend against claims of
infringement or invalidity. This litigation, whether successful or unsuccessful,
could result in substantial costs and diversions of resources, either of which
could harm our business. If we are unable to protect our current or future
proprietary technology, our ability to compete effectively will be harmed.
If we are to remain competitive, we must be able to keep pace with rapid
technological change.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our website. The online commerce
industry is characterized by rapid technological change, changes in user and
customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices that could render our business model and proprietary
technology and systems obsolete in comparison to systems competitors may
implement. Our future success will depend, in part, on our ability to develop or
license leading technologies useful in our business, enhance the ease of use of
our existing services, develop new services and technologies that address the
varied needs of our customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
If we were unable, for technical, legal, financial or other reasons, to
incorporate new technology in new features or products, we may not be able to
adapt in a timely manner to changing market conditions or customer requirements.
We may infringe intellectual property rights of third parties.
Litigation regarding intellectual property rights is common in the software
and technology industries. We may in the future be the subject of claims for
infringement, invalidity, or indemnification claims based on such claims of
other parties' proprietary rights. These claims, with or without merit, could be
time consuming and costly to defend or litigate, divert our attention and
resources, or require us to enter into royalty or licensing agreements. There is
a risk that such licenses would not be available on reasonable terms, or at all.
Although we believe we have the ability to use our intellectual property to
operate and market our existing services without incurring liability to third
parties, there is a risk that our products and services infringe the
intellectual property rights of third parties.
Our products and technology depend on the continued availability of licensed
technology from third parties.
We license and will continue to license certain technology and software
from third parties. These licenses are integral to our business. If any of these
relationships were terminated or if any of these third parties were to cease
doing business, we would be forced to spend significant time and money to
replace the licensed software. If we are not able to replace these licenses on
commercially reasonable terms, it may be necessary for us to modify or
discontinue some of our services that depend upon technology licensed from third
parties. We cannot assure you that we would be able to replace these licenses.
12
Risks Related to the Internet
The Internet could become subject to regulations that affect our business.
Our business relies on the Internet and other electronic communications
gateways. We intend to expand our use of these gateways. To date, the use of the
Internet has been relatively free from regulatory restraints. However,
legislation, regulations, or interpretations may be adopted in the future that
constrain our own and our customers' abilities to transact business through the
Internet or other electronic communications gateways. Legislation or other
attempts at regulating commerce over the Internet could impair the growth of
commerce on the Internet or could impose licensing or other requirements that
could increase our cost of providing Internet-based services.
We are vulnerable to the effects of natural disasters, computer viruses, and
similar disruptions.
The continued and uninterrupted performance of our computer system is
critical to our success. Our ability to successfully provide our applications
and high-quality customer service largely depends on uninterrupted operation of
our computer and communications hardware and software systems. We have taken
measures to help assure that our systems are protected from unauthorized access.
In addition, we maintain redundant systems for backup and disaster recovery.
Despite these safeguards, we may be vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, and similar
events. In addition, we do not, and may not in the future, carry sufficient
business interruption insurance to compensate us for losses that may occur.
Despite our implementation of Internet security measures, our servers will be
vulnerable to computer viruses, physical or electronic break-ins, and similar
disruptions which could lead to interruptions, delays, loss of data or the
inability to process transactions.
Our future success will depend on the Internet's ability to accommodate growth.
The recent growth in the use of the Internet has caused frequent periods of
performance degradation. Any failure in performance or reliability of the
Internet could adversely affect our ability to fulfill our obligations to
customers in a timely manner and, consequently, hurt our operating results. To
the extent that the Internet continues to experience increased numbers of users,
frequency of use or increased bandwidth requirements of users, the Internet
infrastructure may not be able to continue to support the demands placed on it
and, as a result, the performance or reliability of the Internet may be
adversely affected. Furthermore, the Internet has experienced a variety of
outages and other delays as a result of damage to portions of its infrastructure
or otherwise. The relatively complex and unproven technology that makes up the
Internet infrastructure poses a risk of material outages or delays that could
adversely affect the ability of our customers to use our trading systems. In
addition, the Internet could lose its viability as a form of media due to delays
in the development or adoption of new standards and protocols that can handle
increased levels of activity. The infrastructure and complementary products and
services necessary to maintain the Internet as a viable commercial medium may
not be developed or maintained.
We are dependent on the continued growth of online commerce.
Our future revenues and any future profits will be dependent upon the
widespread acceptance and use of the Internet and other online services as an
effective medium of commerce by consumers. No standards have yet been widely
accepted for the measurement of the effectiveness of Internet sales, and there
can be no assurance that such standards will develop sufficiently to support
Internet sales as a purchasing medium. Rapid growth in the use of and interest
in the Internet, and other online services is a recent phenomenon, and there can
be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. We rely, and will continue to rely, on consumers who have historically
used traditional means of commerce to purchase merchandise. For us to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. There can be no assurance that our
customers will accept the Internet as a means to purchase the Company's services
or that our customers will adopt its systems as a means to purchase services.
Governmental regulation and taxation of the Internet is subject to change.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may result in there
being enacted laws concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party activities, and
jurisdictional issues. These laws could harm our business by increasing our cost
of doing business or discouraging use of the Internet.
13
In addition, the tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made that could result in
Internet activities, including the sale of goods and services, being taxed. The
U.S. Congress passed the Internet Tax Information Act, which places a three-year
moratorium on new state and local taxes on Internet commerce. There may,
however, be enacted in the future laws that change the federal, state or local
tax treatment of the Internet in a way that is detrimental to our business.
Some local telephone carriers claim that the increasing popularity of the
Internet has burdened the existing telecommunications infrastructure and that
many areas with high Internet use are experiencing interruptions in telephone
service. These carriers have petitioned the Federal Communications Commission to
impose access fees on Internet service providers. If these access fees are
imposed, the cost of communicating on the Internet could increase, and this
could decrease the demand for our services and increase our cost of doing
business.
Risks Related to Our Common Stock
Our Common Stock price may be volatile, which could result in substantial losses
for individual stockholders.
The market price for our Common Stock is volatile and subject to wide
fluctuations in response to factors including the following, some of which are
beyond our control, which means our market price could be depressed and could
impair our ability to raise capital:
o actual or anticipated variations in our quarterly operating results;
o announcements of technological innovations or new products or services by
us or our competitors; o changes in financial estimates by securities
analysts; o conditions or trends in the Internet and/or online commerce
industries; o changes in the economic performance and/or market valuations
of other Internet, online commerce companies;
o additions or departures of key personnel.
Our Certificate of Incorporation limits director liability thereby making it
difficult to bring any action against them for breach of fiduciary duty.
As permitted by Nevada law, the Company's Certificate of Incorporation
limits the liability of directors to the Company or its stockholders for
monetary damages for breach of a director's fiduciary duty except for liability
in certain instances. As a result of the Company's charter provision and Nevada
law, stockholders may have limited rights to recover against directors for
breach of fiduciary duty.
We may be unable to meet our future capital requirements.
We are substantially dependent on receipt of additional capital to
effectively execute our business plan. If adequate funds are not available to us
on favorable terms we will not be able to develop new services or enhance
existing services in response to competitive pressures, which would affect our
ability to continue as a going concern. We do not anticipate issuing any
additional shares of our Series A Preferred Stock as a source of capital. We
cannot be certain that additional financing will be available to us on favorable
terms when required, or at all. If we raise additional funds through the
issuance of equity, equity-related or debt securities, such securities may have
rights, preferences or privileges senior to those of the rights of our Common
Stock and our stockholders may experience additional dilution.
Penny stock regulations may impose certain restrictions on marketability of our
stock.
The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price (as defined) of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. As a result,
our Common Stock is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
14
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker-dealer must also disclose the commission payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, 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. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our securities.
We have never paid dividends on our Common Stock and do not expect to pay any in
the foreseeable future. We are subject to restrictions on our ability to pay
dividends.
A potential purchaser should not expect to receive a return on their
investment in the form of dividends on our Common Stock. We have never paid cash
dividends on our Common Stock and we do not expect to pay dividends in the
foreseeable future. Our ability to pay dividends on our Common Stock is
restricted by the terms of our agreements with the holders of our Series A
Preferred Stock. Holders of our Series A Preferred Stock are entitled to annual
dividends of 8% (currently aggregating $107,200 annually, assuming no
conversion). To date, we have fulfilled our dividend obligations on the Series A
Preferred Stock through the issuance of additional shares of our Common Stock to
the holders of our series A Preferred Stock.
Substantial sales of our Common Stock could cause our stock price to rapidly
decline.
The market price of our Common Stock may fall rapidly and significantly due
to sales of our Common Stock from other sources such as:
o The sale of Common Stock underlying the conversion rights of our Series A
Preferred Stock and convertible debentures.
o The sale of shares of our Common Stock underlying the exercise of
outstanding options and warrants.
o The sale of shares of our Common Stock, which are available for resale
under Rule 144 or are otherwise freely tradable and which are not subject
to lock-up restrictions.
Any sale of substantial amount of our Common Stock in the public market, or
the perception that these sales might occur, whether as a result of the sale of
Common Stock received by shareholders upon conversion of our Series A Preferred
Stock, exercise of outstanding warrants or options or otherwise, could lower the
market price of our Common Stock. Furthermore, substantial sales of our Common
Stock by such parties in a relatively short period of time could have the effect
of depressing the market price of our Common Stock and could impair our ability
to raise capital through the sale of additional equity securities. Moreover, our
ability to obtain additional equity capital may be adversely affected by the
restrictions imposed upon us under the agreements relating to the issuance of
our Series A Preferred Stock.
The covenants with our Series A Preferred Shareholders restrict our ability
to incur debt outside the normal course, acquire other businesses, pay dividends
on our Common Stock, sell assets or issue our securities without the consent of
the Series A Preferred Shareholders. Such arrangements may adversely affect our
future operations or may require us to make additional concessions to the
holders of the Series A Preferred Stock in order to enter into transactions or
take actions management deems beneficial and in our best interests of the
holders of our Common Stock.
The forward-looking information in this Form 10-KSB may prove inaccurate.
This Form 10-KSB contains forward-looking statements and information that
are based on management's beliefs as well as assumptions made by, and
information currently available to, management. When used in this prospectus,
words such as "anticipate," "believe," "estimate," "expect," and, depending on
the context, "will" and similar expressions, are intended to identify
forward-looking statements. Such statements reflect our current views with
respect to future events and are subject to certain risks, uncertainties and
assumptions, including the specific risk factors described above. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, believed, estimated or expected. We do not intend to update these
forward-looking statements and information.
15
ITEM 2. DESCRIPTION OF PROPERTY
Our main offices are located at 110 East Douglas Road, Oldsmar, Florida
33467. Monthly rent of approximately $16,900 terminates on November 30, 2006.
The monthly rent increases annually until it reaches approximately $19,000 per
month in the year ended November 30, 2006. We have the option to renew the lease
for two additional years after the initial five-year term. On or after December
31, 2004, we also have the right to purchase the entire facility, totaling
62,000 square feet, with the associated land for $2,950,000. We issued 45,956
shares of our Common Stock to the landlord of this lease with registration
rights to obtain the purchase option.
ITEM 3. LEGAL PROCEEDINGS
In August 2002, we received a letter from counsel to Body Shops Unlimited,
which included a copy of a complaint filed in a California State Court. Body
Shops claims to have developed and delivered a software program to us, which
remains unpaid. We contend the software does not meet specifications, and
accordingly we are entitled to terminate the contract and any related
maintenance fees. Body Shop alleged that they were owed $114,000 plus potential
damages for fraud and unjust enrichment. We disputed these allegations. Instead
of incurring significant legal fees we settled this lawsuit for $35,000.
In August 2002, we were served with a complaint styled David B. Linka vs.
eAutoclaims. Mr. Linka is a former employee of ours and alleged he is due
substantial past and future compensation relating to his alleged improper
termination. Essentially, this dispute concerned Mr. Linka's entitlement to
approximately $1.4 million of some past, but mostly future commissions relating
to an account Mr. Linka assisted in selling. While management believed that
there were meritorious defenses to Mr. Linka's allegations, the Company settled
for $75,000 instead of incurring significant legal fees.
In April 2003, we received a letter requiring arbitration in the state of
California on our contract with Decision Support Services (DSS). We stopped
paying DSS because of their inability to deliver an agreed upon software product
that meets required operation standards. Their initial complaint alleged that
the Company owed them $250,000. We allege DSS owes us $110,000 for breach of
contract. A subsequent amendment to the claim increased the amount claimed by
DSS to $2.3 million based upon what we believe is an incorrect interpretation of
the contract licensing fees and termination clause. The Company believes that
their alleged damages are grossly overstated. While we believe that there are
meritorious defenses against this action and that this matter will be vigorously
and aggressively defended, it is too early to predict the ultimate outcome of
this dispute.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal year ended July 31, 2003.
16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Value
Our Common Stock is traded on the OTCBB under the symbol "EACC". The
following table sets forth, the high and low bid prices of the Common Stock for
the periods shown as reported by the National Quotation Bureau. The bid prices
quoted on the OTCBB reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
High Bid Low Bid
Fiscal Year Ended July 31, 2002
First Quarter (August 1, 2001 to October 31, 2001) 1.68 0.39
Second Quarter (November 1, 2001 to January 31, 2002) 0.92 0.37
Third Quarter (February 1, 2002 to April 30, 2002) 0.70 0.40
Fourth Quarter (May 1, 2002 to July 31, 2002) 0.45 0.28
Fiscal Year Ended July 31, 2003
First Quarter (August 1, 2002 to October 31, 2002) 0.36 0.10
Second Quarter (November 1, 2002 to January 31, 2003) 0.16 0.08
Third Quarter (February 1, 2003 to April 30, 2003) 0.14 0.08
Fourth Quarter (May 1, 2003 to July 31, 2003) 0.55 0.17
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of Common Stock,
$.001 par value ("Common Stock"), and 5,000,000 of preferred stock, $.001 par
value ("Preferred Stock"), issuable in series. The following description of our
capital stock does not purport to be complete and is subject to and qualified in
its entirety by our Certificate of Incorporation and Bylaws, amendments thereto,
including the Certificates of Designation for our Series A Preferred Stock, and
by the provisions of applicable Nevada law. Our transfer agent is Equity
Transfer Services, Inc., 120 Adelaide West, Suite 420, Toronto, Ontario, M5H 4C3
Common Stock
As of September 30, 2003, there were approximately 23,542,200 shares of our
Common Stock outstanding. In addition, as of September 30, 2003, shares of
common stock were subject to the following outstanding warrants:
o 1,044,385 warrants issued to the agent and purchasers of our Series A
Preferred Stock at exercise prices of between $1.46 and $4.50
o 1,150,000 warrants at an exercise price of $0.63 per share, issued to the
purchasers of our convertible debentures, and
o 220,000 warrants at an exercise price of $0.75 per share, issued to the
purchasers of common stock.
As of September 30, 2003, we have reserved 4,723,467 shares of our Common
Stock underlying options issued to our directors, employees and consultants with
exercise prices of between $.01 and $5.06. We have also deposited 585,040 shares
of our Common Stock in escrow in connection with the conversion rights of our
outstanding Series A Convertible Preferred Stock, which shares are included in
the number of currently outstanding shares. As of September 30, 2003, we had
approximately 250 common shareholders of record.
The holders of Common Stock are entitled to one vote per share for the
election of directors and all other purposes and do not have cumulative voting
rights. The holders of our Common Stock are entitled to receive dividends when,
as, and if declared by our Board of Directors, and in the event of our
liquidation to receive pro-rata, all assets remaining after payment of debts and
expenses and liquidation of the preferred stock. Holders of our Common Stock do
not have any pre-emptive or other rights to subscribe for or purchase additional
shares of capital stock, no conversion rights, redemption, or sinking-fund
provisions.
17
Preferred Stock and Related Warrants
Our Board of Directors (without further action by the shareholders) has the
option to issue from time to time authorized un-issued shares of Preferred Stock
and determine the terms, limitations, residual rights, and preferences of such
shares. The Company has the authority to issue up to 5,000,000 shares of
Preferred Stock pursuant to action by its Board of Directors. As of September
30, 2003, we had 247 shares of Series A Preferred Stock outstanding.
Effective June 27, 2000, we entered into a Securities Purchase Agreement
and related agreements relating to the issuance of our Series A Preferred Stock.
The following discussion is only a summary of certain of the terms and
provisions of the Securities Purchase Agreement, Registration Rights Agreement,
Security Agreement, Certificate of Designation for our Series A Preferred Stock,
Purchaser's Warrants and Agent's Warrants.
Each time we issued our Series A Preferred Stock we issued to the purchaser
warrants (the "Purchaser's Warrants") to purchase the number of shares of our
Common Stock determined by dividing 30% of the dollar amount of our Preferred
Stock issued to that purchaser by 130% of the closing bid price of our Common
Stock on the day immediately preceding the issuance of our Preferred Stock. We
also issued warrants to the Agent (the "Agent's Warrants") equal to 10% of the
number of our Common Stock that our Preferred Stock would be convertible into if
the Series A Preferred Stock were convertible into our Common Stock, assuming
the conversion date was the date the Preferred Stock was issued at an exercise
price of $4.50. All Purchaser's Warrants and Agent's Warrants are immediately
exercisable, and have five (5) year exercise period.
During the time period June 2000 through June 2001, we raised a total of
$2,289,929 (net of selling commissions and legal fees) from the sale of 520
shares of our Series A Preferred Stock at $5,000 per share. We paid total
selling commissions of $260,000 and legal fees of $50,071 in connection with
these placements. We issued a total of 780,000 Purchaser Warrants at exercise
prices ranging from $1.46 to $3.33 and 264,385 Agent Warrants with an exercise
price of $4.50.
The Series A Preferred Stock carries a cumulative preferred dividend of 8%
per annum and a liquidation preference of $5,000 per share. We have the right to
redeem the Series A Preferred Stock at a price of $5,500 per share upon giving
not less than thirty days prior written notice to holders. Upon receipt of our
notice of conversion, a holder of the Series A Preferred Stock may elect to
convert the shares into Common Stock at any time prior to the date of redemption
as specified in our notice.
In May 2001, we amended our agreements and understandings with the holders
of our Series A Preferred Stock, which provide, among other matters, as follows:
o We issued to the holders of our Series A Preferred Stock 344,500
restricted shares of our Common Stock to satisfy the penalty provisions for
our failure to register our Common Stock underlying the Series A Preferred
Stock and related warrants to the holders of this Series A Preferred Stock
under our Registration Rights Agreement.
o The conversion price of our Series A Preferred Stock is set at the lower
of 75% of the average of the three lowest bid prices of our Common Stock
for the twenty trading days preceding the Conversion Date or $.62.5 cents.
o The mandatory commission feature is automatically extended until such
time as beneficial ownership upon conversion does not exceed 4.9%.
o All Series A Preferred Stock is automatically converted at such time as
the outstanding amount of Series A Preferred Stock is less than $250,000,
subject to the 4.9% beneficial ownership limitation.
o The Series A Preferred Shareholders may not acquire any additional shares
of our Common Stock in the open market or convert our Series A Preferred
Stock into Common Stock or exercise their warrants if the effect of such a
purchase or conversion would be to increase such entities equity beneficial
ownership position above 4.9%.
o The Series A Preferred Shareholders agreed to allow us to withdraw our
prior registration statement, which registered the shares of Common Stock
underlying the conversion rights of the Series A Preferred Stock and
related investor and agent warrants. The holders of the Series A Preferred
Stock have a demand registration right upon 60 days notice.
18
In January 2002, we issued 551,629 common shares to Governors Road in
connection with the conversion of 42 shares of Series A Preferred Stock and
accrued interest. In March 2002, we issued 4,097,951 common shares to Canadian
Advantage Limited Partnership (2,991,504 shares) and Advantage (Bermuda) Fund,
Ltd. (1,106,447 shares) in connection with the conversion of 210 shares of
Series A Preferred Stock.
In the fiscal year ended July 31, 2003, we issued 1,113,151 common shares
to Governors Road, LLC in connection with the conversion of 21 shares of Series
A Preferred Stock and accrued interest. Accordingly, Governors Road, LLC is the
sole owner of the 247 shares of our currently outstanding Series A Preferred
Stock.
The agreements we entered into in connection with the issuance of the
Series A Preferred Stock contain numerous affirmative and negative covenants,
which may adversely affect our ability to attract other sources of capital or
grow our business. We cannot incur debt outside the normal course, acquire other
businesses, pay dividends, sell assets or issue our securities without the
consent of the holders of our Series A Preferred Stock so long as our Series A
Preferred Stock remains unpaid.
In the future, subject to the limitations imposed by the Securities
Purchase Agreement for the Series A Preferred Stock, our Board of Directors has
the authority to issue additional shares of our Preferred Stock in series with
rights, designations and preferences as determined by the Board of Directors.
When any shares of our Preferred Stock are issued, certain rights of the holders
of our Preferred Stock may affect the rights of the holders of Common Stock. The
authority of the Board of Directors to issue shares of our Preferred Stock with
characteristics which it determines (such as preferential voting, conversion,
redemption and liquidation rights) may have a deterrent effect on persons who
might wish to make a takeover bid to purchase our shares at a price, which might
be attractive to our shareholders. However, the Board of Directors must fulfill
its fiduciary obligation to our shareholders in evaluating a takeover bid.
Certain Provisions of the Certificate of Incorporation and Bylaws
Our Certificate of Incorporation provides that no director shall be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director except as limited by Nevada law. Our
Bylaws provide that we shall indemnify to the full extent authorized by law each
of our directors and officers against expenses incurred in connection with any
proceeding arising by reason of the fact that such person is or was an agent of
the corporation.
Insofar as indemnification for liabilities may be invoked to disclaim
liability for damages arising under the Securities Act of 1933, as amended, or
the Securities Act of 1934 (collectively, the "Acts"), as amended, it is the
position of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Acts and are therefore, unenforceable.
Dividends
We have not paid any cash dividends on our common or preferred stock and do
not anticipate paying any such cash dividends in the foreseeable future.
Earnings, if any, will be retained to finance future growth.
Shares Eligible for Future Sale
As of September 30, 2003, we had outstanding 23,542,200 shares of Common
Stock. Of these shares, 8,675,516 shares are freely tradable without restriction
or limitation under the Securities Act, except for any shares purchased by
"affiliates" or persons acting as "underwriters" as these terms are defined
under the Securities Act.
The 14,866,684 shares of Common Stock held by existing shareholders that
are "restricted" within the meaning of Rule 144 adopted under the Securities Act
(the "Restricted Shares"), may not be sold unless they are registered under the
Securities Act or sold pursuant to an exemption from registration, such as the
exemption provided by Rule 144 promulgated under the Securities Act. The
Restricted Shares were issued and sold by us in private transactions in reliance
upon exemptions from registration under the Securities Act and may only be sold
in accordance with the provisions of Rule 144 of the Securities Act, unless
otherwise registered under the Securities Act.
19
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
(1) 1% of the then-outstanding shares of Common Stock; and
(2) the average weekly trading volume in the Common Stock during the four
calendar weeks immediately preceding the date on which the notice of such
sale on Form 144 is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to provisions relating to notice and
manner of sale and the availability of current public information about us. In
addition, a person (or persons whose shares are aggregated) who has not been an
affiliate of ours at any time during the 90 days immediately preceding a sale,
and who has beneficially owned the shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. While the foregoing discussion
is intended to summarize the material provisions of Rule 144, it may not
describe all of the applicable provisions of Rule 144, and, accordingly, you are
encouraged to consult the full text of that Rule.
We also have the ability to file Form S-8 registration statements, which
registers for resale securities issued to our employees, officers, directors,
consultants and advisors.
We are required to register the shares of Common Stock underlying
conversion features of our Series A Preferred Stock along with the shares of
Common Stock underlying the Agent's Warrants and Purchaser's Warrants upon 60
days prior notice. The sale of our Common Stock underlying any such registration
statement may also adversely affect the market price of our Common Stock, result
in substantial dilution to our stockholders and might also adversely affect our
ability to raise additional capital.
The possibility of future sales by existing stockholders under Rule 144 or
otherwise will, in the future, have a depressive effect on the market price of
our Common Stock, and such sales, if substantial, might also adversely affect
our ability to raise additional capital.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with
our audited financial statements as of July 31, 2003 and the notes thereto, all
of which financial statements are included elsewhere in this form 10-KSB. In
addition to historical information, the following discussion and other parts of
this Form 10-KSB contain forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from those anticipated
by such forward-looking information due to factors discussed under "Description
of Business" and elsewhere in this Form 10-KSB.
The statements that are not historical constitute "forward-looking
statements". Said forward-looking statements involve risks and uncertainties
that may cause the actual results, performance or achievements of the Company
and its subsidiaries to be materially different from any future results,
performance or achievements, express or implied by such forward-looking
statements. These forward-looking statements are identified by their use of such
terms and phrases as "expects", "intends", "goals", "estimates", "projects",
"plans", "anticipates", "should", "future", "believes", and "scheduled".
The variables which may cause differences include, but are not limited to,
the following: general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employment benefit costs;
availability and costs of raw materials and supplies; and changes in, or failure
to comply with various government regulations. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements included in this Form
10-KSB will prove to be accurate.
20
In light of the significant uncertainties inherent in the
forward-looking statements included herein the inclusion of such information
should not be regarded as a representation by the Company or any person that the
objectives and expectations of the Company will be achieved.
OVERVIEW
We are a business-to-business e-commerce company that uses the Internet to
streamline and lower the overall costs of automotive repair paid by insurance
companies, managing general agents (MGA) and third party claims administrators
(TPA) and self-insured automobile fleet management companies. We are
establishing ourselves as the preeminent service provider for the automobile
insurance industry, providing a seamless back-end infrastructure that links
thousands of collision repair shops and support facilities. We provide a
proprietary, cost-effective and highly advanced system for the processing and
ultimate repair of claims for damaged vehicles filed by policyholders of our
insurance company clients. We receive revenues from insurance companies for
repairs completed by members of our network of repair shops. We approve all
repair shops for inclusion in our network and determine which repair shop will
ultimately perform the repairs. We receive a discount, ranging from 10% to 15%,
from repair facilities that are members of our provider network. The revenues
generated from the vehicle and glass repair through our provider network
accounts for 92% and 95% of the revenue for the years ended July 31, 2003 and
2002, respectively. We are paid on a per claims basis from our insurance and
fleet company customers for each claim that we process through our system. These
fees vary from $10 to $60 per claim depending upon the level of service
required. For the years ended July 31, 2003 and 2002, 8% and 5% of the revenue
has been received from claims processing fees and other income, respectively.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and the results of
our operations are based upon our consolidated financial statements and the data
used to prepare them. The Company's financials have been prepared in accordance
with accounting principles generally accepted in the United States. On an
ongoing basis we re-evaluate our judgments and estimates including those related
to revenues, bad debts, long-lived assets, and income taxes. We base our
estimates and judgments on our historical experience, knowledge of current
conditions and our beliefs of what could occur in the future considering
available information. Actual results may differ from these estimates under
different assumptions or conditions. Our estimates are guided by observing the
following critical accounting policies.
Revenue recognition:
The Company derives revenue primarily from collision repairs, glass repairs
and fleet repairs. Revenue is recognized when an agreement between the Company
and its customer exists, the repair services have been completed, the Company's
revenue is fixed and determinable and collection is reasonably assured.
The Company records revenue gross in the areas of collision and fleet
repairs. It also records at gross in certain glass repair transactions. Revenue
is recorded at gross in these areas when:
o The Company is the primary obligor in its arrangements. The Company is
responsible for the quality of the repair and must satisfy the customer if
the body shop fails to repair the vehicle properly.
o The Company has latitude in establishing price. The price is established
based on the Company's audit of the repair estimate submitted by the repair
facility. The repair facility cannot begin the repair until an agreed upon
price is established between the facility and the Company for the repair.
o The Company controls what is repaired with their contracted shops, as
they audit the estimate submitted by the repair facility. The Company must
agree that the repair is reasonable and necessary before the repair
facility is allowed to proceed with the work being requested. o The Company
has discretion in supplier selection. Through the use of software, the
Company prioritizes which repair facility is used based on the efficiency
and effectiveness of the repair facility, and
o The Company has credit risk. The Company is responsible to pay the repair
facility even if the customer does not pay for the repair.
The Company records revenue net of the repair costs when the supplier, not
the Company, is the primary obligor in an arrangement, the amount the Company
earns is fixed or the supplier has credit risk. This occurs when the repair has
been performed before it is referred to the Company. When they receive notice of
the transaction, they call the glass repair facility to ask them to become part
21
of our network and to negotiate a better price on the repair. If the Company is
able to negotiate a better price for the customer they keep a portion of the
added discount. In that situation the revenue is recorded net of the repair
costs even though the Company pays for the entire claim and are reimbursed by
the insurance company, since they did not have the risk of loss and are not
responsible for the repair.
The Company maintains an allowance for doubtful accounts for losses that
they estimate will arise from the customers' inability to make required
payments. Collectibilty of the accounts receivable is estimated by analyzing
historical bad debts, specific customer creditworthiness and current economic
trends. At July 31, 2003 the allowance for doubtful accounts was $242,000.
Accounting for Income taxes:
The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While we consider
historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event that we
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of the net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made. We have recorded
valuation allowances against our deferred tax assets of $6,315,000 at July 31,
2003. The valuation allowance consists mainly of net operating losses previously
realized and stock compensation currently not deductible. The valuation
allowance was necessary because the use of these deductions is not reasonably
assured since the company just recently reached profitability.
Valuation of long-lived assets:
The Company identifies and records impairment on long-lived assets,
including goodwill, when events and circumstances indicate that such assets have
been impaired. The Company periodically evaluates the recoverability of its
long-lived assets based on expected undiscounted cash flows, and recognizes
impairment, if any, based on expected discounted cash flows. Factors we consider
important which could trigger an impairment review include the following:
o Significant negative industry trends
o Significant underutilization of the assets
o Significant changes in how we use the assets of our plans for their use.
Goodwill was amortized using the straight-line method over 7 years through
July 31, 2002. As of August 1, 2002 no additional amortization was recorded as a
result of the change in accounting standards as described below in "recently
issued financial accounting standards." At each balance sheet date, the Company
evaluates the period of amortization of intangible assets. The factors used in
evaluating the period of amortization include: (i) current operating results,
(ii) projected future operating results, and (iii) any other material factors
that effect the continuity of the business. No charge for impairment of this
asset was considered to be necessary as of July 31, 2003.
RESULTS OF OPERATIONS
The accompanying financial statements reflect the operations of eAutoclaims
for the fiscal years ended July 31, 2003 and 2002.
REVENUE
Total revenue for the year ended July 31, 2003 was approximately $34.1
million, which consists of approximately $29.7 million in collision repair
management for insurance companies, approximately $0.9 million in auto glass
repairs and approximately $3.5 million in fleet repair management and other
repairs and fees. Total revenue for the year ended July 31, 2002 was
approximately $32.3 million, which consists of approximately $28.5 million in
collision repair management for insurance companies, approximately $1.0 million
in auto glass repairs and approximately $2.8 million in fleet repair management
and other repairs and fees. Total revenues increased approximately $1.7 million
or 5% compared to approximately $32.3 million for the year ended July 31, 2002.
This increase is primarily the result of growth in revenues attributed to our
core collision repairs management business and the growth in fees and other
revenue as described below. The company implemented a series of price increases
during this period and evaluated the contribution to net margin by all accounts.
The effect likely contributed to minimal growth for the year.
22
The glass revenue decrease by 10% from approximately $1.0 million in fiscal
year ended July 31, 2002 to approximately $0.9 million in fiscal year ended July
31, 2003. This decrease is a result of the loss of a major customer in fiscal
year 2002 due to the maturing and increased competition for the glass repair
business. We negotiated lower pricing from one of our larger glass vendors,
which has helped our competitiveness in this market in the last quarter of
fiscal year 2003. In the fourth quarter of fiscal 2003, glass revenue increased
89% or by approximately $186,000. The glass repair business complements our core
business and allows our customers to use a single source for all their repair
needs. The fleet revenue decreased approximately $261,000, or 23% from
approximately $1.1 million in fiscal 2002 to approximately $0.9 in fiscal 2003.
This decrease is mostly a result of a decrease in the amount of claims from our
existing clients and two clients from 2002 that are no longer clients in 2003.
During the year ended July 31, 2003, we derived 58% and 14% of our revenues
from two customers. We have recently received information that the largest
customer has sold one-half of their U.S. auto physical damage business and will
possibly sell the other half. There is no assurance that the Company will
continue to process the claims from the portion of the business that has been
sold. If not, the impact of the change is not expected to start until January
2004, at which time the Company would expect one-twelfth of that portion of the
business to decrease, or a decrease of approximately 2.4% of the Company's gross
revenue each month, until the total decrease is approximately 29% by December of
2004. Currently, new customers are being rolled out on the Company's
application, which will start to mitigate the loss of business before the
Company feels the effect of the change. The Company's management expects that
additional customers that are currently testing the Company's outsourcing
solution will come on board and make up for the lost business from this
customer. Because of the competitive nature of our business and the uncertainty
of bring on enough business to offset the loss of business, we may be unable to
replace revenues quickly enough to sustain profitability. However, the company's
management will cut expenses in the event we are unable to sustain
profitability.
EXPENSES
Claims processing charges are primarily the costs of collision repairs paid
by eAutoclaims to its collision repair shop network. Claims processing charges
for the fiscal year 2002 were approximately $27.3 million compare to $28.3
million in fiscal 2003. This is an increase in total costs but a decrease in the
percentage of claims costs compared to total revenue from 84.5% in fiscal 2002
to 83.2% in fiscal 2003. This decrease in the percentage of the claims
processing charges compared to revenue over the same periods last year was
mostly caused by increase sales in higher margin products.
We are dependent upon our third party collision repair shops for insurance
claims repairs. eAutoclaims currently has approximately 2,400 affiliated repair
facilities in its network for claims repairs. We electronically and manually
audit individual claims processes to their completion using remote digital
photographs transmitted over the Internet. However, if the quality of service
provided by collision repair shops fall below a satisfactory standard leading to
poor customer service, this could have a harmful effect on our business. We
control our service requirements by continually monitoring customer service
levels and providing staff inspections of our network shops and, if required,
establish similar relationships with other collision repair shops. Our shop
totals have decreased by approximately 800 shops over the last nine months. This
decrease is a result of a combination of, poor performance of some shop network
members, the Company's decision to reduce network shop coverage in certain
geographical areas in order to increase the number of claims assigned to the
best shops in those areas and late payments made over the last year. Management
believes that the shops lost to slow payment can be replaced with other
qualified shops and has started to do so.
Selling, general and administrative (SG&A) expenses for the year ended July
31, 2003 were approximately $6.4 million or 19% of revenue compared to
approximately $8.1 million or 25% of revenue for the year ended July 31, 2002.
This represents an overall decrease in SG&A of 21%. This decrease in expense is
mostly a result of a $1.1 million reduction in payroll and operating expenses.
During the year ended July 31, 2003 and 2002 we incurred payroll related
expenses of approximately $ 4.2 million and approximately $5.1 million,
respectively, a 17% decrease.
SG&A expenses included non-cash charges of approximately $997,000 for the
year ended July 31, 2002. These non-cash charges included a $360,000 write-off
of software, a $340,000 reserve for bad debts, $136,000 of stock and stock
options for rent and employee compensation, and approximately $161,000 of stock
issued for consulting agreements for investor relation services, legal, board
and professional consultants.
During fiscal year ended 2002, two insurance companies that owed the
Company approximately $289,000 were placed into receivership in the state of
California. During the summer of 2003 we were notified that our claims against
these insurance companies are eligible and will be paid out of the State of
California Guaranteed Fund. We received approximately $30,000 from this fund
prior to the July 31, 2003 year-end, and have been told the Company will receive
23
the remaining funds by the end of December 2003. Consequently, we have reversed
approximately $122,000 of the allowance for doubtful accounts that was
originally established due to the nature of the receivables.
The Company has settled the two lawsuits that were present at the end of
the 2002 fiscal year. In both cases management settled the suit in order not to
incur significant legal fees. The settlements in each case were for amounts far
less than the plaintiff was asserting. Cash combined settlement for these two
lawsuits totaled $110,000, the effects of which have been recorded in the July
31, 2003 financial statements.
Depreciation and amortization was approximately $503,000 and $1,086,000 for
the years ended July 31, 2003 and 2002, respectively. Depreciation of fixed
assets represented approximately $491,000 and $312,000, respectively.
Amortization expense of approximately $0 and $218,000 in fiscal year ended 2003
and 2002, respectively, reflects the amortization of goodwill from the purchase
of Premier Express Claims and Salvage Connection. The remaining amortization in
the fiscal year ended 2003 and 2002 of approximately $12,000 and $556,000,
respectively, relates to the warrants and debenture conversion feature created
by the debenture financing in fiscal year 2003 and 2002. Due to a change in the
accounting standards, no amortization is recorded in the year-ended July 31,
2003 from our acquisition of Premier Express Claims or Salvage Connection.
Interest income of approximately $12,000 is included in selling, general
and administrative expenses, net of interest expense of approximately $45,000
for the year ended July 31, 2003. For the 2002 fiscal year interest income of
approximately $33,000 is included in selling, general and administrative
expenses, net of interest expense of approximately $35,000, including
approximately $10,000 of debenture interest. Interest expense related primarily
to interest on shareholder loans and capital leases and interest income resulted
primarily form interest earned on our cash reserves.
NET LOSS
We recognized a net loss of approximately $1.2 million and $4.2 million for
the years ended July 31, 2003 and 2002, respectively. This represents a 72%
decrease in the loss between the two years. Net loss before non-cash charges,
which are described above, were approximately $0.7 million and $2.1 million for
the years ended July 31, 2003 and 2002, respectively. The decrease in the loss
was primarily a result of the restructuring of expenses, improving margins and
focusing on the most profitable clients. These three initiatives resulted in
profitability for the third and forth quarters of fiscal year 2003.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2002, we had cash and cash equivalents of $226,161, a $181,506
increase from last year, and a working capital deficiency of approximately $5.0
million as of July 31, 2003 compared to $4.5 million as of July 31, 2002. The
primary source of our working capital during the year ended July 31, 2003, was
the receipt of $777,750 from the sale of our securities. Another $165,000 of
securities was sold subsequent to year-end, in August of 2003.
From June to August 2003, the Company raised a total of $942,750 from the
sale of debt and equity securities. The Company paid finder's fees and legal
fees of $76,430 for a net of $866,320. Of the total funds raised, $300,000 was
received from an 8% convertible debt security with a term of one year. The
holder of the debt can convert the debt to equity at a fixed rate of $0.279 per
share. The Company has the option to pay the interest in cash or equity. The
remaining $642,750 was raised through the sale of 2,303,732 shares of common
stock at a price of $0.279 per share. These shares include 128,136 common shares
issued as a portion of the finder's fee. There were no warrants or other equity
kickers included in these transactions.
On October 27, 2003 the Company also received a commitment letter from a
current investor to invest an additional $1,000,000-$2,000,000 into eAutoclaims
if the funds were needed.
On November 13, 2002 we signed a term sheet on a $10,000,000 equity line of
credit that will allow eAuto, once the shares are registered, to access funds
over a 36-month period by selling registered shares of common stock at 94% of
the market value of the shares. Under this agreement, the amount of funds
available to the Company would be based on the volume of the previous 20 trading
days. The purchasing party offering the equity line of credit would receive
warrants for 3% of the shares sold as well as a 2% placement fee. While this
option is still available to the Company, management has not executed this
document because their belief that financing with better terms is available.
Our management continues to analyze our operations and streamline where
appropriate. In October 2002 and January 2003, management made cost cuts that
are anticipated to save the Company approximately $1.9 million per year. The
24
costs that were cut focused primarily upon the trimming of overhead, including
the termination of personnel and the deferral of new product development. These
cost cuts, along with continued high levels of customer service, has allowed the
Company to become profitable in the final two quarters of fiscal year 2003.
During fiscal year ended 2002, two insurance companies that owed the
Company approximately $289,000 were placed into receivership in the state of
California. During the summer of 2003 we were notified that our claims against
these insurance companies are eligible and will be paid out of the State of
California Guaranteed Fund. We received approximately $30,000 from this fund
prior to the July 31, 2003 year-end, and have been told the Company will receive
the remaining funds by the end of December 2003. Consequently, we have reversed
approximately $122,000 of the allowance for doubtful accounts that was
originally established due to the nature of the receivables. The collections of
these funds will help the Company's cash flow in the first two quarters of
fiscal year ended 2004.
The Company has settled the two lawsuits that were present at the end of
the 2002 fiscal year. In both cases management settled the suit in order not to
incur significant legal fees. The settlements in each case were for amounts far
less than the plaintiff was asserting. Cash combine settlement for these two
lawsuits totaled $110,000, the effects of which have been recorded in the July
31, 2003 financial statements.
We believe that cash generated from the financing, operations together with
cost cuts and the collection of past due receivables described above will be
sufficient to meet our working capital requirements for the next 12 months.
However, we will need to raise additional capital to pursue other business
or technology acquisitions or if we experience losses. Although we will be able
to continue to grow our business base, we will not be able to grow as quickly as
management would like without the infusion of additional capital. We cannot
assure you that we will be able to raise such funds or that such funds will be
available to us on favorable terms. If we raise additional funds for the
issuance of our securities, such securities may have rights, preferences or
privileges similar to those of the rights of our Common Stock and our
stockholders may experience additional dilution.
Once we replace the business that will possibly be lost from our largest
customer selling a portion of their business that we service, management expects
revenue growth. If revenues decrease we will require additional funding. If
revenue increase it will provide it's own working capital. However, there is no
assurance that we will continue to sustain our growth. Our business has grown
significantly since our inception. This estimate is a forward-looking statement
that involves risks and uncertainties. The actual time period may differ
materially from that indicated as a result of a number of factors so that we
cannot assure that our cash resources will be sufficient for anticipated or
unanticipated working capital and capital expenditure requirements for this
period.
Our principle commitments at July 31, 2003 consist of monthly operating
rental payments, compensation of employees and accounts and notes payable.
Inflation
We believe that the impact of inflation and changing prices on our
operations since the commencement of our operations has been negligible.
Seasonality
eAutoclaims does not deem its revenues to be seasonal.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement no. 142, "Goodwill and Other
Intangible Assets," which we have adopted as of August 1, 2002, that changes the
accounting for goodwill from an amortization method to an impairment-only
approach. As of August 1, 2002, eAutoclaims has ceased the amortization of
goodwill. This statement also requires companies with goodwill recorded on their
financial statements to evaluate if the goodwill has been impaired and if a
charge should be recorded to write-off any impairment. We do not expect this
statement to have an impact on our financial statements except to cease
recording amortization expense of the goodwill.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements to be provided pursuant to this Item 7 begin on
page F-1 of this Report, following Part III hereof.
25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the design and operations of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of July 31, 2003. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective such that
the material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to
eAutoclaims.com, Inc., including our consolidated subsidiaries, and was made
known to them by others within those entities, particularly during the period
when this report was being prepared.
b) Changes in internal controls over financial reporting.
In addition, there were no significant changes in our internal control over
financial reporting that could significantly affect these controls during fiscal
year ended July 30, 2003. We have not identified any significant deficiency or
materials weaknesses in our internal controls, and therefore there were no
corrective actions taken.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
Name Age Position
Eric Seidel 40 Chief Executive Officer,
President and Director
Scott Moore 42 Chief Financial Officer
Stacey Adams 31 Sr. VP of Operations
Dave Mattingly 45 Chief Information Officer
Reed Mattingly 34 Executive Vice President
Jeffrey D. Dickson 60 Chairman of the Board of Directors
Christopher Korge 49 Director
Nicholas D. Trbovich, Jr. 43 Director
Because we are a small company, we are currently dependent on the efforts
of a limited number of management personnel. We believe that, given the
development stage of our business and the large amount of responsibility being
placed on each member of our management team, the loss of the services of any
member of this team at the present time would harm our business. Each member of
our management team supervises the operation and growth of one or more integral
parts of our business.
26
The Chief Executive Officer/President is elected and can be removed by the
Board of Directors. Directors are elected at the annual meeting of shareholders
to serve for their term and until their respective successors are duly elected
and qualify, or until their earlier resignation, removal from office, or death.
The remaining directors may fill any vacancy in the Board of Directors for an
unexpired term.
Business Experience of Executive Officers and Directors
Eric Seidel has been a director and our chief executive officer and
president since June 1, 2000. From January 1, 2000 through May 31, 2000, Mr.
Seidel was the chief executive officer and president of eAutoclaims, Inc., which
was privately held Delaware corporation, which merged with us. From September
1997 through December 1999, Mr. Seidel was employed as a senior executive
officer of First American AMO. From August 1995 through June 1997, Mr. Seidel
was a senior executive at Salex Corporation; a fleet management company serving
Fortune 500 companies, where, among other responsibilities he was responsible
for insurance company services. Mr. Seidel is a past president of the U.S.
Junior Chamber of Commerce.
Reed Mattingly, Executive Vice President. Mr. Mattingly was formerly the
Chief Operating Officer of eAutoclaims and VP Premier Express Claims prior to
its acquisition by eAutoclaims.com in July of 2000. He has 13 years of
experience in the automotive insurance services business. Mr. Mattingly
currently leads our sales and marketing teams. Mr. Mattingly is responsible for
growth in revenue from new and existing clients through the effective marketing
and sales of existing eAutoclaims applications and services as well as
identification and development of alternative revenue generating opportunities.
In the previous position of COO for eAutoclaims.com, he was instrumental in
increasing revenue from approximately 15 million to over 30 million in revenues
by working directly with national accounts and consistently providing excellent
service to clients. He has also built and managed a 24-hour/7 day national claim
reporting call center. Companies under his management have been known for a
"high-tech, high-touch" approach to personalized customer service. He earned a
degree in Business Management from the University of South Carolina.
Scott Moore, CPA became our Chief Financial Officer on September 11, 2000.
Mr. Moore is responsible for the internal and external financial reporting of
the Company as well as providing financial insights into business operations.
Mr. Moore was previously a partner in the accounting firm of Harper Van Scoik &
Company in Clearwater, Florida for approximately 3 years and served as the
technical review and quality control partner for the accounting and auditing
practice of the firm. Mr. Moore was with the firm for a total of 12 years. Prior
to that time Mr. Moore was a senior accountant with Deloitte Haskins & Sells.
David Mattingly became our Chief Information Officer in June 2002. He had
previously held the position of VP IT at eAutoclaims since March of 2001. Mr.
Mattingly is responsible for developing new products and keeping the Company's
technology on the `cutting edge.' He oversees and manages all eAutoclaims
technology projects, inclusive of projects in both Network Administration and
Programming departments. Mr. Mattingly also develops and maintains internal
intranet applications and processes that form the `backroom' for claim
processing. Mr. Mattingly has been in the Computer Technology field for over 22
years. He earned a BS Degree in Electronic Engineering Technology from the State
University of New York during his seven-year tour with the United States Air
Force. Mr. Mattingly has several other Computer Technology & Engineering degrees
and is currently enrolled in Devry University's Keller Graduate School of
Management MBA program with a concentration in Information Systems Management.
Stacey Adams, Sr. Vice President Operations. Ms. Adams has been with
eAutoclaims since its inception in December 1999. She is formerly the Operations
Manager of the Royal Care Division. She has over 5 years experience in the
insurance and technology industries. Prior to eAutoclaims Ms. Adams was with a
Senior Customer Account Representative/Account Executive with NetWireless from
April 1998 to February 1999, where she provided technical support and marketing
support for the customers and sales team. Stacey has earned a bachelor's in
communications from Arizona State University and carries agents license in
Property & Casualty Insurance.
Jeffrey D. Dickson has been a director and the chairman of our board of
directors since June 2000. From May 1997 through November 1999, Mr. Dickson was
the president and chief executive officer of First American AMO. From February
1995 through May 1997, Mr. Dickson was the president and chief operating officer
of Salex Corporation. Mr. Dickson has served as an executive vice president of
the American Bankers Insurance Group and president of Interloc Corp. Mr. Dickson
was awarded a Masters of Business Administration degree from Harvard University
in 1979.
Christopher Korge has been a director since June 2000. He is the managing
partner at the law firm of Korge & Korge, P.A. in Miami, Florida. He received
his J.D. degree from Temple School of Law in 1981 and B.S. in Business
Administration, from the University of Florida, in 1977. Mr. Korge's firm
represents numerous Fortune 500 corporations. Mr. Korge serves on numerous
boards of directors and is a major shareholder in various companies including
27
two housing development companies, and one E commerce company, Intune Group. He
is Chairman of Intune. Mr. Korge is Finance Vice Chairman of the Democratic
National Committee. He is past Co-Chair of the Democratic National Committee
Business Council.
Nicholas D. Trbovich, Jr., has been a director of eAutoclaims since June
2000. He is a director and vice president of AMEX-listed Servotronics, Inc.,
President of TSV ELMA, Inc. and TSV Franklinville, Inc. (a Servotronics
development subsidiary), Chairman and CEO of Queen Cutlery and CEO and President
of Ontario Knife Company, (the U.S. Military's largest supplier of edged tools
and survival knives).
Other Key Employees
In addition to the individuals identified above as "Executive Officers",
the following individuals are considered key employees and certain information
with respect to these key employees is described below:
John Prozinski, Vice President Business Development. Mr. Prozinski joined
eAutoclaims in August 1998. During his time with eAutoclaims he has also held
positions as Regional Sales Manager, National Body Shop Manager, and Director of
Consumer Products. In March of 2002 he was promoted to the Vice President of
Business Development. From August of 1995 through August of 1998 Mr. Prozinski
was a regional sales manager for Ashland, Inc. covering North American and
Canadian. He holds a bachelor's degree from St. John's University and is a past
president of the United States Junior Chamber of Commerce.
Larry C. Colton, Controller. Mr. Colton joined eAutoclaims in December
2000. He has over 25 years experience in accounting and finance, having held a
variety of positions in several industries. Between December 1997 and December
2000, Mr. Colton was Vice President of an asset management division of Sky
Financial Group. He holds a bachelor's degree from Elmhurst College and a
Masters of Business Administration degree from Northern Illinois University.
Mike Probyn, Operations General Manager. Mr. Probyn has been with
eAutoclaims for 3 years and is currently serving as our Operations General
Manager overseeing the Auditing, Claims and Vendor departments. He formerly
served as the Regional Vendor Manager and National Vendor Manager. Prior to
working for eAutoclaims, Mr. Probyn was Co-Owner of a Pest Control Company for
over 15 years and also Past President of the Florida Junior Chamber of Commerce.
Ryan Blade, Vice President Information Technology. Mr. Blade joined
eAutoclaims in September 2000. He has served as a Technical Support Specialist,
a programmer and an IT Department Manager. He was promoted to Vice President
Information Technology in May 2003 and oversees the IT Support, Programming and
Network Administration departments. Formerly he served thirteen years in the
United States Army.
Election
The Company's Bylaws fix the size of the Board of Directors at no fewer
than three and no more than nine members, to be elected annually by a plurality
of the votes cast by the holders of Common Stock, and to serve until the next
annual meeting of stockholders and until their successors have been elected or
until their earlier resignation or removal. Currently there are four Committees
of the Board of Directors and Meetings
Committees of the Board of Directors and Meetings
Our Board of Directors held seven (7) meetings during the fiscal year ended
July 31, 2003. Each of our directors attended at least 75% or more of the
aggregate of (i) the total number of meetings of the Board of Directors held
during fiscal 2003, and (ii) the total number of meetings held by all committees
of the Board of Directors on which such person served during fiscal 2003.
28
Audit Committee
The Audit Committee, which held four meetings during fiscal 2003 to review
the three 10QSBs and one 10KSB, acts on behalf of the Board to oversee all
material aspects of the Company's reporting, control and audit functions. The
Audit Committee's role includes a particular focus on the qualitative aspects of
financial reporting to shareholders and on Company processes for the management
of the business/financial risk and for compliance with significant applicable
legal, ethical and regulatory requirements. In addition, the Audit Committee
reviews the adequacy of internal account, financial and operating controls and
reviews the Company's financial reporting compliance procedures. During fiscal
2003 Mr. Dickson was Chairman of the Audit Committee. For fiscal 2004 Mr. Korge
is Chairman of the Audit Committee and serves with Mr. Trbovich, Jr. and Mr.
Dickson. See "Report of the Audit Committee"
Compensation Committee
The Compensation Committee, which held two meetings during fiscal 2003 to
review compensation issues and contracts, administers the Company's Stock Option
Plan, establishes the compensation of the Chief Executive Officer and sets
policy for compensation of all senior management and directors. The Compensation
Committee consists of Mr. Dickson, Mr. Trbovich, Jr. and Mr. Korge. During
fiscal 2003, Mr. Dickson served as Chairman of the Compensation Committee. Mr.
Trbovich, Jr. became the Compensation Committee Chairperson effective August 1,
2003. See "Board Compensation Committee Report on Executive Compensation."
Nominating Committee
The Company does not currently have a standing nominating committee of the
Board of Directors.
Director Compensation
During the eleven months ended June 30, 2003, the board members were paid
$500 plus expenses for each board meeting they attend in person, and $300 for
each board meeting they attend via conference call. Each outside director was
entitled to $1,250 worth of Common Stock to be issued on a quarterly basis at
the fair market value as of the end of each quarter. For the fiscal year ended
July 31, 2003 and 2002, we have issued 55,797 and 35,257 shares, respectively,
to our outside directors under this arrangement.
Those outside Directors are also compensated with stock options at various
points throughout the year. All these options have an exercise price set at the
market value of the stock on the date of the granting of the option. The have an
exercise term of five years and vest after one year. For the fiscal year ended
July 31, 2003, two outside Directors received 12,500 options each quarter, which
were issued on November 8, 2002, January 31, 2003, April 30, 2003 and July 31,
2003 at an exercise prices of $0.23, $0.13, $0.17 and $0.45, respectively, for a
total of 100,000 options. For the fiscal year ended July 31, 2002, four
directors received 12,500 options on both October 31, 2001 and January 31, 2002
with exercise prices $0.47 and $0.73 each, and three outside directors received
12,500 options on both April, 30 2002 and July 31, 2002 at an exercise prices of
$0.51, $0.36, respectively, for a total of 175,000 options. The outside board
members will be issued 12,500 options at the end of each quarter at the market
value at the end of each quarter as compensation for their services. All these
options are exercisable after one year and have terms of five years.
Starting July 1, 2003 the directors' compensation was raised to be
competitive in the industry. The two outside directors received an annual
retainer of $25,000 each. This retainer was paid in stock for the fiscal year
beginning August 1, 2003. Additionally, the two outside directors will receive
$6,000 per year for attending board meetings and $4,000 per committee per year
for attending committee meetings. The committee fee is raised to from $4,000 to
$8,000 per committee per year if they are the Chairperson for the committee. If
they don't attend one or more committee or board meetings their compensation is
reduced accordingly.
Code of Ethics
The Company has adopted a "Code of Business Conduct and Ethics" that
applies to all eAuto employees and Board of Directors, including eAuto's
principal executive officer and principal financial officer, or persons
performing similar functions. A copy of the Company's Code of Business Conduct
and Ethics is attached as an exhibit to this annual report on Form 10-KSB. The
Company intends to post the Code of Business Conduct and Ethics and related
amendments or waivers, if any, on its website at www.eautoclaims.com.
Information contained on the Company's website is not a part of this report.
Copies of the Company's Code of Business Conduct and Ethics will be provided
free of charge upon written request to eAutoclaims.com, Inc., 110 East Douglas
Road, Oldsmar, Florida 34677, attention: Scott Moore.
29
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the Forms 3, 4 and 5 filed during fiscal 2003
the registrant reasonably believes, except as described below, that each person
who, at any time during the current fiscal year, was a director, officer,
beneficial ownership of more than 10% of our common stock filed the appropriate
form on a timely basis with respect to changes in such owner's beneficial
ownership of our common stock. Mr. Dickson, our Chairman, was delinquent in
filing Form 4s related to the acquisition of 7,954 common shares which occurred
on or about September 2002.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation paid or accrued by us for the fiscal
years ended July 31, 2003, 2002 and 2001 to or for the account of our Officers
that exceed $100,000.
Long-Term Compensation
Annual Compensation Awards Payouts
----------------------------- ---------- ------------ ---------- --------------- ------------ -------------- ---------- ------------
Long-Term
---------------------------- Other Restricted Securities Incentive All
Fiscal Annual Stock Underlying Plan Other
Name of Individual & Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation
Principal Position (1)
----------------------------- ---------- ------------ ---------- --------------- ------------ -------------- ---------- ------------
----------------------------- ---------- ------------ ---------- --------------- ------------ -------------- ---------- ------------
Eric Seidel 2001 $162,835 -0- -0- -0- 1,080,000 -0- -0-
President and 2002 $249,398 $37,500 $76,311 -0- 182,870 -0- -0-
Chief Executive Officer 2003 $242,402 $37,500 -0- -0- 165,000 -0- -0-
Scott Moore 2001 $111,539 -0- -0- -0- 222,000 -0- -0-
Chief Financial Officer 2002 $130,726 -0- -0- -0- 106,250 -0- -0-
2003 $131,424 -0- -0- -0- 80,000 -0- -0-
Randy Wright (2) 2001 $118,038 -0- -0- -0- 120,000 -0- -0-
Chief Development Officer 2002 $123,718 -0- -0- -0- 102,778 -0- -0-
2003 $95,556 -0- -0- -0- 30,000 -0- -0-
Gaver Powers (3) 2001 $98,700 -0- -0- -0- 165,000 -0- -0-
Chief Information Officer 2002 $100,946 -0- -0- -0- 99,306 -0- -0-
2003 $45,311 -0- -0- -0- -0- -0- -0-
Reed Mattingly 2001 $95,078 -0- -0- -0- 90,000 -0- -0-
Executive Vice President 2002 $115,932 -0- -0- -0- 100,463 -0- -0-
2003 $104,931 -0- -0- -0- 30,000 -0- -0-
Dave Mattingly 2002 $100,303 -0- -0- -0- 66,204 -0- -0-
Chief Information Officer 2003 $100,185 -0- -0- -0- 30,000 -0- -0-
----------------------------- ---------- ------------ ---------- --------------- ------------ -------------- ---------- ------------
The cost to us of personal benefits, including premiums for life insurance and
any other perquisites, to such executives do not exceed 10% of such executive's
annual salary and bonus.
(1) Other annual compensation, including cell phones is less than 10% of
the officers' salaries and is therefore not disclosed above.
(2) Mr. Wright resigned in January 2003.
(3) Mr. Powers' employment ceased in October 2002.
30
Option/SAR Grants in Last Fiscal Year
---------------------------------------------------------------------------------------------------------------------
Percent of Total
Number of Options/SARs
Securities Granted
Underlying to Employees/ Exercise Fair Market Value
Options/SARs Directors or Base At date of Expiration
Name of Individual Granted (1) In Fiscal Year Price Grant Date
----------------------- ----------------- ------------------- ----------------- --------------------- ----------------
Eric Seidel 40,000 4.4% $0.15 $0.15 12/21/07
50,000 5.5% $0.10 $0.10 4/7/08
25,000 2.8% $0.21 $0.21 5/16/08
25,000 2.8% $0.39 $0.39 6/14/08
25,000 2.8% $0.52 $0.52 7/25/08
Scott Moore 30,000 3.3% $0.15 $0.15 12/21/07
50,000 5.5% $0.13 $0.13 4/25/08
Randy Wright 30,000 3.3% $0.15 $0.15 12/21/07
Reed Mattingly 30,000 3.3% $0.15 $0.15 12/21/07
Dave Mattingly 30,000 3.3% $0.15 $0.15 12/21/07
------------------------------------------------------------------------------------------------- ---------------------
(1) Except as described in the description of Mr. Seidel's employment
contract below, each option granted has a term of 5 years, and
vests over three years.
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
The following table provides information with respect to the named officer
concerning exercised and unexercised options in fiscal year ended July 31, 2003.
------------------------- --------------- ------------------ ------------------------------- -------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs Options/SARs
Name of Acquired on Value at Fiscal Year End (#) at Fiscal Year End($)
Individual Exercise (#) Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable
(2)
------------------------- --------------- ------------------ ------------------------------- -------------------------
Eric Seidel 677,504 $60,200 357,500 / 165,000 -0-/$37,000
Scott Moore 81,250 $7,563 139,666 / 187,334 -0-/$25,000
Randy Wright 27,778 $3,611 166,666 / 73,334 $9,000/-0-
Gaver Powers -0- -0- 195,973 / 0 $32,695/-0-
Reed Mattingly 25,463 $3,310 123,334 / 96,666 -0-/$9,000
Dave Mattingly 25,000 $2,107 63,334 / 76,666 -0-/$9,000
------------------------------------------------------------------------------------------------------------------------
(1) Value Realized represents the market value of the underlying securities on
the exercise date minus the exercise price of such options.
(2) Value Realized represents the market value of the underlying securities
on 7/31/03 minus the exercise price of such options.
Employment Contracts and Other Arrangements
Eric Seidel, President and Chief Executive Officer. On March 27, 2003, the
Board of Directors approved an Amended and Restated Employment Agreement with
Mr. Seidel. Mr. Seidel agreed to a salary reduction from his last contract in
order to assist the Company in meeting it's financial goals. His previous
agreement specified a salary of $250,000. His new two (2) year agreement
specifies an annual base salary of $185,000, effective February 1, 2003 through
December 31, 2003. From January 1, 2004 through February 1, 2005, his minimum
annual base salary will be $200,000. Mr. Seidel receives bonuses equal to 3% of
the Company's earnings before interest, taxes, depreciation and amortization as
defined by generally accepted accounting principles (GAAP). Mr. Seidel may elect
to receive part or his entire bonus, if any, in shares of our Common Stock
valued at 90% of the then current market value. Each month that the Company is
profitable on a GAAP basis, He also has the right to receive options to purchase
25,000 shares of our common stock, with a term of five years at a strike price
equal to the stock's fair market value at the date of granting. These options
vest over the remaining life of his contract. He continues his entitlement to
reimbursement of ordinary, necessary and reasonable business expenses incurred
in connection with his services. He continues his right to participate in any
retirement, medical, dental, welfare and stock options plans, life and
disability insurance coverage and other benefits afforded our employees. He is
entitled to a $750 per month automobile allowance and $1,000 of personal
allowances. He is entitled to 299% of his current base salary if he loses his
position, unless he is terminated for cause. This contract supercedes the change
of control agreement dated April 9, 2001.
31
Reed Mattingly, Executive Vice President - Sales. We entered into an
employment agreement with Reed Mattingly. Mr. Mattingly is currently our
Executive Vice President in charge of Sales. This agreement was effective May 1,
2003, and has a term of two (2) years. Under this agreement, Mr. Mattingly is
entitled to an annual base salary of $110,000 through April 30, 2004, and then
$115,500 through April 30, 2005. Mr. Mattingly is entitled to bonus compensation
as determined by the Company. Mr. Mattingly may elect to receive part or his
entire bonus, if any, in shares of our Common Stock valued at 90% of the then
current market value. Mr. Mattingly is entitled to reimbursement for ordinary,
necessary and reasonable business expenses in connection with his services. He
may participate in any retirement, medical, dental, welfare and stock options
plans, life and disability insurance coverages and other benefits afforded our
employees. He is entitled to a $700 per month automobile allowance. During the
term of his agreement and for a period of two (2) years after termination of his
agreement, Mr. Mattingly is subject to a non-competition and restrictive
covenant with us. This agreement supercedes the "Change of Control Agreement"
dated April 9, 2001.
M. Scott Moore, Chief Financial Officer. In March 2003, we entered into an
employment agreement with M. Scott Moore, our Chief Financial Officer. This
agreement has a term of two (2) years, and commences on May 1, 2003. Under this
agreement, Mr. Moore is entitled to an annual base salary of $135,000 through
April 30, 2004, and $144,445 through April 30, 2005. Mr. Moore is entitled to
bonus compensation as determined by the Company. Mr. Moore may elect to receive
part or his entire bonus, if any, in shares of our Common Stock valued at 90% of
the then current market value. Mr. Moore is entitled to reimbursement for
ordinary, necessary and reasonable business expenses in connection with his
services. He may participate in any retirement, medical, dental, welfare and
stock options plans, life and disability insurance coverages and other benefits
afforded our employees. He is entitled to an automobile allowance of $400 per
month during the term of his agreement. Mr. Moore was issued options to purchase
50,000 shares of our Common Stock at $0.13 per share, which was the fair market
value of the closing price of our shares as of the date of his agreement. These
options vest in 1/3 installments over each year of employment. These options
have a maximum exercise period of 5 years. All his options vest if the contract
is not renewed or there is a change in control of the Company. If we elect not
to renew this agreement, then he is entitled to nine (9) months severance pay at
his then current base salary. Mr. Moore has agreed not to compete with us during
the term of this agreement and for a period of two (2) years after termination
of this agreement. This agreement supercedes the "Change of Control Agreement"
dated April 9, 2001.
David Mattingly, Chief Information Officer. We entered into an employment
agreement with David Mattingly. Mr. Mattingly is currently our Chief Information
Officer. This agreement was effective May 1, 2003, and has a term of two (2)
years. Under this agreement, Mr. Mattingly is entitled to an annual base salary
of $105,000 through April 30, 2004, and then $110,250 through April 30, 2005.
Mr. Mattingly is entitled to bonus compensation as determined by the Company.
Mr. Mattingly may elect to receive part or his entire bonus, if any, in shares
of our Common Stock valued at 90% of the then current market value. Mr.
Mattingly is entitled to reimbursement for ordinary, necessary and reasonable
business expenses in connection with his services. He may participate in any
retirement, medical, dental, welfare and stock options plans, life and
disability insurance coverages and other benefits afforded our employees. He is
entitled to a $400 per month automobile allowance. During the term of his
agreement and for a period of two (2) years after termination of his agreement,
Mr. Mattingly is subject to a non-competition and restrictive covenant with us.
This agreement supercedes the "Change of Control Agreement" dated April 9, 2001.
Stacey Adams, Senior Vice President - Operations. We entered into an
employment agreement with Stacey Adams. Ms. Adams is currently our Senior Vice
President in charge of operations. This agreement was effective May 1, 2003, and
has a term of two (2) years. Under this agreement, Ms. Adams is entitled to an
annual base salary of $75,000 through April 30, 2004, and then $78,750 through
April 30, 2005. Ms. Adams is entitled to bonus compensation as determined by the
Company. Ms. Adams may elect to receive part or her entire bonus, if any, in
shares of our Common Stock valued at 90% of the then current market value. Ms.
Adams is entitled to reimbursement for ordinary, necessary and reasonable
business expenses in connection with his services. She may participate in any
retirement, medical, dental, welfare and stock options plans, life and
disability insurance coverages and other benefits afforded our employees. She is
entitled to a $400 per month automobile allowance. During the term of her
agreement and for a period of two (2) years after termination of his agreement,
Ms. Adams is subject to a non-competition and restrictive covenant with us. This
agreement supercedes the "Change of Control Agreement" dated April 9, 2001.
Change of Control Shares
On March 27, 2003, as part of a employee and board member retention program
the Board of Directors voted to grant certain employees (Mr. Seidel is not
entitled to participate in the employee retention program) a total of 2,000,000
shares of our common stock or equivalent consideration thereof and the current
and future board members 1,000,000 common shares if there is a change in control
of greater than 50% ownership of the Company or a sale of all or substantially
all it's assets. Only those employees and board members employed or on the board
at the time of the change will participate in the compensation.
32
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors administers our Chief
Executive Officer's compensation package. The committee reviews, recommends and
approves changes to our compensation policies and programs, makes
recommendations to the Board of Directors as to the amount and form of executive
officer compensation, and administers our stock option plans.
General Compensation Philosophy. Our compensation programs are designed to
directly align compensation with our performance and increases in stockholder
value as measured by our stock price and to enable us to attract, retain and
reward executives and employees needed to accomplish our goals. The committee
believes that executive pay should be linked to our overall performance.
Therefore, we provide an executive compensation program, which includes base
pay, long-term incentive opportunities through the use of stock options, shares
and, in some cases, cash bonuses.
The Compensation Committee is currently evaluating and studying the level
of equity participation by our employees and executives. The Compensation
Committee feels strongly that our employees and executives must have a greater
equity stake in order to more closely align the interest of our employees and
executives with our stockholders. Therefore, it is the intent of the
Compensation Committee to recommend that our executives and employees be issued
significantly more shares of our stock and options in the near future. It is
anticipated that any such issuance of our additional equity to employees and
executives will be performance based, and tied to the market value of our Common
Stock.
Base Salary. Base salary is designed primarily to be competitive with base
salary levels in effect at high technology companies that area of comparable
size and with which we compete for executive personnel. Base salary is set
annually based on job-related experience, individual performance and pay levels
of similar positions at comparable companies. Salaries for executive officers
were generally determined on an individual basis by evaluating each executive's
scope of responsibility, performance, prior experience and salary history, as
well as salaries for similar positions at comparable companies.
Cash Performance Awards. Management believes that cash performance awards,
such as bonuses, should be tied to achievement of performance goals established
by the committee. On June 2, 2003 the board approved a bonus plan based on
achieve certain levels of profitability. If the management team achieves
earnings per share of $0.01 to $0.10 per share then eight senior managers will
split a total bonus pool ranging from $10,000 to $100,000 based on the level of
profitability. The computation was tied to profitability to directly tie the
employee bonuses to goals that will enhance shareholder value.
Stock Options. In order to link the interests of our stockholders and
senior management, we issue stock options. We believe that the practice of
granting stock options is critical to retaining and recruiting the key talent
necessary at all employee levels to ensure our success. Stock options generally
have value for executive officers only if the price of our Common Stock
increases above the fair market value of a share of Common Stock on the grant
date and the officer remains in our employ for the period required for the
options granted to such person to vest.
The number of shares subject to stock options granted is within the
discretion of the Compensation Committee. In determining the size of stock
option grants, the Compensation Committee considers the officer's
responsibilities, the expected future contribution of the officer to the
Company's performance and the number of shares, which continue to be subject to
vesting under outstanding options. For 2003, options were granted to the
executive officers based on their positions and a subjective assessment of
individual performances. Stock options typically have been granted to executive
officers when the executive first joins the Company. At the discretion of the
Committee, executive officers may also be granted stock options to provide
greater incentives to continue their employment with the Company and to strive
to increase the value of the Company's Common Stock.
Compensation for the Chief Executive Officer. Mr. Seidel's base salary for
the year 2003 was determined by the employment agreement we assumed with Mr.
Seidel. The Compensation Committee believes that the employment agreement terms
are in a manner consistent with the factors described above for all executive
officers.
Internal Revenue Code Section 162(m) Limitation. Section 162(m) of the
Internal Revenue Code imposes a limit, with certain exceptions, on the amount
that a publicly held corporation may deduct in any year for the compensation
paid or accrued with respect to its five most highly compensated executive
officers. In general, it is the Committee's policy to qualify, to the maximum
extent possible, executives' compensation for deductibility under applicable tax
laws.
33
Stock Options
We established the 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan
is intended to provide the employees and directors of the Company with an added
incentive to continue their services to the Company and to induce them to exert
their maximum efforts toward the Company's success. The 1998 Plan provides for
the grant of options to directors and employees (including officers) of the
Company to purchase up to an aggregate of twenty percent (20%) of the number of
shares of Common Stock in the capital of the Company issued and outstanding from
time to time less any shares of Common Stock reserved, set aside and made
available pursuant to the terms of the Company's employee share purchase plan
(the "Share Purchase Plan") and pursuant to any options for services rendered to
the Company. The number of shares of Common Stock subject to options granted to
any one person under the Plan, the Share Purchase Plan and options for services
rendered to the Company may not at any time exceed five percent (5%) of the
outstanding shares of Common Stock. The 1998 Plan is currently administered by
the Board of Directors. The Board determines, among other things, the persons to
be granted options under the 1998 Plan, the number of shares subject to each
option and the option price.
The 1998 Plan allows the Company to grant Non-Qualified Stock Options
("NQSOs") not intended to qualify under Section 422(b) of the Internal Revenue
Code of 1986, as amended (the "Code"). The exercise price of NQSO's may not be
less than the fair market value of the Common Stock on the date of grant.
Options may not have a term exceeding ten years. Options are not transferable,
except upon the death of the optionee.
During the fiscal year ended July 31, 2003 we issued 808,000 options to
employees in accordance with the 1998 Plan. In addition, 100,000 options were
granted to board members.
All of these options are subject to vesting and are exercised at the
current market price of our stock as of the date of issuance. We have the right
to increase the total amount of options, which may be issued so long as total
outstanding options do not exceed 15% of the number of our fully diluted
outstanding shares of Common Stock. Furthermore, in lieu of paying cash bonuses,
the employees may be issued shares of our Common Stock at the then fair market
value in an amount not to exceed 50% of that employee's base salary. All of the
options we have issued are subject to immediate vesting and are exercisable in
the event of a change of control, which is defined as a sale of substantially
all of our assets or a merger in which we are not the surviving entity.
As of September 30, 2003, we have issued, or reserved for issuance,
7,137,852 shares of our Common Stock relating to outstanding options and
warrants which are categorized as follows:
Options issued to Directors 1,471,000 (1)
Options issued to Chief Executive Officer 547,500 (2)
Options issued in connection with acquisition of PEC 130,000 (3)
Options issued to Employees 2,484,538 (4)
Options issued to Consultants 86,429 (5)
Options Outstanding prior to eAutoclaims.com merger 4,000
Warrants relating to debentures 1,150,000 (6)
Warrants relating to private placement 220,000 (7)
Purchaser's Warrants 780,000 (8)
Agent's Warrants 264,385 (9)
---------------
Total 7,137,852
===============
(1) The options issued to our directors have strike prices ranging
from $0.01 to $5.06 and are exercisable through April 9, 2011.
See "Directors and Executive Officers-Directors Compensation".
34
(2) Mr. Seidel currently owns the following options with the
following terms:
Strike #
# of Options Price Vested Expiration Date
------------ ------ ------- ---------------
32,500 $2.00 32,500 4/24/05
100,000 $1.22 100,000 12/4/05
40,000 $1.01 40,000 1/10/06
40,000 $2.00 40,000 2/2/06
20,000 $1.26 20,000 3/2/06
50,000 $0.69 50,000 9/18/06
75,000 $0.55 75,000 3/27/07
40,000 $0.15 0 12/21/07
50,000 $0.10 0 4/7/08
25,000 $0.21 0 5/16/08
25,000 $0.39 0 6/15/08
25,000 $0.52 0 7/25/08
25,000 $0.32 0 8/29/08
-------- --------
547,500 357,500
========= =======
During fiscal year ended July 31, 2003, Mr. Seidel exercised
677,504 options at a strike price of $.01. See "Executive
Compensation" and "Directors and Executive Officers -
Employment Contracts and Other Matters".
(3) 65,000 options immediately exercisable at $2.00 per share were
issued to each of Randall K. Wright and Reed Mattingly. See
"Executive Compensation - Employment Contracts and Other
Matters".
(4) Represents options issued to our employees at exercise prices
ranging from $0.01 to $3.38. 1,338,504 shares of these options
are currently exercisable. The remaining options vest over a
three year term. On December 21, 2002, 598,000 options were
granted to various employees with an exercise price of $0.15
per share. Another 85,000 shares were issued to three
employees with a strike price ranging from $0.13 to $0.30 per
share. All these shares vest over three years with a term of 5
years.
(5) 65,000 of these options are held by our Chairman, Mr. Dickson,
and are immediately exercisable at $2.00 per share. See
"Certain Relationships and Related Transactions". The other
21,429 options were given to a public relations consultant
with an exercise price of $0.49 per share.
(6) Represents warrants issued to the agents of the debenture investors,
exercisable at $0.63 per share, with a term of 10 years.
(7) Represents warrants issued to purchasers of common stock on
June 17, 2002 with an exercise price of $0.75 per share, with a
term of 5 years.
(8) Represents warrants issued to the purchasers of our Series A
Preferred Stock. Of these warrants, 300,000 are exercisable at
$3.00; 90,000 are exercisable at $1.4625; 90,000 exercisable
at $3.33; and 300,000 are exercisable at $2.60. See "Market
for Common Equity and Related Stockholder Matters - Preferred
Stock and Related Warrants".
(9) Represents warrants issued to Thomson Kernaghan and Greenfield
Investments, as Agents, exercisable at $4.50. See "Market for
Common Equity and Related Stockholder Matters - Preferred
Stock and Related Warrants".
35
The following table sets forth information with respect to our common stock that
may be issued upon the exercise of outstanding options, warrants, and rights to
purchase shares of our common stock as of September 30, 2003.
(c)
Number of Securities
Number of Securities (b) Remaining Available for
To be Issued Upon Weighted Average Future Issuance Under
Exercised of Exercise Price of Equity Compensation Plan
Outstanding Options, Outstanding Options, (Excluding Securities
Plan Category Warrants, and Rights Warrants, and Rights Reflected in Column (a))
------------- --------------------- --------------------------------------------
Equity Compensation
Plans Approved by
Stockholders (1) 2,624,218 $0.95 907,112 (4)
Equity Compensation
Plans Not Approved by
Stockholders (2) (3) 5,030,249 $023 N/A
---------
Total 7,654,467 $0.48
=========
__________________________
---------------------------
(1) Includes options issued to our Chairman of the Board at $.01, and options
issued to employees.
(2) Includes 3,000,000 shares that may be issued in connection with a change of
control,
(3) Exclude 2,418,385 warrants issued to investors in connection with capital
raising transactions not approved by our stockholders.
(4) Based on a Board of Directors imposed limit of 15%, not the 20% shown in the
approved plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information with respect to the beneficial
ownership of our Common Stock as of September 30, 2003, by:
o each person who we know beneficially owns more than 5% of our Common Stock;
o each of our directors and each individual who serve as our named executive
officers individually; and
o all of our directors and executive officers as a group.
Name and Address of Amount and Nature of Percentage
Beneficial Owner (1), (14) Beneficial Ownership (2)(13)
-------------------------- -------------------- -----------
Eric Seidel (3) 1,442,592 6.04%
Scott Moore (4) 264,750 1.12%
Reed Mattingly (5) 386,832 1.63%
Dave Mattingly (6) 111,038 0.47%
Jeffrey D. Dickson (7) 1,175,550 4.79%
Nicholas D. Trbovich, Jr. (8) 242,894 1.03%
Christopher Korge (9) 1,841,431 7.46%
Canadian Advantage Limited Partnership 2,991,504 12.71%
(10) 1,137,330 4.83%
Advantage (Bermuda) Fund, Ltd. (11) 1,315,680 5.59%
Entrade, Inc. (12)
Directors and officers 5,465,087 20.59%
as a group (10 persons) (13)
(1) Unless otherwise noted, the Company believes that all persons
named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
Unless otherwise noted, each such person is deemed to be the
beneficial owner of shares of Common Stock held by such person on
September 30, 2003, and any shares of Common Stock which such
person has the right to acquire pursuant to securities exercisable
or exchangeable for, or convertible into, Common Stock, within 60
days from such date. The address of each beneficial owner is in
care of the Company, 110 East Douglas Rd, Oldsmar, Florida 34677.
36
(2) Based on 23,542,200 shares of Common Stock outstanding at the
close of business on September 30, 2003. This amount excludes
shares of our Common Stock underlying the conversion rights of our
Series A Preferred Stock and excludes 7,137,852 shares reserved
for outstanding options and warrants. 1,000,000 warrants issued to
Mr. Korge were included (see note 9 below).
(3) 400,000 shares of our Common Stock were issued to Mr. Seidel as
founder shares. He acquired 12,341 in open market purchases and
exercised 777,504 of options granted to him by the company and
transferred 104,753 shares to his ex-wife in a divorce. This
amount also includes vested options to acquire 357,500 Common
Shares at exercise prices between $0.55 and $2.00. This amount
excludes options, which are not vested over the next 60 days, to
acquire 190,000 Common Shares at an exercise price of $0.10 to
$0.52, which vest through May 21, 2005. See "Executive
Compensation - Employment Contracts and Other Matters".
(4) Mr. Moore's ownership consists of (i) 1,500 common shares acquired
in open market purchase, (ii) 81,250 common shares acquired through
exercising options at $.01 per share, and (iii) vested options to
acquire up to 182,000 common shares at an exercise price between
$0.55 and $2.69. This amount excludes unvested options for 145,000
common shares at exercise prices between $0.13 and $2.00, which
vest through April 25, 2006. See "Executive Compensation -
Employment Contracts and Other Matters".
(5) Mr. Reed Mattingly's ownership consists of (i) 64,000 of our common
shares issued to him in connection with the Premier Express Claims, Inc.
merger, (ii) the issuance of 125,701 shares in satisfaction of a promissory
note plus interest related to the Premier Express Claims, Inc. merger,
(iii) the exercise of options to acquire 40,000 shares at an exercise price
of $.01, (iv) 25,463 shares of our common stock acquired by exercising
options at a price of $0.01 per share, and (v) options to acquire up to
131,668 shares at exercise prices between $0.55 to $2.00. This amount
excludes unvested options to acquire up to 88,332 common shares at exercise
prices of $0.15 to $2.00, which vest through December 21, 2005. See
"Executive Compensation".
(6) Mr. Dave Mattingly's ownership consists of (i) 25,000 of our
common shares issued to him when he exercised his option to
purchase 25,000 shares at $.01 per share, (ii) 1,500 shares that
he purchased on the open market, (iii) the exercise of options to
acquire 16,204 shares at an exercise price of $.01, and (v)
options to acquire up to 68,334 shares at exercise prices between
$0.55 and $3.38. This amount excludes unvested options to acquire
up to 71,666 common shares at exercise prices of $0.15 to $2.00,
which vest through December 21, 2005. See "Executive
Compensation".
(7) Includes160,000 shares of our Common Stock issued to Mr. Dickson
as founder shares and 18,550 shares acquired in the open market.
Also includes options to acquire up to 900,000 shares of our
Common Stock at $0.01 and 97,000 shares at a price between $0.90
and $5.06. See Directors and Executive Officers - Director
Compensation".
(8) Mr. Trbovich, Jr.'s ownership consists of (i) 98,814 shares issued
to him for his service on the board, (ii) 2,080 shares that he
purchased on the open market, (iii) 10,000 shares owned by Mr.
Trbovich's wife, of which he disclaims beneficial ownership, and
(iv) options to acquire up to 132,000 shares at exercise prices
between $0.36 and $5.06. This amount excludes unvested options to
acquire up to 50,000 common shares at exercise prices of $0.13 to
$0.45, which vest through July 31, 2004. See Directors and
Executive Officers - Director Compensation".
(9) Mr. Korge's ownership consists of (i) 488,090 common shares relating to
the conversion of $300,000 of our convertible debentures, which matured on
September 30, 2001 at a conversion price of $0.63, (ii) 98,814 shares
issued to him for his service on the board, (iii) 15,000 shares that he
purchased on the open market, (iv) 107,527 shares purchased from the
Company in August 2003, (v) warrants to acquire up to 1,000,000 shares of
our Common Stock at a conversion price of $0.63 in connection with the
issuance of our convertible debentures, and (vi) options to acquire 132,000
shares at exercise prices between $0.36 and $5.06 for services as a
director. This amount excludes unvested options to acquire up to 50,000
common shares at exercise prices of $0.13 to $0.45, which vest through July
31, 2004. See Directors and Executive Officers - Director Compensation".
(10) Represents shares received upon the conversion of preferred shares
in March 2002 as reported on a Schedule 13D on or about March 26,
2002. John Pennington has investment decision-making authority for
this entity.
(11) Represents shares received upon the conversion of preferred shares
in March 2002 as reported on a Schedule 13D on or about March 26,
2002. John Pennington has investment decision-making authority for
this entity.
(12) Represents shares acquired privately in December 2001 as reported
on a Schedule 13G filed on or about December 13, 2001.
(13) Includes outstanding options and warrants to acquire up to
3,000,502 shares of our Common Stock issued to our officers and
directors, which are currently exercisable.
(14) Excludes warrants to acquire 641,220 shares of our common stock
and excludes shares of our common stock currently held or relating
to the conversion of our Series A Preferred Stock owned by
Governor's Road, LLC. David Sims as the director of Navigator
Management, which is the general partner of this fund, is the
natural person who controls and has investment making decision
authority over our securities owned by Governors Road, LLC and its
affiliates. Mr. Sims disclaims beneficial ownership of all of
these shares. Each of these entities has entered into an agreement
which provides that such entity will not acquire any additional
shares of our Common Stock in the open market or, convert our
Series A Preferred Stock into the Common Stock or exercise
warrants if the effect of such a purchase, exercise or conversion
would be to increase such entity's equity ownership position above
4.9%. Accordingly, because it is not anticipated that any of these
entities will acquire beneficial ownership within the next 60 days
of shares of our Common Stock underlying warrants or conversion
privileges of our Series A Preferred Stock such amounts are
excluded from the above tables.
* Less than .1%.
37
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a result of the eAutoclaims (Del.) merger, we assumed obligations under
a Consulting Agreement with Jeffrey D. Dickson. This agreement was effective
December 1, 1999 and is renewable on an annual basis. Mr. Dickson agreed to
provide Mr. Seidel, our Chief Executive Officer, day-to-day advisory services
concerning management, capitalization, corporate structure, organizational,
industrial and regulatory issues. In addition, Mr. Dickson agreed to serve as
our Chairman of the Board of Directors, as well as Chairman of our Audit and
Compensation Committees.
In consideration for these consulting services Mr. Dickson is entitled to
an annual consulting fee of $100,000, payable every two (2) weeks. In addition,
Mr. Dickson is entitled to a non-interest bearing $126,500 line of credit that
was originally established in fiscal year 2000. As of July 31, 2003, $78,431 is
still outstanding under this arrangement, after $30,000 of service credits as
described above. Mr. Dickson is spending a substantial amount of his time
dealing with administrative matters, investor relations and public relations.
This frees up Mr. Seidel's time to focus on sales and marketing. The Company and
Mr. Dickson have agreed that $3,000 per month of his consulting fee will be
withheld by the Company and used to reduce the outstanding balance under the
line of credit. No further borrowings will be made under this line of credit.
We have entered into employment agreements with all of our senior
management. For description of these employment agreements and related rights to
our stock options, see "Executive Compensation - Employment Contracts and Other
Arrangements."
In fiscal year ended 2003 and 2002, we issued 412,521 and 234,277 shares,
respectively, of our Common Stock to Michael T. Cronin, Esq., who is a partner
in the law firm which serves as our corporate and securities counsel, in
consideration for $118,525 and $105,040 of his services charged at normal hourly
rates. All other charges incurred by us for other employees of his firm are paid
in cash. As of July 31, 2003, all these common shares have been earned.
In July 2001, we executed debenture agreements totaling $650,000. These
debentures bear interest at Libor plus 3% and matured on September 30, 2001.
Once these debentures mature they are converted to Common Stock at the lesser or
(i) $1.00 or (ii) 75% of the average of the closing bid price of our Common
Stock in 30 trading days immediately preceding the conversion date, but in no
event shall the floating conversion price be less than $0.75. A purchaser of
$100,000 of these convertible debentures is the brother-in-law of Mr. Seidel.
Investors who purchase $300,000 or more of the debentures have a conversion
price equal to the lesser of (i) $.63 or (ii) 75% of the average of the closing
bid price of our Common Stock in the 30 trading days immediately preceding the
conversion date, but in no event shall the floating conversion price be less
than $0.63. Holders of these convertible debentures are granted piggyback
registration rights.
Christopher Korge, one of our directors, purchased $300,000 of these
debentures. Upon the September 30, 2001 maturity date, we converted the $300,000
face amount of debentures acquired by Mr. Korge into 476,190 shares of our
Common Stock (a $0.63 conversion price). In consideration for Mr. Korge's
purchasing and facilitating the placement of these debentures, we have agreed to
issue Mr. Korge, or his assigns, warrants to acquire 1,000,000 shares of our
Common Stock and Mr. Seidel's brother-in-law warrants to acquire 150,000 shares
of our Common Stock, both at an exercise price of $0.63 per share.
In connection with the issuance of shares of our Common Stock in August
2003, Christopher Korge, one of our directors acquired 107,527 shares at a fixed
price of $.279 per share. In addition, the brother-in-law of Mr. Seidel, our
CEO, acquired 35,842 shares at a fixed price of $.279.
38
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are amended/restated in their entirety to reflect our
merger with eAutoclaims.com.
Exhibit No. Description
1.1 [Reserved]
1.2 [Reserved]
3.1 Articles of Incorporation of Samuel Hamann Graphix, Inc. (Nevada)
as amended (1)
3.2 Articles of Merger between Samuel Hamann Graphix, Inc. (Nevada) and
Samuel Hamann Graphix, Inc. (California) (1)
3.3 By-laws of Transformation Processing Inc. (Nevada).(1)
3.4 Articles of Merger between of TPI (Ontario) and TPI (Nevada) (1)
3.5 Agreement and Plan of Merger by and between Transformation Processing,
Inc. and eAutoclaims.com, Inc., dated April 26, 2000 (3)
3.6 Articles of Merger of eAutoclaims.com, Inc., a Delaware corporation with
and into Transformation Processing, Inc., a Nevada corporation (5)
3.7 Agreement and Plan of Merger by and among eAutoclaims.com, Inc., a Nevada
corporation, eAutoclaims.com Acquisition, a South Carolina corporation,
Premier Express Claims, Inc., a South Carolina corporation, and its
stockholders, dated June 8, 2000 (2)
3.8 First Amendment to Agreement and Plan of Merger with Premier Claims, Inc.
dated June 27, 2000 (2)
3.9 Articles of Merger or Share Exchange between Premier Express, Inc., as
the surviving corporation and eAutoclaims.com Acquisition Corporation,
filed July 20, 2000 with the Secretary of State of South Carolina (5)
3.10 Promissory Note dated June 27, 2000 between eAutoclaims.com, Inc. and
Randal K. Wright and S.Reed Mattingly (2)
3.11 Promissory Note dated June 16, 2000 between eAutoclaims.com, Inc.
and Randal K. Wright (2)
3.12 Promissory Note dated June 16, 2000 between eAutoclaims.com, Inc. and
S. Reed Mattingly. (2)
4.1 Specimen of Common Stock Certificate (1)
4.2 [Reserved]
4.3 [Reserved]
4.4 The Registrants 1998 Stock Option Plan (4)
4.5 [Reserved]
4.6 Form of Stock Option Agreement to Employees(6)
4.7 Form of Directors Stock Option Agreement(6)
4.8 Form of Non-Qualified Stock Option Agreement(6)
5.1 [Reserved]
10.1 Employment Agreement between eAutoclaims.com, Inc. and Eric Seidel
dated February 1, 2000 (5)(8)
10.2 Employment Agreement between eAutoclaims.com, Inc. and Randal K. Wright
dated July 1, 2000 (2)(9)
10.3 Employment Agreement between eAutoclaims.com, Inc. and S. Reed Mattingly
dated July 1, 2000 (2)(8)
10.4 Employment Agreement between eAutoclaims.com, Inc. and M. Scott Moore
dated August 14, 2000 (5)(9)
10.5 Employment Agreement between eAutoclaims.com, Inc. and Gaver Powers dated
April 13, 2000 (5)
10.6 Consulting Agreement between eAutoclaims.com, Inc. and Jeffrey D. Dickson
dated December 1, 1999 (5)
10.7 Consulting Agreement between eAutoclaims.com, Inc. and Liviakis Financial
Communications, Inc.
dated February 1, 2000 (5)(9)
10.8 Amendment No. 1 to Consulting Agreement between eAutoclaims.com, Inc.
and Liviakis Financial Communications, Inc. dated September 18, 2000
(5)(9)
10.9 Lease Agreement between eAutoclaims.com, Inc. and KWPH, Inc., dated
October 17, 2000 (5)(9)
10.10 Service Agreement between eAutoclaims.com, Inc. and WE Securities, Inc.
dated August 8, 2000 (5)(9)
10.11 Business Consulting Agreement between eAutoclaims.com, Inc. and TTG
LLC dated September 8, 2000 (5)(9)
39
10.12 Commercial lease dated October 12, 1998 between Premier Express
Claims, Inc. and Stephenson Park Associates Limited (5)(9)
10.13 [Reserved]
10.14 Certificate of Full Performance of Proposal - Form 46 filed by BDO
Dunwoody Limited - Trustee dated May 8, 2000 (5)
10.15 Order of the Superior Court of Justice in the Matter of the Proposal of
Transformation Processing, Inc. dated November 25, 1999 (5)
10.16 Proposal of Transformation Processing, Inc. - Court File No. 32-107046
filed in the Superior Court of Justice dated October 14, 1999. (5)
10.17 Share Exchange Agreement between Transformation Processing, Inc. and
certain of its securities holders dated April 30, 2000 (5)
10.18 [Reserved]
10.19 Securities Purchase Agreement effective June 27, 2000 between Thomson
Kernaghan, as Agent and eAutoclaims.com, Inc. (5)
10.20 Certificate of Rights, Designations, Preferences and Limitations of
Series A Convertible Preferred Stock (5)
10.21 Security Agreement between Thomson Kernaghan, as Agent and
eAutoclaims.com, Inc. (5)
10.22 Form of Purchasers Warrant (5)
10.23 Form of Agents Warrant (5)
10.24 Registration Rights Agreement (5)
10.25 eAutoclaims.com, Inc. Agreement with Certain Securities Holders
effective May 31, 2000 (5)
10.26 eAutoclaims.com, Inc. Agreement with Sovereign Partners, Ltd.
effective May 31, 2000 (5)
10.27 eAutoclaims.com, Inc. Agreement with Dominium Capital Fund (5)
10.28 Form of Master Modification Agreement with Certain Security Holders
dated January 12, 2001(6)
10.29 Restated master Modification Agreement dated May 2001
10.30 Modification agreement dated November 2001 superceding the original
Modification Agreement dated January 12, 2001 and the Restated
Modification Agreement dated May 2001
10.31 Form of Bricks to Clicks Service and License Agreement (6)
10.32 Form of Collision Repair Facility Agreement and Procedures (6)
10.33 Form of Change of Control and Termination Agreement (6)
10.34 Form of Officers/Directors Indemnification Agreement (6)
10.35 Bricks to Clicks Service and Licensing Agreement with Inspire Claims
Management, Inc., dated November 1, 2000(6)(9)
10.36 Lease Agreement for 110 East Douglas Road dated September 2001 (6)
10.37 Form of Employee Confidentiality Agreement (6)
10.38 Letter Agreement with Liviakis Financial Communications, Inc. (6)
10.39 Letter Agreement with Former Liviakis Financial Communications, Inc.
Employees (6)
10.40 Claims Management Services and License Agreement with Royal Indemnity
Company, dated April 24, 2001(6)
10.41 Amended and Restated Employment Agreement with Eric Seidel effective
May 21, 2001 (6)(8)
10.42 Form of Amendment to Certificate of Designation, Rights and Preferences
of Series A Preferred Stock effective May 21, 2002 (7)*
10.43 Agreement between Parts.com, Inc. and the Registrant effective
May 1, 2001(6)
10.44 Form of Convertible Debenture (6)
10.45 Form of Warrants issued in connection with Convertible Debentures (6)
10.46 Form of Subscription Agreement for purchasers of Convertible
Debentures (6)
10.47 Amended and Restated Employment Agreement with Eric Seidel, dated
March 27, 2003*
10.48 Employment Agreement with Scott Moore, effective April 25, 2003*
10.49 Employment Agreement with Reed Mattingly, effective May 1, 2003*
10.50 Employment Agreement with Dave Mattingly, effective May 1, 2003*
10.51 Employment Agreement with Stacy Adams, effective May 1, 2003*
31 Certificates of the Chief Executive Officer and Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a)
32 Certificate pursuant to Section 1350 pursuant to Section 906 of
Sarbanes-Oxley Note of 2002.
99.1 Code of Ethics*
40
(1) Incorporated by reference from the Registrant's Form 10-SB filed on
March 12, 1998 and amended on August 31, 1998 and October 22, 1998
(2) Incorporated by reference from the Registrant's Form 8-K filed on
July 25, 2000
(3) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 1999
(4) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 1998
(5) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2000
(6) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2001
(7) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2002
(8) This Employment Agreement has been superseded by a new employment
agreement filed herewith. See (9)
(9) Terminated, no longer in effect
* Filed herewith
(b) Reports on Form 8-K
Item 5./Item 9. - Regarding private placement of $972,000, dated July 13, 2003
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND EXPENSES
Compensation of Auditors
Audit Fees. Goldstein Golub Kessler LLP billed the Company an aggregate of
$83,500 in fees and expenses for professional services rendered in connection
with the audit of the Company's financial statements for the fiscal year ended
July 31, 2002 and the reviews of the financial statements included in each of
the Company's Quarterly Reports on Form 10-Q during the fiscal year ended July
31, 2003.
Financial Information Systems Design and Implementation Fees. Goldstein Golub
Kessler LLP did not provide the Company any professional services for financial
information systems design or implementation for the fiscal year ended July 31,
2003.
All Other Fees. Goldstein Golub Kessler LLP billed the Company an aggregate of
$23,444 in fees and expenses during the year ended July 31, 2003, primarily for
the following professional services:
Audit related services $18,444 (1)
Taxes $ 5,000
(1) Audit related services include due diligence investigations related to
the Company's acquisitions, registration statements and related
offerings, accounting advice and other audits, including benefit
plans.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Oldsmar,
State of Florida, on the 29th day of October, 2003.
eAUTOCLAIMS.COM.INC.
BY: /s/ Eric Seidel
--------------------------------------------
Eric Seidel
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/Eric Seidel President, Chief Executive October 29, 2003
---------------------------- Officer and Director
Eric Seidel
/s/Scott Moore Chief Financial and October 29, 2003
---------------------------- Accounting Officer
Scott Moore
/s/Jeffrey D. Dickson Chairman October 29, 2003
----------------------------
Jeffrey D. Dickson
/s/Nicholas D. Trbovich, Jr. Director October 24, 2003
----------------------------
2003
Nicholas D. Trbovich, Jr.
/s/Christopher Korge Director October 27, 2003
-----------------------------
Christopher Korge
10/25/2003 9:32 AM
41287.102070
#301774 v2 - EAUTOCLAIMS Form 10-KSB (10/9/03)
42
EXHIBIT 31
CERTIFICATIONS
I certify that:
1. I reviewed this annual report on Form 10-KSB;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
materials respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Ac Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 29, 2003 /s/ Eric Seidel
------------------------------- --------------------------------------------
President and C.E.O.
Date: October 29, 2003 /s/ Scott Moore
------------------------------- ---------------------------------------------
Chief Financial Officer
43
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of eAutoclaims.com, Inc. (the
"Company"), on Form 10-KSB of the year ended July 31, 2003, we hereby certify
solely for the purpose of complying with 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of
my knowledge:
1. The annual report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the annual report fairly presents, in
all materials respects, the financial condition and results of operations of the
Company.
Date: October 29, 2003.
/s/ Eric Seidel
---------------------------------------
Print Name: Eric Seidel
Title: Chief Executive Officer
/s/ Scott Moore
---------------------------------------
Print Name: Scott Moore
Title: Chief Financial Officer
44
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page
_____
Independent Auditor's Report F-2
Consolidated Financial Statements:
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders Equity (Deficiency) F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
eAutoclaims.com, Inc.
We have audited the accompanying consolidated balance sheet of eAutoclaims.com,
Inc. and Subsidiary as of July 31, 2003, and the related consolidated statements
of operations, stockholders' equity (deficiency), and cash flows for each of the
two years in the period then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eAutoclaims.com,
Inc. and Subsidiary as of July 31, 2003 and the results of their operations and
their cash flows for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
September 19, 2003
F-2
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
July 31, 2003
--------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 226,161
Accounts receivable, less allowance for doubtful
accounts of $242,000 1,198,764
Due from related parties 111,821
Prepaid expenses and other current assets 52,832
--------------------------------------------------------------------------------
Total current assets 1,589,578
Property and Equipment, net of accumulated
depreciation of $1,034,701 1,033,551
Goodwill 1,093,843
Other Assets 40,540
Deferred Income Tax Asset, net of valuation
allowance of $6,315,000
--------------------------------------------------------------------------------
Total Assets $ 3,757,512
================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 6,259,323
Loan payable - stockholder 117,993
Current portion of capital lease obligation 33,925
Convertible debenture, net of unamortized
discount of $129,122 170,878
--------------------------------------------------------------------------------
Total current liabilities 6,582,119
Capital Lease Obligation 86,325
--------------------------------------------------------------------------------
Total liabilities 6,668,444
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 247 shares aggregate liquidation
preference of $1,235,000 1
Common stock - $.001 par value; authorized
50,000,000 shares, issued and
outstanding 22,828,955 shares 22,829
Additional paid-in capital 18,459,225
Accumulated deficit (21,392,987)
--------------------------------------------------------------------------------
Stockholders' Deficiency (2,910,932)
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,757,512
================================================================================
See Notes to Consolidated Financial Statements
F-3
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended July 31 2003 2002
--------------------------------------------------------------------------------
Revenue:
Collision repairs management $ 29,697,420 $ 28,485,167
Glass repairs 894,485 995,972
Fleet repairs management 868,962 1,129,784
Fees and other revenue 2,600,205 1,672,440
--------------------------------------------------------------------------------
Total revenue 34,061,072 32,283,363
Expenses:
Claims processing charges 28,323,741 27,293,568
Selling, general and administrative 6,418,911 8,114,580
Depreciation and amortization 490,935 530,618
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 11,738 555,551
--------------------------------------------------------------------------------
Total expenses 35,245,325 36,494,317
--------------------------------------------------------------------------------
Net loss $ (1,184,253) $ (4,210,954)
================================================================================
Adjustment to net loss to compute loss per common share:
Preferred stock dividends and
Deduction relating to Series A
Convertible Preferred Stock (101,296) (570,997)
--------------------------------------------------------------------------------
Net loss applicable to common stock $ (1,285,549) $ (4,781,951)
================================================================================
Loss per common share - basic and
diluted $ (0.06) $ (0.32)
================================================================================
Weighted-average number of common
shares outstanding-basic and diluted 20,209,634 14,813,549
================================================================================
See Notes to Consolidated Financial Statements
F-4
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended July 31, 2003 and 2002
Additional Stockholders'
Preferred Stock Common Stock Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2001 520 $ 1 11,711,877 $ 11,712 $ 16,051,679 $(15,325,487) $ 737,905
Issuance of common stock for cash 220,000 220 93,245 93,465
Issuance of common stock upon exercise of
options 326,000 326 2,934 3,260
Issuance of common stock for amounts
due to shareholders 91,667 92 43,908 44,000
Issuance of common stock for services 327,184 327 160,933 161,260
Issuance of common stock in conjunction
with lease 97,927 98 92,933 93,031
Issuance of compensatory stock options 82,509 82,509
Issuance of common stock upon conversion
of debentures 942,855 943 649,057 650,000
Issuance of common stock for interest on
debentures 23,028 23 9,188 9,211
Recognition of beneficial conversion feature
on convertible preferred stock 408,000 (408,000) -
Accrued dividends on preferred stock (162,997) (162,997)
Issuance of common stock for preferred stock
dividends 441,537 441 133,051 133,492
Issuance of common stock upon conversion of
preferred stock (252) 4,208,043 4,208 (4,208)
Net loss (4,210,954) (4,210,954)
------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2002 268 1 18,390,118 18,390 17,723,229 (20,107,438) (2,365,818)
Issuance of common stock upon exercise of
options 958,850 960 8,630 9,590
Issuance of common stock for amounts due
to shareholder 84,034 84 9,916 10,000
Issuance of common stock for services 570,437 571 156,264 156,835
Accrued dividends on preferred stock (101,296) (101,296)
Issuance of common stock upon conversion
of preferred stock (21) 928,481 927 (927) -
Issuance of common stock for preferred
stock dividends 184,670 185 19,895 20,080
Issuance of common stock for cash 1,712,365 1712 401,358 403,070
Recognition of beneficial conversion feature
on convertible debenture 140,860 140,860
Net loss (1,184,253) (1,184,253)
------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2003 247 $ 1 22,828,955 $ 22,829 $ 18,459,225 $(21,392,987) $(2,910,932)
====================================================================================================================================
See Notes to Consolidated Financial Statements
F-5
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
Year Ended July 31, 2003 2002
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (1,184,253) $ (4,210,954)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 490,935 530,618
Write off of computer software 360,000
Amortization of discount on debentures 11,738 555,551
Common stock issued for services 156,835 161,260
Common stock issued for interest 9,211
Common stock issued for rent and option to
purchase facility 43,659
Issuance of compensatory stock options 82,509
Allowance for doubtful accounts (158,000) 340,000
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (176,412) 4,057
Decrease (increase) in prepaid expenses and
other current assets 180,681 (57,448)
(Increase) in other assets (15,610) (19,930)
Increase in accounts payable and accrued
expenses 870,186 2,245,810
(Decrease) increase in deferred software
subscription revenue (284,676) 173,006
--------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (108,576) 217,349
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (418,448) (765,980)
Payments from related parties 38,563 53,469
Loans to related parties (7,000) (42,000)
--------------------------------------------------------------------------------
Net cash used in investing activities (386,885) (754,511)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 403,070 93,465
Proceeds from exercise of stock options 9,590 3,260
Principal payments on capital lease (28,686)
Proceeds from issuance of convertible debentures 300,000
Principal payments on shareholder loans (7,007)
--------------------------------------------------------------------------------
Net cash provided by financing activities 676,967 96,725
--------------------------------------------------------------------------------
Net increase (decrease) in cash 181,506 (440,437)
Cash at beginning of year 44,655 485,092
--------------------------------------------------------------------------------
Cash at end of year $ 226,161 $ 44,655
================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 45,324 $ 34,801
================================================================================
Supplemental disclosure of noncash investing and
financing activities:
Conversion of debentures to common stock $ 650,000
==============================================================================
Issuance of common stock for amount due to
shareholders $ 10,000 $ 44,000
==============================================================================
Issuance of stock for payment of rent $ 49,373
==============================================================================
Issuance of stock for preferred stock dividends $ 20,080 $ 133,492
==============================================================================
Accrued dividends on preferred stock $ 101,296
==============================================================================
Equipment acquired by capital lease $ 106,899
==============================================================================
See Notes to Consolidated Financial Statements
F-6
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS AND BASIS OF PRESENTATION
eAutoclaims.com, Inc. (Company) is a Nevada corporation which
provides Internet based vehicle collision claims services for
insurance companies, Managing General Agents (MGA) and third party
claims administrators (TPA) and self-insured automobile fleet
management companies. The Company accepts assignment of claims from
customers, and provides vehicle repairs through a network of repair
shops. The Company also handles estimate, audit and claims
administration services for claims for which the Company does not
perform the repair.
The Company uses the Internet to streamline and lower the overall
costs of automobile repairs and the claims adjustment expenses of its
clients. Management believes that the proprietary web-based software
products and services make the management of collision repairs more
efficient by controlling the cost of the repair and by facilitating
the gathering and distribution of information required in the
automobile repair process.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, SalvageConnection.com,
Inc. ("Salvage). All intra-company accounts and transactions have been
eliminated.
The Company maintains cash in bank deposit accounts that, at times,
exceed federally insured limits. The Company has not experienced any
losses on these accounts.
The Company derives revenue primarily from collision repairs, glass
repairs and fleet repairs. Revenue is recognized when an agreement
between the Company and its customer exists, the repair services have
been completed, the Company's revenue is fixed and determinable and
collection is reasonably assured.
The Company records revenue gross when the Company is the primary
obligor in its arrangements, the Company has latitude in establishing
price, the Company controls what services are provided and where the
services will take place, the Company has discretion in supplier
selection, the Company is involved in the determination of product or
service specifications and the Company has credit risk. The Company
records revenue net when situations occur whereby the supplier (not the
Company) is the primary obligor in an arrangement, the amount the
Company earns is fixed or the supplier (and not the Company) has credit
risk.
F-7
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company derives revenue from the sale of estimating software to
shops within the Company's repair shop network. Since the Company only
resells and does not service the estimating software, the revenue and
cost of revenue from the transaction is recognized on the date of
shipment.
Accounts receivable are reported at their outstanding unpaid principal
balances reduced by an allowance for doubtful accounts. The Company
estimates doubtful accounts based on historical bad debts, factors
related to specific customer's ability to pay and current economic
trends. The company writes off accounts receivable against the
allowance when a balance is determined to be uncollectible.
Property and equipment are stated at cost. Additions and improvements
to property and equipment are capitalized. Maintenance and repairs are
expensed as incurred. When property is retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in operations.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets.
The Company identifies and records impairment on long-lived assets,
including goodwill, when events and circumstances indicate that such
assets have been impaired. The Company periodically evaluates the
recoverability of its long-lived assets based on expected undiscounted
cash flows, and recognizes impairment, if any, based on expected
discounted cash flows. At July 31, 2003, no such impairment existed.
Deferred income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between
the financial statements carrying amounts of existing assets and
liabilities and their respective income tax bases. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation Transition and Disclosure-an amendment of FASB
Statement No. 123." SFAS No. 148 amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation, "to provide alternative
methods of transition for an entity that chooses to change to the
fair-value-based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects that
accounting for stock-based employee compensation using the
F-8
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
fair-value-based method would have on reported net income and earnings
per share. Certain of the disclosure requirements are required for all
companies, regardless of whether the fair value method or intrinsic
value method is used to account for stock-based compensation
arrangements. The amendment to SFAS No. 123 are effective for financial
statements for fiscal years ended after December 15, 2002 and for
interim periods beginning after December 15, 2002.
The Company accounts for its employee incentive stock option plans
using the intrinsic value method in accordance with the recognition and
measurement principles of Accounting Principals Board Opinion No 25,
"Accounting for Stock Issued to Employees," as permitted by SFAS No.
123. Had the Company determined compensation expense based on the fair
value at the grant dates for those awards consistent with the method of
SFAS 123, the Company's net loss per share would have been increased to
the following pro forma amounts:
Year Ended
July 31,
2003 2002
-----------------------------
Net loss as reported $ (1,184,253) $ (4,210,954)
Add back intrinsic value of the options
issued to employees and charged to
operations 82,509
Deduct total stock based employee
compensation expense determined under
fair value based methods for all awards (607,267) (1,034,192)
-----------------------------
Pro forma net loss $(1,791,520) $ (5,162,637)
=============================
Basic and diluted net loss per share
as reported $(.06) $(.32)
Pro forma basic and diluted loss per share $(.09) $(.39)
The fair value for these options was estimated at the date of grant
using a Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended July 31, 2003 and 2002.
The assumptions were risk-free interest rate of 6.50%, dividend yield
of 0%, volatility factor of the expected market price of the Company's
common stock of 200%, and an expected life of the option of five years.
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions
can materially affect the fair value
F-9
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
estimate, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
Management does not believe that any other recently issued, but not yet
effective, accounting standards if currently adopted would have a
material effect on the accompanying financial statements.
In accordance with Emerging Issues Task Force No. 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or In Conjunction with Selling, Goods or Services, the
Company measures the fair value of the equity instruments using the
stock price and other measurement assumptions as of the earlier of the
date at which a commitment for performance by the counterparty to earn
the equity instruments is reached, or the date at which the
counterparty's performance is complete.
The costs of software developed for internal use, including web site
development costs, incurred during the preliminary project stage are
expensed as incurred. Direct costs incurred during the application
development stage are capitalized. Costs incurred during the post
implementation/operation stage are expensed as incurred. Capitalized
software development costs are amortized on a straight-line basis over
their estimated useful lives.
The carrying value of cash, accounts payable, and accrued expenses are
reasonable estimates of their fair value because of short-term
maturity. The fair value of the loans payable and convertible
debentures approximates their principle amounts.
The Company believes that the concentration of credit risk in its trade
receivables, with respect to its limited customer base, is
substantially mitigated by its credit evaluation process. The Company
does not require collateral.
3. PER SHARE CALCULATIONS
Basic loss per share is computed as net loss available to common
stockholders' divided by the weighted- average number of common shares
outstanding for the period. Diluted loss per share reflects the
potential dilution that could occur from common shares issuable through
stock-based compensation including stock options, restricted stock
awards, warrants and convertible securities. As of July 31, 2003 and
2002, 7,112,536 and 7,704,784 options, respectively, were excluded from
the diluted loss per share computation, as their effect would be
antidilutive.
F-10
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
At July 31, 2003 property and equipment, at cost, consists of the
following:
Estimated
2003 Useful Life
--------------------------------------------------------------------------------
Computer Equipment $ 644,702 3 years
Software 868,189 3 years
Office equipment 231,606 3 years
Leasehold improvements 231,883 Term of Lease
Furniture and fixtures 91,872 10 years
--------------------------------------------------------------------------------
2,068,252
Less accumulated depreciation 1,034,701
---------
$1,033,551
==========
5. GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No.'s 141 and 142, "Business Combinations" and "Goodwill and Other
Intangibles." SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. SFAS
142 addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. The provisions for SFAS 142 were
effective for fiscal years beginning after December 15, 2001. The
Company has adopted SFAS 142 as of August 1, 2002; SFAS 142 eliminates
the amortization of goodwill and certain other intangible assets. It
also requires the Company to complete a test for impairment of these
assets annually, as well as a transitional goodwill impairment test
within six months from the date of adoption. SFAS 142 also requires
disclosure of what net loss would have been in all periods presented
had SFAS 142 been in effect.
The following table is provided to disclose what net loss would have
been had SFAS 142 been adopted in prior periods:
Year Ended
July 31,
2003 2002
--------------------------------
Net loss $(1,184,253) $(4,210,954)
Add back: goodwill amortization 218,772
--------------------------------
Adjusted net income loss $(1,184,253) $(3,992,182)
=================================
F-11
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At July 31, 2003 accounts payable and accrued expenses consist of the
following:
2003
--------------------------------------------------------------------------------
Accounts payable $5,509.565
Accrued payroll and vacation wages 128,101
Accrued dividends 244,902
Other accrued liabilities (none in excess
of 5% of current liabilities) 376,755
--------------------------------------------------------------------------------
$6,259,323
================================================================================
7. LOAN PAYABLE - STOCKHOLDER
As of July 31, 2003 the Company had one loan outstanding to a
stockholder totaling $117,993. The loan bears interest at the rate of
12% per annum and is being paid over 18 months with principal and
interest payments of $7,582 per month through December of 2004. The
fair value of the loan approximates its carrying amount based on rates
available to the Company for similar loans.
8. CONVERTIBLE NOTE AND DEBENTURES
In July of 2003 the Company entered into a $300,000, 8% convertible
note payable with a term of 1 year. This note is convertible at the
discretion of the creditor at a fixed rate of $0.279 per share. The
interest can be paid in either cash or common shares at the Company's
discretion at the end of the loan. The Company recorded a discount to
the note payable of $140,860 representing the beneficial conversion
feature of the debentures. The discount will be amortized to interest
expense over the one-year term of the note.
During the months June and July 2001 the Company issued $650,000 of
debentures with interest at the rate of Libor (2.6%) plus 3% maturing
on September 30, 2001. Upon the maturity date the debentures were
converted into common stock at rates between $0.63 and $0.75 per share.
In connection with the issuance of these convertible debentures
1,150,000 warrants were issued to purchase shares of common stock at
$0.63 per share through June 30, 2011. The Company recorded a discount
to the debentures of $260,600 representing the fair value of the
warrants, and $389,400 representing the beneficial conversion feature
of the debentures.
For the years ended July 31, 2003 and 2002 $11,738 and $555,551 has
been charged to operations.
F-12
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
The Company has a two-year employment agreement with its president and
chief executive officer. On March 27, 2003, the Board of Directors
approved an Amended and Restated Employment Agreement with its
President and Chief Executive Officer. The new two year agreement
specifies an annual base salary of $185,000, effective February 1, 2003
through December 31, 2003. From January 1, 2004 through February 1,
2005, the minimum annual base salary will be $200,000. The individual
receives bonuses equal to 3% of the Company's earnings before interest,
taxes, depreciation and amortization as defined by generally accepted
accounting principles (GAAP), and may elect to receive part or the
entire bonus, if any, in shares of our Common Stock valued at 90% of
the then current market value. Each month that the Company is
profitable on a GAAP basis, the individual also has the right to
receive options to purchase 25,000 shares of the Company's common
stock, with a term of five years at an exercise price equal to the
stock's fair market value at the date of grant. These options vest over
the remaining life of his contract. The individual is entitled to a
$750 per month automobile allowance and $1,000 of personal allowances.
The individual is entitled 299% of his current base salary if the
individual loses his position, unless terminated for cause.
In addition, the Company has two-year employment agreements with four
other executives that expire April 30, 2004. The agreements provide
base salaries of $425,000 in the first year to $448,945 in the second
year. They also receive automobile allowance ranging from $400 to $700
per month. If their contracts are not renewed they receive severance
packages ranging from six to nine months of their annual compensation.
These severance packages supercede the previous "Change in Control and
Termination Agreements," dated April 9, 2001, that each of these
executives had previously executed.
On March 27, 2003 the Board of Directors voted to grant certain key
employees a total of 2,000,000 shares of our common stock or equivalent
consideration thereof and the current and future board members
1,000,000 common shares if there is a change in control of greater than
50% ownership of the Company or a sale of all or substantially all it's
assets.
The Company leases equipment and facilities under non-cancelable
capital and operating leases expiring on various dates through fiscal
2008. The main operating lease consists of a 5-year lease for 30,000
square feet of a 62,000 square foot facility. The Company has an option
to buy the entire facility with the associated land for $2,950,000. The
Company issued 51,971 shares of common stock to pay for the January
through March 31, 2002 rent, and another 45,956 shares for the purchase
option, for a total of 97,927 shares. Total rent expense under the
operating leases for the years ended July 31, 2003 and 2002 totaled
approximately $219,000 and $309,000 respectively.
F-13
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (Continued)
The minimum future payments under capital and operating leases are
payable as follows:
Year ending July 31,
2004 $ 273,000
2005 265,000
2006 259,000
2007 101,000
2008 4,000
--------------------------------------------------------------------------------
$ 902,000
================================================================================
10. STOCKHOLDERS' EQUITY
The Company is authorized to issue 5,000,000 shares of $.001 par value
preferred stock. Each share of preferred stock is convertible into a
number of shares of common stock. As amended, the number of common
shares to be issued is derived by taking the lesser of 75% of the
average of the closing bid prices for the common stock for the 3 lowest
trading days out of the 20 consecutive trading days immediately
preceding the date of conversion or $0.625. Dividends are payable at
the rate of 8% of the aggregate liquidation preference amount per annum
and are cumulative. As of July 31, 2003, the Company had issued 520
shares of preferred stock, and 247 were still outstanding.
On July 31, 2001, 100 shares of the preferred stock described above
were redeemable at the Company's option at 120% of face value, plus
accrued dividends by August 15, 2001. Since the Company did not redeem
the preferred stock, its terms became identical to the Company's other
preferred stock. An increase to accumulated deficit and the net loss
available to common shareholders $408,000 has been recorded during the
year ended July 31, 2002, representing the beneficial conversion
feature. The Company has issued warrants as part of this funding in
accordance with the terms of the preferred stock agreements. The fair
value attributed to the warrants has been treated as a cost associated
with the issuance of the convertible preferred stock, and has been
recorded as an increase to accumulated deficit and an increase in the
net loss attributable to common shareholders.
On January 31, 2002, 42 shares of preferred stock with a face value of
$210,000, plus dividends of approximately $26,000 were converted into
551,629 shares of common stock. On March 27, 2002, 210 shares of
preferred stock with a face value of $1,050,000, plus dividends of
approximately $108,000 were converted into 4,097,951 shares of common
stock
On June 17, 2002, the Company sold 220,000 shares of common stock and
warrants to purchase 220,000 shares of common stock, with an exercise
price of $0.75 per share, for $93,465, net of commissions and legal
fees.
During the year ended July 31, 2002, employees exercised 326,000
options to purchase shares of the Company's common stock.
F-14
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (Continued)
On September 20, 2001, two shareholders and officers of the Company
converted $44,000 of debt owed to them by the Company into 91,667
shares of common stock.
During the year ended July 31, 2002, the Company issued 234,277 shares
of common stock in exchange for $105,040 of legal services.
During the year ended July 31, 2002, the Company issued 37,650 shares
of common stock to a company in partial payment of public relations
consulting services. These shares were earned during the same time
period resulting in a charge to operations of $30,120.
During the year ended July 31, 2002, the Company issued 35,257 shares
of common stock to four outside members of the Board of Directors. The
Company charged operations $17,500, which was equal to the fair market
value of the shares when earned.
On June 5, 2002, the Company issued 20,000 shares of common stock to an
individual for consulting services provided to the company during the
fiscal year ended July 31, 2002. The Company charged operations $8,600
which was equal to the fair market value of the shares when earned.
During the year ended July 31, 2002, the Company entered into an
agreement for the lease of a new office facility that called for the
issuance of 97,927 shares of common stock for three months rent and a
five-year purchase option of the property at a pre-established price.
During the year ended July 31, 2002, $43,659 was charged to operations
for the stock issued relating to the purchase option. The $49,372
associated with the rent was recorded as prepaid rent and has been
charged to operations during the year ended July 31, 2003.
During July 2002, the Company issued options to purchase 242,670 shares
of common stock to officers and employees of the Company at $.01 per
share. Accordingly, the Company recorded a charge to operations of
$82,509, representing the difference between the exercise price of the
options and the market price of the Company's common stock at the time
of issuance related to these issuances.
During the year ended July 31, 2002 $650,000 of debentures which were
issued were converted into 942,855 shares of common stock in accordance
with the debenture
agreements. In addition, accrued interest of approximately $9,200 on
those debentures was converted to 23,028 shares of common stock.
During the year ended July 31, 2003, employees exercised 958,850
options to purchase shares of the Company's common stock.
On November 20, 2002, a shareholder and officer of the Company
converted $10,000 of debt owed to him by the Company into 84,034 shares
of common stock ($ .12 per share).
F-15
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (Continued)
During the year ended July 31, 2003, the Company issued 412,521 shares
of common stock in exchange for $118,525 of legal services. The price
of shares was determined by the market value of shares when earned.
During the year ended July 31, 2003, the Company issued 55,797 shares
of common stock to three directors in exchange for their services. The
Company charged operations $11,250, which was equal to the fair market
value of the shares when earned.
During the year ended July 31, 2003, the Company issued 94,119 shares
of common stock to a company in final payment of public relations
consulting services. During the year ended July 31, 2003, all of these
shares were earned resulting in a charge to operations of $24,000. The
price of shares was determined by the market value of shares when
earned.
On July 31, 2003, the Company issued 8,000 shares of common stock to a
past employee as part of a severance agreement. The Company recorded a
charge to operations of $3,060 on the shares issued. The price of
shares was determined by the market value of shares when earned.
On September 5, 2002, 11 shares of preferred stock with a face value of
$55,000, plus dividends of $9,632 were converted into 327,250 shares of
common stock. On January 16, 2003, 4 shares of preferred stock with a
face value of $20,000, plus dividends of $4,090 were converted into
301,123 shares of common stock. On February 19, 2003, 6 shares of
preferred stock with a face value of $30,000, plus dividends of $6,359
were converted into 484,778 shares of common stock.
In June and July of 2003, the Company sold 1,712,365 shares of common
stock at $0.279 per share. The total funds raised was $477,750, less
finders' fees and legal fees of $74,680, resulting in net proceeds of
$403,070.
During the year ended July 31, 2003 and 2002, the Company issued
options to employees and members of the Company's Board of Directors to
purchase 908,000 and 1,555,500 shares of common stock where the
exercise prices of the options are equal to or greater than the fair
market value of the Company's common stock on the date of each grant.
Additionally, options to purchase 541,398 and 468,334 shares of common
stock were canceled during the years ended July 31, 2003 and 2002,
respectively.
On November 12, 2002 the Company signed a term sheet on a $10,000,000
equity line of credit that will allow the Company, once the shares are
registered, to access funds over a 36-month period by selling
registered shares of common stock at 94% of the market value of the
shares. Under this agreement, the amount of funds available to the
Company would be based on the volume of the previous 20
F-16
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (Continued)
trading days. The purchasing party offering the equity line of credit
will receive warrants for 3% of the shares sold as well as a 2%
placement fee. The Company has not utilized this available equity line
of credit at this point but, as there is no expiration date on this
term sheet, the Company could do so if additional funds are needed.
On October 27, 2003 the Company also received a commitment letter from
a current investor to invest an additional $1,000,000-$2,000,000 into
eAutoclaims if the funds were needed.
11. STOCK OPTIONS AND STOCK WARRANTS
The Company has an incentive stock option plan under which options to
purchase shares of common stock may be granted to certain key
employees. The exercise price is based on the fair market value of such
shares as determined by the board of directors at the date of the grant
of such options.
A summary of the status of the company's options as of July 31, 2003 and
July 31, 2002, and changes during the years then ended is presented
below:
July 31, 2003 July 31, 2002
------------- -------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-----------------------------------------------------------------------------
Balance at beginning of period 5,264,970 $0.78 4,261,134 $0.94
Granted 908,000 0.18 1,798,170 .51
Cancelled (541,398) 0.98 (468,334) 1.76
Exercised (958,850) 0.01 (326,000) .01
-----------------------------------------------------------------------------
Outstanding at end of period 4,672,722 $0.80 5,264,970 $ .78
=============================================================================
Options exercisable at end
of period 3,085,263 $0.96 3,293,938 $ .70
=============================================================================
Weighted Average fair value of
options granted during the
period $140,958 $860,239
F-17
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS AND STOCK WARRANTS (Continued)
The following table summarizes information about fixed stock options outstanding
at July 31, 2003:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
-------------------------------------------------------------------------------
$0.01 1,157,820 7.53 $0.01 1,157,820 $0.01
$0.10-$0.47 946,000 4.42 0.19 105,000 0.34
$0.51-$0.90 1,110,168 3.47 0.61 534,680 0.63
$1.01-$1.91 657,467 2.51 1.33 552,667 1.34
$2.00-$5.06 801,267 1.98 2.51 735,096 2.51
----------------------------------------------------------------------------
$0.01-$5.06 4,672,722 $ .80 3,085,263 $0 .96
===============================================================================
12. INCOME TAXES:
As of July 31, 2003, the Company had deferred tax assets of
approximately $6,315,000 resulting from temporary differences and net
operating loss carry-forwards of approximately $13,569,000 which are
available to offset future taxable income, if any, through 2023. As
utilization of the net operating loss carry-forwards and temporary
differences is not assured, the deferred tax asset has been fully
reserved through the recording of a 100% valuation allowance.
The tax effects of temporary differences, loss carry-forwards and the
valuation allowance that give rise to deferred income tax assets were
as follows:
July 31,
2003
Temporary differences:
Allowance for doubtful accounts 98,000
Accrued vacation 32,000
Fair value of warrants 104,000
Compensation not currently deductible 654,000
Net operating losses 5,427,000
Less valuation allowance (6,315,000)
-------------------------------------------------------------------------------
Deferred tax assets $ - 0 -
================================================================================
The reconciliation of the effective income tax rate to the federal
statutory rate for the years ended July 31, 2003 and 2002 is as
follows:
Federal income tax rate (34.0)%
Change in valuation allowance on net
operating carry-forwards 34.0
-------------------------------------------------------------------------------
Effective income tax rate - 0 -%
================================================================================
F-18
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. MAJOR CUSTOMERS
During the years ended July 31, 2003 and 2002 one customer accounted
for 58% of total revenue. During the year ended July 31, 2003 and 2002
a second customer accounted for 14% and 12% of total revenue,
respectively.
14. RELATED PARTY TRANSACTIONS
The Chairman of the Board of the Company was provided a non-interest
bearing loan prior to July 31, 2002, which totaled approximately
$120,000. Over the last 12 months this loan has been reduced by
forgoing certain compensation approved by the Board of Directors. As of
July 31, 2003 the loan balance was $78,431 and is included in due from
related parties on the accompanying balance sheet.
In July of 2001, the Company made a non-interest bearing loan to a
board member for $30,000. This advance is still outstanding as of July
31, 2003.
15. LITIGATION
The Company is subject to one lawsuit arising out of the normal course
of business. This lawsuit is in the early stages. Management believes
there are meritorious defenses and claims against this action, but it
is too early to predict the ultimate outcome of the dispute. Management
believes that the probable resolution of the matter will not materially
affect the financial position, results of operations or cash flows of
the Company.
16. ADDITIONAL INFORMATION
The Company's records and the records of its transfer agent differ with
respect to the number of outstanding shares of the Company's common
stock. According to the transfer agent, the number of shares of common
stock outstanding is approximately 31,500 shares greater than the
22,828,955 indicated by the Company's records. The Company believes
that its records are correct. The number of shares outstanding
reflected in the Company's financial statements do not include these
shares or any adjustment that might be necessary to resolve this
difference.
17. SUBSEQUENT EVENTS
In August 2003, the Company sold 591,397 shares of the Company's common
stock at a price of $0.279 per share to five investors. The total funds
raised were $165,000, less a $1,750 finder's fee, for net funds raised
of $163,250.
F-19