Profit Interest Units

3 Months Ended

Mar. 31, 2013

NOTE 7 — PROFIT INTEREST UNITS

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 former Chief Executive Officer and the Company’s former 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, 2010 and 2011, Sky LLC (and following the Company’s 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.

In November 2008, BP Holdings granted Norman C. Payson, M.D., who was then the Company’s Chief Executive Officer, 38,697,318 Class B units, all of which were 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-vesting Class B units that are unvested on termination of the executive’s services will be forfeited. These units were fully vested as of December 31, 2012.

•

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.

On November 29, 2012, Norman C. Payson, M.D. announced his retirement from his position as Chief Executive Officer and Chairman of the Board of Directors. Dr. Payson will remain on the Company’s Board of Directors and serve as a senior advisor to the Company. In connection with Dr. Payson’s retirement, the Board of Directors determined that in order to retain Dr. Payson’s continued services it was appropriate to amend the terms of his existing performance-vesting Class B Units to, among other things, provide that (1) his performance-vesting Class B Units will become time-vesting units and will vest in equal monthly installments over a two-year period commencing on November 29, 2012 (or an earlier termination of his services) regardless of whether the existing performance-vesting conditions are met during such time and (2) his performance-vesting Class B units will become fully vested on an accelerated basis upon (x) a change in control while he continues to serve as an advisor or director or (y) if his advisory or board services are terminated without “cause” or if he resigns as a result of a “constructive termination” on or prior to November 29, 2014. In addition, Dr. Payson was granted an additional 3,830,365 time-vesting Class B Units which will generally vest in equal installments every three months over a period of four years from the grant date.

The following table summarizes activity for profit interest units for the period December 31, 2012 to March 31, 2013:


	Class B Units
Balance at December 31, 2012		42,527,683
Granted		—
Exercised		—
Forfeited		—

Balance at March 31, 2013		42,527,683

Vested units at March 31, 2013		32,487,163

There is no stated contractual life for the B units.

In December 2008, Sky LLC granted to Chris A. Karkenny, who was then 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 were 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-vesting 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.

On December 28, 2012, it was announced that announced that Chris A. Karkenny, the Company’s Executive Vice President and Chief Financial Officer, would leave the Company effective as of December 31, 2012 to pursue other business opportunities. In connection with Mr. Karkenny’s termination of employment, the Board of Directors determined to amend his management unit subscription agreement to (1) provide that his performance-vesting Class B and Class C Units would not be forfeited as a result of his termination of employment and instead will remain eligible to vest if the performance conditions are satisfied prior to March 31, 2014 and (2) provide that his vested units can only be purchased by the Company during the period from March 31, 2014 to June 1, 2014. Mr. Karkenny forfeited 667,529 units, which were unvested time-vesting units on the date of his departure.

The following table summarizes activity for profit interest units for the period December 31, 2012 to March 31, 2013:


	Class A-2 Units		Class B Units		Class C Units
Balance at December 31, 2012		500,000		6,007,758		2,225,096
Exercised		—		—		—
Forfeited		—		—		—

Balance at March 31, 2013		500,000		6,007,758		2,225,096

Vested units at March 31, 2013				3,782,284

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

Sky LLC (and following the Company’s reorganization in March 2010, Apria Holdings LLC) granted certain management employees 64,702,929 Class B units and 18,416,092 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-vesting 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”) on or prior to the second anniversary of the applicable grant date, then Sky LLC may require the forfeiture of any vested Class B or C units.

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

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 2012 grants:


Expected Asset Volatility(1)	25.0	%
Risk Free Interest Rate(2)	0.83	%
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, 2012 to March 31, 2013:


	Class A-2 Units		Class B Units			Class C Units
Balance at December 31, 2012		1,075,000		42,852,564			11,078,113
Granted		—		—			—
Forfeited		—		(986,782	)		(328,927	)

Balance at March 31, 2013		1,075,000		41,865,782			10,749,186

Vested units at March 31, 2013				13,671,984

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

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

Apria Holdings LLC granted the new Board member, Mr. Zafirovski, 5,030,651 Class B units in October 2011, all of which are subject to vesting terms based on either (i) continued service or (ii) performance/market conditions.

•

Time-Vesting Units. The portion of the Class B units that vest based on continued service represent 33 1/3% of the total Class B units. These units vest over three years starting on the anniversary of the grant date, but will become fully vested on an accelerated basis upon a change in control while the director continues to provide services to Sky LLC or its subsidiaries. Any of these time-vesting Class B units that are unvested on termination of the director’s services will be forfeited; provided however, if Mr. Zafirovski’s service is terminated by the Company without “cause” or due to his death or disability, a pro-rata portion of the time-vesting Class B units that would have vested on the next anniversary of the grant date will vest.

•

Performance-Vesting Units. The remaining portion of the Class B units vest based on performance/market conditions. These units are divided into two categories, with vesting in each category based on the Company’s achievement of EBITDA (as defined in the Company’s credit agreement) targets and return on the investment of the Sponsor (defined as Blackstone Capital Partners V L.P. and its affiliates). The first category of the target-based Class B Units will vest if either of the following conditions is satisfied while Mr. Zafirovski continues to serve as a director (or within 24 months after termination by the Company of his service on the Board of Directors without cause): (1) the Company achieves a specified EBITDA target for each of fiscal year 2012 and fiscal year 2013; or (2) the Sponsor achieves a specified return on investment on or prior to December 31, 2014. The second category of the target-based Class B Units will vest if both of the following conditions are satisfied while Mr. Zafirovski continues to serve as a director (or within 24 months after a termination by the Company of his service on the Board of Directors without cause): (1) the Company achieves a more challenging specified EBITDA target for either fiscal year 2012 or fiscal year 2013 (such year of achievement, the “Subject Year”); and (2) one of the following conditions is satisfied: (a) the Company achieves a more challenging specified EBITDA target for the fiscal year immediately succeeding the Subject Year; or (b) the Sponsor achieves a specified return on investment on or prior to December 31, 2014. The Company believes that the targets set for the target based Class B Units are reasonable, although neither automatically nor easily achieved.

The Class B units acquired by Mr. Zafirovski are similar to the other Class B units, except that the Class B units granted to Mr. Zafirovski contain a special term that would require the value of Holdings’ Class A-2 Units to exceed $1.63 for him to receive any value, such that no payment would be made in respect of a Class B Unit if the value of a Class A-2 Unit fails to exceed $1.63.

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

(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, 2012 to March 31, 2013:


	Class A-2 Units		Class B Units		Class C Units
Balance at December 31, 2012		1,000,000		5,030,651		—
Granted		—		—		—

Balance at March 31, 2013		1,000,000		5,030,651		—

Vested units at March 31, 2013				558,956

In December 2012, BP Holdings and the new Chief Executive Officer and Chairman of the Board of Directors, Mr. Figueroa, entered into a management unit subscription agreement pursuant to which Mr. Figueroa purchased 1,000,000 Class A-2 Units of Holdings at the price of $1.00 per unit. He also has the right, but not the obligation, to purchase up to an additional 9,814,533 Class A-2 Units for a period of six months following December 5, 2012, the date of his initial purchase. The Class A-2 Units purchased by Mr. Figueroa were fully vested when purchased and contain different economic terms than Holdings’ normal Class A-2 Units which will not entitle him to receive any value above $1.00 per Class A-2 Unit unless and until the cumulative value attributable to each of his Class A-2 Units exceeds $1.10, at which point the special Class A-2 Units will become entitled to receive $0.10 per unit and thereafter will become entitled to receive the same amount as other Class A-2 Units.

BP Holdings granted Mr. Figueroa 12,257,169 Class B Units, all of which are subject to vesting terms based on continued service to BP Holdings or its subsidiaries. The Class B Units granted to Mr. Figueroa contain a special term that requires the value of Holdings’ Class A Units to exceed $1.10 in order for him to receive any value from such units, such that no payment will be made in respect of his Class B Units if the value a Class A Unit fails to exceed $1.10.

•

Time Vesting Units. All of Mr. Figueroa’s Class B Units are time-vesting, with 20% of the Class B Units vesting on December 5, 2013 and an additional 5% of the Class B Units vesting every three months for a period of four years thereafter. The Class B Units will become fully vested if a change in control of Holdings occurs while Mr. Figueroa is still employed with the Company. Any Class B Units that are unvested upon termination of Mr. Figueroa’s employment will be forfeited.

Assumptions used were as follows:


Expected Asset Volatility(1)	25.0	%
Risk Free Interest Rate(2)	0.83	%
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, 2012 to March 31, 2013:


	Class A-2 Units		Class B Units		Class C Units
Balance at December 31, 2012		1,000,000		12,257,169		—
Granted		—		—		—
Forfeited		—		—		—

Balance at March 31, 2013		1,000,000		12,257,169		—

Vested units at March 31, 2013				—

Expense recorded related to all profit interest units was $1.3 million and $0.7 million in the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, total unrecognized profit interest compensation cost related to unvested profit interest units was $10.1 million, which is expected to be expensed over a weighted average period of 3.7 years. The total fair market value of shares vested was $0.9 million and $1.1 million in the three months ended March 31, 2013 and 2012, respectively.

The following table summarizes activity for all profit interest units for the period December 31, 2012 to March 31, 2013:


	Class A-2 Shares		Weighted- Average Grant Date Fair Value		Class B Units			Weighted- Average Grant Date Fair Value		Class C Units			Weighted- Average Grant Date Fair Value
Balance at December 31, 2012		3,575,000		0.81		108,675,825			0.37		13,303,209			0.21
Granted		—		—		—			—		—			—
Forfeited		—		—		(986,782	)		0.35		(328,927	)		0.20

Balance at March 31, 2013		3,575,000		0.81		107,689,043			0.37		12,974,282			0.21

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

+ References

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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

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+ Details

APRIA HEALTHCARE GROUP INC 10-Q