SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TROVER SOLUTIONS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
----------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
(TROVER LOGO)
April 2, 2003
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Trover Solutions, Inc. to be held on Friday, May 9, 2003 at Watterson Tower,
12th Floor, Louisville, Kentucky 40218. The meeting will begin promptly at 9:30
a.m., local time.
The items of business are listed in the following Notice of Annual Meeting
and are more fully addressed in the Proxy Statement provided herewith.
Please date, sign and return your proxy card in the enclosed envelope at
your convenience to assure that your shares will be represented and voted at the
Annual Meeting even if you cannot attend. If you attend the Annual Meeting, you
may vote your shares in person even though you have previously signed and
returned your proxy.
On behalf of your Board of Directors, thank you for your continued support
and interest in Trover Solutions, Inc.
Sincerely,
/s/ Patrick B. McGinnis
Patrick B. McGinnis
Chairman of the Board and
Chief Executive Officer
1600 Watterson Tower
Louisville, Kentucky 40218
(TROVER LOGO)
TROVER SOLUTIONS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 9, 2003
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the "Annual
Meeting") of Trover Solutions, Inc. (the "Company") will be held at Watterson
Tower, 12th Floor, Louisville, Kentucky 40218, on Friday, May 9, 2003, at 9:30
a.m., local time, for the following purposes:
(i) To elect two (2) Class C directors to three-year terms expiring at
the 2006 annual meeting of stockholders;
(ii) To ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company to serve for 2003; and
(iii) To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 18, 2003 as
the record date for determination of stockholders entitled to receive notice of,
and to vote at, the meeting and any adjournment thereof. A list of stockholders
as of the close of business on March 18, 2003 will be available at the Company's
offices for examination by stockholders during normal business hours during the
period from April 29, 2003, through the Annual Meeting.
Your attention is directed to the Proxy Statement provided with this
Notice.
By Order of the Board of Directors,
/s/ Douglas R. Sharps
Douglas R. Sharps
Executive Vice President --
Finance and Administration,
Chief Financial Officer and Secretary
Louisville, Kentucky
April 2, 2003
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
TROVER SOLUTIONS, INC.
1600 WATTERSON TOWER
LOUISVILLE, KENTUCKY 40218
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 9, 2003
APRIL 2, 2003
INFORMATION ABOUT THE ANNUAL MEETING OF STOCKHOLDERS
The enclosed form of proxy is solicited by the Board of Directors (the
"Board") of Trover Solutions, Inc. (the "Company) for use at the annual meeting
of stockholders to be held on Friday, May 9, 2003 (the "Annual Meeting"), and
any adjournment thereof. When such proxy is properly executed and returned, the
shares it represents will be voted as directed at the meeting and any
adjournment thereof or, if no direction is indicated, such shares will be voted
in favor of the proposals set forth in the notice attached hereto. Any
stockholder giving a proxy has the power to revoke it at any time before it is
voted. Revocation of a proxy is effective upon receipt by the Secretary of the
Company of either (i) an instrument revoking such proxy or (ii) a duly executed
proxy bearing a later date. Furthermore, if a stockholder attends the Annual
Meeting and elects to vote in person, any previously executed proxy is thereby
revoked.
Only stockholders of record as of the close of business on March 18, 2003
will be entitled to vote at the Annual Meeting. As of that date, the Company had
outstanding 8,451,229 shares of common stock, $0.001 par value (the "Common
Stock"). Each share of Common Stock is entitled to one vote. No cumulative
voting rights are authorized and appraisal rights for dissenting stockholders
are not applicable to the matters being proposed. It is anticipated that this
Proxy Statement and the accompanying proxy will first be mailed to stockholders
of record on or about April 2, 2003.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the inspector of elections appointed for the meeting who will also determine
whether a quorum is present for the transaction of business. The presence in
person or by proxy of holders of a majority of the shares of Common Stock
outstanding on the record date will constitute a quorum for the transaction of
business at the Annual Meeting or any adjournment thereof. Abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining whether a quorum is present. Shares held by nominees for beneficial
owners will be counted for purposes of determining whether a quorum is present
if the nominee has the discretion to vote on at least one of the matters
presented even if the nominee may not exercise discretionary voting power with
respect to other matters and voting instructions have not been received from the
beneficial owner (a "broker non-vote").
The affirmative vote of a plurality of the shares present in person or
represented by proxy at the Annual Meeting and entitled to vote on the election
of directors is required to elect each of the directors. The affirmative vote of
a majority of the shares present in person or by proxy and entitled to vote is
required with respect to the ratification of the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants and any
other matter that may properly come before the Annual Meeting. With respect to
any other matter that may properly come before the Annual Meeting for
stockholder consideration, abstentions will be counted in determining the
minimum number of affirmative votes required for approval of any matter
presented for stockholder consideration and accordingly, will have the effect of
a vote against any such matter. Broker non-votes will not be counted as votes
for or against matters presented for stockholder consideration.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Company's Board is divided into three classes designated as Class A,
Class B and Class C, serving staggered, three-year terms. Of the current six
directors, two will continue to serve for terms expiring in 2004 and two will
continue to serve for terms expiring in 2005 (the "Continuing Directors"). At
the Annual Meeting, Jill L. Force and Patrick B. McGinnis will stand for
election to serve as Class C directors for three-
year terms expiring at the 2006 annual meeting of stockholders, or until their
successors are duly elected and qualified.
The Board has no reason to believe that either of the nominees for the
office of director will be unavailable for election as a director. However, if
at the time of the Annual Meeting either of the nominees should be unable or
decline to serve, the persons named in the proxy will vote for such substitute
nominees, vote to allow the vacancy created thereby to remain open until filled
by the Board, or vote to reduce the number of directors for the ensuing year, as
the Board recommends. In no event, however, can the proxy be voted to elect more
than two directors. The affirmative vote of a plurality of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors is required to elect the directors.
Set forth below are the nominees for election to the Board and the
Continuing Directors. Also set forth below as to each nominee and Continuing
Director is his or her age, the year in which he or she was first elected a
director, a brief description of his or her principal occupation and business
experience during the past five years, directorships of certain companies
presently held by him or her, and certain other information, which information
has been furnished by the respective individuals.
NOMINEES FOR CLASS C DIRECTORS -- TERMS EXPIRING 2006
MS. JILL L. FORCE
Age 50
Director since 1997
Ms. Force has been a partner with The Allegro Group, a healthcare financial
advisory firm, since November 1999. From May 2000 to December 2001 she served as
Chief Financial Officer for Rehab Designs of America Corporation, a
privately-held healthcare company ("RDA") as part of a turn-around project
completed in December 2001. RDA filed a voluntary bankruptcy petition under
Chapter 11 of the Federal bankruptcy laws in February 2001. Ms. Force was
employed by Vencor, Inc. ("Vencor") from 1989 to 1999, most recently as Senior
Vice President, General Counsel and Corporate Secretary. Vencor filed a
voluntary bankruptcy petition under Chapter 11 of the Federal bankruptcy laws in
September 1999.
MR. PATRICK B. MCGINNIS
Age 55
Director since 1997
Mr. McGinnis serves as Chairman, Chief Executive Officer, and a director of
the Company. In 1988, Mr. McGinnis left Humana Inc., where he served as Vice
President -- Finance & Planning, to co-found the Company. He served as the
Company's Chief Executive Officer until August 1996, when he left the Company to
become President of the Medaphis Healthcare Information Technology Company. He
rejoined the Company and assumed his current responsibilities in January 1997.
CONTINUING CLASS A DIRECTORS -- TERMS EXPIRING 2004
MR. JOHN H. NEWMAN
Age 58
Director since 1997
Mr. Newman is a senior partner in the international law firm of Sidley
Austin Brown & Wood LLP. He joined the firm in 1972 and was made partner in
1980. Based in New York City, Mr. Newman's legal practice is concentrated on the
representation of domestic and international issuers and underwriters in the
capital formation process.
2
MR. CHRIS B. VAN ARSDEL
Age 59
Director since 1997
Mr. Van Arsdel is an independent consultant in the technology services
industry. He previously served as a Senior Vice President at BancTec, Inc.
("BancTec"). He was responsible for the company's hardware and software
products, and its service organization. Prior to joining BancTec, Mr. Van Arsdel
was an executive with Electronic Data Systems Corporation, responsible for
technical engineering and customer service support groups.
CONTINUING CLASS B DIRECTORS -- TERMS EXPIRING 2005
MR. WILLIAM C. BALLARD, JR.
Age 62
Director since 1997
Mr. Ballard is of counsel to the law firm Greenebaum Doll & McDonald in
Louisville, Kentucky. He retired in 1992 after 22 years as the Chief Financial
Officer and a director of Humana Inc. Mr. Ballard serves on the boards of
directors of Health Care REIT, Inc. and UnitedHealth Group.
MR. LAUREN N. PATCH
Age 51
Director since 2001
Mr. Patch is the former Chief Executive Officer of Wyncom, Inc., a provider
of leadership training and education. He also served as a consultant to and
Interim Chief Executive Officer of InsurePoint.com, an internet company that
facilitates communications between insurers and their agents. He is the past
Chief Executive Officer and President of The Ohio Casualty Insurance Company, a
Fortune 1000 company in the insurance and financial services sectors. He is a
past director of Wyncom, Inc., Ohio Casualty Corporation, First Financial
Bancorp and the Insurance Services Office.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends the election of each of Jill L. Force and
Patrick B. McGinnis to the office of Class C director to hold office for a
three-year term, or until their successors are duly elected and qualified.
CORPORATE GOVERNANCE
The Company's Board of Directors is committed to maintaining high standards
of corporate governance, ensuring the integrity and transparency of the
Company's financial statements and promoting a corporate atmosphere dedicated to
the long-term benefit of the Company's stockholders. The Board will continue to
review the Company's corporate governance policies and practices, comparing them
to those suggested by various authorities in corporate governance and the
practices of other public companies. Based upon the Board's on-going review, the
Company intends to adopt such changes to its corporate governance policies and
practices as the Board believes reflect the best corporate governance policies
and practices for the Company. The Company also will adopt such changes to its
corporate governance policies and practices as are required by the
Sarbanes-Oxley Act of 2002, rules promulgated by the Securities and Exchange
Commission and the National Association of Securities Dealers' listing
standards.
DIRECTOR INDEPENDENCE
The Company believes that independent directors play an important role in
maintaining investor confidence and in assuring fair and impartial management of
the Company in the best interests of its stockholders. Accordingly, the
Company's Board is comprised of a majority of independent directors as defined
by the National Association of Securities Dealers' listing standards. These
standards generally define
3
an independent director as one who is not an officer or employee of the Company
and does not have any relationship that may interfere with the exercise of his
or her independent judgment in carrying out the responsibilities of a director.
The Company has been following closely recent proposals by the National
Association of Securities Dealers relating to the definition and role of
independent directors in corporate governance and will adopt such changes to its
corporate governance policies and practices as required by these proposals once
they are final.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
The Company has an Audit Committee of the Board which is composed of Jill
L. Force, Chairperson, Lauren N. Patch, and Chris B. Van Arsdel. Each member of
the Audit Committee is "independent" as defined by the National Association of
Securities Dealers' listing standards. The Audit Committee is responsible for,
among other things, appointing (subject to stockholder approval) the accounting
firm that will serve as independent accountants for the Company and reviewing
and pre-approving all audit and non-audit services provided to the Company by
its independent accountants. The Audit Committee is also responsible for
reviewing the Company's internal accounting controls and annual and quarterly
financial statements. The Audit Committee may exercise such additional authority
as may be prescribed from time to time by resolution of the Board. In February
2002, the Board adopted a revised written charter for the Audit Committee which
was previously sent to the Company's stockholders with the Company's proxy
statement for the 2002 annual meeting of stockholders. The Board is currently
reviewing the Audit Committee's written charter in light of recent pending and
proposed statutory and regulatory requirements relating to the composition and
duties of public company audit committees, and intends to amend the Audit
Committee's written charter to comply with such requirements once they are final
and effective.
Compensation and Nominating Committee
During 2002, the Company combined the functions of its nominating and
compensation committees into the Compensation and Nominating Committee. The
Compensation and Nominating Committee is composed of William C. Ballard, Jr.,
Chairperson, John H. Newman and Lauren N. Patch. The Compensation and Nominating
Committee, among other things, approves base salaries of executive officers,
approves the terms of annual incentive or bonus plans in which executive
officers participate, and reviews and makes recommendations to the Board
concerning approval and adoption of and amendments to stock-based compensation
plans. Additionally, the Compensation and Nominating Committee is responsible
for reviewing the qualifications and backgrounds of, and recommending,
candidates for election to the Board. The Compensation and Nominating Committee
may consider recommendations from stockholders for nominees to the Board if
submitted in accordance with the Company's Bylaws. The Compensation and
Nominating Committee may exercise such additional authority as may be prescribed
from time to time by resolution of the Board.
Attendance
During 2002, the Board met 4 times, the Audit Committee met 7 times and the
Compensation and Nominating Committee met 5 times. Each of the directors
attended 75% or more of the aggregate number of meetings of the Board and of the
committees on which they served during 2002.
DIRECTORS' COMPENSATION
The Company pays its non-employee directors an annual retainer in the
amount of $15,000 ($17,000 for committee chairpersons) plus $1,500 for
attendance (in person or by telephone) at each meeting of the Board and at each
meeting of a committee of the Board that does not coincide with a meeting of the
full Board, with one-third of the annual retainer paid in Common Stock pursuant
to the Company's Outside Directors Equity Compensation Plan (the "2002 Outside
Directors Stock Plan"). In 1998, the Company adopted the 1998 Deferred
Compensation Plan for Directors (the "Deferred Plan"). The Deferred Plan
provides a mechanism under which a director can elect to defer the payment of
the foregoing fees until after the earlier of his or her
4
death, resignation, removal or retirement as a director. To date, there have
been no deferrals under the Deferred Plan.
During 2002, the Company provided for the grant of options to purchase
Common Stock to each non-employee director of the Company under the 2002 Outside
Directors Stock Plan. The 2002 Outside Directors Stock Plan replaced the
Company's Amended and Restated Directors' Stock Option Plan (the "Directors'
Plan"), which terminated as to the granting of options on April 1, 2002. Under
the 2002 Outside Directors Stock Plan, each director automatically is granted an
option to purchase 10,000 shares of Common Stock on the effective date of his or
her initial election or appointment as a member of the Board at an option
exercise price equal to the fair market value of a share of Common Stock on such
date. Further, each director automatically is granted each calendar year
subsequent to the calendar year in which his or her initial election or
appointment as a member of the Board becomes effective, options under the 2002
Outside Directors Stock Plan to purchase 1,000 shares of Common Stock as of each
March 31, June 30, September 30, and December 31, if he or she is still a
director on such grant date, at an exercise price equal to the fair market value
of a share of Common Stock on such date. Options to purchase 102,000 shares of
Common Stock currently are outstanding under the Directors' Plan and the 2002
Outside Directors Stock Plan.
As a further means of aligning directors' and stockholders' interests in
the enhancement of stockholder value, in December 2000 the Board adopted
resolutions that put in place stock ownership requirements for non-employee
directors. Each non-employee director is required to accumulate Common Stock
equal in value to one year's annual retainer. Non-employee directors serving on
the Board at the time of adoption had until January 1, 2002 to accumulate the
required stockholdings and newly elected non-employee directors have one year
from their election to accumulate the required stockholdings. As of March 18,
2003, each of the Company's non-employee directors had accumulated Common Stock
equal in value to one year's annual retainer based on the closing price of the
Company's Common Stock as of such date.
MANAGEMENT COMMON STOCK OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of March 18, 2003 by (i) the Company's
Chief Executive Officer and named executive officers (as hereinafter defined),
(ii) each of the Company's directors and (iii) such directors and all executive
officers as a group.
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT OF
NAME OWNED(1) CLASS(2)
---- ------------ -----------
Patrick B. McGinnis......................................... 503,601(3) 6.0%
Robert G. Bader, Jr......................................... 129,039(4) 1.5%
Douglas R. Sharps........................................... 190,387(5) 2.3%
Debra M. Murphy............................................. 197,784(6) 2.3%
Mark J. Bates............................................... 130,110(7) 1.5%
William C. Ballard, Jr...................................... 58,071(8) *
Jill L. Force............................................... 25,571(9) *
John H. Newman.............................................. 33,071(10) *
Lauren N. Patch............................................. 8,071(11) *
Chris B. Van Arsdel......................................... 24,071(12) *
All executive officers and directors as a group (12
persons).................................................. 1,380,617 16.3%
---------------
* Beneficial ownership represents less than 1% of the Company's outstanding
Common Stock.
(1) Under the rules of the Securities and Exchange Commission, a person is
deemed to be a "beneficial owner" of a security if that person has or
shares "voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security. A person also is
deemed to be a beneficial owner of any securities which that person has the
right to acquire within sixty (60) days. Under these rules, more than one
5
person may be deemed to be a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as of which he
or she has no economic or pecuniary interest. Except as set forth in the
footnotes below, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as being
beneficially owned by them. Shares have been rounded to avoid listing
fractional shares issued in connection with the Company's Employee Stock
Purchase Plan (the "Stock Purchase Plan").
(2) Based on an aggregate of 8,451,229 shares of Common Stock issued and
outstanding as of March 18, 2003.
(3) Includes 5,000 shares held by Mr. McGinnis's spouse. Also includes 386,000
shares that are not currently outstanding, but that may be acquired within
sixty (60) days upon the exercise of stock options granted under the
Company's Non-Qualified Stock Option Plan for Eligible Employees (the
"Option Plan") and the Company's 1997 Stock Option Plan for Eligible
Participants (the "Stock Option Plan").
(4) Includes 6,300 shares Mr. Bader holds jointly with his spouse. Includes
4,025 shares acquired under the Stock Purchase Plan. Also includes 110,000
shares that are not currently outstanding, but that may be acquired within
sixty (60) days upon the exercise of stock options granted under the Stock
Option Plan.
(5) Includes 163,750 shares that are not currently outstanding, but that may be
acquired within sixty (60) days upon the exercise of stock options granted
under the Option Plan and the Stock Option Plan.
(6) Includes 700 shares which are held by Ms. Murphy as trustee for a minor
child. Also includes 175,000 shares that are not currently outstanding, but
that may be acquired within sixty (60) days upon the exercise of stock
options granted under the Option Plan and the Stock Option Plan.
(7) Includes 120,000 shares that are not currently outstanding, but that may be
acquired within sixty (60) days upon the exercise of stock options granted
under the Stock Option Plan.
(8) Includes 5,000 shares held by Mr. Ballard in a charitable remainder trust
for the benefit of his son, 5,000 shares held by Mr. Ballard in a
charitable remainder trust for the benefit of his daughter and 10,000
shares held by Mr. Ballard in a charitable remainder trust for the benefit
of his spouse. Mr. Ballard has sole voting power over the shares. Also,
includes 17,334 shares that are not currently outstanding, but that may be
acquired within sixty (60) days upon the exercise of stock options under
the Directors' Plan.
(9) Includes 17,334 shares that are not currently outstanding, but that may be
acquired within sixty (60) days upon the exercise of stock options under
the Directors' Plan.
(10) Includes 15,000 shares owned by Mr. Newman's spouse and 17,334 shares that
are not currently outstanding, but that may be acquired within sixty (60)
days upon the exercise of stock options under the Directors' Plan.
(11) Includes 3,334 share that are not currently outstanding, but may be
acquired within sixty (60) days upon the exercise of stock options under
the Directors' Plan.
(12) Includes 17,334 shares that are not currently outstanding, but that may be
acquired within sixty (60) days upon the exercise of stock options under
the Directors' Plan.
6
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of December 31, 2002 with
respect to shares of Common Stock to be issued upon the exercise, and the
weighted-average exercise price, of all outstanding options and rights granted
under the Company's equity compensation plans, as well as the number of shares
available for future issuance under such plans.
NUMBER OF SECURITIES REMAINING
WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO BE ISSUED EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
UPON EXERCISE OF OUTSTANDING OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY OPTIONS, WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- --------------------------------- -------------------- -------------------------------
(A) (B) (C)
Equity Compensation Plans
Approved by Security
Holders(1)................. 2,251,235(2) $8.82 635,457
Equity Compensation Plans Not
Approved by Security
Holders(3)................. N/A(3) N/A(3) 8,000(3)
Total.................... 2,251,235 $8.82 643,457
---------------
(1) Equity compensation plans approved by security holders are the 2002 Outside
Directors Stock Plan, the Directors' Plan, the Stock Option Plan, the Option
Plan and the Stock Purchase Plan. The 2002 Outside Directors Stock Plan was
approved by the Company's stockholders at the Company's 2002 annual meeting
of stockholders held on May 10, 2002. The Stock Option Plan was originally
approved by the Company's stockholders at a special meeting of stockholders
held on December 8, 1997, and subsequently amended at the Company's 1999
annual meeting of stockholders held on May 3, 1999, to increase the number
of shares of Common Stock reserved for issuance under the Stock Option Plan
from 860,000 to 1,760,000. The Directors' Plan, the Option Plan and the
Stock Purchase Plan were each approved by the Company's sole stockholder,
Medaphis Corporation, prior to the completion of the Company's initial
public offering on May 22, 1997.
(2) Excludes an aggregate of 2,480 shares of Common Stock issued to non-employee
directors as partial payment of their annual retainer under the 2002 Outside
Directors Stock Plan and an aggregate of 105,776 shares of Common Stock
issued under the Stock Purchase Plan.
(3) The only equity compensation plan not approved by security holders is a
restricted stock award (the "Restricted Stock Award") granted to Thomas
Quinn on March 1, 2002 as an inducement to Mr. Quinn to enter into
employment with the Company. Pursuant to the Restricted Stock Award, Mr.
Quinn was granted 10,000 shares of Common Stock, vesting annually in five
equal 2,000 share increments commencing on October 1, 2002.
EMPLOYMENT AGREEMENTS
Effective January 1, 2003, the Company entered into an employment agreement
with Mr. McGinnis, replacing his prior employment agreement with the Company
originally entered into by Mr. McGinnis in May 1997. Pursuant to his employment
agreement, Mr. McGinnis serves as Chairman and Chief Executive Officer of the
Company. The employment agreement has an initial term of three years and renews
automatically for subsequent two-year periods, unless a notice of termination is
delivered by either party at least sixty days prior to the end of the initial
term or the end of a renewal term.
Under the terms of the employment agreement, Mr. McGinnis is entitled to a
minimum base salary of $325,000, subject to annual percentage increases for
inflation equivalent to those increases given in the normal course of business
to Company employees on substantially a Company-wide basis. In addition, Mr.
McGinnis's employment agreement entitles him to participate in the Company's
Management Group Incentive Compensation Plan, to receive such awards of stock
options as determined by the Company's Compensation and Nominating Committee and
to receive such fringe benefits as the Company may provide from time to time to
its executive employees, including, group health insurance, life insurance, and
disability
7
insurance. Further, Mr. McGinnis received a bonus of $200,000 in conjunction
with signing his employment agreement. The bonus is subject to reimbursement by
Mr. McGinnis to the Company if Mr. McGinnis terminates his employment with the
Company during the initial three-year term of his employment as follows: (i) if
such termination occurs prior to January 1, 2004, Mr. McGinnis is required to
reimburse the entire $200,000 signing bonus; (ii) if such termination occurs on
or after January 1, 2004 but prior to January 1, 2005, Mr. McGinnis is required
to reimburse $133,334 to the Company; and (iii) if such termination occurs on or
after January 1, 2005 but prior to January 1, 2006, Mr. McGinnis is required to
reimburse $66,667 to the Company.
The Company may terminate the employment agreement and all of its
obligations thereunder if Mr. McGinnis (i) materially breaches any term of the
employment agreement and fails to cure such breach within ten days after written
notice of such breach from the Board (no cure period is permitted for breaches
of certain confidentiality and noncompete provisions contained in the employment
agreement in favor of the Company), (ii) commits any other act in bad faith
materially detrimental to the business or reputation of the Company, or (iii)
engages in illegal activities or is convicted of any felony involving fraud,
deceit, or moral turpitude. The Company's obligations under the employment
agreement to pay salary, provide for the continued vesting of stock option
awards, and provide for health insurance benefits continue for the greater of
the remainder of the renewal term or two years if the Company terminates the
employment agreement for any reason other than (i)-(iii) above, or if Mr.
McGinnis terminates the agreement for one of the following reasons (i) the
Company materially breaches any term of the employment agreement and fails to
cure such breach within ten days after written notice of such breach from Mr.
McGinnis, (ii) the Company assigns Mr. McGinnis duties, or significantly reduces
his assigned duties, in a manner inconsistent with his position with the Company
(without his consent), (iii) the Company requires Mr. McGinnis's relocation
outside of the metropolitan Louisville, Kentucky area (without his consent),
(iv) the Company fails to obtain the assumption of the employment agreement by
any successors to the Company, (v) Mr. McGinnis dies or becomes mentally or
physically incapacitated or disabled so as to be materially unable to perform
his duties under his employment agreement, or (vi) a Change in Control Event (as
defined in the employment agreement) occurs, and Mr. McGinnis's employment is
terminated by Mr. McGinnis within 120 days thereafter (in this latter event, Mr.
McGinnis may also be entitled to receive a certain Gross-Up Payment (as defined
in the employment agreement)). The employment agreement contains certain
confidentiality and noncompete provisions in favor of the Company.
In addition, on June 30, 2000, pursuant to Board authorization and in
accordance with the terms of an Amended Promissory Note (see "Certain
Relationships and Related Transactions" for a description of the Amended
Promissory Note), the Company and Mr. McGinnis entered into a deferred
compensation agreement (the "Deferred Compensation Agreement"). Under the
Deferred Compensation Agreement, 50% of the amount otherwise payable to Mr.
McGinnis under the Company's Management Group Incentive Compensation Plan is to
be deferred until the Amended Promissory Note is paid in full, with such
deferred compensation then being paid in full to Mr. McGinnis within 30 days
thereafter. The Company has full right of set-off against any deferred
compensation under the Deferred Compensation Agreement should Mr. McGinnis
default under the Amended Promissory Note. At the election of Mr. McGinnis, the
payment of the deferred compensation, upon payment of the Amended Promissory
Note, may be extended for a period of not more than ten years. At March 31,
2003, the amount of deferred compensation was $182,013, with accrued interest of
$9,809.
The Company has entered into severance agreements (the "Severance
Agreements") with Ms. Murphy and Messrs. Bader, Bates Jefferson, Longshore and
Sharps, which provide that in the event that such executive officer is
terminated by the Company without "Cause" (as such term is defined in the
Severance Agreements), the Company would continue to pay that executive officer
his or her base salary in effect on the date of termination for a period of one
year following the day on which the termination occurs ("Severance Pay") and for
a period of one year from the date of termination, pay, or reimburse such
executive officer for, the Company-paid portion of medical premiums under the
Company's group health plan that would apply to such executive officer had he or
she not been terminated, provided that the executive officer makes a timely
election of such continuation coverage under COBRA. Severance Pay would be paid
and delivered to the
8
executive officer on the same basis that the executive officer's regular base
salary was paid and delivered prior to termination, would be reduced to the
extent the executive officer receives compensation as an employee from an entity
other than the Company during the one-year period following termination, and
would not include any amounts of incentive compensation.
In addition, the Severance Agreements provide that if the executive officer
is terminated or voluntarily terminates employment for "Good Reason" (as such
term is defined in the Severance Agreements) within two years following a
"Change in Control" (as such term is defined in the Severance Agreements), the
Company would make a "Change in Control Payment" to the executive officer,
provided the executive officer is employed by the Company on the date of the
Change in Control and was a member of the Company's "Management Group" (as
defined by the Board) prior to the execution of a definitive agreement, if any,
between the Company and any entity to be combined with the Company in connection
with a Change in Control. The amount of the Change in Control Payment would be
equal to one year of salary and one year of benefits continuation if the
executive officer were a member of the Management Group for three years or less
on the date of the Change in Control, and equal to two years of salary and two
years of benefits continuation if the executive officer were a member of the
Management Group for more than three years on the date of the Change in Control.
In both cases, the Change in Control Payment would be paid as salary
continuation in accordance with the payment provisions relating to Severance
Pay. The Severance Agreements preclude payment of Severance Pay if such
executive officer is entitled to a Change in Control Payment. The Severance
Agreements also contain certain confidentiality, noncompete and nonsolicitation
provisions in favor of the Company and provide that nothing contained therein
shall be deemed to alter the executive officer's "at will" employment by the
Company.
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information as of March 18, 2003
concerning persons known to the Board to be a "beneficial owner," as such term
is defined by the rules of the Securities and Exchange Commission, of more than
5% of the outstanding shares of the Common Stock.
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OWNED(1) CLASS(2)
---------------- ------------------ ----------
PAR Investment Partners, L.P................................ 1,394,600(3) 16.5%
One Financial Center, Suite 1600
Boston, Massachusetts 02111
FMR Corp.................................................... 1,112,500(4) 13.2%
82 Devonshire Street
Boston Massachusetts 02109
Dimensional Fund Advisors Inc............................... 629,100(5) 7.4%
1299 Ocean Avenue
11th Floor
Santa Monica, California 90401
Heartland Advisors, Inc..................................... 600,000(6) 7.1%
798 North Water Street
Milwaukee, Wisconsin 53202
Patrick B. McGinnis......................................... 503,601 6.0%
1600 Watterson Tower
Louisville, Kentucky 40218
---------------
(1) See Note (1) under "Management Common Stock Ownership" herein.
(2) Based on an aggregate of 8,451,229 shares of Common Stock issued and
outstanding as of March 18, 2003.
(3) The information regarding Par Investment Partners, L.P. ("Par Investment")
is given in reliance upon a Schedule 13G/A filed with the Commission on
February 14, 2003 by such stockholder, Par Group, L.P., the general partner
of Par Investment ("Par Group"), Par Capital Management, Inc., the general
partner of Par Group ("Par Capital"), and Arthur G. Epker, III ("Epker").
The Schedule 13G/A indicates that Par Investment, Par Group, Par Capital
and Epker have sole voting power and sole dispositive power over 1,394,600
shares.
9
(4) The information regarding FMR Corp. is given in reliance upon a Form 13F
filed with the Commission on February 14, 2003.
(5) The information regarding Dimensional Fund Advisors Inc. ("Dimensional") is
given in reliance upon a Schedule 13G/A filed with the Commission on
February 11, 2003 by such stockholder. The Schedule 13G/A indicates that
Dimensional serves as a registered investment advisor to four investment
companies and as an investment manager to certain other commingled group
trusts and separate accounts and that in its role as investment adviser or
manager, Dimensional possesses voting and/or investment power over 629,100
shares. The Schedule 13G/A also indicates that Dimensional disclaims
beneficial ownership of such shares.
(6) The information regarding Heartland Advisors, Inc. ("Heartland") is given
in reliance upon a Schedule 13G/A filed with the Commission on February 13,
2003 by such stockholder and William J. Nasgovitz ("Nasgovitz"). The
Schedule 13G/A indicates that Heartland has sole dispositive power over
600,000 shares. The Schedule 13G/A indicates that Nasgovitz has sole voting
power over 600,000 shares.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and the four other most highly compensated executive
officers of the Company (the "named executive officers") for the year ended
December 31, 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------- ------------
SECURITIES
ALL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1) OPTIONS (#)
--------------------------- ---- ---------- --------- ------------------- ------------
Patrick B. McGinnis............... 2002 $238,007 $419,318(2)(3) $15,807 0
Chairman, Chief Executive 2001 231,750 39,411(2) 14,029 0
Officer, Director 2000 225,000 105,296(2) 20,371 160,000
Robert G. Bader, Jr............... 2002 149,919 106,954 14,018 0
Executive Vice President -- 2001 144,200 15,381 14,375 0
Healthcare Sales, Marketing & 2000 140,000 49,862 17,457 75,000
Corporate Client Solutions
Douglas R. Sharps................. 2002 149,502 74,879 14,375 0
Executive Vice 2001 144,200 19,242 14,375 0
President -- Finance 2000 140,000 49,862 17,195 75,000
& Administration, Chief
Financial
Officer and Secretary
Debra M. Murphy................... 2002 148,093 56,967 13,830 0
Executive Vice President -- 2001 144,200 21,172 14,084 0
Healthcare Recoveries Division, 2000 140,000 34,369 16,512 75,000
Subrogation
Mark J. Bates..................... 2002 148,093 40,246 10,626 0
Senior Vice 2001 144,200 15,863 13,294 0
President -- Troveris 2000 140,000 52,960 15,148 75,000
---------------
(1) All other compensation for 2002, 2001 and 2000 includes amounts paid by the
Company for matching 401(k) plan contributions and insurance premiums.
10
(2) Since June 30, 2000, 50% of the amount otherwise payable to Mr. McGinnis
under the Company's Management Group Incentive Compensation Plan has been
deferred under the Deferred Compensation Agreement between Mr. McGinnis and
the Company. See "Employment Agreements".
(3) Includes payment of a $200,000 signing bonus to Mr. McGinnis in conjunction
with the execution of his employment agreement. See "Employment Agreements".
EXECUTIVE OFFICERS
EXECUTIVE
NAME AGE POSITION OFFICER SINCE
---- --- -------- -----------------
Patrick B. McGinnis................ 55 Chairman of the Board, Chief 1997
Executive Officer & Director
Robert G. Bader, Jr................ 46 Executive Vice 1998
President -- Healthcare Sales,
Marketing & Corporate Client
Solutions
Mark J. Bates...................... 43 Senior Vice President -- Troveris 1998
Robert L. Jefferson................ 47 Senior Vice President -- TransPaC 1999
Solutions
Robert T. Longshore................ 46 Senior Vice President -- Healthcare 2003
Recoveries Division,
Overpayments, Provider Bill Audit
& MD Audit Operations
Debra M. Murphy.................... 47 Executive Vice 1997
President -- Healthcare Recoveries
Division, Subrogation
Douglas R. Sharps.................. 49 Executive Vice President -- Finance 1997
& Administration, Chief Financial
Officer and Secretary
PATRICK B. MCGINNIS serves as Chairman, Chief Executive Officer and a
director of the Company. In 1988, Mr. McGinnis left Humana Inc., where he served
as Vice President -- Finance & Planning, to co-found the Company. He served as
the Company's Chief Executive Officer until August 1996, when he left to become
President of Medaphis Healthcare Information Technology Company, which provides
a variety of sophisticated software solutions to healthcare enterprises
throughout the United States. He rejoined the Company and assumed his current
responsibilities in January 1997.
ROBERT G. BADER, JR. serves as Executive Vice President -- Healthcare
Sales, Marketing & Corporate Client Solutions. He assumed his current
responsibilities in December 2002. Beginning in November 1999, he served as
Executive Vice President -- Overpayments Operations. Mr. Bader joined the
Company in January 1998 as Senior Vice President -- Business Development. From
1992 until 1994, Mr. Bader served as Vice President of Strategic Planning of
Blue Cross Blue Shield of Kentucky. In 1994, he assumed the positions of Chief
Operating and Chief Financial Officer of Acordia of Louisville, one of the
operating companies of Acordia, Inc., which was a publicly traded insurance
brokerage and health administrative services company until wholly acquired by
Anthem, Inc. in 1997.
MARK J. BATES serves as Senior Vice President -- Troveris. Before joining
the Company in June 1998, Mr. Bates was Director of Application Development at
Humana Inc. In his 14 years at Humana Inc., he held a variety of systems
management responsibilities including Director of Technical Services, Director
of Customer Service, and Director of Development Support. Mr. Bates is a 1981
graduate of Rose-Hulman Institute of Technology with a B.S. in Computer Science.
He is a founding member of the Computer Information Systems Corporate Partner
Program and a part-time instructor at the University of Louisville School of
Business.
ROBERT L. JEFFERSON serves as Senior Vice President -- TransPaC Solutions.
He assumed his current responsibilities in November 2000 after having served as
Senior Vice President -- Business Development since joining the Company in
November 1999. From 1994 through 1999, he served as Director of Planning
11
and Budget for AEGON USA, the domestic insurance division of AEGON's
international operations. During the period of 1979 through 1994, he headed up
financial reporting and budgeting for the Agency Group division of Providian
Corporation, which was subsequently acquired by AEGON.
ROBERT T. LONGSHORE serves as Senior Vice President -- Healthcare
Recoveries Division, Overpayments, Provider Bill Audit & MD Audit Operations.
Mr. Longshore joined the Company in January 2003 after 21 years at Humana, Inc.,
where he most recently served as Director of the Business Consultant Practice.
Over the course of his career at Humana, Mr. Longshore served in a number of
capacities in the claims operations, customer service and finance areas.
DEBRA M. MURPHY serves as Executive Vice President -- Healthcare Recoveries
Division, Subrogation. Ms. Murphy joined the Company in 1991 as Sales and
Marketing Manager. She was promoted to Director of Sales in October 1994, to
Vice President -- Sales in February 1996, to Senior Vice President in November
1996, to Executive Vice President -- Operations in June 1998 and Executive Vice
President -- HRI Division in October 1999. She assumed her current
responsibilities as Executive Vice President -- Healthcare Recoveries Division,
Subrogation in January 2002.
DOUGLAS R. SHARPS serves as Executive Vice President -- Finance &
Administration, Chief Financial Officer and Secretary. Mr. Sharps joined the
Company in January 1990 as Vice President and General Counsel and became Chief
Financial Officer in October 1994. He is also the principal of Sharps &
Associates, PSC, a law firm that provides support to the Company and handles
litigated recoveries in California, Florida, Illinois, Kentucky, Texas, Virginia
and Wisconsin. He assumed his current responsibilities in January 1997.
STOCK OPTION GRANTS
No options were granted during 2002 to the Chief Executive Officer or to
any of the named executive officers (as previously defined in this Proxy
Statement).
STOCK OPTION EXERCISES
The table below shows the number of shares of Common Stock covered by both
exercisable and unexercisable stock options held by the Chief Executive Officer
and each of the named executive officers (as previously defined in this Proxy
Statement) as of December 31, 2002. The table also reflects the value for in-
the-money options based on the positive spread between the exercise price of
such options and the last reported sale price of $5.50 of the Common Stock on
December 31, 2002, the last trading date in 2002 for the Common Stock.
AGGREGATED OPTION EXERCISES IN 2002
AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN THE
OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, 2002 DECEMBER 31, 2002
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Patrick B. McGinnis........................... 354,000 96,000 $198,976 $238,464
Robert G. Bader, Jr........................... 95,000 45,000 99,520 111,780
Douglas R. Sharps............................. 148,750 45,000 99,520 111,780
Debra M. Murphy............................... 160,000 45,000 99,520 111,780
Mark J. Bates................................. 105,000 45,000 99,520 111,780
12
STOCK PRICE PERFORMANCE GRAPH
The graph below reflects the cumulative stockholder return (assuming
reinvestment of dividends) on the Common Stock compared to the return of the
Center for Research in Security Price Total Return Index for The Nasdaq Stock
Market, U.S. Companies (the "Nasdaq Composite, U.S.") and the Company's peer
group index for the periods indicated. This graph reflects the investment of
$100.00 on December 31, 1997 in the Common Stock, the Nasdaq Composite, U.S.,
the Company's 2001 peer group and the Company's 2002 peer group. The Company's
2002 peer group consists of the following companies: CCC Information Services
Group, CorVel Corporation ("CorVel"), Health Management Systems, Inc., Maximus,
Inc., National Research, Inc., Profit Recovery Group International and QuadraMed
Corporation. The companies constituting the Company's 2002 and 2001 peer group
were selected based on business model, product market and market capitalization.
In order to obtain a more representative sample, the Company deleted INSpire
Insurance Solutions, Inc., which was acquired in bankruptcy, from the 2002 peer
group and added CorVel, based on certain similarities between CorVel's and the
Company's principal lines of business.
(PERFORMANCE GRAPH)
12/31/ 3/31/ 6/30/ 9/30/ 12/31/ 3/31/ 6/30/ 9/30/ 12/31/
97 98 98 98 98 99 99 99 99
2001 Peer Group Annual
Values 100 146 134 121 134 108 112 103 94
2002 Peer Group Annual
Values 100 140 127 112 130 103 113 112 106
NASDAQ Annual Values 100 117 121 108 140 157 171 175 259
TROV Annual Values 100 104 89 45 76 22 21 12 16
3/31/ 6/30/ 9/29/ 12/29/ 3/30/ 6/29/ 9/28/ 12/31 3/28/ 6/28/ 9/30/
00 00 00 00 01 01 01 01 02 02 02
2001 Peer Group Annual
Values 85 59 47 50 50 66 65 70 70 71 57
2002 Peer Group Annual
Values 99 73 64 73 72 90 90 102 99 103 86
NASDAQ Annual Values 291 253 234 162 117 138 95 124 118 93 75
TROV Annual Values 15 16 20 13 19 23 18 21 27 27 18
The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended (together, the "Acts"), except
to the extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
13
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company has combined its nominating and compensation committees into
the Compensation and Nominating Committee (the "Compensation Committee"). The
Compensation Committee, among other things, approves base salaries of executive
officers, approves the terms of annual incentive or bonus plans in which
executive officers participate and reviews and makes recommendations to the
Board concerning approval and adoption of and amendments to stock-based
compensation plans. The Compensation Committee is composed of William C.
Ballard, Jr., Chairperson, John H. Newman and Lauren N. Patch, three non-
employee members of the Board. During 2002 the Compensation Committee retained
William M. Mercer, Incorporated ("Mercer") to assist it in the evaluation of
executive compensation. Over the course of the year, the Compensation Committee
commissioned from Mercer studies regarding base compensation, incentive
compensation and benefits for executives, and conferred with Mercer personnel on
these matters. The purpose of this engagement was to ensure that the Company
offers executive compensation at appropriate levels given the Company's current
operations and strategy and its current and future needs for managerial talent.
Based on comparisons with the compensation arrangements of other comparable
public companies, Mercer recommended that the Compensation Committee consider
increases in base salary and incentive compensation to the Company's Chief
Executive Officer and other key executive officers in light of the Company's on-
going need to maintain and attract managerial talent and the competitive market
for senior executive compensation.
Currently, the Chief Executive Officer, Mr. Patrick B. McGinnis, is a party
to an employment agreement that provides for his participation in the Management
Group Incentive Compensation Plan, and to a deferred compensation agreement
under which 50% of the amount otherwise payable to Mr. McGinnis under the
Management Group Incentive Compensation Plan is deferred. See "Employment
Agreements". In addition, each of the other executive officers of the Company is
a party to a severance agreement. See "Employment Agreements".
Compensation Components. The components of the Company's executive
compensation program consist of base salaries, cash bonuses and stock options.
The Company's compensation program is designed to provide competitive base
salaries for the Company's executive officers, and incentive compensation and
long-term incentives that retain the executive officers and motivate them to
achieve the Company's business objectives over the long-term.
Management Group Incentive Compensation Plan. The Company has annually
adopted a performance-based bonus plan. The plan typically creates a
nondiscretionary bonus pool and a discretionary bonus pool from which cash
bonuses are paid to its participants based on performance-based thresholds set
forth in the plan, the discretion of the Board of Directors and each
participant's achievement of annual goals. Near the beginning of each year, the
Compensation Committee approves these goals for each participant in the plan for
that year. After the end of each year, based on its evaluation of the Chief
Executive Officer's performance in achieving his goals for the year and
attaining the Company's financial results, the Compensation Committee may then
grant Mr. McGinnis an annual bonus from the discretionary bonus pool. Mr.
McGinnis recommends to the Compensation Committee the discretionary annual bonus
for the executive officers based on each executive officer's performance for the
year, as well as the Company's financial results. In 2002, the participants in
the plan were Messrs. McGinnis, Bader, Bates, Jefferson and Sharps and Ms.
Murphy.
Stock Option Plans. The Company maintains stock option plans designed to
align executives' and stockholders' interests in the enhancement of stockholder
value. Stock options are granted under these plans to certain officers, key
employees and consultants of the Company by the Compensation Committee. Stock
options may be granted annually if available and if supported by the Company's
growth, profitability, retention goals, and related compensation concerns. To
foster long-term commitments, executives' options typically vest over a period
of at least three years (the Company's most recent grants of options in 2000
vest over a five-year period) and remain outstanding for ten years. In
accordance with United States Treasury Department regulations, in the event the
value realized upon the exercise of options by any "covered" employee (the
difference between the per share exercise price and the market price on the date
of exercise multiplied by the number of options exercised) when combined with
such employee's other "covered" compensation in the year
14
of exercise exceeds $1.0 million, the Company will be unable to deduct the
amount of such excess compensation.
Required Stockholdings. As a further means of aligning executives' and
stockholders' interests in the enhancement of stockholder value, the
Compensation Committee has put in place stock ownership requirements for
executive officers. Each executive officer is required to accumulate Common
Stock equal in value to one year's base compensation. Executive officers
employed by the Company at the time of adoption of the stock ownership
requirements have until December 31, 2005 to accumulate the required
stockholdings and new executive officers have five years from their appointment
to accumulate the required stockholdings. As of March 18, 2003, Mr. McGinnis,
the Company's Chief Executive Officer, had accumulated Common Stock equal in
value to one year's base compensation, based on the closing price of the
Company's Common Stock as of such date.
Supplemental Retirement Savings Plan. The Company has adopted a
non-qualified deferred compensation plan under which certain key employees of
the Company may defer up to 85% of their compensation (reduced by the amount
they could have deferred under the Company's 401(k) Plan). The Company matches
employee contributions equal to the contributions that would have been made
under the Company's 401(k) Plan but for certain tax restrictions. Participants
are entitled to receive distributions upon termination of employment. The
Company may fund all or part of its obligations under this plan in a trust
reachable by the Company's general creditors.
Deductibility of Certain Compensation. Section 162(m) of the Internal
Revenue Code of 1986, as amended, generally disallows tax deductions to publicly
held corporations for compensation in excess of $1 million per employee in any
taxable year that is paid to the corporation's chief executive officer or to its
four other most highly compensated executive officers. No executive officer
received more than $1 million in compensation in 2002.
Chief Executive Officer Compensation. During 2002 the Compensation
Committee reviewed, together with Mercer, Mr. McGinnis's employment arrangement
with the Company in light of his leadership role, the challenges facing the
Company and the competitive market for chief executive officers. In consequence,
the Compensation Committee concluded that it was in the best interest of the
Company to enter into a new employment agreement with Mr. McGinnis.
Consequently, the Company entered into an employment agreement with Mr. McGinnis
effective January 1, 2003 (the "Employment Agreement") with an initial term of
three years and renewing automatically for subsequent two year periods, unless a
notice of termination is delivered by either party at least sixty days prior to
the end of the initial term or the end of a renewal term. The Employment
Agreement contains certain confidentiality and noncompete provisions. Pursuant
to the Employment Agreement, Mr. McGinnis is entitled to receive a minimum base
salary of $325,000, subject to annual percentage increases for inflation
equivalent to those increases given in the normal course of business to Company
employees on substantially a Company-wide basis. In addition, the Employment
Agreement entitles Mr. McGinnis to participate in the Company's Management Group
Incentive Compensation Plan, to receive such awards of stock options as
determined by the Compensation Committee and to receive such fringe benefits as
may be provided from time to time by the Company to its executive employees,
including group health insurance, life insurance and disability insurance. In
conjunction with his execution of the Employment Agreement, Mr. McGinnis
received a signing bonus of $200,000, subject to reimbursement by Mr. McGinnis
of all or a portion of such amount if Mr. McGinnis terminates his employment
with the Company during the initial three-year term of his employment. See
"Employment Agreements".
The Compensation Committee determines the amount of discretionary bonuses
that Mr. McGinnis receives under the Management Group Incentive Compensation
Plan, based on his performance with respect to achieving the goals for the year
approved by the Compensation Committee, as well as financial results. Under a
deferred compensation agreement, 50% of the amount otherwise payable to Mr.
McGinnis under the Company's Management Group Incentive Compensation Plan is
deferred. See "Employment Agreements".
15
In addition, to augment Mr. McGinnis's long-term incentive for continued
employment with the Company, Mr. McGinnis has been granted options to acquire
shares of the Common Stock under the Company's Option Plan and Stock Option
Plan.
COMPENSATION AND NOMINATING COMMITTEE
William C. Ballard, Jr., Chairperson
John H. Newman
Lauren N. Patch
April 2, 2003
The foregoing report should not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into any
filing under the Acts, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As described earlier in this Proxy Statement, the Company has a
Compensation and Nominating Committee of the Board that, among other things,
approves base salaries of executive officers, approves the terms of annual
incentive or bonus plans in which executive officers participate and reviews and
makes recommendations to the Board concerning approval and adoption of and
amendments to stock-based compensation plans. William C. Ballard, Jr.,
Chairperson, John H. Newman and Lauren N. Patch currently serve on the
Compensation and Nominating Committee and served on it and the Company's former
compensation committee during 2002. Additionally, Mr. Herbert A. Denton served
on the Company's former compensation committee during 2002, until his
resignation from the Board at the Company's 2002 annual meeting of stockholders.
None of the members of the Compensation and Nominating Committee nor Mr. Denton
were officers of the Company or had any relationship requiring disclosure under
Securities and Exchange Commission regulations.
AUDIT COMMITTEE REPORT
The Audit Committee reviews the Company's financial reporting process on
behalf of the Board of Directors. Management is responsible for the Company's
financial reporting processes, including specifically its system of internal
control, and for the preparation of all financial statements in conformity with
accounting principles generally accepted in the United States of America. The
Company's independent accountants, PricewaterhouseCoopers LLP, are responsible
for reviewing the Company's quarterly financial statements and auditing the
Company's annual financial statements and for expressing an opinion on the
conformity of the audited financial statements with accounting principals
generally accepted in the United States of America. The Audit Committee consists
of Jill L. Force, Chairperson, Lauren N. Patch and Chris B. Van Arsdel, each an
independent director.
Members of the Audit Committee rely, without independent verification, on
the information provided to them and on the representations made by management
and the opinions and communications of the Company's independent accountants.
Accordingly, the Audit Committee's review does not provide an independent basis
to determine that management has maintained appropriate accounting and financial
reporting principles or appropriate internal controls and procedures designed to
assure compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee's activities do not assure that the audit of
the Company's financial statements has been carried out in accordance with
generally accepted auditing standards, that the financial statements are
presented in accordance with accounting principals generally accepted in the
United States of America or that the Company's independent accountants are in
fact independent.
16
In this context:
- The Audit Committee reviewed and discussed the audited financial
statements contained in the Company's 2002 Annual Report on Form 10-K
with the Company's management and the independent accountants prior to
the filing of the Form 10-K with the Securities and Exchange Commission
(the "Commission").
- The Audit Committee reviewed and discussed the unaudited financial
statements contained in the Company's Quarterly Reports on Form 10-Q for
each of the quarters ended in 2002 with the Company's management and the
independent accountants prior to the filing thereof with the Commission.
- The Audit Committee reviewed and discussed with the independent
accountants the matters required to be discussed by Statement on Auditing
Standards No. 61 (Communications with Audit Committees).
- The Audit Committee received from the independent accountants written
disclosures regarding the accountants' independence, as required by
Independence Standards Board Standard No. 1 (Independence Discussions
with Audit Committees), and discussed with the accountants their
independence from the Company and its management.
In reliance on the reviews and discussions noted above and subject to the
limitations set forth above, the Audit Committee recommended to the Board of
Directors (and the Board approved) that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002, for filing with the Commission.
AUDIT COMMITTEE
Jill L. Force, Chairperson
Lauren N. Patch
Chris B. Van Arsdel
April 2, 2003
The foregoing report should not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into any
filing under the Acts, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
17
PRINCIPAL ACCOUNTING FIRM FEES
The following table sets forth the aggregate fees billed to the Company for
the fiscal years ended December 31, 2002 and December 31, 2001 by the Company's
principal accounting firm, PricewaterhouseCoopers LLP. All audit and non-audit
services provided by PricewaterhouseCoopers LLP are pre-approved by the Audit
Committee, which considers whether the provision of non-audit services is
compatible with maintaining the accountants' independence.
DECEMBER 31, 2002
Audit Fees.................................................. $136,455
Audit-Related Fees.......................................... 17,188(1)
Tax Fees.................................................... 69,365(2)
All Other Fees.............................................. 12,000(3)
Total............................................. $235,008
---------------
(1) Represents fees related to an audit of the Company's 401k Plan and research
and consultation on various audit related issues.
(2) Represents fees related to the preparation of the Company's federal and
state income tax returns, consultation on state income tax planning and
other income tax issues.
(3) Represents fees related to review of a filing of a Form S-8 with the
Securities and Exchange Commission.
DECEMBER 31, 2001
Audit Fees.................................................. $ 82,500
Audit-Related Fees.......................................... 29,172(1)
Tax Fees.................................................... 89,546(2)
All Other Fees.............................................. --
Total............................................. $201,218
---------------
(1) Represents fees related to an audit of the Company's 401k Plan, agreed upon
procedures relating to an earn out payment and research and consultation on
various audit related issues.
(2) Represents fees related to the preparation of the Company's federal and
state income tax returns and consultation on state income tax planning, the
research and experimental tax credit and other income tax issues.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MCGINNIS DEMAND NOTE. 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.
The promissory note and all accrued interest are due and payable upon the
earlier of January 1, 2005 or the termination of Mr. McGinnis's employment with
the Company. At March 31, 2003, the promissory note of $886,520 and accrued
interest of $55,030 were outstanding.
18
On June 30, 2000, pursuant to Board authorization and in accordance with
the terms of the Amended Promissory Note, the Company and Mr. McGinnis entered
into a Deferred Compensation Agreement. Under the Deferred Compensation
Agreement, 50% of the amount otherwise payable to Mr. McGinnis under the
Company's Management Group Incentive Compensation Plan is to be deferred until
the Amended Promissory Note is paid in full, with such deferred compensation
then being paid in full to Mr. McGinnis within 30 days thereafter. The Company
has full right of set-off against any deferred compensation under the Deferred
Compensation Agreement should Mr. McGinnis default under the Amended Promissory
Note. At the election of Mr. McGinnis, the payment of the deferred compensation,
upon payment of the Amended Promissory Note, may be extended for a period of not
more than ten years. At March 31, 2003, the amount of deferred compensation was
$182,013, with accrued interest of $9,809.
SHARPS & ASSOCIATES. As part of its obligations under client contracts,
the Company generally pays for the legal representation of clients, as required
in the recovery process. A portion of those payments is made in the form of a
retainer to Sharps & Associates PSC, a law firm solely owned by Douglas R.
Sharps, the Company's Executive Vice President -- Finance and Administration,
Chief Financial Officer and Secretary. This law firm employs 28 attorneys, 14
paralegals and 1 administrative assistant at its offices in Louisville,
Kentucky; Pleasanton, California; Chicago, Illinois; Tampa, Florida; Milwaukee,
Wisconsin; Dallas, Texas; and Locust Grove, Virginia. The Company paid
approximately $3,346,000 to such related party during the year ended December
31, 2002 for legal services. However, Mr. Sharps receives no financial or other
personal benefits from his ownership of the firm.
PROPOSAL 2 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Audit Committee has appointed the firm of PricewaterhouseCoopers LLP to
serve as independent accountants of the Company for 2003, subject to
ratification of this appointment by the stockholders of the Company.
PricewaterhouseCoopers LLP has served as independent accountants of the Company
since 1997. One or more representatives of PricewaterhouseCoopers LLP will be
present at the meeting, will have an opportunity to make a statement if he or
she so desires and will be available to respond to appropriate questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board recommends a vote "FOR" the proposal to ratify the appointment of
PricewaterhouseCoopers LLP as independent accountants.
OTHER MATTERS
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers, directors and persons who own
more than ten percent (10%) of the Common Stock to file certain reports with
respect to each such person's beneficial ownership of the Common Stock,
including statements of changes in beneficial ownership on Form 4. In addition,
Item 405 of Regulation S-K requires the Company to identify in its Proxy
Statement each reporting person that failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act during the most recent fiscal year
or prior fiscal years. Based solely upon a review of Forms 3 and 4 and
amendments thereto, all such persons complied with the applicable reporting
requirements during 2002; however, the Form 3 for Mr. Robert T. Longshore, an
executive officer of the Company as of January 2, 2003, relating to options
granted to him in connection with his election as an executive officer of the
Company was not filed on a timely basis during 2003.
ANNUAL REPORT ON FORM 10-K; INCORPORATION BY REFERENCE
A copy of the Company's Annual Report on Form 10-K, including the financial
statements and financial statement schedules, as filed with the Securities and
Exchange Commission, except exhibits thereto (other than Exhibit 99.1),
accompanies this Proxy Statement. The Company will provide copies of the
exhibits,
19
should they be requested by eligible stockholders, and the Company may impose a
reasonable fee for providing such exhibits. Requests for copies of the Company's
Annual Report on Form 10-K should be mailed to:
Trover Solutions, Inc.
1600 Watterson Tower
Louisville, Kentucky 40218
Attention: Douglas R. Sharps
Executive Vice President --
Finance and Administration,
Chief Financial Officer and
Secretary
The "Trover Solutions, Inc. Private Securities Litigation Reform Act of
1995 Safe Harbor Compliance Statement for Forward-Looking Statements", attached
as Exhibit 99.1 to the Form 10-K accompanying this Proxy Statement, is hereby
incorporated herein and in the other materials provided with this Proxy
Statement by reference thereto.
STOCKHOLDER PROPOSALS
Any stockholder proposals intended to be presented at the Company's 2004
annual meeting of stockholders must be received by the Company no later than
December 3, 2003 in order to be considered for inclusion in the Proxy Statement
and form of proxy to be distributed by the Board of Directors in connection with
such meeting.
Any stockholder proposal to be considered at next year's annual meeting but
not included in the proxy statement must be delivered to or mailed and received
at the principal executive offices of the Company not less than 60 days and not
more than 90 days prior to the meeting; provided, however, that if less than 70
days notice or public disclosure of the date of the meeting is given or made to
stockholders, in order to be timely, notice by the stockholder must be received
not later than the close of business on the 10th day following the day on which
such notice of the date of the meeting is mailed or such public disclosure is
made.
OTHER PROPOSALS
The Board of Directors knows of no other proposals to be brought before the
meeting. However, if any other proposals should come before the meeting, the
persons named in the proxy will vote such proxy in accordance with their
judgment.
20
EXPENSES OF SOLICITATION
The cost of solicitation of proxies will be borne by the Company. In an
effort to have as large a representation at the meeting as possible, special
solicitation of proxies may, in certain instances, be made personally or by
telephone, facsimile or mail by one or more employees of the Company. The
Company also will reimburse brokers, banks, nominees and other fiduciaries for
postage and reasonable clerical expenses of forwarding the proxy material to
their principals who are beneficial owners of the Company's Common Stock. In
addition, the Company has retained Georgeson Shareholder Communications, Inc.
("Georgeson") to assist in the solicitation of proxies with respect to shares of
the Company's Common Stock held of record by brokers, nominees and institutions
and, in certain cases, by other holders. Such solicitation may be made through
the use of mail, by telephone or by personal calls. The anticipated cost of
Georgeson's services is a fee of $5,000 plus reasonable out-of-pocket expenses.
By Order of the Board of Directors,
/s/ Douglas R. Sharps
Douglas R. Sharps
Executive Vice President --
Finance & Administration,
Chief Financial Officer
and Secretary
Louisville, Kentucky
April 2, 2003
21
TROVER SOLUTIONS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS
ON MAY 9, 2003
The undersigned hereby appoints PATRICK B. McGINNIS and DOUGLAS R. SHARPS,
and each of them, proxies, with full power of substitution and resubstitution,
for and in the name of the undersigned, to vote all shares of stock of Trover
Solutions, Inc. (the "Company") which the undersigned would be entitled to vote
if personally present at the Annual Meeting of Stockholders to be held on
Friday, May 9, 2003 at 9:30 a.m., local time, at Watterson Tower, 12th Floor,
Louisville, Kentucky 40218, and at any adjournment thereof, upon the matters
described in the accompanying Notice of Annual Meeting of Stockholders and Proxy
Statement, receipt of which is hereby acknowledged, and upon any other business
that may properly come before the meeting or any adjournment thereof. Said
proxies are directed to vote on the matters described in the Notice of Annual
Meeting and Proxy Statement as follows, and otherwise in their discretion upon
such other business as may properly come before the meeting or any adjournment
thereof.
(1) To elect two (2) Class C directors to three-year terms expiring at the 2006
annual meeting of stockholders:
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to vote for all nominees
listed
(except as marked below to the contrary)
Jill L. Force
Patrick B. McGinnis
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST
ABOVE.)
(2) To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company to serve for 2003:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued, and to be signed, on the other side)
(Continued from other side)
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED FOR THE PROPOSALS LISTED ON THE OTHER SIDE OF THIS PROXY.
Date
------------------------------------------------------------------------- ,
2003
----------------------------
----------------------------
Please sign exactly as your
name or names appear hereon.
Where more than one owner is
shown above, each should
sign. When signing in a
fiduciary or representative
capacity, please give full
title. If this proxy is
submitted by a corporation,
it should be executed in the
full corporate name by a
duly authorized officer. If
a partnership, please sign
in partnership name by
authorized person.
PLEASE COMPLETE, DATE AND SIGN
THIS PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL
MEETING. IF YOU ATTEND THE MEET
ING, YOU MAY VOTE IN PERSON IF
YOU WISH, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY.
Proxy Card