Item 1. Business
American Claims Evaluation, Inc. (the "Company") was incorporated in the State of New York and commenced operations in April 1982. Currently, 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, which include commercial health insurance companies, third-party administrators, self-funded employers, health maintenance organizations ("HMO's") and other third-party payers. Over the past several 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 as it began the new fiscal year and opted to sell its 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 (See Note 2 to the Consolidated Financial Statements in this Annual Report on Form 10-K). As defined in the agreement, the Company is entitled to payments based upon the net revenues generated over the period ending April 30, 2000. Management does not anticipate the potential value of these payments to 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. L & I has extended all vocational service contracts to August 1999. The loss of these contracts would have a material impact on RPM's revenues. Although RPM 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.
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, some of which firms are directly owned by insurance companies which are clients of the Company. 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, 1998, the Company had 23 full-time employees and three part-time employees. Of these full-time employees, three were in management, twelve were vocational rehabilitation consultants and eight were in administration.
Item 2.
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. The Company had maintained its hospital bill audit operations in Dallas, Texas; this facility consisted of 4,500 square feet of space on an amended lease which will expire in July 1998. 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.
Item 3.
Item 3. Legal Proceedings
(a) The Company is not engaged in any material litigation. (b) Not applicable.
Item 4.
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 fiscal year ended March 31, 1998.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's common shares (the "Shares") trade on the NASDAQ National Market(R) under the symbol "AMCE." NASD marketplace Rule(s) 4450(a)(2) became effective February 23, 1998. Under these new National Market System ("NMS") maintenance standards, the Company's common stock was not in compliance with the new market value of NMS public float requirements. The Company has filed a request for an oral hearing to appeal the potential removal of its securities from the NMS. The Company anticipates that its securities would be approved for a transfer to The Nasdaq SmallCap Market(SM) in the event that its appeal is unsuccessful.
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, 1996 through March 31, 1998:
High Low ---- --- Fiscal 1997:
4/01/96 - 6/30/96 2 9/16 2 1/16 7/01/96 - 9/30/96 2 3/8 1 1/2 10/01/96 - 12/31/96 2 7/16 1 1/4 1/01/97 - 3/31/97 1 15/16 1 5/16
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
The number of holders of the Company's Shares was approximately 532 on March 31, 1998, 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.
Item 6.
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, 1998. The information set forth below should be read in conjunction with the financial statements and the notes thereto included elsewhere herein.
(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
Item 7.
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
The Company had net earnings of $40,085 for the fiscal year ended March 31, 1998 ("Fiscal 1998"). For the fiscal year ended March 31, 1997 ("Fiscal 1997"), the Company had net earnings from continuing operations of $94,514, coupled with net earnings of $210,767 from discontinued operations, resulting in total net earnings after discontinued operations of $305,281. During the fiscal year ended March 31, 1996 ("Fiscal 1996"), the Company had net earnings of $156,934 from continuing operations with earnings of $580,704 from discontinued operations producing total net earnings of $737,638.
During Fiscal 1998, revenue from vocational rehabilitation services totaled $1,285,798, an increase of 5.4% from the $1,219,890 reported for Fiscal 1997. Revenue for Fiscal 1997 had experienced a 5.7% decrease from the $1,293,166 generated in Fiscal 1996. The majority of the Company's vocational rehabilitation services are provided to the Washington State Department of Labor & Industries ("L & I"). Management continues to focus its marketing plans on self-insured corporations as a source of new business and for decreasing its dependence on the L & I contracts.
The cost of services for vocational rehabilitation services was 43.5% as a percentage of revenues for Fiscal 1998 as compared to 42.7% as a percentage of revenues for Fiscal 1997. During Fiscal 1996, the cost of services was 44.8% as a percentage of related revenues.
Selling, general and administrative expenses were $1,199,277, $1,280,644 and $1,349,086 in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. With the disposition of the HBA division, management continually seeks new alternatives to reduce corporate overhead. However, it is anticipated that certain expenditures related to the Company's search for acquisition candidates will increase.
Interest income increased to $460,758 during Fiscal 1998, as compared to interest income of $417,293 and $338,517 for Fiscal 1997 and Fiscal 1996, respectively. This increase was a direct result of the continued increase in available cash balances combined with increases in prevailing market rates. During Fiscal 1998, 1997 and 1996, the Company realized gains on the sales of marketable securities of $6,970, $285,356 and $470,652, respectively. Miscellaneous income, representing ancillary revenues, amounted to $59,617 in Fiscal 1998, as compared with ancillary revenues of $46,296 for Fiscal 1997 and $91,277 for Fiscal 1996.
Liquidity and Capital Resources
The Company's primary source of cash is internally generated funds. At March 31, 1998, the Company had working capital of $7,988,972 as compared to working capital of $7,607,725 at March 31, 1997.
For the fiscal year ended March 31, 1998, the net cash provided by operating activities of continuing operations was $212,681. The significant sources were income from continuing operations of $40,085, a net decrease of $33,000 in deferred tax assets, $100,020 of depreciation and amortization and a $29,402 decrease in accounts receivable. During Fiscal 1998, net cash provided by financing activities consisted of $250,000 received from the issuance of common stock.
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.
Discontinued Operations
Over the past several years, the hospital bill audit ("HBA") industry as a whole suffered a decline in demand for its services and the number of hospital bill audits being performed. This negative trend accelerated during Fiscal 1997 and management determined that the Company's HBA division would not continue to generate net earnings on a going forward basis. In April 1997, the Company sold the HBA division to one of its competitors. The financial statements were reclassified at March 31, 1997 to exclude the operating results of the HBA division from the continuing operations and account for them as discontinued operations (see Note 2 to the Consolidated Financial Statements.) As defined in the agreement, the Company is entitled to payments based upon the net revenues generated over the three year period ending April 30, 2000. Management does not anticipate the potential value of these payments to be material.
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 has been initiated. Outside companies such as vendors and banks are also being asked to verify their Year 2000 readiness. We expect these projects to be successfully completed during the upcoming fiscal year.
Based on current plans and efforts to date, management expects that there will be no material adverse effect on operations and the future costs to be incurred are not considered to be material. There is no guarantee, however, that all problems will be foreseen and corrected.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which becomes effective for the Company's Fiscal 1999 financial statements. SFAS No. 130 requires disclosure of comprehensive income, which consists of all changes in equity from nonshareholder sources. The adoption of the statement will be limited to form and content of the Company's disclosures and will not affect results. Currently, the Company does not have any comprehensive income type items.
In June 1997, the FASB also issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting information about operating segments, and related disclosures about products and services, geographic areas and major customers. The Company has not determined the impact that the adoption will have on its consolidated financial statement disclosures. The Company will adopt this statement effective April 1, 1998, as required. Interim information is not required until the second year of application, at which time comparative information is required.
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 8.
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).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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 51 Chairman of the Board, President and Chief Executive Officer
Gary J. Knauer 38 Chief Financial Officer, Treasurer and Secretary
Edward M. Elkin, M.D. 59 Director
Peter Gutmann 69 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 medical devices.
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 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.
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, 1998.
SUMMARY COMPENSATION TABLE
(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.
(2) Consists of $227 of matching contributions made by the Company under the 401(k) profit sharing plan during the fiscal year ended March 31, 1996.
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, 1998, 1997 and 1996 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 provided for the issuance of up to 400,000 Shares to all 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. Condi tions of the exercise of options, which must be consistent with the terms of the 1991 Plan, 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. 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 4, 1997, The Board of Directors granted options to purchase 300,000 Shares under the 1997 Plan at an exercise price of $1.25, exercisable immediately, to the Chief Executive Officer. Additionally, grants of options to purchase 35,000 Shares (including 25,000 Shares granted to an executive officer), inadvertently made under the 1985 Plan after its provisions had expired, were invalidated simultaneously with the issuance of grants under the 1997 Plan at the same price ($2.25/Share), vested retroactively to the date the invalidated grants were first made.
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 1998 and FY-End Option/SAR Values
The following table summarizes the number and dollar value of unexercised stock options at March 31, 1998 for the Chief Executive Officer.
(1) The closing price of the Company's Shares on March 31, 1998 as reported by the NASDAQ National Market System was $1.625 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.
Item 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 5, 1998 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) 56.3% Peter Gutmann (2) 80,000 (3) 1.7% Edward M. Elkin, M.D. (2) 60,200 1.3% Gary J. Knauer (2) 40,250 * D.H. Blair Investment Corp. 573,824 (5) 12.0% All officers and directors as a group (five persons) 2,876,850 60.1%
- ---------
* Less than 1%
(1) Based on a total of 4,273,500 Shares issued and outstanding, 514,250 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 514,250 Shares) which, in the case of Messrs. Gelman, Gutmann, Elkin, and Knauer are 400,000, 34,000, 40,000, and 40,250 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") (535,824 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.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14.
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, 1998 and 1997
Consolidated Statements of Earnings for the Three Year Period ended March 31, 1998
Consolidated Statements of Stockholders' Equity for the Three Year Period ended March 31, 1998
Consolidated Statements of Cash Flows for the Three Year Period ended March 31, 1998
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.A Accountants' Consent
2.B. Tenth Amendment dated May 1997 to Employment Agreement between the Company and Gary Gelman.
2.C 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.
2.D 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, 1996 and are incorporated by reference herein:
1. Ninth Amendment dated February 13, 1996 to Employment Agreement between the Company and Gary Gelman.
2. First Amendment to Lease dated March 28, 1996 between HMS Office, L.P. as landlord and the Company as tenant with respect to premises located at 222 West Las Colinas Blvd., Irving, Texas.
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.
3. Lease dated June 3, 1993 between Homart Development Co. as landlord and the Company as tenant with respect to premises at 222 West Las Colinas Blvd., Irving, Texas.
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, 1998.
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 22, 1998
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 22, 1998 - ----------------------- President and Chief Gary Gelman Executive Officer (Principal Executive Officer)
/s/ Gary J. Knauer Chief Financial Officer, June 22, 1998 - ----------------------- Treasurer (Principal Financial Gary J. Knauer Officer) and Secretary
/s/ Edward M. Elkin Director June 22, 1998 - ----------------------- Edward M. Elkin, M.D.
/s/ Peter Gutmann Director June 22, 1998 - ----------------------- Peter Gutmann
[KPMG LOGO]
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Consolidated Financial Statements (Form 10-K)
March 31, 1998 and 1997
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements
Independent Auditors' Report
Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 1998 and 1997 Consolidated Statements of Earnings for the years ended March 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements
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 and Stockholders American Claims Evaluation, Inc.:
We have audited the consolidated financial statements of American Claims Evaluation, Inc. and subsidiary as listed in the accompanying index. 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 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP -------------------------- KPMG PEAT MARWICK LLP
Jericho, New York June 2, 1998
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 1998 and 1997
See accompanying notes to consolidated financial statements.
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended March 31, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended March 31, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Nature of Business
American Claims Evaluation, Inc. (the Company) 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
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in these financial statements. 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.
(f) Long-Lived Assets
Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful lives or the remaining term of the lease.
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, 1998, 1997 and 1996 and is included in selling, general and administrative expenses in the consolidated statements of earnings.
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances occur that indicated that the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of long-lived assets held and to be used on undiscounted cash flows, and measures the impairment, if any, using discounted cash flows.
(Continued)
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1), Continued
(g) Income Taxes
The Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards 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.
(h) Earnings per Share
Statement of Financial Accounting Standards No.128, Earnings per Share, which became effective December 31, 1997, requires presentation of two calculations of earnings per share. Basic earnings per share equals net earnings dividend by 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.
(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 expects that these payments will not be material.
As at 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 and $3,946,682 for the fiscal years ended March 31, 1997 and 1996, respectively.
The following summarizes assets and liabilities of the discontinued operations which have been segregated in the accompanying consolidated balance sheets:
1998 1997 --------- --------- Current assets - discontinued operations: Accounts receivable, net $ - 258,116 Prepaid expenses - 14,755 --------- ---------
$ - 272,871 ========= =========
(Continued)
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2), Continued
1998 1997 --------- ---------
Non-current assets - discontinued operations: Property and equipment, net $ - 71,332 ========= =========
Current liabilities - discontinued operations: Accounts payable 61,324 266,480 Accrued expenses 24,880 96,045 --------- ---------
$ 86,204 362,525 ========= =========
(3) Acquisition
On September 14, 1993, the Company acquired all of the outstanding stock of RPM Rehabilitation & Associates, Inc. (RPM). The total acquisition cost amounted to $723,500 (including expenses of $48,500). The purchase price included a cash payment of $675,000 at closing and may include payments up to an additional $675,000, contingent upon the future earnings through September 14, 1998 of RPM as defined in the stock purchase agreement. Through March 1998, no additional consideration has been earned. The excess of cost over fair value of net assets acquired, amounting to approximately $648,500, is being amortized on a straight-line basis over 20 years.
(4) Property and Equipment
Property and equipment at March 31, 1998 and 1997 consist of the following:
Estimated 1998 1997 useful life ---- ---- -----------
Equipment $ 392,860 276,918 5 years Furniture and fixtures 107,418 107,418 5 to 10 years ---------- --------- 500,278 384,336
Less accumulated depreciation 406,222 302,875 ---------- ---------
$ 94,056 81,461 ========== =========
Depreciation expense for the years ended March 31, 1998, 1997 and 1996 amounted to $67,595, $53,157 and $61,735, respectively.
(Continued)
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Income Taxes
Income tax expense (benefit) for the years ended March 31, 1998, 1997 and 1996 is comprised of the following:
Year ended March 31, ------------------------------------ 1998 1997 1996 --------- ---------- ---------- Current: Federal $ 22,000 75,000 104,900 State (2,000) 8,000 8,000 --------- ---------- ----------
20,000 83,000 112,900 --------- ---------- ----------
Deferred: Federal (6,000) (10,000) (4,900) --------- ---------- ----------
$ 14,000 73,000 108,000 ========= ========== ==========
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:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at March 31, 1998 and 1997 are as follows:
1998 1997 ------- -------- Deferred tax assets: Discontinued operations $ - 39,000 ======= ========
Deferred tax liabilities: Depreciation $ 2,473 8,473 ======= ========
(6) Major Customer
The Company has one customer who accounted for 77%, 84% and 87% of consolidated revenues for the years ended March 31, 1998, 1997 and 1996, respectively. Services are performed by the Company for this customer under two separate contracts which expire in August 1999. The Company anticipates that these contracts will be renewed.
(Continued)
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Treasury Stock
During fiscal 1997, the Company repurchased 176,500 shares of its own common shares through open market transactions at an aggregate cost of $298,217.
(8) Stock Options
The Company has three stock option plans, the 1985 Stock Option Plan, the 1991 Stock Option Plan and the 1997 Incentive Stock Option 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.
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. The Board of Directors then granted options to purchase 300,000 shares at an exercise price of $1.25 per share, exercisable immediately, to the Chief Executive Officer.
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 1998, 1997 and 1996 are summarized in the following table:
Weighted average No. of exercise shares price -------- -------- Balance - March 31, 1995 186,000 $ 2.57
Fiscal 1996: Options granted 22,500 2.00 Options terminated (6,000) 3.50 -------- --------
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 ======== ========
(Continued)
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8), Continued
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, 1998:
Number of options Weighted average ------------------------- contractual Exercise price Outstanding Exercisable life remaining -------------- ----------- ----------- --------------
$ 1.25 300,000 300,000 9 years 1.82 - 2.25 250,500 218,000 6 years
The Company has adopted the "disclosure only" provisions of Statement of Financial Accounting Standards (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 1998, 1997 and 1996 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:
1998 1997 1996 -------- ------- ------- Net earnings (loss): As reported $ 40,085 305,281 737,638 Pro forma (201,575) 241,458 717,316
Basic net earnings (loss) per share: As reported .01 .07 .17 Pro forma (.05) .06 .17
Diluted net earnings (loss) per share: As reported .01 .07 .17 Pro forma (.05) .06 .17
The weighted average fair value per stock option granted was $.76, $1.39 and $1.69 for those options granted in the fiscal years ended March 31, 1998, 1997 and 1996, respectively. The Company estimated the fair values using the Black-Scholes option pricing model, using the following assumptions:
1998 1997 1996 ---- ---- ---- Expected dividend yield - - - Risk-free interest rate 6.00% 6.00% 6.00% Expected stock price volatility 50.00% 95.00% 95.00% Expected option lives (years) 7.5 7.5 7.5
The pro forma effects on net earnings and net earnings per share for the years ended March 31, 1998, 1997 and 1996 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.
(Continued)
AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) 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 $6,168, $6,806 and $7,408 for the years ended March 31, 1998, 1997 and 1996, respectively.
(10) Commitments
Rental expense under non-cancelable operating leases for office space amounted to $206,154, $189,039 and $211,592 for the years ended March 31, 1998, 1997 and 1996, respectively. Minimum lease payments under non-cancelable operating leases, exclusive of future escalation charges, as of March 31, 1998 are as follows:
1999 $ 136,000 2000 124,000 2001 126,000 2002 82,000 2003 and thereafter 113,000 ----------
Total minimum lease payments $ 581,000 ==========