Share-Based Compensation

9 Months Ended

Sep. 30, 2011

Share-Based Compensation

Share-Based Compensation

Note 10.           Share-Based Compensation

As described in Note 2, a change of control occurred with the Onex transaction on November 16, 2010. The outstanding stock options were forfeited and all outstanding restricted shares vested immediately and were acquired as part of the share exchange, which was finalized on December 22, 2010. All share-based compensation expense related to the prior share-based incentive plans was recorded in the predecessor period which ended November 15, 2010.

During the second quarter of 2011, certain executive officers executed stock option agreements for options to purchase shares of the Class A common stock of Onex Rescare Holdings Corp., the entity that holds all of the outstanding shares of ResCare. These options were awarded pursuant to the Onex Rescare Holdings Corp. Stock Option Plan (the Plan).

Under the Plan, initial stock option grants of 1,999 shares were awarded on April 1, 2011, at a $5,000 exercise price. These options have a ten year life. From the initial grant of 1,999 options, 1,666 have a service period of five years and 333 have no service period. Each option incorporated both market conditions to vesting and performance conditions to exercisability and is forfeited upon termination of employment if the relevant conditions have not been met.

We have engaged a valuation company to determine the fair value for each option. This valuation work is not complete as of this date. The fair value of each stock option will be estimated as of the date of grant using Monte Carlo simulation in a numerical option valuation model taking into account the market condition to vesting. The expected volatility of our stock price will be based on historical volatility of a group of our peers over the expected term, adjusted for our leverage. The expected term of the option will be based on expected exercise based on norms of exercise behavior, the vesting conditions of the respective award and the contractual term. Our stock price volatility and the expected option lives are based on management’s best estimates at the time of grant, both of which impact the fair value of the option calculated under the option valuation methodology. Ultimately, the expense that will be recognized will be based on the fair value of the options in conjunction with the achievement of the performance conditions for exercisability.

Based on the performance conditions that require a liquidity event as a condition for exercising the options, no share-based compensation expense was recorded in the nine months ended September 30, 2011 for the 1,999 options granted on April 1, 2011.

On November 1, 2011, the board of directors passed a resolution amending the option agreements, whereby a liquidity event would not be required as a condition for exercising the options. As a result, we will be recording share-based compensation expense for these options beginning in the fourth quarter of 2011. Although we are still in the process of determining the fair value of each option, we expect to record share-based compensation expense in the range of $6.0 million to $6.5 million over the next five years for these options.