10KSB 1 c24838_10ksb.txt FORM 10KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 0-14807 AMERICAN CLAIMS EVALUATION, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) New York 11-2601199 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Jericho Plaza, Jericho, NY 11753 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (516) 938-8000 Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Shares, $.01 par value (Title of class) Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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: Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for the fiscal year ending March 31, 2002 were $1,260,913. As of June 14, 2002, there were 4,259,800 shares of the issuer's common stock, $.01 par value, outstanding with an aggregate market value of $2,678,224 held by non-affiliates. For purposes of this disclosure, shares of common stock held by directors, officers and stockholders whose ownership exceeds five percent of the common stock outstanding 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 issuer, or that such person is controlled by or under common control of the issuer. DOCUMENTS INCORPORATED BY REFERENCE None. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] PART I ITEM 1. DESCRIPTION OF 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 designed to maximize injured workers' abilities in order to reintegrate them into their respective communities through its wholly-owned subsidiary, RPM Rehabilitation & Associates, Inc. ("RPM"). 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 assists 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 expedite the adjudication process, resulting in timely and successful case closure. RPM was approved as a preferred provider of vocational rehabilitation services to the Washington State Department of Labor & Industries ("L&I") under two separate contracts, which expired on May 31, 2001. Effective June 1, 2001, L&I eliminated the process of awarding contracts to qualifying firms in favor of a new system which created the opportunity for any firm or individual meeting L&I's requirements to provide services. To be eligible under this new system, a provider must only meet certain business practice standards and consultant credentialing criteria without the necessity of being awarded a contract. All RPM consultants have been transitioned into the new system and have until December 1, 2006 to meet the credentialing standards. The Company has instituted a program to assure that all consultants not currently meeting L&I's credentialing requirements will do so by the imposed deadline. For the year ended March 31, 2002, L&I accounted for 55% of the Company's total revenues. Although revenue generated on services provided to L&I decreased slightly in the current fiscal year, the Company did not experience any material changes in the volume of cases referred to it or its consultants as a direct result of the new system. MARKETING AND ADVERTISING The President of the Company 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. 2 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, 2002, the Company had nineteen full-time employees and three part-time employees. Of these full-time employees, three were in management, ten were vocational rehabilitation consultants and six were in administration. ITEM 2. DESCRIPTION OF PROPERTY. 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 3,300 square feet of office space in Spokane, Washington under a lease, as extended, which expires in June 2005. 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 are adequate to meet its present needs. However, should the Company require additional space it is assumed that such space will be available. ITEM 3. LEGAL PROCEEDINGS. The Company is not engaged in any material litigation. 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, 2002. 3 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common shares, par value $.01 (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, 2000 through March 31, 2002: HIGH LOW ---- --- Fiscal 2001: 4/01/00 - 6/30/00 3.25 1.88 7/01/00 - 9/30/00 2.97 1.81 10/01/00 - 12/31/00 2.88 1.56 1/01/01 - 3/31/01 3.03 1.81 Fiscal 2002: 4/01/01 - 6/30/01 2.40 1.75 7/01/01 - 9/30/01 2.20 1.36 10/01/01 - 12/31/01 1.75 1.33 1/01/02 - 3/31/02 1.60 1.29 The number of holders of the Company's Shares was approximately 724 on March 31, 2002, 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. 4 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. RESULTS OF OPERATIONS For the fiscal year ended March 31, 2002 ("Fiscal 2002"), revenue from vocational rehabilitation services totaled $1,260,913, an increase of 9.5% from the $1,151,006 reported for the fiscal year ended March 31, 2001 ("Fiscal 2001"). This increase was a result of an increase in the volume of cases referred to the Company by its existing self-insured clients and the addition of case management services to the Company's service offerings. Revenue for Fiscal 2001 had experienced a 3.8% increase from the $1,109,286 generated in the fiscal year ended March 31, 2000. During Fiscal 2002, approximately 55% of total revenues were generated providing vocational rehabilitation services to the Washington State Department of Labor & Industries ("L&I") under two separate contracts which expired on May 31, 2001. Effective June 1, 2001, L&I eliminated the process of awarding contracts to qualifying firms in favor of a new system which created the opportunity for any firm or individual meeting L&I's requirements to provide services. To be eligible under this new system, a provider must only meet certain business practice standards and consultant credentialing criteria without the necessity of being awarded a contract. Although revenue generated on services provided to L&I decreased slightly in the current fiscal year, the Company did not experience any material changes in the volume of cases referred to it or its consultants as a direct result of the new system. The cost of vocational rehabilitation services was 49.1% of revenues for Fiscal 2002 as compared to 47.5% of revenues for Fiscal 2001. The Company experienced an increase in the cost of vocational rehabilitation services as a result of fees paid to the vocational rehabilitation consultants for self-insured cases and for case management services which are higher than fees paid on work performed for L&I. Selling, general and administrative expenses were $1,147,695 and $1,091,651 in Fiscal 2002 and Fiscal 2001, respectively. Interest income decreased to $265,040 during Fiscal 2002, as compared to interest income of $469,513 for Fiscal 2001 as a direct result of substantial declines in prevailing market interest rates. During Fiscal 2001, the Company had recorded an impairment charge of $916,967 on its investment in IVC Industries, Inc. ("IVCO") common stock for which the decline in market value was deemed to be other than temporary. During Fiscal 2002, IVCO and Inverness Medical Innovations, Inc. consummated a definitive merger agreement providing for the merger of a wholly-owned subsidiary of Inverness with and into IVCO. The Company received $2.50 in cash for each share owned on the merge date and ceased to own any shares of IVCO common stock. Accordingly, the Company recorded a gain on the sale of marketable securities of $450,069 ($0.11 net earnings per share) during Fiscal 2002 based on the adjusted cost after the impairment charge. The Company recognized an income tax benefit of $94,000 for the current year as a result of the utilization of Federal tax operating loss carrybacks related to operating losses generated in Fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of cash is internally generated funds. At March 31, 2002, the Company had working capital of $7,511,469 as compared to working capital of $7,100,642 at March 31, 2001. For Fiscal 2002, net cash used in operating activities was $164,888. Cash flows provided by investing activities totaled $715,395, consisting of $750,155 provided by the proceeds from the sale of marketable securities offset by $34,760 in capital expenditures. 5 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. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that the amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets with finite lives, other than goodwill, be amortized over their estimated useful lives. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company on April 1, 2002. Since the Company did not enter into any business combinations subsequent to June 30, 2001, adoption of SFAS No. 141 did not have an impact on the Company's consolidated financial statements. During fiscal 2003, the Company will perform the first of the required SFAS No. 142 impairment tests of goodwill and indefinite lived intangible assets as of April 1, 2002. The Company has not determined the effect, if any, that the adoption of SFAS No. 142 will have on the Company's consolidated financial statements. CRITICAL ACCOUNTING POLICIES The Company makes estimates and assumptions in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. Note 1 of the notes to the consolidated financial statements includes a summary of the significant accounting policies used in the preparation of the accompanying consolidated financial statements and addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results of operations and which require management's most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. FORWARD LOOKING STATEMENTS Except for the historical information contained herein, the matters discussed in this report on Form 10-KSB 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 7. FINANCIAL STATEMENTS. The financial statements required by this Item are set forth at the pages indicated in Item 13 on page 12 of this report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 6 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The executive officers and directors of the Company are as follows: NAME AGE POSITION ---- --- -------- Gary Gelman 55 Chairman of the Board, President and Chief Executive Officer Gary J. Knauer 42 Chief Financial Officer, Treasurer and Secretary Edward M. Elkin, M.D. 63 Director Peter Gutmann 73 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. from Queens College. Since 1996, Mr. Gelman has been Chairman of the Board of Directors of 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, he was employed from October 1984 to June 1991 by the accounting firm of KPMG LLP. He is a Certified Public Accountant and holds a B.S. 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. from Harvard College and his M.D. 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 College, a B.S. from Massachusetts Institute of Technology, an M.A. from Columbia University and a PhD. from Harvard University. 7 Compliance with Section 16(a) of the Securities Exchange Act of 1934 Under Federal securities laws, the Company's directors, its executive officers and any person holding more than 10% of the Company's Shares are required to report their ownership of the Company's Shares and any changes in that ownership to the Securities and Exchange Commission ("SEC") on the SEC's Forms 3, 4 and 5. Based on its review of the copies of such forms it has received, the Company believes that all officers, directors and owners of greater than 10% of the Company's equity securities complied with all filing requirements applicable to them with respect to transactions during Fiscal 2002. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth all compensation paid or accrued to the Company's Chief Executive Officer and another executive officer for each of the Company's last three fiscal years. No other executive officer had total annual salary and bonus which exceeded $100,000 during the fiscal year ended March 31, 2002. SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards --------------------------------------- ------------- Name and Other Annual All Other Principal Fiscal Salary Bonus Compensation Options Compensation Position Year ($) ($) ($)(1) (#) ($)(2) ----------- ------ -------- ------ ------------ ------------- ------------ Gary Gelman 2002 $244,311 - - - $2,546 Chairman, 2001 244,311 - - 250,000 2,511 President 2000 244,311 - - - 1,636 and CEO Gary J. Knauer 2002 $106,081 - - - $1,340 Treasurer, 2001 98,595 - - 25,000 1,403 Secretary 2000 81,793 - - 25,000 815 and CFO
(1) The aggregate amount of all perquisites and other personal benefits paid were not greater than either $50,000 or 10% of the total annual salary and bonus reported for the respective officers. (2) Consists of matching contributions made by the Company under the 401(k) plan for the fiscal years ended March 31, 2002, 2001 and 2000, respectively. 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, 2002, 2001 and 2000 or pursuant to which such compensation may be distributed in the future, to the Chief Executive Officer and another executive officer. 8 401(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 which is qualified under Section 401(k) of the Internal Revenue Code. The Company matches 50 percent of employee contributions up to 3 percent of compensation. Under the terms of the plan, there is a vesting requirement with respect to Company contributions, but employees are 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 (consisting of 27,500 options outstanding at March 31, 2002), and no additional options may be granted. 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. The 1991 Plan has also expired, except as to options outstanding (consisting of 152,000 options at March 31, 2002), and no additional options may be granted. 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. On August 25, 2000, the Board of Directors adopted the 2000 Incentive Stock Plan (the "2000 Plan"). The Company's shareholders ratified and approved the 2000 Plan in October 2000. The 2000 Plan permits the granting of an aggregate of 750,000 Shares. Under both the 1997 Plan and 2000 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 committee appointed by the Board of Directors; provided, however, that the exercise price shall not be less than the fair market value of the Shares on the date of the grant. The term of each option granted pursuant to the 1997 and 2000 Plans 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. No options were granted during the year ended March 31, 2002. On June 6, 2002, the Company granted options to purchase a total of 606,000 Shares under the 2000 Plan at an exercise price of $1.80 to the Company's executive officers and outside directors. Both the 2000 and 1997 Plans provide that the number of Shares subject thereto and the outstanding options and their exercise prices are to be appropriately adjusted for mergers, consolidations, recapitalizations, stock dividends, stock splits or combinations of shares. The current option committee appointed by the Board of Directors to administer the Company's stock option plans consists of Messrs. Gelman, Gutmann and Elkin. The Board of Directors may at any time terminate or from time to time amend or alter any of the existing stock option plans. 9 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES The following table summarizes the number and dollar value of unexercised stock options at March 31, 2002 for the Named Executive Officers.
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at Value FY-End (#) FY-End ($)(1) Shares Acquired Realized Exercisable/ Exercisable/ Name On Exercise(#) ($) Unexercisable Unexercisable -------------------------- --------------- ------------ ------------- ------------- Gary Gelman, - - 650,000/- $30,000/- Chairman President and CEO Gary J. Knauer Treasurer, - - 107,000/25,000 -/- Secretary and CFO
(1) The closing price of the Company's Shares on March 31, 2002 as reported by the Nasdaq SmallCap Market was $1.35 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 two 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 Directors meeting and/or Audit Committee meeting attended in person. 10 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table and notes thereto set forth information regarding the beneficial ownership of the Company's Shares as of June 15, 2002 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 executive 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) 3,446,400 63.7% Peter Gutmann (2) 116,000(3) 2.7% Edward M. Elkin, M.D. (2) 96,200 2.2% Gary J. Knauer (2) 107,000 2.5% D.H. Blair Investment Corp. 423,824(5) 9.9% All executive officers and directors as a group (four persons) 3,765,600 66.5%
(1) Based on a total of 4,259,800 Shares issued and outstanding and 1,403,000 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 4,000 Shares owned by the wife of Mr. Gutmann, as to which beneficial ownership is disclaimed by the respective reporting person. (4) Includes the presently exercisable portions of outstanding stock options (aggregating 1,403,000 Shares) which, in the case of Messrs. Gelman, Gutmann, Elkin, and Knauer are 1,150,000, 70,000, 76,000, and 107,000 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' 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' wife, respectively. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 11 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. DOCUMENTS FILED WITH THIS REPORT 1. FINANCIAL STATEMENTS: Independent Auditors' Report Consolidated Balance Sheets as of March 31, 2002 and 2001 Consolidated Statements of Operations for the years ended March 31, 2002 and 2001 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years ended March 31, 2002 and 2001 Consolidated Statements of Cash Flows for the years ended March 31, 2002 and 2001 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. EXHIBITS 23 Consent of Independent Auditors. EXHIBITS The following was filed as an exhibit to the Company's Annual Report on Form 10-KSB for its year ended March 31, 2001 and is incorporated by reference herein: 1. Employment Agreement between the Company and Gary Gelman. The following was filed as Exhibit A to the Company's Proxy Statement dated September 11, 2000 and is incorporated by reference herein: 1. 2000 Stock Incentive Plan. The following was filed as an exhibit to the Company's Annual Report on Form 10-KSB for its year ended March 31, 2000 and is incorporated by reference herein: 1. Lease Renewal Agreement with respect to the RPM Rehabilitation & Associates, Inc. office located at 901 East Second Avenue, Spokane, WA. 12 The following was filed as an exhibit to the Company's Annual Report on Form 10-K for its year ended March 31, 1998 and is incorporated by reference herein: 1. Lease Extension and Modification Agreement with respect to the Company's office at One Jericho Plaza, Jericho, NY. The following was filed as an exhibit to the Company's Registration Statement on Form S-8 (File No.333-39071) and is incorporated by reference herein: 1. 1997 Stock Incentive Plan. The following was filed as an exhibit to the Company's Annual Report on Form 10-K for its year ended March 31, 1995 and is incorporated by reference herein: 1. Lease Agreement with respect to the RPM Rehabilitation & Associates, Inc. office at 901 East Second Avenue, Spokane, WA. The following was filed as an exhibit to the Company's Annual Report on Form 10-K for its year ended March 31, 1994 and is incorporated by reference herein: 1. Lease Agreement with respect to the Company's office at One Jericho Plaza, Jericho, NY. The following was filed as an exhibit to the Company's Annual Report on Form 10-K for its year ended March 31, 1989 and is incorporated by reference herein: 1. Certificate of Amendment of Certificate of Incorporation. The following were filed as exhibits 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. 10.3 1985 Stock Option Plan. The following were filed as exhibits 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. 10.5 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. REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the quarter ended March 31, 2002. 13 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant 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 14, 2002 In accordance with the Exchange Act, 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 14, 2002 -------------------------- President and Chief Gary Gelman Executive Officer (Principal Executive Officer) /s/ GARY J. KNAUER Chief Financial Officer, June 14, 2002 -------------------------- Treasurer (Principal Financial Gary J. Knauer and Accounting Officer) and Secretary /s/ EDWARD M. ELKIN Director June 14, 2002 -------------------------- Edward M. Elkin, M.D. /s/ PETER GUTMANN Director June 14, 2002 -------------------------- Peter Gutmann 14 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Financial Statements (Form 10-KSB) March 31, 2002 and 2001 AMERICAN CLAIMS EVALUATION, INC. TABLE OF CONTENTS PAGE Independent Auditors' Report 1 Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 2002 and 2001 2 Consolidated Statements of Operations for the years ended March 31, 2002 and 2001 3 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years ended March 31, 2002 and 2001 4 Consolidated Statements of Cash Flows for the years ended March 31, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 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, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Melville, New York May 3, 2002 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Balance Sheets March 31, 2002 and 2001
ASSETS 2002 2001 ----------- ----------- Cash and cash equivalents $ 7,440,897 6,890,390 Marketable securities -- 225,064 Accounts receivable (net of allowance for doubtful acccounts of $1,000 in 2002 and 2001) 99,571 99,078 Prepaid expenses 33,329 29,454 Prepaid and recoverable income taxes 59,535 -- Deferred income taxes 2,527 5,527 ----------- ----------- Total current assets 7,635,859 7,249,513 Property and equipment, net 121,724 122,265 Excess cost over fair value of net assets acquired, net of accumulated amortization of $276,964 and $244,539 in 2002 and 2001, respectively 371,536 403,961 ----------- ----------- Total assets $ 8,129,119 7,775,739 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 34,811 26,806 Accrued expenses 89,579 81,199 Income taxes payable -- 40,866 ----------- ----------- Total current liabilities 124,390 148,871 ----------- ----------- Commitments (note 8) Common stock, $0.01 par value. Authorized 10,000,000 shares; issued 4,450,000 shares; outstanding 4,273,500 shares 44,500 44,500 Additional paid-in capital 3,515,699 3,515,699 Accumulated other comprehensive loss -- (75,022) Retained earnings 4,742,747 4,439,908 ----------- ----------- 8,302,946 7,925,085 Treasury stock, at cost, 176,500 shares (298,217) (298,217) ----------- ----------- Total stockholders' equity 8,004,729 7,626,868 ----------- ----------- Total liabilities and stockholders' equity $ 8,129,119 7,775,739 =========== ===========
See accompanying notes to consolidated financial statements. 2 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended March 31, 2002 and 2001
2002 2001 ----------- ----------- Revenues $ 1,260,913 1,151,006 Cost of services 619,488 547,114 ----------- ----------- Gross margin 641,425 603,892 Selling, general and administrative expenses 1,147,695 1,091,651 ----------- ----------- Operating loss (506,270) (487,759) Other income (expense): Interest income 265,040 469,513 Gain on sale of marketable securities 450,069 -- Loss on impairment of marketable securities -- (916,976) Miscellaneous income -- 1,000 ----------- ----------- Earnings (loss) before income tax expense (benefit) 208,839 (934,222) Income tax expense (benefit) (94,000) 3,000 ----------- ----------- Net earnings (loss) $ 302,839 (937,222) =========== =========== Earnings (loss) per share - basic $ 0.07 (0.22) =========== =========== Earnings (loss) per share - diluted $ 0.07 (0.22) =========== =========== Weighted average shares - basic 4,273,500 4,273,500 Potential dilutive shares 9,773 -- ----------- ----------- Weighted average shares - diluted 4,283,273 4,273,500 =========== ===========
See accompanying notes to consolidated financial statements 3 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) Years ended March 31, 2002 and 2001
COMMON STOCK ADDITIONAL ACCUMULATED ------------------------- PAID-IN OTHER COMPRE- RETAINED SHARES PAR VALUE CAPITAL HENSIVE LOSS EARNINGS ---------- ---------- ---------- ------------- ----------- Balance at March 31, 2000 4,450,000 $ 44,500 3,515,699 (68,600) 5,377,130 Comprehensive loss: Net loss -- -- -- -- (937,222) Unrealized loss on available-for- sale marketable securities -- -- -- (6,422) -- Total comprehensive loss ---------- ---------- ---------- ---------- ---------- Balance at March 31, 2001 4,450,000 44,500 3,515,699 (75,022) 4,439,908 Comprehensive income: Net earnings -- -- -- -- 302,839 Unrealized gain on available-for- sale marketable securities -- -- -- 75,022 -- Total comprehensive income ---------- ---------- ---------- ---------- ---------- Balance at March 31, 2002 4,450,000 $ 44,500 3,515,699 -- 4,742,747 ========== ========== ========== ========== ========== TOTAL TREASURY STOCK STOCKHOLDERS SHARES AMOUNT EQUITY ---------- ---------- ---------- 176,500 $ (298,217) 8,570,512 -- -- (937,222) -- -- (6,422) ---------- (943,644) ---------- ---------- ---------- 176,500 (298,217) 7,626,868 -- -- 302,839 -- -- 75,022 ---------- 377,861 ---------- ---------- ---------- 176,500 $ (298,217) 8,004,729 ========== ========== ==========
See accompanying notes to consolidated financial statements. 4 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended March 31, 2002 and 2001
2002 2001 ----------- ----------- Cash flows from operating activities: Net earnings (loss) $ 302,839 (937,222) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 67,726 57,046 Loss on impairment of marketable securities -- 916,976 Gain on sale of marketable securities (450,069) -- Deferred income taxes 3,000 (2,000) Changes in assets and liabilities: Accounts receivable (493) (10,649) Prepaid expenses (3,875) (7,568) Prepaid and recoverable income taxes (59,535) -- Accounts payable 8,005 8,303 Accrued expenses 8,380 2,508 Income taxes payable (40,866) 9,480 ----------- ----------- (467,727) 974,096 ----------- ----------- Net cash provided by (used in) operating activities (164,888) 36,874 ----------- ----------- Cash flows from investing activities: Purchases of marketable securities -- (492,072) Proceeds from sales of marketable securities 750,155 -- Capital expenditures (34,760) (106,807) ----------- ----------- Net cash provided by (used in) investing activities 715,395 (598,879) ----------- ----------- Net increase (decrease) in cash and cash equivalents 550,507 (562,005) Cash and cash equivalents - beginning of year 6,890,390 7,452,395 ----------- ----------- Cash and cash equivalents - end of year $ 7,440,897 6,890,390 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $ 3,401 2,130
See accompanying notes to consolidated financial statements 5 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002 and 2001 (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) 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 $6,595,381 and $6,686,156 as of March 31, 2002 and 2001, respectively. (e) MARKETABLE SECURITIES The Company classifies its investments in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. At March 31, 2001, marketable securities were classified as available-for-sale securities and as a result were recorded at fair value based on quoted market prices. Unrealized gains (losses), net of taxes, are reported as accumulated other comprehensive income (loss) as a separate component of stockholders' equity. Realized gains and losses from the sale of available-for-sale securities are determined on the specific identification basis. (f) PROPERTY AND EQUIPMENT Property and equipment are 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 for each of the years ended March 31, 2002 and 2001, and is included in selling, general and administrative expenses in the consolidated statements of operations. 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 (Continued) 6 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002 and 2001 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. (h) INCOME TAXES The Company accounts for income taxes under the asset and liability method. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (i) EARNINGS PER SHARE Basic earnings per share are computed on the weighted average common shares outstanding. Diluted earnings per share reflects the maximum dilution from potential common shares issuable pursuant to the exercise of stock options, if dilutive, outstanding during each period. Employee stock options totaling 584,500 and 920,500 for the years ended March 31, 2002 and 2001, respectively, were not included in the earnings (loss) per share calculations because their effect would have been anti-dilutive. (j) FAIR VALUE OF FINANCIAL INSTRUMENTS The book values of the Company's monetary assets and liabilities approximate fair value as a result of the short-term nature of such assets and liabilities. (k) USE OF ESTIMATES 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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. (l) COMPREHENSIVE INCOME SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for reporting and presentation of comprehensive income and its components. SFAS No. 130 requires unrealized gains (losses) on the Company's available-for-sale marketable securities to be included in accumulated other comprehensive income (loss) which is presented in the consolidated statements of stockholders' equity and comprehensive income (loss). (m) RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, BUSINESS Combinations, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as (Continued) 7 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002 and 2001 assets apart from goodwill. SFAS No. 142 requires that the amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets with finite lives, other than goodwill, be amortized over their estimated useful lives. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company on April 1, 2002. Since the Company did not enter into any business combinations subsequent to June 30, 2001, adoption of SFAS No. 141 did not have an impact on the Company's consolidated financial statements. During fiscal 2003, the Company will perform the first of the required SFAS No. 142 impairment tests of goodwill and indefinite lived intangible assets as of April 1, 2002. The Company has not determined the effect, if any, that the adoption of SFAS No. 142 will have on the Company's consolidated financial statements. (2) MARKETABLE SECURITIES At March 31, 2001, marketable securities consisted of shares of IVC Industries, Inc. (IVCO) common stock, which were classified as available-for-sale securities. During the year ended March 31, 2001, the Company recorded an impairment charge of $916,976 related to its investment in IVCO, which was judged to have experienced an other than temporary decline in value. A summary of marketable securities information related to the adjusted cost after the impairment charge, fair value, and unrealized holding loss at March 31, 2001 was as follows: ADJUSTED FAIR UNREALIZED HOLDING COST VALUE LOSS ------------- ------------- ------------------ Investment in IVCO $ 300,086 225,064 (75,022) During March 2002, IVCO and Inverness Medical Innovations, Inc. (Inverness) consummated a definitive merger agreement providing for the merger of a wholly owned subsidiary of Inverness with and into IVCO. The Company received $2.50 in cash for each share owned on the merger date and ceased to own any shares of IVCO common stock. As a result, the Company recognized a gain on the sale of its marketable securities of $450,069 during the year ended March 31, 2002 based upon the adjusted cost after the impairment charge. The realized loss, based upon the Company's original unadjusted cost, totaling $466,907 will be available as a capital loss tax carryforward. (3) PROPERTY AND EQUIPMENT Property and equipment at March 31, 2002 and 2001 consist of the following:
ESTIMATED USEFUL 2002 2001 LIFE ----------------- ----------------- ----------------- Equipment $ 193,289 335,295 5 years Furniture and fixtures 72,366 72,366 5 to 10 years ----------------- ----------------- 265,655 407,661 Less accumulated depreciation 143,931 285,396 ----------------- ----------------- $ 121,724 122,265 ================= =================
8 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002 and 2001 Depreciation expense for the years ended March 31, 2002 and 2001 amounted to $35,301 and $24,621, respectively. (4) INCOME TAXES Income tax expense (benefit) for the years ended March 31, 2002 and 2001 is comprised of the following: YEAR ENDED MARCH 31, ----------------- --------------- 2002 2001 ----------------- --------------- Current: Federal $ (98,000) 4,000 State 1,000 1,000 ----------------- --------------- (97,000) 5,000 Deferred: Federal 3,000 (2,000) ----------------- --------------- $ (94,000) 3,000 ================= =============== In 2001, the Company realized a $94,000 income tax benefit upon the utilization of a Federal tax operating loss carryback related to operating losses generated in fiscal 2002. Total income tax expense (benefit) 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, ------------------------------------------------------------------------ 2002 2001 ---------------------------------- ---------------------------------- Expected income tax expense (benefit) at the statutory Federal tax rate $ 71,000 34% $ (318,000) (34)% Increase (decrease) in valuation allowance (179,000) (86) 312,000 33 State taxes, net of Federal tax benefit 1,000 1 1,000 -- Amortization of goodwill 11,000 5 11,000 1 Effect of graduated tax rates and other 2,000 1 (3,000) -- ---------------- -------------- ---------------- --------------- Actual income tax provision (benefit) $ (94,000) (45)% $ 3,000 --% ================ ============== ================ ===============
(Continued) 9 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002 and 2001 The tax effects of temporary differences that give rise to the deferred tax assets at March 31, 2002 and 2001 are as follows:
2002 2001 ----------------- ------------------ Deferred tax assets: Capital loss carryforwards $ 159,000 312,000 Depreciation 2,527 5,527 Unrealized loss on marketable securities -- 25,500 Valuation allowance (159,000) (337,500) ----------------- ------------------ $ 2,527 5,527 ================= ==================
Capital loss carryforwards of approximately $467,000 are available only to reduce future capital gains. The Company has historically generated limited capital gains. Therefore, the Company does not believe it is more likely than not that it would generate sufficient capital gains within the appropriate time period to offset capital losses. A valuation allowance of $159,000 was recorded at March 31, 2002 for capital loss carryforwards not anticipated to be realized before expiration. (5) MAJOR CUSTOMERS The Company has one customer, Washington State Department of Labor & Industries, that accounted for 55% and 65% of revenues for the years ended March 31, 2002 and 2001, respectively. The Company also had a customer that accounted for 10% of revenues for the year ended March 31, 2002. (6) STOCK OPTIONS The Company has four stock option plans, the 1985 Stock Option Plan (1985 Plan), the 1991 Stock Option Plan (1991 Plan), the 1997 Incentive Stock Option Plan (1997 Plan) and the 2000 Incentive Stock Option Plan (2000 Plan). The 1985 Plan and the 1991 Plan have expired except as to options outstanding. The 1997 Plan and the 2000 Plan provide for incentive or nonqualified stock 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 per Plan. Under the 1997 and 2000 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. (Continued) 10 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002 and 2001 Changes in the options outstanding during the years ended March 31, 2002 and 2001 are summarized in the following table:
WEIGHTED AVERAGE NO. OF SHARES EXERCISE PRICE ---------------- ---------------- Outstanding - March 31, 2000 595,500 $ 1.75 Options granted 325,000 2.56 ---------------- -------------- Outstanding - March 31, 2001 920,500 2.04 Options forfeited (36,000) 1.95 ---------------- -------------- Outstanding - March 31, 2002 884,500 $ 2.05 ================ ==============
As of March 31, 2002, 45,000 and 750,000 options were available for grant under the 1997 Plan and 2000 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, 2002:
WEIGHTED AVERAGE NUMBER OF OPTIONS EXERCISE PRICE OF WEIGHTED AVERAGE ------------------------------------------ EXERCISABLE CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISABLE OPTIONS REMAINING ---------------------- ------------------- ------------------- ------------------- -------------------- $1.25 300,000 300,000 $ 1.25 4 years $1.88 - $2.56 584,500 548,250 2.45 6.2 years ------------------- ------------------- ------------------- -------------------- 884,500 848,250 $ 2.03 5.8 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 during the years ended March 31, 2002 and 2001 consistent with the provisions of SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below: (Continued) 11 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002 and 2001 2002 2001 --------------- --------------- Net earnings (loss): As reported $ 302,839 (937,222) Pro forma 278,126 (1,466,535) Basic earnings (loss) per share: As reported .07 (0.22) Pro forma .07 (0.34) Diluted earnings (loss) per share: As reported .07 (0.22) Pro forma .07 (0.34) The fair value of each stock option grant was estimated at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for the year ended March 31, 2001: expected dividend yield 0%; expected option lives of 7.5 years; risk-free interest rate of 6%; and expected volatility of 58%. The weighted average fair value of options granted during the year ended March 31, 2001 was $1.69. The pro forma effects on net earnings (loss) and earnings (loss) per share for the years ended March 31, 2002 and 2001 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) RETIREMENT PLAN The Company sponsors a retirement plan pursuant to Section 401(k) of the Internal Revenue Code (the Code) for all employees meeting certain service requirements. Participants may contribute a percentage of compensation not to exceed the maximum allowed under the Code. The plan provides for a matching contribution by the Company which amounted to $13,057 and $13,048 for the years ended March 31, 2002 and 2001, respectively. (8) COMMITMENTS Rental expense under noncancelable operating leases for office space amounted to $134,407 and $136,060 for the years ended March 31, 2002 and 2001, respectively. Minimum lease payments under noncancelable operating leases, exclusive of future escalation charges, as of March 31, 2002 are as follows: 2003 $ 118,000 2004 97,000 2005 53,000 2006 13,000 -------------- Total minimum lease payments $ 281,000 ============== 12