SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23903
eAUTOCLAIMS, INC.
(Exact name of registrant as specified in charter)
Nevada 95-4583945
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
110 E. Douglas Road, Oldsmar, Florida 34677
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 749-1020
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark if no disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ __ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes ____ No __X___
Aggregate market value of the voting stock held by non-affiliates of the
registrant at September 30, 2004 was $9,194,805.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
as of September 30, 2004 was 35,364,635.
FORM 10-K - Index
PART I
Page
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Item 1. Description of Business................................ 2
Item 2. Description of Property................................ 18
Item 3. Legal Proceedings...................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.... 18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 19
Item 6 Selected Financial Data 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 24
Item 7A Quantitative and Qualitative Disclosures About Market
Risk.................................................. 32
Item 8. Financial Statements and Supplementary Data............ 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................. 32
Item 9A Controls and Procedures 32
Item 9B Other Information
PART III
Item 10 Directors and Executive Officers....................... 33
Item 11. Executive Compensation................................. 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stock Matters.................. 43
Item 13. Certain Relationships and Related Transactions......... 46
Item 14. Principal Accounting Fees and Services ................ 46
PART III
Item 15. Exhibits, Lists and Reports on Form 8-K ............... 47
Signatures............................................. 50
Certifications......................................... 51
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This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and assumptions made by
management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
eAutoclaims is a Nevada corporation which provides Internet based vehicle
collision claims services for insurance companies, managing general agents (MGA)
and third party claims administrators (TPA) and self-insured automobile fleet
management companies. We accept assignment of claims from our customers, and
provide vehicle repairs through a network of repair shops. We also provide
online systems to connect clients with service providers of estimates, audits
and claims administration services for claims for which we do not perform the
repair.
Our business strategy is to use the Internet to streamline and lower the
overall costs of automobile repairs and the claims adjustment expenses of our
clients. We believe that our proprietary web-based software products and
services make the management of collision repairs more efficient by controlling
the cost of the repair and by facilitating the gathering and distribution of
information required in the automobile repair process.
eAutoclaims controls the vehicle repair process from the reporting of the
accident through the satisfactory repair of damage. We bring together and
coordinate the activities of the insurance company, its insured, and the various
parties involved in evaluating a claim, negotiating the cost of the repair, and
performing necessary repair services. We have contracted with approximately
2,500 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.
In March 2004, we entered into a Co-Marketing Agreement with ADP Claims
Service Group ("ADP"), pursuant to which ADP will sell and market eAutoclaims'
core Internet application and service of collision management services, the
product is being private labeled under the name ADP Managed Repair Solutions and
utilizes EACC as the back room for processing the claim repairs and EACC's
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.
During the year ended July 31, 2004, we derived 60% and 13% of our revenues
from two customers. Our previous largest customer sold a substantial part of its
U.S. based auto physical damage business which substantially reduced revenue
from their account in fiscal year ended 2004. The loss of this customer's
business combined with the increase in expenditures required to roll out the ADP
contract and the time lag involved before we recognize significant revenues
under the ADP contract resulted in us incurring significant losses in fiscal
2004.
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Products and Services
Our latest product, eJusterSuiteTM, provides both outsourcing and ASP
(application service provider) solutions. The outsourcing solution requires
eAuto personnel to audit and coordinate the vehicle repair. The ASP solution
allows the customer to use our technology independent of our personnel; thereby,
providing a solution for the largest insurance companies that already have the
staff to process and control the claims process, while paying us a fee for every
transaction that is run through our system. The ASP model will provide margin
without the associated personnel and operating costs.
eJusterSuite also builds in service partners that can provide the needed
services such as independent adjustors, car rentals, tow trucks and accident
reporting by merely clicking an Icon that is added to the screen of the
customer's desktop in the current system. The system automatically provides the
service partner the information already in our system via the Internet. The
service partner will systematically provided the requested services and pay us a
fee for each assignment they receive through our system. This process
significantly reduces the customers' time and cost to process claims as well as
reduces the number of mistakes that occur in a manual process. Because there is
no need to reenter the information, 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 91% of the revenue for the
fiscal year ended July 31, 2004. We are paid on a per claim 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, 2004, 9% of the revenue has been received from claims
processing fees and other income.
Outsourcing Solutions:
In our outsourcing solution we handle the entire collision repair function
for our customers from the time of reporting of the accident through the
vehicle's satisfactory repair. Through our network of parts and repair service
providers, we are frequently able to obtain parts and services at lower costs
than otherwise available. We monitor and audit all repair work to help assure
that the proper repair work is performed at the negotiated price. In most cases,
digital photographs of the damaged vehicle are transmitted to us via the
Internet to assist us in monitoring repairs.
We strive to provide our customers with ways to control costs associated
with processing collision claims. These services include:
1. Centralized accident reporting.
2. Copies of accident reports.
3. Identifying the appropriate network repair facility and directing the
policyholder to such facility.
4. Deliver repair estimates and photographs/digital images of damage to any
location overnight or same day upload.
5. Audit of every claim by our in-house physical damage experts.
6. Assignment of independent field appraiser, when necessary.
7. Expedited deliver of part and materials as needed.
8. Computerized tracking and follow-up system to minimize repair time.
9. Replacement rental vehicles.
10. A lifetime guarantee from our network of repair shops (for as long as
the insured owns the vehicle) on all physical damage body repairs and
administration of manufacturer or installer's warranty on replacement
parts.
We help our clients monitor their automobile claims losses by providing the
following:
o Technology - We built one of the first customized web-based vehicle
claim assignment and delivery systems for insurance companies and
corporate fleets. We use state-of-the-art technology and security for
the transmission of files and records. In addition, we utilize digital
cameras, Internet communication, advanced data storage and scanners for
auto repair shops that are not equipped with digital cameras, to create
a defined audit trail and high capacity digital storage. We provide
these applications to our clients with their own private label that
includes their corporate colors and logos, which makes the claims
process transparent to both insurance company personnel and the insured.
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o Online, real time reporting - We provide our customers with online,
real-time reports of the most critical information used in their
operations. These reports include a comparison of their average paid
losses (cost to repair a vehicle), cycle time (time to complete an
estimate of the damage), and lost adjustment expense (cost of the repair
estimate or appraisal) between the eAutoclaims network, independent
appraisers and staff appraisers. This comparison allows them to see the
cost saving they realize while using our outsourcing solution.
o Audit Trail - We audit every claim that comes into our network. This
helps us deliver the lowest available audited cost to our 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):
eJusterSuite(R) provides 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 (rental car companies,
towing, salvage, etc.) can also be plugged into the ASP solution, whereby we are
paid a fee for each referral being made to the service partner.
Technology Provider:
The company has developed certain technologies that create efficiencies for
the automobile parts industry. One new product that management thinks will have
a significant impact on the Company's net financial results is "eDataTransfer."
eDataTransfer significantly reduces the customers' costs by automating the part
price lookup function when an automobile repair estimate is received from an
outside party. Since the function is done programmatically, staff time is
reduced in helping their customers.
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. We have built several specialty applications for
companies serving the insurance industry.
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
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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 are also a value added service to our collision
management clients.
Summary of our Co-Marketing Agreement with ADP Claims Solution Group, Inc.
On March 9, 2004, we entered into a Co-marketing 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 service 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.
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 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. There is no minimum sales commitment by
ADP under the agreement.
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
Solution with ADP products and work with ADP to develop, implement and maintain
ADP proprietary software developed by us.
The ADP Agreement provided for a Phase I Marketing Program of approximately
3 to 4 months during which eAutoclaims and ADP jointly conducted planning,
testing and rollout process in a region that was determined by ADP. During the
Phase I Marketing Program, ADP and eAutoclaims developed system performance,
service and training levels and metrics applicable to our performance of
services under the ADP Agreement. ADP has begun to Market eAutoclaims' products
nationally to ADP's existing and potential clients.
We have agreed to provide ADP with a "favored Nation" treatment, ensuring
preferred pricing should the Company enter into another Co-Marketing agreement
with another organization. ADP has the right to cancel the Co-Marketing
agreement should the Company enter into a similar agreement with a direct
competitor.
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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. 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 create new marketing collateral that has been updated
to illustrate the breadth of products and services offered. The eAutoclaims
sales force is focusing more of the available resources to market and sell
eJusterSuite whereas eAutoclaims is the Application Service Provider and/or the
Technology Provider.
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 September 30, 2004, we had four
personnel in our sales and marketing department.
Part of the agreement with ADP Claims Solution Group, Inc. allows
eAutoclaims to market ADP Shoplink, an estimating system used by collision
repair shops to produce estimates. The agreement stipulates that eAutoclaims
will market Shoplink to shops on the eAutoclaims collision repair network. We
have a dedicated unit within eAutoclaims to focus efforts on this initiative.
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;
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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.
Employees
As of July 31, 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.
During fiscal 2004 we changed our corporate name from eAutoclaims.com, Inc.
to eAutoclaims, Inc. We have filed for and have been granted the fictitious name
EAUTOCLAIMS in the State of Florida. We also own fifty-five (55) URL Internet
domain names. 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 report.
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 several 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
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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.
OPERATIONS AND TECHNOLOGY
EAutoclaims' flagship product, eJusterSuite, contains the functionality and
the ability for client customization that accommodates Fleet, Commercial, and
Consumer insurance claims processing markets. eJustersuite has been coded using
the philosophy of `code globally, implement locally' to ensure that the features
our customers need are available globally and can be implemented locally with
the flip of a bit, literally.
The only requirements for use of our product are that the customer has
Microsoft Internet Explorer 5.5 SP2 or higher installed on their system and that
they have Internet access. We have a couple of applets that are used for
uploading estimate files and optimizing images that act as browser plug-ins. We
have no components that operate outside the browser environment that need to be
installed on the clients system.
Behind our flagship product eJusterSuite, resides a complex infrastructure
of intranet applications that assist each department in effectively managing the
claim processes. EAutoclaims continually refines its operational processes to
ensure maximum efficiency. These operational refinements are achieved in part by
modification of our internal software applications. eAutoclaims uses programming
practices to assist us in the rapid application development process. Based on
points of functionality, over 95% of all code used by eAutoclaims and our client
to process claims was written internally at our Oldsmar, Florida facility.
As an additional compliment to our eJusterSuite product, eAutoclaims has
both the internal and external ability to take First Notice Of Loss (FNOL)
assignments. This functionality allows our backroom system to pre-populate
eJusterSuite with all the information needed by the insurance company adjuster.
This functionality can also be used by our external customers through the use of
our innovative technology called CAsE (Customizable Assignment Entry). With CAsE
the client can create their own forms based on a comprehensive collection of
data elements.
The hardware that eAutoclaims operates is highly scalable and reliable.
Each aspect of the operation has redundancies built in to ensure high
availability of systems by our customers. As of the end of FY2002 we have
replaced and upgraded all mission critical servers.
Security and protection of customer data is also a paramount concern for
our enterprise. We have in place Intrusion Detection Systems (IDS) that alert us
to attempts to breach our security. We vigorously keep our operating systems
updated with the most current security patches as well as keep our Antivirus
software patterns updated and deployed to all systems within the organization.
We have diverse data communications circuits that are used to access the
Internet. We have circuits terminating in Orlando and circuits terminating in
Tampa. This provision of two separate Points of Presence (POP) help ensure no
interruption of service should an accidental fiber cut occur. As a backup,
eAutoclaims also uses dedicated coaxial cable access to the Tampa POP.
Our production environment is segregated from our development environment
and as a result all code modifications occurs on development platforms. From
development all code changes are tested on a staging server that is a replica of
production. After successful testing the changes are scheduled for deployment to
production. Our version control software tracks all changes and changes are
deployed to all customers at the same time. Customers are always notified of
changes through a flashing icon on their screens that details any changes in
appearance or functionality of the application.
Prevention of Access to Data by Unauthorized Personnel
Our technology systems are designed to address important security concerns.
Only personnel in our Information and Technology Department are allowed access
to stored data. Our Information and Technology Department provides indirect
access to our clients via controlled program code. Notwithstanding such
safeguards and procedures, like with all online systems providers, a successful
unauthorized access to sensitive data or a virus attack on systems such as ours
is possible. A malicious unauthorized access or effective virus could adversely
affect our business protection from catastrophic events.
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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 insurance claims adjuster, appraiser
or legality of a direct repair network under the laws of that particular
jurisdiction. We also received inquiries regarding compliance with steering laws
of certain jurisdictions. To date, we have been successful in demonstrating to
the appropriate state regulators that we do not violate the jurisdiction laws,
that qualification is not required.
Certain jurisdictions could adopt laws directed at the auto insurance
industry, which could affect our business in an unforeseen and adverse manner. A
couple of 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.
9
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 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.
Special Considerations
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us may also adversely
impact our business operations. If any of the following risks actually occur,
our business, financial condition, or operating results could be negatively
affected.
Risks Related to Our Business
Our limited operating history makes evaluating our business and prospects
difficult.
We have been involved in the Internet based automobile collision insurance
claims business since 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
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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.
We are dependent on only a few customers for a substantial portion of our
revenue and our two largest customers have recently had reductions in their
claims volume.
During the year ended July 31, 2004, we derived 60% and 13% of our revenues
from two customers.. Our largest customer sold half of its U.S. based auto
physical damage business. This customer accounted for 60% of our revenue for
year ended July 31, 2004. We also experienced a decrease in revenue from our
second largest customer because of a change in their state's legislation
regarding a special type of insurance policy requiring a direct repair networks.
We believe the decrease of business from these two customers is complete. The
loss of this business combined with the increase expenditures required to roll
out the ADP contract and the time lag involved before we begin recognizing
significant revenues under the ADP contract will result in us incurring losses
for the first part of fiscal 2005. 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.
Our recent agreement with ADP Claims Services Group may not be profitable.
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, the program is early in its sales cycle. 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.
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 the
repair facility or we 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.
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The market for insurance auto collision claims services is 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 two other companies that offer
internet-based services similar to ours. These competitors provide their
services primarily to the fleet management and auto glass industries. 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
administration services over the Internet. There is no way to be sure that a
sufficient number of customers will utilize our services to enable us to remain
profitable.
We depend on key personnel and will need to recruit new personnel as we grow.
Because we are a small company, we are currently dependent on the efforts
of a limited number of management personnel. We believe that given the
development stage of our business and the large amount of responsibility being
placed on each member of our management team, the loss of the services of any
member of this team at the present time would harm our business. Each member of
our management team supervises the operation and growth of one or more integral
parts of our business.
If we are successful in expanding our customer base, we will need to add
additional key personnel as we continue to grow. If we cannot attract and retain
enough qualified and skilled staff, the growth of our business may be limited.
Our ability to provide services to clients and expand our business depends, in
part, on our ability to attract and retain staff with professional experiences
that are relevant to technology development and other functions we perform.
Competition for personnel with these skills is intense. Some technical job
categories are under conditions of severe shortage in the United States. In
addition, restrictive immigration quotas could prevent us from recruiting
skilled staff from outside the United States. We may not be able to recruit or
retain the caliber of staff required to carry out essential functions at the
pace necessary to sustain or expand our business.
We believe our future success will depend in part on the following:
o the continued employment and performance of our senior management,
o our ability to retain and motivate our officers and key employees, and
o our ability to identify, attract, hire, train, retain, and motivate
other highly skilled technical, managerial, marketing, and customer
service personnel.
12
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.
If we fail to adequately protect our trademarks and proprietary rights, our
business could be harmed. Our rights to our servicemarks are uncertain.
The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade secrets and similar
intellectual property as critical to our success. We rely on trademark and
copyright law, trade secret protection and confidentiality or license agreements
with our employees, customers, partners and others to protect our proprietary
rights. Although we were granted supplemental registration rights for
eAutoclaims.com(R), our service mark applications for eAutoclaims.com and Bricks
to Clicks on the primary federal register were rejected, however this product is
no longer in service and has been replaced by our latest product eJusterSuite.
There is no assurance our pending trademark and service mark applications for
eAudit, eAutoclaims, eJusterSuite, eJuster Transfer, and eProperty Suite will be
approved. We have been involved in litigation regarding the rights to use the
name eAutoclaims.com. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which we may in the
future offer our products and services. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary right is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights.
We may not be able to protect our proprietary technology.
Despite any precautions we may take, a third party may be able to copy or
otherwise obtain and use our software or other proprietary information without
authorization or develop similar software independently. We cannot assure you
that the steps we have taken or will take will prevent misappropriation of our
technology. Litigation may be necessary in the future to determine the validity
and scope of the proprietary rights of others, or defend against claims of
infringement or invalidity. This litigation, whether successful or unsuccessful,
could result in substantial costs and diversions of resources, either of which
could harm our business. If we are unable to protect our current or future
proprietary technology, our ability to compete effectively will be harmed.
If we are to remain competitive, we must be able to keep pace with rapid
technological change.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our website. The online commerce
industry is characterized by rapid technological change, changes in user and
customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices that could render our business model and proprietary
technology and systems obsolete in comparison to systems competitors may
implement. Our future success will depend, in part, on our ability to develop or
license leading technologies useful in our business, enhance the ease of use of
our existing services, develop new services and technologies that address the
varied needs of our customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
If we were unable, for technical, legal, financial or other reasons, to
incorporate new technology in new features or products, we may not be able to
adapt in a timely manner to changing market conditions or customer requirements.
We may infringe intellectual property rights of third parties.
Litigation regarding intellectual property rights is common in the software
and technology industries. We may in the future be the subject of claims for
infringement, invalidity, or indemnification claims based on such claims of
other parties' proprietary rights. These claims, with or without merit, could be
time consuming and costly to defend or litigate, divert our attention and
resources, or require us to enter into royalty or licensing agreements. There is
a risk that such licenses would not be available on reasonable terms, or at all.
Although we believe we have the ability to use our intellectual property to
operate and market our existing services without incurring liability to third
parties, there is a risk that our products and services infringe the
intellectual property rights of third parties.
13
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.
Our information technology systems are subject to certain risks that we cannot
control.
Our information systems, including our accounting systems, are dependent,
to an extent, upon third-party software, global communications providers,
telephone systems and other aspects of technology and Internet infrastructure
that are susceptible to failure. Though we have implemented redundant systems
and network security measures, our information technology remains susceptible to
outages, computer viruses, break-ins and similar disruptions that may inhibit
our ability to provide services to our customers and the ability of our
customers to access our systems. In addition, because we are located in Florida
we are susceptible to power disruptions and outages due to hurricanes and other
weather events. This may result in the loss of customers or a reduction in
demand for our services. If disruption occurs, our profitability and results of
operations may suffer.
We are exposed to potential risks from recent legislation requiring companies
to evaluate their internal control over financial reporting.
We are working diligently toward evaluating and documenting our internal
control systems in order to allow management to report on, and our independent
auditors to attest to, our internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act of 2002. This system for the
purpose of complying with Sarbanes-Oxley Section 404 will require significant
effort in a compressed timeframe, as well as result in our incurring costs to
comply with Sarbanes-Oxley Section 404. There can be no assurances that the
evaluation required by Sarbanes-Oxley Section 404 will not result in the
identification of significant control deficiencies or that our auditors will be
able to attest to the effectiveness of our internal control over financial
reporting.
We have account payables that have long payment cycles due to the nature of the
collision repair business.
Many of our contracts with customers provide for payment to us for vehicle
repairs at the time the repair cost has been determined. Under these agreements,
we bear all risks associated with the repair of the vehicle beginning with
receipt of payment from our customer. Historically, approximately two percent
(2%) of policyholders fail to have the vehicle repaired after filing a claim
with their insurance carrier. Although we bear the risk of these repairs, it is
not entirely clear as to when, or if, we are entitled to hold these payments. It
is possible that other parties (i.e. the insurance carrier, the repair facility
or the individual automobile owner) may claim that they are entitled to such
funds. The policyholder often saves for the deductible portion of their claim,
which can result in a long period of time between the time they file their claim
and the time that the vehicle is repaired. Because of the uncertainty as to if
we may be required to make these payments, when we may be required to make them,
and who we may be required to pay, we book such amounts as accounts payable in
our financial statements. As of July 31, 2004, approximately $2,658,295 of our
accounts payable consisted of advance payments. Although management believes we
are entitled to hold such funds due to the risk we assume for repair of a
vehicle, there is no assurance that customers will agree with our position.
Should eAutoclaims be required to issue payment for all such amounts at one
time, we may not be able to do so.
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
14
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
hurricanes, fire, flood, power loss, telecommunications failure, break-ins, and
similar events. In addition, we do not, and may not in the future, carry
sufficient business interruption insurance to compensate us for losses that may
occur. Despite our implementation of Internet security measures, our servers
will be vulnerable to computer viruses, physical or electronic break-ins, and
similar disruptions which could lead to interruptions, delays, loss of data or
the inability to process transactions.
Our future success will depend on the Internet's ability to accommodate growth.
The recent growth in the use of the Internet has caused frequent periods of
performance degradation. Any failure in performance or reliability of the
Internet could adversely affect our ability to fulfill our obligations to
customers in a timely manner and, consequently, hurt our operating results. To
the extent that the Internet continues to experience increased numbers of users,
frequency of use or increased bandwidth requirements of users, the Internet
infrastructure may not be able to continue to support the demands placed on it
and, as a result, the performance or reliability of the Internet may be
adversely affected. Furthermore, the Internet has experienced a variety of
outages and other delays as a result of damage to portions of its infrastructure
or otherwise. The relatively complex and unproven technology that makes up the
Internet infrastructure poses a risk of material outages or delays that could
adversely affect the ability of our customers to use our trading systems. In
addition, the Internet could lose its viability as a form of media due to delays
in the development or adoption of new standards and protocols that can handle
increased levels of activity. The infrastructure and complementary products and
services necessary to maintain the Internet as a viable commercial medium may
not be developed or maintained.
We are dependent on the continued growth of online commerce.
Our future revenues and any future profits will be dependent upon the
widespread acceptance and use of the Internet and other online services as an
effective medium of commerce by consumers. No standards have yet been widely
accepted for the measurement of the effectiveness of Internet sales, and there
can be no assurance that such standards will develop sufficiently to support
Internet sales as a purchasing medium. Rapid growth in the use of and interest
in the Internet, and other online services is a recent phenomenon, and there can
be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. We rely, and will continue to rely, on consumers who have historically
used traditional means of commerce to purchase merchandise. For us to be
successful, these consumers must accept and utilize novel ways of conducting
business and exchanging information. There can be no assurance that our
customers will accept the Internet as a means to purchase the Company's services
or that our customers will adopt its systems as a means to purchase services.
Governmental regulation and taxation of the Internet is subject to change.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may result in there
being enacted laws concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party activities, and
jurisdictional issues. These laws could harm our business by increasing our cost
of doing business or discouraging use of the Internet.
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
15
U.S. Congress passed the Internet Tax Information Act, which places a three-year
moratorium on new state and local taxes on Internet commerce. There may,
however, be enacted in the future laws that change the federal, state or local
tax treatment of the Internet in a way that is detrimental to our business.
Some local telephone carriers claim that the increasing popularity of the
Internet has burdened the existing telecommunications infrastructure and that
many areas with high Internet use are experiencing interruptions in telephone
service. These carriers have petitioned the Federal Communications Commission to
impose access fees on Internet service providers. If these access fees are
imposed, the cost of communicating on the Internet could increase, and this
could decrease the demand for our services and increase our cost of doing
business.
Risks Related to Our Common Stock
Our Common Stock price may be volatile, which could result in substantial losses
for individual stockholders.
The market price for our Common Stock is volatile and subject to wide
fluctuations in response to factors including the following, some of which are
beyond our control, which means our market price could be depressed and could
impair our ability to raise capital:
o actual or anticipated variations in our quarterly operating results;
o announcements of technological innovations or new products or services
by us or our competitors;
o changes in financial estimates by securities analysts;
o conditions or trends in the Internet and/or online commerce industries;
o changes in the economic performance and/or market valuations of other
Internet, online commerce companies;
o additions or departures of key personnel.
Our Certificate of Incorporation limits director liability thereby making it
difficult to bring any action against them for breach of fiduciary duty.
As permitted by Nevada law, the Company's Certificate of Incorporation
limits the liability of directors to the Company or its stockholders for
monetary damages for breach of a director's fiduciary duty except for liability
in certain instances. As a result of the Company's charter provision and Nevada
law, stockholders may have limited rights to recover against directors for
breach of fiduciary duty.
We may be unable to meet our future capital requirements.
We are substantially dependent on receipt of additional capital to
effectively execute our business plan. If adequate funds are not available to us
on favorable terms we will not be able to develop new services or enhance
existing services in response to competitive pressures, which would affect our
ability to continue as a going concern. We 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.
16
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 $70,400 annually, assuming no
conversion). To date, we have fulfilled our dividend obligations on the Series A
Preferred Stock through the issuance of additional shares of our Common Stock to
the holders of our series A Preferred Stock.
Substantial sales of our Common Stock could cause our stock price to rapidly
decline.
The market price of our Common Stock may fall rapidly and significantly due
to sales of our Common Stock from other sources such as:
o The sale of Common Stock underlying the conversion rights of our Series
A Preferred Stock and convertible debentures.
o The sale of shares of our Common Stock underlying the exercise of
outstanding options and warrants.
o The sale of shares of our Common Stock, which are available for resale
under Rule 144 or are otherwise freely tradable and which are not
subject to lock-up restrictions.
Any sale of substantial amount of our Common Stock in the public market, or
the perception that these sales might occur, whether as a result of the sale of
Common Stock received by shareholders upon conversion of our Series A Preferred
Stock, exercise of outstanding warrants or options or otherwise, could lower the
market price of our Common Stock. Furthermore, substantial sales of our Common
Stock by such parties in a relatively short period of time could have the effect
of depressing the market price of our Common Stock and could impair our ability
to raise capital through the sale of additional equity securities. Moreover, our
ability to obtain additional equity capital may be adversely affected by the
restrictions imposed upon us under the agreements relating to the issuance of
our Series A Preferred Stock.
Antidilution rights granted to certain investors may cause substantial dilution
to our other stockholders.
During March through May, 2004 we sold a total of 9,004,429 units at an
offering price of $.28 per unit generating gross offering proceeds of
$2,521,240. We netted $2,428,125 after payment of placement fees and expenses.
Each unit consists of one (1) share of Common Stock and one Common Stock
purchase exercised with $.35 per share. The warrant contained "4 ratchet"
antidilution protection to avoid dilution of the equity interest represented by
the underlying shares upon the occurrence of certain events, including the
issuance of equity securities if an issuance, conversion or exercise price less
than $.35. The warrant holders are entitled to demand registration rights for a
two year period. In addition, we are subject to liquidated damages if we do not
maintain the effectiveness of the subject registration statement. Our Common
Stock currently trades at a price less than $.35 per share. If we raise
additional capital to meet our current working capital requirements this may
trigger the antidilution rights of the investors in our March through May 2004
private placement which may result in additional dilution to our current
shareholders. In addition, if we fail to process 9,000 claims under the ADP
Co-Marketing Agreement by March 1, 2005 or 25,000 claims by August 1, 2005 these
same investors are entitled to receive additional units for no additional
consideration. If we fail to process 6,000 claims under the ADP Co-Marketing
Agreement by March 1, 2005 or 16,500 claims by August 1, 2005 these same
investors are entitled to a 50% increase in the number of purchased units on
each date for no additional consideration. The additional units that could be
issued if both targets are not met are 9,004,429. If we process between 6,000
and 9,000 before March 1, 2005 and/or between 16,500 and 25,000 before August 1,
2005, these investors would receive a prorated portion of 4,502,215 units for
the March 1, 2005 target date and a prorated portion of 4,502,215 units for the
August 1, 2005 target date.
17
The forward-looking information in this Form 10-K may prove inaccurate.
This Form 10-K contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by, and information
currently available to, management. When used in this report, words such as
"anticipate," "believe," "estimate," "expect," and, depending on the context,
"will" and similar expressions, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the specific risk factors described above. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
estimated or expected. We do not intend to update these forward-looking
statements and information.
ITEM 2. DESCRIPTION OF PROPERTY
Our main offices are located at 110 East Douglas Road, Oldsmar, Florida
33467. Monthly rent of approximately $17,880 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.
ITEM 3. LEGAL PROCEEDINGS
We are currently not involved in any legal proceedings which are considered
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 30, 2004 we amended our Certificate of Incorporation pursuant to an
action by written consent as follows:
o We amended our name to eAutoclaims, Inc. We were formerly known as
eAutoclaims.com, Inc.
o We increased our authorized number of Common Shares from 50,000,000 to
100,000,000 having a par value of $.001 per share. We maintained our
authorized number of preferred shares a 5,000,000.
In connection with these actions we received the written consent of the
holders of 17,750,340 shares or approximately 52.5% of our outstanding Common
Stock approving these amendments prior to 7/31/04. The holders of 164,740 shares
or 0.5% of outstanding Common Stock voted against such amendments as of
10/18/04.
18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Value
Our Common Stock is traded on the OTCBB under the symbol "EACC". The
following table sets forth, the high and low bid prices of the Common Stock for
the periods shown as reported by the National Quotation Bureau. The bid prices
quoted on the OTCBB reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
High Bid Low Bid
-------- -------
Fiscal Year Ended July 31, 2002
First Quarter (August 1, 2001 to October 31, 2001) 1.68 0.39
Second Quarter (November 1, 2001 to January 31, 2002) 0.92 0.37
Third Quarter (February 1, 2002 to April 30, 2002) 0.70 0.40
Fourth Quarter (May 1, 2002 to July 31, 2002) 0.45 0.28
Fiscal Year Ended July 31, 2003
First Quarter (August 1, 2002 to October 31, 2002) 0.36 0.10
Second Quarter (November 1, 2002 to January 31, 2003) 0.16 0.08
Third Quarter (February 1, 2003 to April 30, 2003) 0.14 0.08
Fourth Quarter (May 1, 2003 to July 31, 2003) 0.55 0.17
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
Fourth Quarter (May 1, 2004 to July 31, 2004) 0.38 0.25
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of Common
Stock, $.001 par value ("Common Stock"), and 5,000,000 of preferred stock, $.001
par value ("Preferred Stock"), issuable in series. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our Certificate of Incorporation and Bylaws,
amendments thereto, including the Certificates of Designation for our Series A
Preferred Stock, and by the provisions of applicable Nevada law. Our transfer
agent is Equity Transfer Services, Inc., 120 Adelaide West, Suite 420, Toronto,
Ontario, M5H 4C3
Common Stock
As of September 30, 2004, there were approximately 35,364,635 shares of our
Common Stock outstanding. In addition, as of September 30, 2004, shares of
common stock were subject to the following outstanding warrants:
o 1,044,385 warrants issued to the agent and purchasers of our Series A
Preferred Stock at exercise prices of between $1.46 and $4.50,
o 1,150,000 warrants at an exercise price of $0.35 to $0.63 per share,
issued to the purchasers of our convertible debentures,
o 9,004,429 warrants at an exercise price of $0.35, issued to purchases of
units (one share of common stock and one warrant to purchase one share
of common stock) between March and June of 2004,
o 790,200 warrants to purchase one unit for $0.28. The units consist of
one share of common stock and one warrant to purchase another share of
stock for $0.35, and
o 220,000 warrants at an exercise price of $0.75 per share, issued to the
purchasers of common stock.
19
As of September 30, 2004, we have reserved 6,797,866 shares of our Common
Stock underlying options issued to our directors, employees and consultants with
exercise prices of between $.01 and $3.38. We have also deposited 585,040 shares
of our Common Stock in escrow in connection with the conversion rights of our
outstanding Series A Convertible Preferred Stock, which shares are included in
the number of currently outstanding shares. As of July 31, 2004, we had
approximately 229 common shareholders of record.
As of July 29, 2004 authorized common shares were increased from 50,000,000
to 100,000,000 based on the consent of the majority of the stockholders. The
holders of Common Stock are entitled to one vote per share for the election of
directors and all other purposes and do not have cumulative voting rights. The
holders of our Common Stock are entitled to receive dividends when, as, and if
declared by our Board of Directors, and in the event of our liquidation to
receive pro-rata, all assets remaining after payment of debts and expenses and
liquidation of the preferred stock. Holders of our Common Stock do not have any
pre-emptive or other rights to subscribe for or purchase additional shares of
capital stock, no conversion rights, redemption, or sinking-fund provisions.
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
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 7,931,108 shares of our Common Stock to the holders
of the Series A Preferred Stock in connection with the conversion of 344 shares
of Series A Preferred Stock and the currently outstanding satisfaction of
accrued dividends. We currently have 176 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 has 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.
20
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
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.
Certain Provisions of the Certificate of Incorporation and Bylaws
Our Certificate of Incorporation provides that no director shall be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director except as limited by Nevada law. Our
Bylaws provide that we shall indemnify to the full extent authorized by law each
of our directors and officers against expenses incurred in connection with any
proceeding arising by reason of the fact that such person is or was an agent of
the corporation.
Insofar as indemnification for liabilities may be invoked to disclaim
liability for damages arising under the Securities Act of 1933, as amended, or
the Securities Act of 1934 (collectively, the "Acts"), as amended, it is the
position of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Acts and are therefore, unenforceable.
Dividends
We have not paid any cash dividends on our common or preferred stock and do
not anticipate paying any such cash dividends in the foreseeable future.
Earnings, if any, will be retained to finance future growth.
21
Shares Eligible for Future Sale
As of September 30, 2004, we had outstanding 35,364,635 shares of Common
Stock. Of these shares, 22,849,898 shares are freely tradable without
restriction or limitation under the Securities Act, except for any shares
purchased by "affiliates" or persons acting as "underwriters" as these terms are
defined under the Securities Act.
The 12,514,737 shares of Common Stock held by existing shareholders that
are "restricted" within the meaning of Rule 144 adopted under the Securities Act
(the "Restricted Shares"), may not be sold unless they are registered under the
Securities Act or sold pursuant to an exemption from registration, such as the
exemption provided by Rule 144 promulgated under the Securities Act. The
Restricted Shares were issued and sold by us in private transactions in reliance
upon exemptions from registration under the Securities Act and may only be sold
in accordance with the provisions of Rule 144 of the Securities Act, unless
otherwise registered under the Securities Act.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
(1) 1% of the then-outstanding shares of Common Stock; and
(2) the average weekly trading volume in the Common Stock during the four
calendar weeks immediately preceding the date on which the notice of
such sale on Form 144 is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to provisions relating to notice and
manner of sale and the availability of current public information about us. In
addition, a person (or persons whose shares are aggregated) who has not been an
affiliate of ours at any time during the 90 days immediately preceding a sale,
and who has beneficially owned the shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. While the foregoing discussion
is intended to summarize the material provisions of Rule 144, it may not
describe all of the applicable provisions of Rule 144, and, accordingly, you are
encouraged to consult the full text of that Rule.
We also have the ability to file Form S-8 registration statements, which
registers for resale securities issued to our employees, officers, directors,
consultants and advisors.
We are required to register the shares of Common Stock underlying
conversion features of our Series A Preferred Stock along with the shares of
Common Stock underlying the Agent's Warrants and Purchaser's Warrants upon 60
days prior notice. The sale of our Common Stock underlying any such registration
statement may also adversely affect the market price of our Common Stock, result
in substantial dilution to our stockholders and might also adversely affect our
ability to raise additional capital.
In June, 2004 we had a Form S-1 registration statement registering
21,749,289 shares of our Common Stock declared effective by the Commission. The
shares of Common Stock registered related to (i) 9,146,097 shares of Common
Stock purchased by certain investors in a private placement conducted during
2004; (ii) 10,022,792 shares issuable upon exercise of Common Stock purchase
warrants; (iii) up to 1,000,000 issuable upon conversion of a $250,000
convertible note; and (iv) up to 1,580,400 shares underlying a placement agent
warrant. In addition, the holders of these securities are granted "full ratchet"
antidilution rights if we issue any additional equity securities at an issue
price, conversion price or exercise price at less than $.35 per share. The sale
of such securities pursuant to the above-referenced registration statement may
have a depressive affect on the market price of our Common Stock.
The possibility of future sales by existing stockholders under Rule 144 or
otherwise will, including sales pursuant to the registration statement in the
future, have a depressive effect on the market price of our Common Stock, and
such sales, if substantial, might also adversely affect our ability to raise
additional capital.
22
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from financial statements
that have been audited by Goldstein Golub Kessler LLP, independent registered
public accounting firm. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction
with our financial statements, related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this annual report.
EAUTOCLAIMS, INC.
SELECTED FINANCIAL DATA
-------------------------------------------------------------------------------------------------------------------------
Period from
December 7, 1999
(inception) to
Year Ended July 31, 2004 2003 2002 2001 July 31, 2000
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Total revenue $27,160,682 $34,061,072 $32,283,363 $20,188,249 $1,751,710
-------------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 22,130,634 28,323,741 27,293,568 16,842,287 1,471,509
Selling, general and administrative 6,417,316 6,418,911 8,114,580 10,479,232 3,293,208
Depreciation and amortization 515,813 490,935 530,618 504,656 62,750
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 307,694 11,738 555,551
-------------------------------------------------------------------------------------------------------------------------
Total expenses 29,371,457 35,245,325 36,494,317 27,826,175 4,827,467
-------------------------------------------------------------------------------------------------------------------------
Net loss $(2,210,775) $(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 (95,518) (101,296) (570,997) (4,611,804)
-------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(2,306,293) $(1,285,549) $(4,781,951) $(12,249,730) $(3,075,757)
=========================================================================================================================
Loss per common share - basic and
diluted $ (0.09) $ (0.06) $ (0.32) $ (1.09) $ (0.29)
=========================================================================================================================
Weighted-average number of common
shares outstanding-basic and diluted 26,308,434 20,209,634 14,813,549 11,252,514 10,591,146
=========================================================================================================================
Balance Sheet Data:
July 31, 2004 July 31, 2003 July 31, 2002 July 31, 2001 July 31, 2000
-------------------------------------------------------------------------------------------------------------------------
Cash $415,549 $226,161 $44,655 $485,092 $239,979
Working capital (deficit) (3,190,515) (4,992,541) (4,483,740) (1,484,725) (1,613,552)
Total assets 3,482,149 3,757,512 3,403,826 4,197,677 2,914,584
Debt and capital lease obligations 495,621 86,325
Total stockholders equity (deficiency) $(1,493,084) $(2,910,932) $(2,365,818) $737,905 $151,319
-------------------------------------------------------------------------------------------------------------------------
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with
our audited financial statements as of July 31, 2004 and the notes thereto, all
of which financial statements are included elsewhere in this form 10-K. In
addition to historical information, the following discussion and other parts of
this Form 10-K contain forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from those anticipated
by such forward-looking information due to factors discussed under "Description
of Business" and elsewhere in this Form 10-K.
The statements that are not historical constitute "forward-looking
statements". Said forward-looking statements involve risks and uncertainties
that may cause the actual results, performance or achievements of the Company
and its subsidiaries to be materially different from any future results,
performance or achievements, express or implied by such forward-looking
statements. These forward-looking statements are identified by their use of such
terms and phrases as "expects", "intends", "goals", "estimates", "projects",
"plans", "anticipates", "should", "future", "believes", and "scheduled".
The variables which may cause differences include, but are not limited to,
the following: general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employment benefit costs;
availability and costs of raw materials and supplies; and changes in, or failure
to comply with various government regulations. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements included in this Form
10-K 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. The revenues
generated from the vehicle and glass repair through our provider network
accounts for 91 %, 92% and 95% of the revenue for the years ended July 31, 2004,
2003 and 2002, respectively. We are paid on a per claims basis from our
insurance and fleet company customers for each claim that we process through our
system. These fees vary from $10 to $60 per claim depending upon the level of
service required. For the years ended July 31, 2004, 2003 and 2002, 9%, 8% and
5% of the revenue has been received from claims processing fees and other
income, respectively.
MANAGEMENT'S INTERIM OPERATING PLAN
Four separate events happened during the second half of the fiscal year and
in September 2004 that has impacted the Company's financial position. First, our
largest customer, sold a substantial part of its U.S. based auto physical damage
business. Starting in January 2004, the business was expected to decrease
one-twelfth each month for one year; however, the reduction in policy run-off
accelerated in the last three months of the fiscal year and the expected drop in
revenue has already occurred. Second, we experienced a significant decrease in
revenue from our second largest customer because of a change in their state's
legislation regarding a special type of insurance policy requiring a direct
repair networks. That decrease in revenue also occurred in the second half of
the fiscal year. Third, in August and September 2004 our office was threatened
by four hurricanes, two of which impacted our community and operations. While
our facilities withstood the hurricanes, it interrupted our claims assignment
stream for several days; thereby, reducing revenue and cash flow. It also caused
24
us to incur additional expenses to insure that our business process would not be
interrupted in the future. Fourth, the ADP Co-Marketing Agreement took longer to
implement than expected. Specifically, there has been a time lag involved
between when we anticipated rolling out the ADP Sales & Marketing efforts on a
national basis and the actual time that this event has occurred. While we are
still very optimistic about the opportunities presented with the ADP
Co-Marketing Agreement. The effect of a delay has resulted in the Company
incurring additional expenses for carrying support personnel and ramping for the
remainder of fiscal 2004 and the first part of fiscal 2005.
As a result of these events, management is currently taking the following
actions that are expected to positively impact the Company's financial position:
o Rolling out Higher Margin Product Lines - Management is leveraging
internally develop ASP/technologies that will allow other companies in
related industries to significantly reduce labor costs and improve
operating efficiencies. These technologies have already been implemented
in the Company's operating processes and have shown themselves to be of
significant value. By modifying the interface to these technologies, the
Company can produce significant click fees without significant
additional operating costs. The target market for these technologies
will include a wide range of organizations, including the largest (tier
1) insurance companies. The Company's management believes this
additional product line will result in a greater growth in high volume,
high margin revenues that will have a meaningful impact to the Company's
bottom-line. While there are no guarantees these transactions or new
business will mature, management believes this will be a growth market
for the Company in the future.
o Raising Additional Capital - The Company is raising up to an additional
$1.5 million of working capital to ensure the success of the initiative
taken over the last twelve months. This additional capital will allow
management the necessary resources to bring these initiatives to their
successful completion.
o ADP Co-Marketing Agreement - Management is concentrating on the national
rollout of the ADP Co-Marketing Agreement, which is the beginning of the
Company's Special Markets Division. Since August 2004 this agreement has
produced five signed pilot agreements with insurance companies or third
party administrators, and has produced two verbal commitments for
additional pilot agreement rollouts. In addition, there are other
accounts in the sales cycle that are expected to mature into new
accounts. While there are no guarantees that these pilot agreements will
mature into annual or multi-year contracts, maturing these accounts past
the pilot stage could produce significant claims volume. The Company
would share the associated revenues with ADP Claims Services Group.
Based on the early results of the ADP Co-Marketing agreement and the
expansion of the Company's ASP/Technology sales, we expect to need the extra
staff we are currently carrying on our payroll. However, there are no guarantees
this new expected business will materialize; therefore the Company has developed
a contingency plan in the event these events do not occur. If necessary, the
Company would reduce staff positions currently being carried for the expected
new business from the ADP Co-Marketing agreement. In addition, our management
team would also take a second round of salary reductions ranging from 5% to 15%.
The senior management team would once again take the highest percentage
reductions.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and the results of
our operations are based upon our consolidated financial statements and the data
used to prepare them. The Company's financials have been prepared in accordance
with accounting principles generally accepted in the United States. On an
ongoing basis we re-evaluate our judgments and estimates including those related
to revenues, bad debts, long-lived assets, and income taxes. We base our
estimates and judgments on our historical experience, knowledge of current
conditions and our beliefs of what could occur in the future considering
available information. Actual results may differ from these estimates under
different assumptions or conditions. Our estimates are guided by observing the
following critical accounting policies.
25
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.
The revenue generated from the co-marketing agreement with the ADP Claims
Services Group (ADP) will be recorded net of the repair costs because in the
agreement the Company is performing a fee for service. The insurance company is
the customer of ADP, who will be collecting the revenue and paying the shop. The
first claims from this agreement were processed in the fiscal year ended July
31, 2005.
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, 2004 the allowance for doubtful accounts was approximately
$161,000.
Accounting for Income taxes:
The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While we consider
historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event that we
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of the net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made. We have recorded
valuation allowances against our deferred tax assets of $9,002,000 at July 31,
2004. 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.
26
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, 2004.
RESULTS OF OPERATIONS
Fiscal Year Ended July 31, 2004, Compared to Fiscal Year Ended 2003
REVENUE
Total revenue for the year ended July 31, 2004 was approximately $27.2
million, which consists of approximately $22.7 million in collision repair
management for insurance companies, approximately $1.3 million in auto glass
repairs and approximately $3.2 million in fleet repair management and other
repairs and fees. 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 revenues decreased approximately $6.9 million
or 20% compared to approximately $34.1 million for the year ended July 31, 2003.
This decrease is primarily the result of the loss of revenues from our two
largest clients. During the year ended July 31, 2004 we derived 60% and 13% of
our revenue from two customers. In October 2003, our largest client announced
that they were selling one-half of their U.S. auto physical damage business to
another insurance carrier. We have experienced approximately a $5.2 million or
20% decrease in the revenue from that customer between fiscal years ended July
31, 2003 and 2004. The loss in monthly revenue was the highest in the last three
months of the fiscal year ended July 31, 2004. The decrease in revenue between
the three months ended July 31, 2003 and 2004 totaled $2.6 million or 47%. We
also experienced a decrease in revenue from our second largest customer because
of a change in their state's legislation regarding a special type of insurance
policy requiring a direct repair networks. We experienced approximately a $1.9
million or 35% decrease in the revenue from that customer between fiscal years
ended July 31, 2003 and 2004. The loss in monthly revenue was the highest in the
last three months of the fiscal year ended July 31, 2004. The decrease in
revenue between the three months ended July 31, 2003 and 2004 totaled $1.0
million or 67%. The Company anticipates meaningful growth in new clients based
on the early results of its new co-marketing agreement with ADP Claims Services
Group. However, because of the competitive nature of our business and the
uncertainty of bring on enough business to offset the loss of business, we may
be unable to replace revenues quickly enough to sustain profitability. However,
the company's management will cut expenses in the event we are unable to obtain
profitability.
The glass revenue increase by 39%, or $345,000, from $894,000 in fiscal
year 2003 to approximately $1.2 million in fiscal year 2004. This increase is a
result of a new customer in fiscal year 2004. 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 repair needs. The fleet revenue
decreased approximately $156,000, or 18% from approximately $869,000 in fiscal
2003 to approximately $713,000 in fiscal 2004. This decrease is mostly a result
of a decrease in the amount of claims from one of our existing clients.
27
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 2003 were approximately $28.3 million compare to $22.1
million in fiscal 2004. This is a decrease in total costs of 22% and a decrease
in the percentage of claims costs compared to total revenue from 83.2% in fiscal
2004 to 81.5% 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 an increase in the overall margin of our products.
We are dependent upon our third party collision repair shops for insurance
claims repairs. As of September 30, 2004, eAutoclaims has approximately 2,500
affiliated repair facilities in its network for claims repairs. We
electronically and manually audit individual claims processes to their
completion using remote digital photographs transmitted over the Internet.
However, if the quality of service provided by collision repair shops fall below
a satisfactory standard leading to poor customer service, this could have a
harmful effect on our business. We control our service requirements by
continually monitoring customer service levels and providing staff inspections
of our network shops and, if required, establish similar relationships with
other collision repair shops.
Selling, general and administrative (SG&A) expenses for the year ended July
31, 2004 were approximately $6.4 million or 24% of revenue compared to
approximately $6.4 million or 19% of revenue for the year ended July 31, 2003.
During the year ended July 31, 2004 and 2003 we incurred payroll related
expenses of approximately $ 3.7 million and approximately $4.2 million,
respectively, a 12% decrease. During fiscal year ended July 31, 2004,
approximately $240,000 of the payroll expense related to personnel establishing
the systems and infrastructure to support the ADP Co-marketing agreement. While
there was no return on this expenditure in fiscal year 2004, management expects
it to provide for revenues in fiscal year 2005 and beyond.
SG&A expenses included non-cash charges of approximately $1.0million for
the year ended July 31, 2004. These non-cash charges included a $77,000
write-off of equipment that was replaced to keep pace with new technology,
$869,000 of compensatory options issued to employees, and approximately $165,000
of stock issued for consulting agreements for interest and legal, board and
professional services as well as $12,000 for interest. There was also an $81,000
credit in the allowance for doubtful accounts that partially offset these
charges.
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, but have still maintained
staff to service new clients expected from the ADP co-marketing agreement. In
addition, our management team took 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. The total cost savings
from this expense reduction is expected to be approximately $524,000 per year.
Depreciation and amortization was approximately $823,000 and $503,000 for
the years ended July 31, 2004 & 2003, respectively. Depreciation of fixed assets
represented approximately $516,000 and $491,000, respectively. Amortization
expense of approximately $308,000 in fiscal year 2004 reflects the amortization
of discount on the convertible debentures issued in July of 2003. The
amortization expense of $12,000 in fiscal year 2003 reflects the warrants and
debenture conversion feature created by the debenture financing in fiscal year
2003.
Interest income of approximately $2,000 and $12,000 is included in selling,
general and administrative expenses, net of interest expense of approximately
$57,000 and $45,000 for the year ended July 31, 2004 and 2003, respectively.
Interest expense related primarily to interest on shareholder loans and capital
leases and interest income resulted primarily form interest earned on our cash
reserves.
NET LOSS
We recognized a net loss of approximately $2.2 million and $1.2 million for
the years ended July 31, 2004 and 2003, respectively. The increase in net loss
was a result of non-cash charges as described above. Net loss before non-cash
charges were approximately $345,000 and $683,000 for the years ended July 31,
2004 and 2003, respectively. The decrease in the net-loss before non-cash
charges was primarily a result of the restructuring of expenses and improving
margins.
28
Fiscal Year Ended July 31, 2003, Compared to Fiscal Year Ended 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. During the year ended July 31, 2003, we derived 58% and 14% of
our revenues from two (2) customers. 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. We implemented a series of
price increases during this period and evaluated the contribution to net margin
by all accounts. -
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.
EXPENSES
Claims processing charges are primarily the costs of collision repairs paid
by eAutoclaims to its collision repair shop network. Claims processing charges
for the fiscal year 2002 were approximately $27.3 million compare to $28.3
million in fiscal 2003. This is an increase in total costs but a decrease in the
percentage of claims costs compared to total revenue from 84.5% in fiscal 2002
to 83.2% in fiscal 2003. This decrease in the percentage of the claims
processing charges compared to revenue over the same periods last year was
mostly caused by increase sales in higher margin products.
We are dependent upon our third party collision repair shops for insurance
claims repairs. As of September 30, 2003, eAutoclaims had approximately 2,400
affiliated repair facilities in its network for claims repairs. We
electronically and manually audit individual claims processes to their
completion using remote digital photographs transmitted over the Internet.
However, if the quality of service provided by collision repair shops fall below
a satisfactory standard leading to poor customer service, this could have a
harmful effect on our business. We control our service requirements by
continually monitoring customer service levels and providing staff inspections
of our network shops and, if required, establish similar relationships with
other collision repair shops. Our shop totals decreased during fiscal 2003 by
approximately 800 shops. This decrease is a result of a combination of, poor
performance of some shop network members, the Company's decision to reduce
network shop coverage in certain geographical areas in order to increase the
number of claims assigned to the best shops in those areas and late payments
made over the last year. Management believes that the shops lost to slow payment
can be replaced with other qualified shops and has started to do so (See
Expenses under the caption Fiscal Year Ended July 31, 2004, Compared to Fiscal
Year Ended 2003).
Selling, general and administrative (SG&A) expenses for the year ended July
31, 2003 were approximately $6.4 million or 19% of revenue compared to
approximately $8.1 million or 25% of revenue for the year ended July 31, 2002.
This represents an overall decrease in SG&A of 21%. This decrease in expense is
mostly a result of a $1.1 million reduction in payroll and operating expenses.
During the year ended July 31, 2003 and 2002 we incurred payroll related
expenses of approximately $ 4.2 million and approximately $5.1 million,
respectively, a 17% decrease.
SG&A expenses included non-cash charges of approximately $997,000 for the
year ended July 31, 2002. These non-cash charges included a $360,000 write-off
of software, a $340,000 reserve for bad debts, $136,000 of stock and stock
options for rent and employee compensation, and approximately $161,000 of stock
issued for consulting agreements for investor relation services, legal, board
and professional consultants.
29
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.
Depreciation and amortization was approximately $503,000 and $1,086,000 for
the years ended July 31, 2003 and 2002, respectively. Depreciation of fixed
assets represented approximately $491,000 and $312,000, respectively.
Amortization expense of approximately $0 and $218,000 in fiscal year ended 2003
and 2002, respectively, reflects the amortization of goodwill from the purchase
of Premier Express Claims and Salvage Connection. The remaining amortization in
the fiscal year ended 2003 and 2002 of approximately $12,000 and $556,000,
respectively, relates to the warrants and debenture conversion feature created
by the debenture financing in fiscal year 2003 and 2002. Due to a change in the
accounting standards, no amortization is recorded in the year-ended July 31,
2003 from our acquisition of Premier Express Claims or Salvage Connection.
Interest income of approximately $12,000 is included in selling, general
and administrative expenses, net of interest expense of approximately $45,000
for the year ended July 31, 2003. For the 2002 fiscal year interest income of
approximately $33,000 is included in selling, general and administrative
expenses, net of interest expense of approximately $35,000, including
approximately $10,000 of debenture interest. Interest expense related primarily
to interest on shareholder loans and capital leases and interest income resulted
primarily form interest earned on our cash reserves.
NET LOSS
We recognized a net loss of approximately $1.2 million and $4.2 million for
the years ended July 31, 2003 and 2002, respectively. This represents a 72%
decrease in the loss between the two years. Net loss before non-cash charges,
which are described above, were approximately $0.7 million and $2.1 million for
the years ended July 31, 2003 and 2002, respectively. The decrease in the loss
was primarily a result of the restructuring of expenses, improving margins and
focusing on the most profitable clients. These three initiatives resulted in
profitability for the third and forth quarters of fiscal year 2003.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2004, we had cash of approximately $416,000, a $189,000
increase from last year, and a working capital deficiency of approximately $3.2
million as of July 31, 2004 compared to $5.0 million as of July 31, 2003, a
decrease in the deficit of approximately $1.8 million. - Other than working
capital generated from operation, our primary source of working capital during
the fiscal year ended July 31, 2004, was the receipt of $2,436,240 from the sale
of our equity securities and $250,000 from the sale of debentures, which were
converted into equity securities. Of these proceeds $258,115 were paid out in
expenses of raising the funds, for a net of $2,178,125.
Our management continues to analyze our operations and streamline where
appropriate. In April 2004, management made cost cuts that are anticipated to
save the Company approximately $580,000 per year. The costs that were cut
focused primarily upon the trimming of overhead, including the termination of
personnel and the deferral of new product development. - Our ability to make
additional significant cost cuts is limited. Also, such cost cutting programs
are potentially counterproductive to our long term best interests because such
cost cutting results in the loss of the Company's valued employees and new
product initiatives.
As a result of the loss of business from our two largest customers,
additional financing may be necessary. If revenues grow it will provide its 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.
30
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.
We remain optimistic about our long term business prospects. However, we
still face significant obstacles to achieve profitability. We anticipate that in
fiscal 2005 we will begin to roll out a substantial volume of repairs pursuant
to our ADP Claims co-marketing agreement. We have invested a significant amount
of our working capital, technical infrastructure and personnel time in preparing
eAuto for the increased claims volume from ADP Claims co-marketing agreement.
Our financial and personnel commitment to the ADP Claims co-marketing agreement
combined with the loss of revenue from our largest customer due to a sale of
part of their business has created the working capital pressures we experienced
during fiscal 2004 and will continue to experience during at least the first
half of fiscal 2005.
DEBT AND CONTRACTUAL OBLIGATIONS
Our commitments for debt and other contractual arrangements as of July 31,
2004 are summarized as follows:
Years ending July 31,
2005 2006 2007 2008 Total
---------- -------- -------- ------- ----------
Property lease $ 219,000 $ 225,000 $ 76,000 $ 520,000
Equipment lease 103,000 113,000 105,000 15,000 336,000
Loan payable to
stockholder 36,900 36,900
Convertible debenture 300,000 300,000
Employee compensation 786,300 119,000 905,300
---------- -------- -------- ------- ----------
$1,145,200 $757,000 $181,000 $15,000 $2,098,200
========== ======== ======== ======= ==========
The Company leases equipment and facilities under non-cancelable capital
and operating leases expiring on various dates through fiscal 2007. 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.
As of July 31, 2004 the Company had one loan outstanding to a stockholder
totaling $36,866. 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 2004 the Company renewed a $300,000, 8% convertible note payable
with a maturity date of August 2005. The note was initially executed in July of
2003. 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. In fiscal year 2003 The Company
recorded a discount to the note payable of $140,860 representing the beneficial
conversion feature of the debentures. The discount was amortized to interest
expense over the original 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 to up to 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.
31
In addition, the Company has two-year employment agreements with four other
executives that expire April 30, 2006. The agreements provide base salaries of
$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 supersede 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
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
The Company typically experiences a slow down in revenue during November
and December each year. Consumers tend to delay repairing their vehicles during
the holidays.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements to be provided pursuant to this Item 7 begin on
page F-1 of this Report, following Part III hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the design and operations of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of July 31, 2003. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective such that
the material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to
eAutoclaims, Inc., including our consolidated subsidiaries, and was made known
to them by others within those entities, particularly during the period when
this report was being prepared.
(b) Changes in internal controls over financial reporting.
In addition, there were no significant changes in our internal control over
financial reporting that could significantly affect these controls during fiscal
year ended July 30, 2004. We have not identified any significant deficiency or
materials weaknesses in our internal controls, and therefore there were no
corrective actions taken.
ITEM 9B OTHER INFORMATION
None
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
Name Age Position
Eric Seidel 41 Chief Executive Officer,
President and Director
Reed Mattingly 35 Executive Vice President
Scott Moore 43 Chief Financial Officer
Stacey Adams 32 Sr. VP of Operations
Dave Mattingly 46 Chief Information Officer
Jeffrey D. Dickson 61 Chairman of the Board of Directors
Christopher Korge 50 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 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, he was instrumental in increasing revenue from
approximately 15 million to over 30 million in revenues by working directly with
national accounts and consistently providing excellent service to clients. He
has also built and managed a 24-hour/7 day national claim reporting call center.
Companies under his management have been known for a "high-tech, high-touch"
approach to personalized customer service. He earned a degree in Business
Management from the University of South Carolina.
33
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 the Ontario Knife Company, (the U.S. Military's largest supplier of
bayonets and survival knives). He is founder and owner of Aero, Inc., A
fabricator of hot forged metal products.
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.
34
Mike Probyn, -Vice President of Operations. Mr. Probyn has been with
eAutoclaims for 3 years and is currently serving as our Vice President of
Operations overseeing the Auditing, Claims and Vendor departments. He formerly
served as the Regional Vendor Manager and National Vendor Manager. Prior to
working for eAutoclaims, Mr. Probyn was Co-Owner of a Pest Control Company for
over 15 years and also Past President of the Florida Junior Chamber of Commerce.
Ryan Blade, Vice President Information Technology. Mr. Blade joined
eAutoclaims in September 2000. He has served as a Technical Support Specialist,
a programmer and an IT Department Manager. He was promoted to Vice President
Information Technology in May 2003 and oversees the IT Support, Programming and
Network Administration departments. Formerly he served thirteen years in the
United States Army.
Election
The Company's Bylaws fix the size of the Board of Directors at no fewer
than three and no more than nine members, to be elected annually by a plurality
of the votes cast by the holders of Common Stock, and to serve until the next
annual meeting of stockholders and until their successors have been elected or
until their earlier resignation or removal. Currently there are four Committees
of the Board of Directors and Meetings
Board of Directors Meetings
Our Board of Directors held three (3) meetings during the fiscal year ended
July 31, 2004. Each of our directors attended all three meetings.
Audit Committee
The Audit Committee, which held four meetings during fiscal 2004 to review
the three 10Qs 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
2004 Mr. Korge was Chairman of the Audit Committee. For fiscal 2005 Mr.
Trbovich, Jr. will be Chairperson of the Audit Committee and serves with Mr.
Korge and Mr. Dickson. None of our Audit Committee members are a financial
expert as is defined under Item 401(h) of Regulations S-F. However, 2 of our 3
Audit Committee members are not part of the Company's management. We are an
OTC:BB issuer and accordingly are not currently required to have a financial
expert on our board.
Compensation Committee
The Compensation Committee, which held one meeting during fiscal 2004 to
review compensation issues, 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 2004, Mr. Trbovich, Jr. served as
Chairman of the Compensation Committee. Mr. Korge will be the Compensation
Committee Chairperson. 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. The entire board of directors acts as the nominating
committee.
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.
35
Those two outside Directors are also compensated with stock options at
various points throughout the year. All these options have an exercise price set
at the market value of the stock on the date of the granting of the option. The
options vest after one year and have a term of five years. For the fiscal year
ended July 31, 2004, two outside Directors received 12,500 options each quarter,
which were issued on November 1, 2003, January 31, 2004, April 30, 2004 and July
31, 2004 at an exercise prices of $0.35, $0.32, $0.35 and $0.38, respectively,
for a total of 50,000 options per director or 100,000 options in aggregate. 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, 2004 and 2003. Additionally, the two outside directors have
received $6,000 per year for attending board meetings and $4,000 per committee
per year for attending committee meetings. The committee fee is raised to from
$4,000 to $8,000 per committee per year if they are the Chairperson for the
committee. If they don't attend one or more committee or board meetings their
compensation is reduced accordingly.
Code of Ethics
The Company has adopted a "Code of Business Conduct and Ethics" that
applies to all eAuto employees and Board of Directors, including eAuto's
principal executive officer and principal financial officer, or persons
performing similar functions. A copy of the Company's Code of Business Conduct
and Ethics is attached as an exhibit to this annual report on Form 10-K. The
Company intends to post the Code of Business Conduct and Ethics and related
amendments or waivers, if any, on its website at www.eautoclaims.com.
Information contained on the Company's website is not a part of this report.
Copies of the Company's Code of Business Conduct and Ethics will be provided
free of charge upon written request to eAutoclaims, 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. Eric Seidel, Reed Mattingly, Scott Moore and Dave
Mattingly delinquent in the filing of their form 4s relating to the Company
granting stock options on March 10, 2004. Christopher Korge was delinquent on
his Form 4 filing relating to the investment and conversion of his debenture
into units in April and June 2004.
36
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation paid or accrued by us for the
fiscal years ended July 31, 2004, 2003, and 2002 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 2002 $249,398 $37,500 $76,311 -0- 182,870 -0- -0-
President and 2003 $242,402 $37,500 -0- -0- 165,000 -0- -0-
Chief Executive Officer 2004 $198,859 $19,752 -0- -0- 1,075,000 -0- -0-
Reed Mattingly 2002 $115,932 -0- -0- -0- 100,463 -0- -0-
Executive Vice President 2003 $104,931 -0- -0- -0- 30,000 -0- -0-
2004 $121,320 $1,500 -0- -0- 200,000 -0- -0-
Scott Moore 2002 $130,726 -0- -0- -0- 106,250 -0- -0-
Chief Financial Officer 2003 $131,424 -0- -0- -0- 80,000 -0- -0-
2004 $134,221 $1,500 -0- -0- 150,000 -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-
2004 $108,808 $1,500 -0- -0- 150,000 -0- -0-
Randy Wright (2) 2002 $123,718 -0- -0- -0- 102,778 -0- -0-
Chief Development Officer 2003 $95,556 -0- -0- -0- 30,000 -0- -0-
2004 -0- -0- -0- -0- -0- -0- -0-
Gaver Powers (3) 2001 $100,946 -0- -0- -0- 99,306 -0- -0-
Chief Information Officer 2002 $45,311 -0- -0- -0- -0- -0- -0-
2003 -0- -0- -0- -0- -0- -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.
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 25,000 1.0% $0.32 $0.32 9/25/08
25,000 1.0% $0.35 $0.35 11/01/08
25,000 1.0% $0.32 $0.32 11/15/08
1,000,000 39.4% $0.01 $0.41 3/10/14
Reed Mattingly 200,000 5.9% $0.01 $0.41 3/10/14
Scott Moore 150,000 3.3% $0.15 $0.41 3/10/14
Dave Mattingly 150,000 3.3% $0.15 $0.15 3/10/14
----------------------- ----------------- ------------------- ----------------- --------------------- ---------------------
(1) Except as described in the description of Mr. Seidel's employment contract
below, each option granted has a term of 10 years, and vests upon issuance.
37
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
The following table provides information with respect to the named officer
concerning exercised and unexercised options in fiscal year ended July 31, 2004.
------------------------- --------------- ------------------ ------------------------------- -------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs Options/SARs
Name of Acquired on Value at Fiscal Year End (#) at Fiscal Year End($)
Individual Exercise (#) Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable
(2)
------------------------- --------------- ------------------ ------------------------------- -------------------------
------------------------- --------------- ------------------ ------------------------------- -------------------------
Eric Seidel -0- -0- 1,088,333/101,667 $384,067/$17,133
Reed Mattingly -0- -0- 210,000 / 20,000 $76,300/$4,600
Scott Moore -0- -0- 176,667 /53,333 $61,967/$12,933
Dave Mattingly -0- -0- 160,000 /20,000 $57,800/$4,600
------------------------- --------------- ------------------ ------------------------------- -------------------------
(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
7/31/04 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 its financial goals. His previous
agreement specified a salary of $250,000. His new two (2) year agreement
specifies an annual base salary of $185,000, effective February 1, 2003 through
December 31, 2003. From January 1, 2004 through February 1, 2005, his minimum
annual base salary will be $200,000. Mr. Seidel receives bonuses equal to 3% of
the Company's earnings before interest, taxes, depreciation and amortization as
defined by generally accepted accounting principles (GAAP). Mr. Seidel may elect
to receive part or his entire bonus, if any, in shares of our Common Stock
valued at 90% of the then current market value. Each month that the Company is
profitable on a GAAP basis, He also has the right to receive options to purchase
25,000 shares of our common stock, with a term of five years at a strike price
equal to the stock's fair market value at the date of granting. These options
vest over the remaining life of his contract. He continues his entitlement to
reimbursement of ordinary, necessary and reasonable business expenses incurred
in connection with his services. He continues his right to participate in any
retirement, medical, dental, welfare and stock options plans, life and
disability insurance coverage and other benefits afforded our employees. He is
entitled to a $750 per month automobile allowance and $1,000 of personal
allowances. He is entitled to 299% of his current base salary if he loses his
position, unless he is terminated for cause. This contract supercedes the change
of control agreement dated April 9, 2001. 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. Mr. Mattingly is currently our
Executive Vice President in charge of Sales. This agreement was effective May 1,
2003, and has a term of two (2) years. Under this agreement, Mr. Mattingly is
entitled to an annual base salary of $110,000 through April 30, 2004, and then
$115,500 through April 30, 2005. Mr. Mattingly is entitled to bonus compensation
as determined by the Company. Mr. Mattingly may elect to receive part or his
entire bonus, if any, in shares of our Common Stock valued at 90% of the then
current market value. Mr. Mattingly is entitled to reimbursement for ordinary,
necessary and reasonable business expenses in connection with his services. He
may participate in any retirement, medical, dental, welfare and stock options
plans, life and disability insurance coverages and other benefits afforded our
employees. He is entitled to a $700 per month automobile allowance. If we elect
not to renew this agreement, then he is entitled to six (6) months severance pay
at his then current base salary. During the term of his agreement and for a
period of two (2) years after termination of his agreement, Mr. Mattingly is
subject to a non-competition and restrictive covenant with us. This agreement
supercedes the "Change of Control Agreement" dated April 9, 2001. Mr. Mattingly
took a 15% pay cut starting April 19, 2004 until the Company shows a monthly
profit of at least $50,000.
38
M. Scott Moore, Chief Financial Officer. In March 2003, we entered into an
employment agreement with M. Scott Moore, our Chief Financial Officer. This
agreement has a term of two (2) years, and commences on May 1, 2003. Under this
agreement, Mr. Moore is entitled to an annual base salary of $135,000 through
April 30, 2004, and $144,445 through April 30, 2005. Mr. Moore is entitled to
bonus compensation as determined by the Company. Mr. Moore may elect to receive
part or his entire bonus, if any, in shares of our Common Stock valued at 90% of
the then current market value. Mr. Moore is entitled to reimbursement for
ordinary, necessary and reasonable business expenses in connection with his
services. He may participate in any retirement, medical, dental, welfare and
stock options plans, life and disability insurance coverages and other benefits
afforded our employees. He is entitled to an automobile allowance of $400 per
month during the term of his agreement. Mr. Moore was issued options to purchase
50,000 shares of our Common Stock at $0.13 per share, which was the fair market
value of the closing price of our shares as of the date of his agreement. These
options vest in 1/3 installments over each year of employment. These options
have a maximum exercise period of 5 years. All his options vest if the contract
is not renewed or there is a change in control of the Company. If we elect not
to renew this agreement, then he is entitled to nine (9) months severance pay at
his then current base salary. Mr. Moore has agreed not to compete with us during
the term of this agreement and for a period of two (2) years after termination
of this agreement. This agreement supercedes the "Change of Control Agreement"
dated April 9, 2001. 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. Mr. Mattingly is currently our Chief Information
Officer. This agreement was effective May 1, 2003, and has a term of two (2)
years. Under this agreement, Mr. Mattingly is entitled to an annual base salary
of $105,000 through April 30, 2004, and then $110,250 through April 30, 2005.
Mr. Mattingly is entitled to bonus compensation as determined by the Company.
Mr. Mattingly may elect to receive part or his entire bonus, if any, in shares
of our Common Stock valued at 90% of the then current market value. Mr.
Mattingly is entitled to reimbursement for ordinary, necessary and reasonable
business expenses in connection with his services. He may participate in any
retirement, medical, dental, welfare and stock options plans, life and
disability insurance coverages and other benefits afforded our employees. He is
entitled to a $400 per month automobile allowance. If we elect not to renew this
agreement, then he is entitled to six (6) months severance pay at his then
current base salary. During the term of his agreement and for a period of two
(2) years after termination of his agreement, Mr. Mattingly is subject to a
non-competition and restrictive covenant with us. This agreement supercedes the
"Change of Control Agreement" dated April 9, 2001. Mr. Mattingly took a 15% pay
cut starting April 19, 2004 until the Company shows a monthly profit of at least
$50,000
Stacey Adams, Senior Vice President - Operations. We entered into an
employment agreement with Stacey Adams. Ms. Adams is currently our Senior Vice
President in charge of operations. This agreement was effective May 1, 2003, and
has a term of two (2) years. Under this agreement, Ms. Adams is entitled to an
annual base salary of $75,000 through April 30, 2004, and then $78,750 through
April 30, 2005. Ms. Adams is entitled to bonus compensation as determined by the
Company. Ms. Adams may elect to receive part or her entire bonus, if any, in
shares of our Common Stock valued at 90% of the then current market value. Ms.
Adams is entitled to reimbursement for ordinary, necessary and reasonable
business expenses in connection with her services. She may participate in any
retirement, medical, dental, welfare and stock options plans, life and
disability insurance coverages and other benefits afforded our employees. She is
entitled to a $400 per month automobile allowance. If we elect not to renew this
agreement, then she is entitled to six (6) months severance pay at her then
current base salary. During the term of her agreement and for a period of two
(2) years after termination of her agreement, Ms. Adams is subject to a
non-competition and restrictive covenant with us. This agreement supercedes the
"Change of Control Agreement" dated April 9, 2001. 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 a employee and board member retention program
the Board of Directors voted to grant certain employees (Mr. Seidel is not
entitled to participate in the employee retention program) a total of 2,000,000
shares of our common stock or equivalent consideration thereof and the current
and future board members 1,000,000 common shares if there is a change in control
of greater than 50% ownership of the Company or a sale of all or substantially
all it's assets. Only those employees and board members employed or on the board
at the time of the change will participate in the compensation.
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.
39
General Compensation Philosophy. Our compensation programs are designed to
directly align compensation with individual performance and stockholder value.
These programs 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.
Base Salary. Base salary is designed primarily to be competitive with base
salary levels in effect at high technology companies that area of comparable
size and with which we compete for executive personnel. Base salary is set
annually based on job-related experience, individual performance and pay levels
of similar positions at comparable companies. Salaries for executive officers
were generally determined on an individual basis by evaluating each executive's
scope of responsibility, performance, prior experience and salary history, as
well as salaries for similar positions at comparable companies.
Cash Performance Awards. Management believes that cash performance awards,
such as bonuses, should be tied to achievement of performance goals established
by the committee. On June 2, 2003 the board approved a bonus plan based on
achieve certain levels of profitability. If the management team achieves
earnings per share of $0.01 to $0.10 per share then eight senior managers will
split a total bonus pool ranging from $10,000 to $100,000 based on the level of
profitability. The computation was tied to profitability to directly tie the
employee bonuses to goals that will enhance shareholder value.
Stock Options. In order to link the interests of our stockholders and
senior management, we issue stock options. We believe that the practice of
granting stock options is critical to retaining and recruiting the key talent
necessary at all employee levels to ensure our success. Stock options generally
have value for executive officers only if the price of our Common Stock
increases above the fair market value of a share of Common Stock on the grant
date and the officer remains in our employ for the period required for the
options granted to such person to vest.
The number of shares subject to stock options granted is within the
discretion of the Compensation Committee. In determining the size of stock
option grants, the Compensation Committee considers the officer's
responsibilities, the expected future contribution of the officer to the
Company's performance and the number of shares, which continue to be subject to
vesting under outstanding options. For 2003, options were granted to the
executive officers based on their positions and a subjective assessment of
individual performances. Stock options typically have been granted to executive
officers when the executive first joins the Company. At the discretion of the
Committee, executive officers may also be granted stock options to provide
greater incentives to continue their employment with the Company and to strive
to increase the value of the Company's Common Stock.
Compensation for the Chief Executive Officer. Mr. Seidel's base salary for
the year 2004 was determined by the employment agreement previously signed on
February 1, 2003 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.
40
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, 2004 we issued 367,500 options to
employees in accordance with the 1998 Plan. During that same time period the
Company issued 367,500 options to employees in accordance with the 1998 Plan.
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. In addition 2,020,000 options with
an exercise price of $0.01 were granted to employees as a performance bonus in
executing the contract with ADP claims services and 72,767 options with an
exercise price of $0.01 were issued to middle management personnel as
alternative compensation when salary cuts were announced. 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 except the penny options, which vested upon
issuance below the market value of the stock.
We have the right to increase the total amount of options, which may be
issued so long as total outstanding options do not exceed 15% of the number of
our fully diluted outstanding shares of Common Stock. Furthermore, in lieu of
paying cash bonuses, the employees may be issued shares of our Common Stock at
the then fair market value in an amount not to exceed 50% of that employee's
base salary. All of the options we have issued are subject to immediate vesting
and are exercisable in the event of a change of control, which is defined as a
sale of substantially all of our assets or a merger in which we are not the
surviving entity.
As of September 30, 2004, we have issued, or reserved for issuance,
19,797,079 shares of our Common Stock relating to outstanding options and
warrants which are categorized as follows:
Options issued to Directors 1,395,000 (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 3,614,937 (4)
Options issued to Consultants 56,429 (5)
Options Outstanding prior to eAutoclaims merger 4,000
Warrants relating to debentures 1,150,000 (6)
Warrants relating to private placement 9,224,428 (7)
Purchaser's Warrants 780,000 (8)
Agent's Warrants 264,385 (9)
Placement Agent warrants 1,580,400 (10)
----------
Total 19,797,079
==========
(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".
41
(2) Mr. Seidel currently owns the following options with the following
terms:
Strike #
# of Options Price Vested Expiration Date
32,500 $2.00 32,500 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, 2004, 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. 2,767,764 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 35,000 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 $0.35 to $0.63 per share, with a term
of 10 years.
(7) Represents warrants issued to purchasers of commons stock with an
exercise price of between $0.35 and $0.75 per share, with a term of
between 3 and 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".
(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) Represent 790,200 placement agent warrants to purchase a unit for
$0.28. Each unit consists of one share of stock and one warrant to
purchase another share of stock at $0.35.
42
The following table sets forth information with respect to our common stock
that may be issued upon the exercise of outstanding options, warrants, and
rights to purchase shares of our common stock as of September 30, 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 2,626,850 $0.83 2,642,845 (4)
Equity Compensation Plans
Not Approved by
Stockholders (1) (2) (3) 7,132,016 $0.11 N/A
---------
Total 9,758,866 $0.30
=========
-----------------------------------------------------------------------------------------------------
(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 13,003,212 warrants issued to investors in connection with capital
raising transactions not approved by our stockholders.
(4) Based on a Board of Directors imposed limit of 15%, not the 20% shown in the
approved plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK MATTERS
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.
43
Name and Address of Amount and Nature of
Beneficial Owner (1) Beneficial Ownership Percentage(2)(16)
-------------------- --------------------- -----------------
Eric Seidel (3) 2,255,925 6.12%
Reed Mattingly (5) 538,497 1,51%
Scott Moore (4) 489,750 1.37%
Dave Mattingly (6) 274,537 0.77%
Stacey Adams (7) 225,802 0.63%
Jeffrey D. Dickson (8) 1,003,550 2.76%
Nicholas D. Trbovich, Jr. (9) 406,294 1.14%
Christopher Korge (10) 3,784,831 10.12.%
Canadian Advantage Limited Partnership 2,991,504 8.46%
(11) 1,137,330 3.22%
Advantage (Bermuda) Fund, Ltd. (12) 5,192,858 13.68%
Kinderhook Partners, LP (13) 1,315,680 6.65%
Entrade, Inc. (14)
Directors and officers 8,979,186 21.75%
as a group (8 persons) (15)
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. Unless otherwise noted, each such
person is deemed to be the beneficial owner of shares of Common Stock held
by such person on September 30, 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 35,364,635 shares of Common Stock outstanding at the close of
business on September 30, 2004. Excludes: (i) 10,283,417 shares currently
issuable pursuant to outstanding options issued under Stock Option Plan; (ii
) 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. . This amount excludes
shares of our Common Stock underlying the conversion rights of our Series A
Preferred Stock and excludes 7,054,352 shares reserved for outstanding
options and warrants. 1,000,000 warrants issued to Mr. Korge were included
(see note 10 below).
(3) 400,000 shares of our Common Stock were issued to Mr. Seidel as founder
shares. He acquired 12,341 in open market purchases and exercised 777,504 of
options granted to him by the company. He subsequently gave up 104,753 in a
divorce and sold another 300,000 shares. 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) 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 $0.01
(iv) The sale of 100,000 shares, (v) options to acquire 200,000 common
shares at an exercise price of $.01 and (vi) options to acquire up to
183,333 shares at exercise prices between $0.15 to $2.00. 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".
(5) Mr. Moore's ownership represents (i) 1,500 common shares acquired in open
market purchase, (ii) 81,250 common shares acquired through exercising
options at $.01 per share, and (iii) options to acquire 150,000 common
shares at an exercise price of $.01, and (iv) vested options to acquire up
to 257,000 common shares at an exercise price between $0.13 and $2.69. This
amount excludes unvested options for 70,000 common shares at exercise prices
between $0.13 and $0.55, which vest through April 25, 2006. See "Executive
Compensation - Employment Contracts and Other Matters".
(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) the exercise of options
to acquire 16,204 shares at an exercise price of $.01 (iv) The sale of
26,500 shares (v) options to acquire 150,000 common shares at an exercise
price of $.01, (iv) options to acquire up to 108,333 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 $0.55,
which vest through December 21, 2005. See "Executive Compensation".
44
(7) Ms. 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 60,000 shares at exercise prices between $0.15 and $3.00. This
amount excludes unvested options to acquire up to 25,000 common shares at
exercise prices of $0.15 to $0.55, which vest through December 21, 2005. See
"Executive Compensation".
(8) Includes 10,000 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) 234,214 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 160,000
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 $0.38, 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) 228,500 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 $0.35 in connection with the issuance of our
convertible debentures in 2001, (vi) warrants to acquire up to 892,857
shares of our Common Stock at a conversion price of $0.35 in connection with
the issuance of our convertible debentures in 2004 (vii) 892,857 shares
assume to have been converted as a result of the convertible debentures
purchased on 4/23/04, and (viii) options to acquire 160,000 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 $0.38, 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 2,596,429 shares and 2,596,429 warrants purchased in a private
placement in the spring of 2004. Warrants have a three year term and a
strike price of $0.35.
(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.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a result of the eAutoclaims (Del.) merger, we assumed obligations under
a Consulting Agreement with Jeffrey D. Dickson. This agreement was effective
December 1, 1999 and is renewable on an annual basis. Mr. Dickson agreed to
provide Mr. Seidel, our Chief Executive Officer, day-to-day advisory services
concerning management, capitalization, corporate structure, organizational,
industrial and regulatory issues. In addition, Mr. Dickson agreed to serve as
our Chairman of the Board of Directors, as well as Chairman of our Audit and
Compensation Committees.
In consideration for these consulting services Mr. Dickson is entitled to
an annual consulting fee of $121,000, payable every two (2) weeks. In addition,
Mr. Dickson was entitled to a non-interest bearing $126,500 line of credit that
was originally established in fiscal year 2000. No borrowings were made
subsequent to September 2002 or will be made in the future under this line of
credit. As of July 31, 2004, $42,431 is still outstanding under this
arrangement, after $36,000 of service credits as described below. Mr. Dickson is
spending a substantial amount of his time dealing with administrative matters,
investor relations and public relations. This frees up Mr. Seidel's time to
focus on sales and marketing. The Company and Mr. Dickson have agreed that
$3,000 per month of his consulting fee will be withheld by the Company and used
to reduce the outstanding balance under the line of credit. .
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 2004, 2003 and 2002, we issued 228,498, 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 $80,584, $118,525 and $105,040 of his services
charged. All other charges incurred by us for other employees of his firm are
paid in cash. As of July 31, 2004, all these common shares have been earned.
In connection with the issuance of shares of our Common Stock in August
2003, Christopher Korge, one of our directors acquired 107,527 shares at a fixed
price of $.279 per share. In addition, the brother-in-law of Mr. Seidel, our
CEO, acquired 35,842 shares at a fixed price of $.279.
On April 23, 2004 the Company received $250,000 from Mr. Korge in exchange
for 8% convertible debentures due and payable on October 14, 2004 unless
converted. The debentures were convertible into common stock at $0.28 per share.
The Company also issued 892,857 three-year warrants with a strike price of $0.35
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 $0.35 per share. The
Company agreed to register the shares underlying the warrants and the
convertible debenture. 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. On June 24, 2004, Mr. Korge elected to exchange the
convertible debentures and the 892,857 warrants received from his investment for
892,857 units. Each unit consists of one share of stock and one warrant, with a
three-year term and a strike price of $0.35 per share.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND EXPENSES
Compensation of Auditors
Audit Fees. Goldstein Golub Kessler LLP billed the Company an aggregate of
$92,395 in fees and expenses for professional services rendered in connection
with the audit of the Company's financial statements for the fiscal year ended
July 31, 2003 and the reviews of the financial statements included in each of
the Company's Quarterly Reports on Form 10-Q during the fiscal year ended July
31, 2004.
Financial Information Systems Design and Implementation Fees. Goldstein
Golub Kessler LLP did not provide the Company any professional services for
financial information systems design or implementation for the fiscal year ended
July 31, 2004.
All Other Fees. Goldstein Golub Kessler LLP billed the Company an aggregate
of $25,624 in fees and expenses during the year ended July 31, 2004, primarily
for the following professional services:
Audit related services $ 25,624 (1)
Taxes $ 2,500
(1) Audit related services include the review of Form S-1 related to the
Company's registration statement and related offerings and accounting
advice.
46
ITEM 15. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are amended/restated in their entirety to reflect our
merger with eAutoclaims.
Exh
No. Description
1.1 [Reserved]
1.2 [Reserved]
3.1 Articles of Incorporation of Samuel Hamann Graphix, Inc. (Nevada)
as amended (1)
3.2 Articles of Merger between Samuel Hamann Graphix, Inc. (Nevada) and
Samuel Hamann Graphix, Inc. (California) (1)
3.3 By-laws of Transformation Processing Inc. (Nevada).(1)
3.4 Articles of Merger between of TPI (Ontario) and TPI (Nevada) (1)
3.5 Agreement and Plan of Merger by and between Transformation Processing,
Inc. and eAutoclaims.com, Inc., dated April 26, 2000 (3)
3.6 Articles of Merger of eAutoclaims.com, Inc., a Delaware corporation with
and into Transformation Processing, Inc., a Nevada corporation (5)
3.7 Agreement and Plan of Merger by and among eAutoclaims.com, Inc., a Nevada
corporation, eAutoclaims.com Acquisition, a South Carolina corporation,
Premier Express Claims, Inc., a South Carolina corporation, and its
stockholders, dated June 8, 2000 (2)
3.8 First Amendment to Agreement and Plan of Merger with Premier Claims, Inc.
dated June 27, 2000 (2)
3.9 Articles of Merger or Share Exchange between Premier Express, Inc., as
the surviving corporation and eAutoclaims.com Acquisition Corporation,
filed July 20, 2000 with the Secretary of State of South Carolina (5)
3.10 Promissory Note dated June 27, 2000 between eAutoclaims.com, Inc. and
Randal K. Wright and S.Reed Mattingly (2)
3.11 Promissory Note dated June 16, 2000 between eAutoclaims.com, Inc.
and Randal K. Wright (2)
3.12 Promissory Note dated June 16, 2000 between eAutoclaims.com, Inc. and
S. Reed Mattingly. (2)
3.13 Articles of Amendment to Articles of Incorporation increasing number of
authorized shares from 50 million to 100 million and name modification.*
4.1 Specimen of Common Stock Certificate (1)
4.2 [Reserved]
4.3 [Reserved]
4.4 The Registrants 1998 Stock Option Plan (4)
4.5 [Reserved]
4.6 Form of Stock Option Agreement to Employees(6)
4.7 Form of Directors Stock Option Agreement(6)
4.8 Form of Non-Qualified Stock Option Agreement(6)
5.1 [Reserved]
10.1 Employment Agreement between eAutoclaims.com, Inc. and Eric Seidel
dated February 1, 2000 (5)(8)
10.2 Employment Agreement between eAutoclaims.com, Inc. and Randal K. Wright
dated July 1, 2000 (2)(9)
10.3 Employment Agreement between eAutoclaims.com, Inc. and S. Reed Mattingly
dated July 1, 2000 (2)(8)
10.4 Employment Agreement between eAutoclaims.com, Inc. and M. Scott Moore
dated August 14, 2000 (5)(9)
10.5 Employment Agreement between eAutoclaims.com, Inc. and Gaver Powers dated
April 13, 2000 (5)
10.6 Consulting Agreement between eAutoclaims.com, Inc. and Jeffrey D. Dickson
dated December 1, 1999 (5)
10.7 Consulting Agreement between eAutoclaims.com, Inc. and Liviakis Financial
Communications, Inc.
dated February 1, 2000 (5)(9)
10.8 Amendment No. 1 to Consulting Agreement between eAutoclaims.com, Inc.
and Liviakis Financial Communications, Inc. dated September 18, 2000
(5)(9)
10.9 Lease Agreement between eAutoclaims.com, Inc. and KWPH, Inc., dated
October 17, 2000 (5)(9)
10.10 Service Agreement between eAutoclaims.com, Inc. and WE Securities, Inc.
dated August 8, 2000 (5)(9)
10.11 Business Consulting Agreement between eAutoclaims.com, Inc. and TTG
LLC dated September 8, 2000 (5)(9)
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)
47
10.15 Order of the Superior Court of Justice in the Matter of the Proposal of
Transformation Processing, Inc. dated November 25, 1999 (5)
10.16 Proposal of Transformation Processing, Inc. - Court File No. 32-107046
filed in the Superior Court of Justice dated October 14, 1999. (5)
10.17 Share Exchange Agreement between Transformation Processing, Inc. and
certain of its securities holders dated April 30, 2000 (5)
10.18 [Reserved]
10.19 Securities Purchase Agreement effective June 27, 2000 between Thomson
Kernaghan, as Agent and eAutoclaims.com, Inc. (5)
10.20 Certificate of Rights, Designations, Preferences and Limitations of
Series A Convertible Preferred Stock (5)
10.21 Security Agreement between Thomson Kernaghan, as Agent and
eAutoclaims.com, Inc. (5)
10.22 Form of Purchasers Warrant (5)
10.23 Form of Agents Warrant (5)
10.24 Registration Rights Agreement (5)
10.25 eAutoclaims.com, Inc. Agreement with Certain Securities Holders
effective May 31, 2000 (5)
10.26 eAutoclaims.com, Inc. Agreement with Sovereign Partners, Ltd.
effective May 31, 2000 (5)
10.27 eAutoclaims.com, Inc. Agreement with Dominium Capital Fund (5)
10.28 Form of Master Modification Agreement with Certain Security Holders
dated January 12, 2001(6)
10.29 Restated master Modification Agreement dated May 2001
10.30 Modification agreement dated November 2001 superceding the original
Modification Agreement dated January 12, 2001 and the Restated
Modification Agreement dated May 2001
10.31 Form of Bricks to Clicks Service and License Agreement (6)
10.32 Form of Collision Repair Facility Agreement and Procedures (6)
10.33 Form of Change of Control and Termination Agreement (6)
10.34 Form of Officers/Directors Indemnification Agreement (6)
10.35 Bricks to Clicks Service and Licensing Agreement with Inspire Claims
Management, Inc., dated November 1, 2000(6)(9)
10.36 Lease Agreement for 110 East Douglas Road dated September 2001 (6)
10.37 Form of Employee Confidentiality Agreement (6)
10.38 Letter Agreement with Liviakis Financial Communications, Inc. (6)
10.39 Letter Agreement with Former Liviakis Financial Communications, Inc.
Employees (6)
10.40 Claims Management Services and License Agreement with Royal Indemnity
Company, dated April 24, 2001(6)
10.41 Amended and Restated Employment Agreement with Eric Seidel effective
May 21, 2001 (6)(8)
10.42 Form of Amendment to Certificate of Designation, Rights and Preferences
of Series A Preferred Stock effective May 21, 2002 (7)*
10.43 Agreement between Parts.com, Inc. and the Registrant effective
May 1, 2001(6)
10.44 Form of Convertible Debenture (6)
10.45 Form of Warrants issued in connection with Convertible Debentures (6)
10.46 Form of Subscription Agreement for purchasers of Convertible
Debentures (6)
10.47 Amended and Restated Employment Agreement with Eric Seidel, dated
March 27, 2003*
10.48 Employment Agreement with Scott Moore, effective April 25, 2003* (8)
10.49 Employment Agreement with Reed Mattingly, effective May 1, 2003* (8)
10.50 Employment Agreement with Dave Mattingly, effective May 1, 2003* (8)
10.51 Employment Agreement with Stacy Adams, effective May 1, 2003* (8)
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 Form of $250,000 Convertible Note and Related Matters with Christopher
Korge, dated May ----, 2004 (11)
10.58 Form of 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)
31 Certificates of the Chief Executive Officer and Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a)
32 Certificate pursuant to Section 1350 pursuant to Section 906 of
Sarbanes-Oxley Note of 2002.
99.1 Code of Ethics
48
(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) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2003
(9) This Employment Agreement has been superseded by a new employment
agreement filed herewith. See (10)
(10) Terminated, no longer in effect
(11) Incorporated by reference from the Registrant's Form S-1 Registration
Statement File No. 333-115705
* Filed herewith
(b) Reports on Form 8-K
Item 5/Item 9. Regarding commitments for a private placement of $1,000,000,
dated August 8, 2004.
Item 5/Item 9 Royal Sun Alliance sells a portion of business serviced by
eAutoclaims, dated October 9, 2003.
Item 5/Item 9 Restructuring of outstanding convertible preferred stock, dated
November 17,2003.
Item 5/Item 9 ADP Claims Services Group Joint Marketing Agreement, date
March 10, 2004.
Item 9 Guidance on Fiscal Year 2005, dated March 18, 2004.
Item 5/Item 9 Closing of $1.6 million of Financing, dated April 23, 2004.
Item 5/Item 9 Closing of $2.5 million of financing (including the $1.6
million), dated May 21, 2004.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Oldsmar,
State of Florida, on the 9th day of November 2004.
eAUTOCLAIMS.COM.INC.
BY: /s/ Eric Seidel
--------------------------------------------
Eric Seidel
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/Eric Seidel President, Chief Executive November 9, 2004
---------------------------- Officer and Director
Eric Seidel
/s/Scott Moore Chief Financial and November 9, 2004
---------------------------- Accounting Officer
Scott Moore
/s/Jeffrey D. Dickson Chairman November 9, 2004
----------------------------
Jeffrey D. Dickson
/s/Nicholas D. Trbovich, Jr. Director November 9, 2004
----------------------------
Nicholas D. Trbovich, Jr.
/s/Christopher Korge Director November 10, 2004
-----------------------------
Christopher Korge
50
EXHIBIT 31
CERTIFICATIONS
I certify that:
1. I reviewed this annual report on Form 10-K;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
materials respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Ac Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 9, 2004 /s/ Eric Seidel
------------------------------- -----------------------------------
President and C.E.O.
Date: November 9, 2004 /s/ Scott Moore
------------------------------- -----------------------------------
Chief Financial Officer
51
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of eAutoclaims-, Inc. (the
"Company"), on Form 10-K of the year ended July 31, 2004, we hereby certify
solely for the purpose of complying with 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of
my knowledge:
1. The annual report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the annual report fairly presents, in
all materials respects, the financial condition and results of
operations of the Company.
Date: November 9, 2004
/s/ Eric Seidel
---------------------------------------
Print Name: Eric Seidel
Title: Chief Executive Officer
/s/ Scott Moore
---------------------------------------
Print Name: Scott Moore
Title: Chief Financial Officer
52
EAUTOCLAIMS, INC.
FINANCIAL STATEMENTS
JULY 31, 2004
Page
----
Report of Independent Registered Public Accounting Firm F - 2
Financial Statements:
Balance Sheets F - 3
Statements of Operations F - 4
Statements of Stockholders' Equity (Deficiency) F - 5
Statements of Cash Flows F - 6
Notes to Financial Statements F-7 - F-25
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule F-26
Schedule II - Valuation and Qualifying Accounts F-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
eAutoclaims.com, Inc.
We have audited the accompanying balance sheets of eAutoclaims, Inc. as of July
31, 2004 and 2003 and the related statements of operations, stockholders' equity
(deficiency), and cash flows for each of the three years in the period ended
July 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eAutoclaims, Inc. as of July
31, 2004 and 2003 and the results of its operation and its cash flows for each
of the three years in the period ended July 31, 2004, in conformity with United
States generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
September 24, 2004
F-2
EAUTOCLAIMS, INC.
BALANCE SHEETS
-----------------------------------------------------------------------------------------------------------------------------
July 31, 2004 July 31, 2003
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 415,549 $ 226,161
Accounts receivable, less allowance for doubtful accounts
of $161,000 and $242,000 respectively 728,776 1,198,764
Due from related parties 65,431 111,821
Prepaid expenses and other current assets 79,341 52,832
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 1,289,097 1,589,578
Property and Equipment, net of accumulated depreciation
of $1,326,462 and $1,034,701 respectively 1,073,409 1,033,551
Goodwill 1,093,843 1,093,843
Other Assets 25,800 40,540
Deferred Income Tax Asset, net of valuation
allowance $9,002,000 and $6,315,000 respectively
-----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,482,149 $ 3,757,512
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable, advanced payments and accrued expenses $ 4,378,858 $ 6,259,323
Loan payable - stockholder 36,866 117,993
Current portion of capital lease obligation 63,888 33,925
Convertible debenture, net of unamortized discount of $129,122 170,878
-----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,479,612 6,582,119
Convertible debenture 300,000
Capital Lease Obligation 195,621 86,325
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,975,233 6,668,444
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 200 shares and 247 shares respectively
aggregate liquidation preference of $1,000,000 and $1,235,000 respectively 1 1
Common stock - $.001 par value; authorized 100,000,000 shares, issued
and outstanding 34,337,362 shares and 22,828,955 shares respectively 34,338 22,829
Additional paid-in capital 22,171,857 18,459,225
Accumulated deficit (23,699,280) (21,392,987)
-----------------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (1,493,084) (2,910,932)
-----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,482,149 $ 3,757,512
==============================================================================================================================
See Notes to Financial Statements
F-3
EAUTOCLAIMS, INC.
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------
Year Ended July 31 2004 2003 2002
--------------------------------------------------------------------------------------------
Revenue:
Collision repairs management $ 22,718,284 $ 29,697,420 $ 28,485,167
Glass repairs 1,239,969 894,485 995,972
Fleet repairs management 713,303 868,962 1,129,784
Fees and other revenue 2,489,126 2,600,205 1,672,440
--------------------------------------------------------------------------------------------
Total revenue 27,160,682 34,061,072 32,283,363
Expenses:
Claims processing charges 22,130,634 28,323,741 27,293,568
Selling, general and administrative 6,417,316 6,418,911 8,114,580
Depreciation and amortization 515,813 490,935 530,618
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 307,694 11,738 555,551
--------------------------------------------------------------------------------------------
Total expenses 29,371,457 35,245,325 36,494,317
--------------------------------------------------------------------------------------------
Net loss $ (2,210,775) $ (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 (95,518) (101,296) (570,997)
--------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (2,306,293) $ (1,285,549) $ (4,781,951)
============================================================================================
Loss per common share - basic and
diluted $ (0.09) $ (0.06) $ (0.32)
============================================================================================
Weighted-average number of common
shares outstanding-basic and diluted 26,308,434 20,209,634 14,813,549
============================================================================================
See Notes to Financial Statements
F-4
EAUTOCLAIMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
------------------------------------------------------------------------------------------------------------------------------------
Additional Stockholders'
Preferred Stock Common Stock Paid-in Accumulated Equity
Years ended July 31, 2004, 2003 and 2002 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 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 1,712,365 1,712 401,358 403,070
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)
Issuance of common stock for services 436,419 437 164,599 165,036
Accrued dividends on preferred stock (95,518) (95,518)
Issuance of common stock upon
conversion of preferred stock (47) 1,071,891 1,072 (1,072) -
Issuance of common stock for
preferred stock dividends 326,800 327 71,325 71,652
Issuance of compensatory stock options 868,756 868,756
Fair value of warrants issued in conjunction
with convertible debenture 89,286 89,286
Recognition of beneficial conversion feature
on convertible debenture 89,286 89,286
Proceeds from sale of common stock and
warrants, net of costs 8,737,429 8,737 2,169,388 2,178,125
Conversion of debt to equity 892,857 893 249,107 250,000
Isssuance of common stock for interest
on convertible debt 43,011 43 11,957 12,000
Net loss (2,210,775) (2,210,775)
------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2004 (200) $1 34,337,362 $34,338 $22,171,857 $(23,699,280) $(1,493,084)
====================================================================================================================================
See Notes to Financial Statements F-5
EAUTOCLAIMS, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------
Year Ended July 31 2004 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (2,210,775) $ (1,184,253) $ (4,210,954)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 515,813 490,935 530,618
Loss on disposal of property and equipment 77,430
Write off of computer software 360,000
Amortization of discount on debentures 307,694 11,738 555,551
Common stock issued for services 165,036 156,835 161,260
Common stock issued for interest 12,000 9,211
Common stock issued for rent and option to purchase facility 43,659
Issuance of compensatory stock options 868,756 82,509
Allowance for doubtful accounts (81,000) (158,000) 340,000
Changes in operating assets and liabilities
Accounts receivable 550,988 (176,412) 4,057
Prepaid expenses and other current assets (23,119) 180,681 (57,448)
Other assets 14,740 (15,610) (19,930)
Accounts payable and accrued expenses (1,904,331) 870,186 2,245,810
Deferred software subscription revenue 0 (284,676) 173,006
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,706,768) (108,576) 217,349
--------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activity:
Purchases of property and equipment (463,725) (418,448) (765,980)
Payments from related parties 43,000 38,563 53,469
Loans to related parties (7,000) (42,000)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activity (420,725) (386,885) (754,511)
--------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 2,178,125 403,070 93,465
Proceeds from exercise of stock options 9,590 3,260
Principal payments on capital lease (30,117) (28,686)
Proceeds from issuance of convertible debentures 250,000 300,000
Principal payments on shareholder loans (81,127) (7,007)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,316,881 676,967 96,725
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 189,388 181,506 (440,437)
Cash at beginning of year 226,161 44,655 485,092
--------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 415,549 $ 226,161 $ 44,655
==========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 56,855 $ 45,324 $ 34,801
==========================================================================================================================
Supplemental disclosure of noncash investing and financing
activities:
Gross proceeds from sale of equity $ 2,436,240
Less costs paid to raise equity $ (258,115)
-----------
Net proceeds from sale of equity $ 2,178,125
==========================================================================================================================
Fair value of warrants issued in conjunction with convertible
debenture $ 89,286
==========================================================================================================================
Recognition of beneficial conversion feature on convertible
debenture $ 89,286
==========================================================================================================================
Conversion of debentures to common stock $ 250,000 $ 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 $ 71,652 $ 20,080 $ 133,492
==========================================================================================================================
Accrued dividends on preferred stock $ 95,518 $ 101,296
==========================================================================================================================
Equipment acquired by capital lease $ 169,376 $ 106,899
==========================================================================================================================
See Notes to Financial Statements F-6
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE BUSINESS AND BASIS OF PRESENTATION
eAutoclaims.com, Inc. changed its name to eAutoclaims, Inc. (the "Company")
as of July 29, 2004. The 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
As shown in the financial statements, the Company has suffered recurring
losses from operations, has a stockholders' deficiency and a working capital
deficiency. The Company has been able to raise additional funds from debt
and equity offerings and management believes it can continue to do so in the
future. During the year ending July 31, 2004, the Company entered into new
agreements and alliances, which should provide the Company with increased
revenue. In addition, the Company has secured a noncancellable line of
equity from a shareholder in the amount of $2,000,000.
The accompanying financial statements include the accounts of the Company
and SalvageConnection.com, Inc. ("Salvage), which was merged into the
Company in January 2004. 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, INC.
NOTES TO 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, 2004, 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
F-8
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
compensation using the 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,
2004 2003 2002
--------- --------- -------
Net loss as reported $(2,210,775) $(1,184,253) $(4,210,954)
Add back intrinsic value of the
options issued to employees and
charged to operations 868,756 82,509
Deduct total stock based employee
compensation expense determined
under fair value based methods
for all awards (905,006) (607,267) (1,034,192)
--------------------------------------
Pro forma net ($2,247,025) $(1,791,520) $(5,162,637)
=====================================
Basic and diluted net loss per share
as reported $(.09) $(.06) $(.32)
Pro forma basic and diluted loss per
share $(.09) $(.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 years ended July 31, 2004, 2003 and 2002. The assumed
risk-free interest rate was 4.68%, 6.50% and 6.50%, respectively, and the
assumed market volatility of the of the Company's common stock was 170%,
200% and 200%, respectively. The assumed dividend yield was 0% and an
expected option life was five years for all three years presented.
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
F-9
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2004, 2003 and 2002, 19,909,078,
7,112,536 and 7,704,784 options and warrants, respectively, were excluded
from the diluted loss per share computation, as their effect would be
antidilutive. Additionally, as of July 31, 2004, 2003 and 2002, 6,075,269,
5,363,463 and 6,077,098 of shares respectively, that would be issuable upon
conversion of convertible securities plus accrued interest were excluded
from the dilutive loss per share computation, as their effect would be
antidilutive.
F-10
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
At July 31, 2004 property and equipment, at cost, consists of the following:
Estimated
2004 2003 Useful Life
----------------------------------------------------------------------------
Computer Equipment $719,266 $644,702 3 years
Software 977,608 868,189 3 years
Office equipment 367,026 231,606 3 to 10 years
Leasehold improvements 247,550 231,883 Term of Lease
Furniture and fixtures 88,421 91,872 7 to 10 years
----------------------------------------------------------------------------
2,399,871 2,068,252
Less accumulated depreciation 1,326,462 1,034,701
----------------------------------------------------------------------------
$1,073,409 $1,033,551
============================================================================
Office equipment and software include amounts acquired under capital leases
of approximately $276,000 and $147,000 at July 31, 2004 and 2003
respectively, with related accumulated depreciation of approximately $22,000
for each year.
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.
F-11
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
5. GOODWILL AND INTANGIBLE ASSETS (Continued)
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,
2004 2003 2002
-----------------------------------------------------------------------------
Net loss $(2,210,775) $(1,184,253) $(4,210,954)
Add back: goodwill amortization 218,772
-----------------------------------------------------------------------------
Adjusted net income loss $(2,221,775) $(1,184,253) $(3,992,182)
=============================================================================
6. ACCOUNTS PAYABLE, ADVANCED PAYMENTS AND ACCRUED EXPENSES
Accounts payable, advanced payments and accrued expenses consist of the
following:
July 31
2004 2003
========================================================================
Advanced payments from customers $ 2,658,295 $ 2,907,741
Accounts payable to repair facilities
and other vendors $ 1,057,093 $ 2,601,824
Accrued payroll and vacation wages 149,846 128,101
Accrued dividends 268,768 244,902
Other accrued liabilities (none in excess
of 5% of current liabilities) 244,856 376,755
------------------------------------------------------------------------
$ 4,378,858 $ 6,259,323
========================================================================
7. LOAN PAYABLE - STOCKHOLDER
As of July 31, 2004 the Company had one loan outstanding to a stockholder
totaling $36,866. 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. Interest expense amounted to approximately $10,000 and $14,000 for
the years ended July 2004 and 2003 respectively.
F-12
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
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. In July 2003, The Company recorded a discount to the note payable
of $140,860 representing the beneficial conversion feature of the
debentures. The discount was amortized to interest expense over the one-year
term of the note.
On July 21, 2004, the debtor extended the term of the 8% note to mature in
August of 2005. No discount to the note payable was recorded in July of 2004
because the market price of the stock was materially the same as the $0.279
conversion rate in the extension. On August 24, 2004, the debtor converted
$25,000 of the debt into common stock (see Subsequent Events). In the event
that the average closing price for the Company's common stock for the last
ten trading days of any month is $0.50 or greater, the Company has the right
to require mandatory conversion of $25,000 of the principal amount of the
note into shares of the Company's common stock. Interest expense relating to
these debentures amounted to approximately $22,000 and $2,000 for the years
ended July 31, 2004 and 2003 respectively.
On April 23, 2004 the Company received $250,000 from a member of the Board
of Directors in exchange for 8% convertible debentures due and payable on
October 14, 2004 unless converted. The debentures are convertible into
common stock at $0.28 per share. The Company also issued 892,857 three-year
warrants with a strike price of $0.35 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 $0.35 per share. The initial value assigned to the
warrants of $89,286, plus the value assigned to the debentures' beneficial
conversion feature of another $89,286 for a total of $178,572, was recorded
as a discount to the debenture and was to be accreted to interest expense
over the term of the debenture. In June of 2004 the Director converted his
debentures into 892,857 shares of the Company's common stock, and the
discount was expensed on the date of the conversion.
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, 2004, 2003 and 2002 totals of $307,694, $11,738
and $555,551 has been charged to operations under these agreements
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
F-13
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES - (Continued)
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. The President and CEO took a 15%
reduction in salary starting April 19, 2004, which will continue until the
Company shows a monthly profit of at least $50,000.
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. Each
of these executives took a 15% reduction in salary starting April 19, 2004,
which will continue until the Company shows a monthly profit of at least
$50,000.
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 and facilities under a non-cancelable operating lease
expiring on November 30, 2006. 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, 2004, 2003 and 2002 totaled
approximately $212,000, $219,000 and $309,000 respectively.
Approximate minimum future payments under this operating lease is payable
as follows:
Year ending July 31,
2005 219,000
2006 225,000
2007 76,000
----------------------------------------------------------------------------
$ 520,000
============================================================================
F-14
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES - (Continued)
The Company leases equipment under non-cancelable capital leases expiring on
various dates through fiscal 2008.
The approximate minimum future payments under these capital lease are
payable as follows:
Year ending July 31,
2005 $ 103,000
2006 113,000
2007 105,000
2008 15,000
----------------------------------------------------------------------
Total $ 336,000
Less amount representing interest (76,000)
----------------------------------------------------------------------
$260,000
Less current maturities (64,000)
----------------------------------------------------------------------
Long term debt less current maturities $196,000
======================================================================
Interest expense on capital leases for the years ended July 31, 2004, 2003
and 2002 amounted to approximately $20,000, $22,000 and $6,000,
respectively.
10. STOCKHOLDERS' EQUITY
On July 8, 2004, shareholders holding greater than 50% of the outstanding
common stock of the Company consented to increase the Company's authorized
shares of common stock from 50,000,000 to 100,000,000 shares.
The Company is authorized to issue 5,000,000 shares of $5,000 par value,
series A, 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 75% of the average of the closing bid
prices for the common stock for the 5 lowest trading days out of the 20
consecutive trading days immediately preceding the date of conversion, but
no lower than $0.20 per share. Dividends are payable at the rate of 8% of
the aggregate liquidation preference amount per annum and are cumulative. As
of July 31, 2004 and 2003, the Company had issued 520 shares of preferred
stock, and 200 and 247 were still outstanding, respectively.
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.
F-15
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (Continued)
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.
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, 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 years ended July 31, 2002.
F-16
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (Continued)
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).
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 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, the Company 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. Additionally, options to purchase 541,398 shares of common
stock were canceled during the years ended July 31, 2003.
In August 2003, the Company issued 591,396 shares of common shares at $
.0279 per share. The funds raised totaled $165,000, less finder's fees and
legal fees of $1,750 resulting in net proceeds of $163,250.
F-17
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (Continued)
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 since the Company may 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. During the year ended July 31, 2004
the Company did not repurchase preferred shares under this agreement.
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. On June 4, 2004, 12 shares of preferred stock with a
face value of $60,000, plus dividends of $18,898 were converted into 392,525
shares of common stock. On June 25, 2004, 12 shares of preferred stock with
a face value of $60,000, plus dividends of $19,187 were converted into
345,041 shares of common stock.
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.
The Company issued 35,000 options to a consultant for services performed for
the Company. On April 20, 2004 the Company issued 72,767 options to managers
who took a pay cut as partial compensation for the pay cut. All three sets
of options are exercisable at $0.01, immediately vested and have a term of
ten years. During the 2004 fiscal year, the Company recorded non-cash
charges of $868,756 to operations relating to these stock options.
During the year ended July 31, 2004, the Company issued 248,046 shares of
common stock to two directors in exchange for their services. The Company
charged operations $98,833, which was equal to the fair market value of the
shares when earned.
During the year ended July 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 100,000 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 458,552 shares of common stock were
canceled.
In March through June 30, 2004 the Company raised $2,271,240 from the sale
of 8,111,572 Units at $.28 per Unit to twenty-one (21) investors. Each Unit
consists of one (1) share of common stock and one (1) common stock purchase
warrant exercisable at $.35. The Company paid Noble International
Investment, Inc. ("Noble") total commissions and expenses of $170,378, one
other individual $9,667 as a finder's fee in connection with the issuance of
these securities and incurred
F-18
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (Continued)
other expenses of $69,320. The Company also issued Noble placement agent
warrants to acquire 790,200 Units valued at $158,040 and issued the other
finder 34,525 shares of our restricted common stock valued at $9,667.
In addition to the investors described in the preceding paragraph, the
Director that held $250,000 of convertible debentures and 892,857 warrants
at $0.35 exchanged his debentures and warrants for 892,857 units as
described in the previous paragraph. This resulted in a total of 9,004,429
units being sold.
Pursuant to the terms of the registration rights agreement entered in
connection with the transaction, within 30 days of the closing of the
private placement, the Company was required to file with the Securities and
Exchange Commission (the "SEC") a registration statement under the
Securities Act of 1933, as amended, covering the resale of all the common
stock purchased and the common stock underlying the warrants. Additionally,
within 120 days of closing, the Company was required to cause such
registration statement to become effective. The registration rights
agreement further provided that if a registration statement is not filed, or
does not become effective, within the defined time periods, then in addition
to any other rights the holders may have, the Company would be required to
pay each holder up to 10% additional shares of stock, as damages. The
registration statement was filed within the allowed time and was declared
effective as of June 10, 2004. Therefore, no additional shares will be
issued as damages.
In accordance with EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed To, and Potentially Settled In a Company's Own Stock,"
and the terms of the warrants and the transaction documents, the warrants
were accounted for as a liability in the amount of $517,427. On June 10,
2004, the registration statement covering the shares underlying the warrants
was declared effective. Accordingly, the fair value of the warrants at that
date was reclassified to additional paid in capital.
In order to obtain an appropriate valuation of the warrants that were issued
as of July 31, 2004, in connection with the offering of the units, issuance
of placement warrants and the $250,000 convertible debenture the Company
hired an investment banker. The investment banker employed several valuation
models and provided a preliminary valuation of $0.05 to $0.10 per warrant.
The Company estimated the value of each warrant to be $0.10.
F-19
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
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, 2004, 2003
and 2002, and changes during the years then ended is presented below:
July 31, 2004
----------------
Weighted-Average
----------------
Number of Exercise
Shares Price
--------- --------
Balance at beginning of year 4,672,722 $0.80
Granted 2,635,267 .07
Cancelled or Expired (458,552) 1.89
Exercised (0) 0.00
--------------------------------------------------------------------------------
Outstanding at end of year 6,849,437 $0.45
================================================================================
Options exercisable at end of year 5,685,010 $0.47
================================================================================
Weighted Average fair value of
options granted during the period $1,052,999
July 31, 2003 July 31, 2002
---------------- ----------------
Weighted-Average Weighted-Average
----------------- ----------------
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- -------- --------- --------
Balance at beginning of year 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 year 4,672,722 $0.80 5,264,970 $ .78
================================================================================
Options exercisable at end of year 3,085,263 $0.96 3,293,938 $ .70
================================================================================
Weighted Average fair value of
options granted during the period $140,958 $860,239
F-20
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
11. STOCK OPTIONS AND STOCK WARRANTS (continued)
The following table summarizes information about fixed stock options
outstanding at July 31, 2004:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Outstanding Life Price Exercisable Price
Price
------------------------------------------------------------------------------
$0.01 3,250,587 8.70 $0.01 3,250,587 $0.01
$0.10 -$ .47 1,356,667 3.90 0.24 474,835 0.23
$ .51 -$ .90 1,075,583 2.41 0.61 792,988 0.61
$1.01-$1.91 623,200 2.52 1.33 623,200 1.34
$2.00-$3.38 543,400 1.24 2.28 543,400 2.28
-----------------------------------------------------------------------------
$0.01 - $3.38 6,849,437 $ .45 5,685,010 $0 .47
=============================================================================
12. INCOME TAXES:
As of July 31, 2004, and 2003 the Company had deferred tax assets of
approximately $9,002,000 and $6,315,000, respectively, resulting from
temporary differences and net operating loss carry-forwards of approximately
$19,411,000 and $13,569,000, respectively, which are available to offset
future taxable income, if any, through 2024. 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,
2004 2003
---------------------------------------------------------------------------
Temporary differences:
Allowance for doubtful accounts $64,000 $98,000
Accrued vacation 37,000 32,000
Fair value of warrants 123,000 104,000
Compensation not currently deductibl 1,014,000 654,000
Net operating losses 7,764,000 5,427,000
Less valuation allowance (9,002,000) (6,315,000)
----------------------------------------------------------------------------
Deferred tax assets $ - 0 - $ -0-
============================================================================
F-21
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
12. INCOME TAXES: - (continued)
The reconciliation of the effective income tax rate to the federal statutory
rate for the years ended July 31, 2004, 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 - %
================================================================================
13. 401K Plan
The Company has a noncontributory defined contribution plan under Section
401 (k) of the Code covering all qualified employees. An officer of the
Company serves as trustee of the plan. The Company did not make a
contribution to the plan for the years ended July 31, 2004, 2003 or 2002.
14. MAJOR CUSTOMERS
During the years ended July 31, 2004, 2003 and 2002 one customer accounted
for 60%, 58% and 58% of total revenue respectively. During the years ended
July 31, 2004, 2003 and 2002 a second customer accounted for approximately
13%, 14% and 12% of total revenue, respectively.
15. 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, 2004 the loan balance was
$42,431 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. As of July 31, 2004, an amount totaling $23,000 is still
outstanding.
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 34,337,362
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-22
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
17. SUBSEQUENT EVENTS
On August 24, 2004, the holder of the Convertible debenture converted
$25,000 of the principal for 89,606 shares of common stock. On September 29,
2004, the Company issued an additional 20,759 shares of common stock, for
the first three-month's interest payments on the convertible debenture.
On August 2, 2004, 12 shares of preferred stock with a face value of
$60,000, plus dividends of $15,966 were converted into 379,933 shares of
common stock. On September 3, 2004, 12 shares of preferred stock with a face
value of $60,000, plus dividends of $17,951 were converted into 389,753
shares of common stock.
18. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the Company's last twelve fiscal quarters. This information has been
consistent with the Company's audited financial statements and includes all
adjustments consisting only of normal recurring adjustments that the Company
considers necessary for a fair presentation of the data.
EAUTOCLAIMS, INC.
QUARTERLY RESULTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, 2004 April 30, 2004 January 31, 2004 October 31, 2003
---------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Total revenue $ 4,397,591 $ 6,563,222 $ 7,509,359 $ 8,690,510
---------------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 3,449,203 5,368,369 6,190,356 7,122,706
Selling, general and administrative 1,181,005 2,401,353 1,407,418 1,427,540
Depreciation and amortization 118,205 131,836 135,750 130,022
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 307,694
---------------------------------------------------------------------------------------------------------------------------
Total expenses 5,056,107 7,901,558 7,733,524 8,680,268
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (658,516) $(1,338,336) $ (224,165) $ 10,242
===========================================================================================================================
Adjustment to net income (loss) to compute
loss per common share:
Preferred stock dividends (23,148) (22,564) (24,903) (24,903)
---------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (681,664) $(1,360,900) $ (249,068) $ (14,661)
===========================================================================================================================
Loss per common share - basic and
diluted $ (0.02) $ (0.06) $ (0.01) $ (0.00)
===========================================================================================================================
Weighted-average number of common
shares outstanding - basic and diluted 30,113,428 24,666,084 23,569,733 23,458,463
===========================================================================================================================
F-23
18. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)- Continued
EAUTOCLAIMS, INC.
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 29,896,097 22,022,522 19,562,796 18,782,334
===========================================================================================================================
F-24
18. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)- Continued
EAUTOCLAIMS, INC.
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
===========================================================================================================================
F-25
Report of Independent Registered Public Accounting Firm on Financial
Statment Schedule
To the Board of Directors
eautoclaims, 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
financial statements. In our opinion, the information included on Schedule II
relating to the years ended July 31, 2004, 2003, 2002 and 2001 is fairly stated
in all material respects, in relation to the basic 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 24, 2004
F-26
Schedule II
eAutoclaims, Inc.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Information relating to the allowance for doubtful accounts is as follows:
Beginning Ending
Balance Additions Deductions Balance
-------------------------------------------------------------------------
Year ended 7/31/2001 $ 34,077 $ 25,923 $ - $ 60,000
Year ended 7/31/2002 $ 60,000 $ 353,132 $ 13,132 $ 400,000
Year ended 7/31/2003 $ 400,000 $ 139,874 $ 297,874 $ 242,000
Year ended 7/31/2004 $ 242,000 $ 63,607 $ 144,607 $ 161,000
F-27