Share-Based Compensation

9 Months Ended

Sep. 30, 2015

7.Share-Based Compensation

During the nine months ended September 30, 2015, activity under the 2007 Stock Option Plan (the “2007 Stock Option Plan”), of UHS Holdco, Inc., our parent company (“Parent”), was as follows:


						Weighted
						average
		Weighted		Aggregate		remaining
	Number of	average		intrinsic		contractual
(in thousands, except exercise price and years)	options	exercise price		value		term (years)
Outstanding at December 31, 2014	37,340	$	0.84	$	—	9.9
Granted	19,565		0.71
Exercised	—		—	$	—
Forfeited or expired	(20,172)		0.95
Outstanding at September 30, 2015	36,733	$	0.71	$	—	9.1
Exercisable at September 30, 2015	8,808	$	0.71	$	—	9.1
Remaining authorized options available for issue	6,953

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 an expense on a straight-line basis over the options’ expected vesting periods. The following assumptions were used in determining the fair value of stock options granted during the nine months ended September 30, 2015 under the Black-Scholes model. There were no stock options granted during the nine months ended September 30, 2014.


		Nine Months Ended
		September 30, 2015
Risk-free interest rate		1.70	%
Expected volatility		27.0	%
Dividend yield		N/A
Expected option life (years)		5.23
Black-Scholes Value of options	$	0.20

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 is estimated based on foreseeable trends.

At September 30, 2015, unearned non-cash share-based compensation that we expect to recognize as expense over a weighted average period of 2.1 years totals approximately $6.7 million, net of our estimated forfeiture rate of 2.0%. The expense could be accelerated upon the sale of Parent or the Company.

In April 2015, Parent granted the Company’s Chief Executive Officer 7.0 million restricted stock units which vest over four years. Total compensation expense related to this grant was $0.3 million and $0.6 million for the three and nine months ended September 30, 2015, respectively.

Although Parent grants stock options and restricted stock units, the Company recognizes compensation expense related to these options and units 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.