As filed with the Securities and Exchange Commission on June 8, 2004.
Registration No. 333-115709
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20459
---------------------------
AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
EAUTOCLAIMS.COM, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 7373 95-4583945
-------------- ----------------------- -------------------
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification number)
Organization)
110 E. Douglas Road
Oldsmar, Florida 34677(813) 749-1020
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(Address and telephone number of principal executive offices
and principal place of business)
Eric Seidel, President and Chief Executive Officer
110 E. Douglas Road
Oldsmar, Florida 34677
(813) 749-1020
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(Name, address and telephone number of agent for service)
Copies of all communications to:
Michael T. Cronin, Esq.
Johnson, Pope, Bokor, Ruppel & Burns, LLP
911 Chestnut StreetClearwater, Florida 33756
Telephone: (727) 461-1818
Facsimile: (727) 462-0365
Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed of continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------- --------------------- ---------------------- ----------------------- ----------------------
Title of each class of Proposed maximum
securities to be Amount to be offering price per Proposed maximum Amount of
registered Registered security aggregate offering Registration fee
price
-------------------------- --------------------- ---------------------- ----------------------- ----------------------
Common Stock 21,749,289 $0.30 $6,524,786 $827
-------------------------- --------------------- ---------------------- ----------------------- ----------------------
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(1) Estimated solely for the purpose of determining the registration fee,
in accordance with Rule 457(c), based on the average high and low bid
pries of our Common Stock as reported on the OTC:BB on May 14, 2004.
(2) The shares of Common Stock being registered hereunder on behalf of the
Selling Stockholders relate to (i) 9,146,097 shares of Common Stock;
(ii) 10,022,792 shares issuable upon exercise of Common Stock Purchase
Warrants; (iii) up to 1,000,000 shares issuable upon conversion of a
$250,000 convertible note; or (iv) up to 1,580,400 shares underlying a
placement agent warrant.
(3) Pursuant to Rule 416, there are also being registered such additional
number of shares of Common Stock as may become issuable pursuant to the
anti-dilution provisions of the warrants, convertible note and
placement agent warrants registered herein.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
The information in this Prospectus is not compete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This Prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy those securities in
any state where the offer or sale is prohibited.
Subject to Completion, Dated June __, 2004
PROSPECTUS
21,749,289 Shares of Common Stock
EAUTOCLAIMS.COM, INC.
We are registering for resale an aggregate of 21,749,289 shares of Common
Stock of eAutoclaims.com, Inc. (the "Company", "us" or "we") that have been
issued or may be issued to certain of our stockholders named in this Prospectus
and their transferees ("Selling Stockholders").
We will not receive any proceeds from the sale of the shares, but we may
receive proceeds from the Selling Stockholders if they exercise their warrants.
Our Common Stock is quoted on the OTCBB under the symbol "EACC". On May 14,
2004, the closing sales price of our Common Stock, as reported on the OTCBB was
$0.30 per share.
The shares of Common Stock may be sold from time to time by the Selling
Stockholders in one or more transactions at fixed prices, at market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices. The Selling Stockholders and any broker-dealer who may
participate in the sale of the shares may use this Prospectus. See "Plan of
Distribution."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is June __, 2004
3
TABLE OF CONTENTS
Prospectus Summary 5
Risk Factors 6
Special Note regarding Forward-Looking Statements 15
Use of Proceeds 16
Selling Stockholders 17
Plan of Distribution 20
Market Price of Common Stock 22
Dividend Policy 23
Selected Financial Information and Other Data 24
Management's Discussion and Analysis of Financial Condition and
Results of Operations 27
-
Business 40
Management 51
Executive Compensation 55
Certain Transactions 63
Principal Stockholders 64
Description of Securities 66
Shares Eligible for Future Sale 69
Legal Matters 70
Experts 71
Where You Can Find Additional Information 72
Index to Consolidated Financial Statements F-1
Part II. Information Not Required In Prospectus 73
4
PROSPECTUS SUMMARY
This Summary highlights information contained elsewhere in this Prospectus.
It does not contain all of the information that you should consider before
investing in our Common Stock. We encourage you to read the entire Prospectus
carefully, including the section entitled "Risk Factors" and the financial
statements and the notes to those financial statements.
COMPANY OVERVIEW
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.
In March 2004, we entered into an Agreement with ADP Claims Service Group
("ADP"), pursuant to which ADP will jointly offer an ADP managed repair service
solution utilizing the eAuto online claims processing system and network of
repair facilities. Although there is no assurance, we believe that this
Agreement with ADP will substantially increase the volume of claims processed by
eAuto resulting in significant long-term benefit to eAuto and its shareholders.
However, there are significant risks associated with our Agreement with ADP and
there is no assurance that a national rollout of this program will occur or that
we will be able to otherwise meet our obligations and duties under the ADP
Agreement.
THE OFFERING
Common Stock offered by the
Selling Stockholders 21,749,289
Common Stock Outstanding
Prior to the Offering (1) 24,339,476
Common Stock Outstanding
after the Offering(2) 46,088,765
Use of Proceeds We will not receive any
proceeds from the sale of
Common Stock by the
Selling Stockholders.
(1) Based on the number of shares outstanding currently issuable as of
April 30, 2004. Excludes: (i) 6,865,032 shares currently issuable
pursuant to outstanding options issued under Stock Option Plan; (ii)
21,749,289 shares being registered hereunder (including 9,146,097 of
shares issued under the private placement being registered), which
include shares issuable upon conversion of a convertible note and
exercise of common stock purchase warrants; (iii) 503,165 shares
issuable upon exercise of other outstanding warrants; and (iv) shares
of our Common Stock issuable upon conversion of our Series A Preferred
Stock and outstanding convertible notes.
(2) Assumes the issuance of 21,749,289 shares of our Common Stock, which
are being registered in this registration statement including shares
that are issuable upon exercise of outstanding warrants or conversion
of convertible notes held by the Selling Stockholders.
5
RISK FACTORS
You should carefully consider the following factors and other
information in this Prospectus before deciding to purchase our Common Stock.
Risks Related to Our Business
Our limited operating history makes evaluating our business and prospects
difficult.
We have only been involved in the Internet based automobile collision
insurance claims business since January 2000. Our limited operating history in
this industry makes an evaluation of our future prospects very difficult. If we
do achieve profitability in any period, 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.
Our largest customer recently sold half of its U.S. based auto physical damage
business.
Our largest customer sold half of its U.S. based auto physical damage
business. This customer accounted for 58% of our revenue for year ended July 31,
2003. We believe that there will be a lag period of between 6 to 12 months when
we begin processing a sufficient number of claims under our ADP contract to fill
the void created by the loss of this business. The loss of this customer's
business combined with the increase expenditures required to roll out the ADP
contract and the time lag involved before we begin recognizing significant
6
revenues under the ADP contract will result in us incurring losses for the
remainder of fiscal 2004 and the first part of fiscal 2005.
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. During the six months ended January 31, 2004 we derived 54% and
14% from the same two customers. We have recently received information that the
largest customer has sold one-half of their U.S. auto physical damage business.
There is no assurance that the Company will continue to process the claims from
the portion of the business that has been sold. Because of the competitive
nature of our business and the uncertainty of bringing on enough new 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.
Our recent agreement with ADP Claims Services Group may not be profitable for
us.
We may not be successful in commercially exploiting the ADP Agreement.
The ADP Agreement anticipates that we will substantially increase the volume of
claims that we are currently processing. Our current infrastructure is not
capable of processing the anticipated number of claims. We are in the process of
improving our technological infrastructure by acquiring the equipment and
resources necessary to increase the volume of claims we anticipate handling with
ADP. There is no assurance we will be able to substantially increase our claims
processing capacity in such a short period of time. Although we have achieved
certain milestones and met certain conditions for the continuation of this
agreement, we are still in the Phase I Marketing Program. We will not be in a
position to institute a national rollout of this product and program until we
complete the Phase I Marketing Program. There is no requirement that ADP refer a
minimum number of claims to us under the Agreement. There is no assurance we
will achieve the anticipated revenues, gross margins or profits anticipated
under this Agreement. ADP has the ability to cancel this Agreement, which would
adversely affect our business prospects. Our Agreement with ADP will result in a
different revenue recognition model for claims processed through the ADP system.
Because ADP is the obligor to make the payments directly to the repair shops we
will only recognize our portion of the net revenues from sales under this
agreement. Thus, our revenue will not grow as significantly as in the past, if
and when we generate more business with ADP. However, our margins would grow
significantly if and when we generate more business with ADP.
Potential non-cash charges to operations may result from the Private Placement
In accordance with Emerging Issues Task Force Issue 00-19 ("EITF
00-19"), "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", we will initially account for
the fair value of the warrants issued in private placement as a liability until
a registration statement for the resale of the underlying shares of common stock
to be issued upon the conversion of the preferred stock and the exercise of the
warrants is declared effective. In addition, changes in the market value of our
common stock from the closing date through the effective date of the
registration statement, will result in non-cash charges or credits to operations
to reflect the change in fair value of the warrants during this period. At the
effective date of the registration statement, the fair value of the warrants
will be reclassified to equity and, accordingly, the net effect of the
application of the EITF would not be expected to have a material impact on our
financial position and our business. However, in the interim, the effect of the
EITF will be to record an initial liability and then to record non-cash charges
or credits to our operating results to reflect the change in the fair value.
Accordingly, the accounting treatment may have a negative impact on the way we
are perceived by investors and by potential customers and partners. Further, it
may have an adverse effect on our stock price and business prospects.
7
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 three other companies that offer
internet-based services similar to ours. These competitors provide their
services primarily to the fleet management industry. We are aware of one
competitor that offers repair shop connectivity with the claims review and
volume discount we offer. 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
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
8
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 become
and 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 2,500 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. We are dependent upon our ability to
enter into agreements with collision repair shops, glass shops and other
providers of services who provide quality service at the negotiated prices.
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
9
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, EJuster Suite, 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.
10
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
11
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.
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 likely to be highly 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.
12
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,
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.
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.
13
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.
14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Any statements about our expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and may be forward-looking. These statements are often, but not
always, made through the use of words or phrases such as "anticipate,"
"estimate," "plans," "projects," "continuing," "ongoing," "expects," "management
believes," "we believe," "we intend" and similar words or phrases. Accordingly,
these statements involve estimates, assumptions and uncertainties, which could
cause actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to the
"Risk Factors" contained on pages 6 through 13 of this Prospectus.
Because the factors discussed in this Prospectus could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by us or on behalf of our company, you should not place undue
reliance on any such forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which it is made, and we undertake no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
15
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares by the Selling
Stockholders. We may receive proceeds if warrants are exercised by Selling
Stockholders. These proceeds, if any, will be used for working capital purposes
or any other purpose approved by the Board of Directors.
16
SELLING STOCKHOLDERS
The following table sets forth information as of May 31, 2004 with
respect to the beneficial ownership of our Common Stock both before and
immediately following the offering by each of the Selling Stockholders.
Calculation of the percent of outstanding shares owned is based on shares
of our Common Stock issued and outstanding as of May 31, 2004. Beneficial
ownership is determined in accordance with Rule 13d-3 promulgated by the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. Except as indicated in the footnotes to the
table, we believe each holder possesses sole voting and investment power with
respect to all of the shares of Common Stock owned by that holder, subject to
community property laws where applicable. In computing the number of shares
beneficially owned by a holder and the percentage ownership of that holder,
shares of Common Stock underlying options, warrants, debentures, notes or
preferred stock by that holder that are currently exercisable or convertible or
are exercisable or convertible within 60 days after the date of the table are
deemed outstanding. Those shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person or group.
------------------------------------------------------------------------------------------------------------------------
Common Shares Common Shares Common Shares
Owned Before the Offered in the Owned After
Offering Offering Offering
---------------------------------- ---------------------------- --------------------------- ----------------------------
Name of Stockholder Number Percentage(9) Number Percentage(9) Number Percentage(9)
------------------- ---------- -------------- ----------- ------------- ---------- -------------
John J. Phillips (1) 142,858 * 142,858 * 0 *
Vincent A. Stona (1) 142,858 * 142,858 * 0 *
Graham Partners (1) 1,428,572 4.4% 1,428,572 4.4% 0 *
Radcliff Investment Partners (1) 350,000 1.1% 350,000 1.1% 0 *
Noble Special Situation Fund (1) 1,078,572 3.3% 1,078,572 3.3% 0 *
C.S.L. Associates, L.P. (1) 1,071,428 3.3% 1,071,428 3.3% 0 *
Mosaic Partners Fund (1) 357,142 1.1% 357,142 1.1% 0 *
J. Wild Fund, LP (1) 178,572 * 178,572 * 0 *
Engin Yesil (1) 357,142 1.1% 357,142 1.1% 0 *
MTB Investment Partners, LP (1) 714,286 2.2% 714,286 2.2% 0 *
Credit Agricole Indosuez (1) 1,786,000 5.5% 1,786,000 5.5% 0 *
KJS Investments Corp (1) 1,055,519 3.3% 927,383 2.8% 128,136 *
Entrade, Inc. (1) (3) 2,387,108 7.4% 1,071,428 3.3% 1,315,680 4.1%
BDC, LLC (1) 80,000 * 80,000 * 0 *
Douglas F. Gass (1) 214,286 * 214,286 * 0 *
Dori Rath (1) 500,000 1.5% 500,000 1.6% 0 *
Michael P. McDonough Trust (1) 200,000 * 200,000 * 0 *
David Lucas McDonough (1) 300,000 * 300,000 * 0 *
Kinderhook Partners, LP (1) 5,192,858 16.1% 5,192,858 16.1% 0 *
Vinodray R. Shah MD 401K Plan 164,286 * 164,286 * *
U/A DTD 01/01/1994 (1)
Christopher Korge (4) 3,902,042 12.1% 3,000,000 9.3% 902,042 2.8%
Mark Pyms (5) 322,365 * 150,000 * 172,365 *
Governors Road, LLC (2) 541,220 1.7% 541,220 1.7% 0 *
Jeffrey Powers (6) 300,000 * 150,000 * 150,000 *
Carlton Dodge (6) 100,000 * 50,000 * 50,000 *
Irving Liss (6) 40,000 * 20,000 * 20,000 *
Noble International Investments, 1,580,400 4.9% 1,580,400 4.9% 0 *
Inc. (7)
--------------
* Less than 1%.
(1) Listed shares represent an equal number of common shares owned by the
Selling Stockholders and shares issuable upon exercise of the warrants
acquired by the Selling Stockholders in connection with our Unit
private offering as described below.
(2) Common Shares offered in this offering represents the Purchaser
Warrants and Agent Warrants issued to Governor's Road, LLC in
connection with the private placement of our Series A Preferred Stock.
Excludes shares of our Common Stock underlying the conversion
provisions of our Series A Preferred Stock owned by Governor's Road,
LLC. See "Principal Stockholders - Footnote (16)" and "Description of
Securities - Preferred Stock and Related Warrants".
(3) Entrade, Inc. also owns 1,315,680 shares of our Common Stock, which
were acquired in October 2001, which are not being registered in this
offering. See "Principal Stockholders - Footnote (14)".
17
(4) Mr. Korge is a director. The securities being registered on his behalf
consist of (i) up to 1,000,000 of our Common Stock underlying his
$250,000 convertible note, and (ii) up to 2,000,000 shares of our
Common Stock, which may be issuable upon exercise of Common Stock
Purchase Warrants. See "Principal Stockholders - Footnote (9)" for
detail of his other securities, which are not being registered in this
offering.
(5) Mr. Pyms is the brother-in-law of Mr. Seidel, our CEO. These securities
represent shares underlying Common Stock Purchase Warrants issued to
Mr. Pyms in connection with his purchase of convertible debentures in
2001. These warrants have an exercise price of $.63. See "Certain
Transactions."
(6) Represents shares underlying common stock purchase warrants exercisable
at $.75 which were required in June, 2002 in connection with a private
placement of shares and warrants. We granted these Selling Stockholders
piggyback registration rights.
(7) Noble International Investments, Inc. ("Noble") acted as our placement
agent in our recent Unit private placement offering, as described below
under the caption "Circumstances Under Which Selling Stockholders
Acquire Securities". In connection with this Unit private offering, we
agreed to issue Noble a "cashless exercise" warrant to purchase a
number of Units equal to 15% of the total Units sold by Noble in this
offering at an exercise price equal to the offering price per Unit
($.28) paid by the investors. These warrants have a three (3) year term
and the same anti-dilution protection as the warrants in the offering.
The shares comprising the Units and the shares underlying the warrants
as part of the Units are being registered hereunder.
(8) Because the Selling Stockholders may sell all or some portion of the
shares of Common Stock beneficially owned by them, only an estimate
(assuming the Selling Stockholders sell all of the shares offered
hereby) can be given as to the number of shares of Common Stock that
will be beneficially owned by the Selling Stockholders after this
offering. In addition, any selling stockholder may have sold,
transferred or otherwise disposed or, or may sell, transfer or
otherwise dispose of, at any time or from time to time since the dates
on which they provided the information regarding the shares
beneficially owned by them, all or a portion of the shares beneficially
owned by them in transactions exempt from the registration requirements
of the Securities Act of 1933.
(9) Excludes: (i) 6,865,032 shares currently issuable pursuant to
outstanding options issued under Stock Option Plan; (ii) 503,165
shares issuable upon exercise of other outstanding warrants; and (iii)
shares of our Common Stock issuable upon conversion of our Series A
Preferred Stock and outstanding convertible notes.
CIRCUMSTANCES UNDER WHICH SELLING STOCKHOLDERS ACQUIRED SECURITIES
Set forth below is a summary of the circumstances that led to the
issuance to the listed Selling Stockholders of shares of our Common Stock and
the securities, which are exercisable into shares of our Common Stock.
During March through May, 2004 we sold a total of 8,111,572 Units at an
offering price of $.28 per Unit generating gross proceeds of $2,271,240. We
netted $2,059,311 after payment of placement agent fees and expenses. Each Unit
consists of one (1) share of Common Stock and one Common Stock purchase warrant
exercisable at $.35 per share, subject to adjustment. The warrants are not
callable during their first year. After the first year, we have the right to
call the warrants for nominal consideration at the average closing per share for
any 20 consecutive trading days exceeds the warrant exercise price by $.50 or
more. The warrants contain "full ratchet" anti-dilution protection to avoid
dilution of the equity interest represented by the underlying shares upon the
occurrence of certain events, such as share dividends or stock splits or the
issuance of equity securities with an issuance, conversion or exercise price
less than $.35. The warrant holders are entitled to demand registration rights
for a two (2) year period.
We are subject to liquidated damages for failure to file a registration
statement on a timely basis equal to 10% of the number of Units purchased if we
fail to file a registration statement before May 24, 2004. In addition, we are
subject to liquidated damages equal to 10% of the number of Units purchased for
failure to have this registration statement declared effective for each month
which exceeds 120 days from April 23, 2004.
The holders of these Units are entitled to additional adjustment if we
fail to process a sufficient number of claims with ADP by March 1, 2005 and
August 1, 2005. We have targeted 9,000 ADP claims as of March 1, 2005 and 25,000
ADP claims as of August 1, 2005. If we fail to process 66-2/3% of the targeted
18
number of claims (i.e. 6,000 claims as of March 1, 2005 or 16,500 claims of
August 1, 2005), then we are required to increase the number of Units by 50%. If
we achieve the floor number of claims (i.e. 66-2/3%, but not the targeted number
of cumulative ADP claims), then the number of Units are adjusted on a pro rata
basis equal to the percentage amount of the shortfall.
Christopher Korge, one of our directors, invested $250,000 on April 23,
2004 in exchange for an eight percent (8%) convertible note. This note is
convertible at 70% of the average of the closing bid price of our Common Stock
for the ten (10) trading days immediately proceeding the conversion date. This
note matures on October 14, 2004, unless previously converted into shares of our
Common Stock. This note has a floor value, which guaranties a return of equity
of at least 110% of the principal amount of note so converted. 1,000,000 shares
included in the above table is a good faith estimate of the number of common
shares that we have reserved underlying the conversion right of this note, based
upon the note conversion formula.
In connection with this investment, we also agreed to issue Mr. Korge
warrants to acquire 1,000,000 shares of our Common Stock at an exercise price of
$.20 per share. In addition, we agreed to re-price warrants to acquire up to
1,000,000 shares of Common Stock held by Mr. Korge from an existing exercise
price of $.63 per share to an exercise price equal to $.315, which was 90% of
the closing bid price as of this funding date. We agreed to grant Mr. Korge
registration rights in connection with the shares underlying his note and
warrants. In addition, Mr. Korge is entitled to full ratchet anti-dilution
protection.
In connection with the offering of our Units described above, we paid
Noble International Investments, Inc. ("Noble"), as placement agent, cash
compensation equal to $170,378, $140,378 in commission and $30,000 as a
non-accountable expense allowance. In addition, we issued Noble cashless
exercise warrants to purchase 790,200 Units, which equaled 15% of the total
Units sold by Noble at an exercise price of $.28 per Unit. We agreed to register
the shares comprising the Units, including the shares underlying the warrants as
part of the Units in this registration statement.
We have issued Governor's Road, LLC an aggregate of 541,220 Purchase
Warrants and Agent Warrants in connection with the issuance of our Series A
Preferred Stock. These Warrants have an exercise price of $.70. These Warrants
have expiration dates from August 2005 to May 2006 and may be exercised on a
cashless basis. See "Description of Securities - Preferred Stock and Related
Warrants".
Certain of the other Selling Stockholders were granted piggyback
registration rights in connection with the purchase of their securities. We
granted these Selling Stockholders piggyback registration rights and accordingly
are including the shares underlying their warrants as being registered. See
footnotes (5) and (6) above.
All of the securities identified above are referred to as the
"registrable securities".
19
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, assignees,
transferees, donees and successors-in-interest may, from time to time, sell any
or all of their shares of Common Stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The Selling Stockholders may use any one
or more of the following methods when selling shares:
o on the OTC electronic bulletin board (OTC:BB) or such other market on
which the Common Stock may from time to time be trading;
o in privately-negotiated transactions;
o through the writing of options on the shares;
o short sales; or
o any combination thereof;
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to such prevailing market price;
o at negotiated prices; or
o such other price as the selling stockholders determine from time to time.
The shares may also be sold pursuant to Rule 144. The Selling
Stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The Selling Stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may be compensated with
discounts, concessions or commissions from the Selling Stockholders or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both. The compensation as to a particular
broker-dealer might be greater than customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. The Selling Stockholders may sell shares of Common Stock in
block transactions to market makers or other purchases at a price per share,
which may be below the then market price. The Selling Stockholders cannot assure
that all or any of the shares offered in this prospectus will be issued to, or
sold by, the Selling Stockholders. The Selling Stockholders and any brokers,
dealers or agents, upon effecting the sale of any of the shares offered in this
prospectus, may be deemed "underwriters" as that term is defined under the
Securities Act or the Securities Exchange Act of 1934 (or Exchange Act) or the
rules and regulations under such Acts.
The Selling Stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into. If a Selling
Stockholder enters into such an agreement or agreements, the relevant details
will be set forth in a supplement or revisions to this prospectus.
20
The Selling Stockholders and any other persons participating in the
sale or distribution of shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations under the Exchange Act, including,
without limitation, Regulation M. These provisions may restrict certain
activities of, and limit the timing of purchases and sales of any of the shares
but, the Selling Stockholders or any other such person. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the shares.
21
MARKET PRICES OF COMMON STOCK
Our Common Stock currently trades on the OTCBB under the symbol "EEAC."
Set forth below is the range of high and low information for our Common Stock as
traded on the OTCBB for fiscal 2002, 2003 and the six months ended April 30,
2004. This information regarding trading on OTCBB represents prices between
dealers and does not reflect retail mark-up or markdown or commissions, and may
not necessarily represent actual market transactions.
High Bid Low Bid
-------- -------
Fiscal Year Ended July 31, 2001
Fourth Quarter (May 1, 2001 to July 31, 2001) 2.80 1.14
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
Fiscal Year Ended July 31, 2004
First Quarter (August 1, 2003 to October 31, 2003) 0.43 0.27
Second Quarter (November 1, 2003 to January 31, 2004) 0.34 0.21
Third Quarter (February 1, 2004 to April 30, 2004) 0.53 0.33
As of May 14, 2004, our closing bid price was 0.30 per share. As of
April 30, 2004, there were approximately 1,600 shareholders of our outstanding
Common Stock.
22
DIVIDEND POLICY
We do not anticipate the declaration or payment of any dividends in the
foreseeable future. We have never declared or paid cash dividends on our Common
Stock and our Board of Directors intends to continue its policy for the
foreseeable future. Holders of our Series A Preferred Stock are entitled to
annual dividends of 8% and to participate in dividends, if any, declared on our
Common Stock. Also, we will consider our earnings, financial condition,
contractual restrictions and other factors in deciding whether to issue
dividends in the future.
23
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The selected financial information set forth below is derived from, and
should be read in conjunction with, the more detailed financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. See
"Consolidated Financial Statements."
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
SUMMARY FINANCIAL DATA
Period from
Six Months Ended Year Ended July 31, December 7, 1999
----------------------------------- ---------------------------------------- (inception) to
January 31, 2004 January 31, 2003 2003 2002 2001 July 31, 2000
---------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Total revenue $16,199,869 $15,999,399 $34,061,072 $32,283,363 $20,188,249 $1,751,710
---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 13,313,062 13,383,555 28,323,741 27,293,568 16,842,287 1,471,509
Selling, general and administrative 2,834,958 3,785,939 6,418,911 8,114,580 10,479,232 3,293,208
Depreciation and amortization 265,772 244,415 490,935 530,618 504,656 62,750
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 11,738 555,551
---------------------------------------------------------------------------------------------------------------------------------
Total expenses 16,413,792 17,413,909 35,245,325 36,494,317 27,826,175 4,827,467
---------------------------------------------------------------------------------------------------------------------------------
Net loss $(213,923) $(1,414,510) $(1,184,253) $(4,210,954) $(7,637,926) $(3,075,757)
Adjustment to net loss to compute loss per
common share:
Preferred stock dividends and
Deduction relating to Series A
Convertible Preferred Stock (49,806) (52,180) (101,296) (570,997) (4,611,804)
---------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(263,729) $(1,466,690) $(1,285,549) $(4,781,951) $(12,249,730) $(3,075,757)
=================================================================================================================================
Loss per common share - basic and
diluted $(0.01) $(0.08) $(0.06) $(0.32) $(1.09) $(0.29)
=================================================================================================================================
Weighted-average number of common
shares outstanding-basic and diluted 23,513,950 19,172,565 20,209,634 14,813,549 11,252,514 10,591,146
=================================================================================================================================
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
BALANCE SHEET DATA
January 31, 2004 July 31, 2003 July 31, 2002 July 31, 2001 July 31, 2000
---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Cash 201,941 226,161 44,655 485,092 239,979
Working capital (deficit) (4,933,591) (4,992,541) (4,483,740) (1,484,725) (1,613,552)
Total assets 3,701,490 3,757,512 3,403,826 4,197,677 2,914,584
Long-term capital lease obligations 67,988 86,325
Total stockholders equity (deficiency) (2,935,578) (2,910,932) (2,365,818) 737,905 151,319
24
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
QUARTERLY RESULTS OF OPERATIONS
---------------------------------------------------------------------------------------
Three Months Ended January 31, 2004 October 31, 2003
---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Total revenue $7,509,359 $8,690,510
--------------------------------------------------------------------------------------
Expenses:
Claims processing charges 6,190,356 7,122,706
Selling, general and administrative 1,407,418 1,427,540
Depreciation and amortization 135,750 130,022
--------------------------------------------------------------------------------------
Total expenses 7,733,524 8,680,268
--------------------------------------------------------------------------------------
Net income (loss) $(224,165) $10,242
======================================================================================
Adjustment to net income (loss) to compute
loss per common share:
Preferred stock dividends (24,903) (24,903)
--------------------------------------------------------------------------------------
Net loss applicable to common stock $(249,068) $(14,661)
======================================================================================
Loss per common share - basic and diluted $(0.01) $(0.00)
======================================================================================
Weighted-average number of common
shares outstanding - basic and diluted 23,569,733 23,458,463
======================================================================================
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
QUARTERLY RESULTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, 2003 April 30, 2003 January 31, 2003 October 31, 2002
-----------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Total revenue $8,673,501 $9,388,172 $7,834,573 $8,164,826
-----------------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 7,127,041 7,813,145 6,527,086 6,856,469
Selling, general and administrative 1,364,177 1,268,795 1,719,424 2,066,515
Depreciation and amortization 123,919 122,601 125,721 118,694
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 11,738
-----------------------------------------------------------------------------------------------------------------------------
Total expenses 8,626,875 9,204,541 8,372,231 9,041,678
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 46,626 $ 183,631 $ (537,658) $ (876,852)
=============================================================================================================================
Adjustment to net income (loss) to compute
income (loss) per common share:
Preferred stock dividends (24,904) (24,212) (25,847) (26,333)
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 21,722 $ 159,419 $ (563,505) $ (903,185)
=============================================================================================================================
Income (loss) per common share -
Basic & dilutive $ - $ 0.01 $ (0.03) $ (0.05)
=============================================================================================================================
Weighted-average number of common
shares outstanding
Basic 22,592,685 20,651,859 19,562,796 18,782,334
Diluted 22,022,522 19,562,796 18,782,334
=============================================================================================================================
25
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
QUARTERLY RESULTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, 2002 April 30, 2002 January 31, 2002 October 31, 2001
-----------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Total revenue $8,061,882 $8,049,466 $8,481,094 $7,690,921
-----------------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 6,786,140 6,814,781 7,198,805 6,493,842
Selling, general and administrative 2,607,751 1,965,496 1,672,842 1,868,491
Depreciation and amortization 156,242 145,096 117,915 111,365
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 555,551
-----------------------------------------------------------------------------------------------------------------------------
Total expenses 9,550,133 8,925,373 8,989,562 9,029,249
Net loss $(1,488,251) $(875,907) $(508,468) $(1,338,328)
=============================================================================================================================
Adjustment to net loss to compute loss
per common share:
Preferred stock dividends and
Deduction relating to Series A
Convertible Preferred Stock (27,020) (37,686) (45,862) (460,429)
-----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(1,515,271) $(913,593) $(554,330) $(1,798,757)
=============================================================================================================================
Loss per common share - basic and
diluted $(0.08) $(0.06) $(0.04) $(0.15)
=============================================================================================================================
Weighted-average number of common
shares outstanding
Basic and diluted 18,218,487 15,520,183 13,280,782 12,257,787
=============================================================================================================================
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in conjunction
with our audited financial statements as of July 31, 2003, 2002, 2001 and our
unaudited financial statements as of January 31, 2004 and the notes thereto, all
of which financial statements are included elsewhere in this prospectus. In
addition to historical information, the following discussion and other parts of
this prospectus 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 prospectus.
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
prospectus will prove to be accurate.
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. 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.
MANAGEMENT'S INTERIM OPERATING PLAN
Our previous largest customer, Royal Sun Alliance ("RSA") sold a
substantial part of its U.S. based auto physical damage business. We started to
feel the impact of the reduction of RSA claims processing in January 2004.
27
On the other hand, we are very optimistic about the opportunities presented with
the ADP Agreement. However, we face significant challenges in commercially
maximizing the ADP Agreement. Specifically, there will be a time lag involved
between when we anticipate rolling out the ADP claims based solution on a
national basis which will result in us incurring losses for the remainder of
fiscal 2004 and the first part of fiscal 2005.
In order for us to mitigate the reduction in business caused by the
reduction in RSA business and the time lag before we start processing a
significant number of ADP claims we have adopted a three step approach to
address our short-term working capital and liquidity issues:
o Step One - Reduce Expenses by Approximately $50,000 Per Month.
------------------------------------------------------------------
We recently implemented a series of cost reductions, including a reduction
in the RSA servicing team. We have reduced our staff by eight individuals
that were responsible for processing the RSA business. In addition, our
management team has also agreed to take salary reductions ranging from 5%
to 15%. The senior management team took the highest percentage reductions.
The middle managers received a total of 72,767 stock options with a strike
price of $0.01 as partial compensation for their 5% salary reduction. The
senior management team did not receive stock options for their salary
reductions. We are also implementing reductions in other operational
expenses.
o Step Two - Raise Additional Capital.
------------------------------------
We have netted approximately $2.1 million from the recent offering of our
units consisting of shares of our common stock and warrants to acquire
shares of our common stock which are being registered under this
Prospectus. In addition, one of our Board members, Mr. Korge invested
$250,000 in the form of an 8% convertible note. We were able to use this
capital to retire vendor debt, acquire technological infrastructure
necessary to fulfill our obligations under the ADP Agreement and to
generate sufficient working capital to fund the gap period between the
generation of ADP claims processing and the reduction of RSA claims.
o Step Three - Growth of New Business.
------------------------------------
We believe that the announcement of our ADP Agreement will help E-Auto
obtain other new business. We have recently obtained pilot contracts with
three potential new clients. Management believes that it will be able to
gradually replace over the next 12 months a substantial amount of the lost
RSA claims processing business. We also believe that by raising the
additional capital referred to above, we will have a better opportunity to
secure new clients and customers who will be more comfortable with our
financial position.
RESULTS OF OPERATIONS
For the six and three months ended January 31, 2004 compared to the six and
three-months ended January 31, 2003.
REVENUE
Total revenue for the six-months ended January 31, 2004 was
approximately $16.2 million, which is a 1% increase from approximately $16.0
million of total revenue for the six-months ended January 31, 2003. Total
revenue for the three-months ended January 31, 2004 was approximately $7.5
million. This represents a 4% decrease from approximately $7.8 million of total
revenue for three-months ended January 31, 2003. The change in the six and
three-month total revenue is the net effect of changes in collision repair
revenue, glass repair revenue and fees and other revenue as described below.
Collision repair management revenue decreased 2% and 6% for the six and
three-months ended January 31, 2004 compared to the six and three-months ended
January 31, 2003, respectively. The decrease in collision repair management
revenue is primarily the result of the decrease in claims from our two largest
customers. In October 2003, our largest customer announced that they were
selling half of their auto physical damage insurance book of business to another
insurance carrier. We have started to see a decrease in their business as a
28
result of that announcement. We have experienced approximately a $758,000 or 15%
quarterly decrease in the revenue from that customer between the quarters ended
July 31, 2003 and January 31, 2004. We expect to see the other 35% decrease
begin gradually starting March 2004. The decrease is expected to occur
one-twelfth per month for twelve months until it reaches $1.7 million per
quarter. Management also expects to replace that business over the same time
period. A 12% decrease in revenue from our second largest customer occurred
because of a change in their state's legislation regarding a special type of
insurance policy requiring a direct repair network. The Company doesn't expect
further reduction in revenue resulting from this legislation. Because of the
competitive nature of our business and the uncertainty of bringing 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.
Fees and other revenue increased 13% and decreased 6% for the six and
three-months ended January 31, 2004 compared to the three-months ended January
31, 2003, respectively. The six-month increase is mainly a result of the
increase in the service partner click fees and the sale of estimating software
to the Company's network repair facilities, and to a lesser extent an increase
in file handling fees from customers. The three-month decrease is net effect of
the increase in service partner click fees and a decrease in the sale of
estimating software. Management believes that this decrease in estimating
software sales is temporary.
Glass repair revenues increased 118% and 99% for the six and
three-months ended January 31, 2004 compared to the six and three-months ended
January 31, 2003. This increase is due to sales generated by a new customer. We
negotiated lower pricing from one of our larger glass vendors, which has helped
our competitiveness in this market. The glass repair business complements our
core business and allows our customers to use a single source for all their
repair needs.
During the six and three-months ended January 31, 2004, we derived 54%
and 55% from one customer, respectively, and 14% of our revenues from a second
customer during those same time periods. As described above, our largest
customer sold one-half of their auto physical damage insurance business.
EXPENSES
Claims processing charges include the costs of collision and glass
repairs paid to repair shops within our repair shop network, as well as the cost
of the estimating software sold to the Company's network of shops. Claims
processing charges for the six and three-months ended January 31, 2004 was $13.3
million and $6.2 million. This was 82% of total revenue in both periods,
compared to 84% and 83% for six and three-months ended January 31, 2003.
We are dependent upon our third party collision repair shops for
insurance claims repairs. eAutoclaims currently has approximately 2500
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 number of shops or the quality of service provided by collision
repair shops fall below a satisfactory level leading to poor customer service,
this could have a harmful effect on our business.
Selling, general and administrative (SG&A) expense is mainly comprised
of salaries and benefits, facilities related expenses, telephone charges,
professional fees, advertising costs, and travel expenses. SG&A expenses for the
six and three-months ended January 31, 2004 totaled approximately $2.8 and $1.4
million, respectively. This is compared to approximately $3.8 and $1.7 million
for the six and three-months ended January 31, 2003. The decrease in SG&A
expenses of approximately $951,000 and $312,000 for the six and three-month
periods ended January 31, 2004 is a result of the more efficient use of
resources through technology and the restructuring of the corporate structure.
29
Payroll and benefit related expenses for the six-months ended January
31, 2004 and 2003 totaled approximately $1.9 million and $2.4 million, which is
approximately a 20% decrease. Payroll and benefit related expenses for the
three-months ended January 31, 2004 and 2003 totaled approximately $938,000 and
$1,075,000, which is approximately a 13% decrease. These decreases are the
result of personnel and salary cuts made during the last fiscal year.
SG&A expenses included a $35,000 settlement on a lawsuit with Decision
Support Services (DSS). In April 2003, DSS filed an arbitration demand against
the Company for $2.3 million. While management believed the Company had valid
defenses, it settled the case instead of incurring additional legal fees. The
legal fees charged during the three-month period relating to this arbitration
totaled approximately $25,000 for a total one time charge of approximately
$60,000 during the three-months ended January 31, 2004.
SG&A expenses also include non-cash charges of approximately $146,000
and $84,000 for the six and three-month period ended January 31, 2004,
respectively. These non-cash charges for the six and three-month periods ended
January 31, 2004 include approximately $70,000 and $35,000 of amortization of
debenture discount and approximately $76,000 and $49,000 of common stock issued
to pay fees to directors, respectively. SG&A expenses also include total
non-cash charges for the six and three-month period ended January 31, 2003 of
approximately $149,000 and $30,000. The non-cash charges include common stock
issued to pay for services (legal fees, director fee and investor relation
fees).
Also included in the SG&A is interest expense related to a loan from a
shareholder, capital leases and a convertible note payable. This interest
expense totals approximately $31,000 and $14,000 for the six and three-months
ended January 31, 2004 compared to approximately $21,000 and $12,000 for the six
and three-months ended January 31, 2003. Interest income from cash reserves
totaled approximately $2,000 and $1,000 for the six and three-months ended
January 31, 2004 compared to approximately $10,000 and $1,000 for the six and
three-months ended January 31, 2003, respectively.
DEPRECIATION
Depreciation of property and equipment of approximately $266,000 and
$136,000 was recognized in the six and three-months ended January 31, 2004. This
is compared to approximately $244,000 and $126,000 for the six and three-months
ended January 31, 2003.
NET LOSS
The net loss for the six and three-months ended January 31, 2004
totaled approximately $214,000 and $224,000 compared to a net loss of
approximately $1,415,000 and $538,000 from the six and three-months ended
January 31, 2003, an improvement of approximately $1,201,000 and $314,000,
respectively.
The net loss amounts include non-cash expenses of approximately
$412,000 and $220,000 for the six and three-months ended January 31, 2004,
respectively. The net loss amounts for the six and three-months ended January
31, 2003 include non-cash expenses of approximately $393,000 and $156,000,
respectively.
Net cash income (net of non-cash items) for the six-months ended
January 31, 2004 totaled approximately $198,000 compared to a net cash loss of
approximately $1,021,000 from the six-months ended January 31, 2003, an
improvement of approximately $1,219,000.
The $60,000 paid for the DSS litigation settlement and legal fees
described above caused the Company to have a $4,000 cash loss for the
three-month period ended January 31, 2004. Net cash loss for the three-months
ended January 31, 2003 totaled approximately $382,000, an improvement of
approximately $378,000. The improvement in both the six and three-month periods
is a result of reduced costs and higher margins.
30
FOR THE YEAR ENDED JULY 31, 2003 COMPARED TO THE YEAR ENDED JULY 31, 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.
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 bringing on enough new 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.
31
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
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.
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.
DEPRECIATION
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.
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.
32
FOR THE YEAR ENDED JULY 31, 2002 COMPARED TO THE YEAR ENDED JULY 31, 2001.
REVENUE
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 $12.1 million or 60%
compared to approximately $20.2 million for the year ended July 31, 2001. This
increase is primarily the result of 131% growth in revenues attributed to our
core collision repairs management business. Total revenues are expected to
increase again in fiscal 2003.
The glass revenue decrease by 49% from approximately $1.9 million in
fiscal year ended July 31, 2001 to approximately $1.0 million in fiscal year
ended July 31, 2002. This decrease is a result of the loss of a major customer
due to the maturing and increased competition for the glass repair business. The
customer was offered lower pricing that, at that time, would have reduced
margins below acceptable levels. We have recently negotiated lower pricing from
one of our larger glass vendors, which will help our competitiveness in this
market in the future. 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 $204,000 from approximately $1.3 million
in fiscal 2001 to approximately $1.1 in fiscal 2002. This decrease is a normal
fluctuation in the fleet repair revenue due to the actual accident rate
experienced by our customers for the year.
During the year ended July 31, 2002, we derived 58% and 12% of our
revenues from two customers. We have a five-year contract with the first
customer which ends in April 2006.
EXPENSES
Claims processing charges for the year ended July 31, 2002 were
approximately $27.3 million, or 84.5% of total revenues. This is an increase
from approximately $16.8 million, or 83.4%, of sales in fiscal year ended July
31, 2001. Claims processing charges are primarily the costs of collision repairs
paid by eAutoclaims to its collision repair shop network. This increase in the
percentage of the claims processing charges compared to sales over the same
periods last year was mostly caused by volume discounts extended to our largest
customer. We expect this percentage of claims process charges to revenues to
decrease in the future as the click fee revenue increases as a result of the
eJusterSuiteTM product implementation.
SG&A expenses for the year ended July 31, 2002 were approximately $8.1
million or 25% of revenue compared to approximately $10.5 million or 52% of
revenue for the year ended July 31, 2001. Selling, general and administrative
expenses consisted of non-cash charges of approximately $997,000 for the year
ended July 31, 2002. In the fiscal year ended July 31, 2002 there were non-cash
charges of approximately $161,000 incurred pertaining to consulting agreements
for investor relation services, legal, board and professional consultants. In
the year ended July 31, 2001, non-cash charges included $ 3.3 million for
options to purchase 2.2 million shares of Common Stock to our officers,
directors and employees at $.01 per share. Other non-cash charges of
approximately $396,000 for the issuance of stock to settle penalties for not
registering certain stock and approximately $463,000 incurred pertaining to
consulting agreements for investor relation services, legal, board and
professional consultants. In addition there was approximately $278,000 of
offering costs associated with registration statement that were charged to
earnings when the registration was withdrawn in July 2001. During the year ended
July 31, 2002 and 2001 we incurred payroll related expenses of approximately $
5.1 million and approximately $3.9 million, respectively.
33
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) for the year
ended July 31, 2002. Interest income of approximately $24,000 is included in
selling, general and administrative expenses, net of interest expense of
approximately $20,000 for the year ended July 31, 2001. Interest expense related
primarily to interest on shareholder loans and capital leases and interest
income resulted primarily form interest earned on our cash reserves.
DEPRECIATION
Depreciation and amortization was approximately $1,086,000 and $505,000
for the years ended July 31, 2002 and 2001, respectively. Depreciation of fixed
assets represented approximately $312,000 and $176,000, respectively.
Amortization expense of approximately $218,000 and $234,000 in fiscal year ended
2002 and 2001, respectively reflects the amortization of goodwill of from the
purchase of Premier Express Claims and salvage connection. The remaining
amortization in the fiscal year ended 2002 and 2001 of approximately $556,000
and $95,000, respectively, relates to the warrants and debenture conversion
feature created by the debenture financing in fiscal year 2001. Due to a change
in the accounting standards, no amortization is expected in the year-ended July
31, 2003 from our acquisition of Premier Express Claims or salvage connection,
nor is there any amortization remaining from the debentures issued in fiscal
year ended July 31, 2001.
NET LOSS
We recognized a net loss of approximately $4.2 million and $7.6 million
for the years ended July 31, 2002 and 2001, respectively. This represents a 45%
decrease in the loss between the two years. Net loss before non-cash charges,
which are described above, were approximately $2.1 million and $2.8 million for
the years ended July 31, 2002 and 2001, respectively. We expect our net loss to
narrow and then become profitable as we experience higher revenues that will
increasingly absorb our fixed costs associated with our infrastructure.
FOR THE YEAR ENDED JULY 31, 2001 COMPARED TO THE YEAR ENDED JULY 31, 2000.
The accompanying financial statements reflect the operations of
eAutoclaims.com for the year ended July 31, 2001 and the eight month period from
inception (December 7, 1999) to July 31, 2000. As of May 31, 2000 eAuto merged
into a public entity that had ceased its operations. As a result, the financial
statements for the fiscal year ended July 31, 2000 reflects the historic
operations of eAutoclaims for an eight month period. Comparisons of fiscal years
should consider that operating results for the fiscal year July 31, 2000 are
only for eight months while the fiscal year ended July 31, 2001 are for a full
12 month period.
REVENUE
Total Revenue for the year ended July 31, 2001 was approximately $20.2
million, which consists of approximately $16.2 million in collision repair
management for insurance companies, approximately $1.9 million in auto glass
repairs and approximately $2.1 million in fleet repair management and other
repairs and fees. Revenues increased approximately $18.4 million or 10,525%
compared to approximately $1.8 million for the eight month period ended July 31,
2000. This increase is primarily the result of growth in revenues attributed to
our core collision repairs management business. Revenue is expected to increase
in fiscal 2002. During the year ended July 31, 2001, we derived 64% of our
revenues from one customer. We have terminated the agreement with this customer
for breach of contract. The loss of this customer has been mitigated with the
addition of a larger customer. We have entered into a Claims Management Service
and License Agreement with Royal Indemnity Company, which is ranked in the top
25 automobile property and casualty insurance companies in revenue in the United
States. Currently, this new customer is providing more claims and revenue than
the customer who's contract we have terminated.
34
EXPENSES
Claims processing charges for the year ended July 31, 2001 were
approximately $16.8 million, or 84% of revenues. The collision repair costs
represented 70% of revenue, fleet repair costs represented 6% of revenue, while
glass and other costs represented 9% of revenue during the year. Claims
processing charges are primarily the costs of collision repairs paid by
eAutoclaims to its collision repair shop network. We expect margins on claims
repairs to remain low in the near future as we use favorable pricing as a means
to obtain increased market share. However, we expect our margins as a whole to
increase by supplementing our collision repairs management revenues with new
complimentary higher margin product lines such as the sale of estimating
software to independent adjustors and appraisers and click fees associated with
uploading information from our network. Claims processing charges increased
approximately $15.4 million or 10,446% from approximately $1.5 million in the
eight month period ended July 31, 2000.
SG&A expenses for the year ended July 31, 2001 were approximately
$10.5 million or 52% of revenue compared to approximately $3.3 million or 188%
of revenue for the eight month period ended July 31, 2000. Selling, general and
administrative expenses consisted of non-cash charges of approximately $4.4
million for the year ended July 31, 2001. Non-cash charges included
approximately $3.3 million for options to purchase 2.2 million shares of Common
Stock to our officers, directors and employees at $.01 per share. Other non-cash
charges approximately $396,000 for the issuance of stock to settle penalties for
not registering certain stock and approximately $463,000 incurred pertaining to
consulting agreements for investor relation services, legal, board and
professional consultants. In addition there was approximately $278,000 of
offering costs associated with registration statement that were charged to
earnings when the registration was withdrawn in July 2001. During the year ended
July 31, 2001 we incurred payroll related expenses of approximately $3.9
million.
Interest income of approximately $24,000 is included in selling,
general and administrative expenses, net of interest expense of approximately
$20,000 for the year ended July 31, 2001. Interest expense related primarily to
interest on shareholder loans and capital leases and interest income resulted
primarily form interest earned on our cash reserves.
DEPRECIATION
Depreciation and amortization was approximately $505,000 for the year
ended July 31, 2001. Depreciation of fixed assets represented approximately
$176,000. Amortization expense of approximately $328,000 reflects the
amortization of goodwill associated with our acquisition of Premier Express
Claims and the warrants associated with the debentures.
NET LOSS
We recognized a net loss of approximately $7.6 million for the year
ended July 31, 2001 or 38% of revenues. Net loss before non-cash charges, which
are described above, was approximately $2.8 million or 14% of revenues for the
year ended July 31, 2001. Net loss increased approximately $4.6 million or 148%
from approximately $3.1 million in the eight month period ended July 31, 2000.
We expect our net loss to narrow and then become profitable as we experience
higher revenues that will increasingly absorb our fixed costs associated with
our infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2004, we had approximately $202,000 in cash. This is a
decrease of approximately $24,000 from July 31, 2003. We have a working capital
deficiency of approximately $4.9 million. The primary source of our working
capital during the six and three-month periods ended January 31, 2004, was from
cash provided by operations and the sale of $165,000 of equity securities.
However, there is no assurance that we will be able to continue to provide cash
through operations or the sale of additional securities.
35
In March through May 2004 we raised $2,271,240 from the sale of Units
at $.28 per Unit to nineteen (19) investors. Each Unit consists of one (1) share
of common stock and one (1) common stock purchase warrant exercisable at $.35.
We paid Noble International Investment, Inc. ("Noble") total commissions and
expenses of $170,378 and two other individuals $16,667 as a finder's fee in
connection with the issuance of these securities. We also issued Noble placement
agent warrants to acquire 790,200 Units and issued one of the finders 34,525
shares of our restricted common stock.
In August 2003, the Company raised a total of $165,000 from the sale of
equity securities. The Company paid finder's fees and legal fees of $1,750 for a
net of $163,250. In exchange for these funds the Company issued 591,397 shares
of common stock at $0.279 per share. There were no warrants or other
consideration 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.
With the potential loss of business from our largest customer,
additional financing may be necessary. If revenues grow it will provide it's own
working capital, but because revenue growth is not guaranteed, we have solicited
proposals for additional financing. 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.
We believe that cash generated from operations and additional
financing, if necessary, will be sufficient to meet our working capital
requirements for the next 12 months. 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 January 31, 2004 consist of monthly
operating rental payments, compensation of employees and accounts and notes
payable.
DEBT AND CONTRACTUAL OBLIGATIONS
Our commitments for debt and other contractual arrangements as of July 31, 2003
are summarized as follows:
Years ending July 31,
-------------------------------------------------------
2004 2005 2006 2007 2008 Total
-------------------------------------------------------
Property lease 212,000 219,000 225,000 76,000 732,000
Equipment lease 61,000 46,000 34,000 25,000 4,000 170,000
Loan payable to stockholder 91,000 45,000 136,000
Convertible debenture 300,000 300,000
Employee compensation 595,000 446,000 119,000 1,160,000
-------------------------------------------------------
1,259,000 756,000 378,000 101,000 4,000 2,498,000
=======================================================
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.
36
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.
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.
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. Mr. Seidel took a voluntary pay reduction of 15% of
his pay effective May 1, 2004 until the Company returns to profitability. This
adjustment was reflected in the debts and contractual obligation table above.
In addition, the Company has two-year employment agreements with four other
executives that expire April 30, 2006. 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. These executives also took a pay
reduction of 15% of their $425,000 first year aggregated contracted amount until
the Company returns to profitability. This adjustment was reflected in the debts
and contractual obligation table above.
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.
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
37
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
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.
Our Agreement with ADP will result in a different revenue recognition model
for claims processed through the ADP system. Because ADP is the obligor to make
the payments directly to the repair shops we will only recognize our portion of
the net revenues from sales under this agreement. Thus, our revenue will not
grow as significantly as in the past, if and when we generate more business with
ADP. However, our margins would grow significantly if and when we generate more
business with ADP.
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 and January 31, 2004 the allowance for doubtful
accounts was approximately $242,000 and $204,000, respectively.
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
38
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 and
$6,370,000 at July 31, 2003 and January 31, 2004, respectively. 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 or January 31, 2004.
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.
39
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
2,500 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. During the six months ended January 31, 2004, we derived 54%
and 14% for the same two customers. We have recently received information that
the largest customer has sold one-half of their U.S. auto physical damage
business. There is no assurance that the Company will continue to process the
claims from the portion of the business that has been sold. - Because of the
competitive nature of our business and the uncertainty of bringing on enough new
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.
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 eAutoclaims personnel to audit and
40
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 be 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 and the six months ended January 31, 2004. 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 and
the six months ended January 31, 2004, 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.
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
41
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, managing general
agents (MGAs), third party administrators (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.
42
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 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.
Summary of our Agreement with ADP Claims Solution Group, Inc.
On March 9, 2004, we entered into an agreement (the "ADP Agreement") with
ADP Claims Solution Group, Inc. ("ADP"). We granted ADP the non-transferable,
non-assignable right to market and sell our web-based claims management system
and related services that automates the administration, estimating, auditing,
appraising and management of physical damage repair and claims processing for
vehicles via a network of vendors and partners. Pursuant to the ADP Agreement,
we will customize our products and private label our customized Internet
applications to ADP's specifications for use in the United States and, at the
option of ADP, Canada. There is no minimum sales commitment by ADP under the
agreement.
The ADP Agreement has an initial term of three years. After the initial
term, the agreement automatically continues until terminated by either ADP or us
upon 180 days prior notice to the other party.
For the first 100,000 claims processed by ADP pursuant to the ADP
Agreement, we will be paid 60%, and ADP will retain 40%, of Semiweekly Recurring
Revenues (as defined in the ADP Agreement) received by ADP from its clients.
After claims processed under the ADP Agreement exceed 100,000, we will be paid
50% of such revenues.
ADP's responsibilities under the ADP Agreement include: (i) marketing and
selling, at its discretion, the system; (ii) performing all billing and
collections for its clients; (iii) allowing on-site visits at our option, no
more frequently than once annually, to ADP's places of business upon prior
written notice and during normal business hours and allow us to periodically
examine books and records of ADP insofar as they relate specifically to the ADP
Agreement; (iv) using reasonable efforts to keep us informed as to any material
problems encountered with the our products and any resolutions arrived at for
those problems; (v) establishing sales incentives and commission policies for
its sales personnel; (vi) working with us to develop a mutually acceptable
periodic reporting mechanism; and (vii) providing us, at no cost, ADP products
to assist us in our internal operations.
Our responsibilities under the ADP agreement include: (i) assisting ADP
with development of marketing materials, sales training and ongoing support for
the ADP sales personnel; (ii) performing client implementation, set-up training
and customer support for ADP clients; (iii) performing all product maintenance
support; data center operation; and customer and technical support; as well as
any other function normally performed by eAutoclaims in selling, implementing,
training and supporting our products; (iv) providing ongoing samples of our
product literature and online sales tools for the ADP sales team and to package
the ADP products with the appropriate documentation (including, product
reference guides and instructions); (v) allowing a reasonable number of on-site
audits and visits at ADP's option to our places of business upon reasonable
prior written notice and during normal business hours and allow ADP and/or any
ADP client to periodically examine our business practices, policies and
procedures and make copies of our books and records insofar as they relate to
the ADP Agreement; and (vi) integrate our product in the ADP Managed Network
43
Solution with ADP products and work with ADP to develop, implement and maintain
ADP proprietary software developed by us.
The ADP Agreement provides for a Phase I Marketing Program of approximately
3 to 4 months during which eAutoclaims and ADP will jointly conduct planning,
testing and roll-out process in regions and/or accounts determined by ADP.
During the Phase I Marketing Program, ADP and eAutoclaims will develop system
performance, service and training levels and metrics applicable to our
performance of services under the ADP Agreement. ADP and eAutoclaims have agreed
that, upon the successful completion of the Phase I Marketing Program, as
mutually determined by us and ADP, ADP will begin the National Roll-out. ADP
may, at its discretion, market the products to its existing client base and/or
other ADP clients or potential clients either on a standalone basis or with ADP
products or any other product or service offered by ADP.
We have agreed to provide ADP with a current price list for our products
and to provide at least 60 days prior notice of any changes to our prices. We
have agreed not to enter into an agreement or arrangement with any other sales
representative, joint marketer, reseller or similar company for the purpose of
distributing our products, which agreement or arrangement includes sales
commissions, payment terms and/or pricing discounts that will be greater than
those offered to ADP under the ADP Agreement, unless (i) we also offer such
sales commissions, payment terms and/or pricing discounts to ADP, (ii) the terms
of the agreement with such other company are, in the aggregate, substantially
more favorable to us than the ADP Agreement or (iii) such company takes on
distribution and/or support obligations which, in the aggregate, are materially
greater than ADP's distribution and/or support obligations and the increased
commissions, payment terms and/or customer discounts offered to such company are
reasonable compensation for undertaking such additional obligations, or ADP may
cancel the Agreement.
ADP shall have the right to terminate the ADP Agreement if ADP determines
that our product is non-compliant with any federal, state or local laws, statues
or regulations including, without limitation, claims licensing and handling
regulations. However, both parties have established compliance validity. Both
parties have the right to terminate the agreement upon certain events of
default, including the breach of significant provision of the ADP Agreement or
insolvency of the other party.
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 April 30, 2004, we had four
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.
44
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; 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;
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.
45
Employees
As of April 30, 2004, eAutoclaims, Inc. had 71 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 prospectus.
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.
46
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
47
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 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. 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
48
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.
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.
PROPERTIES
Our corporate headquarters 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.
We believe that the facilities are well maintained, are in substantial
compliance with environmental laws and regulations, and are adequately covered
by insurance. We also believe that these leased facilities are not unique and
could be replaced, if necessary, at the end of the term of the existing lease.
49
LEGAL PROCEEDINGS
We are currently not involved in any legal proceedings which are considered
material.
50
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information with respect to our
executive officers and directors as of May 1, 2004.
Name Age Position
-------------- --- ------------------------
Eric Seidel 40 Chief Executive Officer,
President and Director
Scott Moore 42 Chief Financial Officer
Stacey Adams 32 Sr. VP of Operations
Dave Mattingly 46 Chief Information Officer
Reed Mattingly 34 Executive Vice President
Jeffrey D. Dickson 61 Chairman of the Board of Directors
Christopher Korge 49 Director
Nicholas D. Trbovich, Jr. 44 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.
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
51
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
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. (Servotronics
development subsidiaries), 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). He is founder and owner of Aero, Inc., A
fabrication of hot forged metal products.
52
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.
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.
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"
53
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.
Outside Directors are also compensated with stock options at various times
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 options have
an exercise term of five years and vest after one year. For the six months ended
January 31, 2004 two outside directors were issued 12,500 options each on
October 31, 2003 and January 31, 2004, at an exercise price of $0.35 and $0.32,
respectively. 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 eAutoclaims employees and Board of Directors, including
eAutoclaim'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 available on the Company's website at www.eautoclaims.com.
Information contained on the Company's website is not a part of this prospectus.
54
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.
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.
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.
55
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
56
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 and 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. Mr. Seidel took a 15% pay cut starting April 19, 2004 until the Company
shows a monthly profit of at least $50,000.
Reed Mattingly, Executive Vice President - Sales. We entered into an
employment agreement with Reed Mattingly effective May 1, 2003. The agreement
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 all or part of his
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 and 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. Mr. Mattingly took a 15% pay cut starting April 19, 2004 until
the Company shows a monthly profit of at least $50,000.
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 beginning 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
all or part of his 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 and 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 and 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. Mr. Moore took a 15% pay cut starting April 19, 2004 until the
Company shows a monthly profit of at least $50,000.
David Mattingly, Chief Information Officer. We entered into an
employment agreement with David Mattingly, 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 all or part of his 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 and 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. Mr. Mattingly took a 15% pay
cut starting April 19, 2004 until the Company shows a monthly profit of at least
$50,000.
57
Stacey Adams, Senior Vice President - Operations. We entered into an
employment agreement with Stacey Adams. Ms. Adams, 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 all or part of her 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 and 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. Ms. Adams took a 15% pay
cut starting April 19, 2004 until the Company shows a monthly profit of at least
$50,000.
Change of Control Shares
On March 27, 2003, as part of an 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.
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 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
58
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 operate a successful business. 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.
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
59
granted to board members. During the nine months ended April 30, 2004 the
Company issued 367,500 options to employees in accordance with the 1998 Plan. In
addition 2,020,000 penny options were granted to employees as a performance
bonus in executing the contract with ADP claims services and 72,767 penny
options were issued to middle management personnel as alternative compensation
when salary cuts were announced. The Board members were issued 75,000 options in
accordance with the Board compensation plan and 75,000 options were issued to
the President and CEO in accordance with his compensation agreement.
Except for the penny options, 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 April 30, 2004, we have issued, or reserved for issuance,
10,283,417 shares of our Common Stock relating to outstanding options and
warrants which are categorized as follows:
Options issued to Directors 1,282,500 (1)
Options issued to Chief Executive Officer 1,597,500 (2)
Options issued in connection with acquisition of PEC 130,000 (3)
Options issued to Employees 3,823,603 (4)
Options issued to Consultants 31,429 (5)
Options Outstanding prior to eAutoclaims.com merger 4,000
Warrants relating to debentures 2,150,000 (6)
Warrants relating to private placement 220,000 (7)
Purchaser's Warrants 780,000 (8)
Agent's Warrants 264,385 (9)
----------
Total 10,283,417 (10)
===========
(1) The options issued to our directors have strike prices ranging from $0.01
to $2.00 and are exercisable through April 9, 2011. See "Directors and
Executive Officers-Directors Compensation".
60
(2) Mr. Seidel currently owns the following options with the following terms:
Strike Number Expiration
# of Options Price Vested Date
----------- ------- ------- ---------------
32,500 $2.00 32,500 04/24/05
100,000 $1.22 100,000 12/04/05
40,000 $1.01 40,000 01/10/06
40,000 $2.00 40,000 02/02/06
20,000 $1.26 20,000 03/02/06
50,000 $0.69 50,000 09/18/06
75,000 $0.55 75,000 03/27/07
40,000 $0.15 13,333 12/21/07
50,000 $0.10 25,000 04/07/08
25,000 $0.21 12,500 05/16/08
25,000 $0.39 12,500 06/15/08
25,000 $0.52 12,500 07/25/08
50,000 $0.32 25,000 08/29/08
25,000 $0.35 12,500 11/01/08
1,000,000 $0.01 1,000,000 03/10/14
--------- ----------
1,597,500 1,470,833
========= ==========
During fiscal year ended July 31, 2003, Mr. Seidel exercised 691,504
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. 2,831,176 shares of these options are currently
exercisable. The remaining options vest over a three year term.
(5) 21,429 options were given to a public relations consultant with an exercise
price of $0.49 per share. The other 10,000 options were given to a sales
consultant with an exercise price of $0.01 per share and a term of ten
years.
(6) Represents warrants issued to the agents of the debenture investors,
exercisable at a price range of $0.20 to $0.63 per share, with a term of 5
to 10 years.
(7) Represents warrants issued to purchasers of commons 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, 150,000 are exercisable at $3.00; 465,000 are
exercisable at $0.70; 90,000 exercisable at $3.33; and 75,000 are
exercisable at $2.60. See "Market for Common Equity and Related Stockholder
Matters - Preferred Stock and Related Warrants".
61
(9) Represents warrants issued to Thomson Kernaghan and Greenfield Investments,
as Agents, exercisable at $4.50, except for 76,220 warrants, which are
exercisable at $0.70. See "Market for Common Equity and Related Stockholder
Matters - Preferred Stock and Related Warrants".
(10) Excludes 1,580,400 shares issuable upon conversion of the placement agent
warrants and 10,111,572 issuable upon exercise of common stock purchaser
warrants given to purchaser of units in the March through May 2004 private
placement.
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 April 30, 2004.
(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) 2,870,516 $0.81 780,405
Equity Compensation
Plans Not Approved by
Stockholders (2) (3) 6,994,516 $0.11 N/A
---------
Total 9,865,032 $0.31
=========
__________________________
---------------------------
(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 3,418,385 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.
62
CERTAIN TRANSACTIONS
In connection with 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 has
agreed to provide Mr. Seidel, our Chief Executive Officer, day-to-day advisory
services concerning management, capitalization, corporate structure,
organizational, industrial and regulatory issues. Mr. Dickson is currently the
Chairman of our Board of Directors.
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 was
outstanding under this arrangement, after $30,000 of service credits as
described above. Mr. Dickson spends a substantial amount of his time dealing
with administrative matters, investor relations and public relations, thereby
freeing 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 may 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.
Christopher Korge, one of our directors, purchased $300,000 of convertible
debentures in July, 2001. 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 acquired
1,000,000 shares of our Common Stock and Mr. Seidel's broker-in-law warrants to
acquire 150,000 shares of our Common Stock, both at an exercise price of $0.63
per share. We adjusted the exercise price of Mr. Korge's warrants to $.315 in
connection with Mr. Korge's recent purchase of a $250,000 convertible note.
In connection with the issuance of shares of our Common Stock in August
2003, Mr. Korge acquired 107,527 shares at a fixed price of $.279 per share. In
addition, the broker-in-law of Mr. Seidel, our CEO, acquired 35,842 shares at a
fixed price of $.279.
Mr. Korge also invested $250,000 on April 23, 2004 in exchange for an eight
percent (8%) convertible note. This note is convertible at 70% of the average of
the closing bid price of our Common Stock for the ten (10) trading days
immediately proceeding the conversion date. This note matures on October 14,
2004, unless previously converted into shares of our Common Stock. This note has
a floor value, which guaranties a return of equity of at least 110% of the
principal amount of note so converted. 1,000,000 shares being registered herein
is a good faith estimate of the number of common shares that we have reserved
underlying the conversion right of this note, based upon the note conversion
formulae.
In connection with this investment, we also agreed to issue Mr. Korge
warrants to acquire 1,000,000 shares of our Common Stock at an exercise price of
$.20 per share. In addition, we agreed to re-price warrants to acquire up to
1,000,000 shares of Common Stock held by Mr. Korge from an existing exercise
price of $.63 per share to an exercise price equal to $.315, which was 90% of
the closing bid price as of this funding date. We agreed to grant Mr. Korge
registration rights in connection with the shares underlying his note and
warrants. In addition, Mr. Korge is entitled to full ratchet anti-dilution
protection.
63
PRINCIPAL STOCKHOLDERS
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 April 30, 2004, 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.
Amount and Nature
Name and Address of of Beneficial Percentage
Beneficial Owner (1) Ownership (2)(16)
--------------------------------------------------------------------------------
Eric Seidel (3) 2,555,925 9.90%
Scott Moore (4) 481,417 1,95%
Reed Mattingly (5) 630,164 2.55%
Dave Mattingly (6) 269,537 1.10%
Stacey Adams (7) 221,135 0.90%
Jeffrey D. Dickson (8) 1,153,550 4.56%
Nicholas D. Trbovich, Jr. (9) 309,219 1.26%
Christopher Korge (10) 3,902,042 14.20%
Canadian Advantage Limited
Partnership (11) 2,991,504 12.29%
Advantage (Bermuda) Fund, Ltd. (12) 1,137,330 4.67%
Pintura (13) 1,433,692 5.89%
Entrade, Inc. (14) 1,315,680 5.41%
Directors and officers
as a group (8 persons) (15) 8,522,989 28.11%
(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 April 30, 2004, 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.
(2) Based on 24,339,476 shares of Common Stock outstanding at the close of
business on April 30, 2004. Excludes: (i) 10,283,417 shares currently
issuable pursuant to outstanding options issued under Stock Option Plan;
(ii) 21,749,289shares being registered hereunder, which include shares
issuable upon conversion of a convertible note and exercise of common stock
purchase warrants; (iii) 503,165 shares issuable upon exercise of other
outstanding warrants; and (iv) shares of our Common Stock issuable upon
conversion of our Series A Preferred Stock and outstanding convertible
notes.
(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. He subsequently gave up 104,753
in a divorce. This amount also includes vested options to acquire 1,000,000
Common Shares at an exercise price of $.01 and options to acquire 470,833
Common Shares at exercise prices between $0.10 and $2.00. This amount
excludes options, which are not vested over the next 60 days, to acquire
126,667 Common Shares at an exercise price of between $0.10 to $0.52 ,
which vest through February 1, 2005. See "Executive Compensation -
Employment Contracts and Other Matters".
(4) This amount represents (i) 1,500 common shares acquired in open market
purchase, (ii) options to acquire 150,000 common shares at an exercise
price of $.01, and (iii) vested options to acquire up to 248,667 common
shares at an exercise price between $0.13 and $2.69. This amount excludes
unvested options for 78,333 common shares at exercise prices between $0.13
and $0.69, 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 65,463 shares at an exercise price of
$.01,and (iv) options to acquire 200,000 common shares at an exercise price
of $.01 and (v) options to acquire up to 175,000 shares at exercise prices
between $0.15 to $2.00. This amount excludes unvested options to acquire up
to 45,000 common shares at exercise prices of $0.15 to $0.69, which vest
through December 21, 2005. See "Executive Compensation".
64
(6) Mr. Dave Mattingly's ownership consists of (i) 25,000 of our common shares
issued to him when he exercised his options at $.01 per share, (ii) 1,500
shares that he purchased on the open market, (iii) options to acquire
150,000 common shares at an exercise price of $.01, (iv) options to acquire
up to 103,333 shares at exercise prices between $0.15 and $3.38. This
amount excludes unvested options to acquire up to 36,667 common shares at
exercise prices of $0.15 to $0.69, which vest through December 21, 2005.
See "Executive Compensation".
(7) Ms. Stacey Adams' ownership consists of (i) 5,000 of our common shares
issued to her when she exercised her options at $.01 per share, (ii)
options to acquire 160,802 common shares at an exercise price of $.01,
(iii) options to acquire up to 55,333 shares at exercise prices between
$0.15 and $3.00. This amount excludes unvested options to acquire up to
29,667 common shares at exercise prices of $0.15 to $0.69, which vest
through December 21, 2005. See "Executive Compensation".
(8) 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 75,000
shares at a price between $0.90 and $2.00. See Directors and Executive
Officers - Director Compensation".
(9) Mr. Trbovich, Jr.'s ownership consists of (i) 149,639 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 147,500
shares at exercise prices between $0.13 and $1.91. This amount excludes
unvested options to acquire up to 50,000 common shares at exercise prices
of $0.32 to $0.45, which vest through April 30, 2005. See Directors and
Executive Officers - Director Compensation".
(10) 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) 143,925 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 $0.315 in connection with the
issuance of our convertible debentures in 2001, (vi) warrants to acquire up
to 1,000,000 shares of our Common Stock at a conversion price of $0.20 in
connection with the issuance of our convertible debentures in 2004 (vii)
1,000,000 shares assume to have been converted as a result of the
convertible debentures purchased on 4/23/04, and (viii) options to acquire
147,500 shares at exercise prices between $0.13 and $1.91 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
April 30, 2005. See Directors and Executive Officers - Director
Compensation".
(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.
Excludes warrants to acquire up to 403,165 shares of our Common Stock
issued as Purchaser and Agent Warrants in connection with the issuance of
our Series A. Preferred Stock.
(12) 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.
Excludes warrants to acquire up to 503,165 shares of our Common Stock
issued as Purchaser and Agent Warrants in connection with the issuance of
our Series A Preferred Stock.
(13) Represents shares purchased in a private placement in the fall of 2003.
(14) Represents shares acquired privately in December 2001 as reported on a
Schedule 13G filed on or about December 13, 2001.
(15) Includes outstanding options and warrants to acquire up to 6,983,968 shares
of our Common Stock issued to our officers and directors, which are
currently exercisable.
(16) Excludes warrants to acquire 541,220 shares of our Common Stock issuable as
Purchaser and Agent Warrants 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%.
65
DESCRIPTION OF SECURITIES
We are authorized to issue:
o 50,000,000 shares of Common Stock,
o 5,000,000 shares of Preferred Stock, issuable in series.
As of April 30, 2004, we had approximately 24,339,476 shares of our Common
Stock issued and outstanding (exclusive of 9,146,097 shares issued in the March
through May 2004 private placement) and 224 shares of Class A Preferred Stock
issued and outstanding.
Common Stock
We are authorized to issue up to 50,000,000 shares of our Common Stock, par
value $0.001 per share. The holders of our Common Stock are entitled to one vote
for each share held of record on all matters to be voted on by stockholders.
There is no cumulative voting with respect to the election of directors, with
the result that the holders of more than 50% of the shares voted for the
election of directors can elect all of the directors. The holders of our Common
Stock are entitled to receive dividends when, as and if declared by the Board of
Directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of our Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are validly issued,
fully paid and nonassessable.
Preferred Stock and Related Warrants
Our Board of Directors has the authority, without further action by our
stockholders, to issue up to 5,000,000 shares of our preferred stock, par value
$0.001 per share, in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. 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
66
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.
To date, we have issued 6,768,356 shares of our Common Stock to the holders
of the Series A Preferred Stock in connection with the conversion of 296 shares
of Series A Preferred Stock and the currently outstanding satisfaction of
accrued dividends. We currently have 224 shares of Series A Preferred Stock
outstanding held by Governor's Road, LLC ("Governor's Road"). In October, 2003,
we entered into an agreement with Governor's Road, as the sole holder of our
Series A Preferred Stock, which amended and restated in all respects the prior
agreements entered into by and between us and the holders of the Series A
Preferred Stock. This agreement provides, among other matters, as follows:
o The conversion price of the Series A Preferred Stock shall equal the
greater of $.20 per share or 75% of the average of the closing bid prices for
our Common Stock for the 5 lowest trading days out of the 20 consecutive trading
days immediately preceding the conversion date.
o We have the right to redeem the Series A Preferred Stock, in whole or
in part, at a price equal to 110% of the purchase price per share plus accrued
and unpaid dividends in cash. If we elect to redeem the Series A Preferred
Stock, Governor's Road had the right to convert shares of our Series A Preferred
Stock, providing the conversion of such shares does not result in Governor's
Road owning more than 4.9% of our outstanding shares of our Common Stock, after
taking into account the shares to be issued to Governor's Road upon such
conversion.
o We have the right to optionally redeem outstanding Series A Preferred
Shares on a monthly basis equal to 110% of the original purchase price per share
over a 30 month term, or 8.233 shares of Series A Preferred Stock each month. We
are required to increase this ordinary optional monthly redemption if our net
income exceeds the following thresholds:
(a) net income equal to or greater than $150,000 per month - the monthly
redemption amount is increased by 25%;
(b) net income equal to or greater than $200,000 per month - the monthly
redemption amount is increased by 50%;
(c) net income equal to or greater than $300,000 per month - the monthly
redemption amount is increased by 100%;
(d) net income equal to or greater than $400,000 per month - the monthly
redemption amount is increased by 150%.
If we do not make the ordinary monthly optional redemptions, then
Governor's Road has the right to convert in each 30-day period, beginning in the
first day of each calendar month, at the conversion price then in effect, up to
1/20th (i.e., 5%) of the outstanding preferred shares. In addition, if we fail
to make the ordinary optional redemption, then Governor's Road is entitled to
certain accelerated conversion privileges if our average daily trading volume is
greater than $10,000 and our conversion price exceeds $.75. In such events,
Governor's Road is entitled to increase the number of shares that it may convert
based upon a formula which increases this amount by 50% if the conversion price
is $.75 per share to 300% if the conversion price is at least $1.50 per share,
subject to our securities maintaining an average daily dollar value of at least
$10,000 in the prior calendar month.
The October, 2003 Agreement with Governor's Road amended and superseded in
significant respects the Securities Purchase Agreement entered into in June,
2000. We are no longer subject to the numerous negative covenants contained in
the original Securities Purchase Agreement. The redemption and conversion
features were superseded as described above. The Registration Rights Agreement
was modified so that Governor's Road only has piggyback rights unless it is
otherwise able to sell pursuant to Rule 144(k). In addition, we agreed that the
exercise price of all purchaser warrants and agent warrants, issued to
67
Governor's Road or its affiliate are set of the lower of current existing
exercise prices or $.70 per share.
In the future, 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.
Anti-Takeover Effects of Certain Provisions of Our Articles of Incorporation
and Bylaws
Certain provisions of our certificate of incorporation and bylaws, which
are summarized below, may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including those attempts that might result
in a premium over the market price for the shares held by stockholders.
Special Meeting of Stockholders
Our bylaws provided that special meetings of our stockholders may only be
called by (1) resolution of the Board or the president or (2) the president or
the secretary upon the written request (stating the purpose of the meeting) of a
majority of the directors then in office or the holders of a majority of the
outstanding shares entitled to vote.
Authorized But Unissued Shares
The authorized but unissued shares of Common Stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including public or
private offerings to raise capital, corporate acquisitions and employee benefit
plans. The existence of authorized but unissued shares of Common Stock and
preferred stock could render more difficult or discourage an attempt to obtain
control of us, by means of a proxy contest, tender offer, merger or otherwise.
Limitations on Liability and Indemnification Matters
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 arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling person based
on the foregoing provisions, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and is, therefore, unenforceable.
TRANSFER AGENT
The transfer agent for our Common Stock is Equity Transfer Services, Inc.,
120 Adelaide West, Suite 420, Toronto, Ontario, M5H 4C3.
68
SHARES ELIGIBLE FOR FUTURE SALE
As of April 30, 2004, we have 24,339,476 shares of our Common Stock issued
and outstanding. If all of the 9,146,097 shares being registered in this
Prospectus are issued, we will have 33,485,573 shares issued and outstanding. Of
these shares, all of the 9,146,097 shares registered in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, unless such shares are purchased by "affiliates" as that term is
defined in Rule 144 under the Securities Act of 1933. Shares that cannot be
traded without restriction are referred to as "restricted securities" as that
term is defined in Rule 144 under the Securities Act of 1933. As of April 30,
2004, approximately 21,882,600 shares are eligible for sale under Rule 144.
Restricted securities may be sold in the public market only if registered of if
they qualify for an exemption from registration under Rule 144 of the Securities
Act of 1933.
Rule 144
In general, under Rule 144 as currently in effect, a person (or group of
person whose shares are aggregated), including affiliates of the Company, who
have beneficially owned shares of our Common Stock for at least one year would
be entitled to sell within any three-month period, an amount of restricted
securities that does not exceed the greater of:
o 1% of the number of shares of Common Stock then outstanding
(approximately 243,395 shares as of April 30, 2004; or
o the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the filing of a notice on Form 144 with respect
to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
No prediction can be made as to the effect, if any that market sales of the
Company's Common Stock, or the availability of the Common Stock for sale, will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of a significant number of shares of the Company's Common
Stock in the public market, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock and impair our future
ability to raise capital through an offering of equity securities. See "Risk
Factors - Future sales of our Common Stock may depress our stock price."
69
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon by
Johnson, Pope, Bokor, Ruppel & Burns, LLP, 911 Chestnut Street, Clearwater,
Florida 33756. Michael T. Cronin, a partner in this firm, currently owns 837,013
shares of our Common Stock.
70
EXPERTS
Our financial statements for the years ended July 31, 2003, 2002, and 2001
appearing in this Prospectus and registration statement have been audited by
Goldstein Golub Kessler LLP, as independent registered public accounting firm,
as set forth in their report appearing elsewhere herein, and are included in
reliance upon the report given on the authority of the firm as experts in
accounting and auditing.
71
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 pursuant to the Securities Act of 1933, as amended, with
respect to the offer, issuance and sale of 21,749,289 shares of our Common
Stock. This Prospectus does not contain all of the information set forth in the
registration statement. For further information with respect to us, and the
shares of our Common Stock to be sold in this offering, we make reference to the
registration statement.
You may read and copy all or any portion of the registration statement or
any other information, which we filed at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. The address for the
SEC's public reference room in Washington, D.C. is Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. You can request copies of these documents,
upon payment of a duplicating filing fee, by writing to the SEC. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms. Our SEC filings are also available
to you free or charge at the SEC's web site at http://www.sec.gov.
72
EAUTOCLAIMS.COM INC. & SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS FOR THE YEAR ENDED JULY 31, 2003 Page
-------
Report of Independent Registered Public Accounting Firm F - 2
Consolidated Financial Statements
Balance Sheet at July 31, 2003 F - 3
Statement of Operations for the Years Ended F - 4
July 31, 2003 and 2002
Statement of Stockholders' Equity (Deficiency) F - 5
for the Years Ended July 31, 2003 and 2002
Statement of Cash Flows for the Years Ended F - 6
July 31, 2003 and 2002
Notes to Consolidated Financial Statements F - 7
FINANCIAL STATEMENTS FOR THE YEAR ENDED JULY 31, 2002 F - 20
Report of Independent Registered Public Accounting Firm F - 21
Consolidated Financial Statements
Balance Sheet at July 31, 2002 F - 22
Statement of Operations for the Years Ended F - 23
July 31, 2002 and 2001
Statement of Stockholders' Equity (Deficiency) F - 24
for the Years Ended July 31, 2002 and 2001
Statement of Cash Flows for the Years Ended F - 25
July 31, 2002 and 2001
Notes to Consolidated Financial Statements F - 26
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JANUARY 31, 2004 F - 38
(unaudited)
Consolidated Financial Statements
Balance Sheet at January 31, 2004 F - 39
Statement of Operations for the Six Months F - 40
Ended January 31, 2004 and 2003
Statement of Stockholders' Equity (Deficiency) F - 41
for the Six Months Ended January 31, 2004 and 2003
Statement of Cash Flows for the Six Months Ended F - 42
January 31, 2004 and 2003
Notes to Consolidated Financial Statements F - 43
FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED
JULY 31, 2003, 2002 AND 2001
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule F - 46
Schedule II - Valuation and Qualifying Accounts F - 47
F-1
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003
Report of Independent Registered Public Accounting Firm
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 the standars of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the 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 U.S. generally accepted accounting principles.
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
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2002
F-20
Report of Independent Registered Public Accounting Firm
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, 2002, 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eAutoclaims.com,
Inc. and Subsidiary as of July 31, 2002 and the results of their operations and
their cash flows for each of the two years in the period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ Goldstein Golub Kessler LLP
-------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
September 27, 2002, except for the last two paragraphs of note 9 as to which
the date is November 12, 2002.
F-21
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
July 31, 2002
--------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 44,655
Accounts receivable, less allowance for doubtful accounts
of $400,000 864,352
Due from related parties 143,384
Prepaid expenses and other current assets 233,513
--------------------------------------------------------------------------
Total current assets 1,285,904
Property and Equipment, net of accumulated depreciation
of $543,766 999,149
Goodwill, net of accumulated amortization
of $459,809 1,093,843
Other Assets 24,930
Deferred Income Tax Asset, net of valuation
allowance of $5,649,000 -
--------------------------------------------------------------------------
Total Assets $ 3,403,826
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 5,349,968
Deferred software subscription revenue 284,676
Loans payable - stockholders 135,000
--------------------------------------------------------------------------
Total current liabilities 5,769,644
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value;
authorized 5,000,000 shares,
268 shares issued and outstanding, aggregate
liquidation preference of $1,340,000 1
Common stock - $.001 par value; 50,000,000
shares authorized, 18,390,118 shares
shares issued and outstanding 18,390
Additional paid-in capital 17,723,229
Accumulated deficit (20,107,438)
--------------------------------------------------------------------------
Stockholders' Deficiency (2,365,818)
--------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,403,826
==========================================================================
See Notes to Consolidated Financial Statements
F-22
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended July 31, 2002 2001
----------------------------------------------------------------------------
Revenue:
Collision repairs management $ 28,485,167 $ 16,186,861
Glass repairs 995,972 1,944,721
Fleet repairs management 1,129,784 1,333,452
Fees and other revenue 1,672,440 723,215
----------------------------------------------------------------------------
Total revenue 32,283,363 20,188,249
Expenses:
Claims processing charges 27,293,568 16,842,287
Selling, general and administrative 8,114,580 10,479,232
Depreciation and amortization 530,618 504,656
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 555,551
----------------------------------------------------------------------------
Total expenses 36,494,317 27,826,175
----------------------------------------------------------------------------
Net loss $ (4,210,954) $ (7,637,926)
============================================================================
Adjustment to net loss to compute
loss per common share:
Preferred stock dividends and
Deduction relating to Series A
Convertible Preferred Stock (570,997) (4,611,804)
----------------------------------------------------------------------------
Net loss applicable to common stock $ (4,781,951) $ (12,249,730)
Loss per common share - basic and
diluted $ (0.32) $ (1.09)
============================================================================
Weighted-average number of common
shares outstanding-basic and diluted 14,813,549 11,252,514
============================================================================
See Notes to Consolidated Financial Statements
F-23
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Additional Stockholders'
Preferred Stock Common Stock Paid-in Accumulated Equity
Years ended July 31, 2002 and 2001 Shares Amount Shares Amount Capital Deficit (Deficiency)
------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2000 10,790,367 10,790 3,216,286 (3,075,757) 151,319
Shares of common stock issued
in acquisitions 322,372 322 1,211,678 1,212,000
Issuance of common stock for services 599,138 600 885,912 886,512
Issuance of preferred stock 520 $1 2,265,428 2,265,429
Recognition of beneficial conversion
feature of convertible preferred stock 2,233,600 (2,233,600)
Recognition of beneficial conversion feature of
convertible debentures 389,400 389,400
Proceeds from stock options 750 750
Accrued dividend on preferred stock (134,179) (134,179)
Fair value of warrants issued in
connection with the preferred stock 2,244,025 (2,244,025)
Fair value of warrants issued in
connection with convertible debentures 260,600 260,600
Issuance of compensatory stock options 3,344,000 3,344,000
Net loss (7,637,926) (7,637,926)
------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2001 520 1 11,711,877 11,712 16,051,679 (15,325,487) 737,905
Issuance of common stock 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 of
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)
========================================================================================================================
See Notes to Consolidated Financial Statements
F-24
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 2002 2001
------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (4,210,954) $ (7,637,926)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 530,618 504,656
Write off of computer software 360,000
Amortization of discount on debentures 555,551
Common stock issued for services 161,260 858,724
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 3,344,000
Allowance for doubtful accounts 340,000 148,814
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 4,057 (659,680)
(Increase) in prepaid expenses and other current assets (57,448) (45,007)
(Increase) decrease in other assets (19,930) 6,660
Increase in accounts payable and accrued expenses 2,245,810 2,189,997
Increase in deferred software subscription revenue 173,006 111,670
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 217,349 (1,178,092)
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (765,980) (435,991)
Acquisition of software (360,000)
Payments from related parties 53,469
Loans to related parties (42,000) (90,983)
------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (754,511) (886,974)
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 93,465
Proceeds from issuance of debentures 650,000
Proceeds from exercise of stock options 3,260 750
Net proceeds from issuance of preferred stock 1,765,429
Principal payments on stockholder loans (106,000)
------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 96,725 2,310,179
------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (440,437) 245,113
Cash at beginning of year 485,092 239,979
------------------------------------------------------------------------------------------------------------------
Cash at end of year 44,655 $ 485,092
==================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 19,664
==================================================================================================================
Supplemental schedule of noncash investing and financing activities:
------------------------------------------------------------------------------------------------------------------
Common stock to be issued in conjunction with acquisition of subsidiary $ 12,000
================================================================================================================
Fair value of warrants issued in conjunction with convertible debentures $ 260,600
================================================================================================================
Conversion of debentures to common stock 650,000
================================================================================================================
Issuance of common stock for amount due to shareholders 44,000
================================================================================================================
Issuance of stock for payment of rent and purchase option 49,373
================================================================================================================
Issuance of stock for preferred stock dividends 133,492
================================================================================================================
See Notes to Consolidated Financial Statements
F-25
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.
Deferred software subscription revenue is recorded when estimating software
is sold to a body shop within the Company's repair shop network. The
revenue from the sale is recognized over the one-year term of the contract
on a straight-line basis.
F-26
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, 2002, no such impairment existed.
Goodwill is amortized using the straight-line method over 7 years through
July 31, 2002. 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.
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 July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.'s 141 and 142, "Business Combinations" and "Goodwill and Other
Intangibles". FASB 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. Under FASB
142, goodwill is no longer subject to amortization over its estimated
useful life. Rather, goodwill is subject to at least an annual assessment
for impairment applying a fair-value based test. Additionally, an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or
if the intangible asset can be sold, transferred, licensed, rented, or
exchanged, regardless of the acquirer's intent to do so. Management has not
yet determined the impact the adoption of FASB No. 142 will have on the
Financial Statements.
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.
F-27
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 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. During the fiscal year ended July 31, 2002, three customers or
the underling insurance companies have experienced financial troubles and
consequently a reserve of $400,000 has been established at July 31, 2002.
3. PER SHARE CALCULATIONS:
Basic loss per share is computed as net loss 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. Potential
common shares have not been included in diluted loss per share since the
effect would be anti-dilutive. The calculation of basic and diluted loss
per common share is as follows:
Year ended Year ended
July 31, 2002 July 31, 2001
-------------------------------------------------------------------------
Net Loss $(4,210,954) $(7,637,926)
Less: Preferred stock dividends (162,997) (134,179)
Deduction related to
Series A convertible
Preferred stock (408,000) (4,477,625)
-------------------------------------------------------------------------
Net loss applicable to
Common stock $(4,781,951) $(12,249,730)
=========================================================================
Basic and diluted:
Weighted average number
of common shares
outstanding 14,813,549 11,252,514
Basic and diluted loss
per common share $(0.32) $(1.09)
=========================================================================
F-28
4. PROPERTY AND EQUIPMENT:
At July 31, 2002 property and equipment, at cost, consists of the
following:
Estimated
2002 Useful Life
---------------------------------------------------------------------------
Computer Equipment $ 505,450 3 years
Software 574,043 3 years
Office equipment 141,551 3 years
Leasehold improvements 231,883 Term of Lease
Furniture and fixtures 89,988 10 years
---------------------------------------------------------------------------
1,542,915
Less accumulated depreciation 543,766
---------------------------------------------------------------------------
$ 999,149
===========================================================================
During the year ended July 31, 2002, the Company determined that software
costing $360,000 purchased during the prior fiscal year and never placed in
service had no value.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
At July 31, 2002 accounts payable and accrued expenses consist of the
following:
2002
---------------------------------------------------------------------------
Accounts payable $ 4,674,702
Accrued payroll and vacation wages 233,032
Other accrued liabilities (none in excess of
5% of current liabilities) 442,234
---------------------------------------------------------------------------
$ 5,349,968
===========================================================================
6. LOAN PAYABLE - STOCKHOLDERS:
The Company has two loans outstanding to two stockholders/officers
aggregating $135,000. The loans bear interest at the rate of 12% per annum
and are due on demand. The stockholders/officers have agreed to accept
interest only payments until the loans are paid-off. The fair value of the
loans approximates their carrying amount based on rates available to the
Company for similar loans.
F-29
7. CONVERTIBLE DEBENTURES:
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, 2002 and 2001 $555,551 and $94,449,
respectively, has been charged to operations.
8. COMMITMENT AND CONTINGENCIES:
The Company has a two-year employment agreement with its president and
chief executive officer. This two-year employment agreement effective May
21, 2001 provides for aggregate annual base salary of $200,000 through
December 31, 2001 and $250,000 from January 1, 2002 through May 20, 2003.
The President and Chief Executive Officer is entitled to a special one-time
bonus equal to 15% of his base salary, payable on or before January 15,
2002. He retains his right to bonus compensation as determined by the
Compensation Committee, which at no time may be less than 5% of the
Company's pre-tax profits. He may elect to receive part or his entire
bonus, if any, in shares of the Company's common stock based on 90% of the
then current market price. As of May 20, 2002, the president and chief
executive officer voluntarily reduced his salary by 15% from $250,000 to
$212,500 per year.
In addition, the Company has three-year employment agreements with four
other executives that expire between February 2003 and September 2003. The
agreements provide for aggregate annual base salaries ranging from $465,000
to $500,000 per annum. As of May 20, 2002, these officers accepted a 15%
salary reduction totaling $70,500 per year.
The Company entered into an agreement with several of its top management
personnel to compensate them if there is a change in control of the Company
and they lose their employment with the Company without cause. The
compensation under this agreement ranges from 200% to 299% of their annual
salary, depending on the level of management.
The Company leases office facilities under non-cancelable operating leases
expiring on various dates through 2006. The office facilities leases
contain escalation clauses relating to operating expenses and real estate
taxes. Rent expense under the operating leases for the year ended July 31,
2002 and 2001 totaled approximately $309,000 and $196,000, respectively.
The Company entered into 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 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.
F-30
Approximate minimum future payments under these leases are payable as
follows:
Year ending July 31,
2003 257,000
2004 229,000
2005 219,000
2006 225,000
2007 76,000
------------------------------------------------------------------------
$ 1,006,000
========================================================================
9. 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,
2002, the Company had issued 520 shares of preferred stock, and 268 were
still outstanding.
Also issued in connection with the preferred stock were warrants to
purchase shares of common stock of the Company. During the year ended July
31, 2001, the Company issued 264,385 warrants to the agent, which are
exercisable at a price of $4.50 per share, are exercisable upon issuance,
and expire in five years. During the year ended July 31, 2001, the Company
also issued 780,000 warrants to the purchasers, which are exercisable at
prices between $1.46 and $3.33 per share, are exercisable upon issuance,
and expire in five years. The fair value of $2,244,025 attributable 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 available to common
shareholders.
On the date of issuance, and upon amendment of the conversion terms of the
convertible preferred stock, a beneficial conversion feature of the
convertible stock existed represented by the intrinsic value of that
feature. That amount is calculated as the difference between the conversion
price and the fair value of the common stock into which the preferred stock
is convertible, multiplied by the number of shares into which the preferred
stock is convertible. This amount has been recorded as an increase to
accumulated deficit and an increase in the net loss available to common
shareholders. The aggregate amount attributable to the beneficial
conversion feature on the date of issuance was $1,715,198, and was an
additional $418,402 on the date of amendment of conversion terms.
F-31
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 of $100,000 was recorded during the year
ended July 31, 2001 and $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.
In August 2000, the Company issued 2,372 shares of restricted common stock
on the acquisition of Salvage. These shares were valued at the fair market
value at the date of issuance that totaled $12,000.
During the year ended July 31, 2001, the Company issued shares to three
consultants that provided services to the Company. These consultants
received cash and 93,936 shares of the Company's common stock for these
services. The Company recorded a charge to operations when the services
were performed based on the fair market value of the shares of common stock
on the date in which the services were performed. During the year ended
July 31, 2001, $176,329 was charged to operations as a result of these
agreements.
During the year ended July 31, 2001, the Company issued 150,000 shares of
common stock in exchange for $157,720 of legal services.
During the year ended July 31, 2001, the Company issued 10,702 shares of
common stock to five outside members of the Board of Directors. The Company
charged operations $22,500, which was equal to the fair market value of the
shares when earned.
After renegotiation of a consulting agreement, 200,000 shares of stock that
were issued in fiscal year ended July 31, 2000 were cancelled as the
services were not performed. During April 2001, the Company issued 200,000
shares of common stock to a member of the Company's board of directors who
provided those consulting services. As a result of these transactions the
Company recorded a net charge to operations of $106,000, which was equal to
the difference in the fair market value of the shares at the dates of
original issuance and the subsequent new issuance.
During the year ended July 31, 2001 the Company issued options to employees
and members of the Company's Board of Directors to purchase 1,402,700
shares of common stock. 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.
During April 2001, the Company issued options to purchase 2,200,000 shares
of common stock to officers, directors and employees of the Company at $.01
per share. Accordingly, the Company recorded a charge to operations of
$3,344,000, 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.
F-32
In July 2001, the Company issued 344,500 shares of common stock to an
investor to satisfy their expense (penalty) provisions in a preferred stock
agreement for not registering the shares of common stock underlying the
conversion of the preferred stock. The Company recognized a charge to
operations of $396,175, which was equal to the fair market value of the
shares on the date of issuance.
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 $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, 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 will be charged to operations as the rent
expense is incurred.
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 options to
employees and members of the Company's Board of Directors to purchase
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 468,334
shares of common stock were canceled.
During the year ended July 31, 2002, employees exercised 326,000 options to
purchase shares of the Company's stock.
During the year ended July 31, 2002, the Company issued 35,257 shares of
common stock to four directors in exchange for their services. The Company
charged operations $17,500, which was equal to the fair market value of the
shares when earned.
On February 28, 2002, the Company issued 37,650 shares of common stock to a
company in partial payment of public relations consulting services. During
the year ended July 31, 2002, all of these shares were earned resulting in
a charge to operations of $30,120.
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.
F-33
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 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.
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 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.
On November 12, 2002, the Company received a commitment letter from a
current investor to invest an additional $1,000,000-$2,000,000 into the
Company.
10. 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, 2002 and
July 31, 2001, and changes during the years then ended is presented below:
---------------------------------------------------------------------------
July 31, 2002 July 31, 2001
--------------- ---------------
Weighted- Weighted-
average average
Number of Exercise number of Exercise
shares Price shares Price
---------------------------------------------------------------------------
Balance at beginning of
period 4,261,134 $0.94 719,500 $2.68
Granted 1,798,170 0.51 3,602,700 0.61
Canceled <468,334> 1.76 (61,066) 1.86
Exercised <326,000> 0.01
---------------------------------------------------------------------------
Outstanding at end of period 5,264,970 $0.78 4,261,134 $0.94
===========================================================================
Options exercisable at end
of period 3,293,938 $0.70 3,158,999 $0.70
===========================================================================
Weighted Average fair value of
options granted during the
period $860,239 $ 5,365,333
===========================================================================
F-34
The following table summarizes information about fixed stock options
outstanding at July 31, 2002:
Options Outstanding Options Exercisable
-------------------------------- -----------------------
Weighted-
average Weighted- Weighted-
Remaining average average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------------------------------------------------------------------
$0.01 2,116,670 8.27 $ 0.01 2,116,670 $ .01
$ .36 - $.90 1,485,000 3.86 0.60 112,500 .74
$1.01- $1.91 798,200 3.49 1.31 426,065 1.39
$2.00- $5.06 865,100 2.73 2.48 638,703 2.50
---------------------------------------------------------------------------
$0.01 - $5.06 5,264,970 $ .78 3,293,938 $ .70
===========================================================================
The Company has elected to apply APB Opinion No. 25 and related
interpretations in accounting for its stock options and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation. If the Company
had elected to recognize compensation cost based on the fair value of the
options granted at the grant date as prescribed by SFAS No. 123, the
Company's net loss per common share for the year ended July 31, 2002 and
2001 would have been as follows:
Year Ended Year Ended
July 31, 2002 July 31, 2001
---------------------------------------------------------------------------
Net loss applicable to common stock:
As reported $(4,781,951) $(12,249,730)
===========================================================================
Pro forma $(5,733,634) $(13,506,636)
===========================================================================
Loss per common share - basic and diluted:
As reported $ (.32) $ (1.09)
==========================================================================
Pro forma $ (.39) $ (1.20)
==========================================================================
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, 2002 and 2001. 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.
F-35
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 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.
11. INCOME TAXES:
As of July 31, 2002, the Company had deferred tax assets of approximately
$5,649,000 resulting from temporary differences and net operating loss
carry-forwards of approximately $10,452,000 which are available to offset
future taxable income, if any, through 2022. 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 carryforwards and the
valuation allowance that give rise to deferred income tax assets were as
follows:
July 31,
2002
------------------------------------------------------------------
Temporary differences:
Allowance for doubtful accounts 160,000
Accrued vacation 32,000
Fair value of warrants 104,000
Compensation not currently deductible 1,172,000
Net operating losses 4,181,000
Less valuation allowance <5,649,000>
------------------------------------------------------------------
Deferred tax assets $ - 0 -
==================================================================
The reconciliation of the effective income tax
rate to the federal statutory rate for the years
ended July 31, 2002 and 2001 is as follows:
Federal income tax rate (34.0)%
Change in valuation allowance on net
operating carryforwards 34.0
------------------------------------------------------------------
Effective income tax rate 0.0%
==================================================================
F-36
12. MAJOR CUSTOMERS:
During the years ended July 31, 2002 and 2001 one customer accounted for
58% and 64% of total revenue, respectively. During the year ended July 31,
2002 a second customer accounted for 12% of total revenue.
13. RELATED PARTY TRANSACTIONS
During the year ended July 31, 2001 the Company shared an operating
facility and certain personnel with a corporation whose chairman is also
the chairman of the board of the Company. The Company also paid certain
expenses on behalf of this corporation. Amounts allocated and paid on
behalf of this corporation amounted to $118,814 for the year ended July 31,
2001. These amounts were based on the amount of space and personnel time
devoted to this corporation plus the actual expenses paid on behalf of this
corporation. In the fiscal year ended July 31, 2001, $118,814 was charged
to operations because the other company is in financial trouble and
collection of these funds is considered unlikely.
Also, the chairman of the board of the Company is entitled to a
non-interest bearing line of credit. At July 31, 2002, $107,794 has been
advanced under the line of credit and is included in due from related
parties on the accompanying balance sheet.
In June and July of 2001, the Company advanced the President/CEO and a
board member $50,000 and $30,000, respectively. The $50,000 advanced to the
President/CEO was repaid during the year ended July 31, 2002. The $30,000
advanced to the board member is outstanding as of July 31, 2002. These
loans are non-interest bearing.
14. LITIGATION:
The Company is subject to two lawsuits arising out of the normal course of
business. These lawsuits are in the early stages. Management believes there
are meritorious defenses and claims against these actions, but it is too
early to predict the ultimate outcome of these disputes. Management
believes that the probable resolution of such matters will not materially
affect the financial position, results of operations or cash flows of the
Company.
15. 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 18,390,118
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.
F-37
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004
F-38
--------------------------------------------------------------------------------
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
January 31, 2004 July 31, 2003
(unaudited)
--------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 201,941 $ 226,161
Accounts receivable, less allowance for
doubtful accounts of $204,000 and
$242,000 respectively 1,298,921 1,198,764
Due from related parties 95,171 111,821
Prepaid expenses and other current assets 39,456 52,832
--------------------------------------------------------------------------------
Total current assets 1,635,489 1,589,578
Property and Equipment, net of accumulated
depreciation of $1,300,471 and
$1,034,701, respectively 931,618 1,033,551
Goodwill 1,093,843 1,093,843
Other Assets 40,540 40,540
Deferred Income Tax Asset, net of valuation
allowance of $6,370,000 and $6,315,000,
respectively - -
--------------------------------------------------------------------------------
Total Assets $3,701,490 $3,757,512
================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $6,216,205 $6,259,323
Loans payable - stockholders 78,608 117,993
Current portion of capital lease obligation 32,959 33,925
Convertible debenture, net of unamortized
discount 241,308 170,878
--------------------------------------------------------------------------------
Total current liabilities 6,569,080 6,582,119
Capital Lease Obligation 67,988 86,325
--------------------------------------------------------------------------------
Total liabilities 6,637,068 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 1
Common stock - $.001 par value; authorized
50,000,000 shares, issued and outstanding
23,605,280 shares and 22,828,955 shares,
respectively 23,605 22,829
Additional paid-in capital 18,697,532 18,459,225
Accumulated deficit (21,656,716) (21,392,987)
--------------------------------------------------------------------------------
Stockholders' Deficiency (2,935,578) (2,910,932)
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $3,701,490 $3,757,512
================================================================================
See Notes to Consolidated Financial Statements
F-39
------------------------------------------------------------------------------------------------------------------------------------
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
Three-month Three-month Six-month Six-month
Period Ended Period Ended Period Ended Period Ended
January 31, 2004 January 31, 2003 January 31, 2004 January 31, 2003
(unaudited) (unaudited) (unaudited) (unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Revenue:
Collision repairs management $ 6,494,781 $ 6,940,059 $ 13,873,193 $ 14,196,252
Glass repairs 288,231 144,796 688,541 316,324
Fleet repairs management 200,281 188,514 416,763 406,275
Fees and other revenue 526,066 561,204 1,221,372 1,080,548
------------------------------------------------------------------------------------------------------------------------------------
Total revenue 7,509,359 7,834,573 16,199,869 15,999,399
Expenses:
Claims processing charges 6,190,356 6,527,086 13,313,062 13,383,555
Selling, general and administrative 1,407,418 1,719,424 2,834,958 3,785,939
Depreciation and amortization 135,750 125,721 265,772 244,415
------------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,733,524 8,372,231 16,413,792 17,413,909
------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (224,165) $ (537,658) $ (213,923) $ (1,414,510)
====================================================================================================================================
Adjustment to net loss to compute loss per common
share:
Preferred stock dividends (24,903) (25,847) (49,806) (52,180)
------------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (249,068) $ (563,505) $ (263,729) $ (1,466,690)
====================================================================================================================================
Loss per common share - basic and diluted $ (0.01) $ (0.03) $ (0.01) $ (0.08)
====================================================================================================================================
Weighted-average number of common shares outstanding
- basic and diluted 23,569,733 19,562,796 23,513,950 19,172,565
====================================================================================================================================
See Notes to Consolidated Financial Statements
F-40
------------------------------------------------------------------------------------------------------------------------------------
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
------------------------------------------------------------------------------------------------------------------------------------
Six month period ended January 31, 2004 - unaudited
Additional
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2003 247 $1 22,828,955 $22,829 $18,459,225 $(21,392,987) $(2,910,932)
Shares issued to board members 184,928 185 75,648 75,833
Accrued dividends on preferred stock (49,806) (49,806)
Issuance of common stock for cash 591,397 591 162,659 163,250
Net loss (213,923) (213,923)
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2004 247 $1 23,605,280 $23,605 $18,697,532 $(21,656,716) $(2,935,578)
====================================================================================================================================
See Notes to Consolidated Financial Statements
F-41
------------------------------------------------------------------------------------------------------------------------------------
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
Six-month Six-month
Period ended Period ended
January 31, 2004 January 31, 2003
(unaudited) (unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (213,923) $ (1,414,510)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 265,772 244,415
Amortization of discount on debentures 70,430
Common stock issued for services 75,833 148,775
Changes in operating assets and liabilities:
Increase in accounts receivable (100,157) (416,926)
Decrease in due from related parties - 7,988
Decrease in prepaid expenses and other current assets 13,376 41,098
Increase in other assets (9,610)
(Decrease) Increase in accounts payable and accrued expenses (92,924) 1,708,030
Decrease in deferred software subscription revenue (49,022)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,407 260,238
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activity:
Purchases of property and equipment (163,839) (287,605)
Payments from related parties 18,000
Payments to related parties (1,350)
Principal payments on shareholder loans (39,385)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (186,574) (287,605)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 163,250
Proceeds from exercise of stock options 3,964
Principal payments on capital lease (19,303) (13,471)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 143,947 (9,507)
------------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash (24,220) (36,874)
Cash at beginning of period 226,161 44,655
------------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 201,941 $ 7,781
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 31,517 $ 21,287
====================================================================================================================================
Supplemental disclosure of noncash investing and financing activities:
------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for amount due to shareholders 10,000
====================================================================================================================================
Issuance of stock for preferred stock dividends 13,722
====================================================================================================================================
Accrued dividends on preferred stock 49,806 52,180
====================================================================================================================================
Equipment acquired by capital lease 90,055
====================================================================================================================================
See Notes to Consolidated Financial Statements
F-42
--------------------------------------------------------------------------------
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1 - Basis of presentation
------------------------------
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of those of a normal recurring nature) necessary to
present fairly the financial position of eAutoclaims.com, Inc. and it's wholly
owned subsidiary as of January 31, 2004 and its results of operations for the
three and six-month periods ended January 31, 2004 and 2003 and cash flows for
the six-month periods ended January 31, 2004 and 2003. Results of operations for
the three and six-month period ended January 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending July 31,
2004.
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.
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 Principles 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 income (loss) per
share would have been increased to the following pro forma amounts:
Three-month Six-month
period ended period ended
January 31, January 31,
2004 2003 2004 2003
---------- ---------- ---------- ------------
Net loss $(224,165) $(537,658) $(213,923) $(1,414,510)
Deduct total stock based employee
compensation expense determined
under fair value based methods
for all awards (96,039) (188,066) (96,039) (376,131)
---------- ---------- ---------- ------------
Adjusted net loss $(320,204) $(725,724) $(309,962) $(1,790,641)
========== ========== ========== ============
Basic and diluted net loss per
share as reported $(.01) $(.03) $(.01) $(.08)
======= ======= ======= ========
Pro forma basic and diluted
loss per share $(.01) $(.04) $(.02) $(.10)
======= ======= ======= ========
F-43
Note 2 - 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 January 31, 2004 and 2003, 7,203,316 and 5,161,452
options and warrants, respectively, were excluded from the diluted loss per
share computation, as their effect would be antidilutive.
Note 3 - Equity Transactions
----------------------------
In August 2003, the Company raised a total of $165,000 from the sale of
equity securities. The Company paid finder's fees and legal fees of $1,750 for a
net of $163,250. In exchange for these funds the Company issued 591,397 shares
of common stock at $0.279 per share.
During the six-months ended January 31, 2004, the Company issued
184,928 shares of common stock to two directors in exchange for their services.
Of the shares of common stock issued 121,849 was a prepayment of an annual
retainer for the fiscal year ending July 31, 2004. These shares are being
expense over the year. The remaining 63,079 shares of common stock were for
director services rendered during the six-months ended January 31, 2004. The
Company charged operations $50,832, which was equal to the fair market value of
the shares when earned.
During the six-month period ended January 31, 2004, the Company issued
options to purchase common stock, where the exercise price of the options are
equal to or greater than the fair market value of the Company's common stock on
the date of the grant, as follows:
o Options to purchase 75,000 shares of common stock to the President and
CEO, in accordance with his contract.
o Options to purchase 50,000 shares of common stock to the Board of
Directors in accordance with their compensation agreement.
o Options to purchase 367,500 shares of common stock to the employees of
eAutoclaims, excluding senior management.
Additionally, options to purchase 401,720 shares of common stock were
canceled.
On October 23, 2003, the Company entered into an agreement to restructure
the preferred stock terms with the existing preferred stockholders. The
agreement provides the Company an opportunity to purchase a certain number of
preferred shares each month should we choose to do so. If the Company does not
purchase preferred shares in a month, and the holders elect to convert some
preferred shares, the holders must give the Company four days notice to arrange
a block trade in order to minimize the impact of the sale of converted shares in
the open market. The agreement also sets a minimum conversion price of $0.20 per
share for the conversion of preferred shares to common shares.
F-44
--------------------------------------------------------------------------------
EAUTOCLAIMS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 4 - Salary Commitments
---------------------------
During the quarter ended April 30, 2003 the Company entered into new or amended
employment agreements with five of its officers for two years. Minimum annual
commitments under the new agreements are as follows:
Fiscal years ended:
July 31, 2004 $624,700
July 31, 2005 $549,900
July 31, 2006 $148,300
----------
Total $1,322,900
==========
Note 5 - 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 23,605,280 indicated
by the Company's records. 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.
Note 6 - Subsequent Event
-------------------------
On February 2, 2004 the holder of the Company's series A, preferred stock
converted 12 shares of the preferred stock with a face value of $60,000, plus
accrued dividends of $17,293, for 386,466 shares of the Company's common stock.
F-45
Report of Independent Registered Accounting Firm on Financial Statment Schedule
To the Board of Directors
eautoclaims.com, Inc.
The information included on Schedule II is the responsibility of management, and
although not considered necessary for a fair presentation of financial position,
results of operations, and cash flows is presented for additional analysis and
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements. In our opinion, the information included on
Schedule II relating to the years ended July 31, 2003, 2002 and 2001 is fairly
stated in all material respects, in relation to the basic consolidated financial
statements taken as a whole. Also, such schedule presents fairly the information
set forth therein in compliance with the applicable accounting regulations of
the Securities and Exchange Commission.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
--------------------
September 19, 2003
F-46
Schedule II
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Information relating to the allowance for doubtful accounts is as follows:
Beginning Ending
Year ended Balance Charges (A) Deductions (B) Balance
------------ ---------- ----------- -------------- ------------
7/31/01 30,000 30,000 - 60,000
7/31/02 60,000 353,132 13,132 400,000
7/31/03 400,000 139,874 297,874 242,000
F-47
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth various expenses, which will be incurred in
connection with the registration of our securities. Other than the SEC
Registration Fee, the amounts set forth below are estimates:
SEC Registration Fee $ 827
Printing & Engraving Expenses 500
Legal Fees and Expenses 15,000
Accounting Fees and Expenses 10,000
Transfer Agent Fees 250
State Blue Sky filings 3,500
-------
TOTAL $30,077
=======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
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 its 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. We have entered into indemnity agreements with our officers and
directors.
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth our sale of securities during the last three
years, which securities were not registered under the Securities Act of 1933, as
amended. Except as described below, no underwriters were employed with respect
to the sale of any of the securities listed below.
During the time period June 2000 through June 2001, we issued $2,100,000 of
our Series A Preferred Stock to two (2) investors. The following is a detailed
table that sets forth separately each sale of our Series A Preferred Stock,
which discloses the amount of consideration, selling commissions, legal fees,
net proceeds and related warrants.
73
--------------------------------------------------------------------------------------------------------------------
Number Date Cash Gross Selling Legal Net Agents Warrants Purchaser Warrants
of Shares Received Amount Commission Fees Proceeds Number Strike Number Strike
--------------------------------------------------------------------------------------------------------------------
200 06/27/2000 500,000
08/29/2000 380,015
09/22/2000 9,929
1,000,000 100,000 10,056 889,944 55,096 4.50 300,000 3.00
60 10/04/2000 300,000 30,000 -0- 270,000 18,826 4.50 90,000 3.33
60 12/08/2000 300,000 30,000 -0- 270,000 30,023 4.50 90,000 1.46
100 01/25/2001 170,000 -0- 170,000
Feb-01 330,000 50,000 30,000 250,000
500,000 50,000 30,000 420,000 76,220 4.50 150,000 2.60
100 6/6/01 500,000 50,000 10,000 440,000 76,220 4.50 150,000 2.60
--- --------- ------- ------ --------- ------- -------
520 total 2,600,000 260,000 50,056 2,249,944 264,385 780,000
=== ========= ======= ====== ========= ======= =======
--------------------------------------------------------------------------------------------------------------------
On July 20, 2000, we acquired Premier Express Claims, Inc. through a
merger in a stock-for-stock exchange. We issued 320,000 restricted common shares
to two (2) Premier Express Claims shareholders. The names and numbers of our
common shares issued to each former Premier Express Claims shareholder is as
follows:
# of
Name eAuto Shares
----------------- ------------
Randal K. Wright 256,000
Reed Mattingly 64,000
-------
Total 320,000
=======
During the year ended July 31, 2001, we issued 93,936 shares to three
consultants that provided services to the Company.
During the year ended July 31, 2001, we issued 150,000 shares of common
stock to one (1) person in exchange for $157,720 of legal services.
During the year ended July 31, 2001, we issued 10,702 shares of common
stock to five outside members of the Board of Directors.
During April 2001, we issued 200,000 shares of common stock to a member of
our Board of Directors who provided consulting services.
During the year ended July 31, 2001 we issued options to employees and
members of the Company's Board of Directors to purchase 1,402,700 shares of
common stock. The exercise prices of the options were equal to or greater than
the fair market value of the Company's common stock on the date of each grant.
During April 2001, we issued options to purchase 2,200,000 shares of common
stock to officers, directors and employees of the Company at $.01 per share.
During the months June and July 2001 we issued $650,000 of debentures with
interest at the rate of Libor (2.6%) plus 3% maturing on September 30, 2001 to
five (5) individuals. 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.
74
In July 2001, we issued 344,500 shares of common stock to an investor to
satisfy their expense (penalty) provisions in a preferred stock agreement for
not registering the shares of common stock underlying the conversion of the
preferred stock.
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, we sold 220,000 shares of common stock and warrants to
purchase 220,000 shares of common stock to three (3) individuals, with an
exercise price of $0.75 per share, for $93,465, net of $11,000 of finder's fee
and $5,535 of legal fees.
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, we issued 234,277 shares of common
stock in exchange for $105,040 of legal services to one (1) individual.
During the year ended July 31, 2002, we issued 37,650 shares of common
stock to a company in partial payment of public relations consulting services.
During the year ended July 31, 2002, we issued 35,257 shares of common
stock to four outside members of the Board of Directors.
On June 5, 2002, we 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.
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.
During the year ended July 31, 2002, we issued options to employees and
members of the Company's Board of Directors to purchase 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 468,334 shares of common stock were
canceled. During the year ended July 31, 2002, thirteen (13) employees exercised
options to purchase 326,000 common shares.
During July 2002, we issued options to purchase 242,670 shares of common
stock to officers and employees of the Company at $.01 per share.
During the year ended July 31, 2002 $650,000 of debentures which were
issued to nine (9) individuals 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, twelve (12) employees exercised
958,850 options to purchase shares of 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).
During the year ended July 31, 2003, we issued 412,521 shares of common
stock in exchange for $118,525 of legal services to one (1) individual.
75
During the year ended July 31, 2003, we issued 55,797 shares of common
stock to three directors in exchange for their services.
During the year ended July 31, 2003, we issued 94,119 shares of common
stock to a company in final payment of public relations consulting services.
In July of 2003 we entered into a $300,000, 8% convertible note payable
with a term of 1 year with one (1) individual. 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.
On July 31, 2003, we issued 8,000 shares of common stock to a past employee
as part of a severance agreement.
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, we sold 1,712,365 shares of common stock at
$0.279 per share to four (4) investors. The funds raised totaled $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, we issued options to employees and
members of the Company's Board of Directors to purchase 908,000 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.
In August of 2003, we sold 591,397 shares of common stock at $0.279 per
share to five (5) investors. The funds raised totaled $165,000, less finders'
fees and legal fees of $1,750, resulting in net proceeds of $163,250.
During the nine-months ended April 30, 2004, the Company issued 217,784
shares of common stock to two directors in exchange for their services. Of the
shares of common stock issued 121,849 was a prepayment of an annual retainer for
the fiscal year ending July 31, 2004. These shares are being expense over the
year. The remaining 95,935 shares of common stock were for director services
rendered during the nine-months ended April 30, 2004. The Company charged
operations $62,332, which was equal to the fair market value of the shares when
earned.
During the nine-month period ended April 30, 2004, the Company issued
options to purchase common stock, where the exercise price of the options are
equal to or greater than the fair market value of the Company's common stock on
the date of the grant, as follows:
o Options to purchase 75,000 shares of common stock to the President and CEO,
in accordance with his contract.
o Options to purchase 75,000 shares of common stock to the Board of Directors
in accordance with their compensation agreement.
o Options to purchase 367,500 shares of common stock to the employees of
eAutoclaims, excluding senior management.
Additionally, options to purchase 427,386shares of common stock were
canceled.
76
On March 10, 2004 the board approved and the Company issued 2,020,000 options to
the management team for executing an agreement with ADP Claims Services. On
March 29, 2004, The Company issued 10,000 options to a consultant for services
performed for the Company. On April 20, 2004, 72,767 options were issued to
managers who took a pay cut as partial compensation for the pay cut. Both sets
of options are exercisable at $0.01, immediately vested and have a term of ten
years.
On October 23, 2003, the Company entered into an agreement to restructure
the preferred stock terms with the existing preferred stockholders. The
agreement provides the Company an opportunity to purchase a certain number of
preferred shares each month should we choose to do so. If the Company does not
purchase preferred shares in a month, and the holders elect to convert some
preferred shares, the holders must give the Company four days notice to arrange
a block trade in order to minimize the impact of the sale of converted shares in
the open market. The agreement also sets a minimum conversion price of $0.20 per
share for the conversion of preferred shares to common shares.
On February 2, 2004, 12 shares of preferred stock with a face value of
$60,000, plus dividends of $17,293 were converted into 386,466 shares of common
stock. On March 9, 2004, 11 shares of preferred stock with a face value of
$55,000, plus dividends of $16,274 were converted into 274,659 shares of common
stock.
In March through May 2004 we raised $2,271,240 from the sale of Units at
$.28 per Unit to nineteen (19) investors. Each Unit consists of one (1) share of
common stock and one (1) common stock purchase warrant exercisable at $.35. We
paid Noble International Investment, Inc. ("Noble") total commissions and
expenses of $170,378 and two other individuals $16,667 as a finder's fee in
connection with the issuance of these securities. We also issued Noble placement
agent warrants to acquire 790,200 Units and issued one of the finders 34,525
shares of our restricted common stock.
On April 23, 2004 the Company received $250,000 in exchange for 8%
convertible debentures due and payable on October 14, 2004 unless converted. The
debentures are convertible into common stock at 70% of the average of the
closing bid price on the 10 trading days immediately preceding the conversion
date. The Company has guaranteed the 10% return on his investment if he converts
to equity. The Company also issued 1,000,000 five-year warrants with a strike
price of $0.20 per share. The Company also adjusted the strike price on
1,000,000 warrants that the investor owned prior to this investment from $0.63
to $0.315 per share. The Company agreed to register the shares underlying the
warrants and the convertible debenture in this registration statement. The
investor also has anti-dilution rights on the warrants and conversion price of
the debentures, in case other securities are issued with a lower sales price or
strike price per share prior to the maturity date of the debentures.
Other than indicated above, no underwriter, broker dealer or finder
participated in any of the sales discussed above, nor did the Registrant pay any
commissions or fees with respect to these issuances. With regard to all such
issuances, the Registrant relied on Section 4(2) of the Securities Act of 1933
(the "Act") or Rule 506 of Regulation D for an exemption from the registration
requirement of the Act. The purchasers had access to information concerning the
Registrant, its financial condition, assets, management and proposed activities.
Each purchaser represented that he had the ability to bear economically a total
loss of his investment. The Registrant has impressed each certificate with a
restrictive legend and will issue stop transfer instructions to the Registrant's
transfer agent upon completion of this offering.
Exhibit No. Description of Exhibit
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, 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)
77
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)(9)
3.11 Promissory Note dated June 16, 2000 between eAutoclaims.com, Inc.and
Randal K. Wright (2)(9)
3.12 Promissory Note dated June 16, 2000 between eAutoclaims.com, Inc. and
S. Reed Mattingly. (2)(9)
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 Opinion of Johnson, Pope, Bokor, Ruppel & Burns, LLP as to legality of
securities being issued. *
10.1 Employment Agreement between eAutoclaims.com, Inc. and Eric Seidel dated
February 1, 2000 (5)(8)(9)
10.2 Employment Agreement between eAutoclaims.com, Inc. and Randal K.
Wright dated July 1, 2000 (2)(8)(9)
10.3 Employment Agreement between eAutoclaims.com, Inc. and S. Reed
Mattingly dated July 1, 2000 (2)(8)(9)
10.4 Employment Agreement between eAutoclaims.com, Inc. and M. Scott
Moore dated August 14, 2000 (5)(8)(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.
August 8, 2000 (5)(9)
10.11 Business Consulting Agreement between eAutoclaims.com, Inc. and TTG LLC
dated September 8, 2000 (5)(9)
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)
78
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*
10.52 Agreement by and between eAutoclaims.com, Inc. and Governor's Road,
LLC, effective October 23, 2003 (11)
10.53 Form of Amendment to Certificate of Rights, Designation and
Preferences of Series A Preferred Stock, filed with the Nevada Secretary
of State on November 20, 2003 (11)
10.54 Letter Agreement with Noble International Investments, Inc., dated
April 22, 2004 (11)
10.55 Registration Rights Agreement relating to April/May 2004 Unit Offering
(11)
10.56 Form of Common Stock Purchase Warrant relating to April/May 2004 Unit
Offering (11)
10.57 $250,000 Convertible Note with Christopher Korge, dated May __, 2004 (11)
10.58 Common Stock Purchase Warrant issued to Christopher Korge dated
May __, 2004 (11)
10.59 Agreement with ADP Claims Solution Group, Inc. dated March 9, 2004 (11)
21.1 List of Subsidiaries (12)
23.1 Consent of Goldstein Golub Kessler, LLP *
23.2 Consent of Johnson, Pope, Bokor, Ruppel & Burns, LLP (included in
Exhibit 5.1) *
79
99.1 Code of Ethics (10)
(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
(10) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2003
(11) Previously filed through registration statement number 333-115709,
dated May 21, 2004.
(12) None - no subsidiaries
(*) - filed herewith
80
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
Prospectus filed with the Securities and Exchange Commission pursuant to Rule
424(b) if, in the aggregate, the change in volume and price represents no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of the Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, treat each such post-effective amendment as a new
registration statement relating to the securities offered therein, and the
offering of the securities at that time to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) For purposes of determining any liability under the Securities Act of
1933, as amended, treat the information omitted from the form of Prospectus
filed as part of this registration statement in reliance upon Rule 430A, and
contained in a form of Prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declares it effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at the time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement amendment No. 1 on Form S-1, to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Oldsmar, Florida, on June 8, 2004.
eAutoclaims.com, Inc.
Dated: June 8, 2004 By: /s/ Eric Seidel
------------------------------------------
Eric Seidel, Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/Eric Seidel President, Chief Executive June 8, 2004
---------------------------- Officer and Director
Eric Seidel
/s/Scott Moore Chief Financial and June 8, 2004
---------------------------- Accounting Officer
Scott Moore
/s/Jeffrey D. Dickson Chairman June 7, 2004
----------------------------
Jeffrey D. Dickson
/s/Nicholas D. Trbovich, Jr. Director June 7, 2004
----------------------------
Nicholas D. Trbovich, Jr.
/s/Christopher Korge Director June 8, 2004
-----------------------------
Christopher Korge
82
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
5.1 Opinion re: Legality of the Securities Being Registered.
23.1 Consent of Goldstein Golub and Kessler, LLP
23.2 Consent of Johnson, Pope, Bokor, Ruppel & Burns, LLP (contained in
Exhibit 5.1)
83