Profit Interest Units

6 Months Ended

Jun. 30, 2011

Profit Interest Units

Profit Interest Units

NOTE 7 — PROFIT INTEREST UNITS

In November and December of 2008, BP Healthcare Holdings LLC ("BP Holdings") and Sky LLC, parent entities of the Company affiliated with the Sponsor, granted equity units to the Company's Chief Executive Officer and the Company's Chief Financial Officer for purposes of retaining them and enabling such individuals to participate in the long-term growth and financial success of the Company. In addition, in 2009 and 2010, Sky LLC (and following our reorganization in March 2010, Apria Holdings LLC) granted equity units to certain management employees for purposes of retaining them and enabling such individuals to participate in the long-term growth and financial success of the Company. Profit interest units are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over the employee's requisite service period. These equity awards were issued in exchange for services to be performed.

BP Holdings granted the Company's Chief Executive Officer 38,697,318 Class B units, all of which are subject to vesting terms based on either (i) continued service to BP Holdings or its subsidiaries and/or (ii) performance/market conditions.

• Time-Vesting Units. The portion of the Class B units that vest based on continued service represent 80% of the total Class B units. These units vest over four years starting on October 28, 2008 based on continued service, but will become fully vested on an accelerated basis either (x) upon a change in control while the Company's Chief Executive Officer continues to provide services to BP Holdings or its subsidiaries or (y) if affiliates of the Sponsor receive cash proceeds in respect to 50% of their units in BP Holdings equal to at least 200% of their aggregate capital contributions in respect of such units while the Company's Chief Executive Officer continues to provide services to BP Holdings or its subsidiaries. In addition, if the Company's Chief Executive Officer's services are terminated (a) by the Company without "cause" or (b) by the Chief Executive Officer as a result of "constructive termination," an additional number of these time-vesting Class B units will vest equal to the number that would have vested over the 24-month period following the applicable termination date. Any of these time-vested Class B units that are unvested on termination of the executive's services will be forfeited.

• Performance-Vesting Units. The remaining portion of the Class B units that vest based on performance/market conditions represent 20% of the total Class B units. One-half of these units will vest if affiliates of the Sponsor receive cash proceeds equal to at least 200% of their aggregate capital contributions in respect of all of their units in BP Holdings, with the other half eligible to vest if they receive cash proceeds equal to at least 300% of their aggregate capital contributions in respect of all of their units in BP Holdings. Any of these performance-vesting units that are unvested upon a termination of the Company's Chief Executive Officer's services (x) by the Company without "cause," (y) by the executive as a result of "constructive termination" or (z) by the executive for any reason on or following October 28, 2012, will remain outstanding until the second anniversary of the applicable termination date (unless they vest prior to that date). If the units do not vest by such anniversary, then any unvested performance-vesting units shall be immediately forfeited.

Assumptions used were as follows:

Expected Asset Volatility (1)	23.0	%
Risk Free Interest Rate (2)	2.24	%
Expected Life (3)	5.0 years

(1) The expected asset volatility is derived from the asset volatilities of comparable publicly traded companies.

(2) The risk free interest rate is interpolated from the constant maturity treasury rate ("CMT Rate") as of the valuation date with the maturity matching the expected life.

(3) The expected life is based on management's estimate.

The following table summarizes activity for profit interest units for the period December 31, 2010 to June 30, 2011:

	Class B Units
Balance at December 31, 2010		38,697,318
Granted		—
Forfeited		—
Exercised		—
Balance at June 30, 2011		38,697,318
Vested units at June 30, 2011		19,348,659

There is no stated contractual life for the B units.

Sky LLC granted the Company's Chief Financial Officer 500,000 Class A-2 units, 6,675,287 Class B units and 2,225,096 Class C units, all of which are subject to vesting terms based on either (i) continued service to Sky LLC or its subsidiaries or (ii) performance/market conditions.

• Class A-2 Units. The Class A-2 units vest if an initial public offering ("IPO") or change of control occurs and the valuation of Class A-1 units of Sky LLC implied by the transaction exceeds 110% of the aggregate capital contributions of affiliates of the Sponsor for the Class A-1 units. The Company's Chief Financial Officer does not need to be employed at the time of the IPO or change in control to vest. The Class A-2 Units will be forfeited if an IPO or change of control occurs at a valuation that does not result in vesting.

• Time-Vesting Units. The portion of the Class B units that vest based on continued service represent 66 2/3% of the total Class B units. These units vest over 57 months starting on October 28, 2008 based on continued service, but will become fully vested on an accelerated basis upon a change in control while the Company's Chief Financial Officer continues to provide services to Sky LLC or its subsidiaries. Any of these time-vested Class B units that are unvested on termination of the executive's services will be forfeited.

• Performance-Vesting Units. The remaining portion of the Class B units and all of the Class C units vest based on performance/market conditions. These units will vest if affiliates of the Sponsor receive cash proceeds equal to at least 200% of their aggregate capital contributions in respect of 25% of their units in Sky LLC while the Company's Chief Financial Officer continues to provide services to Sky LLC or its subsidiaries.

Assumptions used were as follows:

Expected Asset Volatility (1)	23.0	%
Risk Free Interest Rate (2)	1.35	%
Expected Life (3)	5.0 years

(1) The expected asset volatility is derived from the asset volatilities of comparable publicly traded companies.

(2) The risk free interest rate is interpolated from the CMT Rate as of the valuation date with the maturity matching the expected life.

(3) The expected life is based on management's estimates.

The following table summarizes activity for profit interest units for the period December 31, 2010 to June 30, 2011:

	Class A-2 Units		Class B Units		Class C Units
Balance at December 31, 2010		500,000		6,675,287		2,225,096
Granted		—		—		—
Forfeited		—		—		—
Exercised		—		—		—
Balance at June 30, 2011		500,000		6,675,287		2,225,096
Vested units at June 30, 2011				2,447,360

There are no stated contractual lives for the A-2, B or C units.

Sky LLC (and following our reorganization in March 2010, Apria Holdings LLC) granted certain management employees 44,116,448 Class B units and 15,189,198 Class C units, all of which are subject to vesting terms based on either (i) continued service to Sky LLC or its subsidiaries or (ii) performance/market conditions.

• Time-Vesting Units. The portion of the Class B units that vest based on continued service represent 66 2/3% of the total Class B units. These units vest over five years starting on the later of (x) October 28, 2008 and (y) the date the employee commenced employment based on continued service, but will become fully vested on an accelerated basis upon a change in control while the employee continues to provide services to Sky LLC or its subsidiaries. Any of these time-vested Class B units that are unvested on termination of the employee's services will be forfeited.

• Performance-Vesting Units. The remaining portion of the Class B units and all of the Class C units vest based on performance/market conditions. These units will vest if affiliates of the Sponsor receive cash proceeds equal to at least 200% of their aggregate capital contributions in respect of 25% of their units in Sky LLC while the employee continues to provide services to Sky LLC or its subsidiaries.

Notwithstanding the vesting terms described above, if the employee voluntarily resigns (in the absence of "constructive termination") then Sky LLC may require the forfeiture of any vested Class B or C units.

Assumptions used were as follows for the 2011 grants:

Expected Asset Volatility (1)	25.0	%
Risk Free Interest Rate (2)	2.01	%
Expected Life (3)	5.0 years

Assumptions used were as follows for the 2010 grants:

Expected Asset Volatility (1)	25.0	%
Risk Free Interest Rate (2)	2.39	%
Expected Life (3)	5.0 years

(1) The expected asset volatility is derived from the asset volatilities of comparable publicly traded companies.

(2) The risk free interest rate is interpolated from the CMT Rate as of the valuation date with the maturity matching the expected life.

(3) The expected life is based on management's estimate.

The following table summarizes activity for profit interest units for the period December 31, 2010 to June 30, 2011:

	Class A-2 Units			Class B Units			Class C Units
Balance at December 31, 2010		2,075,000			35,341,831			12,635,175
Granted		—			—			—
Forfeited		(1,000,000	)		(2,118,678	)		(706,226	)
Exercised		—			—			—
Balance at March 31, 2011		1,075,000			33,223,153			11,928,949
Granted		—			1,189,943			396,648
Forfeited		—			(435,345	)		(145,115	)
Exercised		—			—			—
Balance at June 30, 2011		1,075,000			33,977,751			12,180,482
Vested units at June 30, 2011					9,407,023

There are no stated contractual lives for the A-2, B or C units.

Pursuant to a reorganization we conducted in March 2010, units of Sky LLC were converted or exchanged into units of Apria Holdings LLC, its parent entity.

Expense recorded related to profit interest units was $0.7 million and $1.1 million in the three months ended June 30, 2011 and 2010, respectively, and $1.6 million and $2.2 million in the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, total unrecognized profit interest compensation cost related to unvested profit interest units was $3.4 million, which is expected to be expensed over a weighted average period of 3.2 years.