-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AtADd0R8j4orclVAc2dYTxDM7cXnfoWWSUwZFXsEL81KrrhL1njmZrkUvtWRK2Xf cN7OEXFx8BCh3QPlRvf65A== 0000889812-99-002031.txt : 19990701 0000889812-99-002031.hdr.sgml : 19990701 ACCESSION NUMBER: 0000889812-99-002031 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CLAIMS EVALUATION INC CENTRAL INDEX KEY: 0000774517 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 112601199 STATE OF INCORPORATION: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14807 FILM NUMBER: 99657044 BUSINESS ADDRESS: STREET 1: 375 N BROADWAY STREET 2: ONE JERICHO PLAZA CITY: JERICHO STATE: NY ZIP: 11753 BUSINESS PHONE: 5169388000 MAIL ADDRESS: STREET 1: ONE JERICHO PLAZA CITY: JERICHO STATE: NY ZIP: 11753 10-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File Number 0-14807 AMERICAN CLAIMS EVALUATION, INC. (Exact name of registrant as specified in its charter) New York 11-2601199 ------------------------------- ------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Jericho Plaza, Jericho, NY 11753 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 938-8000 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Shares, $.01 par value ("the Shares") (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes X No Indicate by check mark if disclosure of delinquent filers pursuant 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 or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] [Cover page 1 of 2 pages] As of June 9, 1999, the aggregate market value of the Registrant's voting stock held by non-affiliates was $3,142,106. For purposes of this calculation, shares of Common Stock held by directors, officers and stockholders whose ownership exceeds five percent of the Common Stock outstanding at June 9, 1999 were excluded. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the Registrant, or that such person is controlled by or under common control of the Registrant. As of June 9, 1999, there were 4,273,500 shares of the Registrant's $.01 par value common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The exhibits to the Company's Annual Report to its shareholders on Form 10-K for the year ended March 31, 1989 and the exhibits to the Company's Registration Statement on Form S-18 (File No. 2-99625-NY) and exhibits to the Company's Reports on Form 8-K dated September 14, 1993 and April 21, 1997 are hereby incorporated by reference. TOTAL PAGES IN THIS REPORT: 16 EXHIBIT INDEX: PAGE 14 [Cover page 2 of 2 pages] PART I ------ Item 1. Business - ----------------- American Claims Evaluation, Inc. (the "Company") was incorporated in the State of New York and commenced operations in April 1982. The Company provides a full range of vocational rehabilitation and disability management services through its wholly owned subsidiary, RPM Rehabilitation & Associates, Inc. Through April 1997, the Company was also in the business of verifying the accuracy of hospital bills submitted for payment to its clients. During the preceding years, the hospital bill audit ("HBA") industry as a whole suffered a decline in demand for its services. The Company experienced decreasing revenue and shrinking gross margins throughout this period. Management determined that the HBA division would no longer be able to sustain operating earnings and opted to sell the HBA division to one of its competitors. Accordingly, the HBA division was reflected as a discontinued operation at March 31, 1997 and, unless otherwise indicated, all of the information contained in this Item has been restated to delete data applicable to the HBA division. As defined in the agreement, the Company receives payments based upon net revenues generated throughout the period ending April 30, 2000. The total realized value of these payments will not be material. On September 14, 1993, the Company acquired 100% of the outstanding common stock of RPM Rehabilitation & Associates, Inc. ("RPM"), a Washington state corporation, pursuant to a stock purchase agreement between the Company and the shareholders of RPM. RPM, which commenced operations in 1986, provides rehabilitation services designed to maximize injured workers' abilities in order to reintegrate them into their respective communities. The functional capabilities of the injured workers referred to the Company vary. Comprehensive, in-house vocational evaluations are utilized to assess aptitudes, interests, values and abilities. Issues of medical restrictions, functional overlays, illiteracy and occupational diseases are assessed and factored into the development of a rehabilitation strategy. Specifically, in working with injured workers, the purpose and intent are to bring the injured worker back to work with the employer of injury as soon as medically feasible. The role of a vocational rehabilitation consultant is to convene the claimant, the employer of injury, and associated medical professionals to facilitate an expedited return to work, utilizing the principles of job accommodation, job modification and transitional work. In addition, the consultant can provide medical monitoring of the worker's progress through pain clinics and work hardening programs. Coordination of these services assist the worker in building strength and motivation to return to their employer and/or occupation at the time of injury. The Company's philosophy is that timely coordination of professional services, coupled with education and liaison with the employer community provides positive results for all parties concerned. Some early intervention activities include contacting employers at the time of injury to develop return to work strategies such as work restructuring and job modification, on site analysis, local labor market analysis and obtaining work histories. Feedback from clients' claims managers regarding the Company's responsive interventions indicates a trusting, team approach which allows for clear and accurate assessments that expedites the adjudication process, resulting in timely and successful case closure. RPM is currently approved as a "preferred provider" of vocational rehabilitation services to the Washington State Department of Labor & Industries ("L&I") under two separate contracts, which expire in August 1999. For the year ended March 31, 1999, the L&I contracts accounted for 69% of total revenues. Although RPM -3- has successfully renewed its contracts with L&I since its inception in 1986, there can be no assurances that these contracts will continue to be renewed in future periods. During the period from March 1999 through May 1999, RPM experienced a substantial decrease in new case referrals received from L&I. Under a new performance-based vocational referral program ("the referral program"), RPM's performance rating was deemed to be below L&I's required rating to receive new case referrals. The implementation and criteria used in the referral program are currently the subject of considerable debate and potential litigation amongst numerous vocational rehabilitation providers and L&I. Although updated ratings were released by L&I in May 1999, which reported a qualifying rating for RPM, it cannot be predicted whether or not RPM will continue to receive a favorable rating under the referral program as it currently exists. If the referral program is not modified or eliminated and RPM receives an unfavorable rating and/or if the Company=s contracts with L&I are not renewed in August 1999, it would have a material adverse effect on the consolidated results of operations. Marketing and Advertising - ------------------------- The President and the President of RPM are responsible for the Company's sales and marketing program. In addition to direct contact with leading health care payers, the Company advertises its services in trade magazines and exhibits at conventions and trade association meetings. Competition - ----------- The vocational rehabilitation field is highly competitive. The Company competes with a number of businesses that provide the same services. Many of these competitors have a longer operating history, greater financial resources, and provide other services to the insurance companies that the Company does not provide. Principal competitors in vocational rehabilitation include national firms, such as Concentra Managed Care, Inc. and Crawford & Company, as well as many regional firms. Quality of service, high caliber consultants, proper pricing and range of services offered are the principal factors that will enable the Company to compete effectively. Employees - --------- As of March 31, 1999, the Company had twenty-one full-time employees and one part-time employee. Of these full-time employees, three were in management, twelve were vocational rehabilitation consultants and six were in administration. Item 2. Properties - ------------------- The Company leases approximately 2,700 square feet of space at its executive office in Jericho, New York under a lease, as extended, which expires in November 2003. RPM leases approximately 3,900 square feet of office space in Spokane, Washington. This lease expires in June 2000. RPM also maintains an office in Moses Lake, Washington which is leased on a month-to-month basis. The Company believes that its existing facilities will be adequate to meet its present needs. However, should the Company require additional space it is assumed that such space will be available. -4- Item 3. Legal Proceedings - -------------------------- (a) The Company is not engaged in any material litigation. (b) Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of the year ended March 31, 1999. PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters - -------------------------------------------------------------------------- The Company's common shares (the "Shares") trade on the Nasdaq SmallCap Market under the symbol "AMCE." . The following table sets forth the range of high and low sales prices for the Company's Shares for each quarter during the period April 1, 1997 through March 31, 1999: High Low ---- --- Fiscal 1998: 4/01/97 - 6/30/97 1 7/16 1 3/16 7/01/97 - 9/30/97 2 1/2 1 3/16 10/01/97 - 12/31/97 2 13/32 1 3/8 1/01/98 - 3/31/98 1 15/16 1 5/8 Fiscal 1999: 4/01/98 - 6/30/98 2 5/8 1 3/8 7/01/98 - 9/30/98 2 11/16 1 7/8 10/01/98 - 12/31/98 2 1/8 1 5/8 1/01/99 - 3/31/99 2 1/4 1 11/16 The number of holders of the Company's Shares was approximately 582 on March 31, 1999, computed by the number of record holders, inclusive of holders for whom Shares are being held in the name of brokerage houses and clearing agencies. The Company has never paid a cash dividend and does not presently anticipate doing so in the foreseeable future, but expects to retain earnings, if any, for use in its business. -5- Item 6. Selected Financial Data - -------------------------------- The following table sets forth certain selected financial data with respect to the Company for each of the years in the five year period ended March 31, 1999. The information set forth below should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere herein.
Year Ended March, 31 ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ----- Summary Earnings Data (1): Revenues $ 1,169,436 $ 1,285,798 $ 1,219,890 $ 1,293,166 $ 1,304,212 Operating loss from continuing operations (475,224) (473,260) (581,431) (635,462) (840,886) Earnings (loss) from continuing operations before provision for (benefit from) income taxes 92,924 54,085 167,514 264,934 (422,285) Net earnings (loss) from continuing operations 59,924 40,085 94,514 156,934 (287,285) Discontinued operations (2) -- -- 210,767 580,704 351,782 Net earnings 59,924 40,085 305,281 737,638 64,497 Net earnings per share - basic Continuing operations $ .01 $ .01 $ .02 $ .04 $ (.07) Discontinued operations -- $ -- $ .05 $ .13 $ .09 Net earnings per share - basic $ .01 $ .01 $ .07 $ .17 $ .02 Net earnings per share - diluted Continuing operations $ .01 $ .01 $ .02 $ .04 $ (.07) Discontinued operations -- $ -- $ .05 $ .13 $ .09 Net earnings per share - diluted $ .01 $ .01 $ .07 $ .17 $ .02 Weighted average shares: Basic 4,273,500 4,223,500 4,147,042 4,250,000 4,250,000 Diluted 4,384,877 4,302,888 4,151,421 4,251,662 4,256,072 March, 31 ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ----- Balance Sheet Data: Working capital $ 8,120,621 $ 7,988,972 $ 7,607,725 $ 7,569,169 $ 5,550,420 Total assets 8,842,886 8,819,478 8,791,554 9,266,786 8,567,184 Stockholders' equity 8,644,188 8,584,264 8,294,179 8,404,270 7,680,720
- --------------- (1) There were no cash dividends paid per Common Share during this period. (2) See note (2) to the consolidated financial statements in this Annual Report on Form 10-K -6- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ------------------------------------------------------------------------ Summary of Operations - Fiscal years ended March 31, 1998, 1997 and 1996 - ------------------------------------------------------------------------ For the fiscal year ended March 31, 1999 ("Fiscal 1999"), revenue from vocational rehabilitation services totaled $1,169,436, a decrease of 9.0% from the $1,285,798 reported for the fiscal year ended March 31, 1998 ("Fiscal 1998"). Revenue for Fiscal 1998 had experienced a 5.4% increase from the $1,219,890 generated in the fiscal year ended March 31, 1997 ("Fiscal 1997"). During Fiscal 1999, approximately 69% of total revenues were generated providing vocational rehabilitation services to the Washington State Department of Labor & Industries ("L&I"). Beginning in March 1999 and through May 1999, RPM experienced a substantial decrease in new case referrals received from L&I. Under a new performance-based vocational referral program ("the referral program"), RPM's performance rating was deemed to be below L&I's required rating to receive new case referrals. The implementation and criteria used in the referral program are currently the subject of considerable debate and potential litigation amongst numerous vocational rehabilitation providers and L&I. Although updated ratings were released by L&I in May 1999, which reported a qualifying rating for RPM, it cannot be predicted whether or not RPM will continue to receive a favorable rating under the referral program as it currently exists. If the referral program is not modified or eliminated and RPM should receive an unfavorable rating and/or if the Company's contracts with L&I are not renewed in August 1999, there would be a material adverse effect on the consolidated results of operation. Management assesses the unamortized goodwill for potential impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Such goodwill totaled $468,811 at March 31, 1999. The cost of vocational rehabilitation services was 43.7% of revenues for Fiscal 1999 as compared to 43.5% of revenues for Fiscal 1998. During Fiscal 1997, the cost of vocational rehabilitation services was 42.7% of related revenues. Selling, general and administrative expenses were $1,133,580, $1,199,277, and $1,280,644 in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. It is anticipated that certain expenditures related to the Company's search for acquisition candidates will increase. Interest income decreased slightly to $452,181 during Fiscal 1999, as compared to interest income of $460,758 and $417,293 for Fiscal 1998 and Fiscal 1997, respectively. During Fiscal 1998, and 1997, the Company realized gains on the sales of marketable securities of $6,970 and $285,356, respectively. Miscellaneous income, including commission payments received based upon the net revenues of its sold hospital bill audit division, amounted to $115,967 in Fiscal 1999, as compared with ancillary revenues of $59,617 for Fiscal 1998 and $46,296 for Fiscal 1997. Liquidity and Capital Resources - ------------------------------- The Company's primary source of cash is internally generated funds. At March 31, 1999, the Company had working capital of $8,120,621 as compared to working capital of $7,988,972 at March 31, 1998. For Fiscal 1999, net cash provided by operating activities of continuing operations was $192,779. The primary sources of cash were net earnings from continuing operations of $59,924 and a $48,045 increase in income tax payable. -7- The Company continues its review of strategic alternatives for maximizing shareholder value. Potential acquisitions will be evaluated based on their merits within its current line of business, as well as other fields. Management believes that the Company has sufficient cash resources and working capital to meet its capital resource requirements for the foreseeable future. Year 2000 Computer Systems Compliance - ------------------------------------- This issue affects computer systems that have time-sensitive programs that may not properly recognize the Year 2000. Such programs may interpret the Year 2000 to mean some other year or not interpret it at all. If not corrected, those programs could cause date-related transaction failures. Assessment of both Company and client information systems is ongoing. The Company believes that with minor modifications to existing operating systems, the Year 2000 issue will not pose significant operational problems for its computer systems. Communications are in progress with all significant clients and vendors to determine the extent to which the Company's systems are vulnerable to such third parties' failure to remediate their own Year 2000 issues. The Company can provide no assurance that such clients and vendors will complete their respective Year 2000 solutions in time for the Company to fully test interfaces with them. Although the Company does not have a formal Year 2000 contingency plan, it will be responding to any disruption in service from a Year 2000 compliance problem in its systems and software or in a client's or vendor's system. There is no assurance, however, that the Company will be able to remedy any disruption in service, in particular any disruption from a client's or vendor's failure to be Year 2000 compliant. Based on current plans and efforts to date, management expects that there will be no material adverse effect on operations and the associated costs to be incurred are not considered to be material. There is no guarantee, however, that all problems will be foreseen and corrected. In the event that the Company was unable to complete any portion of its Year 2000 plans, the Company could be unable to receive new case referrals, invoice clients and collect payments electronically. Safe Harbor Statement under the Private Securities Litigation Act - ----------------------------------------------------------------- Except for the historical information contained herein, the matters discussed in this report on Form 10-K and the Company's other periodic reports and other documents incorporated by reference or incorporated herein as exhibits, may contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic and market conditions, the potential loss or termination of existing clients and contracts and the ability of the Company to successfully identify and thereafter consummate one or more acquisitions. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- None. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The financial statements and supplementary data required by this Item are set forth at the pages indicated in Item 14(a)(1). -8- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------ None. PART III -------- Item 10. Directors and Executive Officers of the Company - -------------------------------------------------------- The executive officers and directors of the Company are as follows: Name Age Position ---- --- -------- Gary Gelman 52 Chairman of the Board, President and Chief Executive Officer Gary J. Knauer 39 Chief Financial Officer, Treasurer and Secretary Edward M. Elkin, M.D. 60 Director Peter Gutmann 70 Director Gary Gelman, the founder of the Company, has been Chairman of the Board since July 1, 1985, and President, Chief Executive Officer and a director since inception. Mr. Gelman served as Treasurer from inception to October 1991. Since 1973, Mr. Gelman has also been Chief Executive Officer and a principal of American Para Professional Systems, Inc., which provides nurses who perform physical examinations of applicants for life and/or health insurance for insurance companies. He received a B.A. Degree from Queens College. Since 1996, Mr. Gelman has been Chairman of the Board of Directors for Misonix, Inc., a publicly traded company engaged in the design, development and manufacturing of ultrasonic devices including medical instruments. Gary J. Knauer joined the Company as its Controller in July 1991 and has served as Chief Financial Officer and Treasurer since October 1991 and as Secretary since March 1993. Before joining the Company, Mr. Knauer was employed from October 1984 to June 1991 by the accounting firm of KPMG Peat Marwick LLP. He is a Certified Public Accountant and holds a B.S. degree from the State University of New York at Binghamton. Since February 1994, Mr. Knauer also serves as Chief Financial Officer of American Para Professional Systems, Inc. Edward M. Elkin, M.D. has been a director of the Company since July 1, 1985. For more than the past five years, Dr. Elkin has been performing services relating to utilization review and quality assurance in hospitals for the New York State Department of Health. He is certified by the American Board of Pediatrics and the American Board of Quality Assurance and Utilization Review Physicians. He received his B.A. Degree from Harvard College and his M.D. Degree from New York University School of Medicine. Peter Gutmann has been a director of the Company since July 1, 1985. For more than the past twenty years, he has been a Professor of Economics and Finance at Baruch College, City University of New York and was Chairman of the Economics and Finance Department from 1971 to 1977. He received a B.A. from Williams -9- College, a B.S. from Massachusetts Institute of Technology, an M.A. from Columbia University and a Ph.D. degree from Harvard University. Item 11. Executive Compensation - -------------------------------- The following table sets forth all plan and non-plan compensation awarded to, earned or paid to the Company's Chief Executive Officer for each of the Company's last three fiscal years. No other executive officer had total annual salary and bonus which exceeded $100,000 during the Company's fiscal year ended March 31, 1999. SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards ------------------------------------- ------ Name and Other Annual All Other Principal Fiscal Salary Bonus Compensation Options Compensation Position Year ($) ($) ($) (1) (#) ($) - ----------- ------ ---------- ------- ------------ ------- ------------ Gary Gelman 1999 $244,311 - - - - Chairman, 1998 278,498 - - - - President 1997 397,772 - - - - and CEO
(1) The aggregate amount of all perquisites and other personal benefits paid to the Chief Executive Officer is not greater than either $50,000 or 10% of the total annual salary and bonus reported. Compensation Plans The following describes plans adopted by the Company pursuant to which cash or non-cash compensation was paid or distributed during the years ended March 31, 1999, 1998 and 1997 or pursuant to which such compensation may be distributed in the future, to the Chief Executive Officer. 401(k) Profit Sharing Plan - -------------------------- The Company sponsors a profit sharing plan covering all employees having reached the age of 21 with one or more years of service. The plan is qualified under Section 401(k) of the Internal Revenue Code of 1986 (the "Code"). Such plan requires the Company to match participants' contributions to the extent of 10% of such eligible contributions. Under the terms of the plan, there is a vesting requirement with respect to Company contributions, but employees will be fully vested in their own salary deferral contributions. Stock Option Plans - ------------------ In July 1985, the Company's Board of Directors adopted the 1985 Stock Option Plan (the "1985 Plan"). The 1985 Plan has expired, except as to options outstanding, and no additional options may be granted. The 1985 Plan -10- provided for the issuance of up to 400,000 Shares to full-time employees and directors of the Company. Incentive stock options were granted at the fair market value of the Company's Shares at the date of grant. The option terms were determined by the Board of Directors, but no options were granted with a term of more than ten years. The options are not transferable and not exercisable while any previously granted incentive stock options under the 1985 Plan are outstanding, and are exercisable only while the optionee is associated with the Company and for three months thereafter, with certain exceptions. In March 1991, the Board of Directors adopted the Company's 1991 Stock Option Plan (the "1991 Plan") and in October 1991, the shareholders of the Company ratified, approved and adopted the 1991 Plan. Under the 1991 Plan, a total of 400,000 Shares are reserved for issuance to employees, including directors and officers who may not be salaried employees. Both incentive and nonstatutory stock options may be granted under the 1991 Plan, at a price to be determined by the option committee, provided, however, that incentive stock options must be granted at an exercise price not less than the fair market value of the Shares on the date of the grant. Such exercise price may be payable in cash or by a combination of cash or Shares with the approval of the committee which administers the 1991 Plan. The term of any option may not exceed ten years from the date of grant. Conditions of the exercise of options are fixed by a committee appointed by the Board of Directors, consisting of not less than two nor more than five persons. Optionees under the 1991 Plan with incentive options may exercise up to 25 percent of such option granted for each year of service to the Company after the date of grant of the option, but the committee may accelerate the schedule of the time or times when an option may be exercised, provided that the fair market value of the securities subject to an incentive option may not exceed $100,000 at the first time such options become exercisable. The 1991 Plan also provides for stock appreciation rights, pursuant to which the optionee may surrender to the Company all or any part of an unexercised option and receive from the Company in exchange therefor Shares having an aggregate market value equal to the dollar amount obtained by multiplying the number of Shares subject to the surrendered options by the amount by which the market value per share at the time of such surrender exceeds the exercise price per share of the related option. The Company's obligation arising from an exercise of stock appreciation rights may also be settled by the payment of cash, or a combination of cash and Shares. On May 7, 1997, the Board of Directors adopted the 1997 Incentive Stock Option Plan (the "1997 Plan") covering 750,000 Shares reserved for issuance. The shareholders of the Company ratified and approved the 1997 Plan in September 1997. Under the 1997 Plan, either incentive stock options or nonstatutory options may be granted as an incentive to key employees (including directors and officers who are key employees), non-employee directors, independent contractors and consultants of the Company and to offer an additional inducement in obtaining the services of such individuals. The exercise price of the Shares under each option shall be determined by a fixed committee appointed by the Board of Directors; provided, however, that the exercise price shall not be less than the fair market value (as defined in the 1997 Plan) of the Shares subject to such option on the date of the grant. The term of each option pursuant to the Plan shall be such term as established by the committee appointed by the Board of Directors, in its sole discretion, provided that it shall be for a period not exceeding ten years from the date of the grant. On June 23, 1998, the Board of Directors granted options to purchase 20,000 Shares under the 1997 Plan at an exercise price of $2.25 to an executive officer. -11- Both the 1997 and 1991 Plans provide that the number of Shares subject thereto and the outstanding options and their exercise prices, are to be appropriately adjusted for mergers, consolidations, recapitalizations, stock dividends, stock splits or combinations of shares. The current option committee appointed by the Board of Directors to administer the Company's stock option plans consists of Messrs. Gelman, Gutmann and Elkin. The Board of Directors may at any time terminate or from time to time amend or alter any of the existing stock option plans. Aggregated Option/SAR Exercises in 1999 --------------------------------------- and FY-End Option/SAR Values ---------------------------- The following table summarizes the number and dollar value of unexercised stock options at March 31, 1999 for the Chief Executive Officer.
Value of Number of Unexercised Options at Options at Value FY-End (#) FY-End ($)(1) Shares Acquired Realized Exercisable/ Exercisable/ Name on Exercise(#) ($) Unexercisable Unexercisable - ----------------------------------- --------------- ------------ ------------- ------------- Gary Gelman, - - 400,000/- $150,000/- Chairman of the Board, President and CEO
(1) The closing price of the Company's Shares on March 31, 1999 as reported by the NASDAQ National Market System was $1.75 per Share. Employment Agreements - --------------------- Mr. Gelman's employment agreement with the Company provides for him to be employed as Chairman of the Board of Directors and Chief Executive Officer at an annual salary of $238,800. In addition, Mr. Gelman is entitled to participate in all employee benefit programs and other policies and programs of the Company. Mr. Gelman is not required to devote any specific number of hours to the business of the Company. He is subject to a non-competition and non-disclosure covenant for a period of three years following termination of employment with the Company. Director Compensation - --------------------- The Company's policy is to pay its non-employee directors a uniform fee of $400 for each Board of Director's meeting and/or Audit Committee meeting attended in person. -12- Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The following table and notes thereto sets forth information regarding the beneficial ownership of the Company's Shares as of June 4, 1999 by (i) each person known by the Company to be the beneficial owner of more than 5% of such voting security, (ii) each director of the Company and (iii) all officers and directors of the Company as a group. The percentages have been calculated by taking into account all Shares owned on the record date as well as all such Shares with respect to which such person has the right to acquire beneficial ownership at such date or within 60 days thereafter. Unless otherwise indicated all persons listed below have sole voting and sole investment power over the Shares owned. Amount and Nature Name and Address of Beneficial Percent of Voting of Beneficial Owner Ownership (1) (4) Securities (1) - ------------------- -------------------- ----------------- Gary Gelman (2) 2,696,400 (3) 56.1% Peter Gutmann (2) 80,000 (3) 1.7% Edward M. Elkin, M.D. (2) 60,200 1.3% Gary J. Knauer (2) 56,500 1.2% D.H. Blair Investment Corp. 423,824 (5) 8.8% All officers and directors as a group (four persons) 2,893,100 60.2% - ---------- (1) Based on a total of 4,273,500 Shares issued and outstanding, 530,500 Shares issuable upon the exercise of presently exercisable stock options by persons described in the preceding table. (2) Address is c/o the Company, One Jericho Plaza, Jericho, N.Y. 11753 (3) Includes 10,000 Shares and 4,000 Shares owned, respectively by the wives of Messrs. Gelman and Gutmann, as to which beneficial ownership is disclaimed by the respective reporting person. (4) Includes the presently exercisable portions of outstanding stock options (aggregating 530,500 Shares) which, in the case of Messrs. Gelman, Gutmann, Elkin, and Knauer are 400,000, 34,000, 40,000, and 56,500 Shares, respectively. (5) These Shares are owned of record by D.H. Blair Investment Banking Corp., whose address is 44 Wall Street, New York, New York ("Blair Investment") (385,824 Shares), by Mr. J. Morton Davis' wife (16,200 Shares) and by Rivkalex Corporation, a private corporation controlled by Mr. Davis's wife (21,800 Shares). Mr. Davis has reported Blair Investment's Shares as being beneficially owned by himself but has disclaimed ownership of the 21,800 Shares and 16,200 Shares described in this table owned by Rivkalex Corporation and by Mr. Davis's wife, respectively. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- None. -13- PART IV ------- Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K - -------------------------------------------------------------------------- (a) Documents filed as part of this report: 1. Financial Statements: -------------------- Independent Auditors' Report Consolidated Balance Sheets as of March 31, 1999 and 1998 Consolidated Statements of Earnings for the Three Year Period ended March 31, 1999 Consolidated Statements of Stockholders' Equity for the Three Year Period ended March 31, 1999 Consolidated Statements of Cash Flows for the Three Year Period ended March 31, 1999 Notes to Consolidated Financial Statements Financial Statement Schedules ----------------------------- Financial statement schedules have been omitted because the required information is inapplicable or because the information is presented in the financial statements or related notes. 2. 23 Consent of Independent Auditors 27 Financial Data Schedule 3. Exhibits and Index: ------------------- The following were filed as exhibits to the Company's Annual Report on Form 10-K for its year ended March 31, 1998 and are incorporated by reference herein: 1. Tenth Amendment dated May 1997 to Employment Agreement between the Company and Gary Gelman. 2. Lease Extension and Modification Agreement dated February 24, 1998 between Chasco Company as landlord and the Company as tenant with respect to the premises at One Jericho Plaza, Jericho, New York. The following were filed as exhibits to the Company's Annual Report on Form 10-K for its year ended March 31, 1996 and are incorporated by reference herein: 1. Ninth Amendment dated February 13, 1996 to Employment Agreement between the Company and Gary Gelman. -14- The following were filed as exhibits to the Company's Annual Report on Form 10-K for its year ended March 31, 1995 and are incorporated by reference herein: 1. Eighth Amendment dated March 2, 1995 to Employment Agreement between the Company and Gary Gelman. 2. Lease dated March 10, 1995 between Gateway Associates as landlord and RPM Rehabilitation & Associates, Inc. as tenant with respect to premises at 901 East Second Avenue, Spokane, Washington. The following were filed as exhibits to the Company's Annual Report on Form 10-K for its year ended March 31, 1994 and are incorporated by reference herein: 1. Seventh Amendment dated March 9, 1994 to Employment Agreement between the Company and Gary Gelman. 2. Lease dated August 20, 1993 between Chasco Company as landlord and the Company as tenant with respect to premises at One Jericho Plaza, Jericho, New York. The following were filed as exhibits to the Company's Annual Report on Form 10-K for its year ended March 31, 1989 and are incorporated by reference herein: 1. Amendment dated March 1, 1989 to Employment Agreement between the Company and Gary Gelman. 2. Certificate of Amendment of Certificate of Incorporation of the Company filed October 19, 1987. The following were filed as an Exhibit to the Company's Registration Statement on Form S-18 (File No. 2-99625-NY) and are incorporated by reference herein: 3.1 Certificate of Incorporation of the Company as amended. 10.1 Employment Agreement dated February 1, 1986 between the Company and Gary Gelman. 10.3 1985 Stock Option Plan. The following were filed as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-40200) and are incorporated by reference herein: 3.2 By-Laws of the Company. 10.1 Fourth Amendment to Employment Agreement dated as of February 27, 1991 between the Company and Gary Gelman. 10.5 1991 Stock Option Plan Exhibits to the Company's reports on Form 8-K dated September 14, 1993 and April 21, 1997 are incorporated by reference herein. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended March 31, 1999. -15- 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. AMERICAN CLAIMS EVALUATION, INC. By: /s/ Gary Gelman -------------------------------- Gary Gelman Chairman of the Board, President and Chief Executive Officer DATE: June 23, 1999 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: SIGNATURES TITLE DATE - ---------- ----- ---- /s/ Gary Gelman Chairman of the Board, June 23, 1999 - ------------------------- President and Chief Gary Gelman Executive Officer (Principal Executive Officer) /s/ Gary J. Knauer Chief Financial Officer, June 23, 1999 - ------------------------- Treasurer (Principal Financial Gary J. Knauer Officer) and Secretary /s/ Edward M. Elkin Director June 23, 1999 - ------------------------- Edward M. Elkin, M.D. /s/ Peter Gutmann Director June 23, 1999 - ------------------------- Peter Gutmann -16- AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Table of Contents
Page Independent Auditors' Report 1 Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 1999 and 1998 2 Consolidated Statements of Earnings for the years ended March 31, 1999, 1998 and 1997 3 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999, 1998 and 1997 4 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 6 Notes to Consolidated Financial Statements 7
Financial statement schedules have been omitted as the required information is inapplicable or the information is presented in the related notes to the consolidated financial statements. [KPMG Letterhead] Independent Auditors' Report The Board of Directors American Claims Evaluation, Inc.: We have audited the accompanying consolidated balance sheets of American Claims Evaluation, Inc. and subsidiary as of March 31, 1999 and 1998 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Claims Evaluation, Inc. and subsidiary, as of March 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ KPMG LLP --------------------------- KPMG LLP Melville, New York June 7, 1999 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Balance Sheets March 31, 1999 and 1998
Assets 1999 1998 --------------- -------------- Cash and cash equivalents $ 8,209,421 8,105,960 Accounts receivable (net of allowance for doubtful accounts of $1,000 in 1999 and 1998) 88,991 90,478 Prepaid expenses 19,380 27,748 Deferred income taxes 1,527 - ------------- ------------- Total current assets 8,319,319 8,224,186 Property and equipment, net 54,756 94,056 Excess cost over fair value of net assets acquired, net of accumulated amortization of $179,689 and $147,264 in 1999 and 1998, respectively 468,811 501,236 ------------- ------------- $ 8,842,886 8,819,478 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 50,122 42,775 Accrued expenses 97,801 101,032 Current liabilities of discontinued operations - 86,204 Income taxes payable 50,775 2,730 Deferred income taxes - 2,473 ------------- ------------- Total current liabilities 198,698 235,214 ------------- ------------- Commitments Stockholders' equity: Common stock, $.01 par value -10,000,000 shares authorized; 4,450,000 shares issued; 4,273,500 shares outstanding 44,500 44,500 Additional paid-in capital 3,515,699 3,515,699 Retained earnings 5,382,206 5,322,282 ------------- ------------- 8,942,405 8,882,481 Treasury shares, at cost, 176,500 shares (298,217) (298,217) ------------- ------------- Total stockholders' equity 8,644,188 8,584,264 ------------- ------------- $ 8,842,886 8,819,478 ============= =============
See accompanying notes to consolidated financial statements. 2 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Statements of Earnings Years ended March 31, 1999, 1998 and 1997
1999 1998 1997 ------------- ----------- ----------- Revenues $ 1,169,436 1,285,798 1,219,890 Cost of services 511,080 559,781 520,677 ----------- ----------- ----------- Gross margin 658,356 726,017 699,213 Selling, general and administrative expenses 1,133,580 1,199,277 1,280,644 ----------- ----------- ----------- Operating loss from continuing operations (475,224) (473,260) (581,431) Other income: Interest income 452,181 460,758 417,293 Gain on sale of marketable securities - 6,970 285,356 Miscellaneous income 115,967 59,617 46,296 ----------- ----------- ----------- Earnings from continuing operations before provision for income taxes 92,924 54,085 167,514 Provision for income taxes 33,000 14,000 73,000 ----------- ----------- ----------- Net earnings from continuing operations 59,924 40,085 94,514 Discontinued operations (note 2): Earnings from operations, net of taxes of $151,000 - - 271,767 Provision for loss on disposal, net of taxes - - (61,000) ----------- ----------- ----------- Net earnings $ 59,924 40,085 305,281 =========== =========== =========== Net earnings per share - basic: From continuing operations 0.01 0.01 0.02 From discontinued operations - - 0.05 ----------- ----------- ----------- Net earnings per share $ 0.01 0.01 0.07 =========== =========== =========== Net earnings per share - diluted: From continuing operations 0.01 0.01 0.02 From discontinued operations - - 0.05 ----------- ----------- ----------- Net earnings per share $ 0.01 0.01 0.07 =========== =========== =========== Weighted average shares - basic 4,273,500 4,223,500 4,147,042 =========== =========== =========== Weighted average shares - diluted 4,384,877 4,302,888 4,151,421 =========== =========== ===========
See accompanying notes to consolidated financial statements. 3 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended March 31, 1999, 1998 and 1997
Unrealized Common stock Additional gain on ------------------------------- paid-in marketable Shares Par value capital securities ------------- ------------ ------------ ------------- Balance at March 31, 1996 4,250,000 $ 42,500 3,267,699 117,155 Reduction in unrealized gain on marketable securities - - - (117,155) Purchase of common stock - - - - Net earnings - - - - ------------- ------------ ------------ ------------- Balance at March 31, 1997 4,250,000 42,500 3,267,699 - Issuance of common stock 200,000 2,000 248,000 - Net earnings - - - - ------------- ------------ ------------ ------------- Balance at March 31, 1998 4,450,000 44,500 3,515,699 - Net earnings - - - - ------------- ------------ ------------ ------------- Balance at March 31, 1999 4,450,000 $ 44,500 3,515,699 - ============= ============ ============ ============= Treasury stock Total Retained -------------------------- stockholders' earnings Shares Amount equity ------------ --------- ----------- ------------ Balance at March 31, 1996 4,976,916 - $ - 8,404,270 Reduction in unrealized gain on marketable securities - - - (117,155) Purchase of common stock - 176,500 (298,217) (298,217) Net earnings 305,281 - - 305,281 ------------ --------- ----------- ------------ Balance at March 31, 1997 5,282,197 176,500 (298,217) 8,294,179 Issuance of common stock - - - 250,000 Net earnings 40,085 - - 40,085 ------------ --------- ----------- ------------ Balance at March 31, 1998 5,322,282 176,500 (298,217) 8,584,264 Net earnings 59,924 - - 59,924 ------------ --------- ----------- ------------ Balance at March 31, 1999 5,382,206 176,500 $ (298,217) 8,644,188 ============ ========= =========== ============
See accompanying notes to consolidated financial statements. 5 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended March 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ----------- ----------- Cash flows from operating activities: Net earnings from continuing operations $ 59,924 40,085 94,514 ------------ ----------- ----------- Adjustments to reconcile net earnings to net cash provided by (used in) continuing operations: Depreciation and amortization 74,339 100,020 128,647 Gain on sale of marketable securities - (6,970) (285,356) Deferred income taxes (4,000) 33,000 (49,000) Changes in assets and liabilities: Accounts receivable 1,487 29,402 (20,238) Prepaid expenses 8,368 (3,016) (3,712) Accounts payable 7,347 21,476 1,027 Accrued expenses (3,231) 6,958 1,340 Income taxes payable 48,045 (8,274) (131,699) ------------ ----------- ----------- Total adjustments 132,355 172,596 (358,991) ------------ ----------- ----------- Net cash provided by (used in) operating activities of continuing operations 192,279 212,681 (264,477) ------------ ----------- ----------- Net cash flows provided by (used in) discontinued operations (86,204) 35,453 496,934 ------------ ----------- ----------- Cash flows from investing activities: Purchases of marketable securities - (14,334) (118,768) Proceeds from sales of marketable securities - 21,304 591,116 Capital expenditures, net (2,614) (47,761) - ------------ ----------- ----------- Net cash (used in) provided by investing activities (2,614) (40,791) 472,348 ------------ ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock - 250,000 - Purchase of treasury stock - - (298,217) ------------ ----------- ----------- Net cash provided by (used in) financing activities - 250,000 (298,217) ------------ ----------- ----------- Net increase in cash and cash equivalents 103,461 457,343 406,588 Cash and cash equivalents - beginning of year 8,105,960 7,648,617 7,242,029 ------------ ----------- ----------- Cash and cash equivalents - end of year $ 8,209,421 8,105,960 7,648,617 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $ 10,511 10,672 366,279 ============ ============ ============
See accompanying notes to consolidated financial statements. 6 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 1999 and 1998 (1) Summary of Significant Accounting Policies (a) Nature of Business American Claims Evaluation, Inc. (the Company) operates in a single segment that provides a full range of vocational rehabilitation and disability management services through its wholly-owned subsidiary, RPM Rehabilitation & Associates, Inc. (b) Principles of Consolidation The Company's financial statements are prepared on a consolidated basis and include the Company and its wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation. (c) Revenue Recognition Revenue for vocational rehabilitation services are recognized when the related services are provided. (d) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (e) Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. Cash equivalents are comprised of short-term commercial paper of $7,954,166 and $7,730,909 as of March 31, 1999 and 1998, respectively. (f) Property and Equipment Property and equipment is stated at cost, less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. (g) Goodwill The excess of cost over fair value of net assets acquired (goodwill) is being amortized on a straight-line basis over a period of twenty years. Amortization expense amounted to $32,425 in each of the years ended March 31, 1999, 1998 and 1997 and is included in selling, general and administrative expenses in the consolidated statements of earnings. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. 7 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 1999 and 1998 (h) Income Taxes The Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized based on the temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted tax rates expected to be in effect when such amounts are realized and settled. (i) Earnings per Share SFAS No. 128, Earnings per Share, which became effective for the Company for the year ended March 31, 1998, requires presentation of two calculations of earnings per share. Basic earnings per share equals net earnings divided by the weighted average common shares outstanding during the period. Diluted earnings per share equals net earnings divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents. Common stock equivalents are shares assumed to be issued if outstanding stock options were exercised. The Company has restated all prior period amounts to reflect these calculations. A reconciliation between the numerators and denominators of the basic and diluted earnings per common share is as follows:
For the years ended March 31, 1999 1998 1997 ------------- ------------- -------- Net earnings from continuing operations (numerator for net earnings from continuing operations per common share, basic and diluted) $ 59,924 40,085 94,514 Discontinued operations - - 210,767 ------------ ------------ ----------- Net earnings (numerator for net earnings per common share, basic and diluted) $ 59,924 40,085 305,281 ============ ============ =========== Weighted average common shares (denominator for net earnings from continuing operations and discontinued operations per common share, basic) 4,273,500 4,223,500 4,147,042 Effect of dilutive securities: Employee stock options 111,377 79,388 4,379 ------------ ------------ ----------- Weighted average common and potential common shares outstanding (denominator for net earnings from continuing operations and discontinued operations per common share, diluted) $ 4,384,877 4,302,888 4,151,421 ============ ============ ===========
(Continued) 8 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 1999 and 1998
For the years ended March 31, 1999 1998 1997 --------- ---------- -------- Net earnings per share - basic: From continuing operations $ 0.01 0.01 0.02 From discontinued operations - - 0.05 --------- --------- -------- Net earnings per share $ 0.01 0.01 0.07 ========= ========= ======== Net earnings per share - diluted: From continuing operations 0.01 0.01 0.02 From discontinued operations - - 0.05 --------- -------- -------- Net earnings per share $ 0.01 0.01 0.07 ========= ========= ========
Employee stock options totaling 206,500, 250,500 and 200,500 for the years ended March 31, 1999, 1998 and 1997, respectively, were not included in the net earnings per share calculation because their effect would have been anti-dilutive. (2) Discontinued Operations In April 1997, the Company sold its hospital bill audit division. As defined in the agreement, the Company is entitled to an ongoing stream of payments based upon the net revenues generated over the period ending April 30, 2000. Management did not expect that these payments would be material. Such payments amounted to $64,422 and $46,269 in 1999 and 1998, respectively, and are included in miscellaneous income. As of March 31, 1997, the Company's consolidated financial statements were reclassified to account for the sale of the hospital bill audit division as discontinued operations. Accordingly, the net sales, costs and expenses, assets and liabilities, and cash flows associated with the hospital bill audit operations were excluded from the respective captions in the accompanying consolidated balance sheets, statements of earnings and statements of cash flows. Revenues of the discontinued operations were $1,846,365 for the fiscal year ended March 31, 1997. Liabilities of discontinued operations consisted of accounts payable and accrued expenses as of March 31, 1998, which were paid during the year ended March 31, 1999. (3) Property and Equipment Property and equipment at March 31, 1999 and 1998 consist of the following:
Estimated 1999 1998 useful life ---------- ---------- ----------- Equipment $ 290,214 392,860 5 years Furniture and fixtures 72,366 107,418 5 to 10 years ---------- --------- 362,580 500,278 Less accumulated depreciation 307,824 406,222 ---------- --------- $ 54,756 94,056 ========== =========
(Continued) 9 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 1999 and 1998 Depreciation expense for the years ended March 31, 1999, 1998 and 1997 amounted to $41,914, $67,595 and $53,157, respectively. (4) Income Taxes Income tax expense (benefit) for the years ended March 31, 1999, 1998 and 1997 is comprised of the following: Year ended March 31, 1999 1998 1997 --------- --------- -------- Current: Federal $ 36,000 22,000 75,000 State 1,000 (2,000) 8,000 --------- --------- -------- 37,000 20,000 83,000 --------- --------- -------- Deferred: Federal (4,000) (6,000) (10,000) --------- --------- -------- $ 33,000 14,000 73,000 ========= ========= ======== The actual provision for (benefit from) income taxes differed from that which would have resulted when applying the statutory Federal income tax rate as a result of the following items:
Year ended March 31, ------------------------------------------------------------------- 1999 1998 1997 ------------------- ----------------- --------------- Expected income tax provision at the statutory Federal tax rate $ 32,000 34% $ 18,000 34% $ 57,000 34% State taxes, net of Federal tax benefit - - (1,000) (2) 5,000 3 Amortization of goodwill 11,000 12 11,000 20 11,000 7 Benefit of graduated rates (11,000) (11) (12,000) (22) - - Other, net 1,000 1 (2,000) (4) - - ---------- ---- --------- --- -------- -- Actual income tax provision $ 33,000 36% $ 14,000 26% $ 73,000 44% ========== ==== ========== == ======== ==
The tax effects of temporary differences that give rise to the deferred tax assets or liabilities at March 31, 1999 and 1998 are as follows: 1999 1998 ------- ------- Deferred tax assets: Depreciation $ 1,527 - ======= ======= Deferred tax liabilities: Depreciation $ - 2,473 ======= ======= 10 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 1999 and 1998 (5) Major Customer The Company has one customer who accounted for 69%, 77% and 84% of revenues for the years ended March 31, 1999, 1998 and 1997, respectively. Services are performed by the Company for this customer under two separate contracts which expire in August 1999. The renewal of these contracts can not be assured. The Company also has a customer who accounted for 11% of revenues for the year ended March 31, 1999. (6) Stock Options The Company has three stock option plans, the 1985 Stock Option Plan (1985 Plan), the 1991 Stock Option Plan (1991 Plan) and the 1997 Incentive Stock Option Plan (1997 Plan). The 1985 Plan, which provided for the granting of 400,000 stock options of the Company's common stock, expired except as to options outstanding. The 1991 Plan provides for the granting of 400,000 stock options, which may be incentive or non-qualified stock options, to directors and employees. The 1991 Plan also provides for stock appreciation rights. No such rights have been granted as of March 31, 1999. During May 1997, the Company adopted the 1997 Incentive Stock Option Plan. The 1997 Plan provides for options to be granted to key employees, officers, directors, independent contractors and consultants of the Company, for the purchase of up to 750,000 shares. Under the plans, options may be granted at prices not less than the fair market value on the date the option is granted. Options become exercisable as determined at the date of grant by a committee of the Board of Directors. Options expire ten years after the date of grant unless an earlier expiration date is set at the time of grant. The vesting schedules for the options are from zero to five years. Changes in the options outstanding during the fiscal years 1999, 1998 and 1997 are summarized in the following table:
Weighted No. of average shares exercise price --------- -------------- Balance - March 31, 1996 202,500 2.48 Fiscal 1997: Options granted 65,000 2.25 Options terminated (3,000) 2.33 --------- ---- Balance - March 31, 1997 264,500 2.29 Fiscal 1998: Options granted 300,000 1.25 Options terminated (14,000) 3.05 -------- ---- Balance - March 31, 1998 550,500 1.70 Fiscal 1999: Options granted 20,000 2.25 -------- ---- Balance - March 31, 1999 570,500 1.72 ======= ====
(Continued) 11 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 1999 and 1998 As of March 31, 1999, 6,000 and 395,000 options were available for grant under the 1991 Plan and 1997 Plan, respectively. The following table sets forth the exercise prices, the number of options outstanding and exercisable, and the remaining contractual lives of the Company's stock options at March 31, 1999:
Weighted average exercise Weighted price of average Number of options exercisable contractual Exercise price Outstanding Exercisable options life remaining -------------- ----------- ----------- ----------- -------------- $1.25 300,000 300,000 1.25 8 years $1.82 - $2.50 270,500 232,375 2.24 5.4 years
The Company has adopted the "disclosure only" provisions of SFAS No.123, Accounting for Stock-Based Compensation, and will continue to use the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No.25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized for the Company's stock option plans. Had compensation expense for the Company's stock option plans been determined based on the fair value at the grant date for awards in fiscal 1999, 1998 and 1997 consistent with the provisions of SFAS No.123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 ---------- ---------- --------- Net earnings (loss): As reported $ 59,924 40,085 305,281 Pro forma 42,339 (201,575) 241,458 Basic net earnings (loss) per share: As reported .01 .01 .07 Pro forma .01 (.05) .06 Diluted net earnings (loss) per share: As reported .01 .01 .07 Pro forma .01 (.05) .06
The weighted average fair value per stock option granted was $1.03, $.76 and $1.39 for those options granted in the years ended March 31, 1999, 1998 and 1997, respectively. The Company estimated the fair values using the Black-Scholes option pricing model, using the following assumptions:
1999 1998 1997 ---------- ---------- ------- Expected dividend yield - - - Risk-free interest rate 6.00% 6.00% 6.00% Expected stock price volatility 55.00% 50.00% 95.00% Expected option lives (years) 7.5 7.5 7.5
(Continued) 12 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 1999 and 1998 The pro forma effects on net earnings and net earnings per share for the years ended March 31, 1999, 1998 and 1997 may not be representative of the pro forma effects in future years since compensation cost is allocated on a straight-line basis over the vesting periods of the grants, which extend beyond the reported years. (7) Profit Sharing Plan The Company sponsors a 401(k) profit sharing plan covering all employees with one or more years of service. Under the plan, participants can contribute up to 12% of their salaries as defined, and the Company is required to match participants' contributions to the extent of 10% of such contributions. Participants are fully vested to the extent of their own salary deferral contributions and become vested in Company contributions over a six-year period in accordance with the terms of the plan. The 401(k) profit sharing plan expense was $2,917, $6,168 and $6,806 for the years ended March 31, 1999, 1998 and 1997, respectively. (8) Financial Instruments The carrying value of the Company's financial instruments is deemed to approximate fair value due to the short-term nature of these instruments. (9) Commitments Rental expense under non-cancelable operating leases for office space amounted to $132,990, $206,154 and $189,039 for the years ended March 31, 1999, 1998 and 1997, respectively. Minimum lease payments under non-cancelable operating leases, exclusive of future escalation charges, as of March 31, 1999 are as follows: 2000 $ 124,000 2001 82,000 2002 68,000 2003 68,000 2004 45,000 ------------- Total minimum lease payments $ 387,000 ============= 13 EX-23 2 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 ---------- KPMG LLP CONSENT OF INDEPENDENT AUDITORS The Board of Directors American Claims Evaluation, Inc.: We consent to incorporation by reference in the registration statement (No. 333-39071) on Form S-8 of American Claims Evaluation, Inc. of our report dated June 7, 1999, relating to the consolidated balance sheets of American Claims Evaluation, Inc. and subsidiary as of March 31, 1999 and 1998, the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended March 31, 1999 which report appears in the March 31, 1999 annual report on Form 10-K of American Claims Evaluation, Inc. KPMG LLP Melville, New York June 25, 1999 EX-27 3 FDS
5 The schedule contains summary financial information extracted from the consolidated financial statements and is qualified in its entirety by reference to such financial statements. YEAR MAR-31-1999 MAR-31-1999 8,209,421 0 89,991 1,000 0 8,319,319 362,580 307,824 8,842,886 198,698 0 44,500 0 0 3,515,699 8,842,886 1,169,436 1,169,436 511,080 511,080 1,133,580 0 0 92,924 33,000 59,924 0 0 0 59,924 0.01 0.01
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