Stock Based Compensation and Stock Options

6 Months Ended

Sep. 30, 2011

Stock Based Compensation and Stock Options [Abstract]

Stock Based Compensation and Stock Options

Note B — Stock Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at September 30, 2011, options for up to 9,682,500 shares of the Company’s common stock may be granted to key employees, non-employee directors and consultants at exercise prices not less than the fair market value of the stock at the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from date of grant and the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the board of directors expire at the end of five years and ten years from date of grant, respectively.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected volatility, the expected option life, and the expected forfeiture rate. The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option. Based upon the historical experience of options cancellations, the Company has estimated an annualized forfeiture rate of 9.27% and 9.36% for the three months ended September 30, 2010 and 2011, respectively. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate. The following assumptions were used to estimate the fair value of options granted during the three months ended September 30, 2010 and 2011 using the Black-Scholes option-pricing model:

	Three Months Ended September  30,
	2010			2011
Risk-free interest rate		2.15	%		1.13	%
Expected volatility		46	%		47	%
Expected dividend yield		0.00	%		0.00	%
Expected forfeiture rate		9.27	%		9.36	%
Expected weighted average life of option in years		4.7 years			4.7 years

All options granted in the six months ended September 30, 2010 and 2011 were granted at fair market value and are non-statutory stock options.

In May 2006, the Company’s Board of Directors granted performance-based stock options for 149,175 shares of common stock at fair market value at the date of grant, which would only vest if the Company attained certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2008, 2009, and 2010. These options were granted with an exercise price of $15.76 per share, which was the fair market value at the date of grant, and have a valuation of $6.75 per share. The Company did not attain the targets for calendar years 2008 and 2009. The Company attained the earnings per share target for calendar year 2010 which allowed for options for 68,025 shares to vest. The Company recognized $413,000 in stock compensation expense in fiscal 2011, and $459,000, cumulatively, for these options. No further stock options will vest under this grant and there will be no further recognition of stock compensation expense.

In February 2008, the Company’s Board of Directors granted performance-based stock options for 42,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain revenue targets for all services sold to claims administration clients and out-of-network bill review revenues, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. The targets for the various options varied by the regions managed by these optionees with each region having a different target. These options were granted with an exercise price of $25.10 per share, which was the fair market value at the date of grant, and have a valuation of $9.81 per share. Currently, management has determined that optionees with 12,000 options attained the revenue targets for calendar year 2009 and 2010, and, accordingly, the Company has recognized $33,000 during fiscal 2011, $11,000 during the quarter ended September 30, 2011, $22,000 during the six months ended September 30, 2011, and $105,000, cumulatively, since the date of the option grant. Currently, management has determined that it is not probable that the revenue targets for the remaining optionees will be attained and, accordingly, the Company has recognized no stock compensation expense for those options.

In February 2009, the Company’s Board of Directors granted performance-based stock options for 100,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. Net of cancelations due to employee terminations, options for 95,000 shares remained under these performance-based stock options as of September 30, 2011. These options were granted with an exercise price of $19.79 per share, which was the fair market value at the date of grant, and have a valuation of $8.21 per share. The Company attained these targets for calendar 2009 and 2010, expects to attain the target for calendar year 2011, and, accordingly, the Company recognized stock compensation expense of $221,000 during fiscal year 2011, $78,000 during the quarter ended September 30, 2011, $156,000 for the six months ended September 30, 2011, and $702,000, cumulatively, since the date of the option grants.

In February 2009, the Company’s Board of Directors granted performance-based stock options for 10,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain revenue targets for all services sold to claims administration clients and out-of-network bill review revenues, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. These options were granted with an exercise price of $20.37 per share, which was the fair market value at the date of grant, and have a valuation of $8.45 per share. The Company did not achieve the revenue target for calendar year 2009 or 2010. Currently, management has determined that it is not probable that the Company will attain the revenue targets for calendar year 2011, and, accordingly, the Company has recognized no stock compensation expense for this stock option grant during fiscal 2011 or the three or six months ended September 30, 2011.

In November 2009, the Company’s Board of Directors granted performance-based stock options for 110,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2010, 2011, and 2012. These options were granted with an exercise price of $28.92 per share, which was the fair market value at the date of grant, and have a valuation of $12.57 per share. The Company attained the earnings per share target in calendar year 2010, and currently, management has determined that it is probable that the Company will attain the earnings per share targets for calendar year 2011. Accordingly, the Company recognized $337,000 of stock compensation expense for this stock option grant during fiscal 2011, $104,000 for the three months ended September 30, 2011, $208,000 for the six months ended September 30, 2011, and $726,000, cumulatively.

In December 2010, the Company’s Board of Directors granted performance-based stock options for 100,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2011, 2012, and 2013. These options were granted with an exercise price of $46.14 per share, which was the fair market value at the date of grant, and have a valuation of $18.72 per share. Management has determined that it is probable that the Company will attain the earnings per share targets for calendar year 2011. Accordingly, the Company has recognized $140,000 of stock compensation expense for this stock option grant during fiscal 2011, $140,000 during the three months ended September 30, 2011, $280,000 for the six months ended September 30, 2011 and $421,000, cumulatively.

The table below shows the amounts recognized in the financial statements for stock compensation expense for time based options and performance based options the three and six months ended September 30, 2010 and 2011, respectively. Included in the three months and six months ended September 30, 2011 stock compensation expense is $334,000 and $668,000, respectively, for the expense related to the performance based options.

	Three Months Ended
	September 30, 2010			September 30, 2011
Cost of revenues	$	147,000		$	125,000
General and administrative		526,000			546,000
Total cost of stock-based compensation included in		673,000			671,000
income before income tax provision
Amount of income tax benefit recognized		(256,000	)		(262,000	)
Amount charged against net income	$	417,000		$	409,000
Effect on diluted net income per share	$	(0.03	)	$	(0.04	)

	Six Months Ended
	September 30, 2010			September 30, 2011
Cost of revenues	$	281,000		$	250,000
General and administrative		983,000			1,079,000
Total cost of stock-based compensation included in		1,264,000			1,329,000
income before income tax provision
Amount of income tax benefit recognized		(474,000	)		(520,000	)
Amount charged against income	$	790,000		$	809,000
Effect on diluted income per share	$	(0.07	)	$	(0.07	)

Summarized information for all stock options for the three months and six months ended September 30, 2010 and 2011 follows:

	Three Months Ended September 30, 2010					Three Months Ended September 30, 2011
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,079,022		$	23.35		797,377		$	29.87
Options granted		45,000			39.06		29,550			43.73
Options exercised		(95,317	)		17.94		(26,429	)		23.51
Options cancelled		(1,266	)		16.81		(1,625	)		25.31
Options outstanding, ending		1,027,439		$	24.55		798,873		$	30.62

	Six Months Ended September 30, 2010					Six Months Ended September 30, 2011
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,065,403		$	22.57		813,622		$	29.26
Options granted		93,000			37.76		45,225			45.75
Options exercised		(129,538	)		17.77		(54,973	)		23.17
Options cancelled		(1,426	)		20.85		(5,001	)		28.20
Options outstanding, ending		1,027,439		$	24.55		798,873		$	30.62

The following table summarizes the status of stock options outstanding and exercisable at September 30, 2011:

Range of Exercise Price	Number of Outstanding Options		Weighted Average Remaining Contractual Life		Outstanding Options – Weighted Average Exercise Price		Exercisable Options – Number of Exercisable Options		Exercisable Options –Weighted Average Exercise Price
$15.55 to $23.55		200,964		2.65	$	19.39		152,052	$	19.17
$24.75 to $28.92		254,669		2.80	$	27.04		140,437	$	26.62
$28.92 to $43.73		212,415		4.11	$	35.69		92,553	$	33.06
$46.00 to $49.56		130,825		4.20	$	46.59		1,175	$	47.70
Total		798,873		3.34	$	30.62		386,217	$	25.29

A summary of the status for all outstanding options at September 30, 2011, and changes during the three months then ended, is presented in the table below:

	Number of Options			Weighted Average Exercise Per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of September 30, 2011
Options outstanding at July 1, 2011		797,377		$	29.89
Granted		29,550			43.73
Exercised		(26,429	)		23.51
Cancelled – forfeited		(1,100	)		28.75
Cancelled – expired		(525	)		18.09
Ending outstanding		798,873		$	30.62		3.34	$	10,062,545
Ending vested and expected to vest		735,700		$	29.91		3.27	$	9,706,495
Ending exercisable at September 30, 2011		386,217		$	25.29		2.72	$	6,651,753

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2010 and 2011, was $16.28 and $17.59, respectively.