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TROVER SOLUTIONS, INC.
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[TROVER SOLUTIONS, INC. LOGO]
Dear Shareholders:
Trover Solutions experienced many challenges as it worked to meet its goals in
2002. We are very pleased with our results, reporting for the year 2002
earnings per diluted share of $0.72, a 57% increase over the $0.46 EPS ($0.55
EPS and a 31% increase when adjusted for goodwill and nonrecurring items*)
reported for the comparable period in 2001. Please see our Annual Report on
Form 10-K for a full discussion of our financial progress in 2002.
In my 2001 letter I discussed four matters of continuing significance - new
products and services, acquisitions, our relationship with UnitedHealth Group
and class action litigation - and would like to give you a progress report.
NEW PRODUCTS & SERVICES MEET EXPECTATIONS
TransPaC Solutions, our property and casualty (P&C) subrogation product, and
Troveris, our subrogation software product, are on track to accomplish the
strategic objectives that we envisioned.
TransPaC Solutions currently has about 17 clients with about 25 contracts and
we are refining our sales strategy to focus more sharply on turnkey outsourcing
opportunities. We also see attractive opportunities for TransPaC in partnering
with large P&C claims administrators that provide services to corporations that
self-insure P&C risks, particularly Workers' Compensation and property damage. I
have taken personal leadership of the TransPaC Solutions sales team and I am
very excited about our prospects for selling 3 to 5 significant outsourcing
accounts this year. We expect this division to be near breakeven in operating
income for 2003 and operating profitably by year-end.
Troveris, our web-enabled subrogation computer application, is proving to be
the vehicle by which we can market subrogation services to health insurers that
are not interested in turnkey outsourcing. We have sold one account to date and
are pleased that Troveris is enabling us to have meaningful contact with large
carriers that historically were not accessible to us. In fact, we have made
several sales of subrogation, bill auditing and overpayment recovery services
to customers who were initially only interested in buying our Troveris
software. Our first sale of Troveris included accident investigation services,
and most of our Troveris prospects have indicated that they also are interested
in buying various other services from us.
Internally our conversion to Troveris continues without any diminution of our
recovery levels to our customers. Our TransPaC Solutions division has been
fully operational on Troveris for about 18 months and our healthcare
subrogation division is about 25% converted to Troveris. We are on schedule to
complete this conversion in the 3rd quarter of 2003. Because Troveris replaces
our legacy subrogation system, we have reduced our maintenance expense, net of
the expense of maintaining the Troveris application, and have captured annual
savings of almost $600,000, included in the Company's guidance for 2003.
We previously reported the introduction of our new physician auditing product,
MD Audit. MD Audit combines a proprietary automated process with analysis by
knowledge workers to ascertain the validity of physicians' evaluation and
management (E&M) claims. Specifically, we employ Certified Professional Coders
to determine whether doctors' E&M claims are coded correctly in accordance with
the supporting medical records. This service is particularly promising given
the pending class action lawsuits against health insurers in which physicians
object to claims software that unilaterally revises billing codes and reduces
doctor reimbursements. Should these lawsuits succeed, our MD Audit service will
offer an even more attractive alternative to the claims software now under
attack.
* The EPS adjustments are for goodwill amortization $0.10; loss on sale
of an office building $0.06; and reversal of income tax reserve
($0.07).
ACQUISITIONS MUST PROVE RELATIVE VALUE
Over the course of 2002 we identified a number of acquisition opportunities
that were attractive strategically but were not, in our view, attractive
financially. Given the expected valuations of sellers and the current valuation
of TROV, we consistently concluded that our share repurchase program was the
the best use of our cash flow. In 2003, we will continue to seek out
acquisition opportunities - especially for new products. However, we will also
continue to evaluate those opportunities against continued investment in TROV.
UHG RELATIONSHIP TAKES NEW FOCUS
Late in 2001, our relationship with UnitedHealth Group (UHG) entered a new
phase. As we previously reported, UHG made the decision to move the bulk of its
subrogation business to an internal unit at that time. Today, our Healthcare
Recoveries division still provides subrogation for about 1.8 million UHG lives
in health plans managed, but not owned, by UHG. In addition, in 2002 UHG
awarded us a provider bill audit contract covering approximately 3.9 million
lives. We believe our relationship with UHG's Uniprise division is excellent
and we look forward to providing a variety of services to it and its clients.
TROVER SOLUTIONS'SUCCESSES IN CLASS ACTIONS
We made significant progress in our defense of class action lawsuits in 2002.
Two of these suits were resolved completely in our favor; two more have been
favorably decided but are on appeal by the plaintiffs; one was settled for
nominal dollars; and one was decided in our favor but sent back by the
appellate court for additional consideration by the trial judge. One action
continues through the discovery process, and we were served with two new class
actions. For a more detailed account of the status of litigation and its
attendant risks, please see our Annual Report on Form 10-K.
I'd like to turn my comments now to some new topics for 2003 and beyond,
beginning with comments on what we are doing, beyond managing and growing our
business, to increase shareholder value.
REPURCHASE PROGRAM BUILDS EPS
Since 1999 we have been an opportunistic buyer of TROV shares. During that time
we have purchased almost 3.1 million shares (about 27% of our outstanding
shares when we began our repurchase program) at an average price of $4.39. We
are currently in the second phase of a $20 million repurchase program
authorized by our Board. That both our financial results and the repurchase
program have had a positive impact on share price during the last two years is
shown in the chart to the right.
[CHANGE IN CLOSING STOCK PRICE AT 12/31 CHART]
While our business is not without its risks and challenges, our Board of
Directors believes that the market is not recognizing our investment potential.
Accordingly, we believe it is likely that the best use of our free cash flow is
the repurchase of our shares. At current market valuation and interest rates,
this program is highly accretive to earnings per share. Our free cash flow in
2002 was about $9.8 million. Free cash flow refers to the net amount of cash
provided by operating activities less purchases of property and equipment and
capitalization of internally developed software. About $6.5 million of our free
cash flow went toward share repurchases and the balance went toward debt
retirement. In our guidance for 2003, we expect similar amounts of free cash
flow to be available and anticipate continued, responsible investment in our
share repurchase program, subject to competing uses for our capital.
INDUSTRY TRENDS OFFER RISK AND OPPORTUNITY
As we assess the markets that our services address, we see opportunity. First,
I'll address the healthcare benefits market. Although our health insurance
clients are generally enjoying attractive growth in profits, it is because
they have been able to increase premiums at a rate a bit higher than the
increase in healthcare claims. That will not last long, for medical provider
pricing and units are increasing at an annual rate of 15% - 25% with no change
in sight. Employers can either absorb these increases or pass them on to
employees as higher premiums and/or greater co-pays and deductibles. Either
way, the cycle will come to an end and cost containment issues will again come
to the fore.
I believe competitive circumstances will cause employers to pass most of these
cost increases to their employees, and that will result in a larger number of
uninsured Americans. Meanwhile, state Medicaid programs and the federal
Medicare program are experiencing cost increases with no offsetting revenue
sources. I expect these trends will lead to attempted political solutions.
Since we are in the business of helping health insurers constrain their claims
costs, I think Trover Solutions is well-positioned for growth. But when
politicians begin fixing things, unforeseen consequences are inevitable. We are
monitoring political developments and will respond appropriately for our
shareholders and our clients.
Turning to the P&C insurance industry, we see a somewhat similar picture, but
with a different near-term outlook for our business. The events of September
11, 2001 triggered a turning point for the P&C industry. Capital rushed in as
investors focused on the need for additional underwriting capacity and profit
opportunities. However, 9/11 also marked the end to any hope that U.S. equity
markets would rally in the near-term. Consequently, while P&C carriers have
been able to impose aggressive premium pricing, they have lost the investment
income cushion that enabled many of them to post positive financial results
during the 1990s. Meanwhile, the P&C industry as a whole continues to suffer
from increased claims frequency and severity - asbestos, mold and medical
malpractice to name the most prominent. The unavoidable conclusion is that P&C
carriers now realize that they must be good underwriters and operators to be
successful.
This change in managerial attitude is very positive. It means that P&C carriers
are becoming much more focused on claims results and much more willing to look
outside their own organizations for solutions. We are noting a greater
receptivity to outsourcing than when we began marketing to the P&C industry in
late 2000. P&C carriers understand that information technology is a real and
important tool in claims management. This is a positive trend that dovetails
exactly with our service model. I am very optimistic about our opportunities in
the P&C market.
In closing, I would like to thank our employees for a job well done in 2002 and
thank our customers for their confidence and reliance on Trover Solutions to be
a part of their operational excellence. Our workforce and our customers enable
us to provide an attractive investment vehicle to you, our shareholders. We
look forward to our continuing dialogue.
Sincerely,
/s/ Patrick B. McGinnis
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Patrick B. McGinnis
Chairman
April 2, 2003
[HEALTHCARERECOVERIES(TM) LOGO] [TRANSPACSOLUTIONS(TM) LOGO] [TROVERIS(TM) LOGO]
DIRECTORS
PATRICK B. MCGINNIS
Chairman
WILLIAM C. BALLARD
Of Counsel
Greenebaum Doll & McDonald PLLC
Chair - Compensation and Nominating
Committee
JILL L. FORCE
Partner
The Allegro Group, Inc.
Chair - Audit Committee
JOHN H. NEWMAN
Senior Partner
Sidley Austin Brown & Wood LLP
LAUREN N. PATCH
Independent Consultant
Insurance
CHRIS VAN ARSDEL
Independent Consultant
Technology Services
EXECUTIVE OFFICERS
PATRICK B. MCGINNIS
Chief Executive Officer
ROBERT G. BADER, JR.
EVP - Healthcare Sales, Marketing &
Corporate Client Solutions
MARK J. BATES
SVP - Troveris Division
ROBERT L. JEFFERSON
SVP - TransPaC Solutions Division
ROBERT T. LONGSHORE
SVP - Healthcare Recoveries Division
Overpayments, Provider Bill Audit
& MD Audit Operations
DEBRA M. MURPHY
EVP - Healthcare Recoveries Division
Subrogation Operations
DOUGLAS R. SHARPS
EVP - Finance and Administration
CFO & Secretary
CORPORATE INFORMATION
Trover Solutions, Inc.
Investor Relations
Watterson Tower
Suite 1600
1930 Bishop Lane
Louisville, KY 40218-5909
Phone: 877-876-8374
E-mail: InvestorRelations@troversolutions.com
Web site: www.troversolutions.com
NASDAQ: TROV
TRANSFER AGENT
National City Bank
P.O. Box 92301
Cleveland OH 44193-0900
(800) 622-6757
INDEPENDENT AUDITORS
PricewaterhouseCoopers, LLP
ANNUAL MEETING
May 9, 2003, 9:30 a.m. local time
Watterson Tower
12th Floor
1930 Bishop Lane
Louisville, KY 40218