Filed under Rule 424(b) (3)
Registration No. 333-122975
PROSPECTUS
23,265,591 Shares of Common Stock
EAUTOCLAIMS, INC.
We are registering for resale an aggregate of 23,265,591 shares of Common Stock
of eAutoclaims, Inc. (the "Company", "us" or "we") that have been issued or may
be issued to certain of our stockholders named in this Prospectus and their
transferees ("Selling Stockholders").
We will not receive any proceeds from the sale of the shares, but we may receive
proceeds from the Selling Stockholders if they exercise their warrants. Our
Common Stock is quoted on the OTCBB under the symbol "EACC". On February 11,
2005, the closing sales price of our Common Stock, as reported on the OTCBB was
$0.26 per share.
The shares of Common Stock may be sold from time to time by the Selling
Stockholders in one or more transactions at fixed prices, at market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices. The Selling Stockholders and any broker-dealer who may
participate in the sale of the shares may use this Prospectus. See "Plan of
Distribution."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is March 8, 2005
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TABLE OF CONTENTS
Page
Part I
Prospectus Summary 5
Risk Factors 6
Special Note regarding Forward-Looking Statements 16
Use of Proceeds 17
Selling Stockholders 18
Plan of Distribution 21
Market Price of Common Stock 22
Dividend Policy 23
Selected Financial Information and Other Data 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Business 39
Management 50
Executive Compensation 55
Certain Transactions 63
Principal Stockholders 64
Description of Securities 66
Shares Eligible for Future Sale 70
Legal Matters 71
Experts 72
Where You Can Find Additional Information 73
Consolidated Financial Statements F-1
4
PART II
PROSPECTUS SUMMARY
This Summary highlights information contained elsewhere in this
Prospectus. It does not contain all of the information that you should consider
before investing in our Common Stock. We encourage you to read the entire
Prospectus carefully, including the section entitled "Risk Factors" and the
financial statements and the notes to those financial statements.
COMPANY OVERVIEW
eAutoclaims is a Nevada corporation which provides Internet based
vehicle collision claims services for insurance companies, managing general
agents (MGA) and third party claims administrators (TPA) and self-insured
automobile fleet management companies. We accept assignment of claims from our
customers, and provide vehicle repairs through a network of repair shops. We
also provide online systems to connect clients with service providers of
estimates, audits and claims administration services for claims for which we do
not perform the repair.
Our business strategy is to use the Internet to streamline and lower
the overall costs of automobile repairs and the claims adjustment expenses of
our clients. We believe that our proprietary web-based software products and
services make the management of collision repairs more efficient by controlling
the cost of the repair and by facilitating the gathering and distribution of
information required in the automobile repair process.
In March 2004, we entered into an Agreement with ADP Claims Service
Group ("ADP"), pursuant to which ADP will jointly offer an ADP managed repair
service solution utilizing the eAuto online claims processing system and network
of repair facilities. Although there is no assurance, we believe that this
Agreement with ADP will substantially increase the volume of claims processed by
eAuto resulting in significant long-term benefit to eAuto and its shareholders.
However, there are significant risks associated with our Agreement with ADP and
there is no assurance that a national rollout of this program will occur or that
we will be able to otherwise meet our obligations and duties under the ADP
Agreement.
THE OFFERING
Common Stock offered by the
Selling Stockholders 23,265,591
Common Stock Outstanding
Prior to the Offering (1) 36,401,764
Common Stock Outstanding
after the Offering(2) 59,667,355
Use of Proceeds We will not receive any proceeds
from the sale of Common Stock by
the Selling Stockholders.
----------
(1) Based on the number of shares outstanding currently issuable as of
January 31, 2005. Excludes: (i) 6,771,367 shares currently issuable
pursuant to outstanding options issued under Stock Option Plan; (ii)
23,265,591 shares being registered hereunder (including 18,586,875
shares issued under the private placement being registered and
4,678,716 shares issued under the amended subscription agreement from
the 2004 private placement); (iii) 13,003,213 shares issuable upon
exercise of other outstanding warrants; and (iv) shares of our Common
Stock issuable upon conversion of our Series A Preferred Stock and
outstanding convertible notes.
(2) Assumes the issuance of 23,265,591 shares of our Common Stock, which
are being registered in this registration statement including shares
that are issuable upon exercise of outstanding warrants or conversion
of convertible notes held by the Selling Stockholders. Excludes: (i)
6,771,367 shares currently issuable pursuant to outstanding options
issued under Stock Option Plan; (ii) 13,003,213 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.
5
RISK FACTORS
You should carefully consider the following factors and other information in
this Prospectus before deciding to purchase our Common Stock.
Risks Related to Our Business
Our limited operating history makes evaluating our business and prospects
difficult.
We have been involved in the Internet based automobile collision insurance
claims business since January 2000. Our limited operating history in this
industry makes an evaluation of our future prospects very difficult. If we do
achieve profitability in any period, we cannot be certain that we will sustain
or increase such profitability on a quarterly or annual basis. You should
carefully consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. There is a risk that we will not be able to accomplish our objectives.
Failure to achieve any of our objectives could negatively affect our business,
financial condition and results of operations.
We have all the risks of a principal in the automobile repair process.
We receive revenue from insurance companies for repairs completed by members of
our network of repair shops. We approve all repair shops for inclusion in our
network and determine which repair shop will perform the repairs. We are
responsible for collecting our revenue directly from the insurance company. We
therefore act as a principal in the transaction.
If the repairs are not completed correctly, and the vehicle must be sent to
another repair shop for repairs to be performed, we must pay for the repairs to
be completed again. This cost is not passed on to the insurance company but is a
risk that we bear. We control this risk by monitoring work performed by the
repair shops, monitoring customer complaints, reviewing the repair shop history
and actual site visits to repair shops. We add or remove repair shops from our
network based on our review of the repair shop's performance. We eliminate
repair shops that we feel are not providing repair work up to its standards.
Repairs are approved by customers upon retrieval of their vehicle. We constantly
review and revise our network to determine if repair shops included should be
removed. We have the risks and rewards of ownership such as the risk of loss for
collection, delivery or returns.
All our fees are negotiated between us and the insurance company, and the
negotiation does not include any repair shop. We must pay the repair shop a fee
negotiated between us and the repair shop, and the negotiation does not include
any insurance company. The amount owed to the repair shop is owed directly by us
and is not guaranteed, directly or indirectly, by any insurance company. We are
not acting as an agent or broker (including performing services, in substance,
as an agent broker) with compensation on a commission or fee basis.
To date, additional repairs that our repair shops have to provide after a
vehicle has been returned to its owner have not been material. We have not
experienced any material bad debts or collection difficulties from our insurance
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 customer 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
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decrease of business from these two customers is complete. The loss of this
business combined with the increase expenditures required to rollout 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 for
us.
We may not be successful in commercially exploiting the ADP Agreement. The ADP
Agreement anticipates that we will substantially increase the volume of claims
that we are currently processing. Our current infrastructure is not capable of
processing the anticipated number of claims. We are in the process of improving
our technological infrastructure by acquiring the equipment and resources
necessary to increase the volume of claims we anticipate handling with ADP.
There is no assurance we will be able to substantially increase our claims
processing capacity in such a short period of time. Although we have achieved
certain milestones and met certain conditions for the continuation of this
agreement, 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.
Potential non-cash charges to operations may result from the Private Placement
In accordance with Emerging Issues Task Force Issue 00-19 ("EITF 00-19"),
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock", we will initially account for the fair value
of the warrants issued in private placement as a liability until a registration
statement for the resale of the underlying shares of common stock to be issued
upon the conversion of the preferred stock and the exercise of the warrants is
declared effective. In addition, changes in the market value of our common stock
from the closing date through the effective date of the registration statement,
will result in non-cash charges or credits to operations to reflect the change
in fair value of the warrants during this period. At the effective date of the
registration statement, the fair value of the warrants will be reclassified to
equity and, accordingly, the net effect of the application of the EITF would not
be expected to have a material impact on our financial position and our
business. However, in the interim, the effect of the EITF will be to record an
initial liability and then to record non-cash charges or credits to our
operating results to reflect the change in the fair value. Accordingly, the
accounting treatment may have a negative impact on the way we are perceived by
investors and by potential customers and partners. Further, it may have an
adverse effect on our stock price and business prospects.
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.
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We may not be indemnified for all losses resulting from our vehicle repair
business.
We require that all repair shops in our network indemnify us from claims
relating to their negligent acts or breach of their agreement with us, maintain
a specified amount of liability insurance coverage, and name us as an additional
insured under their liability policy. This coverage may not, however, cover all
liabilities to which we may be subject, and our business could suffer if we need
to draw significant funds from operating revenue to pay claims that are not
covered or that exceed the limits of our coverage.
The market for insurance auto collision claims services is 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.
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If we are successful in expanding our customer base, we will need to add
additional key personnel as we continue to grow. If we cannot attract and retain
enough qualified and skilled staff, the growth of our business may be limited.
Our ability to provide services to clients and expand our business depends, in
part, on our ability to attract and retain staff with professional experiences
that are relevant to technology development and other functions we perform.
Competition for personnel with these skills is intense. Some technical job
categories are under conditions of severe shortage in the United States. In
addition, restrictive immigration quotas could prevent us from recruiting
skilled staff from outside the United States. We may not be able to recruit or
retain the caliber of staff required to carry out essential functions at the
pace necessary to sustain or expand our business.
We believe our future success will depend in part on the following:
o the continued employment and performance of our senior management,
o our ability to retain and motivate our officers and key employees, and
o our ability to identify, attract, hire, train, retain, and motivate other
highly skilled technical, managerial, marketing, and customer service
personnel.
Our business will suffer if our independent automobile collision repair shops do
not provide good service.
We currently have relationships with over 2,500 independently owned and operated
body shops upon which we depend to perform quality repair services at a
reasonable cost and in a timely manner. Although we monitor the quality and
timeliness of their services and can terminate our relationship with those shops
that do not meet our standards, we do not have meaningful control over the
quality of their services. Poor workmanship or service by any of these shops can
adversely affect our relationships with customers and could cause them to stop
dealing with us or reduce the amount of business that they do with us. In
addition, because we assume the responsibility for the quality of repairs, poor
workmanship and inferior work can negatively affect our financial position
because of the additional costs we incur in properly repairing an automobile.
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
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infringement or invalidity. This litigation, whether successful or unsuccessful,
could result in substantial costs and diversions of resources, either of which
could harm our business. If we are unable to protect our current or future
proprietary technology, our ability to compete effectively will be harmed.
If we are to remain competitive, we must be able to keep pace with rapid
technological change.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our website. The online commerce
industry is characterized by rapid technological change, changes in user and
customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices that could render our business model and proprietary
technology and systems obsolete in comparison to systems competitors may
implement. Our future success will depend, in part, on our ability to develop or
license leading technologies useful in our business, enhance the ease of use of
our existing services, develop new services and technologies that address the
varied needs of our customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
If we were unable, for technical, legal, financial or other reasons, to
incorporate new technology in new features or products, we may not be able to
adapt in a timely manner to changing market conditions or customer requirements.
We may infringe intellectual property rights of third parties.
Litigation regarding intellectual property rights is common in the software and
technology industries. We may in the future be the subject of claims for
infringement, invalidity, or indemnification claims based on such claims of
other parties' proprietary rights. These claims, with or without merit, could be
time consuming and costly to defend or litigate, divert our attention and
resources, or require us to enter into royalty or licensing agreements. There is
a risk that such licenses would not be available on reasonable terms, or at all.
Although we believe we have the ability to use our intellectual property to
operate and market our existing services without incurring liability to third
parties, there is a risk that our products and services infringe the
intellectual property rights of third parties.
Our products and technology depend on the continued availability of licensed
technology from third parties.
We license and will continue to license certain technology and software from
third parties. These licenses are integral to our business. If any of these
relationships were terminated or if any of these third parties were to cease
doing business, we would be forced to spend significant time and money to
replace the licensed software. If we are not able to replace these licenses on
commercially reasonable terms, it may be necessary for us to modify or
discontinue some of our services that depend upon technology licensed from third
parties. We cannot assure you that we would be able to replace these licenses.
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.
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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
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
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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
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
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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
13
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker-dealer must also disclose the commission payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our securities.
We have never paid dividends on our Common Stock and do not expect to pay any in
the foreseeable future. We are subject to restrictions on our ability to pay
dividends.
A potential purchaser should not expect to receive a return on their investment
in the form of dividends on our Common Stock. We have never paid cash dividends
on our Common Stock and we do not expect to pay dividends in the foreseeable
future. Our ability to pay dividends on our Common Stock is restricted by the
terms of our agreements with the holders of our Series A Preferred Stock.
Holders of our Series A Preferred Stock are entitled to annual dividends of 8%
(currently aggregating $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. We also issued
790,200 placement agent warrants to purchase units at $0.28 per units, that if
exercised have the same rights as the other units purchased by the investors.
Each unit consists of one (1) share of Common Stock and one Common Stock
purchase exercised with $.35 per share. The warrant contained "full 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
14
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 (True up). 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.
In order to help resolve this open issue, in December 2004 we offered those
prior investors 50% of the total potential True up Units (i.e.- the units that
were potentially issuable if the March 2005 target volumes are not met) in
exchange for releasing the Company from the remaining August 2005 target volume
commitment. Investors representing 4,678,716 of these units accepted our offer.
We therefore granted 2,339,358 units to the investors that agree to the True Up
amendment. We are still subject to the target volumes on the remaining 4,325,713
units and the 790,200 placement agent unit warrants if they are exercised.
In addition, with the sale of new equity units represented by this registration
statement, we have notified the shareholders that the exercise price of their
warrants for common shares were reduced from $0.35 to $0.16 (the price of the
units).
During March through January and February, 2005 we sold a total of 10,775,000
units at an offering price of $.16 per unit generating gross offering proceeds
of $1,724,000. We netted $1,542,980 after payment of $181,020 in placement fees
and expenses. We also issued 1,616,250 placement agent warrants to purchase
units at $0.16 per units, that if exercised have the same rights as the other
units purchased by the investors, except they have a term of five years. Each
unit consists of one (1) share of Common Stock and one-half Common Stock
purchase warrant exercised with $.30 per share. The warrant contained "full
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 $.30. The warrant holders are entitled to 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 $.30 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 January through
February 2005 private placement which may result in additional dilution to our
current shareholders.
15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Any statements about our expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and may be forward-looking. These statements are often, but not
always, made through the use of words or phrases such as "anticipate,"
"estimate," "plans," "projects," "continuing," "ongoing," "expects," "management
believes," "we believe," "we intend" and similar words or phrases. Accordingly,
these statements involve estimates, assumptions and uncertainties, which could
cause actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to the
"Risk Factors" contained on pages 6 through 13 of this Prospectus.
Because the factors discussed in this Prospectus could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on behalf of our company, you should not place undue
reliance on any such forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which it is made, and we undertake no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
16
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares by the Selling
Stockholders. We may receive proceeds if warrants are exercised by Selling
Stockholders. These proceeds, if any, will be used for working capital purposes
or any other purpose approved by the Board of Directors.
17
SELLING STOCKHOLDERS
The following table sets forth information as January 31, 2005 with respect to
the beneficial ownership of our Common Stock both before and immediately
following the offering by each of the Selling Stockholders.
Calculation of the percent of outstanding shares owned is based on shares of our
Common Stock issued and outstanding as of January 31, 2005. Beneficial ownership
is determined in accordance with Rule 13d-3 promulgated by the Securities and
Exchange Commission, and generally includes voting or investment power with
respect to securities. Except as indicated in the footnotes to the table, we
believe each holder possesses sole voting and investment power with respect to
all of the shares of Common Stock owned by that holder, subject to community
property laws where applicable. In computing the number of shares beneficially
owned by a holder and the percentage ownership of that holder, shares of Common
Stock underlying options, warrants, debentures, notes or preferred stock by that
holder that are currently exercisable or convertible or are exercisable or
convertible within 60 days after the date of the table are deemed outstanding.
Those shares, however, are not deemed outstanding for the purpose of computing
the percentage ownership of any other person or group.
------------------------------------------------------------------------------------------------------------------------
Common Shares Common Shares Common Shares
Owned Before the Offered in the Owned After
Offering Offering Offering
---------------------------------- ---------------------------- --------------------------- ----------------------------
Name of Stockholder Number Percentage(9) Number Percentage(9) Number Percentage(9)
------------------- ---------- -------------- ----------- ------------- ---------- -------------
Recent Unit Offering
--------------------
William A. Lewis IV (1) 6,000,000 14.9% 6,000,000 14.9%
Fertilemind Capital (1) 2,812,500 7.3% 2,812,500 7.3%
Meadowbrook Opportunity Fund LLC 5.9%
(1) 2,250,000 2,250,000 5.9%
Bucks International Ltd (1) 1,875,000 5.0% 1,875,000 5.0%
Andrew Kunar (1) 1,500,000 4.0% 1,500,000 4.0%
Mosaic Partners Fund (U.S.) LP 468,750 468,750
(1) 1.3% 1.3%
Brad Berk (1) 468,750 1.3% 468,750 1.3%
James T Kelly (1) 450,000 1.2% 450,000 1.2%
David Lucas McDonough (1) 487,500 1.3% 187,500 300,000 *
Michael P. McDonough Trust (1) 350,000 1.0% 150,000 200,000 *
Noble International Investments(4) 4,004,775 11.0% 2,424,375 6.7% 1,580,400 4.3%
True-up Adjustment:
------------------
John J. Phillips (2) 214,286 * 71,428 * 142,858 *
Vincent A. Stona (2) 214,286 * 71,428 * 142,858 *
Graham Partners (2) 2,142,858 5.7% 714,286 1.9% 1,428,572 3.8%
Radcliff Investment Partners, I (2) 525,000 1.4% 175,000 * 350,000 1.0%
Noble Special Situation Fund (2) 1,617,858 4.3% 539,286 1.5% 1,078,572 2.9%
C.S.L. Associates. L.P (2) 1,607,142 4.3% 535,714 1.5% 1,071,428 2.9%
Mosaic Partners Fund (2) 535,714 1.5% 178,572 * 357,142 1.0%
J. Wild Fund, LP (2) 267,858 * 89,286 * 178,572 *
Engin Yesil (2) 535,714 7.6% 178,572 * 357,142 1.0%
Credit Agricole Indosuez (2) 2,679,000 7.1% 893,000 2.4% 1,786,000 4.8%
KJS Investments Corp (2) 1,373,813 3.7% 446,430 1.2% 927,383 2.5%
Entrade, Inc. (2) (3) 2,922,822 7.6% 535,714 1.5% 2,387,108 6.2%
Dori Rath (2) 750,000 2.0% 250,000 * 500,000 1.4%
--------------
* Less than 1%.
18
(1) Listed shares represent the common shares owned by the Selling
Stockholders and half as many shares issuable upon exercise of the
warrants acquired by the Selling Stockholders in connection with our
Unit private offering as described below.
(2) Listed shares represents the common shares and an equal number of
shares issuable upon exercise of the warrants acquired by the Selling
Shareholder in connection with our modified subscription agreement
(referred to as the true-up adjustment relating to the number of ADP
claims processed) from the 2004 private placement as described below.
(3) Entrade, Inc. also owns 1,315,680 shares of our Common Stock, which
were acquired in October 2001, which are not being registered in this
offering. See "Principal Stockholders - Footnote (14)".
(4) Noble International Investments, Inc. ("Noble") acted as our placement
agent in our recent Unit private placement offering, as described below
under the caption "Circumstances Under Which Selling Stockholders
Acquire Securities". In connection with this Unit private offering, we
agreed to issue Noble a "cashless exercise" warrant to purchase a
number of Units equal to 15% of the total Units sold by Noble in this
offering at an exercise price equal to the offering price per Unit
($.16) paid by the investors. These warrants have a five (5) year term
and the same anti-dilution protection as the warrants in the offering.
The shares comprising the Units and the shares underlying the warrants
as part of the Units are being registered hereunder.
(5) Because the Selling Stockholders may sell all or some portion of the
shares of Common Stock beneficially owned by them, only an estimate
(assuming the Selling Stockholders sell all of the shares offered
hereby) can be given as to the number of shares of Common Stock that
will be beneficially owned by the Selling Stockholders after this
offering. In addition, any selling stockholder may have sold,
transferred or otherwise disposed or, or may sell, transfer or
otherwise dispose of, at any time or from time to time since the dates
on which they provided the information regarding the shares
beneficially owned by them, all or a portion of the shares beneficially
owned by them in transactions exempt from the registration requirements
of the Securities Act of 1933.
(6) Excludes: (i) 6,771,367 shares currently issuable pursuant to
outstanding options issued under Stock Option Plan; (ii) 13,003,213
shares issuable upon exercise of other outstanding warrants; and (iii)
shares of our Common Stock issuable upon conversion of our Series A
Preferred Stock and outstanding convertible notes.
CIRCUMSTANCES UNDER WHICH SELLING STOCKHOLDERS ACQUIRED SECURITIES
Set forth below is a summary of the circumstances that led to the issuance to
the listed Selling Stockholders of shares of our Common Stock and the
securities, which are exercisable into shares of our Common Stock.
Recent Unit Offering
During January through February, 2005 we sold a total of 10,775,000 Units at an
offering price of $.16 per Unit generating gross proceeds of $1,724,000. We
netted $1,542,980 after payment of placement agent fees and expenses.
Each Unit consists of one (1) share of Common Stock and one-half (1/2) Common
Stock purchase warrant exercisable at $.30 per share, subject to adjustment. The
warrants are not callable during their first year. After the first year, we have
the right to call the warrants for nominal consideration at the average closing
per share for any 20 consecutive trading days exceeds the warrant exercise price
by $.50 or more. The warrants contain "full ratchet" anti-dilution protection to
avoid dilution of the equity interest represented by the underlying shares upon
the occurrence of certain events, such as share dividends or stock splits or the
issuance of equity securities with an issuance, conversion or exercise price
less than $.30. The warrant holders are entitled to registration rights for a
two (2) year period.
We are subject to liquidated damages for failure to file a registration
statement on a timely basis equal to 10% of the number of Units purchased if we
fail to file a registration statement before February 28, 2005. In addition, we
could have been subjected to damages equal to 10% of the number of Units
purchased for failure to have this registration statement declared effective by
June 28, 2005.
In connection with the offering of our Units described above, we paid Noble
International Investments, Inc. ("Noble"), as placement agent, cash compensation
equal to $181,020, $146,540 in commission and $34,480 as a non-accountable
expense allowance. In addition, we issued Noble cashless exercise warrants to
purchase 1,616,250 Units, which equaled 15% of the total Units sold by Noble at
19
an exercise price of $.16 per Unit. We agreed to register the shares comprising
the Units, including the shares underlying the warrants as part of the Units in
this registration statement.
As a result of the sale of the above equity securities we have notified the
holders of 9,004,429 common stock warrants issued as a result of the sale of
equity securities in March through May of 2004 that the exercise price of their
common stock warrants have been reduced from $0.35 per share to $0.16 per share.
This adjustment was a requirement of the anti-dilution provisions of their
warrant agreement.
True-up Adjustment
Also part of the provisions of the sales of equities in March through May of
2004 there is a requirement to meet certain claims volume targets under the ADP
Co-Marketing Agreement. If we fail to meet those targets, up to 100% of the
original Units (as defined in that document) would have to be issued to those
2004 investors for no additional consideration (True-up). In order to help
resolve this open issue, in December 2004 we offered the 2004 investors 50% of
the total potential True up Units in exchange for releasing the Company from the
remaining target volume commitment. Investors representing 4,678,716 of these
units accepted our offer. We therefore granted 2,339,358 units to the investors
that agree to the True Up amendment. We are still subject to the target volumes
on the remaining 4,325,713 units and the 790,200 placement agent unit warrants
if they are exercised. As part of that agreement we gave them piggyback
registration rights on these units.
All of the securities identified above are referred to as the "registrable
securities".
20
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, assignees, transferees,
donees and successors-in-interest may, from time to time, sell any or all of
their shares of Common Stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The Selling Stockholders may use any one or more of
the following methods when selling shares:
o on the OTC electronic bulletin board (OTC:BB) or such other market on which
the Common Stock may from time to time be trading;
o in privately-negotiated transactions;
o through the writing of options on the shares;
o short sales; or
o any combination thereof;
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to such prevailing market price;
o at negotiated prices; or
o such other price as the selling stockholders determine from time to time.
The shares may also be sold pursuant to Rule 144. The Selling Stockholders shall
have the sole and absolute discretion not to accept any purchase offer or make
any sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The Selling Stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals or broker-dealers acting as agents for themselves or their
customers. These broker-dealers may be compensated with discounts, concessions
or commissions from the Selling Stockholders or the purchasers of shares for
whom such broker-dealers may act as agents or to whom they sell as principal or
both. The compensation as to a particular broker-dealer might be greater than
customary commissions. Market makers and block purchasers purchasing the shares
will do so for their own account and at their own risk. The Selling Stockholders
may sell shares of Common Stock in block transactions to market makers or other
purchases at a price per share, which may be below the then market price. The
Selling Stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the Selling Stockholders. The Selling
Stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed "underwriters" as that
term is defined under the Securities Act or the Securities Exchange Act of 1934
(or Exchange Act) or the rules and regulations under such Acts.
The Selling Stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into. If a Selling Stockholder
enters into such an agreement or agreements, the relevant details will be set
forth in a supplement or revisions to this prospectus.
The Selling Stockholders and any other persons participating in the sale or
distribution of shares will be subject to applicable provisions of the Exchange
Act and the rules and regulations under the Exchange Act, including, without
limitation, Regulation M. These provisions may restrict certain activities of,
and limit the timing of purchases and sales of any of the shares but, the
Selling Stockholders or any other such person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the shares.
21
MARKET PRICES OF COMMON STOCK
Our Common Stock currently trades on the OTCBB under the symbol "EEAC." Set
forth below is the range of high and low information for our Common Stock as
traded on the OTCBB for the last three years through January 31, 2005. This
information regarding trading on OTCBB represents prices between dealers and
does not reflect retail mark-up or markdown or commissions, and may not
necessarily represent actual market transactions.
High Bid Low Bid
Fiscal Year Ended July 31, 2002
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
Fiscal Year Ended July 31, 2005
First Quarter (August 1, 2004 to October 31, 2004) 0.19 0.36
Second Quarter (November 1, 2004 to January 31, 2005) 0.18 0.29
As of January 31, 2005, our closing bid price was $0.29 per share. As of January
31, 2005 there were approximately 1,600 shareholders of our outstanding Common
Stock.
22
DIVIDEND POLICY
We do not anticipate the declaration or payment of any dividends in the
foreseeable future. We have never declared or paid cash dividends on our Common
Stock and our Board of Directors intends to continue its policy for the
foreseeable future. Holders of our Series A Preferred Stock are entitled to
annual dividends of 8% and to participate in dividends, if any, declared on our
Common Stock. Also, we will consider our earnings, financial condition,
contractual restrictions and other factors in deciding whether to issue
dividends in the future.
23
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The selected financial information set forth below is derived from, and should
be read in conjunction with, the more detailed financial statements (including
the notes thereto) appearing elsewhere in this Prospectus. See "Financial
Statements."
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
=========================================================================================================================
24
EAUTOCLAIMS, INC.
SELECTED FINANCIAL DATA
-----------------------------------------------------------------------
Three Months Ended October 31, 2004 2003
-----------------------------------------------------------------------
(unaudited) (unaudited)
Total revenue 4,119,796 8,690,510
-----------------------------------------------------------------------
Expenses:
Claims processing charges 3,200,486 7,122,706
Selling, general and administrative 1,330,271 1,427,540
Depreciation and amortization 134,584 130,022
-----------------------------------------------------------------------
Total expenses 4,665,341 8,680,268
-----------------------------------------------------------------------
Net (loss) income $(545,545) $10,242
=======================================================================
Adjustment to net loss to compute
loss per common share:
Preferred stock dividends and
Deduction relating to Series A
Convertible Preferred Stock (16,128) (24,903)
-----------------------------------------------------------------------
Net loss applicable to common stock $(561,673) $(14,661)
=======================================================================
Loss per common share - basic and
diluted $ (0.02) $ -
=======================================================================
Weighted-average number of common
shares outstanding-basic and diluted 35,361,541 23,458,463
=======================================================================
Balance Sheet Data:
October 31, 2004 July 31, 2004 July 31, 2003 July 31, 2002 July 31, 2001 July 31, 2000
-----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash $242,889 $415,549 $226,161 $44,655 $485,092 $239,979
Working capital (deficit) (3,839,146) (3,190,515) (4,992,541) (4,483,740) (1,484,725) (1,613,552)
Total assets 3,279,648 3,482,149 3,757,512 3,403,826 4,197,677 2,914,584
Long-term debt and capital lease
obligations 188,918 495,621 86,325
Total stockholders equity (deficiency) (1,898,158) $(1,493,084) $(2,910,932) $(2,365,818) $737,905 $151,319
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in conjunction with our
audited financial statements as of July 31, 2004, 2003, 2002, 2001 and the notes
thereto, all of which financial statements are included elsewhere in this
prospectus. In addition to historical information, the following discussion and
other parts of this prospectus contain forward-looking information that involves
risks and uncertainties. Our actual results could differ materially from those
anticipated by such forward-looking information due to factors discussed under
"Description of Business" and elsewhere in this prospectus.
The statements that are not historical constitute "forward-looking statements".
Said forward-looking statements involve risks and uncertainties that may cause
the actual results, performance or achievements of the Company and its
subsidiaries to be materially different from any future results, performance or
achievements, express or implied by such forward-looking statements. These
forward-looking statements are identified by their use of such terms and phrases
as "expects", "intends", "goals", "estimates", "projects", "plans",
"anticipates", "should", "future", "believes", and "scheduled".
The variables which may cause differences include, but are not limited to, the
following: general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employment benefit costs;
availability and costs of raw materials and supplies; and changes in, or failure
to comply with various government regulations. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements included in this
prospectus will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein the inclusion of such information should not be
regarded as a representation by the Company or any person that the objectives
and expectations of the Company will be achieved.
OVERVIEW
We are a business-to-business e-commerce company that uses the Internet to
streamline and lower the overall costs of automotive repair paid by insurance
companies, managing general agents (MGA) and third party claims administrators
(TPA) and self-insured automobile fleet management companies. We are
establishing ourselves as the preeminent service provider for the automobile
insurance industry, providing a seamless back-end infrastructure that links
thousands of collision repair shops and support facilities. We provide a
proprietary, cost-effective and highly advanced system for the processing and
ultimate repair of claims for damaged vehicles filed by policyholders of our
insurance company clients. We receive revenues from insurance companies for
repairs completed by members of our network of repair shops. We approve all
repair shops for inclusion in our network and determine which repair shop will
ultimately perform the repairs. We receive a discount, ranging from 10% to 15%,
from repair facilities that are members of our provider network. 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.
26
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
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 developed 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 fee revenue without adding
significant 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.
Management started this process in fiscal year 2004. While total revenues
decreased during the last fiscal year, click fee revenue from the clients'
use of the Company's technology increased from approximately $96,000 in the
three-months ended October 31, 2003 to approximately $124,000 in the
three-months ended October 31, 2004. 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 has netted approximately $1.5
million from the recent private placement of its securities which are being
registered with this registration statement. 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 eight signed pilot agreements with insurance companies or third
party administrators, and has produced two annual agreements after the
pilot periods were completed. 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.
27
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.
RESULTS OF OPERATIONS
For the three months ended October 31, 2004 compared to the three-months ended
------------------------------------------------------------------------------
October 31, 2003.
-----------------
Revenue
Total revenue for the three-months ended October 31, 2004 was $4.1 million,
which is a 53% decrease from the $8.7 million of revenue for the three-months
ended October 31, 2003. Collision repair management revenue decreased 55% to
$3.3 million for the three-months ended October 31, 2004 from $7.4 million for
the three-months ended October 31, 2003. This decrease is primarily the result
of the loss of revenues from our two largest clients. During the three months
ended 31, 2004 we derived 58% and 8% 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 $2.5 million decrease in the revenue from the
three-month period ended October 31, 2003 to same period in 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 experienced approximately a $1.0 million
decrease in the revenue from the three-month period ended October 31, 2003 to
the same period in 2004. 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.
Glass repair revenues decreased by approximately $239,000 from approximately
$400,000 for the three months ended October 31, 2003 to approximately $161,000
for the three months ended October 31, 2004. This decrease is primarily due to
the loss of our second and third largest glass customers. The Company continues
to pursue additional glass customers as the glass repair business complements
our core business and allows our customers to use a single source for all their
repair needs.
Other revenue decreased by approximately $141,000 from approximately $695,000
for the three months ended October 31, 2003 to approximately $554,000 for the
three months ended October 31, 2004. This decrease is mainly a result of the
reduction in estimatic software sales and the reduction in the fee revenue
generated from the claims processed as explained above.
Expenses
Claims processing charges include the costs of collision and glass repairs paid
to repair shops within our repair shop network. Claims processing charges for
the three-months ended October 31, 2004 was approximately $3.2 million. This was
78% of total revenue, compared to approximately $7.1 million, or 82% of total
revenue for the three-months ended October 31, 2003. Claims processing charges
are primarily the costs of collision repairs paid by the Company to its
collision repair shop network. The decrease in claims processing charges as a
percentage of total revenue is a result of the change in the product mix with a
higher percentage of higher margin products as compared to lower margin
28
products. This also includes the growth in click fees, which are fees charged
when a client uses our technology that has little to no associate cost of sale.
We are dependent upon our third party collision repair shops for insurance
claims repairs. eAutoclaims currently 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 number of shops or
the quality of service provided by collision repair shops fall below a
satisfactory level leading to poor customer service, this could have a harmful
effect on our business.
SG&A expense is mainly comprised of salaries and benefits, facilities related
expenses, telephone and internet charges, legal and other professional fees, and
travel expenses. SG&A expenses for the three-months ended October 31, 2004
totaled $1.3 million compared to $1.4 million for the three-months ended October
31, 2003. The decrease in SG&A expenses of approximately $110,000 in payroll is
primarily due to elimination of personnel as a result of the reduced claim
volume. We have maintained staff in anticipation of significant new business
expected to be generated by the ADP Co-Marketing Agreement.
Payroll and benefit related expenses for the three-months ended October 31, 2004
and 2003 totaled approximately $864,000 and $975,000, which is approximately an
11% decrease. This decrease is the result of personnel and salary cuts made
during the last fiscal year as described in the proceeding paragraph.
SG&A expenses also include non-cash charges of approximately $95,000 for the
three-month period ended October 31, 2004. These non-cash charges include
approximately $50,000 of common stock issued to pay fees to directors,
approximately $25,000 of common stock issued in exchange for legal services and
approximately $6,000 of common stock issued for accrued interest associated with
the conversion of debt. These non-cash charges for the three-month period ended
October 31, 2003 include approximately $35,000 of amortization of debenture
discount and approximately $27,000 of common stock issued to pay fees to
directors.
Also included in the SG&A is interest expense related to a loan from a
shareholder and capital leases. This interest expense totals approximately
$10,000 for the three-months ended October 31, 2004 compared to approximately
$17,000 for the three-months ended October 31 2003.
Depreciation
Depreciation of property and equipment of approximately $135,000 was recognized
in the three-month period ended October 31, 2004. This is compared to
approximately $130,000 for the three-month periods ended October 31, 2003.
Net Income/Loss
Net loss for the three-months ended October 31, 2004 totaled approximately
$546,000 compared to a net income of approximately $10,000 for the three-month
period ended October 31, 2003. These amounts include non-cash expenses of
approximately $230,000 and $192,000, respectively. The loss in the current
fiscal quarter is due to the decrease in revenue from our two largest customers.
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
29
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.
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
30
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.
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.
Depreciation and amortization
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.
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.
Fiscal Year Ended July 31, 2003, Compared to Fiscal Year Ended July 31, 2002.
-----------------------------------------------------------------------------
Revenue
Total revenue for the year ended July 31, 2003 was approximately $34.1 million,
which consists of approximately $29.7 million in collision repair management for
insurance companies, approximately $0.9 million in auto glass repairs and
approximately $3.5 million in fleet repair management and other repairs and
fees. 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
31
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.
SG&A expenses for the year ended July 31, 2003 were approximately $6.4 million
or 19% of revenue compared to approximately $8.1 million or 25% of revenue for
the year ended July 31, 2002. This represents an overall decrease in SG&A of
21%. This decrease in expense is mostly a result of a $1.1 million reduction in
payroll and operating expenses. During the year ended July 31, 2003 and 2002 we
incurred payroll related expenses of approximately $ 4.2 million and
approximately $5.1 million, respectively, a 17% decrease.
SG&A expenses included non-cash charges of approximately $997,000 for the year
ended July 31, 2002. These non-cash charges included a $360,000 write-off of
software, a $340,000 reserve for bad debts, $136,000 of stock and stock options
for rent and employee compensation, and approximately $161,000 of stock issued
for consulting agreements for investor relation services, legal, board and
professional consultants.
During fiscal year ended 2002, two insurance companies that owed the Company
approximately $289,000 were placed into receivership in the state of California.
During the summer of 2003 we were notified that our claims against these
insurance companies are eligible and will be paid out of the State of California
Guaranteed Fund. We received approximately $30,000 from this fund prior to the
July 31, 2003 year-end, and have been told the Company will receive the
remaining funds by the end of December 2003. Consequently, we have reversed
approximately $122,000 of the allowance for doubtful accounts that was
originally established due to the nature of the receivables.
The Company has settled the two lawsuits that were present at the end of the
2002 fiscal year. In both cases management settled the suit in order not to
incur significant legal fees. The settlements in each case were for amounts far
less than the plaintiff was asserting. Cash combined settlement for these two
lawsuits totaled $110,000, the effects of which have been recorded in the July
31, 2003 financial statements.
Interest income of approximately $12,000 is included in selling, general and
administrative expenses, net of interest expense of approximately $45,000 for
the year ended July 31, 2003. For the 2002 fiscal year interest income of
approximately $33,000 is included in selling, general and administrative
expenses, net of interest expense of approximately $35,000, including
32
approximately $10,000 of debenture interest. Interest expense related primarily
to interest on shareholder loans and capital leases and interest income resulted
primarily form interest earned on our cash reserves.
Depreciation and amortization
Depreciation and amortization was approximately $503,000 and $1,086,000 for the
years ended July 31, 2003 and 2002, respectively. Depreciation of fixed assets
represented approximately $491,000 and $312,000, respectively. Amortization
expense of approximately $0 and $218,000 in fiscal year ended 2003 and 2002,
respectively, reflects the amortization of goodwill from the purchase of Premier
Express Claims and Salvage Connection. The remaining amortization in the fiscal
year ended 2003 and 2002 of approximately $12,000 and $556,000, respectively,
relates to the warrants and debenture conversion feature created by the
debenture financing in fiscal year 2003 and 2002. Due to a change in the
accounting standards, no amortization is recorded in the year-ended July 31,
2003 from our acquisition of Premier Express Claims or Salvage Connection.
Net loss
We recognized a net loss of approximately $1.2 million and $4.2 million for the
years ended July 31, 2003 and 2002, respectively. This represents a 72% decrease
in the loss between the two years. Net loss before non-cash charges, which are
described above, were approximately $0.7 million and $2.1 million for the years
ended July 31, 2003 and 2002, respectively. The decrease in the loss was
primarily a result of the restructuring of expenses, improving margins and
focusing on the most profitable clients. These three initiatives resulted in
profitability for the third and forth quarters of fiscal year 2003.
Fiscal Year Ended July 31, 2002, Compared to Fiscal Year Ended July 31, 2001.
-----------------------------------------------------------------------------
Revenue
Total revenue for the year ended July 31, 2002 was approximately $32.3 million,
which consists of approximately $28.5 million in collision repair management for
insurance companies, approximately $1.0 million in auto glass repairs and
approximately $2.8 million in fleet repair management and other repairs and
fees. Total revenues increased approximately $12.1 million or 60% compared to
approximately $20.2 million for the year ended July 31, 2001. This increase is
primarily the result of 131% growth in revenues attributed to our core collision
repairs management business.
The glass revenue decrease by 49% from approximately $1.9 million in fiscal year
ended July 31, 2001 to approximately $1.0 million in fiscal year ended July 31,
2002. This decrease is a result of the loss of a major customer due to the
maturing and increased competition for the glass repair business. The customer
was offered lower pricing that, at that time, would have reduced margins below
acceptable levels. We have recently negotiated lower pricing from one of our
larger glass vendors, which will help our competitiveness in this market in the
future. The glass repair business complements our core business and allows our
customers to use a single source for all their repair needs. The fleet revenue
decreased approximately $204,000 from approximately $1.3 million in fiscal 2001
to approximately $1.1 in fiscal 2002. This decrease is a normal fluctuation in
the fleet repair revenue due to the actual accident rate experienced by our
customers for the year.
During the year ended July 31, 2002, we derived 58% and 12% of our revenues from
two customers. We have a five-year contract with the first customer which ends
in April 2006.
Expenses
Claims processing charges for the year ended July 31, 2002 were approximately
$27.3 million, or 84.5% of total revenues. This is an increase from
33
approximately $16.8 million, or 83.4%, of sales in fiscal year ended July 31,
2001. Claims processing charges are primarily the costs of collision repairs
paid by eAutoclaims to its collision repair shop network. This increase in the
percentage of the claims processing charges compared to sales over the same
periods last year was mostly caused by volume discounts extended to our largest
customer. We expect this percentage of claims process charges to revenues to
decrease in the future as the click fee revenue increases as a result of the
eJusterSuiteTM product implementation.
SG&A expenses for the year ended July 31, 2002 were approximately $8.1 million
or 25% of revenue compared to approximately $10.5 million or 52% of revenue for
the year ended July 31, 2001. Selling, general and administrative expenses
consisted of non-cash charges of approximately $997,000 for the year ended July
31, 2002. In the fiscal year ended July 31, 2002 there were non-cash charges of
approximately $161,000 incurred pertaining to consulting agreements for investor
relation services, legal, board and professional consultants. In the year ended
July 31, 2001, non-cash charges included $ 3.3 million for options to purchase
2.2 million shares of Common Stock to our officers, directors and employees at
$.01 per share. Other non-cash charges of approximately $396,000 for the
issuance of stock to settle penalties for not registering certain stock and
approximately $463,000 incurred pertaining to consulting agreements for investor
relation services, legal, board and professional consultants. In addition there
was approximately $278,000 of offering costs associated with registration
statement that were charged to earnings when the registration was withdrawn in
July 2001. During the year ended July 31, 2002 and 2001 we incurred payroll
related expenses of approximately $ 5.1 million and approximately $3.9 million,
respectively.
Interest income of approximately $33,000 is included in selling, general and
administrative expenses, net of interest expense of approximately $35,000
(including approximately $10,000 of debenture interest) for the year ended July
31, 2002. Interest income of approximately $24,000 is included in selling,
general and administrative expenses, net of interest expense of approximately
$20,000 for the year ended July 31, 2001. Interest expense related primarily to
interest on shareholder loans and capital leases and interest income resulted
primarily form interest earned on our cash reserves.
Depreciation and amortization
Depreciation and amortization was approximately $1,086,000 and $505,000 for the
years ended July 31, 2002 and 2001, respectively. Depreciation of fixed assets
represented approximately $312,000 and $176,000, respectively. Amortization
expense of approximately $218,000 and $234,000 in fiscal year ended 2002 and
2001, respectively, reflects the amortization of goodwill of from the purchase
of Premier Express Claims and salvage connection. The remaining amortization in
the fiscal year ended 2002 and 2001 of approximately $556,000 and $95,000,
respectively, relates to the warrants and debenture conversion feature created
by the debenture financing in fiscal year 2001. Due to a change in the
accounting standards, no amortization is expected in the year-ended July 31,
2003 from our acquisition of Premier Express Claims or salvage connection, nor
is there any amortization remaining from the debentures issued in fiscal year
ended July 31, 2001.
34
Net Loss
We recognized a net loss of approximately $4.2 million and $7.6 million for the
years ended July 31, 2002 and 2001, respectively. This represents a 45% decrease
in the loss between the two years. Net loss before non-cash charges, which are
described above, were approximately $2.1 million and $2.8 million for the years
ended July 31, 2002 and 2001, respectively. We expect our net loss to narrow and
then become profitable as we experience higher revenues that will increasingly
absorb our fixed costs associated with our infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2004, we had approximately $243,000 in cash. This is a decrease
of approximately $173,000 from July 31, 2004. We have a working capital
deficiency of approximately $3.8 million. The primary source of our working
capital during the three-month period ended October 31, 2004, was from cash flow
generated by operations and available cash balance. However, there is no
assurance that we will be able to continue to provide cash through operations.
In January and February 2005 we sold $1,724,000 in additional equity securities
as described in this registration statement and received a net of $1,542,980
after expenses. These proceeds will be used to continue to invest in the
Co-Marketing Agreement with ADP Claims Services Group for general corporate
purposes such as paying past due obligations to repair facilities.
We believe that cash generated from operations and this financing 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.
DEBT AND CONTRACTUAL OBLIGATIONS
Our commitments for debt and other contractual arrangements as of October 31,
2004 are summarized as follows:
Years ending October 31,
---------------------------------------------------
2005 2006 2007 Total
---------------------------------------------------
Property lease 220,000 227,000 19,000 466,000
Equipment lease 96,000 110,000 95,000 301,000
Loan payable to stockholder 15,000 15,000
Convertible debenture 275,000 275,000
Employee compensation 744,000 29,000 773,000
---------------------------------------------------
1,350,000 366,000 114,000 1,830,000
===================================================
The Company leases equipment and facilities under non-cancelable capital and
operating leases expiring on various dates through 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 October 31, 2004 the Company had one loan outstanding to a stockholder
totaling $15,007. 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 October 31, 2004 the Company owed $275,000, 8% convertible note payable with
a maturity date of August 2005. This note is convertible at the discretion of
35
the creditor at a fixed rate of $0.279 per share. The interest can be paid in
either cash or common shares at the Company's discretion at the end of the loan.
The Company 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.
In addition, the Company has two-year employment agreements with four other
executives that expire April 30, 2006. The agreements provide for combined 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.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and the results of our
operations are based upon our consolidated financial statements and the data
used to prepare them. The Company's financials have been prepared in accordance
with accounting principles generally accepted in the United States. On an
ongoing basis we re-evaluate our judgments and estimates including those related
to revenues, bad debts, long-lived assets, and income taxes. We base our
estimates and judgments on our historical experience, knowledge of current
conditions and our beliefs of what could occur in the future considering
available information. Actual results may differ from these estimates under
different assumptions or conditions. Our estimates are guided by observing the
following critical accounting policies.
Revenue recognition:
The Company derives revenue primarily from collision repairs, glass repairs and
fleet repairs. Revenue is recognized when an agreement between the Company and
its customer exists, the repair services have been completed, the Company's
revenue is fixed and determinable and collection is reasonably assured.
36
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 and October 31, 2005 the allowance for doubtful accounts was
approximately $161,000 and $175,000 respectively.
Accounting for Income taxes:
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While we consider
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
37
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 and
$9,097,000 at July 31, 2004 and October 31, 2005, respectively. The valuation
allowance consists mainly of net operating losses previously realized and stock
compensation currently not deductible. The valuation allowance was necessary
because the use of these deductions is not reasonably assured since the company
just recently reached profitability.
Valuation of long-lived assets:
The Company identifies and records impairment on long-lived assets, including
goodwill, when events and circumstances indicate that such assets have been
impaired. The Company periodically evaluates the recoverability of its
long-lived assets based on expected undiscounted cash flows, and recognizes
impairment, if any, based on expected discounted cash flows. Factors we consider
important which could trigger an impairment review include the following:
Significant negative industry trends
Significant underutilization of the assets
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 October 31, 2005.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In December 2004, the FASB issued Statement no. 123r, "Share-Based Payment,"
which we need to adopt as of August 1, 2005, that changes the accounting for
share based payments to employees, including stock and employee stock options.
This statement will require the expensing of stock options grant to employees.
Previously the computation of expenses related to stock options was only
disclosed in the financial statements. Management is currently evaluating the
impact the statement will have on the Company's financial statements.
38
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.
39
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.
40
We help our clients monitor their automobile claims losses by providing the
following:
o Technology - We built one of the first customized web-based vehicle claim
assignment and delivery systems for insurance companies and corporate fleets.
We use state-of-the-art technology and security for the transmission of files
and records. In addition, we utilize digital cameras, Internet communication,
advanced data storage and scanners for auto repair shops that are not equipped
with digital cameras, to create a defined audit trail and high capacity
digital storage. We provide these applications to our clients with their own
private label that includes their corporate colors and logos, which makes the
claims process transparent to both insurance company personnel and the
insured.
o Online, real time reporting - We provide our customers with online, real-time
reports of the most critical information used in their operations. These
reports include a comparison of their average paid losses (cost to repair 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.
41
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 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.
42
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.
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 January 31, 2005, we had four
personnel in our sales and marketing department.
43
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;
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
44
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
45
in our markets will be increasingly subject to infringement claims as the number
of services and competitors in our industry segment grows. Any such claim, with
or without merit, could be time-consuming, result in costly litigation, cause
service upgrade delays or require us to enter to royalty or licensing
agreements. Such royalty or licensing agreements might not be available on terms
acceptable to us, or at all. As a result, any such claim of infringement against
us could have a material adverse effect upon our business, results of operations
and financial condition.
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.
46
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.
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.
47
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. 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.
PROPERTIES
Our corporate headquarters are located at 110 East Douglas Road, Oldsmar,
Florida 33467. Monthly rent of approximately $16,900 terminates on November 30,
2006. The monthly rent increases annually until it reaches approximately $19,000
per month in the year ended November 30, 2006. We have the option to renew the
lease for two additional years after the initial five-year term. On or after
December 31, 2004, we also have the right to purchase the entire facility,
totaling 62,000 square feet, with the associated land for $2,950,000. We issued
45,956 shares of our Common Stock to the landlord of this lease with
registration rights to obtain the purchase option.
48
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.
LEGAL PROCEEDINGS
We are currently not involved in any legal proceedings which are considered
material.
49
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information with respect to our executive
officers 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 33 Sr. VP of Operations
Dave Mattingly 46 Chief Information Officer
Jeffrey D. Dickson 61 Chairman of the Board of Directors
Christopher Korge 49 Director
Nicholas D. Trbovich, Jr. 44 Director
John K. Pennington 49 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, Director, President and Chief Executive Officer - Mr. 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
50
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.
Scott Moore, CPA, Chief Financial Officer - Mr. Moore 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 Chief Information Officer - Mr. 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, Chairman of the Board - Mr. Dickson has been the Chairman of
the 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, Director - Mr. 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., Director - Mr. 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.
51
(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.
John K. Pennington, Director - Mr. Pennington was elected to the Board on
October 25, 2004 and is, first, President and sole Director of Kananaskis Alpine
Resort, Inc., the General Partner that manages a luxury resort hotel, second,
President and Chairman of North Shore Mercantile Corp., a small public
investment holding company, which holds controlling interest in two operating
businesses and three hotels, third, Founder, President and Director of CER Group
Funds, an investment company that specializes in illiquid syndicated real estate
investments, and fourth, Founder, President & Director of Advantage Fund G.P.
Limited, a General Partner in two technology investment funds, which owns shares
in eAutoclaims (see Principal Shareholder -Security Ownership of Certain
Beneficial Owners and Management) .
Other Key Employees
In addition to the individuals identified above as "Executive Officers", the
following individuals are considered key employees and certain information with
respect to these key employees is described below:
John Prozinski, Vice President Business Development - Mr. Prozinski joined
eAutoclaims in August 1998. During his time with eAutoclaims he has also held
positions as Regional Sales Manager, National Body Shop Manager, and Director of
Consumer Products. In March of 2002 he was promoted to the Vice President of
Business Development. From August of 1995 through August of 1998 Mr. Prozinski
was a regional sales manager for Ashland, Inc. covering North American and
Canadian. He holds a bachelor's degree from St. John's University and is a past
president of the United States Junior Chamber of Commerce.
Larry C. Colton, Controller - Mr. Colton joined eAutoclaims in December 2000. He
has over 25 years experience in accounting and finance, having held a variety of
positions in several industries. Between December 1997 and December 2000, Mr.
Colton was Vice President of an asset management division of Sky Financial
Group. He holds a bachelor's degree from Elmhurst College and a Masters of
Business Administration degree from Northern Illinois University.
Mike Probyn, 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
52
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.
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
53
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.
54
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
Name of Individual & Principal Fiscal Annual Stock Underlying Plan Other
Position Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation
(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) 2002 $45,311 -0- -0- -0- -0- -0- -0-
Chief Information Officer 2003 -0- -0- -0- -0- -0- -0- -0-
2004 -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 $0.15 3/10/14
----------------------- ----------------- ------------------- ----------------- --------------------- ---------------------
(1) Except as described in the description of Mr. Seidel's employment contract
below, each option granted has a term of 10 years, and vests upon issuance.
55
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
The following table provides information with respect to the named officer
concerning exercised and unexercised options in fiscal year ended July 31, 2004.
------------------------- --------------- ------------------ ------------------------------- -------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs Options/SARs
Name of Acquired on Value at Fiscal Year End (#) at Fiscal Year End($)
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
56
"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.
M. Scott Moore, Chief Financial Officer. In March 2003, we entered into an
employment agreement with M. Scott Moore, our Chief Financial Officer. This
agreement has a term of two (2) years beginning May 1, 2003. Under this
agreement, Mr. Moore is entitled to an annual base salary of $135,000 through
April 30, 2004, and $144,445 through April 30, 2005. Mr. Moore is entitled to
bonus compensation as determined by the Company. Mr. Moore may elect to receive
all or part of his bonus, if any, in shares of our Common Stock valued at 90% of
the then current market value. Mr. Moore is entitled to reimbursement for
ordinary, necessary and reasonable business expenses in connection with his
services and may participate in any retirement, medical, dental, welfare and
stock options plans, life and disability insurance coverages and other benefits
afforded our employees. He is entitled to an automobile allowance of $400 per
month during the term of his agreement. Mr. Moore was issued options to purchase
50,000 shares of our Common Stock at $0.13 per share, which was the fair market
value of the closing price of our shares as of the date of his agreement. These
options vest in 1/3 installments over each year of employment and have a maximum
exercise period of 5 years. All his options vest if the contract is not renewed
or there is a change in control of the Company. If we elect not to renew this
agreement, then he is entitled to nine (9) months severance pay at his then
current base salary. Mr. Moore has agreed not to compete with us during the term
of this agreement and for a period of two (2) years after termination of this
agreement. Mr. Moore took a 15% pay cut starting April 19, 2004 until the
Company shows a monthly profit of at least $50,000.
David Mattingly, Chief Information Officer. We entered into an employment
agreement with David Mattingly, our Chief Information Officer. This agreement
was effective May 1, 2003, and has a term of two (2) years. Under this
agreement, Mr. Mattingly is entitled to an annual base salary of $105,000
through April 30, 2004, and then $110,250 through April 30, 2005. Mr. Mattingly
is entitled to bonus compensation as determined by the Company. Mr. Mattingly
may elect to receive all or part of his bonus, if any, in shares of our Common
Stock valued at 90% of the then current market value. Mr. Mattingly is entitled
to reimbursement for ordinary, necessary and reasonable business expenses in
connection with his services and may participate in any retirement, medical,
dental, welfare and stock options plans, life and disability insurance coverages
and other benefits afforded our employees. He is entitled to a $400 per month
automobile allowance. During the term of his agreement and for a period of two
(2) years after termination of his agreement, Mr. Mattingly is subject to a
non-competition and restrictive covenant with us. Mr. Mattingly took a 15% pay
cut starting April 19, 2004 until the Company shows a monthly profit of at least
$50,000.
Stacey Adams, Senior Vice President - 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.
57
Change of Control Shares
On March 27, 2003, as part of an employee and board member retention program the
Board of Directors voted to grant certain employees (Mr. Seidel is not entitled
to participate in the employee retention program) a total of 2,000,000 shares of
our Common Stock or equivalent consideration thereof and the current and future
board members 1,000,000 common shares if there is a change in control of greater
than 50% ownership of the Company or a sale of all or substantially all it's
assets. Only those employees and board members employed or on the board at the
time of the change will participate in the compensation.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors administers our Chief
Executive Officer's compensation package. The committee reviews, recommends and
approves changes to our compensation policies and programs, makes
recommendations to the Board of Directors as to the amount and form of executive
officer compensation, and administers our stock option plans.
General Compensation Philosophy. Our compensation programs are designed to
directly align compensation with 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.
58
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.
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 and the six months ended January 31,
2005 we issued 367,500 and 1,000 stock options to employees, respectively, and
the Board members were issued 75,000 and 62,500 options, respectively, in
accordance with the Board compensation plan. During the fiscal year ended July
31, 2004, 75,000 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.
59
As of January 31, 2005, we have issued, or reserved for issuance, 19,774,580
shares of our Common Stock relating to outstanding options and warrants which
are categorized as follows:
Options issued to Directors 1,457,500 (1)
Options issued to Chief Executive Officer 1,597,500 (2)
Options issued in connection with acquisition of PEC 130,000 (3)
Options issued to Employees 3,547,438(4)
Options issued to Consultants 38,929 (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 19,774,580 (11)
==========
(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".
(2) Mr. Seidel currently owns the following options with the following
terms:
Strike Number
# 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 26,667 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 1,484,167
========= =========
60
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. 2,995,928 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 17,500 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 three-year
warrant to purchase another share of stock at $0.35.
(11) Excludes 410,625 shares issuable upon conversion of the placement
agent warrants from the units sold in the January 2005 private
placement, 2,737,500 shares issuable upon exercise of common stock
purchaser warrants sold in the January 2005 private placement, and
excludes 2,339,358 shares issuable upon execise of the common stock
purchaser warrants given to the March through May 2004 investors who
signed an Amended Subscription Agreement (True-up).
61
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 January 31, 2005.
(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 2,594,351 $0.83 3,216,817 (4)
Equity Compensation
Plans Not Approved by
Stockholders (1) (2) (3) 7,177,016 $0.11 N/A
---------
Total 9,771,367 $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 23,154,446 warrants issued to investors in connection with
capital raising transactions not approved by our stockholders.
(4) Based on a Board of Directors imposed limit of 15%, not the 20% shown in
the approved plan.
62
CERTAIN TRANSACTIONS
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 and January 31, 2005, $42,431 and 24,431 is still outstanding
under this arrangement, respectively, after the 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.
Christopher Korge, one of our directors, purchased $300,000 of convertible
debentures in July, 2001. Upon the September 30, 2001 maturity date, we
converted the $300,000 face amount of debentures acquired by Mr. Korge into
476,190 shares of our Common Stock (a $0.63 conversion price). In consideration
for Mr. Korge's purchasing and facilitating the placement of these debentures,
we have agreed to issue Mr. Korge, or his assigns, warrants to acquired
1,000,000 shares of our Common Stock and Mr. Seidel's broker-in-law warrants to
acquire 150,000 shares of our Common Stock, both at an exercise price of $0.63
per share. We adjusted the exercise price of Mr. Korge's warrants to $.35 in
connection with Mr. Korge's recent purchase of a $250,000 convertible note.
In connection with the issuance of shares of our Common Stock in August 2003,
Mr. Korge acquired 107,527 shares at a fixed price of $.279 per share. In
addition, the broker-in-law of Mr. Seidel, our CEO, acquired 35,842 shares at a
fixed price of $.279.
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.
63
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information with respect to the beneficial
ownership of our Common Stock as of January 31, 2005, by:
o each person who we know beneficially owns more than 5% of our Common Stock;
o each of our directors and each individual who serve as our named executive
officers individually; and
o all of our directors and executive officers as a group.
Name and Address of Amount and Nature of
Beneficial Owner (1) Beneficial Ownership Percentage(2)(15)
_______________________________ ____________________ _________________
Eric Seidel (3) 2,369,259 6.24%
Reed Mattingly (4) 548,497 1.49%
Scott Moore (5) 499,750 1.36%
Dave Mattingly (6) 284,537 *
Stacey Adams (7) 232,468 *
Jeffrey D. Dickson (8) 1,003,550 2.68%
Nicholas D. Trbovich, Jr. (9) 473,461 1.29%
Christopher Korge (10) 3,851,998 10.01%
John K. Pennington (11) 62,439 *
Canadian Advantage Limited
Partnership (11) 2,991,504 8.22%
Advantage (Bermuda) Fund, Ltd. (11) 1,137,330 3.12%
Kinderhook Partners, LP (12) 5,192,858 13.32%
Entrade, Inc. (13) 2,387,108 6.46%
Directors and officers
as a group (8 persons) (14) 9,325,959 21.93%
(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 January 31, 2005, 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 36,401,764 shares of Common Stock outstanding at the close of
business on January 31, 2005. Excludes: (i) 6,732,438 shares currently
issuable pursuant to outstanding options issued under Stock Option Plan;
(ii ) shares issuable upon exercise of other outstanding warrants; (iii)
3,000,000 shares issuable to the Board and management if there is a sale
of the Company; (iv) 23,265,591 shares underlying this registration
statement; and (v) shares of our Common Stock issuable upon conversion
of our Series A Preferred Stock and outstanding convertible notes. This
amount includes 1,000,000 warrants issued to Mr. Korge (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 13,333 Common
Shares at an exercise price of $0.15 , which vest through December 21,
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 193,333 shares at exercise prices between $0.15
to $2.00. This amount excludes unvested options to acquire up to 26,667
common shares at exercise prices of $0.15 to $0.55, 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 267,000 common shares at an exercise price
64
between $0.13 and $2.69. This amount excludes unvested options for
60,000 common shares at exercise prices between $0.15 and $0.55, which
vest through December 21, 2005. 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 118,333 shares at exercise prices between $0.15 and $3.38. This
amount excludes unvested options to acquire up to 21,667 common shares
at exercise prices of $0.15 to $0.55, which vest through December 21,
2005. See "Executive Compensation".
(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 66,666 shares at exercise prices between $0.15
and $3.00. This amount excludes unvested options to acquire up to 18,334
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) 276,381 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 185,000 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 $0.25 to $0.38, which vest through January 31,
2006. 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) 270,667
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 $0.16 in connection with the issuance of our convertible
debentures in 2004 (vii) 892,857 shares converted from the convertible
debentures purchased on 4/23/04, and (viii) options to acquire 185,000
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 $0.25 to $0.38, which vest through
January 31, 2006. See Directors and Executive Officers - Director
Compensation".
(11) Mr. Pennington ownership consists of 62,439 shares issued to him for his
service on the board. It excludes unvested options to acquire up to
12,500 common shares at exercise prices of $0.32, which vest January 31,
2006. Mr. Pennington became a director on October 25, 2004. He has
investment decision-making authority for Canadian Advantage Limited
Partnership and Advantage (Bermuda) Fund, Ltd. The ownership interest
for these two companies represents shares received upon the conversion
of preferred shares in March 2002 as reported on a Schedule 13D on or
about March 26, 2002. The ownership interest for these two companies
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.
(12) 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 $0.16.
(13) Represents 1,315,68 ,shares acquired privately in December 2001 as
reported on a Schedule 13G filed on or about December 13, 2001, and
535,714 shares and 535,714 warrants purchased on April 23, 2004. The
warrants are 3-year warrants to purchase common stock at $0.16 per
share.
(14) Includes outstanding options and warrants to acquire up to 6,128,158
shares of our Common Stock issued to our officers and directors, which
are currently exercisable.
(15) 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 reling 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.
65
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 January 31, 2005, (excluding the 7,814,358 share issued prior to January
31, 2005 that are being registered in this registration statement) there were
approximately 36,401,764 shares of our Common Stock outstanding. In addition, as
of January 31, 2005, the authorized 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 $0.16, 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
$0.16, and
o 220,000 warrants at an exercise price of $0.75 per share, issued to the
purchasers of common stock.
As of January 31, 2005, we have reserved 6,771,367 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.
66
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.
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%;
67
(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.
Anti-Takeover Effects of Certain Provisions of Our Articles of Incorporation and
Bylaws
Certain provisions of our certificate of incorporation and bylaws, which are
summarized below, may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider in its best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.
Special Meeting of Stockholders
Our bylaws provided that special meetings of our stockholders may only be called
by (1) resolution of the Board or the president or (2) the president or the
secretary upon the written request (stating the purpose of the meeting) of a
majority of the directors then in office or the holders of a majority of the
outstanding shares entitled to vote.
68
Authorized But Unissued Shares
The authorized but unissued shares of Common Stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including public or
private offerings to raise capital, corporate acquisitions and employee benefit
plans. The existence of authorized but unissued shares of Common Stock and
preferred stock could render more difficult or discourage an attempt to obtain
control of us, by means of a proxy contest, tender offer, merger or otherwise.
Limitations on Liability and Indemnification Matters
Our Certificate of Incorporation provides that no director shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director except as limited by Nevada law. Our Bylaws provide
that we shall indemnify to the full extent authorized by law each of our
directors and officers against expenses incurred in connection with any
proceeding arising by reason of the fact that such person is or was an agent of
the corporation.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling person based on
the foregoing provisions, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and is, therefore, unenforceable.
TRANSFER AGENT
The transfer agent for our Common Stock is Equity Transfer Services, Inc., 120
Adelaide West, Suite 420, Toronto, Ontario, M5H 4C3.
69
SHARES ELIGIBLE FOR FUTURE SALE
As of January 31, 2005, (excluding the 7,814,358 share issued prior to January
31, 2005 that are being registered in this registration statement) there were
approximately 36,401,764 shares of our Common Stock outstanding. If all of the
13,114,358 shares being registered in this Prospectus are issued, we will have
49,516,122 shares issued and outstanding. Of these shares, all of the 13,114,358
shares registered in this offering will be freely tradable without restriction
or further registration under the Securities Act of 1933, unless such shares are
purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act of 1933. Shares that cannot be traded without restriction are
referred to as "restricted securities" as that term is defined in Rule 144 under
the Securities Act of 1933. As of February 11, 2005, approximately 29,196,000
shares are eligible for sale under Rule 144. Restricted securities may be sold
in the public market only if registered of if they qualify for an exemption from
registration under Rule 144 of the Securities Act of 1933.
Rule 144
In general, under Rule 144 as currently in effect, a person (or group of person
whose shares are aggregated), including affiliates of the Company, who have
beneficially owned shares of our Common Stock for at least one year would be
entitled to sell within any three-month period, an amount of restricted
securities that does not exceed the greater of:
o 1% of the number of shares of Common Stock then outstanding (approximately
364,018 shares as of September 30, 2004; or
o the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the filing of a notice on Form 144 with respect to
such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, including the holding
period of any prior owner other than an affiliate, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
No prediction can be made as to the effect, if any that market sales of the
Company's Common Stock, or the availability of the Common Stock for sale, will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of a significant number of shares of the Company's Common
Stock in the public market, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock and impair our future
ability to raise capital through an offering of equity securities.
See "Risk Factors - Future sales of our Common Stock may depress our stock
price."
70
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon by
Johnson, Pope, Bokor, Ruppel & Burns, LLP, 911 Chestnut Street, Clearwater,
Florida 33756. Michael T. Cronin, a partner in this firm, currently owns 837,013
shares of our Common Stock.
71
EXPERTS
Our financial statements for the years ended July 31, 2004, 2003 and 2002
appearing in this Prospectus and registration statement have been audited by
Goldstein Golub Kessler LLP, as independent registered public accounting firm,
as set forth in their report appearing elsewhere herein, and are included in
reliance upon the report given on the authority of the firm as experts in
accounting and auditing.
72
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 pursuant to the Securities Act of 1933, as amended, with
respect to the offer, issuance and sale of 23,265,591 shares of our Common
Stock. This Prospectus does not contain all of the information set forth in the
registration statement. For further information with respect to us, and the
shares of our Common Stock to be sold in this offering, we make reference to the
registration statement.
You may read and copy all or any portion of the registration statement or any
other information, which we filed at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. The address for the
SEC's public reference room in Washington, D.C. is Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. You can request copies of these documents,
upon payment of a duplicating filing fee, by writing to the SEC. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference rooms. Our SEC filings are also available
to you free or charge at the SEC's web site at http://www.sec.gov.
73
EAUTOCLAIMS INC.
INDEX TO FINANCIAL STATEMENTS
Page
-------
FINANCIAL STATEMENTS FOR THE YEAR ENDED JULY 31, 2004
Report of Independent Registered Public Accounting Firm F - 2
Financial Statements
Balance Sheets at July 31, 2004 and 2003 F - 3
Statements of Operations for the Years Ended F - 4
July 31, 2004, 2003 and 2002
Statements of Stockholders' Equity (Deficiency) F - 5
for the Years Ended July 31, 2004, 2003 and 2002
Statements of Cash Flows for the Years Ended F - 6
July 31, 2004, 2003 and 2002
Notes to Financial Statements F - 7
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED OCTOBER 31, 2004
(UNAUDITED)
Financial Statements
Balance Sheets at October 31, 2004 and 2003 F - 25
Statements of Operations for the Three Months Ended F - 26
October 31, 2004 and 2003
Statement of Stockholders' Deficiency F - 27
for the Three Months Ended October 31, 2004
Statements of Cash Flows for the Three Months Ended F - 28
October 31, 2004 and 2003
Notes to Financial Statements F - 29
FINANCIAL STATEMENT SCHEDULE FOR THE YEARS ENDED
JULY 31, 2004, 2003 AND 2002
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule F - 32
Schedule II - Valuation and Qualifying Accounts F - 33
F-1
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 $(2,210,775) $(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.
F-23
EAUTOCLAIMS, INC.
FINANCIAL STATEMENTS
October 31, 2005
F-24
EAUTOCLAIMS, INC.
BALANCE SHEETS
----------------------------------------------------------------------------------------------------------------------------
October 31, 2004 July 31, 2004
(unaudited)
----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 242,889 $ 415,549
Accounts receivable, less allowance for doubtful accounts
of $175,000 and $161,000 respectively 744,580 728,776
Due from related parties 59,471 65,431
Prepaid expenses and other current assets 102,802 79,341
Total current assets 1,149,742 1,289,097
Property and equipment, net of accumulated depreciation
of $1,463,155 and $1,326,462 respectively 1,010,263 1,073,409
Goodwill 1,093,843 1,093,843
Other assets 25,800 25,800
Deferred income tax asset, net of valuation
allowance $9,097,000 and $9,002,000 respectively
----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,279,648 $ 3,482,149
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable, advanced payments and accrued expenses $ 4,632,202 $ 4,378,858
Loan payable - stockholder 15,007 36,866
Current portion of capital lease obligation 66,679 63,888
Convertible debenture 275,000
Total current liabilities 4,988,888 4,479,612
Convertible debenture 300,000
Capital lease obligation 188,918 195,621
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,177,806 4,975,233
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 164 shares and 200 shares respectively
aggregate liquidation preference of $820,000 and $1,000,000 respectively 1 1
Common stock - $.001 par value; authorized 100,000,000 shares, issued
and outstanding 35,837,078 shares and 34,337,362 shares respectively 35,837 34,338
Additional paid-in capital 22,326,957 22,171,857
Accumulated deficit (24,260,953) (23,699,280)
----------------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (1,898,158) (1,493,084)
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,279,648 $ 3,482,149
============================================================================================================================
See Notes to Financial Statements
F-25
EAUTOCLAIMS, INC.
STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------
Three-month Three-month
Period Ended Period Ended
October 31, 2004 October 31, 2003
(unaudited) (unaudited)
---------------------------------------------------------------------------------------------------------------
Revenue:
Collision repairs management $3,269,607 $ 7,378,412
Glass repairs 161,088 400,310
Fleet repairs management 134,749 216,482
Other revenue 554,352 695,306
---------------------------------------------------------------------------------------------------------------
Total revenue 4,119,796 8,690,510
Expenses:
Claims processing charges 3,200,486 7,122,706
Selling, general and administrative 1,330,271 1,427,540
Depreciation and amortization 134,584 130,022
---------------------------------------------------------------------------------------------------------------
Total expenses 4,665,341 8,680,268
---------------------------------------------------------------------------------------------------------------
Net loss $ (545,545) $ 10,242
===============================================================================================================
Adjustment to net loss to compute loss per common share:
Preferred stock dividends (16,128) (24,903)
---------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (561,673) $ (14,661)
===============================================================================================================
Loss per common share - basic and
diluted $ (0.02) $ (0.00)
===============================================================================================================
Weighted-average number of common
shares outstanding-basic and diluted 35,361,541 23,458,463
===============================================================================================================
See Notes to Financial Statements
F-26
EAUTOCLAIMS, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
---------------------------------------------------------------------------------------------------------------------------------
Three month period ended October 31, 2004 Additional
(unaudited) Preferred Stock Common Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
---------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2004 200 1 34,337,362 34,338 22,171,857 (23,699,280) (1,493,084)
Issuance of common stock for services 210,176 210 73,491 73,701
Accrued dividends on preferred stock (16,128) (16,128)
Issuance of common stock upon
conversion of preferred stock (36) 900,000 900 (900) 0
Issuance of common stock for
preferred stock dividends 261,675 261 51,845 52,106
Conversion of debt to equity 89,606 90 24,910 25,000
Isssuance of common stock for interest
on convertible debt 20,759 21 5,771 5,792
Issuance of common stock upon exercise of 17,500 17 (17) 0
options
Net loss (545,545) (545,545)
--------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 2004 164 1 35,837,078 35,837 22,326,957 (24,260,953) (1,898,158)
================================================================================================================================
See Notes to Financial Statements
F-27
EAUTOCLAIMS, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Three-month Three-month
Period Ended Period Ended
October 31, 2004 October 31, 2003
(unaudited) (unaudited)
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) (545,545) $ 10,242
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 134,584 130,022
Amortization of discount on debentures 35,215
Common stock issued for services 73,701 26,831
Common stock issued for interest 5,792
Allowance for doubtful accounts 14,000
Changes in operating assets and liabilities
Accounts receivable (29,804) 3,519
Prepaid expenses and other current assets (23,461) (3,524)
Other assets 28,691
Accounts payable and accrued expenses 289,322 42,180
--------------------------------------------------------------------------------
Net cash (used in) provided by operating
activities (81,411) 273,176
--------------------------------------------------------------------------------
Cash flows from investing activity:
Purchases of property and equipment (71,438) (93,285)
Payments from related parties 5,960 9,000
Loans to related parties (2,750)
--------------------------------------------------------------------------------
Net cash used in investing activity (65,478) (87,035)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 163,250
Principal payments on capital lease (3,912) (9,383)
Principal payments on shareholder loans (21,859) (19,399)
--------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (25,771) 134,468
--------------------------------------------------------------------------------
Net (decrease) increase in cash (172,660) 320,609
Cash at beginning of period 415,549 226,161
--------------------------------------------------------------------------------
Cash at end of period $242,889 $546,770
================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,751 $ 17,390
================================================================================
Supplemental disclosure of noncash investing
and financing activities:
Conversion of debentures to common stock $ 25,000
================================================================================
Conversion of preferred stock and accrued
dividends for common stock $ 232,106
================================================================================
Accrued dividends on preferred stock $ 16,128 $ 24,903
================================================================================
See Notes to Financial Statements
F-28
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1 - Basis of presentation
The accompanying unaudited financial statements contain all adjustments
(consisting only of those of a normal recurring nature) necessary to present
fairly the financial position of eAutoclaims, Inc. as of October 31, 2004 and
its results of operations and cash flows for the three-month periods ended
October 31, 2004. Results of operations for the three-month period ended October
31, 2004 are not necessarily indicative of the results that may be expected for
the year ending July 31, 2005.
The Company derives revenue primarily from collision repairs, glass repairs and
fleet repairs. Revenue is recognized when an agreement between the Company and
its customer exists, the repair services have been completed, the Company's
revenue is fixed and determinable and collection is reasonably assured.
The Company records revenue gross when the Company is the primary obligor in its
arrangements, the Company has latitude in establishing price, the Company
controls what services are provided and where the services will take place, the
Company has discretion in supplier selection, the Company is involved in the
determination of product or service specifications and the Company has credit
risk. The Company records revenue net when situations occur whereby the supplier
(not the Company) is the primary obligor in an arrangement, the amount the
Company earns is fixed or the supplier (and not the Company) has credit risk.
The Company accounts for its employee incentive stock option plans using the
intrinsic value method in accordance with the recognition and measurement
principles of Accounting Principles Board Opinion No 25, "Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. Had the Company determined
compensation expense based on the fair value at the grant dates for those awards
consistent with the method of SFAS 123, the Company's net income (loss) per
share would have been increased to the following pro forma amounts:
Three-month
period ended
October 31,
2004 2003
------- -------
Net income (loss) as reported $(545,545) $ 10,242
Deduct total stock based employee
compensation expense determined under
fair value based methods for all awards (16,733) (91,114)
--------- ---------
Pro forma net loss $(562,278) $ (80,872)
========== =========
Basic and diluted net loss per share
as reported $(.02) $(.00)
Pro forma and diluted basic loss per share $(.02) $(.00)
F-29
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 2 - Per share calculations
Basic loss per share is computed as net loss available to common stockholders'
divided by the weighted- average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
from common shares issuable through stock-based compensation including stock
options, restricted stock awards, warrants and convertible securities. As of
October 31, 2004 and 2003, 19,753,245 and 6,784,850 options and warrants,
respectively, were excluded from the diluted loss per share computation, as
their effect would be antidilutive. Additionally, as of October 31, 2004 and
2003 6,250,000 and 7,085,000 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.
Note 3 - Equity Transactions
During the three-months ended October 31, 2004, the Company issued 138,888
shares of common stock to two directors in exchange for their services. These
shares are being expensed over the year as they are earned. During the
three-months ended October 31, 2004, the Company expensed $12,500, or 34,722
shares, which was approximately equal to the fair market value of the shares
when earned. As of October 31, 2004, 104,166 of the shares of common stock
issued with a fair value of $36,250 were reflected in the financial statements
as a prepayment of their annual retainer.
During the three-months ended October 31, 2004, the Company issued 71,288 shares
of common stock in exchange for $24,951 in legal services.
On August 2, 2004, 12 shares of preferred stock with a face value of $60,000
plus dividends of $15,757 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. On
October 6, 2004, 12 shares of preferred stock with a face value of $60,000 plus
dividends of $18,398 were converted into 391,989 shares of common stock.
On August 24, 2004, an investor converted $25,000 of debt owed to him by the
Company into 89,606 shares of common stock. In addition, interest on the debt of
$5,792 was converted into 20,759 shares of common stock.
During the three-months ended October 31, 2004, Options with a strike price of
$0.01 were exercised to purchase 17,500 shares of the Company's common stock.
Additionally, options to purchase 138,333 shares of common stock were canceled.
F-30
EAUTOCLAIMS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 4 - 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 35,837,078 indicated by the
Company's records. The Company believes that its records are correct and is in
the process of resolving this difference. The number of shares outstanding
reflected in the Company's financial statements do not include these shares or
any adjustment that might be necessary to resolve this difference.
Note 5 - Subsequent Event
On November 9, 2004, 12 shares of preferred stock with a face value of $60,000,
plus dividends of $18,700 were converted into 393,501 shares of common stock.
F-31
Report of Independent Registered 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
consolidated financial statements. In our opinion, the information included on
Schedule II relating to the years ended July 31, 2004, 2003 and 2002 is
fairly stated in all material respects, in relation to the basic consolidated
financial statements taken as a whole. Also, such schedule presents fairly the
information set forth therein in compliance with the applicable accounting
regulations of the Securities and Exchange Commission.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
--------------------
September 24, 2004
F-32
Schedule II
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Information relating to the allowance for doubtful accounts is as follows:
Beginning Ending
Year ended Balance Charges Deductions Balance
------------ ---------- ----------- -------------- ------------
7/31/02 60,000 353,132 13,132 400,000
7/31/03 400,000 139,874 297,874 242,000
7/31/04 242,000 63,607 144,607 161,000
F-33