NOTE 9
Stockholders' Equity
Common stock
In October 1999, the Company completed its initial public offering of
4,480,000 shares of common stock, including 630,000 shares issued in connection
with the exercise of the underwriters' over-allotment option, at a price of
$9.00 per share, that raised approximately $36.0 million, net of underwriting
discounts, commissions and other offering costs totaling approximately $4.3
million. In addition, in connection with the offering, 350,000 shares of common
stock of the Company were sold by a selling stockholder at $9.00 per share, for
which the Company received no proceeds. Upon the closing of the offering, all of
the Company's mandatorily redeemable convertible preferred stock converted into
approximately 6,276,000 shares of common stock.
At December 31, 2000, the Company had reserved approximately 7,853,000
shares of common stock for issuance upon exercise of stock options, warrants and
for shares issuable under the Employee Stock Purchase Plan. Common stockholders
are entitled to dividends as and when declared by the Board of Directors subject
to the prior rights of preferred stockholders. The holders of each share of
common stock are entitled to one vote.
Stock option plan
In May 1998, the Company adopted the 1998 Stock Option Plan (the "Plan")
under which the Board of Directors may issue incentive and non-qualified stock
options to employees, directors and consultants. The Board of Directors has the
authority to determine to whom options will be granted, the number of shares,
the term and exercise price. Options are to be granted at an exercise price not
less than fair market value for incentive stock options or 85% of fair market
value for non-qualified stock options. For individuals holding more than 10% of
the voting rights of all classes of stock, the exercise price of incentive stock
options will not be less than 110% of fair market value. The options generally
vest and become exercisable annually at a rate of 25% of the option grant over a
four year period. The term of the options will be no longer than five years for
incentive stock options for which the grantee owns greater than 10% of the
voting power of all classes of stock and no longer than ten years for all other
options.
On November 30, 2000, in connection with the Resource Information
Management Systems, Inc. ("RIMS") acquisition (Note 12), the Company adopted the
RIMS Stock Option Plan based primarily upon RIMS' existing non-statutory stock
option plan. Unless previously terminated by the stockholders the Plan shall
terminate at the close of business on January 1, 2009, and no options shall be
granted under it thereafter. Such termination shall not affect any option
previously granted. Upon a business combination by the Company with any
corporation or other entity, the Company may provide written notice to optionee
that options shall terminate on a date not less than 14 days after the date of
such notice unless theretofore exercised. In connection with such notice, the
Company may, in its discretion, accelerate or waive any deferred exercise
period.
Activity under the two plans was as follows (in thousands, except per share
data):
OUTSTANDING OPTIONS
SHARES ---------------------------- WEIGHTED
AVAILABLE NUMBER OF AGGREGATE AVERAGE
FOR GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE
--------- --------- --------------- --------- --------------
Options reserved at Plan
inception.................. 1,600 -- -- -- --
Granted...................... (1,159) 1,159 $ 0.25 - $ 0.28 $ 297 $ 0.26
Cancelled.................... 10 (10) 0.25 (2) 0.25
------ ----- -------
Balances, December 31, 1998.. 451 1,149 0.25 - 0.28 295 0.26
Additional options
reserved................... 2,400
Granted...................... (2,644) 2,644 0.25 - 29.75 16,318 6.17
Exercised.................... -- (60) 0.25 (15) 0.25
Cancelled.................... 254 (254) 0.25 - 20.25 (261) 1.03
------ ----- -------
Balances, December 31, 1999.. 461 3,479 0.25 - 29.75 16,337 4.70
Additional options
reserved................... 3,200 --
Granted...................... (2,386) 2,386 12.68 - 63.25 47,735 20.00
Adopted and assumed.......... -- 300 7.02 2,107 7.02
Exercised.................... -- (425) 0.25 - 14.50 (312) 0.73
Cancelled.................... 570 (570) 0.25 - 57.50 (7,751) 13.58
------ ----- -------
Balances, December 31, 2000.. 1,845 5,170 $ 0.25 - $63.25 $58,116 $11.24
====== ===== =======
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The options outstanding and currently exercisable by exercise price at
December 31, 2000 are as follows (in thousands, except per share data):
OPTIONS EXERCISABLE AT
DECEMBER 31, 2000
OPTIONS OUTSTANDING AT DECEMBER 31, 2000 ------------------------------
--------------------------------------------------------- NUMBER
NUMBER WEIGHTED AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING REMAINING CONTRACTUAL AVERAGE EXERCISE AS OF AVERAGE
EXERCISE PRICE AS OF 12/31/00 LIFE (YEARS) PRICE 12/31/00 EXERCISE PRICE
-------------- -------------- --------------------- ---------------- ----------- ----------------
$ 0.25 - $ 2.60 1,864 8.00 $ 0.87 456 $ 0.77
$ 6.50 - $ 6.50 280 8.64 6.50 61 6.50
$ 7.02 - $ 7.02 300 8.00 7.02 300 7.02
$12.69 - $15.25 1,979 9.65 14.64 26 14.50
$17.81 - $20.25 332 9.08 19.85 70 20.25
$28.75 - $38.98 268 9.02 31.58 30 28.75
$57.50 - $63.25 147 9.13 58.28 0 0.00
----- ---- ------ --- ------
5,170 8.87 $11.24 943 $ 5.31
===== ==== ====== === ======
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Stock-based compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Had compensation cost for the Company's stock
compensation plans been determined based on the fair value at the grant date for
awards during the years ended December 31, 2000, 1999 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net income would have been as
follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- ------- -----
Net income (loss), as reported.............................. $(42,258) $(7,927) $ 60
Net income (loss), pro forma................................ $(48,340) $(8,695) $ 54
Net income (loss) per share, as reported:
Basic..................................................... $ (1.80) $ (0.85) $0.01
Diluted................................................... $ (1.80) $ (0.85) $0.00
Net income (loss) per share, pro forma:
Basic..................................................... $ (2.06) $ (0.93) $0.01
Diluted................................................... $ (2.06) $ (0.93) $0.00
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Such pro forma disclosures may not be representative of future pro forma
compensation cost because options vest over several years and additional grants
are anticipated to be made each year.
At December 31, 2000, 1999, and 1998 options exercisable under the Plan
were 943,299, 241,921, and none respectively. The weighted average fair values
of options granted during 2000, 1999 and 1998 were $9.31, $6.45 and $0.05,
respectively.
The fair value of each option granted prior to October 9, 1999, the date of
the Company's initial public offering, was estimated on the date of grant using
the minimum value method. Thereafter, the fair value of option grants were
estimated using a Black-Scholes pricing model. The following weighted average
assumptions were used in the estimations:
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
------- ------------ -------
Expected volatility...................................... 50% 221% --
Risk-free interest rate.................................. 6.00% 6.34% 5.18%
Expected life............................................ 4 years 4 years 4 years
Expected dividends....................................... -- -- --
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Employee Stock Purchase Plan
In July 1999, the Board of Directors adopted the Employee Stock Purchase
Plan ("Stock Purchase Plan"), which is intended to qualify under Section 423 of
the Internal Revenue Code. A total of 600,000 shares of common stock have been
reserved for issuance under the Stock Purchase Plan, of which 538,476 remain
available for issuance at December 31, 2000. Employees are eligible to
participate if they are employed for at least 20 hours per week and for more
than five months in any calendar year and who have been employed for at least 90
days. Employees who own more than 5% of the Company's outstanding stock may not
participate. The Stock Purchase Plan permits eligible employees to purchase
common stock through payroll deductions, which may not exceed the lesser of 15%
of an employee's compensation or $25,000.
The Stock Purchase Plan was implemented by six month offerings with
purchases occurring at six month intervals commencing January 1, 2000. The
purchase price of the common stock under the Stock Purchase Plan will be equal
to 85% of the fair market value per share of common stock on either the start
date of the offering period or on the purchase date, whichever is less. In the
event of a proposed dissolution or liquidation of the Company, the offering
periods terminate immediately prior to the consummation of the proposed action,
unless otherwise provided by the Company's Board of Directors. The Stock Purchase Plan will terminate in 2009, unless
terminated sooner by the Board of Directors. Shares issued under the Stock
Purchase Plan were 61,524 in 2000 at a weighted average purchase price of $13.66
per share.
Deferred stock compensation
The Company recorded deferred stock compensation related to stock options
granted to employees where the exercise price is lower than the fair market
value of the Company's common stock on the date of the grant. Total deferred
compensation recorded for these options was $341,000, $6.4 million and $482,000
in 2000, 1999 and 1998, respectively. Additionally, the Company recorded
deferred stock compensation in the amount of $5.1 million related to the
issuance of restricted stock to certain employees of one of its customers in May
2000, and in connection with the acquisitions of Erisco and RIMS in October and
December 2000 -- see "Restricted stock". The Company amortizes the deferred
stock compensation charge over the vesting period of the underlying stock option
or restricted stock award. Amortization of deferred stock compensation expense
was $1.9 million, $1.1 million and $22,000 in 2000, 1999 and 1998, respectively.
Warrants
In September 2000, the Company issued warrants to purchase 300,000 shares
of the Company's common stock, at an exercise price of $13.50 per share and, in
return, received warrants to purchase 100,000 shares of common stock of Maxicare
Health Plans, Inc. at an exercise price of $1.50 per share, in connection with
consummation of an Application Services Provider (ASP) agreement. The warrants
were immediately exercisable upon issuance and expire in 2005. The value of the
warrants was determined using a Black Scholes option pricing model. The net
value of the warrants exchanged is being amortized on a straight line basis over
the agreement term as a reduction of recurring revenue.
As of December 31, 2000, the Company has reserved 300,000 shares of its
common stock for the exercise of these warrants.
In connection with the October 1997 acquisition of Croghan & Associates,
the Company issued a warrant to purchase 162,595 shares of the Company's common
stock at an exercise price of $0.80 per share to replace an existing warrant to
purchase Croghan & Associates stock. The value of the warrant determined using
the Black Scholes model was not material. In August 1999, the warrant to
purchase 162,595 shares of common stock was exercised.
Shareholder rights plan
In September 2000, the Company's Board of Directors adopted a shareholder
rights plan. The plan provides for a dividend distribution of one preferred
stock purchase right (a "Right") for each outstanding share of common stock,
distributed to stockholders of record on October 19, 2000. The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
common stock (an "Acquiring Person") or announces a tender offer for 15% or more
of the common stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of newly created Series A Junior Participating
Preferred Stock, par value $0.001 per share, of the Company at an initial
exercise price of $75 per Right, subject to adjustment from time to time.
However, if any person becomes an Acquiring Person, each Right will then entitle
its holder (other than the Acquiring Person) to purchase at the exercise price,
common stock of the Company having a market value at that time of twice the
Right's exercise price. If the Company is later acquired in a merger or similar
transaction, all holders of Rights (other than the Acquiring Person) may, for
$75.00, purchase shares of the acquiring corporation with a market value of
$150.00. Rights held by the Acquiring Person will become void. The Rights Plan excludes from its
operation IMS Health Incorporated (Note 12), and as a result, their holdings
will not cause the Rights to become exercisable or nonredeemable or trigger the
other features of the Rights. The Rights will expire on October 2, 2010, unless
earlier redeemed by the Board at $0.001 per Right.
The holders of Series A Junior Participating Preferred Stock in preference
to the holders of common stock, shall be entitled to receive, when, as and if
declared by the Board of Directors, quarterly dividends payable in cash in an
amount per share equal to 100 times the aggregate per share amount of all cash
dividends or non-cash dividends other than a dividend payable in share of common
stock.
Each share of Series A Junior Participating Preferred Stock shall entitle
its holder to 100 votes.
Restricted stock
In May 2000, the Company issued 13,700 shares of restricted stock pursuant
to restricted stock agreements with non-employees. Pursuant to the agreements,
the Company shall cancel any unvested shares of common stock upon termination of
employment. Shares subject to the agreements vest over a four-year period, in
equal annual installments, commencing on the first anniversary of the agreement
date. The fair value of the restricted stock is determined based on a
Black-Scholes pricing model at each reporting period. As of December 31, 2000,
the Company cancelled 2,400 shares of unvested common stock due to an employee
termination. The unvested shares of common stock vest immediately prior to a
change in control of the Company unless the Board of Directors determines
otherwise.
In October 2000, in connection with the acquisition of Erisco Managed Care
Technologies, Inc. ("Erisco"), the Company issued 231,404 shares of restricted
stock to certain employees of Erisco. 115,702 of the shares subject to the
agreement vest over a three-year period, in equal annual installments,
commencing on the first anniversary of the agreement date, as long as the
individual remains employed by the Company. The remaining 115,702 shares vest
over a three-year period commencing on December 31, 2001 if certain revenue and
operating income goals are achieved for the prior year. The unvested shares of
common stock vest immediately prior to a change in control of the Company unless
the Board of Directors determines otherwise.
In December 2000, in connection with the acquisition of Resource
Information Management Systems, Inc. ("RIMS"), the Company issued 82,553 shares
of restricted stock to certain employees of RIMS. Shares subject to the
agreement vest over a three-year period, in equal annual installments,
commencing on the first anniversary of the agreement date, as long as the
individual remains employed by the Company. The unvested shares of common stock
vest immediately prior to a change in control of the Company unless the Board of
Directors determines otherwise.
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