Stock-Based Compensation

3 Months Ended

Mar. 31, 2013

Stock-Based Compensation

Stock-Based Compensation

7. Stock-Based Compensation

During the three months ended March 31, 2013, activity under the 2007 Stock Option Plan (the “2007 Stock Option Plan”), of UHS Holdco, Inc., our parent company (“Parent”), was as follows:

(in thousands except exercise price and years)	Number of  Options		Weighted  average  exercise price		Aggregate  intrinsic value		Weighted  average  remaining  contractual  term (years)
Outstanding at December 31, 2012	36,668		$	1.12	$	11,253	5.6
Granted	—		—
Exercised	—		—
Forfeited or expired	(3,562	)	1.04
Outstanding at March 31, 2013	33,106		$	1.13	$	9,957	5.5
Exercisable at March 31, 2013	26,479		$	1.05	$	9,748	4.6
Remaining authorized options available for issue	10,581

The exercise price of the stock option award is equal to the market value of Parent’s common stock on the grant date as determined reasonably and in good faith by Parent’s Board of Directors and compensation committee and based on an analysis of a variety of factors including peer group multiples, merger and acquisition multiples, and discounted cash flow analyses.

The intrinsic value of a stock award is the amount by which the market value of the underlying stock exceeds the exercise price of the award.

We determine the fair value of stock options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straight-line basis over the options’ expected vesting periods. There were no stock options granted during the three months ended March 31, 2013.

Expected volatility is based on an independent valuation of the stock of companies within our peer group.  Given the lack of a true comparable company, the peer group consists of selected public health care companies representing our suppliers, customers and competitors within certain product lines.  The risk free-interest rate is based on the U.S. Treasury yield curve in effect at the grant date based on the expected option life.  The expected option life represents the result of the “simplified” method applied to “plain vanilla” options granted during the period, as provided within Accounting Standards Codification (“ASC”) Topic 718, “Compensation - Stock Compensation.”  Parent used the simplified method as Parent does not have sufficient historical exercise experience to provide a basis upon which to estimate the expected term.

Although Parent grants stock options, the Company recognizes compensation expense related to these options since the services are performed for its benefit.  Along with this expense, which is primarily included in Selling, General and Administrative expense, the Company records an offsetting Payable to Parent liability which is not expected to be settled within the next twelve months.

At March 31, 2013, unearned non-cash stock-based compensation that we expect to recognize as expense over a weighted average period of 2.4 years totals approximately $3.4 million, net of our estimated forfeiture rate of 2.0%. The expense could be accelerated upon the sale of Parent or the Company.