UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-23903
eAUTOCLAIMS, INC.
(Exact name of registrant as specified in charter)
Nevada 95-4583945
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
110 E. Douglas Road, Oldsmar, Florida 34677
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 749-1020
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ __ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes ____ No __X___
Aggregate market value of the voting stock held by non-affiliates of the
registrant at September 30, 2005 was $11,536,123.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
as of September 30, 2005 was 64,089,574.
EXPLANATORY NOTE
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This Amendment to Form 10-K relates solely to including the proper certification
as required by Item 601(b)(31) of Regulation S-K for the Registered Chief
Executive Officer and Chief Financial Officer pursuant to Rules 13a-14(c)1 and
15d-14(a). There are no other changes to the Form 10-K as previously filed.
FORM 10-K - Index
PART I
Page
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Item 1. Description of Business....................................... 2
Item 2. Description of Property....................................... 20
Item 3. Legal Proceedings............................................. 20
Item 4. Submission of Matters to a Vote of Security Holders........... 20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ..... 20
Item 6 Selected Financial Data....................................... 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 26
Item 7A Quantitative and Qualitative Disclosures About Market Risk.... 35
Item 8. Financial Statements and Supplementary Data................... 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures............................ 35
Item 9A Controls and Procedures 35
Item 9B Other Information 35
PART III
Item 10 Directors and Executive Officers ............................. 36
Item 11. Executive Compensation........................................ 39
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stock Matters.................................... 46
Item 13. Certain Relationships and Related Transactions................ 49
Item 14. Principal Accounting Fees and Services ....................... 49
PART III
Item 15. Exhibits, Lists and Reports on Form 8-K ...................... 50
Signatures.................................................... 53
Certifications................................................ 54
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This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and assumptions made by
management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
eAutoclaims is a Nevada corporation which provides Internet based vehicle
collision claims services for insurance companies, managing general agents (MGA)
and third party claims administrators (TPA) and self-insured automobile fleet
management companies. We accept assignment of claims from our customers, and
provide vehicle repairs through a network of repair shops. We also provide
online systems to connect clients with service providers of estimates, audits
and claims administration services for claims for which we do not perform the
repair.
Our business strategy is to use the Internet and our network of approximately
2,700 body shops 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
2,700 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 the vehicle 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 sells and markets eAutoclaims' core
Internet application and collision management services. The product is being
private labeled under the name ADP Managed Repair Solutions and utilizes
eAutoclaims as the back room for processing the claim repairs and our network of
repair facilities. Although there is no assurance, we believe that the ADP
Agreement has the potential to substantially increase the volume of claims
processed by us, resulting in significant long-term benefit to us and our
shareholders.
During the year ended July 31, 2005, we derived 55% and 8% 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 beginning in fiscal year ended 2004 and carrying into 2005. The
loss of this customer's business combined with the increase in expenditures
required to implement 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 2005.
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Products and Services
Our eJusterSuite(R) product provides both outsourcing and ASP (application
service provider) solutions. The outsourcing solution requires eAuto personnel
to audit and coordinate the vehicle repair. The ASP solution allows the customer
to use our technology independent of our personnel; thereby, providing a
solution for the largest insurance companies that already have the staff to
process and control the claims process, while paying us a fee for every
transaction that is run through our system. The ASP model will provide margin
without the associated personnel and operating costs.
eJusterSuite(R) 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
reducing 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 us with additional margin without
requiring significant additional personnel and other 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 on a
particular vehicle. 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 85% of
the revenue for the fiscal year ended July 31, 2005. 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 $65 per claim depending on the level of service
required. For the fiscal year ended July 31, 2005, 15% of our revenue was
received from claims processing fees and other income.
Outsourcing Solutions:
In our outsourcing solution we handle the entire collision repair function for
our customers from the time of reporting of the accident through the vehicle's
satisfactory repair. Through our network of parts and repair service providers,
we are frequently able to obtain parts and services at lower costs than
otherwise available. We monitor and audit all repair work to help assure that
the proper repair work is performed at the negotiated price. In most cases,
digital photographs of the damaged vehicle are transmitted to us via the
Internet to assist us in monitoring repairs.
We strive to provide our customers with ways to control costs associated with
processing collision claims. These services include:
1. Centralized accident reporting.
2. Copies of accident reports.
3. Identifying the appropriate network repair facility and directing the
policyholder to such facility.
4. Deliver repair estimates and photographs/digital images of damage to any
location overnight or same day upload.
5. Audit of every claim by our in-house physical damage experts.
6. Assignment of independent field appraiser, when necessary.
7. Expedited deliver of part and materials as needed.
8. Computerized tracking and follow-up system to minimize repair time.
9. Replacement rental vehicles.
10. A lifetime guarantee from our network of repair shops (for as long as the
insured owns the vehicle) on all physical damage body repairs and
administration of manufacturer or installer's warranty on replacement parts.
We help our clients monitor their automobile claims losses by providing the
following:
o Technology - We built one of the first customized web-based vehicle claim
assignment and delivery systems for insurance companies and corporate fleets.
We use state-of-the-art technology and security for the transmission of files
and records. In addition, we utilize digital cameras, Internet communication,
advanced data storage and scanners for auto repair shops that are not
equipped with digital cameras, to create a defined audit trail and high
capacity digital storage. We provide these applications to our clients with
their own private label that includes their corporate colors and logos, which
makes the claims process transparent to both insurance company personnel and
the insured.
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o Online, real time reporting - We provide our customers with online, real-time
reports of the most critical information used in their operations. These
reports include a comparison of their average paid losses (cost to repair a
vehicle), cycle time (time to complete an estimate of the damage), and lost
adjustment expense (cost of the repair estimate or appraisal) between the
eAutoclaims network, independent appraisers and staff appraisers. This
comparison allows them to see the cost saving they realize while using our
outsourcing solution.
o Audit Trail - We audit every claim that comes into our network. This helps us
deliver the lowest available audited cost to our clients on every repair.
Our system produces financial benefits for our customers as follows:
o Our audit process reduces the average paid loss per vehicle.
o We share a portion of the discounts obtained from the body shops with our
clients based on their submitted volume.
o With lower average paid losses, insurance companies are able to establish
lower loss claims reserves. This, in turn, frees up capital and surplus
allowing for lower premium rates.
o Technology efficiencies reduce their cost of processing each file.
o Our typically faster settlement time reduces the days of use and, therefore,
the cost of rental cars and increases customer satisfaction because their
repaired vehicle is typically returned to them in a shorter time.
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.
AuditPro is a rules-based estimate auditing application that has been well
received by existing clients and prospects. Large carriers can use AuditPro as a
stand-alone model that can be integrated within their organization without the
need for significant initial cost and without materially changing their internal
workflow. Based on the initial favorable acceptance, we believe this product,
with its exceptional high margins, will be a source of significant revenue
growth in the future.
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 made to the service partner that results in the use
of their service.
Technology Provider:
The company has developed technologies that create efficiencies for the
automobile parts industry. One new product that we believe 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, the staff time
necessary to assist customers is reduced.
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,
including ADP, that service the insurance market. We have found interest from
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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(R) application. We have built several specialty
applications for companies serving the insurance industry.
Contracts with existing clients are typically from one to five years. The first
phase of the rollout with 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(R) application
and utilization of the eAutoclaims Guaranteed Repair Network (GRN). Most of our
customers are on a one to five-year contract. Pursuant to the contract we take
responsibility for repairing the vehicle, and the 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 to have the vehicle repaired at a body shop that is not in the
eAutoclaims network shop, we are paid a file-handling fee only.
Integration of service partners in the eJusterSuite(R) 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 customize our products and private label our
customized Internet applications to ADP's specifications for use in the United
States and, at the option of ADP, Canada.
The ADP Agreement has an initial term of three years. After the initial term,
the agreement automatically continues until terminated by either ADP or us upon
180 days prior notice to the other party.
For the first 100,000 claims processed by ADP pursuant to the ADP Agreement, we
will be paid 60%, and ADP will retain 40%, of Semiweekly Recurring Revenues (as
defined in the ADP Agreement) received by ADP from its clients. After claims
processed under the ADP Agreement exceed 100,000, we will be paid 50% of such
revenues.
ADP's responsibilities under the ADP Agreement include: (i) marketing and
selling, at its discretion, the system; (ii) performing all billing and
collections for its clients; (iii) allowing on-site visits at our option, no
more frequently than once annually, to ADP's places of business upon prior
written notice and during normal business hours and allow us to periodically
examine books and records of ADP insofar as they relate specifically to the ADP
Agreement; (iv) using reasonable efforts to keep us informed as to any material
problems encountered with our products and any resolutions arrived at for those
problems; (v) establishing sales incentives and commission policies for its
sales personnel; (vi) working with us to develop a mutually acceptable periodic
reporting mechanism; and (vii) providing us, at no cost, ADP products to assist
us in our internal operations. There is no minimum sales commitment by ADP under
the agreement.
Our responsibilities under the ADP agreement include: (i) assisting ADP with
development of marketing materials, sales training and ongoing support for 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.
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 terminate the Co-Marketing
agreement should the Company enter into a similar agreement with a direct
competitor.
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ADP may 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
Over the past year we have made significant progress with the joint sales
initiative with ADP. ADP has allocated a sales team to market the `ADP Managed
Repair Solution Powered by Eautoclaims'. The primary focus is building the sales
pipeline with larger managed repair prospects through a consultative sales
process. As a result of this effort we have signed a three-year agreement with
Continental Casualty Company (C N A Insurance), a top 20 carrier, and are
currently in a pilot agreement with another sizable carrier. In addition, we
have received notification from a second top 20 carrier that we have been
selected to process their claims. As a result of this joint initiative with ADP,
we will now have two top 20 insurance carriers as clients as well as over a
dozen other accounts of various sizes.
In addition to reselling managed collision repair services, the agreement with
ADP Claims Solution Group, Inc. also 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, which generates an attractive
profit margin.
The eAutoclaims sales force is focusing the majority of available resources to
market ASP applications due to the relatively high margins generated by our ASP
products. Eautoclaims markets three ASP products including eJusterSuite(R),
AuditPro, and the Appraisal Management System. Each of the products can be used
independently or may use other ASP modules, depending on client workflow and
business needs.
eAutoclaims recently released AuditPro, a rules-based estimate auditing
application that has been well received by existing clients and prospects, which
has allowed eAutoclaims to grow our high margin ASP revenue. Large carriers can
use AuditPro as a stand-alone model that can be integrated within their
organization without the need for significant initial cost and without
materially changing their internal workflow.
Licensing of eJusterSuite(R) as an ASP has been another growth product that is
used by carriers who rely on existing Staff Appraisers and those who manage an
existing Direct Repair Program. eJusterSuite(R) allows carriers to manage
appraisal assignments, monitor performance of appraisal sources through various
metrics, and includes access to service partners for rental car procurement,
assignment to salvage vendors, police report pick-up services, and several other
service partners frequently used by Insurance Adjusters.
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 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.
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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(R) system is
designed to ensure that the claims process flows smoothly and seamlessly. The
Company's follow-up on claims assignments helps to ensure that all details of
the claim will be verified to our quality standards.
We have implemented a "Customer Service Professional" certification as part of
our Associate Development Program to ensure that our employees are fully trained
in the latest in customer service techniques and to help us in attaining our
objective of becoming known as one of the best customer service organizations in
the industry.
Employees
As of July 31, 2005, eAutoclaims, Inc. had 75 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 thirty-seven (37) 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.
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On June 15, 2005 we received a Federal Registration Certificate for our service
mark eJusterSuite(R). The registration will remain in effect for ten years and
may be renewed for additional ten-year terms if the mark remains in use as is.
In July 2003, we entered into a Settlement Agreement with IBM regarding the use
and scope of the "e" logo/mark which precedes several of our trademarks and
service marks. IBM takes the position it is the owner of the "e" logo relating
to computer hardware and software and that our use of "e" logo infringed on
their rights. The Settlement Agreement allows us to continue using, in a limited
fashion, the use of the "e" logo in a manner not objectionable to IBM. We do not
believe that the limitations imposed by the IBM Settlement Agreement will
adversely affect our business.
There can be no assurance that other parties will not claim infringement by us
with respect to our current or future technologies. We expect that participants
in our markets will be increasingly subject to infringement claims 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
Overview
eAutoclaims has created several web based applications that assist insurance
adjusters, appraisal sources, and repair centers to efficiently and effectively
conduct business. The web applications facilitate lower turn around times in
settling claims through the use of digital technology integrated with the web,
lower average paid losses through extensive programmatic audits that are
individually customized to the insurance company's auditing profile, and
increased workflow efficiencies by using software modules (First Notice Of Loss,
System Integration to eliminate rekeying, Intelligent dispatch Systems, etc...)
designed to compliment the customer's existing business system and not replace
it.
Each of our products evolves through feedback from our clients. We design new
functionality requests in a modular approach so that any other customer can have
that same functionality by a simple change in their profile. This evolution and
modular integration of functionality allows us to have one of the most dynamic
and versatile products in the marketplace for on line claims processing.
All products are web based and, as such, are periodically updated by us online,
eliminating the need to send updates to our customers. As changes are made to
any application they are deployed and realized in our programs in real time. Our
existing hardware and software requirements to use any of our products are
Internet Explorer 5.5 SP2 or above and an adequate Internet connection.
Understanding the need for high reliability/availability of our customer's data,
eAutoclaims has signed a contract with Peak 10, a Co-Location Facility provider,
to install equipment in their Charlotte, North Carolina facility as well as
their Tampa, Florida facility. Data will be replicated between Oldsmar, Florida,
eAutoclaims Corporate Headquarters, and both data centers. Redundancies have
been built into the network topology. Currently equipment exists in all three
locations.
1. Products
eJustersuite(R)
Our eJustersuite(R) application is a one call contact center solution that
giveinsurance adjusters the ability to take the First Notice of Loss (FNOL) and
dispatch the assignment to the appraisal source of their choice (Staff
Appraiser, Repair Shop, Independent Appraiser, or Desk Estimator) through
geographical proximity algorithms as well as assignment loading for each
appraisal source. An Insurance Adjuster can also make real time rental car
reservations and tow truck pickup arrangements for the car while the customer is
on the phone. The eJustersuite(R) product interfaces with a multitude of
partners for scene investigation, police reports, salvage partners, etc...
eJustersuite(R) customers can use innovative technology called CAsE
(Customizable Assignment Entry). With CAsE the client can create their own forms
based on a comprehensive collection of data elements. There are no limits on the
number of forms a client can create and each form can be tailored to ensure that
only the necessary information is obtained thus increasing efficiency when
entering data.
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AuditPro
Our AuditPro product is an extremely versatile estimate auditing program.
Auditpro allows an Insurance Company to create auditing guidelines and place
them into a profile. This profile can then be associated with an appraisal
source. Insurance companies can have profiles for specific Independent
Appraisers, or all Independent Appraisers, another profile could be for shops on
their Direct Repair Network, or another for their Staff Appraisers. Profiles can
even be associated to the State in which the vehicle is located and the
appraisal source.
With eAutoclaims `alias' technology we are able to minimize the amount of false
positives and produce a highly accurate audit result that characterizes the
estimate violations based on severity and cost variance. Auditpro also has the
ability for the Insurance Company to modify the estimate on the fly and send the
corrected estimate to the appraisal source.
Auditpro versions are also available for shops and independent appraisers.
Within those versions estimates can be verified against the auditing guidelines
of the insurance company at the appraisal source level prior to being submitted
to the insurance company.
Appraisal Management System (AMS)
AMS is a web-based application that allows for centralized dispatch of the
automobile loss assignments received from multiple customers via a customized
portal. AMS supports separate websites for every branch with local
administrative privileges in terms of managing users, subcontractors, branch
invoicing, etc. AMS also provides a top level site for company-wide
administration of the branches. The assignment distribution process is based on
zip code which allows the automation and distribution of work among different
branches. Comprehensive metrics on a company's activity including billing and
invoicing features are available.
Product Development
eAutoclaims finished a proof of concept project in the second quarter of fiscal
year 2004 entitled Virtual Adjuster. Virtual Adjuster allows the appraisal
source the ability to communicate in real time with the call center adjuster or
appraiser where both parties could see the damage to the vehicle and collaborate
on the estimate while capturing the necessary screenshots and documentation
required for the claim. Technology has advanced and now with higher resolution
cameras and higher speed wireless devices the product can be commercialized.
Through video and audio streaming technology claims could be settled in minutes.
We anticipate a production release of this product in 2006.
2. Infrastructure
Software
eAutoclaims is a rapid application development environment. eAutoclaims uses a
form of agile programming methodology called extreme programming (XP) to
development our products. This XP process facilitates us working closely with
our customer to ensure successful completion of our common project objectives.
Approximately 95% of all products are written at our Oldsmar Corporate Office in
Cold Fusion Markup Language (CFML) and the remaining 5% of code consist of
Active Server Pages (ASP), .Net, or Visual Basic (VB). In order to reduce
outside dependencies or influences on our product, we use very little code
written by outside vendors.
We have standard schemas that are used for integration with other client's
systems. This standardized interface is open and non-proprietary. We frequently
make customized changes to our application to accommodate the business process
needs of our customer, but each of those changes is modularized to minimize
interaction with other code. Once modularized the code is available for our
entire customer base upon request.
Our production environment is segregated from our development environment. All
code creation or modifications occur on the development platform. From
development all code is migrated and 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 monitors and track all
changes to code. Changes can be 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.
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We are moving to a Service Oriented Architecture (SOA) with many of our new
modifications. This SOA will allow for a myriad of functionality from the shop
level to the Insurance Company level. These Web Services will allow for the
addition and integration of new partners into our entire web based products.
Network Infrastructure
eAutoclaims has a fiber connection to the Internet with Synchronous Optical
Network (SONET) technology. There are two entrance and two exits points for the
fiber at the Oldsmar, Florida corporate headquarters. In each of the Peak 10
Co-Location facilities, Charlotte and Tampa, we also have redundant SONET
technology. SONET technology ensures a high availability telecommunication
network is available for our application servers and our call center. Our
Oldsmar facility and the Peak 10 facilities all have diesel powered backup
generators that can sustain network operations indefinitely (with adequate
refueling every 10 days) should a power outage occur. All mission critical
equipment has dedicated APC uninterruptible power supplies (UPS). All non
mission essential computer equipment including workstations has either common
UPS modules or small dedicated units.
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.
Our web products can be used with Secure Socket Layer (SSL) technology to ensure
sensitive data is encrypted between our servers and our clients or partners. We
use F5's Security Appliances to perform encryption and decryption thus removing
unnecessary overhead from servers. eAutoclaims also prefers to restrict access
to customer web sites through the use of IP restrictions which limit access to a
specific point of origin, such as the Insurance Company's corporate headquarters
gateway or proxy server.
3. Security
Intrusion Detection System (IDS)
An IDS is deployed and monitors all traffic to and from our servers. This system
is monitored 7/24/365 through ProtectPoint Security services. ProtectPoint also
has IDS systems installed for our equipment in Charlotte and Tampa. ProtectPoint
is extremely proactive in their denial of access to our equipment should
suspicious activity be occurring.
Physical Security
Corporate headquarters Network Operations Center (NOC) has RFID secure door
locks. Only authorized people can access the NOC. There is also a Cipherlock on
the door entering the IT department. Access to the code is on a `need to know'
basis. The building also has cipherlocks that require unique PINs to enter.
Each Co-Location facility has three factor authentication, PIN, Biometric Scan,
and RFID tag restricting access to our remote located servers. Each rack of
servers is also confined in a cage requiring a combination to enter the cage.
Our VPN uses two factor authentication which include RSA tokens that restrict
access to a very limited amount of users. Upon access to the VPN rights and
privileges are restricted based on credentials.
All visitors must be recorded in a visitor log upon entering the facility.
Visitor passes are provided that must be wore at all time. Contractors are also
logged and given contractor badges that must be worn at all times.
Data Security
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
and the prevention of data loss:
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 Category 5 Shelter location. A Grandfather, Father, and Son scenario is
used for tape backups.
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An additional copy of historical data is stored on a development server outside
of the production server area nightly to provide further redundancy protection.
Our Network Operation Center is separately housed within the facility and has a
dedicated electrical supply and redundant air-handling units.
Security sensors detect unauthorized entry. Video Camera surveillance is in
place in the NOC.
All units are on UPS (Uninterruptible Power Supplies) in the event of a
momentary loss of power. Our fire suppression system is computer friendly.
We have a diesel powered backup generator that will keep us up and running for a
minimum of seven and maximum of 12 days depending on electrical load in case the
power were to fail for any reason. We have multiple contracts with local fuel
companies to ensure we have access to additional diesel fuel to keep us running
indefinitely.
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.
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. IP Restrictions, username and password, and SSL technology are used
to restrict customer access to our servers.
Notwithstanding such safeguards and procedures, like with all online systems
providers, a successful unauthorized access to sensitive data or a destructive
virus attack on our infrastructure is possible. A malicious unauthorized access
or effective virus could adversely affect our internal business processes and
our customer's access to our computer systems. With contingency planning using
three redundant sources of operations we would anticipate the interruption to be
minimal.
4. Risks
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
products 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.
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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 qualify in additional jurisdictions. Our failure to qualify in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. It could also hamper our ability to enforce contracts in such
jurisdictions. The application of laws or regulations from jurisdictions whose
laws do not currently apply to our business could have a material adverse effect
on our business, results of operations and financial condition.
Special Considerations
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us may also adversely
impact our business operations. If any of the following risks actually occur,
our business, financial condition, or operating results could be negatively
affected.
Risks Related to Our Business
Our limited operating history makes evaluating our business and prospects
difficult.
We have been involved in the Internet based automobile collision insurance
claims business since January 2000. Our limited operating history in this
industry makes an evaluation of our future prospects very difficult. If we do
achieve profitability in any period, we cannot be certain that we will sustain
or increase such profitability on a quarterly or annual basis. You should
carefully consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. There is a risk that we will not be able to accomplish our objectives.
Failure to achieve any of our objectives could negatively affect our business,
financial condition and results of operations.
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We have all the risks of a principal in the automobile repair process.
We receive revenue from insurance companies for repairs completed by members of
our network of repair shops. We approve all repair shops for inclusion in our
network and determine which repair shop will perform the repairs. We are
responsible for collecting our revenue directly from the insurance company. We
therefore act as a principal in the transaction.
If the repairs are not completed correctly, and the vehicle must be sent to
another repair shop for repairs to be performed, we must pay for the repairs to
be completed again. This cost is not passed on to the insurance company but is a
risk that we bear. We control this risk by monitoring work performed by the
repair shops, monitoring customer complaints, reviewing the repair shop history
and actual site visits to repair shops. We add or remove repair shops from our
network based on our review of the repair shop's performance. We eliminate
repair shops that we feel are not providing repair work up to its standards.
Repairs are approved by customers upon retrieval of their vehicle. We constantly
review and revise our network to determine if repair shops included should be
removed. We have the risks and rewards of ownership such as the risk of loss for
collection, delivery or returns.
All our fees are negotiated between us and the insurance company, and the
negotiation does not include any repair shop. We must pay the repair shop a fee
negotiated between us and the repair shop, and the negotiation does not include
any insurance company. The amount owed to the repair shop is owed directly by us
and is not guaranteed, directly or indirectly, by any insurance company. We are
not acting as an agent or broker (including performing services, in substance,
as an agent broker) with compensation on a commission or fee basis.
To date, additional repairs that our repair shops have to provide after a
vehicle has been returned to its user have not been material. We have not
experienced any material bad debts or collection difficulties from our
customers. However, because we act as the principal in the automobile repair
process, we are subject to the risks of poor repair work and accounts receivable
write-offs from our customers due to dissatisfaction with our services.
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, 2005, we derived 55% and 8% of our revenues from
two customers. Our largest customer sold half of its U.S. based auto physical
damage business. This customer accounted for 55% of our revenue for year ended
July 31, 2005. 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. The loss of this
business combined with the increase expenditures required to roll out the ADP
contract and the time lag involved before we begin recognizing significant
revenues under the ADP contract has resulted in us incurring losses for 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, positive results of this program are not assured. 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.
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We depend upon independently owned and operated repair shops to provide services
to our customers.
We have agreements with a network of independently owned and operated vehicle
repair facilities to provide services to our customers. Either the repair
facility or we can terminate our contracts at will. Our business could suffer if
a significant number of these repair shops terminate their agreements with us or
fail to provide the quality of service expected by our customers.
We may not be indemnified for all losses resulting from our vehicle repair
business.
We require that all repair shops in our network indemnify us from claims
relating to their negligent acts or breach of their agreement with us, maintain
a specified amount of liability insurance coverage, and name us as an additional
insured under their liability policy. This coverage may not, however, cover all
liabilities to which we may be subject, and our business could suffer if we need
to draw significant funds from operating revenue to pay claims that are not
covered or that exceed the limits of our coverage.
The market for insurance auto collision claims services is competitive.
Because the auto collision claims service industry is highly competitive and has
low barriers to entry, we cannot assure you that we will be able to compete
effectively. We are aware of two other companies that offer internet-based
services similar to ours. These competitors provide their services primarily to
the fleet management and auto glass industries. All of these competitors have
been in business longer than we have and have significantly greater assets and
financial resources than currently available to us. We expect competition to
intensify in the Internet-based segment of this industry as current non-Internet
competitors expand their market into the Internet and new competitors enter the
market utilizing the Internet. We cannot assure you that we will be able to
compete successfully against current or future competitors. Competitive
pressures could force us to reduce our prices and may make it more difficult for
us to attract new customers and retain current customers. The principal
competitive factors for our services are:
o turn around time for claims processing;
o quality of repair shop services;
o ability to offer nationwide access to repair facilities;
o claims processing fees and charges;
o ability to offer new services and incorporate technological change
into existing services;
o 24/7 access to status of claim;
o volume of repair claims a repair facility can expect to support
discount amounts.
As competition in our industry increases, it is likely that many of our
competitors will have access to greater resources than are currently available
to us, including financial, employee, customer relations, technology, and
expertise in developing and implementing new technologies as the industry
evolves. In addition, competitors may be able to develop services that are
superior to our service, that achieve greater customer acceptance or that
significantly improves functionality as compared to our existing and future
products and services.
The use of the Internet to provide collision claims administration services is a
recent development and the extent of customer acceptance is not yet known.
Internet-based collision claims administration is a relatively new and evolving
industry. As such, there is no clearly defined business model that has a lengthy
history of customer acceptance and profitability. For the industry to be
successful, insurance companies must be willing to obtain collision
administration services over the Internet. There is no way to be sure that a
sufficient number of customers will utilize our services to enable us to remain
profitable.
We depend on key personnel and will need to recruit new personnel as we grow.
Because we are a small company, we are currently dependent on the efforts of a
limited number of management personnel. We believe that given the development
stage of our business and the large amount of responsibility being placed on
each member of our management team, the loss of the services of any member of
this team at the present time would harm our business. Each member of our
management team supervises the operation and growth of one or more integral
parts of our business.
If we are successful in expanding our customer base, we will need to add
additional key personnel as we continue to grow. If we cannot attract and retain
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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 approximately 2,700 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 service marks 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(R), which we received a Federal Registration Certificate for on
June 15, 2005. We have been involved in litigation regarding the rights to use
the name eAutoclaims.com. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which we may in the
future offer our products and services. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary right is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights.
We may not be able to protect our proprietary technology.
Despite any precautions we may take, a third party may be able to copy or
otherwise obtain and use our software or other proprietary information without
authorization or develop similar software independently. We cannot assure you
that the steps we have taken or will take will prevent misappropriation of our
technology. Litigation may be necessary in the future to determine the validity
and scope of the proprietary rights of others, or defend against claims of
infringement or invalidity. This litigation, whether successful or unsuccessful,
could result in substantial costs and diversions of resources, either of which
could harm our business. If we are unable to protect our current or future
proprietary technology, our ability to compete effectively will be harmed.
If we are to remain competitive, we must be able to keep pace with rapid
technological change.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our website. The online commerce
industry is characterized by rapid technological change, changes in user and
customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices that could render our business model and proprietary
technology and systems obsolete in comparison to systems competitors may
implement. Our future success will depend, in part, on our ability to develop or
license leading technologies useful in our business, enhance the ease of use of
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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.
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, 2005, approximately $2,957,330 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.
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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
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.
17
Governmental regulation and taxation of the Internet is subject to change.
A number of legislative and regulatory proposals under consideration by federal,
state, local and foreign governmental organizations may result in there being
enacted laws concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party activities, and
jurisdictional issues. These laws could harm our business by increasing our cost
of doing business or discouraging use of the Internet.
In addition, the tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made that could result in
Internet activities, including the sale of goods and services, being taxed. The
U.S. Congress passed the Internet Tax Information Act, which places a three-year
moratorium on new state and local taxes on Internet commerce. There may,
however, be enacted in the future laws that change the federal, state or local
tax treatment of the Internet in a way that is detrimental to our business.
Some local telephone carriers claim that the increasing popularity of the
Internet has burdened the existing telecommunications infrastructure and that
many areas with high Internet use are experiencing interruptions in telephone
service. These carriers have petitioned the Federal Communications Commission to
impose access fees on Internet service providers. If these access fees are
imposed, the cost of communicating on the Internet could increase, and this
could decrease the demand for our services and increase our cost of doing
business.
Risks Related to Our Common Stock
Our Common Stock price may be volatile, which could result in substantial losses
for individual stockholders.
The market price for our Common Stock is 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.
18
Penny stock regulations may impose certain restrictions on marketability of our
stock.
The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price (as defined) of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. As a result,
our Common Stock is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker-dealer must also disclose the commission payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our securities.
We have never paid dividends on our Common Stock and do not expect to pay any in
the foreseeable future.
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.
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 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 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.
Antidilution rights granted to certain investors may cause substantial dilution
to our other stockholders.
During 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 $1,508,954 after payment of placement fees and expenses.
Each unit consists of one (1) share of Common Stock and one-half (1/2) Common
Stock Purchase Warrant exercised with a price of $.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 is less than $.30. As a result of this offering, a total of
9,794,628 warrants issued during the March through May 2004 offering were
re-priced to $.16 according to the anti-dilution provisions specified in those
agreements. The warrant holders from both the 2004 and 2005 offerings 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 $.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 2004 and 2005 private placements, which may result in
additional dilution to our current shareholders.
19
The forward-looking information in this Form 10-K may prove inaccurate.
This Form 10-K contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by, and information
currently available to, management. When used in this report, words such as
"anticipate," "believe," "estimate," "expect," and, depending on the context,
"will" and similar expressions, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the specific risk factors described above. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
estimated or expected. We do not intend to update these forward-looking
statements and information.
ITEM 2. DESCRIPTION OF PROPERTY
Our main offices are located at 110 East Douglas Road, Oldsmar, Florida 33467.
Monthly rent of approximately $18,405 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. We also have the right to
purchase the entire facility, totaling 62,000 square feet, with the associated
land for $2,950,000. We issued 45,956 shares of our Common Stock to the landlord
of this lease with registration rights to obtain the purchase option.
We believe that the facilities are well maintained, are in substantial
compliance with environmental laws and regulations, and are adequately covered
by insurance. We also believe that these leased facilities are not unique and
could be replaced, if necessary, at the end of the term of the existing lease.
ITEM 3. LEGAL PROCEEDINGS
We are currently not involved in any legal proceedings that are considered
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal year ended July 31, 2005.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Value
Our Common Stock is traded on the OTCBB under the symbol "EACC.OB". The
following table sets forth, the high and low bid prices of the Common Stock for
the periods shown as reported by the National Quotation Bureau. The bid prices
quoted on the OTCBB reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
High Bid Low Bid
-------- -------
Fiscal Year Ended July 31, 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
20
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) 0.37 0.19
Second Quarter (November 1, 2004 to January 31, 2005) 0.29 0.18
Third Quarter (February 1, 2005 to April 30, 2005) 0.29 0.12
Fourth Quarter (May 1, 2005 to July 31, 2005) 0.20 0.10
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of Common Stock,
$.001 par value ("Common Stock"), and 5,000,000 of preferred stock, $.001 par
value ("Preferred Stock"), issuable in series. The following description of our
capital stock does not purport to be complete and is subject to and qualified in
its entirety by our Certificate of Incorporation and Bylaws, amendments thereto,
including the Certificates of Designation for our Series A Preferred Stock, and
by the provisions of applicable Nevada law. Our transfer agent is Equity
Transfer Services, Inc., 120 Adelaide West, Suite 420, Toronto, Ontario, M5H 4C3
Common Stock
As of September 30, 2005, there were 64,089,574 shares of our Common Stock
outstanding. In addition, as of September 30, 2005, shares of common stock were
subject to the following outstanding warrants:
o 744,385 warrants issued to the agent and purchasers of our Series A Preferred
Stock at exercise prices of between $0.35 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 15,312,363 warrants at an exercise price of $0.16 (repriced in January,
2005), issued to purchasers of units (one share of common stock and one
warrant to purchase one share of common stock) between March and June of
2004,
o 1,616,250 warrants to purchase one unit for $0.16. The units consist of one
share of common stock and one half warrant to purchase another share of stock
for $0.30
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
o 5,387,500 warrants to purchase one unit for $0.16. The units consist of one
share of common stock and one-half warrant to purchase another share at
$0.30, and.
o 220,000 warrants at an exercise price of $0.75 per share, issued to the
purchasers of common stock.
As of September 30, 2005, we have reserved 5,136,253 shares of our Common Stock
underlying options issued to our directors, employees and consultants with
exercise prices of between $.01 and $3.00. As of July 31, 2005, we had
approximately 243 common shareholders of record.
Preferred Stock and Related Warrants
The Company no longer has any outstanding Preferred Stock. The following
discussion is a summary of certain of the terms and provisions of the original
Securities Purchase Agreement and subsequent modified agreements, Registration
Rights Agreement, Security Agreement, Certificate of Designation for our Series
A Preferred Stock, Purchaser's Warrants and Agent's 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.
21
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 carried a cumulative preferred dividend of 8% per
annum and a liquidation preference of $5,000 per share. We had the right to
redeem the Series A Preferred Stock at a price of $5,500 per share upon giving
not less than thirty days prior written notice to holders. Upon receipt of our
notice of conversion, a holder of the Series A Preferred Stock may elect to
convert the shares into Common Stock at any time prior to the date of redemption
as specified in our notice.
In 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. In accordance with this agreement, in fiscal 2005
we redeemed 24 shares of Series A Preferred Stock for cash at a price equal to
110% of the purchase price plus accrued and unpaid dividends. A total of 392
shares of Preferred Stock, along with accrued dividends, were converted into
Common Stock under the terms of the initial agreement and all subsequent
agreements through June 2005.
In July 2005 we reached an agreement with Governor's Road whereby the remaining
104 shares of Series A Preferred Stock, along with the accrued dividends, were
converted into Common Stock at $0.165 per share. This agreement supercedes all
agreements previously entered into with Governor's Road. The July 2005 agreement
further specifies that the exercise price of all Purchaser Warrants and Agent
Warrants, issued to Governor's Road or its affiliate are set at $.35 per share
and that the cashless exercise provisions set forth in the Purchaser Warrants
and Agent Warrants are eliminated. To date, we have issued 13,935,741 shares of
our Common Stock in connection with the conversion of 496 shares of Series A
Preferred Stock and the satisfaction of accrued dividends, which represents,
along with the 24 shares redeemed, all of the preferred shares issued. There are
currently no Series A Preferred Stock shares outstanding as of July 31, 2005.
In the future, our Board of Directors has the authority to issue additional
shares of our Preferred Stock in series with rights, designations and
preferences as determined by the Board of Directors. When any shares of our
Preferred Stock are issued, certain rights of the holders of our Preferred Stock
may affect the rights of the holders of Common Stock. The authority of the Board
of Directors to issue shares of our Preferred Stock with characteristics which
it determines (such as preferential voting, conversion, redemption and
liquidation rights) may have a deterrent effect on persons who might wish to
make a takeover bid to purchase our shares at a price, which might be attractive
to our shareholders. However, the Board of Directors must fulfill its fiduciary
obligation to our shareholders in evaluating a takeover bid.
Certain Provisions of the Certificate of Incorporation and Bylaws
Our Certificate of Incorporation provides that no director shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director except as limited by Nevada law. Our Bylaws provide
that we shall indemnify to the full extent authorized by law each of our
directors and officers against expenses incurred in connection with any
proceeding arising by reason of the fact that such person is or was an agent of
the corporation.
Insofar as indemnification for liabilities may be invoked to disclaim liability
for damages arising under the Securities Act of 1933, as amended, or the
Securities Act of 1934 (collectively, the "Acts"), as amended, it is the
position of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Acts and are therefore, unenforceable.
Dividends
We have not paid any cash dividends on our common or preferred stock and do not
anticipate paying any such cash dividends in the foreseeable future. Earnings,
if any, will be retained to finance future growth.
22
Shares Eligible for Future Sale
As of September 30, 2005, we had outstanding 64,089,574 shares of Common Stock.
Of these shares, 56,708,045 shares are freely tradable without restriction or
limitation under the Securities Act, except for any shares purchased by
"affiliates" or persons acting as "underwriters" as these terms are defined
under the Securities Act.
The 7,381,529 shares of Common Stock held by existing shareholders that are
"restricted" within the meaning of Rule 144 adopted under the Securities Act
(the "Restricted Shares"), may not be sold unless they are registered under the
Securities Act or sold pursuant to an exemption from registration, such as the
exemption provided by Rule 144 promulgated under the Securities Act. The
Restricted Shares were issued and sold by us in private transactions in reliance
upon exemptions from registration under the Securities Act and may only be sold
in accordance with the provisions of Rule 144 of the Securities Act, unless
otherwise registered under the Securities Act.
In general, under Rule 144 as currently in effect, any person (or persons whose
shares are aggregated), including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
(1) 1% of the then-outstanding shares of Common Stock; and
(2) the average weekly trading volume in the Common Stock during the four
calendar weeks immediately preceding the date on which the notice of such
sale on Form 144 is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to provisions relating to notice and
manner of sale and the availability of current public information about us. In
addition, a person (or persons whose shares are aggregated) who has not been an
affiliate of ours at any time during the 90 days immediately preceding a sale,
and who has beneficially owned the shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. While the foregoing discussion
is intended to summarize the material provisions of Rule 144, it may not
describe all of the applicable provisions of Rule 144, and, accordingly, you are
encouraged to consult the full text of that Rule.
In July 2005 we filed a Form S-8 registration statement, which registered for
resale 16,302,594 securities issued to our employees, officers, directors,
consultants and advisors. The shares of Common Stock registered related to (i)
2,266,517 shares underlying options issued pursuant to our 1998 Stock Option
Plan; (ii) 1,253,087 shares underlying options issued to employees and a
consultant outside of our Stock Options Plan; (iii) 2,145,000 shares issuable
pursuant to options issued to our directors; (iv) 5,712,638 shares underlying
our 1998 Stock Option Plan; (v) 2,000,000 shares to be issued under management
compensation agreements signed in 2005; (vi) 2,267,350 shares issued pursuant to
stock options that were excercised by employees, consultants and Board members,
and (vii) 658,002 shares issued to Board members as compensation for Board
services provided to the Company. Also registered are such additional and
intermediate number of shares of Common Stock as may become issuable because of
the provisions of the 1998 Stock Option Plan relating to adjustments for changes
resulting from stock dividends, stock splits and similar changes. The
Registration Statement became effective immediately upon filing on July 29,
2005.
In March 2005 our registration statement on Form S-1 registering 23,265,591
shares of our Common Stock was declared effective by the Commission. The shares
of Common Stock registered relate to (i) 10,775,000 shares of Common Stock
purchased by certain investors in a private placement conducted during 2005;
(ii) 5,387,500 shares issuable upon exercise of Common Stock purchase warrants
issued in conjunction with the 2005 private placement; (iii) 2,339,358 shares
issued to investors from 2004 as a result of the Company not meeting certain
claims volume targets as stated in the agreement; (iv) 2,339,358 shares issuable
upon exercise of Common Stock purchase warrants issued to investors from 2004 as
a result of the Company not meeting certain claims volume targets as stated in
the agreement; and (v) up to 2,424,375 shares underlying a placement agent
warrant. In addition, the holders of the shares from the 2005 private placement
are granted "full ratchet" antidilution rights if we issue any additional equity
securities at an issue price, conversion price or exercise price at less than
$.30 per share. The sale of such securities pursuant to the above-referenced
registration statement may have a depressive affect on the market price of our
Common Stock.
The possibility of future sales by existing stockholders under Rule 144 or
otherwise will, including sales pursuant to the registration statement in the
future, have a depressive effect on the market price of our Common Stock, and
such sales, if substantial, might also adversely affect our ability to raise
additional capital.
23
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from financial statements
that have been audited by Goldstein Golub Kessler LLP, independent registered
public accounting firm. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction
with our financial statements, related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this annual report.
EAUTOCLAIMS, INC.
SELECTED FINANCIAL DATA
-----------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Total revenue $14,651,232 $27,160,682 $34,061,072 $32,283,363 $20,188,249
-----------------------------------------------------------------------------------------------------------------------
Expenses:
Claims processing charges 11,029,261 22,130,634 28,323,741 27,293,568 16,842,287
Selling, general and administrative 5,554,430 6,417,316 6,418,911 8,114,580 10,479,232
Depreciation and amortization 511,812 515,813 490,935 530,618 504,656
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 17,095,503 29,371,457 35,245,325 36,494,317 27,826,175
-----------------------------------------------------------------------------------------------------------------------
Net loss $(2,444,271) (2,210,775) $(1,184,253) $(4,210,954) $(7,637,926)
=======================================================================================================================
Adjustment to net loss to compute loss
per common share:
Preferred stock dividends (50,655) (95,518) (101,296) (570,997) (4,611,804)
Dividend to unit holders (986,623)
-----------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(3,481,549) $(2,306,293) $(1,285,549) $(4,781,951) $(12,249,730)
=======================================================================================================================
Loss per common share - basic and
diluted $ (0.08) $ (0.09) $ (0.06) $ (0.32) $ (1.09)
=======================================================================================================================
Weighted-average number of common
shares outstanding-basic and diluted 44,905,261 26,308,434 20,209,634 14,813,549 11,252,514
=======================================================================================================================
24
Balance Sheet Data:
July 31, 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Cash 306,280 415,549 226,161 44,655 485,092
Working capital (deficit) (3,880,154) (3,190,515) (4,992,541) (4,483,740) (1,484,725)
Total assets 3,120,121 3,482,149 3,757,512 3,403,826 4,197,677
Debt and capital lease obligations 108,979 495,621 86,325
Total stockholders equity (deficiency) (2,012,050) (1,493,084) (2,910,932) (2,365,818) 737,905
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with our
audited financial statements as of July 31, 2005 and the notes thereto, all of
which financial statements are included elsewhere in this form 10-K. In addition
to historical information, the following discussion and other parts of this Form
10-K contain forward-looking information that involves risks and uncertainties.
Our actual results could differ materially from those anticipated by such
forward-looking information due to factors discussed under "Description of
Business" and elsewhere in this Form 10-K.
The statements that are not historical constitute "forward-looking statements".
Said forward-looking statements involve risks and uncertainties that may cause
the actual results, performance or achievements of the Company and its
subsidiaries to be materially different from any future results, performance or
achievements, express or implied by such forward-looking statements. These
forward-looking statements are identified by their use of such terms and phrases
as "expects", "intends", "goals", "estimates", "projects", "plans",
"anticipates", "should", "future", "believes", and "scheduled".
The variables which may cause differences include, but are not limited to, the
following: general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employment benefit costs;
availability and costs of raw materials and supplies; and changes in, or failure
to comply with various government regulations. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements included in this Form
10-K will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein the inclusion of such information should not be
regarded as a representation by the Company or any person that the objectives
and expectations of the Company will be achieved.
OVERVIEW
We are a business-to-business e-commerce company that uses the Internet to
streamline and lower the overall costs of automotive repair paid by insurance
companies, managing general agents (MGA) and third party claims administrators
(TPA) and self-insured automobile fleet management companies. We are
establishing ourselves as the preeminent service provider for the automobile
insurance industry, providing a seamless back-end infrastructure that links
thousands of collision repair shops and support facilities. We provide a
proprietary, cost-effective and highly advanced system for the processing and
ultimate repair of claims for damaged vehicles filed by policyholders of our
insurance company clients. We receive revenues from insurance companies for
repairs completed by members of our network of repair shops. We approve all
repair shops for inclusion in our network and determine which repair shop will
ultimately perform the repairs. We receive a discount, ranging from 10% to 15%,
from repair facilities that are members of our provider network. The revenues
generated from the vehicle and glass repair through our provider network
accounts for 85%, 91 %, and 92% of the revenue for the years ended July 31,
2005, 2004 and 2003, 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 $65 per claim depending upon the level of
service required. For the years ended July 31, 2005, 2004, and 2003, 15%, 9% and
8% of the revenue has been received from claims processing fees and other
income, respectively.
MANAGEMENT'S OPERATING PLAN
Four separate events happened during the second half of the fiscal year 2004 and
into fiscal year 2005 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 direct repair
networks. That decrease in revenue also occurred in the second half of the 2004
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, they interrupted our claims assignment
stream for several days; thereby, reducing revenue and cash flow. It also caused
26
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 was a time lag between when we
anticipated rolling out the ADP Sales & Marketing efforts on a national basis
and the actual time that this event occurred. However, the Company has recently
seen sales efforts net results in new pilots, and more specifically the early
rollout of a top 20 insurance client that began a national rollout in late July
2005. While we are still very optimistic about the opportunities presented with
the ADP Co-Marketing Agreement, the effect of the early delays has resulted in
the Company incurring additional expenses for carrying support personnel and
ramping for 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 ADP Co-Marketing Agreement - Management continues to focus on the sales
development of the ADP Co-Marketing Agreement, which is part of the Company's
Special Markets Division. The most material development is the early rollout
of a new top 20 insurance client, Continental Casualty Company (C N A
Insurance). This client began its national production rollout in late July of
2005 and is expected to be completed in the first quarter of fiscal year
2006. Once the national rollout is completed, the Company would expect a
meaningful improvement in its operating results, as this new client would
become one of the largest clients of eAutoclaims in a very short period.
The Company was also notified in September 2005 that it had been selected by
a second top 20 insurance client through the ADP Co-marketing agreement.
Although the process is still in the early stages, the Company expects
rollout to be completed in the first half of fiscal 2006 and meaningful
revenues to be produced by the completion of the third quarter of fiscal
2006.
Since August 2004 the ADP agreement has produced over a dozen signed pilot
agreements with insurance Companies or third party administrators, and has
produced four annual agreements after the pilot periods were completed. In
addition, other than the two top 20 insurance clients listed above, 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 would produce significant claims volume. The Company would share
the associated revenues with ADP Claims Services Group.
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, as is the case with the Company's recently announced new
product "Audit Pro", a programmatic electronic estimate auditing tool. Many
of 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. Click fee revenue increased from approximately $453,000
in the year ended July 31, 2004 to approximately $484,000 in the year ended
July 31, 2005. This increase came even though collision outsourcing revenue,
which helps drive the results, was significantly reduced during that same
period. While there are no guarantees these transactions or that the 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 an option to purchase the
building it is currently leasing and the associated land for $2,950,000. In
September 2005 the Company entered into an agreement to sell its Oldsmar
facility, while remaining in the facility under a new favorable long term
lease to be signed concurrent with the closing of the sale. After a due
diligence period, the closing is expected to take place within 95 days from
the effective date of the agreement, and will be part of a simultaneous
closing process whereby the Company purchases the facility from the current
landlord under the purchase option provided for in the Company's current
lease agreement and subsequently sells the facility to a third party buyer.
The completed transaction is expected to net the Company a significant
profit. The company is currently reviewing additional options in the event
the sale closing takes longer than expected.
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.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and the results of our
operations are based upon our consolidated financial statements and the data
used to prepare them. The Company's financials have been prepared in accordance
with accounting principles generally accepted in the United States. On an
ongoing basis we re-evaluate our judgments and estimates including those related
to revenues, bad debts, long-lived assets, and income taxes. We base our
estimates and judgments on our historical experience, knowledge of current
conditions and our beliefs of what could occur in the future considering
available information. Actual results may differ from these estimates under
different assumptions or conditions. Our estimates are guided by observing the
following critical accounting policies.
Revenue recognition:
The Company derives revenue primarily from collision repairs, glass repairs and
fleet repairs. Revenue is recognized when an agreement between the Company and
its customer exists, the repair services have been completed, the Company's
revenue is fixed and determinable and collection is reasonably assured.
The Company records revenue gross in the areas of collision and fleet repairs.
It also records at gross in certain glass repair transactions. Revenue is
recorded at gross in these areas when:
o The Company is the primary obligor in its arrangements. The Company is
responsible for the quality of the repair and must satisfy the
customer if the body shop fails to repair the vehicle properly.
o The Company has latitude in establishing price. The price is
established based on the Company's audit of the repair estimate
submitted by the repair facility. The repair facility cannot begin the
repair until an agreed upon price is established between the facility
and the Company for the repair.
o The Company controls what is repaired with their contracted shops, as
they audit the estimate submitted by the repair facility. The Company
must agree that the repair is reasonable and necessary before the
repair facility is allowed to proceed with the work being requested.
o The Company has discretion in supplier selection. Through the use of
software, the Company prioritizes which repair facility is used based
on the efficiency and effectiveness of the repair facility, and
o The Company has credit risk. The Company is responsible to pay the
repair facility even if the customer does not pay for the repair.
The Company records revenue net of the repair costs in certain glass
transactions 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 the Company receives notice of the transaction, we 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 we 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 is reimbursed by the insurance company, since we did not have
the risk of loss and are not responsible for the repair.
28
The revenue generated from the co-marketing agreement with the ADP Claims
Services Group (ADP) is 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, 2005 the allowance for doubtful accounts was approximately $208,000.
Accounting for Income taxes:
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While we consider
historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event that we
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of the net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made. We have recorded
valuation allowances against our deferred tax assets of $9,841,000 at July 31,
2005. The valuation allowance consists mainly of net operating losses previously
realized and stock compensation currently not deductible. The valuation
allowance is necessary because the use of these deductions is not reasonably
assured since the company has not yet returned to profitability.
Valuation of long-lived assets:
The Company identifies and records impairment on long-lived assets, including
goodwill, when events and circumstances indicate that such assets have been
impaired. The Company periodically evaluates the recoverability of its
long-lived assets based on expected undiscounted cash flows, and recognizes
impairment, if any, based on expected discounted cash flows. Factors we consider
important which could trigger an impairment review include the following:
o Significant negative industry trends
o Significant underutilization of the assets
o Significant changes in how we use the assets of our plans for their use.
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 affect the continuity of the business.
No charge for impairment of goodwill was deemed necessary as a result of that
evaluation as of July 31, 2005.
RESULTS OF OPERATIONS
Fiscal Year Ended July 31, 2005, Compared to Fiscal Year Ended 2004
REVENUE
Total revenue for the year ended July 31, 2005 was approximately $14.7 million,
which consists of approximately $11.2 million in collision repair management for
insurance companies, approximately $0.5 million in auto glass repairs and
approximately $2.9 million in fleet repair management and other repairs and
fees. Total revenue for the year ended July 31, 2004 was approximately $27.1
million, which consists of approximately $22.7 million in collision repair
management for insurance companies, approximately $1.2 million in auto glass
29
repairs and approximately $3.2 million in fleet repair management and other
repairs and fees. Total revenues decreased approximately $12.5 million or 46%
compared to approximately $27.1 million for the year ended July 31, 2004. This
decrease is primarily the result of the loss of revenues from our two largest
clients. During the year ended July 31, 2005 we derived 55% and 8% of our
revenue from two customers. In October 2003 our largest client announced they
were selling one-half of their U.S. auto physical damage business to another
insurance carrier. As a result of this, we have experienced approximately an
$8.4 million or 51% decrease in the revenue from that customer between fiscal
years ended July 31, 2004 and 2005. In August 2005 this same customer announced
that they had sold the remaining half of their U.S. auto physical damage
business to another U.S. insurance carrier. We have not experienced any revenue
loss to date as a result of this transaction and do not anticipate any
significant loss of business throughout the duration of our contract, which ends
in April 2006. We are unsure whether we will continue to service this new
carrier after the contract period concludes and, if so, at what volume level.
However, the positive financial results experienced by the customer of the
business in question create the possibility of obtaining additional business
from the purchaser. 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 network. We
experienced approximately a $2.6 million or 69% decrease in the revenue from
that customer between fiscal years ended July 31, 2004 and 2005. The Company
anticipates meaningful growth in new clients based on the early results of its
co-marketing agreement with ADP Claims Services Group. However, because of the
competitive nature of our business and the uncertainty of bringing on enough
business to offset the loss of business, we were unable to replace revenues
quickly enough to reach profitability.
Fees and other revenue decreased approximately $300,000 from $2.5 million for
the year ended July 31, 2004 to $2.2 million for the year ended July 31, 2005.
This decrease is mainly a result of a reduction in file handling fees from the
reduced collision management revenue, and was partially offset by an increase in
the click fee revenue as explained above in the management interim operating
plan.
The glass revenue decreased by 61%, or approximately $750,000, from $1.2 million
in fiscal year 2004 to approximately $.5 million in fiscal year 2005. 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 repair needs.
The fleet revenue increased approximately $5,000, or 1% from approximately
$713,000 in fiscal 2004 to approximately $718,000 in fiscal 2005. This reflects
substantially no change in the claims volume from our existing fleet customers
in fiscal 2005 as compared to fiscal 2004.
EXPENSES
Claims processing charges include the costs of collision, fleet and glass
repairs paid to repair shops within our repair shop network, as well as the cost
of the estimating software sold to the Company's network of shops. Claims
processing charges for the fiscal year 2005 were approximately $11.0 million
compared to $22.1 million in fiscal 2004. This is a decrease in total costs of
50% and a decrease in the percentage of claims costs compared to total revenue
from 81.5% in fiscal 2004 to 75.3% in fiscal 2005. This reduction in claims
processing charges as a percentage of total revenue is a result of the change in
the percentage of revenue generated from higher margin products as well as the
increased emphasis on click fees. If revenues from customers generated by the
ADP Co-marketing agreement grow as management expects, the margins will continue
to increase.
eAutoclaims currently has approximately 2,700 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. We are dependent upon these third party collision
repair shops for insurance claim repairs. 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. 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 is mainly comprised of
salaries and benefits, facilities related expenses, telephone charges,
professional fees, advertising costs and travel expenses. SG&A expenses for the
year ended July 31, 2005 were approximately $5.6 million or 38% of revenue
compared to approximately $6.4 million or 24% of revenue for the year ended July
31, 2004. During the year ended July 31, 2005 and 2004 we incurred payroll
related expenses of approximately $ 3.5 million and approximately $4.6 million,
respectively. The 2004 figure includes a one time charge of approximately
$869,000 for expensing employee stock options. The actual decrease in payroll
cost, after adjusting for the stock option expense, was approximately $200,000
in fiscal 2005 compared to fiscal 2004. The decrease is primarily due to lower
costs associated with reduced claims volume. We have maintained staff in
anticipation of significant new business expected to be generated by the ADP
Co-marketing agreement.
30
SG&A expenses included non-cash charges of approximately $290,000 for the year
ended July 31, 2005. These non-cash charges include approximately $220,000 of
stock issued for legal, board and professional services as well as approximately
$23,000 of stock issued in lieu of a cash interest payment. There was also an
increase in the allowance for doubtful accounts of $47,000. This is compared to
approximately $1.0 million non-cash charges included in SG&A expenses for the
fiscal 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.
Also included in the SG&A is interest expense related to a loan from a
shareholder, capital leases and a convertible note payable. This interest
expense totals approximately $43,000 in fiscal 2005 compared to approximately
$57,000 for fiscal 2004. There was no interest income from cash reserves for the
year ended July 31, 2005 compared to approximately $2000 in interest income for
the year ended July 31, 2004.
Depreciation of property and equipment of approximately $512,000 was recognized
in the year ended July 31, 2005. This was compared to approximately $516,000 of
depreciation in the year ended July 31, 2004. There was no charge for debenture
amortization taken in the year ended July 31, 2005 compared to approximately
$308,000 of debenture amortization recorded in the year ended July 31, 2004.
NET LOSS
We recognized a net loss of approximately $2.4 million and $2.2 million for the
years ended July 31, 2005 and 2004, respectively. The increase in net loss was
primarily a result of the reduction in revenue experienced in fiscal 2005
compared to fiscal 2004 and the retention of staff in anticipation of new
business expected to be generated by the ADP Co-marketing agreement that had not
yet materialized as of the end of fiscal 2005
Fiscal Year Ended July 31, 2004, Compared to Fiscal Year Ended 2003
REVENUE
Total revenue for the year ended July 31, 2004 was approximately $27.2 million,
which consists of approximately $22.7 million in collision repair management for
insurance companies, approximately $1.3 million in auto glass repairs and
approximately $3.2 million in fleet repair management and other repairs and
fees. Total revenue for the year ended July 31, 2003 was approximately $34.1
million, which consists of approximately $29.7 million in collision repair
management for insurance companies, approximately $0.9 million in auto glass
repairs and approximately $3.5 million in fleet repair management and other
repairs and fees. Total revenues decreased approximately $6.9 million or 20%
compared to approximately $34.1 million for the year ended July 31, 2003. This
decrease is primarily the result of the loss of revenues from our two largest
clients. During the year ended July 31, 2004 we derived 60% and 13% of our
revenue from two customers. In October 2003, our largest client announced that
they were selling one-half of their U.S. auto physical damage business to
another insurance carrier. We have experienced approximately a $5.2 million or
20% decrease in the revenue from that customer between fiscal years ended July
31, 2003 and 2004. The loss in monthly revenue was the highest in the last three
months of the fiscal year ended July 31, 2004. The decrease in revenue between
the three months ended July 31, 2003 and 2004 totaled $2.6 million or 47%. We
also experienced a decrease in revenue from our second largest customer because
of a change in their state's legislation regarding a special type of insurance
policy requiring a direct repair network. 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.
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 also 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. 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.
31
EXPENSES
Claims processing charges are primarily the costs of collision repairs we pay to
our 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, we had approximately 2,500 affiliated
repair facilities in our 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 falls 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, establishing similar relationships with other collision repair shops.
Selling, general and administrative (SG&A) expenses for the year ended July 31,
2004 were approximately $6.4 million or 24% of revenue compared to approximately
$6.4 million or 19% of revenue for the year ended July 31, 2003. During the year
ended July 31, 2004 and 2003 we incurred payroll related expenses of
approximately $ 3.7 million and approximately $4.2 million, respectively, a 12%
decrease. During fiscal year ended July 31, 2004, approximately $240,000 of the
payroll expense related to personnel establishing the systems and infrastructure
to support the ADP Co-marketing agreement. While there was no return on this
expenditure in fiscal year 2004, management expects it to provide for revenues
in fiscal year 2005 and beyond.
SG&A expenses included non-cash charges of approximately $1.0million for the
year ended July 31, 2004. These non-cash charges included a $77,000 write-off of
equipment that was replaced to keep pace with new technology, $869,000 of
compensatory options issued to employees, and approximately $165,000 of stock
issued for consulting agreements for interest and legal, board and professional
services as well as $12,000 for interest. There was also an $81,000 credit in
the allowance for doubtful accounts that partially offset these charges.
During fiscal 2004, we implemented a series of cost reductions, including a
reduction in the RSA servicing team, but have 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 also implemented
reductions in other operational expenses, which we anticipated would result in
total annual cost savings of approximately $524,000 per year.
Depreciation and amortization was approximately $823,000 and $503,000 for the
years ended July 31, 2004 and 2003, respectively. Depreciation of fixed assets
represented approximately $516,000 and $491,000, respectively. Amortization
expense of approximately $308,000 in fiscal year 2004 reflects the amortization
of discount on the convertible debentures issued in July of 2003. The
amortization expense of $12,000 in fiscal year 2003 reflects the warrants and
debenture conversion feature created by the debenture financing in fiscal year
2003.
Interest income of approximately $2,000 and $12,000 is included in selling,
general and administrative expenses, net of interest expense of approximately
$57,000 and $45,000 for the year ended July 31, 2004 and 2003, respectively.
Interest expense related primarily to interest on shareholder loans and capital
leases and interest income resulted primarily form interest earned on our cash
reserves.
32
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.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2005, we had cash of approximately $306,000, a $109,000 decrease
from last year, and a working capital deficiency of approximately $3.9 million
as of July 31, 2005 compared to $3.2 million as of July 31, 2004, an increase in
the deficit of approximately $.7 million. Other than working capital generated
from operations, our primary source of working capital during the fiscal year
ended July 31, 2005, was the receipt of $1,724,000 from the sale of our equity
securities. Of these proceeds $215,046 was paid out in expenses of raising the
funds, for a net of $1,508,954.
Our management continues to analyze our operations and streamline where
appropriate. Our ability to make additional significant cost cuts is limited.
Also, such cost cutting programs are potentially counterproductive to our long
term best interests because such cost cutting results in the loss of the
Company's valued employees and new product initiatives. The Company has taken
the position of retaining our skilled employees in anticipation of the
significant new business expected to be generated through the ADP Co-marketing
agreement.
As a result of the loss of business from our two largest customers, additional
financing may be necessary. In September 2005 the Company entered into an
agreement to sell its Oldsmar facility. The completed transaction is expected to
net the Company a significant profit that we will use primarily for working
capital. The Company is currently reviewing additional options in the event the
sale closing takes longer than expected or does not occur.
If revenues grow it will provide its own working capital, but because revenue
growth is not guaranteed, we have solicited proposals for additional financing.
We cannot assure you that we will be able to raise such funds or that such funds
will be available to us on favorable terms. If we raise additional funds for the
issuance of our securities, such securities may have rights, preferences or
privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution.
We believe that cash generated from operations, the sale of our Oldsmar
facility, and additional financing, if necessary, will be sufficient to meet our
working capital requirements for the next 12 months. This estimate is a
forward-looking statement that involves risks and uncertainties. The actual time
period may differ materially from that indicated as a result of a number of
factors so that we cannot assure you 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 2006 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
the Company for the anticipated increased claims volume from ADP Claims
co-marketing agreement. Our financial and personnel commitment to the ADP Claims
co-marketing agreement combined with the loss of revenue from our largest
customer due to a sale of part of their business has created the working capital
pressures we experienced during fiscal 2005 and will continue to experience
during at least the first half of fiscal 2006.
33
DEBT AND CONTRACTUAL OBLIGATIONS
Our commitments for debt and other contractual arrangements as of July 31, 2005
are summarized as follows:
Years ending July 31,
-------------------------------------------------------------------------
2006 2007 2008 Total
-------------------------------------------------------------------------
Property lease $ 225,000 $ 76,000 $ 301,000
Equipment lease 113,000 105,000 $ 18,000 236,000
Convertible debenture 275,000 275,000
Employee compensation 552,000 997,000 1,549,000
-------------------------------------------------------------------------
$ 1,165,000 $ 1,178,000 $ 18,000 $ 2,361,000
=========================================================================
The Company leases equipment and facilities under non-cancelable capital and
operating leases expiring on various dates through fiscal 2008. The main
operating lease consists of a 5-year lease for 30,000 square feet of a 62,000
square foot facility. The Company has an option to buy the entire facility with
the associated land for $2,950,000. In September 2005 the Company entered into
an agreement to sell the facility, while remaining in the facility under a new
favorable long term lease to be signed concurrent with the closing of the sale.
After a due diligence period, the closing is expected to take place within 95
days from the effective date of the agreement and will be part of a simultaneous
closing process whereby the Company purchases the facility from the current
landlord under the purchase option provided for in the Company's current lease
agreement and subsequently sells the facility to a third party buyer.
At the end of July 2005 the Company had an outstanding $275,000, 8% convertible
note payable with a maturity date of August 2005. The note was initially
executed in July of 2003 for $300,000. In August 2004 $25,000 of the principal
was converted into common stock. This note is convertible at the discretion of
the creditor at a fixed rate of $0.279 per share. The interest can be paid in
either cash or common shares at the Company's discretion at the end of the loan.
In fiscal year 2003, the Company recorded a discount to the note payable of
$140,860 representing the beneficial conversion feature of the debentures. The
discount was amortized to interest expense over the original one-year term of
the note. In August 2005, a new agreement was reached with the holder of the
convertible note which resulted in the conversion of the $275,000 principal plus
accrued interest into shares of the Company's common stock.
In May 2005, the Company entered into a new two year employment agreement with
its President and Chief Executive Officer. The agreement specifies an annual
base salary of $170,000, representing a voluntary pay cut in base taken by the
CEO. If the Company generates positive cumulative EBITDA (which excludes
non-cash compensatory and equity charges under GAAP) of greater than $50,000 for
any three consecutive months, the base salary will be increased to $200,000. The
CEO will be entitled to receive a quarterly bonus equal to 3% of the Company's
EBITDA as computed under GAAP, which may be paid in cash or shares of the
Company's common stock, at the CEO's election. The CEO shall also be entitled to
receive an option to purchase 25,000 shares of the Company's common stock,
exercisable at the fair market price, for each month the Company has net income
before taxes and extraordinary items, as computed in accordance with GAAP. These
options vest over the remaining term of the employment agreement. The individual
is entitled to a $750 per month automobile allowance and a $1000 per month
personal allowance. The contract requires the Company to issue the CEO 1,000,000
shares of the Company's common stock. If the individual loses his position for
any reason other than for cause during the term of the agreement, he will
receive a lump sum payment equal to two (2) times the current base salary. If
the Company does not employ the individual beyond the expiration term of the
agreement, he will receive his monthly base salary for the next twelve months.
At the election of the individual, any compensation including severance or
termination payments, may be made one-half (1/2) in cash and one-half (1/2) in
the Company's shares valued at 75% of the average closing price over the 30
trading days preceding the termination date. Any shares issued shall be
registrable under a form S-8 and shall have "piggyback" registration rights.
34
In addition, in May 2005 the Company entered into employment agreements ranging
in length from eighteen to twenty-four months with all four of the Company's
senior executives that total $72,000 to $102,000 annually. This represents
voluntary base pay cuts taken by all of the previously contracted executives.
These executives also receive automobile allowances ranging from $400 to $700
per month and will receive 10,000 shares of the Company's common stock each
month, not to exceed 200,000 shares each. If their contracts are not renewed
they receive severance packages of six months of their annual compensation.
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 because consumers tend to delay repairing their vehicles
during the holidays.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements to be provided pursuant to this Item 7 begin on page
F-1 of this Report, following Part III hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of July 31, 2005. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective such that the material
information required to be included in our Securities and Exchange Commission
("SEC") reports is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms relating to eAutoclaims, Inc.,
including our consolidated subsidiaries, and was made known to them by others
within those entities, particularly during the period when this report was being
prepared.
(b) Changes in internal controls over financial reporting.
In addition, there were no significant changes in our internal control over
financial reporting that could significantly affect these controls during fiscal
year ended July 30, 2005. We have not identified any significant deficiency or
materials weaknesses in our internal controls, and therefore there were no
corrective actions taken.
ITEM 9B OTHER INFORMATION
None
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
Name Age Position
Eric Seidel 42 Chief Executive Officer,
President and Director
Reed Mattingly 36 Executive Vice President
Larry Colton 56 Chief Financial Officer
Stacey Adams 33 Sr. VP of Operations
Dave Mattingly 47 Chief Information Officer
Jeffrey D. Dickson 62 Chairman of the Board of Directors
Christopher Korge 51 Director
Nicholas D. Trbovich, Jr. 45 Director
John K. Pennington 50 Director
Because we are a small company, we are currently dependent on the efforts of a
limited number of management personnel. We believe that, given the development
stage of our business and the large amount of responsibility being placed on
each member of our management team, the loss of the services of any member of
this team at the present time would harm our business. Each member of our
management team supervises the operation and growth of one or more integral
parts of our business.
The Chief Executive Officer/President is elected and can be removed by the Board
of Directors. Directors are elected at the annual meeting of shareholders to
serve for their term and until their respective successors are duly elected and
qualify, or until their earlier resignation, removal from office, or death. The
remaining directors may fill any vacancy in the Board of Directors for an
unexpired term.
Business Experience of Executive Officers and Directors
Eric Seidel has been a director and our chief executive officer and president
since June 1, 2000. From January 1, 2000 through May 31, 2000, Mr. Seidel was
the chief executive officer and president of eAutoclaims, Inc., which was
privately held Delaware corporation, which merged with us. From September 1997
through December 1999, Mr. Seidel was employed as a senior executive officer of
First American AMO. From August 1995 through June 1997, Mr. Seidel was a senior
executive at Salex Corporation; a fleet management company serving Fortune 500
companies, where, among other responsibilities he was responsible for insurance
company services. Mr. Seidel is a past president of the U.S. Junior Chamber of
Commerce and currently serves as Chairman of the Upper Tampa Bay Regional (UTBR)
Chamber of Commerce's Trustee Counsel and as a member of the Executive Committee
as Treasurer of the UTBR 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 16 years of experience in the
automotive insurance services business. Mr. Mattingly currently leads our sales
and marketing teams. Mr. Mattingly is responsible for growth in revenue from new
and existing clients through the effective marketing and sales of existing
eAutoclaims applications and services as well as identification and development
of alternative revenue generating opportunities. In the previous position of COO
for eAutoclaims, he was instrumental in significantly increasing revenue 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.
36
Larry Colton, Chief Financial Officer. Mr. Colton became our Chief Financial
Officer on May 1, 2005. Prior to becoming CFO, Mr. Colton was the Controller of
eAutoclaims since 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, prior to joining eAutoclaims, 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.
David Mattingly, Chief Information Officer. David Mattingly began his career
with eAutoclaims after our purchase of Premier Express Claims in 2000. Mr.
Mattingly was the MIS Director of Premier and joined the eAutoclaims staff as
the VP IT. In June 2002 Mr. Mattingly became the CIO and assumed the
responsibility for developing new products and keeping the Company's technology
on the `cutting edge.' He oversees and manages all eAutoclaims technology
projects, LAN and WAN infrastructure, Intranet and Internet Programming
Projects, and research and development endeavors. Mr. Mattingly has been in the
Computer Technology field for over 24 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 as well as a MBA from Devry
University's Keller Graduate School of Management. Mr. Mattingly plans on
attending Argosy University in 2006 for his Doctorate in Business
Administration.
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 6 years experience in the insurance and
technology industries. Prior to eAutoclaims Ms. Adams was with a Senior Customer
Account Representative/Account Executive with NetWireless, where she provided
technical support and marketing support for the customers and sales team. Stacey
earned a bachelor's in communications from Arizona State University and carries
agents license in Property & Casualty Insurance.
Jeffrey D. Dickson has been a director and the chairman of our board of
directors since June 2000. From May 1997 through November 1999, Mr. Dickson was
the president and chief executive officer of First American AMO. From February
1995 through May 1997, Mr. Dickson was the president and chief operating officer
of Salex Corporation. Mr. Dickson has served as an executive vice president of
the American Bankers Insurance Group and president of Interloc Corp. Mr. Dickson
was awarded a Masters of Business Administration degree from Harvard University
in 1979.
Christopher Korge has been a director since June 2000. He is the managing
partner at the law firm of Korge & Korge, P.A. in Miami, Florida. He received
his J.D. degree from Temple School of Law in 1981 and B.S. in Business
Administration, from the University of Florida, in 1977. Mr. Korge's firm
represents numerous Fortune 500 corporations. Mr. Korge serves on numerous
boards of directors and is a major shareholder in various companies including
two housing development companies, and one E commerce company, Intune Group, of
which he is Chairman. Mr. Korge is Finance Vice Chairman of the Democratic
National Committee. He is past Co-Chair of the Democratic National Committee
Business Council.
Nicholas D. Trbovich, Jr., has been a director of eAutoclaims since June 2000.
He is a director and vice president of AMEX-listed Servotronics, Inc., President
of TSV ELMA, Inc. and TSV Franklinville, Inc. (Servotronics development
subsidiaries), Chairman and CEO of Queen Cutlery and CEO and President of the
Ontario Knife Company, (the U.S. Military's largest supplier of bayonets and
survival knives). He is founder and owner of Aero, Inc., A fabricator of hot
forged metal products.
John K Pennington has been a director of eAutoclaims since October
2004. He is founder, president and director since 2002 of Advantage Fund G.P.
Limited, which acts as general partner of Canadian Advantage Limited Partnership
and VC Advantage Limited Partnership, two large technology investment funds. He
is also founder, president and director since 2001 of Canadian Equity Resources
Corporation, a private investment firm. He holds a Bachelor of Arts (Economics)
from Queen's University, Kingston, Ontario, Canada and a Master of Business
Administration from the University of Western Ontario, London, Ontario, Canada.
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 has been
employed with eAutoclaims since July 1998 and currently serves as the Vice
President of Business Development. His responsibility is the development of
sales and integration opportunities across all eAutoclaims product lines for
Outsourcing, ASP and Specialty Markets. Included are the incorporation of
service partners (Rental, Salvage, Field Adjusting, Report Pick-up, Desk Review
37
and Towing), independent appraisers, and corporate repair centers for both
eJusterSuite(R) and AuditPro platforms. Mr. Prozinski has served eAutoclaims as
a Regional Sales Manager, National Vendor Manager and Director of Consumer
products. Prior to eAutoclaims, John was employed by both Ashland, Inc. and Betz
Laboratories and served in regional sales, marketing and product development
roles. In 2000, John was elected and served as the 80th President of the United
States Junior Chamber of Commerce. He graduated from St. John's University,
Collegeville MN with a Bachelor of Science Degree in 1987.
Marilyn Maginnes, Controller. Ms. Maginnes became eAutoclaims Controller in May
2005. Prior to becoming Controller, Ms. Maginnes had been with eAutoclaims as
Assistant Controller since July 2001. She has over 25 years of accounting
management experience. Prior to eAutoclaims and relocating from Long Island, New
York to Florida, Ms. Maginnes was a Regional Accounting Manager for Petro Inc.
of Stamford Connecticut. She managed Petro's Long Island Region, which included
their largest four branches. Ms Maginnes had obtained her accounting degree and
then went on to obtaining public accounting experience before going into the
private sector.
Mike Probyn, -VP of Operations. Mr. Probyn has been with eAutoclaims for 4 years
and is currently serving as our Operations General Manager overseeing the
Auditing, Claims and Vendor departments. He formerly served as the Regional
Vendor Manager and National Vendor Manager. Prior to working for eAutoclaims,
Mr. Probyn was Co-Owner of a Pest Control Company for over 15 years and also
Past President of the Florida Junior Chamber of Commerce.
Ryan Blade, Vice President Information Technology. Mr. Blade joined eAutoclaims
in September 2000. He has served as a Technical Support Specialist, a programmer
and an IT Department Manager. He was promoted to Vice President Information
Technology in May 2003 and oversees the IT Support, Programming and Network
Administration departments. Formerly he served thirteen years in the United
States Army.
Election and Number of Directors
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 two Committees
of the Board of Directors.
Board of Directors Meetings
Our Board of Directors held five (5) meetings during the fiscal year ended July
31, 2005. Each of our directors attended all five meetings.
Audit Committee
The Audit Committee, which held five meetings during fiscal 2005 to review the
three 10Qs and one 10K, 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
2005 Mr. Trbovich, Jr. was Chairman of the Audit Committee and served with Mr.
Korge and Mr. Dickson. None of our Audit Committee members is a financial expert
as defined under Item 401(h) of Regulations S-F. However, two 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 2005 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 2005, Mr. Korge served as Chairman of the
Compensation Committee. See "Board Compensation Committee Report on Executive
Compensation."
38
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
Two of our three outside Directors were paid an annual retainer of $25,000
during the fiscal year ended July 31, 2005. One individual, who became a
Director in October 2004 was paid a prorated amount of $19,178, which is equal
to the time he served as a Director during the fiscal year. All of the Directors
were paid in Company Stock for these retainers. In addition, each 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, 2005 we issued 67,144 shares to our outside directors under this
arrangement. The three outside Directors also receive $6,000 per year for
attending board meetings and $4,000 per year for attending committee meetings.
The committee fee is raised from $4,000 to $8,000 per year, if they are the
Chairperson of the committee. All of these fees were paid in Company Stock. If
they don't attend one or more committee or board meetings, their compensation is
reduced accordingly.
The three 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, 2005, the three outside Directors received 12,500 options each quarter,
which were issued on January 21, 2005, January 31, 2005, April 30, 2005 and July
31, 2005 at exercise prices of $0.25, $0.30, $0.14 and $0.21, respectively, for
a total of 50,000 options for two Directors and a 37,500 for the third Director
(for 3 quarters of service), or 137,500 options in aggregate.
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: Larry Colton.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the Forms 3, 4 and 5 filed during fiscal 2005 the
registrant reasonably believes, except as described below, that each person who,
at any time during the current fiscal year, was a director, officer, or
beneficial owner 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. Korge was delinquent on his Form 4 filing related to
the acquisition of 12,500 options that occurred on or about January 21, 2005 and
his March 10, 2005 acquisition of 446,429 additional units (shares of common
stock and warrants) issued as required by the terms of the 2004 capital raise.
Mr. Trbovich, Jr. was delinquent on his Form 4 filing related to the acquisition
of 12,500 options that occurred on or about January 21, 2005. Mr. Reed Mattingly
was delinquent on his Form 4 filing related to the acquisition of 192,308 common
shares that occurred on July29, 2005.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation paid or accrued by us for the fiscal
years ended July 31, 2005, 2004, and 2003 to or for the account of our Officers
that exceed $100,000.
39
Long-Term Compensation
Annual Compensation Awards Payouts
----------------------------- ---------- ------------ ---------- --------------- ------------ -------------- ---------- ------------
Long-Term
---------------------------- Other Restricted Securities Incentive All
Fiscal Annual Stock Underlying Plan Other
Name of Individual & Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation
Principal Position (1)
----------------------------- ---------- ------------ ---------- --------------- ------------ -------------- ---------- ------------
----------------------------- ---------- ------------ ---------- --------------- ------------ -------------- ---------- ------------
Eric Seidel 2003 $242,402 $37,500 -0- -0- 165,000 -0- -0-
President and 2004 $198,859 $19,752 -0- -0- 1,075,000 -0- -0-
Chief Executive Officer 2005 $182,250 $12,000 -0- -0- -0- -0- -0-
Reed Mattingly 2003 $104,931 -0- -0- -0- 30,000 -0- -0-
Executive Vice President 2004 $121,320 $1,500 -0- -0- 200,000 -0- -0-
2005 $108,478 $25,000 -0- -0- -0- -0- -0-
Scott Moore (2) 2003 $131,424 -0- -0- -0- 80,000 -0- -0-
Chief Financial Officer 2004 $134,221 $1,500 -0- -0- 150,000 -0- -0-
2005 $108,458 -0- -0- -0- -0- -0- -0-
Dave Mattingly 2003 $100,185 -0- -0- -0- 30,000 -0- -0-
Chief Information Officer 2004 $108,808 $1,500 -0- -0- 150,000 -0- -0-
2005 $109,897 -0- -0- -0- -0- -0- -0-
----------------------------- ---------- ------------ ---------- --------------- ------------ -------------- ---------- ------------
The cost to us of personal benefits, including premiums for life insurance and
any other perquisites, to such executives do not exceed 10% of such executive's
annual salary and bonus.
(1) Other annual compensation, including cell phones is less than 10% of the
officers' salaries and is therefore not disclosed above.
(2) Mr. Moore resigned at the end of his contract in April 2005.
Option/SAR Grants in Last Fiscal Year
There were no Options/SAR grants made to officers in FY 2005
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
The following table provides information with respect to the named officer
concerning exercised and unexercised options in fiscal year ended July 31, 2005.
------------------------- --------------- ------------------ ------------------------------- -------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs Options/SARs
Name of Acquired on Value at Fiscal Year End (#) at Fiscal Year End($)
Individual Exercise (#) Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable
(2)
------------------------- --------------- ------------------ ------------------------------- -------------------------
------------------------- --------------- ------------------ ------------------------------- -------------------------
Eric Seidel 350,000 $52,500 726,667 / 13,333 $136,600 / $800
Reed Mattingly -0- -0- 220,000 / 10,000 $41,200 / $600
Scott Moore (3) -0- -0- 203,333 / 0 $33,867 / $0
Dave Mattingly -0- -0- 170,000 /10,000 $31,200 / $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
7/31/05 minus the exercise price of such options.
(3) Mr. Moore resigned at the end of his contract in April, 2005
40
Employment Contracts and Other Arrangements
Eric Seidel, President and Chief Executive Officer. In May 2005 the Company
entered into a new two-year employment agreement with its President and Chief
Executive Officer. The agreement specifies an annual base salary of $170,000,
representing a voluntary pay cut in base taken by the CEO. If the Company
generates positive cumulative EBITDA (which excludes non-cash compensatory and
equity charges under GAAP) of greater than $50,000 for any three consecutive
months, the base salary will be increased to $200,000. The individual will be
entitled to receive a quarterly bonus equal to 3% of the Company's EBITDA as
computed under GAAP, which may be paid in cash or shares of the Company's common
stock, at the election of the individual. The individual shall also be entitled
to receive an option to purchase 25,000 shares of the Company's common stock,
exercisable at the fair market price, for each month the Company has net income
before taxes and extraordinary items, as computed in accordance with GAAP. These
options vest over the remaining term of the employment agreement. The individual
is entitled to a $750 per month automobile allowance and a $1000 per month
personal allowance. The Company is required to issue the individual 1,000,000
shares of its common stock and has agreed to include the shares in the S-8
Registration Statement. If the individual loses his position for any reason
other than for cause during the term of the agreement, he will receive a lump
sum payment equal to two (2) times the current base salary. If the Company does
not employ the individual beyond the expiration term of the agreement, he will
receive his monthly base salary for the next twelve months. At the election of
the individual, any compensation including severance or termination payments,
may be made one-half (1/2) in cash and one-half (1/2) in the Company's shares
valued at 75% of the average closing price over the 30 trading days preceding
the termination date. Any shares issued shall be registrable under a form S-8
and shall have "piggyback" registration rights.
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, 2005, and has
a term of twenty-two (22) months. Under this agreement, Mr. Mattingly is
entitled to an annual base salary of $93,500 through April 30, 2006. Mr.
Mattingly will receive an automatic increase to his base salary of $6,500 upon
the completion of a capital raise and an automatic increase of $16,500 to his
base when the Company reaches an EBITDA of $1. From May 1, 2006 until the
expiration of the contract on February 28, 2007, Mr. Mattingly's base will be
$130,000. Mr. Mattingly will receive 10,000 shares of the Company's common stock
per month, not to exceed 200,000 shares. The stock will vest upon the Company
raising material working capital. Mr. Mattingly has the option of receiving 25%
of the value of the common shares in cash. The value of the Company's common
shares will be based on the closing price on the day the shares become vested
and the stock has piggy-back rights to the Company's S-8 registration filing.
Mr. Mattingly is entitled to bonus compensation as determined by the Company and
may be paid in cash or issued in shares of the Company's common stock on terms
approved by the Company. Mr. Mattingly is entitled to participate in the
"Executive Bonus Plan" as set forth by the Company and 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 coverage 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 and will provide 90 days of
consulting services to the Company upon his departure at the base pay in effect
at that time of departure. During the term of his agreement and for a period of
six (6) months after termination of his agreement, Mr. Mattingly is subject to a
non-competition and restrictive covenant with us. This agreement supersedes the
contract dated May 1, 2003.
41
Larry C. Colton, Chief Financial Officer. In May 2005, we entered into an
employment agreement with Larry C. Colton, our Chief Financial Officer. This
agreement has a term of twenty-two (22) months. Under this agreement, Mr. Colton
is entitled to an annual base salary of $84,800 through April 30, 2006. He will
receive an automatic adjustment to his base of $5,000 when the Company reaches
an EBITA of $1. From May 1, 2006 until February 28, 2007 Mr. Colton will receive
an annual base salary of $99,678. Mr. Colton will receive 10,000 shares of the
Company's common stock per month, not to exceed 200,000 shares. The stock will
vest upon the Company raising material working capital. Mr. Colton has the
option of receiving 25% of the value of the common shares in cash. The value of
the Company's common shares will be based on the closing price on the day the
shares become vested and the stock has piggy-back rights to the Company's S-8
registration filing. Mr. Colton is entitled to bonus compensation as determined
by the Company and may be paid in cash or issued in shares of the Company's
common stock on terms approved by the Company. Mr. Colton is entitled to
participate in the "Executive Bonus Plan" as set forth by the Company and 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. Colton 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 coverage
and other benefits afforded our employees. He is entitled to an automobile
allowance of $400 per month during the term of his agreement. If we elect not to
renew this agreement, then he is entitled to six (6) months severance pay at his
then current base salary. Mr. Colton has agreed not to compete with us during
the term of this agreement and for a period of six (6) months after termination
of this agreement. This agreement supersedes the contract dated May 1, 2003.
David Mattingly, Chief Information Officer. We entered into an employment
agreement with David Mattingly. Mr. Mattingly is currently our Chief Information
Officer. This agreement was effective May 1, 2005, and has a term of two (2)
years. Under this agreement, Mr. Mattingly is entitled to an annual base salary
of $102,000 through April 30, 2006., Mr. Mattingly will receive an automatic
increase to his base salary of $5,000 upon the completion of a capital raise and
an automatic increase of $18,000 to his base when the Company reaches an EBITDA
of $1. From May 1, 2006 until the expiration of the contract on April 30, 2007,
Mr. Mattingly's base will be $138,750. Mr. Mattingly will receive 10,000 shares
of the Company's common stock per month, not to exceed 200,000 shares. The stock
will vest upon the Company raising material working capital. Mr. Mattingly has
the option of receiving 25% of the value of the common shares in cash. The value
of the Company's common shares will be based on the closing price on the day the
shares become vested and the stock has piggy-back rights to the Company's S-8
registration filing. Mr. Mattingly is entitled to bonus compensation as
determined by the Company and may be paid in cash or issued in shares of the
Company's common stock on terms approved by the Company. Mr. Mattingly is
entitled to participate in the "Executive Bonus Plan" as set forth by the
Company and 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
coverage and other benefits afforded our employees. He is entitled to a $400 per
month automobile allowance. If we elect not to renew this agreement, then he is
entitled to six (6) months severance pay at his then current base salary. If Mr.
Mattingly resigns voluntarily with thirty (30) days written notice, he will
provide consulting services to the Company for a period of ninety (90) days at
his base salary rate in effect at the time of termination. During the term of
his agreement and for a period of six (6) months after termination of his
agreement, Mr. Mattingly is subject to a non-competition and restrictive
covenant with us. This agreement supersedes the contract dated May 1, 2003.
Stacey Adams, Senior Vice President - Operations. We entered into an employment
agreement with Stacey Adams. Ms. Adams is currently our Senior Vice President in
charge of operations. This agreement was effective May 1, 2005, and has a term
of eighteen (18) months. Under this agreement, Ms. Adams is entitled to an
annual base salary of $72,250 through April 30, 2006. Ms. Adams will receive an
automatic increase to her base salary of $5,000 upon the completion of a capital
raise and an automatic increase of $12,750 to her base when the Company reaches
an EBITDA of $1. From May 1, 2006 until the expiration of the contract on
September 30, 2006, Ms. Adams' base will be $100,000. Ms. Adams will receive
10,000 shares of the Company's common stock per month. In the final month of her
contract she will receive 30,000 shares for a total of 200,000 shares. The stock
will vest upon the Company raising material working capital. Ms. Adams has the
option of receiving 25% of the value of the common shares in cash. The value of
the Company's common shares will be based on the closing price on the day the
shares become vested and the stock has piggy-back rights to the Company's S-8
registration filing. Ms. Adams is entitled to bonus compensation as determined
by the Company and may be paid in cash or issued in shares of the Company's
common stock on terms approved by the Company. Ms. Adams is entitled to
participate in the "Executive Bonus Plan" as set forth by the Company and 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 coverage
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
42
entitled to six (6) months severance pay at her then current base salary. During
the term of her agreement and for a period of six (6) months after termination
of her agreement, Ms. Adams is subject to a non-competition and restrictive
covenant with us. This agreement supersedes the contract dated May 1, 2003.
Change of Control Shares
On March 27, 2003, as part of a employee and board member retention program the
Board of Directors voted to grant certain employees (Mr. Seidel is not entitled
to participate in the employee retention program) a total of 2,000,000 shares of
our common stock or equivalent consideration thereof and the current and future
board members 1,000,000 common shares if there is a change in control of greater
than 50% ownership of the Company or a sale of all or substantially all it's
assets. Only those employees and board members employed or on the board at the
time of the change will participate in the compensation.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors administers our Chief
Executive Officer's compensation package. The committee reviews, recommends and
approves changes to our compensation policies and programs, makes
recommendations to the Board of Directors as to the amount and form of executive
officer compensation, and administers our stock option plans.
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 are 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. Stock options typically have been granted to executive officers when
the executive first joins the Company. At the discretion of the Committee,
executive officers may also be granted stock options to provide greater
incentives to continue their employment with the Company and to strive to
increase the value of the Company's Common Stock.
Compensation for the Chief Executive Officer. Mr. Seidel's base salary for the
fiscal year 2005 was determined by the employment agreements previously signed
with Mr. Seidel dated February 1, 2003 and his new contract which began in May,
2005. 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.
43
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, 2005 we issued 71,000 options to employees
in accordance with the 1998 Plan. The Board members were issued 137,500 options
in accordance with the Board compensation plan. All of these options are subject
to vesting and are exercised at the current market price of our stock as of the
date of issuance.
We have the right to increase the total amount of options, which may be issued
so long as total outstanding options do not exceed 15% of the number of our
fully diluted outstanding shares of Common Stock. Furthermore, in lieu of paying
cash bonuses, the employees may be issued shares of our Common Stock at the then
fair market value in an amount not to exceed 50% of that employee's base salary.
All of the options we have issued are subject to immediate vesting and are
exercisable in the event of a change of control, which is defined as a sale of
substantially all of our assets or a merger in which we are not the surviving
entity.
As of September 30, 2005, we have issued, or reserved for issuance,
31,959,276 shares of our Common Stock relating to outstanding options and
warrants which are categorized as follows:
Options issued to Directors 967,500 (1)
Options issued to Chief Executive Officer 1,215,000 (2)
Options issued in connection with acquisition of PEC 130,000 (3)
Options issued to Employees 2,784,824 (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 20,919,863 (7)
Purchaser's Warrants 480,000 (8)
Agent's Warrants 264,385 (9)
Placement Agent warrants 4,004,775 (10)
---------
Total 31,959,276
==========
44
(1) The options issued to our directors have strike prices ranging from $0.01
to $1.91 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 #
# of Options Price Vested Expiration Date
---------- ------ ------- ---------------
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 50,000 04/07/08
25,000 $0.21 25,000 05/16/08
25,000 $0.39 25,000 06/15/08
25,000 $0.52 25,000 07/25/08
50,000 $0.32 50,000 08/29/08
25,000 $0.35 25,000 11/01/08
650,000 $0.01 650,000 03/10/14
------- ---------
1,215,000 1,201,667
========= =========
During fiscal year ended July 31, 2005, Mr. Seidel exercised 350,000
options at a strike price of $.01, and 32,500 options with a strike price
of $2.00 were canceled. 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 $2.00. 2,308,988 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 common stock with an exercise
price of between $0.16 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, 315,000 are exercisable at $0.35; 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".
45
(9) Represents warrants issued to Thomson Kernaghan and Greenfield Investments,
as Agents, exercisable at $4.50, except for 76,220 warrants issued to
Governor's Road, which are exercisable at $0.35. See "Market for Common
Equity and Related Stockholder Matters - Preferred Stock and Related
Warrants".
(10) Represents 790,200 placement agent warrants to purchase a unit for $0.28.
Each unit consists of one share of stock and one warrant to purchase
another share of stock at $0.16. Also includes 1,616,250 placement agent
warrants to purchase a unit for $0.16. Each unit consists of one share of
stock and one-half warrant to purchase another share at $0.30.
The following table sets forth information with respect to our common stock
that may be issued upon the exercise of outstanding options, warrants, and
rights to purchase shares of our common stock as of September 30, 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 1,902,466 $0.60 7,693,470 (4)
Equity Compensation Plans
Not Approved by
Stockholders (1) (2) (3) 8,216,287 $0.08 N/A
---------
Total 10,118,753 $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, and 2,000,000 shares to be issued per management contracts
(3) Excludes 26,823,023 warrants issued to investors in connection with capital
raising transactions not approved by our stockholders.
(4) Based on a Board of Directors imposed limit of 15%, not the 20% shown in
the approved plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK MATTERS
The following table contains information with respect to the beneficial
ownership of our Common Stock as of September 30, 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.
46
Name and Address of Amount and Nature of
Beneficial Owner (1) Beneficial Ownership Percentage(2)
----------------------------------- ---------------------- --------------
Eric Seidel (3) 2,336,759 3.58%
Reed Mattingly (4) 757,472 1.17%
Larry Colton (5) 225,364 0.35%
Dave Mattingly (6) 276,204 0.43%
Stacey Adams (7) 238,135 0.37%
Jeffrey D. Dickson (8) 938,550 1.46%
Nicholas D. Trbovich, Jr. (9) 685,962 1.07%
Christopher Korge (10) 5,850,215 8.72%
John K. Pennington (11) 214,225 0.33%
Canadian Advantage Limited Partnership 3,221,454 5.01%
(12) 1,191,497 1.86%
Advantage (Bermuda) Fund, Ltd. (13) 7,789,289 11.24%
Kinderhook Partners, LP (14) 7,346,422 11.12%
William Lewis (15) 4,004,775 5.88%
Noble International Investments (16) 3,250,000 5.01%
Meadowbrook Opportunity Fund (17)
15,935,837 22.66%
Directors and officers
as a group (9 persons) (18)
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. Unless otherwise noted, each such
person is deemed to be the beneficial owner of shares of Common Stock held
by such person on September 30, 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 64,089,574 shares of Common Stock outstanding at the close of
business on September 30, 2005. Excludes: (i) shares currently issuable
pursuant to outstanding options issued under Stock Option Plan; (ii )
shares issuable upon exercise of other outstanding warrants; and (iii)
shares of our Common Stock issuable upon conversion of outstanding
convertible notes. This amount excludes shares reserved for outstanding
options and warrants. 1,000,000 warrants issued to Mr. Korge were included
(see note 10 below).
(3) 400,000 shares of our Common Stock were issued to Mr. Seidel as founder
shares. He acquired 12,341 in open market purchases and exercised 1,127,504
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 650,000 Common Shares at an exercise price of
$.01 and options to acquire 551,667 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 that vest in December 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) the issuance of 192,308 shares as
payment of a bonus, (vi) options to acquire 200,000 common shares at an
exercise price of $.01 and (vii) options to acquire up to 210,000 shares at
exercise prices between $0.15 to $2.00. This amount excludes unvested
options to acquire up to 10,000 common shares at an exercise price of $0.15
that vest in December 2005. See "Executive Compensation".
(5) Mr. Colton's ownership represents, (i) 35,031 common shares acquired
through exercising options at $.01 per share, and (ii) options to acquire
85,000 common shares at an exercise price of $.01, and (iii) vested options
to acquire up to 105,333 common shares at an exercise price between $0.15
and $1.75. This amount excludes unvested options for 6,667 common shares at
$0.15 that vest in December 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 110,000 shares at exercise
prices between $0.15 and $2.00. This amount excludes unvested options to
acquire up to 10,000 common shares at an exercise price of $0.15 that vest
in December 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 72,333 shares at exercise prices between $0.15 and $2.00.
This amount excludes unvested options to acquire up to 6,667 common shares
at an exercise price of $0.15 that vest in December 2005. See "Executive
Compensation".
47
(8) Mr. Dickson's ownership includes (i) 10,000 shares of our Common Stock
issued as founder shares, (ii) 17,504 shares acquired in the open market,
(iii) 1,046 shares issued to him for his service on the board, and (iv) the
exercise of options to acquire 500,000 shares at an exercise price of
$0.01. It also includes options to acquire up to 400,000 shares of our
Common Stock at $0.01 and 10,000 shares at a price of $0.90. See "Directors
and Executive Officers - Director Compensation".
(9) Mr. Trbovich, Jr.'s ownership consists of (i) 463,882 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 210,000
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 $0.14 to $0.30, which vest through July 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) 458,168 shares
issued to him for his service on the board, (iii) 15,000 shares that he
purchased on the open market, (iv) 107,527 shares purchased from the
Company in August 2003, (v) warrants to acquire up to 1,000,000 shares of
our Common Stock at a conversion price of $0.35 in connection with the
issuance of our convertible debentures in 2001, (vi) warrants to acquire up
to 892,857 shares of our Common Stock at a conversion price of $0.35 in
connection with the issuance of our convertible debentures in 2004 (vii)
892,857 shares assume to have been converted as a result of the convertible
debentures purchased on 4/23/04, (viii) 892,858 shares and warrants to
acquire 892,858 shares of our Common Stock at $0.16 as a result of the
Company not meeting certain claims volume targets in March and August, 2005
and (ix) options to acquire 210,000 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 $0.14 to $0.30,
which vest through July 31, 2006. See " Directors and Executive Officers -
Director Compensation".
(11) Mr. Pennington's ownership represents 214,225 shares issued to him for his
service on the board. See "Directors and Executive Officers - Director
Compensation".
(12) Represents 2,991,504 shares and 229,950 warrants to acquire shares as
reported on a Schedule 13D on or about August 15, 2005. John Pennington has
investment decision-making authority for this entity. Excludes warrants to
acquire up to 353,165 shares of our Common Stock issued as Purchaser and
Agent Warrants in connection with the issuance of our Series A. Preferred
Stock.
(13) Represents 1,106,447 shares and 85,050 warrants to acquire shares as
reported on a Schedule 13D on or about August 15, 2005. John Pennington has
investment decision-making authority for this entity. Excludes warrants to
acquire up to 353,165 shares of our Common Stock issued as Purchaser and
Agent Warrants in connection with the issuance of our Series A Preferred
Stock.
(14) Represents (i) 2,596,429 warrants issued in a private placement in the
spring of 2004. Warrants have a three year term and were repriced from
$0.35 to a strike price of $0.16 in January 2005 in accordance with the
anti-dilution provisions of their original agreement in order to be
consistent with the terms offered in the January 2005 capital raise, (ii)
2,596,430 shares and 2,596,430 warrants to purchase shares of Common Stock
with a strike price of $0.16 as a result of the Company not meeting certain
claims volume targets in March and August 2005.
(15) Represents (i) 4,000,000 shares and 2,000,000 warrants to acquire shares of
Common Stock in a private placement in January, 2005 and, (ii) 1,346,422
shares acquired as a result of the purchase of Common Shares sold in
conjunction with the conversion of preferred stock in July, 2005.
(16) Includes (i) 790,200 placement agent warrants to purchase a unit for $0.28.
Each unit consists of one share of stock and one warrant to purchase
another share of stock at $0.16, and (ii) 1,616,250 placement agent
warrants to purchase a unit for $0.16. Each unit consists of one share of
stock and one-half warrant to purchase another share at $0.30.
(17) Represents (i) 1,500,000 shares and 750,000 warrants to acquire shares of
Common Stock in a private placement in January, 2005 and (ii) 1,000,000
shares acquired as a result of the purchase of Common Shares sold in
conjunction with the conversion of preferred stock in July, 2005.
(18) Includes outstanding options and warrants to acquire up to 5,910,850 shares
of our Common Stock issued to our officers and directors, which are
currently exercisable. The total shares include 3,221,454 from Canadian
Advantage Limited Partnership and 1,191,497 from Advantage (Bermuda) Fund
Ltd for which Mr. Pennington has investment decision-making authority. Mr.
Pennington disclaims beneficial ownership of these shares.
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a result of the eAutoclaims (Del.) merger, we assumed obligations under a
Consulting Agreement with Jeffrey D. Dickson. This agreement was effective
December 1, 1999 and is renewable on an annual basis. Mr. Dickson agreed to
provide Mr. Seidel, our Chief Executive Officer, day-to-day advisory services
concerning management, capitalization, corporate structure, organizational,
industrial and regulatory issues. In addition, Mr. Dickson agreed to serve as
our Chairman of the Board of Directors.
In consideration for these consulting services Mr. Dickson was paid an annual
consulting fee of $107,825, 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, 2005, $6,231 is still outstanding under this arrangement, after
application of service credits as described below. Mr. Dickson is spending a
substantial amount of his time dealing with administrative matters, investor
relations and public relations. This frees up Mr. Seidel's time to focus on
sales and marketing. The Company and Mr. Dickson have agreed that $3,000 per
month of his consulting fee will be withheld by the Company and used to reduce
the outstanding balance under the line of credit. In June 2005 Mr. Dickson and
the Company terminated the consulting arrangement described above. The Company
subsequently entered into an agreement with a firm, which Mr. Dickson is
associated with, to perform basically the same services as were being performed
under the previous agreement. The Company will pay an annual fee of $74,100,
payable every two weeks, to this firm. In addition, the firm will be paid an
additional $3,100 for the first four months of the agreement to off-set
additional start up costs. A total of $11,400 was paid to this firm for the
fiscal year ended July 31, 2005.
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 2005 we issued 1,011,288 shares 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 $175,351 of his services
charged. All other charges incurred by us for other employees of his firm are
paid in cash. As of July 31,2005, all these common shares have been earned.
On March 10, 2005 the Company issued Christopher Korge, one of our directors,
446,429 shares of the Company's Common Stock and 446,429 three-year warrants
with a strike price of $0.16 per share. These shares and warrants were issued to
investors from a 2004 equity raise as a result of the Company not meeting
certain claims volume requirements according to the agreement. In addition, on
January 27, 2005 the Company adjusted the strike price from $0.35 to $0.16 per
share on 892,857 warrants issued to Mr. Korge on June 24, 2004 as a result of
the conversion of his convertible debenture. The re-pricing was in fulfillment
of the anti-dilution provisions of his agreement and was triggered by the
Company's sale of additional securities at $0.16 in January of 2005.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND EXPENSES
Compensation of Auditors
Audit Fees. Goldstein Golub Kessler LLP billed the Company an aggregate of
$92,500 in fees and expenses for professional services rendered in connection
with the audit of the Company's financial statements for the fiscal year ended
July 31, 2004 and the reviews of the financial statements included in each of
the Company's Quarterly Reports on Form 10-Q during the fiscal year ended July
31, 2005. Audit Fees were $92,395 for services rendered in connection with the
audit of the Company's financials statements for the fiscal year ended July 31,
2003 and the reviews of the financial statements included in each of the
Company's Quarterly Reports on Form 10-Q during the fiscal year ended July 31,
2004.
Financial Information Systems Design and Implementation Fees. Goldstein Golub
Kessler LLP did not provide the Company any professional services for financial
information systems design or implementation for the fiscal years ended July
31,2005 and 2004.
All Other Fees. Goldstein Golub Kessler LLP billed the Company fees and expenses
during the years ended July 31, 2005 and 2004, primarily for the following
professional services:
2005 2004
------ -------
Audit related services $9,660 (1) $25,624 (2)
All Other Fees-Sarbanes Oxley 2,500 0
Taxes 2,500 2,500
-------- --------
$14,660 $28,124
======= ========
(1) Audit related services include the review of Forms S-1 and S-8 related to
the Company's registration statements and related offerings and accounting
advice
(2) Audit related services include the review of Form S-1 related to the
Company's registration statement and related offerings and accounting
advice.
49
ITEM 15. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
Exh
No. Description
1.1 [Reserved]
1.2 [Reserved]
3.1 Articles of Incorporation of Samuel Hamann Graphix, Inc. (Nevada)
as amended (1)
3.2 Articles of Merger between Samuel Hamann Graphix, Inc. (Nevada) and
Samuel Hamann Graphix, Inc. (California) (1)
3.3 By-laws of Transformation Processing Inc. (Nevada).(1)
3.4 Articles of Merger between of TPI (Ontario) and TPI (Nevada) (1)
3.5 Agreement and Plan of Merger by and between Transformation Processing,
Inc. and eAutoclaims.com, Inc., dated April 26, 2000 (3)
3.6 Articles of Merger of eAutoclaims.com, Inc., a Delaware corporation with
and into Transformation Processing, Inc., a Nevada corporation (5)
3.7 Agreement and Plan of Merger by and among eAutoclaims.com, Inc., a Nevada
corporation, eAutoclaims.com Acquisition, a South Carolina corporation,
Premier Express Claims, Inc., a South Carolina corporation, and its
stockholders, dated June 8, 2000 (2)
3.8 First Amendment to Agreement and Plan of Merger with Premier Claims, Inc.
dated June 27, 2000 (2)
3.9 Articles of Merger or Share Exchange between Premier Express, Inc., as
the surviving corporation and eAutoclaims.com Acquisition Corporation,
filed July 20, 2000 with the Secretary of State of South Carolina (5)
3.10 Promissory Note dated June 27, 2000 between eAutoclaims.com, Inc. and
Randal K. Wright and S.Reed Mattingly (2)
3.11 Promissory Note dated June 16, 2000 between eAutoclaims.com, Inc.
and Randal K. Wright (2)
3.12 Promissory Note dated June 16, 2000 between eAutoclaims.com, Inc. and
S. Reed Mattingly. (2)
3.13 Articles of Amendment to Articles of Incorporation increasing number of
authorized shares from 50 million to 100 million and name modification.*
4.1 Specimen of Common Stock Certificate (1)
4.2 [Reserved]
4.3 [Reserved]
4.4 The Registrants 1998 Stock Option Plan (4)
4.5 [Reserved]
4.6 Form of Stock Option Agreement to Employees(6)
4.7 Form of Directors Stock Option Agreement(6)
4.8 Form of Non-Qualified Stock Option Agreement(6)
5.1 [Reserved]
10.1 Employment Agreement between eAutoclaims.com, Inc. and Eric Seidel
dated February 1, 2000 (5)(8)
10.2 Employment Agreement between eAutoclaims.com, Inc. and Randal K. Wright
dated July 1, 2000 (2)(9)
10.3 Employment Agreement between eAutoclaims.com, Inc. and S. Reed Mattingly
dated July 1, 2000 (2)(8)
10.4 Employment Agreement between eAutoclaims.com, Inc. and M. Scott Moore
dated August 14, 2000 (5)(9)
10.5 Employment Agreement between eAutoclaims.com, Inc. and Gaver Powers dated
April 13, 2000 (5)
10.6 Consulting Agreement between eAutoclaims.com, Inc. and Jeffrey D. Dickson
dated December 1, 1999 (5)
10.7 Consulting Agreement between eAutoclaims.com, Inc. and Liviakis Financial
Communications, Inc.
dated February 1, 2000 (5)(9)
10.8 Amendment No. 1 to Consulting Agreement between eAutoclaims.com, Inc.
and Liviakis Financial Communications, Inc. dated September 18, 2000
(5)(9)
10.9 Lease Agreement between eAutoclaims.com, Inc. and KWPH, Inc., dated
October 17, 2000 (5)(9)
10.10 Service Agreement between eAutoclaims.com, Inc. and WE Securities, Inc.
dated August 8, 2000 (5)(9)
10.11 Business Consulting Agreement between eAutoclaims.com, Inc. and TTG
LLC dated September 8, 2000 (5)(9)
10.12 Commercial lease dated October 12, 1998 between Premier Express
Claims, Inc. and Stephenson Park Associates Limited (5)(9)
10.13 [Reserved]
50
10.14 Certificate of Full Performance of Proposal - Form 46 filed by BDO
Dunwoody Limited - Trustee dated May 8, 2000 (5)
10.15 Order of the Superior Court of Justice in the Matter of the Proposal of
Transformation Processing, Inc. dated November 25, 1999 (5)
10.16 Proposal of Transformation Processing, Inc. - Court File No. 32-107046
filed in the Superior Court of Justice dated October 14, 1999. (5)
10.17 Share Exchange Agreement between Transformation Processing, Inc. and
certain of its securities holders dated April 30, 2000 (5)
10.18 [Reserved]
10.19 Securities Purchase Agreement effective June 27, 2000 between Thomson
Kernaghan, as Agent and eAutoclaims.com, Inc. (5)
10.20 Certificate of Rights, Designations, Preferences and Limitations of
Series A Convertible Preferred Stock (5)
10.21 Security Agreement between Thomson Kernaghan, as Agent and
eAutoclaims.com, Inc. (5)
10.22 Form of Purchasers Warrant (5)
10.23 Form of Agents Warrant (5)
10.24 Registration Rights Agreement (5)
10.25 eAutoclaims.com, Inc. Agreement with Certain Securities Holders
effective May 31, 2000 (5)
10.26 eAutoclaims.com, Inc. Agreement with Sovereign Partners, Ltd.
effective May 31, 2000 (5)
10.27 eAutoclaims.com, Inc. Agreement with Dominium Capital Fund (5)
10.28 Form of Master Modification Agreement with Certain Security Holders
dated January 12, 2001(6)
10.29 Restated master Modification Agreement dated May 2001
10.30 Modification agreement dated November 2001 superceding the original
Modification Agreement dated January 12, 2001 and the Restated
Modification Agreement dated May 2001
10.31 Form of Bricks to Clicks Service and License Agreement (6)
10.32 Form of Collision Repair Facility Agreement and Procedures (6)
10.33 Form of Change of Control and Termination Agreement (6)
10.34 Form of Officers/Directors Indemnification Agreement (6)
10.35 Bricks to Clicks Service and Licensing Agreement with Inspire Claims
Management, Inc., dated November 1, 2000(6)(9)
10.36 Lease Agreement for 110 East Douglas Road dated September 2001 (6)
10.37 Form of Employee Confidentiality Agreement (6)
10.38 Letter Agreement with Liviakis Financial Communications, Inc. (6)
10.39 Letter Agreement with Former Liviakis Financial Communications, Inc.
Employees (6)
10.40 Claims Management Services and License Agreement with Royal Indemnity
Company, dated April 24, 2001(6)
10.41 Amended and Restated Employment Agreement with Eric Seidel effective
May 21, 2001 (6)(9)
10.42 Form of Amendment to Certificate of Designation, Rights and Preferences
of Series A Preferred Stock effective May 21, 2002 (7)*
10.43 Agreement between Parts.com, Inc. and the Registrant effective
May 1, 2001(6)
10.44 Form of Convertible Debenture (6)
10.45 Form of Warrants issued in connection with Convertible Debentures (6)
10.46 Form of Subscription Agreement for purchasers of Convertible
Debentures (6)
10.47 Amended and Restated Employment Agreement with Eric Seidel, dated
March 27, 2003(9)
10.48 Employment Agreement with Scott Moore, effective April 25, 2003* (9)
10.49 Employment Agreement with Reed Mattingly, effective May 1, 2003* (9)
10.50 Employment Agreement with Dave Mattingly, effective May 1, 2003* (9)
10.51 Employment Agreement with Stacy Adams, effective May 1, 2003* (9)
10.52 Agreement by and between eAutoclaims.com, Inc. and Governor's Road, LLC,
effective October 23, 2003 (11)
10.53 Form of Amendment to Certificate of Rights, Designation and Preferences of
Series A Preferred Stock, filed with the Nevada Secretary of State on
November 20, 2003 (11)
10.54 Letter Agreement with Noble International Investments, Inc., dated
April 22, 2004 (11)
10.55 Registration Rights Agreement relating to April/May 2004 Unit
Offering (11)
10.56 Form of Common Stock Purchase Warrant relating to April/May 2004 Unit
Offering (11)
10.57 Form of $250,000 Convertible Note and Related Matters with Christopher
Korge, dated May ----, 2004 (11)
10.58 Form of Common Stock Purchase Warrant issued to Christopher Korge dated
May----, 2004 (11)
10.59 Agreement with ADP Claims Solution Group, Inc. dated March 9, 2004 (11)
10.60 Employment Agreement with Eric Seidel, effective April 30, 2005 *
10.61 Employment Agreement with Larry Colton, effective May 1, 2005 *
51
10.62 Employment Agreement with Reed Mattingly, effective May 1, 2005 *
10.63 Employment Agreement with Dave Mattingly, effective May 1, 2005 *
10.64 Employment Agreement with Stacy Adams, effective May 1, 2005 *
10.65 Agreement for conversion of Convertible Preferred Stock, dated
July 21, 2005 *
31 Certificates of the Chief Executive Officer and Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a)*
32 Certificate pursuant to Section 1350 pursuant to Section 906 of
Sarbanes-Oxley Note of 2002.*
99.1 Code of Ethics(12)
(1) Incorporated by reference from the Registrant's Form 10-SB filed on
March 12, 1998 and amended on August 31, 1998 and October 22, 1998
(2) Incorporated by reference from the Registrant's Form 8-K filed on
July 25, 2000
(3) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 1999
(4) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 1998
(5) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2000
(6) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2001
(7) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2002
(8) Incorporated by reference from the Registrant's Form 10-KSB for fiscal
year ended July 31, 2003
(9) This Employment Agreement has been superseded by a new employment
agreement filed herewith. See (10)
(10) Terminated, no longer in effect
(11) Incorporated by reference from the Registrant's Form S-1 Registration
Statement File No. 333-115705
* Filed herewith
(12) Incorporated by reference from the Registrant's Form 10-K for fiscal
year ended July 31, 2004
* Filed herewith
(b) Reports on Form 8-K
Item 1.01 - Regarding signing of agreement to sell Oldsmar facility, dated
September 20, 2005
Items 1.01/1.02/3.02 - Regarding shares issued upon conversion of Note Payable
to Common Stock, dated August 22, 2005.
Items 1.01/1.02/3.02/3.03/7.01 - Conversion of all outstanding Convertible
Preferred Stock, dated July 21, 2005.
Item 1.01 - Signing of employment agreements with Chief Executive Officer and
other senior management, dated July 10, 2005.
Item 5.02 - Naming of new Chief Financial Officer, dated April 8, 2005.
Items 3.02/3.03 - Update of 8K filed on February 4, 2005 regarding closing of
$1.7 million in financing dated March 1, 2005.
Items 3.02/3.03 - Closing of $1.5 million in financing, dated February 4, 2005.
Item 5.02 - Election of new Director, dated October 29, 2004.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Oldsmar,
State of Florida, on the 5st day of December 2005.
EAUTOCLAIMS,INC.
BY: /s/ Eric Seidel
----------------------------------------
Eric Seidel
President and Chief Executive Officer
/s/ Larry Colton
----------------------------------------
Larry Colton
Chief Financial Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
/Eric Seidel President, Chief Executive 12/5/05
------------------------- Officer and Director ------------------------
Eric Seidel
/s/Jeffrey D. Dickson Chairman 12/5/05
------------------------- ------------------------
Jeffrey D. Dickson
/s/Nicholas D. Trbovich, Jr. Director 12/5/05
----------------------- ------------------------
Nicholas D. Trbovich, Jr.
Director
------------------------- ------------------------
Christopher Korge
/s/John K. Pennington Director 12/5/05
------------------------ ------------------------
John K. Pennington
53
EXHIBIT 31.1
CERTIFICATIONS
I, Eric Seidel certify that:
1. I have reviewed this annual report on Form 10K of eAutoclaims, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: 12/5/05 /s/ Eric Seidel
----------------- ---------------------------
President and C.E.O.
54
EXHIBIT 31.2
CERTIFICATIONS
I, Larry Colton certify that:
1. I have reviewed this annual report on Form 10K of eAutoclaims, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 5, 2005 /s/ Larry Colton
------------------------- -----------------------------------
Chief Financial Officer
55
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of eAutoclaims, Inc. (the
"Company"), on Form 10-K of the year ended July 31, 2005, as filed with the
Securities and Exchange Commission on October 31, 2005 (the "Report"), I, Eric
Seidel, the President and CEO of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Annual Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Annual Report fairly presents, in
all materials respects, the financial condition and results of operations of
eAutoclaims, Inc..
Date: 12/5/05 /s/ Eric Seidel
----------------- -------------------------
Print Name: Eric Seidel
Title: Chief Executive Officer
56
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of eAutoclaims, Inc. (the
"Company"), on Form 10-K of the year ended July 31, 2005, as filed with the
Securities and Exchange Commission on October 31, 2005 (the "Report"), I, Larry
Colton, the Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Annual Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Annual Report fairly presents, in
all materials respects, the financial condition and results of operations of
eAutoclaims, Inc..
Date: 12/5/05 /s/ Larry Colton
---------- ------------------------------------------
Print Name: Larry Colton
Title: Chief Financial Officer
57
EAUTOCLAIMS, INC.
FINANCIAL STATEMENTS
JULY 31, 2005
Page
----
Report of Independent Registered Public Accounting Firm F - 2
Financial Statements:
Balance Sheets F - 3
Statements of Operations F - 4
Statements of Stockholders' Equity (Deficiency) F - 5
Statements of Cash Flows F - 6
Notes to Financial Statements F-7 - F-25
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule F-26
Schedule II - Valuation and Qualifying Accounts F-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
eAutoclaims.com, Inc.
We have audited the accompanying balance sheets of eAutoclaims, Inc. as of July
31, 2005 and 2004 and the related statements of operations, stockholders' equity
(deficiency), and cash flows for each of the three years in the period ended
July 31, 2005. 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, 2005 and 2004 and the results of its operation and its cash flows for each
of the three years in the period ended July 31, 2005, in conformity with United
States generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
September 16, 2005
F-2
EAUTOCLAIMS, INC.
BALANCE SHEET
---------------------------------------------------------------------------------------------------------------------------
July 31, 2005 July 31, 2004
---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 306,280 $ 415,549
Accounts receivable, less allowance for doubtful accounts
of $208,000 and $161,000 respectively 742,237 728,776
Due from related parties 6,231 65,431
Prepaid expenses and other current assets 88,290 79,341
---------------------------------------------------------------------------------------------------------------------------
Total current assets 1,143,038 1,289,097
Property and Equipment, net of accumulated depreciation 857,440 1,073,409
Goodwill 1,093,843 1,093,843
Other Assets 25,800 25,800
Deferred Income Tax Asset, net of valuation
allowance $9,841,000 and $9,002,000 respectively
---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,120,121 $ 3,482,149
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable, advanced payments and accrued expenses $ 4,701,483 $ 4,378,858
Loan payable - stockholder 36,866
Current portion of capital lease obligation 86,642 63,888
Convertible debenture 275,000
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,063,125 4,479,612
Convertible debenture 300,000
Capital Lease Obligation, net of current portion 108,979 195,621
---------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,172,104 4,975,233
Stockholders' Deficiency:
Convertible preferred stock - $.001 par value; authorized 5,000,000 shares,
issued and outstanding 0 shares and 200 shares respectively
aggregate liquidation preference of $0 and $1,000,000 respectively 1
Common stock - $.001 par value; authorized 100,000,000 shares, issued
and outstanding 59,488,026 shares and 34,337,362 shares respectively 59,488 34,338
Additional paid-in capital 25,081,358 22,171,857
Accumulated deficit (27,192,829) (23,699,280)
---------------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (2,051,983) (1,493,084)
---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 3,120,121 $ 3,482,149
===========================================================================================================================
F-3
EAUTOCLAIMS, INC.
STATEMENT OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------
Year Ended July 31 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------
Revenue:
Collision repairs management $ 11,248,882 $ 22,718,284 $ 29,697,420
Glass repairs 487,723 1,239,969 894,485
Fleet repairs management 718,240 713,303 868,962
Fees and other revenue 2,196,387 2,489,126 2,600,205
------------------------------------------------------------------------------------------------------------------------------
Total revenue 14,651,232 27,160,682 34,061,072
Expenses:
Claims processing charges 11,029,261 22,130,634 28,323,741
Selling, general and administrative 5,554,430 6,417,316 6,418,911
Depreciation and amortization 511,812 515,813 490,935
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 307,694 11,738
------------------------------------------------------------------------------------------------------------------------------
Total expenses 17,095,503 29,371,457 35,245,325
------------------------------------------------------------------------------------------------------------------------------
Net loss $ (2,444,271) $ (2,210,775) $ (1,184,253)
===============================================================================================================================
Adjustment to net loss to
compute loss per common share:
Preferred stock dividends (50,655) (95,518) (101,296)
Dividend to unit holders (986,623)
------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (3,481,549) $ (2,306,293) $ (1,285,549)
===============================================================================================================================
Loss per common share - basic and
diluted $ (0.08) $ (0.09) $ (0.06)
===============================================================================================================================
Weighted-average number of common
shares outstanding-basic and diluted 44,905,261 26,308,434 20,209,634
===============================================================================================================================
F-4
EAUTOCLAIMS, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
------------------------------------------------------------------------------------------------------------------------------
Additional Stockholders'
Preferred Stock Common Stock Paid-in Accumulated Equity
Years ended July 31, 2005, 2004 and 2003 Shares Amount Shares Amount Capital Deficit (Deficiency)
------------------------------------------------------------------------------------------------------------------------------
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
exercise of warrants, net of costs and
common stock warrants liability 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)
Issuance of common stock for services 968,901 969 219,160 220,129
Accrued dividends on preferred stock (50,655) (50,655)
Issuance of common stock upon conversion of
preferred stock and preferred stock
dividends (176) (1) 6,774,319 6,774 273,951 280,725
Conversion of convertible debenture to equity 89,606 90 24,910 25,000
Issuance of common stock for interest
on convertible debt 112,391 112 23,400 23,512
Redemption of preferred stock (24) (120,000) (12,000) (132,000)
Proceeds from sale of common stock and
exercise of warrants, net of costs and
common stock warrants liability 11,715,000 11,715 1,497,239 1,508,954
Dividends issued to unit holders in the form of
shares and warrants 4,502,218 4,502 982,121 (986,623) 0
Issuance of common stock upon exercise of 988,229 988 8,720 9,707
options
Net loss (2,444,271) (2,444,271)
------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 2005 - - 59,488,026 $59,488 $25,081,358 $(27,192,829) $(2,051,983)
===============================================================================================================================
F-5
EAUTOCLAIMS, INC.
STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------
Year Ended July 31 2005 2004 2003
--------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(2,444,271) $(2,210,775) $(1,184,253)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 511,812 515,813 490,935
Loss on disposal of property and equipment 77,430
Amortization of discount on debentures 307,694 11,738
Common stock issued for services 220,129 165,036 156,835
Common stock issued for interest 23,512 12,000
Issuance of compensatory stock options 868,756
Bad debts 47,000 (81,000) (158,000)
Changes in operating assets and liabilities
Accounts receivable (60,461) 550,988 (176,412)
Prepaid expenses and other current assets (8,949) (23,119) 180,681
Other assets 0 14,740 (15,610)
Accounts payable and accrued expenses 591,392 (1,904,331) 870,186
Deferred software subscription revenue (284,676)
--------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,119,836) (1,706,768) (108,576)
Cash flows from investing activity:
Purchases of property and equipment (295,843) (463,725) (418,448)
Proceeds from related parties 59,200 43,000 38,563
Loans to related parties (7,000)
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing activity (236,643) (420,725) (386,885)
Cash flows from financing activities:
Proceeds from sale of common stock 1,508,954 2,178,125 403,070
Proceeds from exercise of stock options 9,707 9,590
Principal payments on capital lease (63,888) (30,117) (28,686)
Payments on redemption of preferred stock (170,698)
Proceeds from sale of convertible debentures 250,000 300,000
Principal payments on shareholder loans (36,866) (81,127) (7,007)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,247,209 2,316,881 676,967
--------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (109,270) 189,388 181,506
Cash at beginning of year 415,549 226,161 44,655
--------------------------------------------------------------------------------------------------------------------
Cash at end of year $306,279 $ 415,549 $ 226,161
====================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 42,581 $ 56,855 $ 45,324
====================================================================================================================
Supplemental disclosure of noncash investing and
financing activities:
Gross proceeds from sale of equity $ 1,724,000 $ 2,436,240
Less costs paid to raise equity $ (215,046) $ (258,115)
Net proceeds from sale of equity $ 1,508,954 $ 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 $ 25,000 $ 250,000
====================================================================================================================
Issuance of common stock for amount due to shareholders $ 10,000
====================================================================================================================
Issuance of stock for preferred stock dividends $ 331,381 $ 71,652 $ 20,080
====================================================================================================================
Accrued dividends on preferred stock $ - $ 95,518 $ 101,296
====================================================================================================================
Shares and warrants issued to unit holders $ 986,623
====================================================================================================================
Equipment acquired by capital lease $ 169,376 $ 106,899
====================================================================================================================
F-6
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. During
the year ended July 31, 2005 the Company began to realize revenue from these
agreements and expects increased revenue will continue. 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 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 for collision repairs. This occurs 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 is involved in the determination of
product or service specifications and the Company has credit risk.
The Company records revenue gross for fleet repairs. This occurs 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
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the services will take place, the Company is involved in the determination of
product or service specifications and the Company has credit risk.
The Company records revenue gross for certain glass repairs. This occurs 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 for certain glass repairs. Revenue is recorded
at 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 records revenue generated from the co-marketing agreement with the
ADP Claims Services Group (ADP) 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 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, 2005,
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.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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,
2005 2004 2003
--------------------------------------
Net loss as reported $(2,444,271) $(2,210,775) $(1,184,253)
Add back intrinsic value of the options
issued to employees and charged to
operations 868,756
Deduct total stock based employee
compensation expense determined under
fair value based methods for all awards (17,786) (905,006) (607,267)
--------------------------------------
Pro forma net $(2,462,057) $(2,247,025) $(1,791,520)
======================================
Basic and diluted net loss per share
as reported $( .08) $(.09) $(.06)
Pro forma basic and diluted loss per share ( .08) $(.09) $(.09)
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, 2005, 2004, and 2003. The assumed
risk-free interest rate was 3.87%, 4.68%, and 6.50%, respectively, and the
assumed market volatility of the Company's common stock was 45%, 170% and 200%,
respectively. The revised volatility factor was determined based on a study done
by an independent securities valuation firm. 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 models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
F-9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" which revised Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". This statement supercedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees." The revised statement
addresses the accounting for share-based payment transactions with employees and
other third parties, eliminates the ability to account for share-based
compensation transactions using APB 25 and requires that the compensation costs
relating to such transactions be recognized in the consolidated statement of
operations. The revised statement is effective for the Company beginning August
1, 2005. It is expected to have an impact on the Company's consolidated
financial statements similar to the pro forma disclosure under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation"("SFAS 123").Management does not believe that, other than FAS
123(R) disclosed above, there are any other recently issued, but not yet
effective, accounting standards that 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
principal 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, 2005, 2004, and 2003, 31,367,131, 19,909,078, and 7,112,536 options and
warrants, respectively, were excluded from the diluted loss per share
computation, as their effect would be antidilutive. Additionally, as of July 31,
2005, 2004, and 2003, 1,724,401, 6,075,269, and 5,363,463 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
4. PROPERTY AND EQUIPMENT
At July 31, 2005 property and equipment, at cost, consists of the following:
Estimated
2005 2004 Useful Life
--------------------------------------------------------------------------------
Computer Equipment $ 656,183 $719,266 3 years
Software 1,105,776 977,608 3 years
Office equipment 303,563 367,026 3 to 10 years
Leasehold improvements 247,550 247,550 Term of Lease
Furniture and fixtures 88,421 88,421 7 to 10 years
--------------------------------------------------------------------------------
2,401,493 2,399,871
Less accumulated depreciation 1,544,053 1,326,462
-------------------------
$857,440 $1,073,409
=========================
Office equipment and software include amounts acquired under capital leases of
approximately $276,000 at July 31, 2005 and 2004, with related accumulated
depreciation of approximately $89,000 for the year ended July 31, 2005 and
approximately $22,000 for the year ended July 31, 2004.
5. ACCOUNTS PAYABLE, ADVANCED PAYMENTS AND ACCRUED EXPENSES
Accounts payable, advanced payments and accrued expenses consist of the
following:
July 31
2005 2004
--------------------------------------------------------------------------------
Advanced payments from customers $ 2,957,330 $ 2,658,295
Accounts payable to repair facilities
and other vendors $ 1,226,058 $ 1,057,093
Accrued payroll and vacation wages 181,706 149,846
Accrued dividends 268,768
Other accrued liabilities (none in excess of
5% of current liabilities) 336,389 244,856
--------------------------------------------------------------------------------
$4,701,483 $ 4,378,858
================================================================================
6. 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 approximated its
carrying amount based on rates available to the Company for similar loans. The
Company paid off the loan in December, 2004. Interest expense amounted to
approximately $1,000 and $10,000 for the years ended July 2005 and 2004
respectively.
F-11
7. 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 holder of the convertible debenture 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
holder of the convertible debenture converted $25,000 of the principal into
89,606 shares of common stock. On August 15, 2005 the holder of the Convertible
debenture converted the remaining $275,000 into 1,718,750 shares of common stock
(see Subsequent Events). Interest expense relating to these debentures amounted
to approximately $24,000 and $22,000 for the years ended July 31, 2005 and 2004
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 F-12
7. CONVERTIBLE NOTE AND DEBENTURES (continued)
892,857 three-year warrants with a strike price of $0.35 per share. These
warrants were re-priced to $0.16 per share in January 2005 to comply with the
anti-dilution provisions of the agreement and were triggered by a capital raise
in January 2005. 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.
There was no charge to operations under these agreements for the year ended
July, 2005. For the years ended July 31, 2004, and 2003 totals of $307,694, and
$11,738 were charged to operations under these agreements
8. COMMITMENTS AND CONTINGENCIES
In May 2005 the Company entered into a new two year employment agreement with
its President and Chief Executive Officer. The agreement specifies an annual
base salary of $170,000, representing a voluntary pay cut in base taken by the
CEO. If the Company generates positive cumulative EBITDA (which excludes
non-cash compensatory and equity charges under GAAP) of greater than $50,000 for
F-12
8. COMMITMENTS AND CONTINGENCIES (continued)
any three consecutive months, the base salary will be increased to $200,000. The
individual will be entitled to receive a quarterly bonus equal to 3% of the
Company's EBITDA, whose components are computed under GAAP, which may be paid in
cash or shares of the Company's common stock, at the election of the individual.
The individual shall also be entitled to receive an option to purchase 25,000
shares of the Company's common stock, exercisable at the fair market price, for
each month the Company has net income before taxes and extraordinary items, as
computed in accordance with GAAP. These options vest over the remaining term of
the employment agreement. The individual is entitled to a $750 per month
automobile allowance and a $1000 per month personal allowance. The Company is
required to issue the individual 1,000,000 shares of its common stock upon
execution of the agreement and agreed to include the shares in an S-8
Registration Statement when filed by the Company. If the individual loses his
position for any reason other than for cause during the term of the agreement,
he will receive a lump sum payment equal to two (2) times the current base
salary. If the Company does not employ the individual beyond the expiration term
of the agreement, he will receive his monthly base salary for the next twelve
months. At the election of the individual, any compensation including severance
or termination payments, may be made one-half (1/2) in cash and one-half (1/2)
in the Company's shares valued at 75% of the average closing price over the 30
trading days preceding the termination date. Any shares issued shall be
registrable under a form S-8 and shall have "piggyback" registration rights.
In addition, in May 2005 the Company entered into employment agreements ranging
in length from eighteen to twenty-four months with all four of the Company's
Senior executives that total $72,000 to $102,000 annually. This represents
voluntary base pay cuts taken by all of the previously contracted executives.
These executives also receive automobile allowances ranging from $400 to $700
per month and will receive 10,000 shares of the Company's common stock each
month, not to exceed 200,000 shares each. If their contracts are not renewed
they receive severance packages of six months of their annual compensation.
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 its 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, 2005, 2004and 2003 totaled approximately $219,000, $212,000
and $219,000 respectively.
Approximate minimum future payments under this operating lease is payable as
follows:
--------------------------------------------------------------------------------
Year ending July 31,
--------------------------------------------------------------------------------
2006 225,000
2007 76,000
--------------------------------------------------------------------------------
$ 301,000
================================================================================
F-13
8. COMMITMENTS AND CONTINGENCIES (continued)
On September 14, 2005 the Company signed an agreement to sell its Oldsmar
facility. The agreement calls for a 45 day due diligence period and for closing
to take place within 95 days and will be part of a simultaneous closing process
whereby the Company purchases the facility from its current landlord under a
purchase option provided for in the current lease agreement and subsequently
sell the facility. As part of the agreement, the Company will remain in the
facility under a new long term lease to be signed concurrent with the closing of
the sale.
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,
2006 $113,000
2007 105,000
2008 18,000
--------------------------------------------------------------------------------
$ 236,000
Less amount representing interest 40,000
--------------------------------------------------------------------------------
$196,000
Less current maturities 87,000
--------------------------------------------------------------------------------
Long term debt less current maturities $109,000
================================================================================
Interest expense on capital leases for the years ended July 31, 2005, 2004 and
2003 amounted to approximately $40,000, $20,000 and $22,000, respectively.
9. 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 face value, series
A, preferred stock. Each share of preferred stock is convertible into a number
of shares of common stock. Dividends are payable at the rate of 8% of the
aggregate liquidation preference amount per annum and are cumulative. During the
year ended July 31, 2005 the Company elected to redeem 24 shares of preferred
stock with a face value of $120,000 and $38,698 of accrued dividends for
$170,698, which included a ten percent premium of $12,000. Also, on July 8, 2005
the remaining 176 shares of preferred stock with a face value of $880,000 plus
dividends of $280,726 were converted into 6,774,319 shares of common stock. As
of July 31, 2005 and 2004, the Company had issued 520 shares of preferred stock
with 0 and 200 still outstanding, respectively.
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.
F-14
9. STOCKHOLDERS' EQUITY (continued)
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.
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.
F-15
9. STOCKHOLDERS' EQUITY (continued)
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 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.
F-16
9. STOCKHOLDERS' EQUITY (continued)
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.
During the year ended July 31, 2005, the Company issued 455,305 shares of common
stock to three directors in exchange for their services. These shares were
expensed over the year as they were earned. During the year ended July 31, 2005,
the Company expensed $124,678 which was approximately equal to the fair market
value of the shares when earned.
During the year ended July 31, 2005, the Company issued 71,288 shares of common
stock in exchange for $24,951 in legal services. In addition, the Board agreed
to issue the Company's legal counsel 940,000 shares of the Company's common
stock, valued at $150,400 as part of his fee for counsel and services rendered
relating to the sale of equity securities.
During the year ended July 31, 2005 the Company elected to redeem 24 shares of
preferred stock with a face value of $120,000 and $38,698 of accrued dividends
for $170,698, which included a ten percent premium of $12,000. Also, in the year
ended July 31, 2005, the remaining 176 shares of preferred stock with a face
value of $880,000 plus dividends of $280,726 were converted into common stock.
Total shares of common stock issued from the conversion of preferred stock and
accrued dividends for these transactions totaled 6,774,319. After these
conversion transactions, the Company no longer has any preferred stock
outstanding.
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, for the year ended July
31, 2005 interest on the debt of $23,512 was converted into 112,391 shares of
common stock.
In July 2005 192,308 shares of common stock were awarded to an officer in the
form of a bonus. A charge of $25,000, which represented the fair market value of
the stock at the time of the award, was charged to operations in July 2005.
F-17
9. STOCKHOLDERS' EQUITY (continued)
During the year ended July 31, 2005, the Company issued options to purchase
137,500 shares of common stock to three Board members for services rendered in
accordance with an approved compensation plan. The Company also issued an option
to purchase 71,000 shares of common stock to three employees under an approved
compensation plan. All options issued had strike prices of $0.12 to $0.30 per
share, which was the market price at the date of issuance.
On April 12, 2005 an officer/director and another director of the Company each
exercised options to purchase 350,000 shares of the Company's common stock, for
a total of 700,000 shares, with a strike price of .01 per share. On May 20, the
director exercised an additional 150,000 options, with a strike price of $.01
per share. Options to purchase 17,500 shares of the Company's common stock with
a strike price of $0.01 per share were exercised by a consultant on October 26,
2004. An additional 120,729 options to purchase common stock were exercised by
employees. Options to purchase 890,166 shares of common stock were canceled.
During the year ended July 31, 2005, the Company raised $1,724,000 from the sale
of 10,775,000 Units at $0.16 per Unit to ten (10) investors. Each Unit consists
of one (1) share of common stock and one-half (1/2), 3-year, common stock
purchase warrant with an exercise price of $0.30 per share. The warrants are not
callable during their first year. After the first year, the Company has the
right to call the warrants for nominal consideration at the average closing per
share if 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 Company paid Noble International Investment, Inc. ("Noble") total
commissions and expenses of $185,520 in connection with the issuance of these
securities and incurred $29,526 of other expenses. Noble also earned placement
agent warrants to purchase 1,616,250 Units at $0.16 per Unit. In addition, as
previously discussed above, the Board agreed to issue the Company's legal
counsel 940,000 shares of the Company's common stock as part of his fee for
counsel and services rendered relating to the sale of these equity securities.
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 March 8, 2005. 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. On March 8, 2005, 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.
F-18
9. STOCKHOLDERS' EQUITY (continued)
In order to obtain an appropriate valuation of the warrants that were issued as
of January 31, 2005, 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 valuation of $0.01 to $0.015 per warrant. The Company estimated the
value of each warrant to be $0.01
Also, as 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 agreed 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, which were registered along with the
securities described above.
On March 1, 2005, the Company evaluated the claims volume that it had received
from customers generated by the ADP Claims Service Group Co-marketing agreement
as specified in the subscription agreements from the 2004 capital raise. In
accordance with those agreements, the Company did not meet the minimum volume
requirements and therefore had to issue 2,162,860 Units (one share of common
stock and one, 3-year, $0.16 warrant to purchase a common share) to the
investors who did not accept our December 2004 offer. The True Up units issued
in December 2004 and March 2005 caused the Company to record a stock dividend to
these shareholders valued at approximately $987,000.
On February 22, 2005, the Company entered into a twelve month Investor Relations
Consulting Agreement. The Consultant will provide various investor relations
services for $6,500 per month plus 250,000 shares of the Company's common stock.
Either party can terminate the agreement after five months.
10. STOCK OPTIONS
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.
F-19
10. STOCK OPTIONS (continued)
A summary of the status of the company's options as of July 31, 2005, 2004, and
2003 and changes during the years then ended is presented below:
July 31, 2005
Weighted-
Average
Number of Exercise
Shares Price
--------------------------------------------------------------------------------
Balance at beginning of year 6,849,437 $0.45
Granted 208,500 .19
Cancelled or Expired (890,166) 1.34
Exercised (970,729) 0.15
--------------------------------------------------------------------------------
Outstanding at end of year 5,197,042 $0.37
================================================================================
Options exercisable at end of year 4,706,206 $0.39
================================================================================
Weighted Average fair value of
options granted during the period $0.09
================================================================================
July 31, 2004 July 31, 2003
------------- -------------
Weighted- Weighted-
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
--------------------------------------------------------------------------------
Balance at beginning of year 4,672,722 $0.80 5,264,970 $0.78
Granted 2,635,267 .07 908,000 0.18
Cancelled (458,552) 1.89 (541,398) 0.98
Exercised (0) 0.00 (958,850) 0.01
--------------------------------------------------------------------------------
Outstanding at end of year 6,849,437 $0.45 4,672,722 $0.80
================================================================================
Options exercisable at end of year 5,685,010 $0.47 3,085,263 $0.96
================================================================================
Weighted Average fair value of
options granted during the period $0.40 $0.16
================================================================================
F-20
10. STOCK OPTIONS (continued)
The following table summarizes information about fixed stock options outstanding
at July 31, 2005:
Options Outstanding Options Exercisable
Weighted
average Weighted Weighted
Remaining average average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
--------------------------------------------------------------------------------------------------
$0.01 2,279,858 7.80 $0.01 2,279,858 $0.01
$0.10 -$ .47 1,380,834 3.10 0.23 889,998 0.24
$ .51 -$ .90 834,750 1.51 0.60 834,750 0.60
$1.01-$1.91 515,600 .51 1.32 515,600 1.32
$2.00-$3.00 186,000 2.00 2.12 186,000 2.12
-------------------------------------------------------------------------------------------------
$0.01 - $3.00 5,197,042 $ .37 4,706,206 $0 .39
=================================================================================================
11. INCOME TAXES:
As of July 31, 2005, and 2004 the Company had deferred tax assets of
approximately $9,841,000 and $9,002,000, respectively, resulting from temporary
differences and net operating loss carry-forwards of approximately $21,891,000
and $19,411,000, respectively, which are available to offset future taxable
income, if any, through 2024. However, as of July 31, 2002 approximately
$10,452,000 of those losses is subject to an annual limitation of deducting
$267,000 per year against future operating income. 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,
2005 2004
--------------------------------------------------------------------------------
Temporary differences:
Allowance for doubtful accounts $83,000 $64,000
Accrued vacation 35,000 37,000
Fair value of warrants 0 123,000
Compensation not currently deductible 966,000 1,014,000
Net operating losses 8,757,000 7,764,000
Less valuation allowance (9,841,000) (9,002,000)
--------------------------------------------------------------------------------
Deferred tax assets $ 0 $ 0
================================================================================
F-21
11. INCOME TAXES: (continued)
The reconciliation of the effective income tax rate to the federal statutory
rate for the years ended July 31, 2005, 2004, and 2003 is as follows:
Federal income tax rate (34.0)%
State income tax rate ( 6.0)%
Change in valuation allowance on net operating carry-forwards 40.0%
--------------------------------------------------------------------------------
Effective income tax rate 0%
================================================================================
12. 401K
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, 2005, 2004, or 2003.
13. MAJOR CUSTOMERS
During the years ended July 31, 2005, 2004 and 2003 one customer accounted for
55%, 60% and 58% of total revenue respectively. During the years ended July 31,
2005, 2004 and 2003 a second customer accounted for approximately 8%, 13% and
14% of total revenue, respectively.
14. RELATED PARTY TRANSACTIONS
The Chairman of the Board of the Company was provided a non-interest bearing
loan prior to July 31, 2002, which totaled approximately $120,000. Over the last
12 months this loan has been reduced by forgoing certain compensation approved
by the Board of Directors. As of July 31, 2005 the loan balance was $6,231 and
is included in due from related parties on the accompanying balance sheet.
15. SUBSEQUENT EVENTS
As 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.
On August 1, 2005, the Company evaluated the claims volume that it had received
from customers generated by the ADP Claims Service Group Co-marketing agreement
as specified in the subscription agreements from the 2004 capital raise. In
accordance with those agreements, the Company did not meet the minimum volume
F-22
15. SUBSEQUENT EVENTS - (continued)
requirements and therefore had to issue 2,162,860 Units (one share of common
stock and one, 3-year, $0.16 warrant to purchase a common share) to the
investors who did not accept our December 2004 offer. Issuing these units
resulted in the Company recording a stock dividend of approximately $476,000.
On August 12, 2005 an investor exercised warrants to purchase 357,143 shares of
common stock with a strike price of $0.16 per share. The Company received
$57,143 from this transaction.
On August 15, 2005 the holder of the convertible debenture converted the note
into 1,718,750 shares of the Company's common stock. In addition, interest on
the note from the end of July, 2005 until August 15 was paid to the holder of
the note with 5,651 shares of the Company's common stock.
On August 17, 2005 a total of 357,144 shares of common stock were issued to
three directors in exchange for their services in fiscal 2006. These shares are
being expensed over the year as they are earned.
16. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly operating results for each of
the Company's last twelve fiscal quarters. This information has been consistent
with the Company's audited financial statements and includes all adjustments
consisting only of normal recurring adjustments that the Company considers
necessary for a fair presentation of the data.
EAUTOCLAIMS, INC.
QUARTERLY RESULTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, 2005 April 30, 2005 January 31, 2005 October 31, 2004
(unaudited) (unaudited) (unaudited) (unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue $3,453,669 $3,552,198 $3,525,569 $4,119,796
Expenses:
Claims processing charges 2,465,088 2,689,195 2,674,492 3,200,486
Selling, general and administrative 1,384,861 1,512,695 1,326,602 1,330,271
Depreciation and amortization 120,144 123,981 133,104 134,584
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,970,093 4,325,871 4,134,198 4,665,341
-----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (516,424) $ (773,673) $ (608,629) $ (545,545)
===================================================================================================================================
Adjustment to net loss to compute loss per common share:
Preferred stock dividends (7,865) (15,273) (11,389) (16,128)
Dividends to unit holders (432,572) (554,051)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (524,289) $ (1,221,518) $ (1,174,069) $ (561,673)
===================================================================================================================================
Loss per common share - basic and
diluted $ (0.01) $ (0.02) $ (0.03) $ (0.02)
===================================================================================================================================
Weighted-average number of common
shares outstanding - basic and diluted 55,806,133 51,529,115 37,681,925 35,361,541
===================================================================================================================================
F-23
EAUTOCLAIMS, INC.
QUARTERLY RESULTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, 2004 April 30, 2004 January 31, 2004 October 31, 2003
(unaudited) (unaudited) (unaudited) (unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue $4,397,591 $6,563,222 $7,509,359 $8,690,510
Expenses:
Claims processing charges 3,449,203 5,368,369 6,190,356 7,122,706
Selling, general and administrative 1,181,005 2,401,353 1,407,418 1,427,540
Depreciation and amortization 118,205 131,836 135,750 130,022
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 307,694
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 5,056,107 7,901,558 7,733,524 8,680,268
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (658,516) $ (1,338,336) $ (224,165) $ 10,242
===================================================================================================================================
Adjustment to net income (loss) to compute loss per common share:
Preferred stock dividends (23,148) (22,564) (24,903) (24,903)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (681,664) $ (1,360,900) $ (249,068) $ (14,661)
===================================================================================================================================
Loss per common share - basic and
diluted $ (0.02) $ (0.06) $ (0.01) $ (0.00)
===================================================================================================================================
Weighted-average number of common
shares outstanding - basic and diluted 30,113,428 24,666,084 23,569,733 23,458,463
===================================================================================================================================
F-24
EAUTOCLAIMS, INC.
QUARTERLY RESULTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, 2003 April 30, 2003 January 31, 2003 October 31, 2002
(unaudited) (unaudited) (unaudited) (unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue $8,673,501 $9,388,172 $7,834,573 $8,164,826
Expenses:
Claims processing charges 7,127,041 7,813,145 6,527,086 6,856,469
Selling, general and administrative 1,364,177 1,268,795 1,719,424 2,066,515
Depreciation and amortization 123,919 122,601 125,721 118,694
Amortization of beneficial conversion
feature on convertible debentures and
fair value of warrants issued in
connection with debentures 11,738
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 8,626,875 9,204,541 8,372,231 9,041,678
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 46,626 $ 183,631 $ (537,658) $ (876,852)
===================================================================================================================================
Adjustment to net income (loss) to compute income
(loss) per common share:
Preferred stock dividends (24,904) (24,212) (25,847) (26,333)
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to
common stock $ 21,722 $ 159,419 $ (563,505) $ (903,185)
===================================================================================================================================
Income (loss) per common share -
Basic & dilutive $ - $ 0.01 $ (0.03) $ (0.05)
===================================================================================================================================
Weighted-average number of common
shares outstanding
Basic 22,592,685 20,651,859 19,562,796 18,782,334
===================================================================================================================================
Diluted 29,896,097 22,022,522 19,562,796 18,782,334
===================================================================================================================================
F-25
Report of Independent Registered Public Accounting Firm on Financial
Statment Schedule
To the Board of Directors
eautoclaims, Inc.
The information included on Schedule II is the responsibility of management, and
although not considered necessary for a fair presentation of financial position,
results of operations, and cash flows is presented for additional analysis and
has been subjected to the auditing procedures applied in the audit of the basic
financial statements. In our opinion, the information included on Schedule II
relating to the years ended July 31, 2005, 2004, 2003, 2002 and 2001 is fairly
stated in all material respects, in relation to the basic financial statements
taken as a whole. Also, such schedule presents fairly the information set forth
therein in compliance with the applicable accounting regulations of the
Securities and Exchange Commission.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
--------------------
September 16, 2005
F-26
Schedule II
eAutoclaims, Inc.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Information relating to the allowance for doubtful accounts is as follows:
Beginning Ending
Balance Additions Deductions Balance
-------------------------------------------------------------------------
Year ended 7/31/2001 $ 34,077 $ 25,923 $ - $ 60,000
Year ended 7/31/2002 $ 60,000 $ 353,132 $ 13,132 $ 400,000
Year ended 7/31/2003 $ 400,000 $ 139,874 $ 297,874 $ 242,000
Year ended 7/31/2004 $ 242,000 $ 63,607 $ 144,607 $ 161,000
Year ended 7/31/2005 $ 161,000 $ 89,675 $ 42,675 $ 208,000
F-27