Stock Based Compensation and Stock Options

9 Months Ended

Dec. 31, 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 December 31, 2011, options for up to 9,682,500 shares of the Company’s common stock may be granted over the life of the plan to key employees, non-employee directors and consultants at exercise prices not less than the fair 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 8.99% for the three months ended December 31, 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 December 31, 2010 and 2011 using the Black-Scholes option-pricing model:

	Three Months Ended December 31,
	2010			2011
Risk-free interest rate		2.15	%		0.91	%
Expected volatility		46	%		47	%
Expected dividend yield		0.00	%		0.00	%
Expected forfeiture rate		9.27	%		8.99	%
Expected weighted average life of option in years		4.7 years			4.9 years

All options granted in the nine months ended December 31, 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 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, 2010, and 2011, and, accordingly, the Company has recognized $33,000 during fiscal 2011, $11,000 during the quarter ended December 31, 2011, $35,000 during the nine months ended December 31, 2011, and $117,000, cumulatively, since the date of the option grant. No further stock options will vest under this grant and there will be no further recognition of stock compensation expense.

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 December 31, 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 100% of these targets for calendar 2009, 2010, and 2011. Accordingly, the Company recognized stock compensation expense of $221,000 during fiscal year 2011, $78,000 during the quarter ended December 31, 2011, $234,000 for the nine months ended December 31, 2011, and $780,000, cumulatively, since the date of the option grants. No further stock options will vest under this grant and there will be no further recognition of stock compensation expense.

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, 2010 and 2011. Accordingly, the Company has recognized no stock compensation expense for this stock option grant during fiscal 2011 or the three or nine months ended December 31, 2011. No stock options vested under this grant and there will be no further recognition of stock compensation expense.

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 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 December 31, 2011, $311,000 for the nine months ended December 31, 2011, and $830,000, cumulatively. The Company will continue to review the actual quarterly and annual earnings as compared to the targets to determine the amount of stock compensation expense to record.

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. The Company achieved a portion of the calendar year 2011 tranche for these options. The Company has recognized $309,000 of stock compensation expense for this stock option grant during fiscal 2011, $28,000 during the three months ended December 31, 2011, $309,000 for the nine months ended December 31, 2011 and $449,000, cumulatively. The Company will continue to review the actual quarterly and annual earnings as compared to the targets to determine the amount of stock compensation expense to record.

In November 2011, the Company’s Board of Directors granted performance-based stock options for 83,700 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 2012, 2013, and 2014. These options were granted with an exercise price of $52.76 per share, which was the fair market value at the date of grant, and have a valuation of $21.80 per share. No stock compensation expense will be recorded prior to the January 1, 2012. The Company will review the actual quarterly and annual earnings as compared to the targets to determine the amount of stock compensation expense to record.

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 nine months ended December 31, 2010 and 2011, respectively. Included in the three months and nine months ended December 31, 2011 stock compensation expense is $221,000 and $889,000, respectively, for the expense related to the performance based options.

	Three Months Ended
	December 31, 2010			December 31, 2011
Cost of revenues	$	166,000		$	121,000
General and administrative		465,000			420,000
Total cost of stock-based compensation included in income before income tax provision		631,000			541,000
Amount of income tax benefit recognized		(252,000	)		(216,000	)
Amount charged against net income	$	379,000		$	325,000
Effect on diluted net income per share	$	(0.03	)	$	(0.03	)

	Nine Months Ended
	December 31, 2010			December 31, 2011
Cost of revenues	$	447,000		$	371,000
General and administrative		1,447,000			1,499,000
Total cost of stock-based compensation included in income before income tax provision		1,894,000			1,870,000
Amount of income tax benefit recognized		(726,000	)		(735,000	)
Amount charged against income	$	1,168,000		$	1,135,000
Effect on diluted income per share	$	(0.10	)	$	(0.10	)

Summarized information for all stock options for the three and nine months ended December 31, 2010 and 2011 follows:

	Three Months Ended December 31, 2010					Three Months Ended December 31, 2011
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,027,189		$	24.55		799,034		$	30.62
Options granted		106,825			46.13		95,050			52.76
Options exercised		(73,998	)		20.12		(54,366	)		27.57
Options cancelled		(68,166	)		15.85		(159	)		29.41
Options outstanding, ending		991,850		$	27.80		839,559		$	33.32

	Nine Months Ended December 31, 2010					Nine Months Ended December 31, 2011
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		1,065,403		$	22.57		813,970		$	29.26
Options granted		199,825			42.24		140,275			50.50
Options exercised		(203,536	)		18.63		(109,339	)		25.36
Options cancelled		(69,842	)		15.97		(5,347	)		28.41
Options outstanding, ending		991,850		$	27.80		839,559		$	33.32

The following table summarizes the status of stock options outstanding and exercisable at December 31, 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 $24.75		202,859		2.36	$	19.58		156,991	$	19.41
$24.76 to $28.92		217,260		2.83	$	27.25		109,099	$	26.83
$28.93 to $43.73		194,740		4.13	$	36.10		84,323	$	33.59
$43.74 to $52.76		224,700		4.35	$	49.19		1,754	$	46.00
Total		839,559		3.42	$	33.32		352,167	$	25.24

A summary of the status for all outstanding options at December 31, 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 December 31, 2011
Options outstanding at September 30, 2011		799,034		$	30.62
Granted		95,050			52.76
Exercised		(54,366	)		27.57
Cancelled – forfeited		—			—
Cancelled – expired		(159	)		29.41
Ending outstanding		839,559		$	33.32		3.42	$	15,537,545
Ending vested and expected to vest		740,137		$	32.13		3.33	$	14,554,785
Ending exercisable at December 31, 2011		352,167		$	25.24		2.69	$	9,323,631

The weighted-average grant-date fair value of options granted during the three months ended December 31, 2010 and 2011, was $16.28 and $21.80, respectively.