12. Share-Based Compensation

Prior to November 15, 2010, we had outstanding awards under three share-based incentive plans. Under the plans, stock options were awarded at a price equal to the market price of our common stock on the date of grant, and an option’s maximum vesting term was normally five years. Generally, all options had varied vesting schedules, varying between 20% and 50% at date of grant with the remaining options vesting over one to four years. Restricted stock awards generally were comprised of service-based restricted shares and performance-based restricted shares. The service-based restricted shares generally vested over three to four years from the date of grant. The performance-based restricted shares vested in increments if and when certain performance criteria were met.

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 employees and non-employee directors 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), which has a total of 3,810 shares to which options may be granted.

Under the Plan, initial stock option grants of 3,556 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 3,556 options, 2,935 have a service period of five years and 621 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 engaged a valuation company to assist in the determination of the fair value for each option. The fair value of each stock option was 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 was based on historical volatility of a group of our peers over the expected term, adjusted for our leverage. We assumed no dividends based on the Company’s prior history. The expected term of the option was based on expected exercise behavior, the vesting conditions of the respective award and the contractual term. Our stock price volatility and the expected option lives were 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/vesting conditions that required 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 3,556 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/vesting the options. We updated the fair value calculation using a modified grant date of November 1, 2011. As a result, share-based compensation expense of $2.4 million was recorded in the fourth quarter of 2011.

Total share-based compensation expense by type of award for the periods presented was as follows:

	SUCCESSOR						PREDECESSOR
	Dec-31,		Dec-31,		Nov-16, 2010-		Jan-1, 2010-
	2012		2011		Dec-31, 2010		Nov-15, 2010
Stock options	$	3,836	$	2,383	$	—	$	—
Restricted stock, service-based	—		—		—		5,095
Restricted stock, performance-based	—		—		—		1,106
Total share-based compensation expense	3,836		2,383		—		6,201
Tax effect	1,492		927		—		2,412
Share-based compensation expense, net of tax	$	2,344	$	1,456	$	—	$	3,789

We use authorized but unissued shares when a stock option is exercised or when restricted stock is granted.

Stock Options

A summary of our stock option activity and related information under the Onex Rescare Holdings Corp. Plan is as follows:

			Weighted		Weighted
			Average		Average
	Stock		Exercise		Remaining
	Options		Price		Contractual Life
Outstanding at December 31, 2010 - Successor	—		$	—
Granted	3,556		5,000.00
Outstanding at December 31, 2011 — Successor	3,556		5,000.00
Granted	501		5,693.41
Exercised	—		—
Forfeited/canceled	(715	)	5,000.00
Outstanding at December 31, 2012- Successor	3,342		$	5,103.95	8.28 years
Exercisable at December 31, 2012 - Successor	976		$	5,000.00	7.98 years

We estimated the fair value of each option share granted on the date of grant using a Monte Carlo simulation that uses expected volatility and risk-free interest rate assumptions. Expected volatilities were based on average volatilities of similar public companies, which ranged from 62.0% to 91.0%. The risk-free interest rate was based on the U.S. Treasury securities commensurate with the terms of each traunch of the option grant and ranged from 0.12% to 2.16%. Unrecognized share-based compensation related to stock options under the new Onex Rescare Holdings Corp. Plan as of December 31, 2012 was $4.9 million, which will be recognized over a four-year period.

Restricted Stock, Service-based

No shares of service-based restricted stock from the predecessor or successor plans were granted during 2012 and 2011. No service-based restricted stock was outstanding as of December 31, 2012 and 2011.

Restricted Stock, Performance-based

No shares of performance-based restricted stock from the predecessor or successor plans were granted during 2012 and 2011. No performance-based restricted stock was outstanding as of December 31, 2012 and 2011.