The Company has three segments: (1) Healthcare Recovery Services, which encompasses its four healthcare recovery products: healthcare subrogation, provider bill audit, overpayments and MD audit; (2) Property and Casualty Recovery Services, which is subrogation recovery services for property and casualty insurers, sold under the name TransPaC Solutions; and (3) Software, which is subrogation recovery software in a browser-based application service provider (ASP) form, sold under the name Troveris.
On February 20, 2004, the Company announced that it had entered into a definitive agreement to be acquired in an all-cash transaction in which TSI Acquisition Co., Inc., a wholly-owned subsidiary of TSI Holding Co., Inc., will be merged into the Company. TSI Holding Co., Inc. is an affiliate of Tailwind Capital Partners LLC (Tailwind), which manages Thomas Weisel Capital Partners, L.P., a private equity fund. As a result of the merger (the “Proposed Transaction”), every stockholder of the Company will receive $7.00 per share in cash, except that certain members of management will obtain new stock option grants by TSI Holding Co., Inc. (which will be the parent corporation of the surviving entity), may exchange unexercised “in the money” stock options of the Company for stock options of TSI Holding Co., Inc., and may purchase shares of common stock of TSI Holding Co., Inc. at $7.00 per share. Immediately following the Proposed Transaction, TSI Holding Co., Inc. will be owned by Tailwind, certain members of management of the Company, and certain co-investors.
If completed, the Proposed Transaction will constitute a going private transaction and will result in the Company no longer being publicly traded and no longer filing annual, quarterly and current reports with the Securities and Exchange Commission (“SEC”). The Proposed Transaction must be approved by the Company’s stockholders at a special meeting of the stockholders, which the Company expects will occur in the second quarter of 2004. The Proposed Transaction is also subject to customary closing conditions. The obligation of Tailwind to proceed under the definitive agreement expires if the Company is unable to close the Proposed Transaction by July 15, 2004. More information on the Proposed Transaction is included in the proxy statement that the Company will mail to its stockholders in connection with the special meeting of the stockholders at which the Proposed Transaction will be voted on.
This discussion and analysis of financial condition and results of operations is based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. The Company relies on historical experience, established fact-gathering procedures, and various assumptions that the Company believes to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
from the provider representative as evidence of agreement with the audit findings. The Company maintains an allowance for doubtful accounts for the estimated losses arising from adjustments the client may make to invoiced amounts based on the client’s inability to recoup the claim overpayment from the provider. The amount of the allowance is based on the Company’s historical experience related to client adjustments. However, the Company’s fee for provider bill audit services is self-funding in that the client is able to adjust future claim payments made to the providers for the audit discrepancies identified. The accounts receivable balance at December 31, 2003 and 2002 that was attributable to provider bill audits completed represented approximately 1,900 completed audits for fourteen clients and 2,900 completed audits for twelve clients, respectively. If the Company’s provider bill audit clients were to increase the value of negative adjustments made to audit results, additional allowances may be required.
The Company engaged the services of a third party valuation firm to complete an analysis of the fair value of the reporting units during the first half of 2002. The completion of its work during the quarter ended June 30, 2002 did not indicate an impairment had occurred with respect to goodwill. The Company performs its annual impairment review during the second quarter of each year, and at such other times as the occurrence of adverse events or changes in circumstances indicate that the goodwill may be impaired. The impairment review performed during the second quarter of 2003 did not result in an impairment charge for the Company.
All references to “lives” in the table, whether reported as from existing client loss, added from new contracts with existing clients or with new clients, lives sold, lives sold eliminations/cross-sold lives, lives installed, or lives installed eliminations/cross-installed lives, are derived by the Company from information provided to it by clients, which may contain estimates.
“Lives sold eliminations/cross-sold lives” specifies the number of lives subject to client contracts under which the Company provides or will provide more than one healthcare recovery service to a client population. By contrast, the number of lives reported in “Cumulative lives sold, end of period” does not include the overlap (i.e., “double counting”) that occurs when multiple healthcare recovery services are provided to the same client population.
“Lives installed eliminations/cross-installed lives” specifies the number of lives as to which the Company provides more than one healthcare recovery service to a client population. By contrast, the number of lives reported in “Lives installed, end of period” does not include the overlap (i.e., “double counting”) that occurs when multiple healthcare recovery services are provided to the same client population.
Throughput equals claims recoveries for the period divided by the average of backlog at the beginning and end of the period.
Cost of Revenues. Cost of revenues for the Healthcare Recovery Services segment decreased 5.3% in 2003 to $30.1 million from $31.8 million in 2002. However, as a percentage of claims revenues, the cost of revenues increased to 46.5% in 2003 from 46.2% in 2002. The decrease in cost of revenues in total is due to the decrease in volume from healthcare subrogation. The increase in cost of revenues as a percentage of claims
Income before Income Taxes. Income before income taxes for the year ended December 31, 2003 decreased $0.8 million, or 2.8%, to $28.0 million from $28.8 million for the year ended December 31, 2002. The primary reason for the decrease was the decrease in healthcare subrogation revenue of $5.2 million which was not fully offset by the growth in provider bill audit revenue of $0.8 million in 2003 compared to 2002, both described above under “Claims Revenues”.
Income before Income Taxes. Income before income taxes for the year ended December 31, 2002 increased $6.5 million, or 28.9%, to $28.8 million from $22.3 million for the year ended December 31, 2001. The reasons for the increase were the additional provider bill audit revenue of $3.4 million in 2002 compared to 2001 and the incremental Healthcare Recovery Services revenue from the UHG contract termination in 2002 of $1.7 million, both described above under “Claims Revenues”, as well as the adoption of FAS 142 on January 1, 2002, as described under “Depreciation and Amortization”.
The following tables present certain key operating indicators for the Property and Casualty Recovery Services segment for the periods indicated (dollars in millions):
Referrals and Closed Claims refer to project-related work assumed by the Company, typically with files transmitted by clients from time to time.
Claims Revenues. Total Property and Casualty Recovery Services revenues for the year ended December 31, 2002 increased $491,000, or 263%, from the year ended December 31, 2001. Property and Casualty Recovery Services claims recoveries for 2002 were $2.8 million, an increase of $2.2 million over 2001. The growth in recoveries and revenues was caused by an increase in backlog from $3.6 million as of December 31, 2001 to $15.3 million as of December 31, 2002. Backlog growth was the result of the addition of 14 new client contracts during the year ended December 31, 2002 and the identification of additional potentially recoverable claims for clients in place at December 31, 2001.
Cost of Revenues. Cost of revenues for the Property and Casualty Recovery Services segment increased 120% for the year ended December 31, 2002 to $1.1 million, from $0.5 million in 2001. The increase was due to the addition of human resources and other expenses necessary to service the additional backlog. As a percentage of claims revenues, cost of revenues decreased to 163% in 2002 compared to 266% in 2001, due to the increase in revenue described above. In the subrogation industry, typically expenses related to investigations and other recovery-related activities are incurred well in advance of revenue recognition.
Revenues. Revenues for the Software segment increased to $1.8 million for the year ended December 31, 2003 from $0.8 million for the year ended December 31, 2002. All but $75,000 and $12,000 of the revenue for the years ended December 31, 2003 and 2002, respectively, was derived from internal clients (i.e., the Healthcare Recovery Services and Property and Casualty Recovery Services segments).
Support Expenses. For the years ended December 31, 2003 and 2002, the Software segment incurred approximately $2.1 million and $1.9 million, respectively, in expenditures in connection with the creation of new software products for the insurance industry. Approximately $0.8 million and $1.1 million of support expenditures were capitalized in 2003 and 2002, respectively, resulting in net reported expenses of $1.3 million and $0.8 million, respectively.
Cost of Revenues. Cost of revenues for the Software segment for the year ended December 31, 2002 was approximately $598,000. This includes approximately $454,000 of depreciation and amortization of software in service. Approximately $144,000 of the cost of revenues for the year ended December 31, 2002 related to the support and maintenance of the software.
Depreciation and Amortization. Depreciation and amortization expenses decreased 29.2% to $3.4 million for the year ended December 31, 2003 from $4.8 million in 2002. The decrease is due to a significant number of fixed assets acquired in prior years becoming fully depreciated in 2003. In addition, approximately $825,000 and $454,000 of depreciation and amortization related to the Software segment is included in cost of revenues for the years ended December 31, 2003 and 2002, respectively, as it is a direct cost of software in service.
Interest Income. Interest income decreased $0.1 million, or 32.1%, for the year ended December 31, 2003 as compared to the year ended December 31, 2002. The decrease was primarily due to lower interest rates during 2003.
Interest Expense. Interest expense totaled $0.4 million and $0.5 million for the years ended December 31, 2003 and 2002, respectively. The decrease in interest expense for 2003 was primarily due to a decrease in borrowed funds in 2003.
Tax. For the year ended December 31, 2003, the Company accrued income taxes at a 40.0% effective tax rate. This is a reduction from the Company’s pre-2002 historical effective tax rate due to the implementation of state tax planning initiatives beginning July 1, 2002.
The Company accrued its income tax at an effective rate of 38.3% for the year ended December 31, 2002. This rate was lower than the Company’s historical effective income tax rate due to research and experimental tax credits, which included a one-time recapture for the previous four tax years, and state tax planning initiatives implemented during 2002.
Other - Loss on Disposal of Assets. In November 2001, the Company sold its building in New Berlin, Wisconsin to a third party at a loss of $1.0 million. The Company acquired the building on January 25, 1999 in the Subro Audit Acquisition.
Tax. The Company accrued its income tax at an effective rate of 38.3% for the year ended December 31, 2002. This rate was lower than the Company’s historical effective income tax rate due to research and experimental tax credits, which included a one-time recapture for the previous four tax years, and state tax planning initiatives implemented during 2002.
Net Income. Net income for the year ended December 31, 2002 increased $2.2 million, or 48.6%, to $6.8 million or $0.72 per diluted common share, from $4.6 million, or $0.46 per diluted common share, for the year ended December 31, 2001. The primary reasons for the increases in net income and diluted earnings per share were: the loss on the sale of the Milwaukee building ($591,000 after tax) in 2001, the reversal of previously accrued income taxes described below under “Tax” in 2001, the adoption of FAS 142 on January 1, 2002 as described under “Depreciation and Amortization” above and the incremental Healthcare Recovery Services revenue from the UHG contract termination in 2002. See “Concentration of Clients”.
The Company’s statements of cash flows for the years ended December 31, 2003, 2002 and 2001 are summarized below:
The Company had working capital of $13.0 million at December 31, 2003, including cash and cash equivalents of $11.2 million, compared with working capital of $8.8 million at December 31, 2002.
Net cash provided by operating activities decreased $1.6 million for the year ended December 31, 2003 compared to 2002, primarily due to the payment of incentive compensation that was accrued as an expense in
Net cash used in financing activities for the year ended December 31, 2002 reflects $4.0 million in net cash repayments, with respect to the Company’s Revolving Credit Facility. The Company repurchased approximately $0.9 million and $6.5 million of treasury stock during the years ended December 31, 2003 and 2002, respectively.
At December 31, 2003 and 2002, the Company reported as a current asset on its balance sheets, restricted cash of $17.0 million and $17.8 million, respectively. Restricted cash at December 31, 2003 and 2002 represented claims recoveries by the Company for its clients. At December 31, 2003 and 2002, the Company reported on its balance sheets, as a current liability, funds due clients of $12.0 million and $12.4 million, respectively, representing recoveries to be distributed to clients, net of the fee earned on such recoveries.
The following summarizes the Company’s contractual obligations at December 31, 2003, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (in thousands):
The business of recovering subrogation and other claims for healthcare payors is subject to a wide variety of external factors. Prominent among these are factors that would materially change the healthcare payment, fault-based liability or workers’ compensation systems. Examples of these factors include, but are not limited to, 1) the non-availability of recovery from such sources as property and casualty and workers’ compensation coverages, 2) law changes that limit the use of or access to claims and medical records, or 3) the ability of healthcare payors to recover related claims and audit medical records. Because the Company’s profitability depends in large measure upon obtaining and using claims data and medical records, the non-availability or decrease in their availability could have a material adverse effect on the Company.
Moreover, because the Company’s revenues are derived from the recovery of the costs of medical treatment, material changes in such costs will tend to affect the Company’s backlog or its rate of backlog growth, as well as its revenue or its rate of revenue growth. The healthcare industry, and particularly the business of healthcare payors, is subject to various external factors that may have the effect of significantly altering the costs of healthcare and the environment for the sale or delivery of medical claims recovery and cost containment services. The Company is unable to predict which of these factors, if any, could have a potentially material impact on healthcare payors and through them, the healthcare recovery and cost containment industry.
On February 12, 1999, the Board of Directors adopted a Stockholder Rights Plan and declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock of the Company. The dividend was payable to stockholders of record on March 1, 1999. The Rights, which initially trade with the Common Stock, separate and become exercisable only upon the earlier to occur of (i) 10 days after the date (the “Stock Acquisition Date”) of a public announcement that a person or group of affiliated persons has acquired 20% or more of the Common Stock (such person or group being hereinafter referred to as an “Acquiring Person”) or (ii) 10 days (or such later date as the Board of Directors shall determine) after the commencement of, or announcement of an intention to make, a tender offer or exchange offer that could result in such person or group owning 20% or more of the Common Stock (the earlier of such dates being called the “Distribution Date”). When exercisable, each Right initially entitles the registered holder to purchase from the Company one one-hundredth of a share of a newly created class of preferred stock of the Company at a purchase price of $65 (the “Purchase Price”). The Rights are redeemable for $0.001 per Right at the option of the Board of Directors. The Rights expire on March 1, 2009.
On February 19, 2004, in connection with the Proposed Transaction, the Company and National City Bank, as Rights Agent, executed a First Amendment to Rights Agreement, which amends the Stockholders Rights Plan and renders the Rights inapplicable to the transactions contemplated by the definitive agreement announced by the Company on February 20, 2004. See “- Recent Developments”.
In 1997, Patrick B. McGinnis, the Chairman and Chief Executive Officer of the Company, borrowed from a commercial bank $500,000 to finance the payment of income taxes related to the ordinary income deemed to have been received by him in the form of 80,000 shares of Common Stock granted to him in connection with the Company’s initial public offering and $350,000 to finance the purchase of 25,000 additional shares of Common Stock in the initial public offering.
may be extended for a period of not more than ten years. At December 31, 2003, the amount of deferred compensation was $182,012, with accrued interest of $19,323.
Effective January 1, 2003, the Company entered into an employment agreement with Mr. McGinnis. Upon signing the employment agreement, Mr. McGinnis received a bonus of $200,000. The bonus is subject to full or partial reimbursement by Mr. McGinnis to the Company, based on the date of termination, if Mr. McGinnis terminates his employment with the Company during the initial three-year term of his employment under the agreement. The bonus payment is recorded in “Other Current Assets” on the accompanying Condensed Balance Sheets and is being amortized over the term of the agreement. The unamortized balance at December 31, 2003 was $133,333.
In our opinion, the accompanying balance sheets and the related statements of income, changes in stockholders’ equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of Trover Solutions, Inc. (the “Company”) at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Preferred stock, $.001 par value; 2,000 shares authorized; no shares issued or outstanding
The financial instruments of the Company consist mainly of cash and cash equivalents, trade receivables, short-term debt and long-term debt. The fair value of cash and cash equivalents, trade receivables and short-term debt approximates their carrying values due to the relatively short-term nature of the instruments. The fair value of long-term debt is based on current rates available to the Company for debt with similar characteristics.
Goodwill represented the unamortized excess of cost over the fair value of tangible and identifiable intangible assets acquired and was amortized on a straight-line basis over twenty years through December 31, 2001. Effective January 1, 2002, the Company adopted FAS 142 under which goodwill is no longer amortized but instead is assessed for impairment at least annually. See Note 7, “Goodwill and Other Intangible Assets”. Identifiable intangible assets are being amortized on a straight-line basis over varying periods, ranging from four to fifteen years. Amortization expense for the years ended 2003, 2002 and 2001 was $1.1 million, $1.1 million, and $2.7 million, respectively.
Revenues for the Healthcare Recovery Services segment are generally derived from contingent fee arrangements whereby the Company receives a percentage of the amount successfully recovered on behalf of its clients. Subrogation revenues and the related receivables are recognized when a fee is earned based on settlement of the case. A case is deemed settled when the Company can confirm that the parties agree on all material terms associated with the settlement. Revenues and the related receivables for provider bill audit, overpayment and physician audit recovery services are generally recognized upon completion of the audit or identification of the overpayment in accordance with client contract terms.
The Company establishes an allowance for doubtful accounts to reduce its receivables to their net realizable value. The allowances are estimated by management based on general factors such as the aging of the receivables and historical collection experience.
In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104) which superseded Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). SAB 104’s primary purpose was to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements which was superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21 was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a significant impact on the Company’s financial statements. The Company was previously following the requirements provided under SAB 104 and, accordingly, the implementation of this pronouncement had no impact on the Company’s financial position or results of operations for 2003, 2002 or 2001.
During 2000, the Company began research and development activities in connection with the creation of new products for the insurance industry. The Company charges all research and development costs to expense when incurred. The Company incurred $537,000 of expenses related to research and development during 2001 and no such expenses in 2003 or 2002.
The provision for income taxes has been prepared in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is provided against these deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of SFAS 123” which provides alternative methods for a voluntary change to the fair value method of accounting for stock-based compensation and amends the disclosure requirements of SFAS 123. The Company has elected to continue to account for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. The following disclosures are provided in accordance with SFAS 148.
Effective January 1, 2002, the Company has three segments which qualify as reportable segments based on qualitative guidelines. The segments include: Healthcare Recovery Services, Property and Casualty Recovery Services and Software. Prior to that date, the Company reported one segment which was Healthcare Services. The Company did not have any products or services which met the quantitative or qualitative guidelines for segment reporting prior to January 1, 2002.
In November 2002, the FASB issued Emerging Issues Task Force Issue (EITF) 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” which addresses revenue recognition accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. The provisions of this statement are effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a significant impact on the Company’s financial statements.
In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the Company on July 1, 2003. The adoption of SFAS 150 did not have a significant impact on the Company’s financial statements.
In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104) which superceded Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). SAB 104’s primary purpose was to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements which was superceded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”.
Temporary differences giving rise to deferred taxes in the accompanying balance sheets at December 31, 2003 and 2002 consist of the following (in thousands):
Wellpoint, which accounted for 72% and 65% of the Company’s revenue from its provider bill audit product in 2003 and 2002, respectively accounted for 30% and 32% of the Company’s accounts receivable balance at December 31, 2003 and 2002, respectively. In addition, HealthNet, which accounted for 22% and 30% of the revenue from the provider bill audit product in 2003 and 2002, respectively, accounted for 10% and 15% of the Company’s accounts receivable balance at December 31, 2003 and 2002, respectively. Should a substantial portion of the current balance of either of these accounts receivable balances become uncollectible, it could have a material adverse effect on the Company’s results of operations and cash flows. No other client accounted for 10% or more of accounts receivable at December 31, 2003 or 2002.
On February 12, 1999, the Board of Directors approved a loan in the amount of $350,000 to Patrick B. McGinnis, the Chairman and Chief Executive Officer of the Company, in exchange for a full recourse promissory note in the same amount from Mr. McGinnis. On June 30, 2000, at the direction of the Board of Directors and in accordance with terms authorized by it, the Company loaned Mr. McGinnis an additional $500,000. Under these terms, the $500,000 loan to Mr. McGinnis was combined with his existing debt to the Company of $350,000 of principal and $36,520 of accrued interest. Mr. McGinnis delivered to the Company his full recourse promissory note in the amount of $886,520, bearing interest at a fixed rate of 6.62% per annum (the applicable Federal mid-term rate in effect for tax purposes at the date of the note), compounded annually (the “Amended Promissory Note”), and the Company cancelled the old promissory note evidencing the prior debt. The Amended Promissory Note provides for mandatory prepayments from certain of the proceeds received by Mr. McGinnis from his sale of the Company’s securities and any related transactions. At December 31, 2003 and 2002, the promissory note of $886,520 and accrued interest of $101,237 and $39,908, respectively, were outstanding. Mr. McGinnis used the proceeds of these loans to repay debts originally incurred by him to pay income taxes related to the ordinary income deemed to have been received by him on account of Common Stock granted to him by the former shareholder of the Company in connection with the initial public offering of the Company’s stock in May 1997, and to purchase additional stock in the initial public offering. The balance of the Amended Promissory Note at December 31, 2003 and 2002 is included in “Other” in the Stockholder’s Equity section of the accompanying balance sheets.
Effective January 1, 2003, the Company entered into an employment agreement with Mr. McGinnis. Upon signing the employment agreement, Mr. McGinnis received a bonus of $200,000. The bonus is subject to full or partial reimbursement by Mr. McGinnis to the Company, based on the date of termination, if Mr. McGinnis terminates his employment with the Company during the initial three-year term of his employment. The bonus payment was recorded in “Other Current Assets” on the accompanying Balance Sheets and is being amortized over the term of the agreement. The unamortized balance December 31, 2003 and 2002 was $133,333 and $200,000, respectively.
Property and equipment consists of the following at December 31, 2003 and 2002 (in thousands):
On November 13, 2001, the Company sold its building in New Berlin, Wisconsin to a third party. The Company recorded a loss on the disposal of the building of approximately $1.0 million during the year ended December 31, 2001.
Following is a reconciliation of previously reported financial information to adjusted amounts excluding amortization of Goodwill for the years ended December 31, 2003, 2002 and 2001 (in thousands, except per share amounts):
Amortization of costs in excess of net assets acquired, net of tax
The carrying value of Goodwill, net was approximately $29.1 million at December 31, 2003 and 2002.
Client lists are being amortized on a straight-line basis over 15 years. Backlog is being amortized over 5 years on a straight-line basis. Non-compete agreements are being amortized on a straight-line basis over periods ranging from 4 years to 5 years.
Amortization expense related to intangible assets for the years ended December 31, 2003, 2002 and 2001 was approximately $496,000, $562,000 and $562,000, respectively. Over the five succeeding fiscal years, amortization expense related to intangible assets is expected to be as follows (in thousands):
loss from future claims under this self-insurance program is based upon an independent actuarial estimate. This provision includes estimated liabilities determined from both reported paid claims and claims liabilities incurred but not reported (IBNR). As noted, the accrual for these liabilities is based on estimates and while management believes that the provision for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. The methods used in determining these liabilities are periodically reviewed and adjustments are reflected in current earnings. The provision for future healthcare claims of $368,000 and $524,000 at December 31, 2003 and 2002, respectively, is recorded in Accrued Expenses as a current liability in the accompanying Balance Sheet.
Accrued bonuses included in the accompanying balance sheets at December 31, 2003 and 2002 approximate $2.6 million and $3.7 million, respectively.
The interest rate swap contract under which the Company agrees to pay fixed rates of interest is considered a hedge against changes in the amount of future cash flows associated with the Company’s interest payments on its variable rate Revolving Credit Facility. Accordingly, the interest rate swap contract is considered a cash flow hedge and is reported at fair value on the balance sheet in “Other Liabilities” at
At the inception of the interest rate contract, the fair value of the hedge was $0. At December 31, 2003, the fair value of the hedge was a liability of $86,397 (($51,838), net of tax, included in Other Comprehensive Income (Loss)). At December 31, 2002, the fair value of the hedge was a liability of $144,804 (($86,882), net of tax, included in Other Comprehensive Income (Loss)).
The 1997 Plan provides for the grant of options to purchase the Company’s Common Stock to eligible participants of the Company at 100% of the market value of the Company’s Common Stock on the date of grant. Awards under the 1997 Plan expire ten years from the date of grant and vest according to the terms that the compensation committee of the Board of Directors determines in its sole discretion. As provided in the 1997 Plan, all options granted to the Company’s employees automatically vest in the event of a change in control. At December 31, 2003, 1,645,289 shares of Common Stock have been reserved under the 1997 Plan, of which 151,001 shares are available for future award.
Activity related to the Employees’ Plan, Directors’ Plan, 1997 Plan and 2002 Outside Directors Stock Plan for the years ended December 31, 2003, 2002 and 2001 is summarized as follows:
Weighted-average fair value of options granted during the year (per share)
As of December 31, 2003, 2002 and 2001 there were 1.7 million, 1.6 million and 1.4 million options exercisable, respectively.
Under the Purchase Plan, eligible employees may purchase shares of the Company’s Common Stock, subject to certain limitations, at the lesser of 85% of its market value on the first day of the purchase period or 85% of its market value on the last day of the purchase period. The plan provides for semi-annual purchase periods. Purchases are made from payroll deductions up to a maximum of 15% of an employee’s eligible annual compensation. During the years ended December 31, 2003, 2002 and 2001, employees paid the Company $52,000, $89,000 and $91,000, respectively, to purchase 11,768 shares, 22,608 shares and 35,782 shares, respectively. As of December 31, 2003, there were 182,456 shares of Common Stock reserved for future purchase under the Purchase Plan.
If any person becomes an Acquiring Person, each holder of a Right will thereafter have the right (the “Flip-In Right”) to receive, in lieu of shares of preferred stock and upon payment of the Purchase Price, shares of Common Stock having a value equal to two times the Purchase Price of the Right. Also, if at any time on or after the Stock Acquisition Date, (i) the Company is acquired in a transaction in which the holders of all the outstanding shares of Common Stock immediately prior to the consummation of the transaction are not the holders of all of the surviving corporation’s voting power, or (ii) more than 50% of the Company’s assets, cash flow or earning power is sold or transferred other than in the ordinary course of business, then each holder of a Right shall thereafter have the right (the “Flip-Over Right”) to receive, in lieu of shares of preferred stock and upon exercise and payment of the Purchase Price, common shares of the acquiring company having a value equal to two times the Purchase Price. If a transaction would otherwise result in a holder having a Flip-In as well as a Flip-Over Right, then only the Flip-Over Right will be exercisable. If a transaction results in a holder having a Flip-Over Right subsequent to a transaction resulting in the holder having a Flip-In Right, a holder will have a Flip-Over Right only to the extent such holder’s Flip-In Rights have not been exercised.
Other comprehensive income (loss) for the years ended December 31, 2003, 2002 and 2001 consists of the following (in thousands):
A summary of the Company’s quarterly results of operations follows (dollars in thousands, except per share amounts):