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UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCK-BASED COMPENSATION
1998 Incentive Compensation Plan
On May 28, 1998, the Company's shareholders
approved the 1998 Incentive Compensation Plan (the
"1998 ICP"). The 1998 ICP superseded the Company's
1993 Incentive Stock Option Plan. Options previously
granted under the Company's Incentive Stock Option
Plan will remain outstanding in accordance with their
terms and the terms of the respective plans.
The 1998 ICP provides for grants of stock options, stock
appreciation rights ("SARs"), restricted stock, deferred
stock, other stock-related awards, and performance or
annual incentive awards that may be settled in cash,
stock, or other property ("Awards").
The total number of shares of the Company's Common
Stock reserved and available for delivery to participants
in connection with Awards under the 1998 ICP is (i) 1.5
million, plus (ii) the number of shares of Common Stock
subject to awards under Preexisting Plans that become
available (generally due to cancellation or forfeiture) after
the effective date of the 1998 ICP, plus (iii) 13% of the
number of shares of Common Stock issued or delivered
by the Corporation during the term of the 1998 ICP
(excluding any issuance or delivery in connection with
Awards, or any other compensation or benefit plan of the
Corporation), provided, however, that the total number of
shares of Common Stock with respect to which incentive
stock options ("ISOs") may be granted shall not exceed
1.5 million. As of December 31, 2000, a total of 6.6 million
shares were eligible for grant under the plan. There
were 5.3 million shares reserved for outstanding Awards
under the 1998 ICP and 1.3 million shares reserved for
issuance under future Awards at December 31, 2000.
Executive officers, directors, and other officers and
employees of the Corporation or any subsidiary, as well
as other persons who provide services to the Corporation
or any subsidiary, are eligible to be granted Awards
under the 1998 ICP, which is administered by the Board
or a Committee established pursuant to the Plan.
The Committee, may, in its discretion, accelerate the exercisability,
the lapsing of restrictions, or the expiration of
deferral or vesting periods of any Award, and such accelerated
exercisability, lapse, expiration and vesting shall
occur automatically in the case of a "change in control" of
the Corporation, except to the extent otherwise determined
by the Committee at the date of grant or thereafter.
Stock Awards
In accordance with the 1998 ICP, the Company grants
restricted stock to its officers and non-officer employees.
These grants vest upon issue. The non-officer grants are
expensed and awarded in the same year. Officer grants
are accrued for during the year for which they are earned
and awarded the following year. During 2000, the
Company awarded 32,290 shares to employees with a
fair value of $4.00 per share. Additionally the Company
anticipates issuing approximately 180,000 shares to
officers for 2000 performance based on fair value of
$3.86 per share. During 1999 and 1998, the Company
awarded 141,825 and 123,975 shares of restricted
stock at weighted average fair values of $4.19 and
$2.50 per share, respectively. The Company recognized
compensation expense of $0.8 million, $0.6 million and
$0.3 million, respectively, relating to stock awards for the
years ended December 31, 2000, 1999 and 1998.
Option Awards
A summary of the activity relating to the options awarded
by the Company for employees, directors and agents for
the three years ended December 31, 2000, is as follows:
Agents & Range of Exercise
Employees Directors Others Total Prices
Balance, January 1, 1998 621 36 103 760
Granted 520 86 134 740 $ 2.25 - $ 3.25
Exercised (165) (9) - (174) $ 0.56 - $ 1.63
Terminated (13) (4) - (17) $ 0.80 - $ 3.50
Balance, December 31, 1998 963 109 237 1,309
Granted 2,349 36 736 3,121 $ 3.09 - $ 5.31
Exercised (13) (16) - (29) $ 1.88 - $ 3.50
Terminated (13) - - (13) $ 2.00 - $ 2.25
Balance, December 31, 1999 3,286 129 973 4,388
Granted 471 51 160 682 $ 3.15 - $ 5.06
Exercised (12) (5) - (17) $ 2.25 - $ 3.15
Terminated (375) - (35) (410) $ 2.25 - $ 4.25
Balance, December 31, 2000 3,370 175 1,098 4,643
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At December 31, 2000, 1,576,550, 106,000 and
474,699 options were currently exercisable by employees,
directors and agents, respectively.
Options Granted to Employees
Options are generally granted to eligible employees at a
price not less than the market price of the Company's
common stock on the date of the grant. Option shares
may be exercised subject to the terms prescribed by the
individual grant agreement; however, options generally
vest 50% after the first year and 50% after the second
year. The options must be exercised not later than ten
years after the date of the grant or following earlier
termination of employment. Because these awards are
made at a price equal to or greater than market, no
compensation cost is recognized for such awards.
The Company issued 2,260,000 stock options with an
exercise price of $3.15 per share to certain employees
and members of management on August 1, 1999. As of
December 31, 2000, the number of these options outstanding
was reduced to 1,901,500, primarily through
terminations. During 2000, the Company issued an
additional 236,250 stock options with an exercise price
of $3.15 per share to certain relocated employees and
members of management on July 31, 2000. These
options generally vest 20% upon grant and 20% each
subsequent year. However, 583,750 vest after seven
years, subject to certain criteria, which could accelerate
vesting to five years. These options must be exercised not
later than ten years after the date of the grant or following
earlier termination of employment. In accordance
with APB 25, the Company recorded an expense for the
difference between the exercise price of $3.15 per share
and the value of the options on the date of grant of $0.8
million and $1.0 million for the years ended December
31, 2000 and 1999, respectively.
Stock Options Issued to Directors
Directors of the Company are eligible for options under
the 1998 ICP. The 1998 ICP provides that unless otherwise
determined by the Board, each non-employee director
would be granted an option to purchase 4,500 shares
of Common Stock upon approval of the 1998 ICP by
shareholders or, as to directors thereafter elected, his or
her initial election to the Board, and at each annual meeting
of shareholders starting in 1999 at which he or she
qualifies as a non-employee director. Unless otherwise
determined by the Board, such options will have an exercise
price equal to 100% of the fair market value per
share on the date of grant and will become exercisable
in three equal installments after each of the first, second
and third anniversaries of the date of grant based on continued
service as a director.
Stock Option Plan for Agents and Others
On December 15, 1995, the Board of Directors
approved a plan under which up to 200,000 options
could be granted to agents of the Company's subsidiaries
(subject to insurance law restrictions) and to other persons
as to whom the Board of Directors believes the grant of
such options will serve the best interests of the
Corporation, provided that no options may be granted
under this plan to officers, directors or employees of the
Company or of any subsidiary, while they are serving as
such. Such options expire ten years from the date of the
grant. Options outstanding under this plan total
102,786, all of which are exercisable. In 1998, agents
and other persons became eligible for options under the
1998 ICP. 159,600 and 152,000 options were issued in
2000 and 1999, respectively, to agents and others. In
accordance with FASB Statement No. 123, "Accounting
for Stock Based Compensation", ("FASB 123"), the fair
value of these options totaling $0.2 million and $0.2 million
was expensed during 2000 and 1999, respectively.
These options vest in equal installments over a three year
period and expire five years from the date of grant.
In addition, in connection with the acquisition of the
Acquired Companies, the Company adopted additional
stock option plans for agents and regional managers of
the Acquired Companies. Agents are to be issued stock
and stock options based on new premium production at
predetermined exercise prices. The plan ends at the earlier
of December 31, 2001 or when the aggregate number
of options have been issued. Total options granted
may not exceed $0.6 million of proceeds to be received
upon exercise to a maximum of 175,778 options.
Options issued under this plan cliff vest 24 months after
the end of the year of option grant and expire at the earliest
of the termination date as an agent or 30 days after
the option becomes exercisable. During 1999, a total of
84,254 options were issued to agents of the Acquired
Companies related to 1999 sales performance at an
exercise price of $3.62. In accordance with FASB 123,
the fair value of these options was expensed which
totaled $0.2 million. These agents were also eligible for
stock grants based on new premium production. Stock
grants in 1999 totaled 84,254 shares for which the
Company recorded an expense of $0.4 million. During
2000, $0.3 million was expensed relating to the stock
grants and options earned based on 2000 production.
Regional managers will receive options based on growth
of new premium earned. The plan ends at the earlier of
December 31, 2001, or when aggregate numbers of
options are issued. Total options to be granted cannot
exceed $4.05 million of proceeds to be received upon
exercise of such options to a maximum of 1,135,174
options. Options cliff vest on the January 1st following the
second calendar year after the year of option grant.
Options issued to regional managers expire at the earliest
of termination as an agent for cause, 30 days after termination
not for cause, or 5 years after the grant date.
Total options issued in 1999 for 1998 performance were
183,055 with an exercise price of $3.15. Options
issued related to 1999 performance totaled 38,397 with
an exercise price of $3.62. In accordance with FASB
123, a total of $0.7 million was expensed during 1999
representing the fair value of the options issued.
Accounting for Stock-Based Compensation
The Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair
value accounting provided for under FASB 123 requires
use of option valuation models that were not developed
for use in valuing employee stock options.
Pro forma information regarding net income and earnings
per share is required by Statement No. 123, and
has been determined as if the Company had accounted
for its employee stock options under the fair value method
of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option
pricing model with the following weighted-average
assumptions:
2000 1999 1998
Risk-free interest rates 5.11% 6.51% - 6.68% 5.63% - 6.63%
Dividend yields 0.0% 0.0% 0.0%
Expected
volatility 21.75% - 43.74% 43.63% - 48.64% 43.74% - 46.08%
Expected lives
of options
(in years) 1.0 - 4.5 2.0 - 6.0 4.5
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The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions including the expected stock
price volatility. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair
value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the
options' vesting period. The Company's pro forma information
is as follows:
2000 1999 1998
(In thousands)
Pro forma net income $ 22,360 $ 8,918 $ 1,832
Pro forma earnings
per common share:
Basic $ 0.48 $ 0.39 $ 0.30
Diluted $ 0.47 $ 0.32 $ 0.17
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A summary of the status of the Company's three stock option plans as of December 31, 2000 and 1999, and changes
during the years ending on those dates is presented below:
2000 1999 1998
Weighted- Weighted- Weighted-
Average Average Average
Fixed Exercise Exercise Exercise
Options Options Price Options Price Options Price
(In thousands) (In thousands) (In thousands)
Outstanding-beginning
of year 4,388 $ 3.09 1,309 $ 2.57 760 $ 2.22
Granted 682 4.30 3,121 3.31 740 2.61
Exercised (17) 2.60 (29) 2.33 (174) 1.49
Terminated (410) 3.18 (13) 2.18 (17) 1.83
Outstanding-end of year 4,643 $ 3.22 4,388 $ 3.09 1,309 $ 2.57
Options exercisable at
end of year 2,157 $ 2.90 1,315 $ 2.69 485 $2.53
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A summary of the weighted average fair value of options granted during the years ended December 31, 2000, 1999
and 1998 is presented below:
2000 1999 1998
Weighted- Weighted- Weighted-
Average Average Average
Options Fair Price Options Fair Price Options Fair Price
(In thousands) (In thousands) (In thousands)
Above market 160 $ 1.34 140 $ 1.63 - $ -
At market 286 1.72 125 2.01 741 1.12
Below market 236 1.86 2,855 3.02 - -
Total granted 682 $ 1.68 3,120 $ 2.92 741 $ 1.12
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The following table summarizes information about stock options outstanding at December 31, 2000:
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
(In thousands) (In thousands)
$ 1.88 - 3.12 1,135 6.3 years $ 2.51 1,135 $ 2.51
3.15 2,566 7.8 years 3.15 768 3.15
3.25 - 4.25 640 6.6 years 3.83 207 3.56
5.06 - 5.31 302 4.5 years 5.18 47 5.30
$ 1.88 - 5.31 4,643 7.1 years $ 3.22 2,157 $ 2.90
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