Approximately $4.1 million and $4.4 million of the Company’s accounts receivable balance of $7.0 and $9.4 million at December 31, 2003 and 2002, respectively, is attributable to subrogation services. The subrogation accounts receivable represents the Company’s fees for cases in which the parties have reached settlements (including settlements of the subrogation claims of the Company’s clients), but the Company has not yet received the cash from the settlement of the subrogation claim. The Company withholds its fee from the gross recovery proceeds of the subrogation claims that it collects on behalf of its clients. An allowance for doubtful accounts is maintained for the estimated loss from settlements that are later broken or significantly delayed, based on the Company’s historical experience. The accounts receivable balance that at December 31, 2003 and 2002 was attributable to subrogation claims represented approximately 3,200 settled cases for approximately 130 clients and approximately 4,000 settled cases for approximately 140 clients, respectively, each one subject to its own settlement agreement with its own settling parties. If the receipt of cash from a significant number of the settled cases comprising the subrogation accounts receivable balance were significantly delayed by third parties to those settled cases (because of broken settlement agreements, for example), additional allowances may be required.
Effective January 1, 2002, the Company instituted a program of self-insurance that offers group healthcare coverage to its employees and their spouses and dependent children. The Company’s provision for 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. 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.
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 FAS 123. The Company has elected to continue to account for options granted under its employee stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. As a result, the Company has not recognized
The Property and Casualty Recovery Services effective fee rate for the year ended December 31, 2003 decreased to 20.3% from 24.2% in 2002. The decrease in fee rate was primarily attributable to the change in mix of referral and closed claim contracts, which typically bear higher fees, and full outsourcing contracts, which typically bear lower fees, that occurred during the year ended December 31, 2003.
Support Expenses. Support expenses for the Property and Casualty Recovery Services segment decreased 50% to $0.4 million in 2002 from $0.8 million in 2001. Support expenses decreased as a percentage of claims revenues from 403% in 2001 to 62% in 2002. The decrease in support expenses resulted from the movement of certain sales and marketing personnel from the Property and Casualty Services segment to Corporate Sales & Marketing. Prior year amounts have not been reclassified because management of the Company views this as a change in position.
Treasury stock at cost; 3,261 shares and 3,088 shares at December 31, 2003 and 2002, respectively
On November 6, 2001, the Company entered into an interest rate swap contract to pay 3.66% and to receive the one-month LIBOR rate on a $4 million notional amount of the Revolving Credit Facility. The Company uses derivative financial instruments to manage the risk that changes in interest rates will affect the amount of its future interest payments. Under the interest rate swap contract, the Company agrees to pay an amount equal to a specified fixed rate of interest times a notional principal amount, and to receive in return an amount equal to a variable rate of interest times the same notional principal amount. The notional amounts of the contract are not exchanged. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. The interest rate swap contract was entered into with a major financial institution in order to minimize counterparty credit risk.
Should the Company enter into contracts that 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.
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, 2003, 671,250 shares of Common Stock were reserved for issuance under the Employees’ Plan, including 176,583 shares available for future award.
As of December 31, 2003, the Company had granted 10,000 shares of restricted stock, all of which were granted during 2002. The weighted average grant price was $5.20. The shares vest over a five year period. The cost of the awards, determined to be the fair market value of the shares at the date of grant, is charged to compensation expense ratably over the vesting period. The Company has recorded compensation expense of $11,000 and $13,000 for the years ended December 31, 2003 and 2002, respectively.
On February 12, 1999, the Board adopted a Stockholder Rights Plan (the “Rights Plan”) and declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock of