As of December 31, 2001, the Company leased property at the following five locations: (i) approximately 105,718 square feet of space for its executive offices and main operations in Louisville, Kentucky, under a lease agreement and amendment expiring in 2009; (ii) approximately 10,206 square feet at a regional
The Company's primary business is to provide medical claims recovery and cost containment services to the private healthcare payor industry. Its primary product is subrogation recovery, which generally entails the identification, investigation and recovery of accident-related medical benefits incurred by its clients on behalf of their insureds, but for which other persons or entities have primary responsibility. The Company's clients' rights to recover the value of these medical benefits, arising by law or contract, are known generally as the right of subrogation and are generally paid from the proceeds of liability or workers' compensation insurance. The Company's other medical claims recovery services include provider bill auditing and overpayment recovery services. The Company offers its services on a nationwide basis to health maintenance organizations, indemnity health insurers, self-funded employee health plans and companies that provide claims administration services to self-funded plans (referred to as "third-party administrators"). The Company had 49.1 million lives under contract from its healthcare clientele at December 31, 2001, a 6% decrease from December 31, 2000. See "-- Results of Operations -- Key Operating Indicators".
The Company believes that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides guidance on revenue recognition and related disclosures and was effective beginning October 1, 2000. The Company was previously following the requirements provided under SAB 101 and, accordingly, the implementation of this pronouncement had no impact on the Company's financial position or results of operations for 2001 or 2000.
Approximately $4.6 million of the Company's accounts receivable balance of $9.4 million at December 31, 2001 is attributable to provider bill audit services. The provider bill audit accounts receivable represents the amounts invoiced by the Company to its clients for its fee for completed provider audits. For each completed audit, prior to invoicing, the Company obtains a sign-off 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 that at December 31, 2001 was attributable to provider bill audits completed represented approximately 3,000 completed audits for nine clients. 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.
Also, in June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets", which establishes the accounting for goodwill and other intangible assets following their recognition. FAS 142 applies to all goodwill and other intangible assets whether acquired singly, as part of a group, or in a business combination. FAS 142 provides that goodwill should not be amortized but should be tested for impairment annually using a fair-value based approach. In addition, FAS 142 provides that other intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". FAS 142 is effective for the Company beginning on January 1, 2002. The Company will now be required to perform a transitional impairment test under FAS 142 for all goodwill recorded as of January 1, 2002. Any impairment loss recorded as a result of completing the transitional impairment test will be treated as a change in accounting principle. The impact of the adoption of FAS 142 on the Company's results of operations for all periods beginning on or after January 1, 2002 will be to eliminate amortization of goodwill. Management of the Company has not performed a transitional impairment test under FAS 142 and accordingly cannot estimate the impact of the adoption of FAS 142 as of January 1, 2002.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (FAS 143), "Accounting for Asset Retirement Obligations". FAS 143 is effective for fiscal years beginning after June 15, 2002, and provides accounting requirements for asset retirement obligations associated with tangible long-lived assets. The Company has not yet determined the effects of this standard on its financial statements.
For a typical new healthcare client, it takes up to six months from the contract signing (when the lives are "sold") to complete the construction of electronic data interfaces necessary for the Company to begin providing service. At this point, the client is considered "installed." During the installation period, the Company must also hire and train quality staff necessary to provide contractual services. After installation, the Company receives files and data from the client from which it creates an inventory of backlog.
"Backlog" is the total dollar amount of potentially recoverable claims that the Company is pursuing or auditing on behalf of its clients at a given point in time. These claims are gross figures, prior to estimates of claim settlements and rejections. Backlog increases when the Company opens new files of potentially recoverable claims and decreases when files are recovered and closed or, after further investigation,
determined to be nonrecoverable. Backlog for a client will range from newly identified potential recoveries to potential recoveries that are in the late stages of the recovery process. Historically, recoveries (the amount actually recovered for the Company's clients prior to the Company's fee) have been produced from backlog in a generally predictable cycle. Any group of potential recoveries, sufficiently large in number to display statistically significant characteristics and that originates from a defined time period, tend to produce recovery results that are comparable to other groups having similar characteristics.
For the most part, the Company is paid contingency fees from the amount of claims recoveries it makes from backlog or recoveries it identifies through other cost containment and related recovery services on behalf of its clients. The Company's revenues are a function of recoveries and effective fee rates. Effective fee rates vary depending on the mix between services provided and client fee schedules. The fee schedules for each client are separately negotiated and reflect the Company's standard fee rates, the services to be provided and anticipated volume of services. The Company grants volume discounts and, for its recovery services, negotiates a lower fee when it assumes backlog from a client because the client will have already completed some of the recovery work. Because the Company records expenses as costs are incurred and records revenues only when a file is settled, there is a lag between the recording of expenses and related revenue recognition.
The following tables present certain key operating indicators and results of operations data for the Company for the periods indicated:
Total claims recoveries for 2001 increased approximately $1.2 million, or 0.5%, from 2000 claims recoveries. Subrogation recoveries for 2001 were about $2.0 million, or 1.0%, more than in the prior year, primarily due to an increase in throughput. Provider bill audit recoveries decreased about $1.2 million, or 3.9%, compared to 2001, in large part due to hospital access issues encountered during the first three quarters of 2001. These access issues, which mainly stem from the delaying tactics of hospitals that want to minimize the costs of being audited and potential negative audit adjustments, were the primary reason that provider bill audit backlog grew to be approximately 35% of total backlog as of December 31, 2001 compared to only 24%
The decrease in installed lives from 48.7 million at December 31, 2000 to 45.5 million at December 31, 2001 was caused by three factors. First, approximately 2.6 million lives were lost because clients were acquired by non-clients. Second, approximately 2.0 million lives associated with provider bill audit service clients which were not furnishing electronic claims data to the Company and were, therefore, relatively unproductive, were removed from the installed lives count. Third, approximately 1.3 million lives from UnitedHealth Group and 1.5 million lives from a managed care health organization based in the Northeast were terminated. These terminations did not, as a matter of contract, result in a decrease to the backlog.
Cost of Services. Cost of services increased 3.8% in 2001 to $31.6 million from $30.4 million in 2000. As a percentage of claims revenues, cost of services increased to 49.2% in 2001 from 47.8% in 2000. The increase in cost of services in total and as a percentage of claims revenues in 2001 compared to 2000 was primarily due to additional expenses for the investigation of files, including increases in staffing levels for the provider bill audit and overpayment recovery services related to new business sold during the year. In addition the Company incurred approximately $0.5 million in costs for services related to the Company's property and casualty recovery services.
Research and Development. The Company incurred approximately $0.5 million of expenses in 2001 related to research and development activities in connection with the creation of new products for the insurance industry compared to approximately $0.4 million in 2000.
Interest Income. Interest income decreased $0.3 million, or 28.9%, for the year ended December 31, 2001 as compared to the year ended December 31, 2000. The decrease was primarily due to the release of the restricted cash from the Subro Audit Acquisition escrow account which was used to pay down long-term debt.
Other -- Special Committee Expenses. In August 1999, the Company's Board of Directors appointed the Special Committee to evaluate strategic alternatives available to the Company, including its possible sale. During the first quarter of 2000, the Company incurred $90,000 of expenses related to the work of the committee. In March 2000, after determining that the interests of the Company's shareholders would be best served by focusing on building the Company's business, the Special Committee ceased seeking a buyer for the Company and its efforts to enhance shareholder value were assumed by the full Board of Directors. See "-- Other Matters -- Special Committee".
Tax. The provision for income taxes was approximately 31.3% of pre-tax income for the year ended December 31, 2001 compared to 41.5% for the year ended December 31, 2000. In September 2001, the Company concluded that in light of the passage of time with respect to the filing of the Company's tax returns for years up to and including 1997, it was proper to reverse previously accrued taxes reducing the tax provision for the third quarter by $681,000, net, or approximately $0.07 per share. This accrual related primarily to certain non-cash compensation charges taken in connection with the initial public offering of the Company's stock in 1997. Management believes that adequate amounts of tax and related interest and penalties, if any, have been provided for any adjustments that may result. The effective tax rates for 2001 (excluding the reversal of previously accrued taxes described above) and 2000 exceeded the Federal statutory tax rate as a consequence of state and local taxes and non-deductible expenses.
26.8% in 2000. The effective fee rate decreased in 2000 because of the recovery mix during the year, with relatively more recoveries coming from the provider bill audit and overpayments services and relatively more subrogation recoveries for clients with lower fee rates.
Support Expenses. Support expenses increased 7.5% to $17.1 million for the year ended December 31, 2000, from $15.9 million for 1999 due to hiring additional staff to support the planned growth and development of new operations. Support expenses as a percentage of claims revenues increased from 25.8% for the year ended December 31, 1999 to 26.8% for 2000. The increase in support expenses as a percentage of claims revenues resulted primarily from expenses incurred in the development of new operations. Support expenses typically do not vary in proportion to revenues.
Research and Development. The Company incurred $366,000 of expenses related to research and development activities in connection with the creation of new products for the insurance industry. See Item 1. "Business -- Business Developments -- Technology Development".
Depreciation and Amortization. Depreciation and amortization expenses increased 28.6% to $6.4 million for the year ended December 31, 2000 from $5.0 million for 1999. The increase in depreciation expense was attributable to the purchased property and equipment related to the Acquisitions and system upgrades. The increase in amortization expense was attributable to the addition of intangible assets acquired in the Acquisitions.
Interest Expense. Interest expense totaled $1.3 million and $0.9 million for the years ended December 31, 2000 and 1999, respectively. The increase in interest expense for 2000 resulted primarily from an increase in borrowed funds related to the stock repurchase program and the MedCap earn-out payment, and was impacted by higher effective interest rates during 2000.
Other -- Special Committee Expenses. In August 1999, the Board of Directors appointed the Special Committee to evaluate strategic alternatives available to the Company, including its possible sale. The Company incurred $451,000 in expenses related to the work of the committee during 1999 and $90,000 in expenses during the first quarter of 2000. In March 2000, after determining that the interests of the Company's shareholders would be best served by focusing on building the Company's business, the Special Committee ceased seeking a buyer for the Company and its efforts to enhance shareholder value were assumed by the full Board of Directors. See "-- Other Matters -- Special Committee".
Tax. Provision for income taxes was approximately 41.5% of pre-tax income for each of the years ended December 31, 2000 and 1999. The effective tax rate exceeded the Federal statutory tax rate as a consequence of state and local taxes and non-deductible expenses.
On November 1, 2001, the Company entered into a revolving credit facility with National City Bank of Kentucky, Bank One Kentucky, N.A. and Fifth Third Bank (the "Revolving Credit Facility"). The Company's obligations under the Revolving Credit Facility are secured by substantially all of the Company's assets, subject to certain permitted exceptions. The Revolving Credit Facility carries a maximum borrowing capacity of $40 million and will mature October 31, 2004. Principal amounts outstanding under the Revolving Credit Facility will bear interest at a variable rate based on the Prime Rate or Eurodollar Rate, as applicable, plus a pre-determined fixed margin. At December 31, 2001, the interest rate was 3.84% based on the one-month Eurodollar Rate plus the fixed margin. The Revolving Credit Facility contains customary covenants and events of default including, but not limited to, financial tests for interest coverage, net worth levels and leverage that may limit the Company's ability to pay dividends. It also contains a material adverse change clause. At December 31, 2001, $8 million was outstanding under the Revolving Credit Facility.
The Company provides services to healthcare plans that as of December 31, 2001 covered approximately 49.1 million lives. The Company's clients are national and regional healthcare payors, large third-party administrators or self-insured corporations. The Company's largest client is UnitedHealth Group. During the years ended December 31, 2001, 2000 and 1999, UnitedHealth Group generated 27%, 24% and 23% of the Company's revenues, respectively. The loss of this account could have a material adverse effect on the Company's business, results of operations and financial condition.
The Company expects that it will continue to recover from the backlog it has created for the terminated portions of the UHG business for 5 to 6 years after the effective dates of the terminations. The Company further expects that 60% to 70% of that UHG backlog will be recovered within 36 months of the effective dates of the terminations. Moreover, the Company does not anticipate that any of these UHG terminations will affect its previously published guidance on 2002 financial results from subrogation services. However, to the extent that the Company does not replace the business terminated by UHG, future subrogation recoveries and revenues will be diminished by the UHG terminations.
In August 1999, the Company's management approached the Company's Board of Directors to propose a transaction in which a private equity firm would acquire the Company for cash and the Company's management would acquire equity participation in the acquisition vehicle. In response, the Board of Directors appointed a Special Committee composed of the non-management directors and gave it a broad mandate to evaluate the strategic alternatives available to the Company and to explore those alternatives, as the committee deemed appropriate. After consulting with its own legal and financial advisers, the Special
Since that time, the Company has taken steps to enhance shareholder value through a variety of business development efforts and a continuation of the stock repurchase plan authorized by the Board in March 1999. See "-- Stock Repurchase Plan" and Item 1. "Business -- Business Developments".
On August 3, 2001, the Board of Directors, through its Nominating Committee, nominated Lauren N. Patch to the Board of Directors to fill a newly created directorship. Mr. Patch's nomination was approved by the Board of Directors on August 3, 2001, as permitted under the Company's Certificate of Incorporation and Bylaws. Mr. Patch will hold office until the next succeeding Annual Meeting, at which time his directorship will be subject to a vote of the Company's shareholders.
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, 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, 2001, the promissory note of $886,520 and accrued interest of $86,195 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 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.
BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
Cash and cash equivalents include cash, demand deposits and highly liquid investments with an original maturity of three months or less. Carrying values of cash and cash equivalents approximate fair value due to the short-term nature of the instruments.
Restricted cash represents the balance in client-specific bank accounts of amounts collected on behalf of certain clients. A portion of the balance will be disbursed to clients in accordance with the terms of the contracts between the Company and its clients, while the remainder will be released to the Company. Restricted cash at December 31, 2000 included $4.7 million which was held in escrow for the Subro Audit (as defined herein) earn-out. See Note 3 "Acquisitions".
Subrogation revenues are generally derived from contingent fee arrangements based on the recoveries effected by the Company on behalf of its clients. Revenue is recognized when a fee is earned based on the settlement of a case. A case is deemed settled when the Company can confirm that the parties agree on all material terms associated with the settlement.
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".
A reconciliation of the numerators and denominators of the basic and diluted earnings per common share calculations follows (dollars in thousands, except per share results):
Basic earnings per common share were computed based on the weighted-average number of shares outstanding during the year. The dilutive effect of stock options is calculated using the treasury stock method. Options to purchase 1,298,653, 1,470,978 and 1,088,358 shares for the years ended December 31, 2001, 2000 and 1999, respectively, were not included in the computation of diluted earnings per common share because the exercise prices of these options were greater than the average market price of the common shares during the respective years.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", established standards for reporting information about operating segments in the Company's financial statements. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is the Board of Directors of the Company.
The Company reports one segment which is Healthcare Services. The Company does not have any products or services which meet the quantitative or qualitative guidelines for segment reporting at December 31, 2001. Effective January 1, 2002, the Company will have three segments which qualify as reportable segments based on qualitative guidelines. The segments include: Healthcare Recovery Services, Property and Casualty Recovery Services and Troveris Software.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (FAS 141), "Business Combinations", which provides that all business combinations should be accounted for using the purchase method of accounting and establishes criteria for the initial recognition and measurement of goodwill and other intangible assets recorded in connection with a business combination. The provisions of FAS 141 apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for by the purchase method that are completed after June 30, 2001. The Company will apply the provisions of FAS 141 to any future business combinations.
Also, in June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets", which establishes the accounting for goodwill and other intangible assets following their recognition. FAS 142 applies to all goodwill and other intangible assets whether acquired singly, as part of a group, or in a business combination. FAS 142 provides that goodwill should not be amortized but should be tested for impairment annually using a fair-value based approach. In addition, FAS 142 provides that other intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". FAS 142 is effective for the Company beginning on January 1, 2002. The Company will now be required to perform a transitional impairment test under FAS 142 for all goodwill recorded as of January 1, 2002. Management of the Company has not performed a transitional impairment test under FAS 142 and accordingly cannot estimate the impact of the adoption of FAS 142 as of January 1, 2002.
On February 15, 1999, the Company acquired the assets and certain liabilities of MedCap Medical Cost Management, Inc., a California corporation ("MedCap"), for approximately $10 million, using available unrestricted cash and borrowed funds (the "MedCap Acquisition" and, together with the Subro Audit Acquisition, the "Acquisitions"). The Company paid approximately $4.8 million from February 15, 2000 through January 15, 2001 pursuant to an amendment to the original earn-out agreement. MedCap provides a variety of medical cost management services to health insurers and HMOs, primarily in California. These services include provider bill auditing, contract compliance review, identification of certain other payments, and cost management consulting services. The MedCap Acquisition was accounted for using the purchase method of accounting.
the results of operations would have been had the Acquisitions actually been consummated at the beginning of the periods presented.
The provision (benefit) for income taxes for the years ended December 31, 2001, 2000 and 1999 consists of the following (in thousands):
The following is a reconciliation of the effective tax rate to the federal statutory rate for the years ended December 31, 2001, 2000 and 1999:
Wellpoint Health Network, which accounted for more than 70% of the Company's revenue from its provider bill audit product in 2001 and 2000, accounted for 40% and 29% of the Company's accounts receivable balance at December 31, 2001 and 2000, respectively. Should a substantial portion of the current balance of this client's account receivable 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, 2001 or 2000.
Effective on January 1, 1997, the Company's employees began participation in the Company's 401(k) defined contribution pension plan. An annual expense provision for the plan is based upon the level of employee participation, as the plan requires the Company to match a certain portion of the employees' contributions. For the year ended December 31, 2001, participants were given the option of receiving their match in cash or in common stock of the Company. For participants choosing the stock match, the Company contributed up to 100% of the participant's contribution, not to exceed 6% of the participant's annual compensation. For participants choosing the cash match, the Company contributed up to 50% of the participant's contribution, not to exceed 6% of the participant's annual compensation. For the years ended December 31, 2000 and 1999, the Company match was made in common stock of the Company, up to 6% of the participant's annual compensation. Total retirement plan expense was approximately $707,100, $818,300 and $877,200 for the years ended December 31, 2001, 2000 and 1999, respectively.
Accrued bonuses included in the accompanying balance sheets at December 31, 2001 and 2000 approximate $3.5 million and $3.9 million, respectively.
On May 15, 2000, the Company entered into a third amendment (the "Amendment") to its February 1, 1998 revolving credit facility with National City Bank of Kentucky and the lenders named therein (the "Credit Facility"). The Company's obligations under the Credit Facility are secured by substantially all of the Company's assets, subject to certain permitted exceptions. Under the Amendment, the maturity date was extended to April 30, 2002 from January 31, 2001, the maximum borrowing capacity decreased to $40 million from $50 million, and certain other financial terms and covenants were amended. Principal amounts outstanding under the Credit Facility bear interest at a variable rate based on the Prime Rate or Eurodollar Rate, as applicable, plus the pre-determined fixed margin. At December 31, 2000, $14 million was outstanding under the Credit Facility.
On November 1, 2001, the Company entered into a revolving credit facility with National City Bank of Kentucky, Bank One Kentucky, N.A. and Fifth Third Bank (the "Revolving Credit Facility"), and the existing Credit Facility was terminated. The Company's obligations under the Revolving Credit Facility are secured by substantially all of the Company's assets, subject to certain permitted exceptions. The Revolving Credit Facility carries a maximum borrowing capacity of $40 million and will mature October 31, 2004. Principal amounts outstanding under the Revolving Credit Facility bear interest at a variable rate based on the Prime Rate or Eurodollar Rate, as applicable, plus a pre-determined fixed margin. At December 31, 2001, the interest rate was 3.84% based on the one-month Eurodollar Rate plus the fixed margin. The Revolving Credit Facility contains customary covenants and events of default including, but not limited to, financial tests for interest coverage, net worth levels and leverage that may limit the Company's ability to pay dividends. It also contains a material adverse change clause. At December 31, 2001, $8 million was outstanding under the Revolving Credit Facility.
The interest rate 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 Assets" and the related gain (or loss) on the contract is deferred in shareholders' equity (as a component of accumulated other comprehensive income). This deferred gain (or loss) is then amortized as an adjustment to interest expense over the same period in which the related interest payments being hedged are recognized in income. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of this contract is immediately recognized in income. The net effect of this accounting on the Company's operating results is that interest expense on the portion of the variable rate Revolving Credit Facility being hedged is generally recorded based on fixed interest rates. At the inception of the interest rate contract, the fair value of the hedge
In May 1997, the Company adopted the Trover Solutions, Inc. Non-Qualified Stock Option Plan for Eligible Employees (the "Employees' Plan"), the Trover Solutions, Inc. Amended and Restated Directors' Stock Option Plan (the "Directors' Plan") and the Trover Solutions, Inc. Employee Stock Purchase Plan (the "Purchase Plan"). On December 8, 1997, the Company adopted the Trover Solutions, Inc. 1997 Stock Option Plan for Eligible Participants (the "1997 Plan").
The Employees' Plan provides for the award of stock options to certain officers and key employees of the Company. Options under the Employees' Plan may be granted with an exercise price greater than or less than the market value of the Company's Common Stock on the date of grant. Awards under the Employees' Plan expire ten years from the date of grant, and pursuant to individual option agreements under the Employees' Plan, vest ratably over at least a three-year period. As provided in the Employees' Plan, all options granted to the Company's employees automatically vest in the event of a change in control. At December 31, 2001, 673,750 shares of Common Stock were reserved for issuance under the Employees' Plan, including 154,233 shares available for future award.
Under the Purchase Plan, eligible employees may purchase shares of the Company's Common Stock, subject to certain limitations, at 85% of its market value. Purchases are made from payroll deductions up to a maximum of 15% of an employee's eligible annual compensation. During the year ended December 31, 2001, 35,782 shares of the Company's Common Stock were purchased under the Purchase Plan, resulting in 216,832 reserved shares of Common Stock being available for purchase at December 31, 2001.
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, 2001, 1,755,953 shares of Common Stock have been reserved under the 1997 Plan, of which 101,034 shares are available for future award.
The Company accounts for options granted under its employee stock-based compensation plans in accordance with APB No. 25. As a result, the Company has not recognized compensation expense for stock options granted with an exercise price equal to the quoted market price of the common stock on the date of grant and that vest based solely on continuation of employment by the recipient of the option award. The Company adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes, the fair value of each option grant and stock-based award has been estimated as of the date of grant using the Black-Scholes option pricing model. The following summarizes the weighted average assumptions used in valuing awards under the Employees' Plan, Directors' Plan and 1997 Plan:
Had compensation expense been recognized under the provisions of SFAS No. 123, utilizing the assumptions in the table above, the Company's net income for the years ended December 31, 2001, 2000 and
The effects of applying SFAS No. 123 in the pro forma disclosures are not likely to be representative of the effects on pro forma net income or earnings per common share for future years because variables such as option grants, option exercises, and stock price volatility included in the disclosures may not be indicative of actual future activity.
The Company's Board approved a stock repurchase plan on March 12, 1999 under which the Company is authorized to repurchase, from time to time, up to $10 million of the Company's Common Stock in the open market, at prices per share deemed favorable by the Company. Shares may be repurchased using cash from operations and borrowed funds and may continue until such time as the Company has repurchased $10 million of the Company's Common Stock or until it otherwise determines to terminate the stock repurchase plan. The Company repurchased 19,500 shares of its own stock during the year ended December 31, 2001 at an average price of $4.02. From inception of the program through December 31, 2001, the total repurchased shares are 1,792,265 at a cost of $7.1 million, or an average cost of $3.97 per share. All of the reacquired shares of Common Stock are reflected as treasury stock on the accompanying Balance Sheets.