OPTIONS AND AWARDS

Stock-based compensation expense consists of share-based payment awards made to employees and directors, including employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense recognized in the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2014 and 2013 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ.

The Company has three option plans, the 2001 Stock Option, Deferred Stock and Restricted Stock Plan (2001 Plan), the 2005 Stock Incentive Plan (2005 Plan) and the 2007 Omnibus Incentive Plan (2007 Plan), all of which have been approved by the stockholders. The total number of shares available under all of the Company’s stock incentive plans was 1,327 as of June 30, 2014.

Effective with the Spin-Off transaction (see Note 2, Spin-Off of Real Estate Assets Through a Real Estate Investment Trust, for further information), all holders of the Company's restricted stock awards on the May 22, 2014 date of record for the spin-off received CareTrust restricted stock awards consistent with the distribution ratio, with terms and conditions substantially similar to the terms and conditions applicable to the Company's restricted stock awards. Also, effective with the Spin-Off transaction, the holders of the Company's stock options on the date of record received stock options consistent with a conversion ratio that was necessary to maintain the pre spin-off intrinsic value of the options. The stock options terms and conditions are based on the preexisting terms in the 2001 Plan, 2005 Plan and 2007 Plan, including nondiscretionary antidilution provisions. In order to preserve the aggregate intrinsic value of the Company's stock options held by such persons, the exercise prices of such awards were adjusted by using the proportion of the CareTrust when issued closing stock price to the total Company closing stock prices on the distribution date. All of these adjustments were designed to equalize the fair value of each award before and after Spin-Off. These adjustments were accounted for as modifications to the original awards. A comparison of the fair value of the modified awards with the fair value of the original awards immediately before the modification did not yield incremental value. Accordingly, the Company did not record any incremental compensation expense as a result of the modifications to the awards on the Spin-Off date.

The Company's future share-based compensation expense will not be significantly impacted by the equity award adjustments that occurred as a result of the Spin-Off. Deferred compensation costs as of the date of Spin-Off reflected the unamortized balance of the original grant date fair value of the equity awards held by the Company's employees (regardless of whether those awards are linked to the Company's stock or CareTrust stock).

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for all share-based payment awards. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. The Company granted 931 options and 4 restricted stock awards from the 2007 Plan during the six months ended June 30, 2014.

The Company used the following assumptions for stock options granted during the three months ended June 30, 2014 and 2013:



Grant Year	Options Granted	Weighted Average Risk-Free Rate		Expected Life	Weighted Average Volatility		Weighted Average Dividend Yield
2014	664	1.80	%	6.5 years	55	%	0.64	%
2013	47	1.48	%	6.5 years	55	%	0.93	%

The Company used the following assumptions for stock options granted during the six months ended June 30, 2014 and 2013:



Grant Year	Options Granted	Weighted Average Risk-Free Rate					Expected Life	Weighted Average Volatility		Weighted Average Dividend Yield
2014	931	1.80	%	-	1.84	%	6.5 years	55	%	0.64	%
2013	150	1.18	%	-	1.48	%	6.5 years	55	%	0.93	%

For the six months ended June 30, 2014 and 2013, the following represents the exercise price and fair value displayed at grant date for stock option grants:



Grant Year	Granted	Weighted Average Exercise Price		Weighted Average Fair Value of Options
2014	931	$	24.38	$	12.51
2013	150	$	17.39	$	8.55

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended June 30, 2014 and 2013 and therefore, the intrinsic value was $0 at date of grant.

As discussed above and in Note 2, Spin-Off Real Estate Assets through a Real Estate Investment Trust, the weighted average exercise prices shown in the table above for the six months ended June 30, 2014 were reduced as a result of the Spin-Off. The number of options outstanding shown in the table below for the six months ended June 30, 2014 were increased as a result of the Spin-Off.

The following table represents the employee stock option activity during the six months ended June 30, 2014:



	Number of Options Outstanding		Weighted Average Exercise Price		Number of Options Vested	Weighted Average Exercise Price of Options Vested
January 1, 2014	2,290		$	11.30	681	$	7.76
Granted	931		24.38
Forfeited	(35	)	14.29
Exercised	(315	)	7.52
June 30, 2014	2,871		$	15.92	1,122	$	8.58

The following summary information reflects stock options outstanding, vested and related details as of June 30, 2014:



								Stock Options Vested
	Stock Options Outstanding							Stock Options Vested
				Number Outstanding	Black-Scholes Fair Value		Remaining Contractual Life (Years)	Vested and Exercisable
Year of Grant	Exercise Price			Number Outstanding	Black-Scholes Fair Value		Remaining Contractual Life (Years)	Vested and Exercisable
2005	2.72	-	3.14	31	*		1	31
2006	3.85	-	4.09	125	654		2	125
2008	5.12	-	8.11	336	1,027		4	336
2009	8.12	-	9.11	427	1,835		5	371
2010	9.53	-	9.91	109	528		6	72
2011	11.79	-	15.98	136	917		7	56
2012	13.12	-	15.91	367	2,709		8	87
2013	15.96	-	22.98	410	4,010		9	44
2014	21.09	-	25.70	930	11,636		10	—
Total				2,871	$	23,316		1,122

* The Company will not recognize the Black-Scholes fair value for awards granted prior to January 1, 2006 unless such awards are modified.

The Company did not grant any restricted stock awards during the three and six months ended June 30, 2014. The Company granted 14 and 60 restricted stock awards during the three and six months ended June 30, 2013, respectively. All awards were granted at an exercise price of $0 and generally vest over five years.

A summary of the status of the Company's nonvested restricted stock awards as of June 30, 2014, and changes during the six-month period ended June 30, 2014 is presented below:



	Nonvested Restricted Awards		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2014	230		$	28.68
Granted	4		43.87
Vested	(34	)	26.95
Forfeited	(8	)	30.40
Nonvested at June 30, 2014	192		$	29.20

As a result of the Spin-Off, holders of outstanding restricted stock awards received an additional share of restricted stock unit award in CareTrust common stock at the Spin-Off so that the intrinsic value of these awards were equivalent to those that existed immediately prior to the Spin-Off. The weighted average grant date fair value shown in the table above did not change as a result of the Spin-Off. The number of nonvested restricted awards shown in the table below did not change as a result of the Spin-Off.

In addition, during the three and six months ended June 30, 2014, the Company granted 2 and 4 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors. The fair value per share of these stock awards ranged from $44.71 to $42.62 based on the market price on the grant date.

Total share-based compensation expense recognized for the three and six months ended June 30, 2014 and 2013 was as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Share-based compensation expense related to stock options	$	711	$	505	$	1,354	$	1,079
Share-based compensation expense related to restricted stock awards	387		328		817		643
Share-based compensation expense related to stock awards	106		121		212		607
Total	$	1,204	$	954	$	2,383	$	2,329

In future periods, the Company expects to recognize approximately $17,158 and $4,916 in share-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of June 30, 2014. Future share-based compensation expense will be recognized over 4.4 and 3.1 weighted average years for unvested options and restricted stock awards, respectively. There were 1,750 unvested and outstanding options at June 30, 2014, of which 1,558 are expected to vest. The weighted average contractual life for options outstanding, vested and expected to vest at June 30, 2014 was 7.1 years.

The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of June 30, 2014 and December 31, 2013 is as follows:



Options	June 30, 2014		December 31, 2013
Outstanding	$	43,531	$	29,431
Vested	25,241		20,465
Expected to vest	15,407		7,873
Exercised	5,306		8,709

The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options.