UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) {X} QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2005 { } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from _____ to _____ Commission file number: 0-14807 AMERICAN CLAIMS EVALUATION, INC. (Exact name of small business issuer as specified 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, New York 11753 ------------------------------------------ (Address of principal executive offices) (516) 938-8000 (Issuer's telephone number) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- As of February 13, 2006, there were 4,761,800 shares of the issuer's common stock, $.01 par value, outstanding. Transitional Small Business Disclosure Format (Check one): Yes No X ------ ----- AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of December 31, 2005 (unaudited) and March 31, 2005 3 Condensed Consolidated Statements of Operations for the Three Months and Nine Months ended December 31, 2005 and 2004 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Nine Months ended December 31, 2005 and 2004 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 - 8 Item 2. Management's Discussion and Analysis or Plan of Operation 9 - 11 Item 3. Controls and Procedures 11 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits 12 SIGNATURES 13 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets Dec. 31, 2005 Mar. 31, 2005 ------------------ ------------------ (Unaudited) Assets ------ Current assets: Cash and cash equivalents $ 6,991,837 $ 7,371,185 Accounts receivable, net 101,709 109,721 Prepaid expenses 22,813 35,301 ------------------- ------------------ Total current assets 7,116,359 7,516,207 Property and equipment, net 16,805 33,045 ------------------- ------------------ Total assets $ 7,133,164 $ 7,549,252 =================== ================== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 11,652 $ 10,354 Accrued expenses 92,922 108,517 Income taxes payable - 1,228 ------------------- ------------------ Total current liabilities 104,574 120,099 ------------------- ------------------ Stockholders' equity: Common stock, $.01 par value. Authorized 10,000,000 shares; issued 5,050,000 shares, outstanding 4,761,800 and 4,859,800 shares at December 31, 2005 and March 31, 2005, respectively 50,500 50,500 Additional paid-in capital 4,586,849 4,579,699 Retained earnings 2,853,082 3,116,095 ------------------- ------------------ 7,490,431 7,746,294 Treasury stock, at cost (461,841) (317,141) ------------------- ------------------ Total stockholders' equity 7,028,590 7,429,153 ------------------- ------------------ Total liabilities and stockholders' equity $ 7,133,164 $ 7,549,252 =================== ================== See accompanying notes to condensed consolidated financial statements. 3 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Condensed Consolidated Statements of Operations (Unaudited) Three months ended Nine months ended ----------------------------------- ----------------------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2005 2004 2005 2004 ----------------- ---------------- ---------------- ----------------- Revenues $ 278,149 $ 284,534 $ 867,060 $ 858,651 Cost of services 143,296 143,384 442,591 428,495 ----------------- ---------------- ---------------- ----------------- Gross margin 134,853 141,150 424,469 430,156 Selling, general and administrative expenses 273,753 286,667 894,804 885,405 ----------------- ---------------- ---------------- ----------------- Operating loss (138,900) (145,517) (470,335) (455,249) Interest income 78,900 39,741 207,322 80,359 ----------------- ---------------- ---------------- ----------------- Loss before income tax expense (60,000) (105,776) (263,013) (374,890) Income tax expense - 1,000 - 3,000 ----------------- ---------------- ---------------- ----------------- Net loss $(60,000) $(106,776) $(263,013) $(377,890) ================= ================ ================ ================= Net loss per share - basic $ (0.01) $ (0.02) $ (0.05) $ (0.08) ================= ================ ================ ================= Net loss per share - diluted $ (0.01) $ (0.02) $ (0.05) $ (0.08) ================= ================ ================ ================= Weighted average shares - basic 4,768,967 4,859,800 4,805,078 4,726,467 ================= ================ ================ ================= Weighted average shares - diluted 4,768,967 4,859,800 4,805,078 4,726,467 ================= ================ ================ ================= See accompanying notes to condensed consolidated financial statements. 4 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended ------------------------------------- Dec. 31, Dec. 31, 2005 2004 --------------- ------------------ Cash flows from operating activities: Net loss $(263,013) $(377,890) --------------- ------------------ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 19,900 25,412 Accelerated vesting of stock options 7,150 - Changes in operating assets and liabilities: Accounts receivable 8,012 16,551 Prepaid expenses 12,488 21,377 Prepaid and recoverable income taxes - 272 Accounts payable 1,298 (30,276) Accrued expenses (15,595) (7,789) Income taxes payable (1,228) 278 --------------- ------------------ 32,025 25,825 --------------- ------------------ Net cash used in operating activities (230,988) (352,065) --------------- ------------------ Cash flows from investing activities: Capital expenditures (3,660) (10,611) --------------- ------------------ Net cash used in investing activities (3,660) (10,611) --------------- ------------------ Cash flows from financing activities: Purchase of treasury shares (144,700) - Proceeds from exercise of stock options - 1,070,000 --------------- ------------------ Net cash provided by (used in) financing activities (144,700) 1,070,000 --------------- ------------------ Net increase (decrease) in cash and cash equivalents (379,348) 707,324 Cash and cash equivalents at beginning of period 7,371,185 6,763,920 --------------- ------------------ Cash and cash equivalents at end of period $6,991,837 $7,471,244 =============== ================== Supplemental disclosure of cash flow information: Income taxes paid $ - $ 2,450 =============== ================== See accompanying notes to condensed consolidated financial statements. 5 AMERICAN CLAIMS EVALUATION, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements (Unaudited) General ------- The accompanying unaudited consolidated financial statements and footnotes have been condensed and therefore do not contain all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the information furnished reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows for the interim periods. Interim periods are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended March 31, 2005 and the notes thereto contained in the Company's Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission. Net Loss Per Share ------------------ The following table sets forth the computation of basic and diluted net loss per share for the three months and nine months ended December 31, 2005 and 2004: Three months ended Nine months ended -------------------------------- -------------------------------- 12/31/05 12/31/04 12/31/05 12/31/04 --------------- --------------- -------------- ---------------- Numerator: Net loss $ (60,000) $(106,776) $(263,013) $(377,890) =============== =============== ============== ================ Denominator: Denominator for basic net loss per share - weighted average shares 4,768,967 4,859,800 4,805,078 4,726,467 Effect of dilutive securities - stock options - - - - --------------- --------------- -------------- ---------------- Denominator for diluted net loss per share 4,768,967 4,859,800 4,805,078 4,726,467 =============== =============== ============== ================ Basic net loss per share $ (0.01) $ (0.02) $ (0.05) $ (0.08) =============== =============== ============== ================ Diluted net loss per share $ (0.01) $ (0.02) $ (0.05) $ (0.08) =============== =============== ============== ================ Potentially dilutive common stock equivalents consisting of employee stock options to purchase 1,236,000 and 908,500 shares as of December 31, 2005 and 2004, respectively, were not included in the diluted net loss per share calculations because their effect would have been anti-dilutive. 6 Recently Issued Accounting Standards ------------------------------------ In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123R") amending SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123") and requiring that all share-based payments to employees be recognized in the financial statements. Generally, the approach to accounting for share-based payments in SFAS 123R is similar to the approach in SFAS 123, however, pro forma footnote disclosure will no longer be an alternative to financial statement recognition. The Company adopted SFAS 123R effective January 1, 2006. Accounting for Stock-Based Compensation --------------------------------------- The Company currently follows the "disclosure only" provisions of SFAS 123 and accounts for share-based payments to employees using the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25"). Under APB 25, no compensation expense is recognized at the time of option grant if the exercise price of the Company's stock option grants equaled or exceeded the fair value of the underlying common stock on the date of grant. On August 15, 2005, the Company granted options to purchase 310,000 shares of common stock at an exercise price of $1.94 per share to members of the Board of Directors (the "Board") and its executive officers. In light of the Company's expected adoption of SFAS 123R on January 1, 2006, the Board also authorized the immediate vesting of unvested stock options previously granted to an officer of the Company. The Board's decision to accelerate the vesting of these stock options was based on the belief that it is in the best interest of its shareholders as it will reduce the Company's reported compensation expense in future periods. In order to prevent unintended personal benefit to the officer, the Board imposed certain restrictions on the sale of any shares obtained through the exercise of an accelerated option. As a result of the vesting acceleration, options to purchase 85,000 shares became exercisable immediately. Based on the closing price of the Company's stock on August 15, 2005, approximately 41% of the total accelerated options had economic value. Such acceleration of unvested "in-the-money" options did not have a material effect on the accompanying condensed consolidated financial statements. The pro forma disclosures required by SFAS No. 148 Accounting for Stock-Based Compensation - Transition and Disclosure are presented below for the three and nine months ended December 31, 2005 and 2004. The unamortized fair value associated with the acceleration of unvested options in the amount of $64,000 amortized immediately and has been included in the pro forma disclosures below for the nine months ended December 31, 2005. These pro forma effects may not be representative of future stock compensation expense since the estimated fair value of stock options on the date of grant is amortized to expense over the vesting period and the vesting options of certain options was accelerated on August 15, 2005. 7 Three months ended Nine months ended ------------------------------ ------------------------------ 12/31/05 12/31/04 12/31/05 12/31/04 -------------- -------------- -------------- -------------- Numerator: Net loss $ (60,000) $(106,776) $(263,013) $(377,890) Deduct: Total stock-based employee compensation expense determined under fair value method for options granted - (5,106) (424,850) (15,318) -------------- -------------- -------------- -------------- Pro forma net loss $ (60,000) $(111,882) $(687,863) $(393,208) ============== ============== ============== ============== Net loss per share: Basic and diluted - as reported $ (0.01) $ (0.02) $ (0.05) $ (0.08) ============== ============== ============== ============== Basic and diluted - pro forma $ (0.01) $ (0.02) $ (0.14) $ (0.08) ============== ============== ============== ============== The per share weighted average fair value of stock options granted during the three and nine months ended December 31, 2005 was $1.16 and the per share weighted average fair value of stock options granted during the three and nine months ended December 31, 2004 was $1.33, respectively, on the dates of the grants. Fair values were determined using the Black-Scholes option-pricing model using weighted average assumptions on a consistent basis. 8 Item 2. Management's Discussion and Analysis or Plan of Operation. Critical Accounting Policies ---------------------------- The Company makes estimates and assumptions in the preparation of its consolidated 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. The Company does not consider any of its accounting policies to be critical. Our significant accounting policies are described in Note 1 to the audited consolidated financial statements included in our Annual Report for the year ended March 31, 2005. The accounting policies used in preparing our interim condensed consolidated financial statements are the same as those described in our Annual Report. Results of Operations - Three Months and Nine Months ended December 31, 2005 and 2004 -------- Revenues for the quarterly period ended December 31, 2005 were $278,149, approximately 2.2% lower than the $284,534 reported for the three month period ended December 31, 2004. Revenues for the nine month period ended December 31, 2005 were $867,060, approximately 1.0% higher than the corresponding period ended December 31, 2004. Although revenues decreased in the quarter ended December 31, 2005 from the prior year as a result of the timing of end of year vacations taken by the Company's vocational rehabilitation consultants, revenue for the nine months ended December 31, 2005 remains higher than the comparable period last year due to an increase in referrals from the Washington State Department of Labor & Industries, the Company's largest client. Cost of services as a percentage of revenues for the three and nine month periods ended December 31, 2005 were 51.5% and 51.0%, respectively. These percentages represented increases over the 50.4% and 49.9% of revenues during the comparable periods ended December 31, 2004, respectively. The increase in cost of services resulted from a change in the mix of vocational rehabilitation services rendered during the current fiscal year. Selling, general and administrative expenses for the quarter ended December 31, 2005 decreased to $273,753 from $286,667 for the three months ended December 31, 2004. Selling, general and administrative expense for the nine months ended December 31, 2005 increased to $894,804 from $885,405 for the nine months ended December 31, 2004. During the nine month period ended December 31, 2005, the Company's expenditures increased as a result of the hiring of an individual to market vocational rehabilitation and related services. This increase has been offset by a decrease in rent expense during the current three and nine month periods under its new sublease in New York and a new lease for its Spokane, WA location. Interest income for the three and nine months ended December 31, 2005 increased to $78,900 and $207,322, respectively, from the $39,741 and $80,359 recorded during the three and nine months, respectively, ended December 31, 2004. These increases are directly related to the increase in cash available for investment as well as incrementally higher interest rates. 9 Liquidity and Capital Resources ------------------------------- At December 31, 2005, the Company had working capital of $7,011,785 as compared to working capital of $7,396,108 at March 31, 2005. The Company believes that it has sufficient cash resources and working capital to meet its present cash requirements. During the nine months ended December 31, 2005, net cash used in operations of $230,988 consisted principally of a net loss of $263,013. On October 19, 2005, the Company repurchased 43,000 shares of common stock in a private transaction at an aggregate cost of $60,300. From time to time, the Company acts upon the opportunity to acquire its own shares in the open market. Although there is no formal stock repurchase plan in place, management will undertake future opportunities to repurchase shares if in their opinion it is deemed appropriate. Cash provided by financing activities during the nine months ended December 31, 2004 reflects $1,070,000 of proceeds related to the issuance of common stock pursuant to the exercise of options to purchase 600,000 shares of common stock. On August 20, 2004, the Company entered into a seven-year non-cancelable operating sublease commencing December 1, 2004, for office space with American Para Professional Systems, Inc. ("APPS"), an entity under the control of the Company's Chairman of the Board. Basic rent under the sublease has been established as a pass-through with the Company's cost being fixed at a cost equal to the pro-rated rent payable for the subleased space by APPS to the building's landlord. Minimum lease payments under non-cancelable leases and subleases, exclusive of future escalation charges, for the remainder of fiscal 2005 and fiscal years ending thereafter are as follows: 2005 $20,000 2006 80,000 2007 83,000 2008 51,000 2009 41,000 Thereafter 71,000 -------- $346,000 ======== The Company continues its review of strategic alternatives for maximizing shareholder value. Potential acquisitions will be evaluated based on their merits within the Company's current line of business, as well as other fields. Off-Balance Sheet Arrangements ------------------------------ The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to the Company. 10 Market Risk ----------- The Company is exposed to market risk related to changes in interest rates. Most of the Company's cash and cash equivalents are invested at variable rates of interest and further decreases in market interest rates would cause a related reduction in interest income. Forward Looking Statements -------------------------- Except for the historical information contained herein, the matters discussed in this report on Form 10-QSB 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 3. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures ------------------------------------------------ Disclosure controls and procedures are designed to ensure the reliability of the financial statements and other disclosures included in this report. As of the end of the fiscal quarter ended December 31, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company's periodic Securities and Exchange Commission filings. (b) Changes in Internal Controls ---------------------------- There have been no changes in the Company's internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. Management is aware that there is a lack of segregation of duties due to the small number of employees dealing with general administrative and financial matters. However, management has decided that considering the employees involved and the control procedures in place, risks associated with such lack of segregation are insignificant and the potential benefits of adding employees to clearly segregate duties do not justify the expenses associated with such increases. 11 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a) Annual Meeting of Shareholders, October 8, 2005 (b) Directors to serve one year terms: Gary Gelman Edward M. Elkin, M.D. Peter Gutmann Joseph Looney (c) Election of Directors. Management nominees for election to the Board of Directors were reelected as directors of the Company to serve until their respective successors are duly elected and qualified as follows: Gary Gelman 4,586,647 for 34,398 withheld Edward M. Elkin, M.D. 4,586,647 for 34,398 withheld Peter Gutmann 4,586,647 for 34,398 withheld Joseph Looney 4,586,647 for 34,398 withheld (d) The 2005 Stock Incentive Plan was approved and adopted and all stock options granted pursuant to such plan were ratified and approved as follows: 3,258,329 for 73,519 against 41,600 abstained Item 6. Exhibits. Exhibit 31.1 Section 302 Principal Executive Officer Certification Exhibit 31.2 Section 302 Principal Financial Officer Certification Exhibit 32.1 Section 1350 Certification Exhibit 32.2 Section 1350 Certification 12 SIGNATURES In accordance with the requirements 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. Date: February 13, 2006 By: /s/ Gary Gelman -------------------------------------- Gary Gelman Chairman of the Board, President and Chief Executive Officer Date: February 13, 2006 By: /s/ Gary J. Knauer -------------------------------------- Gary J. Knauer Chief Financial Officer, Treasurer and Secretary 13