NOTE 3: STOCK-BASED COMPENSATION

DeVry Group maintains four stock-based incentive plans: the 1999 Stock Incentive Plan, the 2003 Stock Incentive Plan, the Amended and Restated Incentive Plan of 2005 and the Second Amended and Restated Incentive Plan of 2013. Under these plans, directors, key executives and managerial employees are eligible to receive incentive stock or nonqualified options to purchase shares of DeVry Group’s common stock. The Second Amended and Restated Incentive Plan of 2013 and the Amended and Restated Incentive Plan of 2005 also permit the granting of stock appreciation rights, restricted stock, performance stock and other stock and cash-based compensation. Though options remain outstanding under the 1999, 2003 and 2005 incentive plans, no further stock-based grants will be issued from these plans. The Second Amended and Restated Incentive Plan of 2013 and the Amended and Restated Incentive Plan of 2005 are administered by the Compensation Committee of the Board. Options are granted for terms of up to ten years and can vest immediately or over periods of up to five years. The requisite service period is equal to the vesting period. The option price under the plans is the fair market value of the shares on the date of the grant.

DeVry Group accounts for stock-based compensation granted to retirement eligible employees that fully vests upon an employee’s retirement under the non-substantive vesting period approach. Under this approach, the entire compensation cost is recognized at the grant date for stock-based grants issued to retirement eligible employees.

For non-retirement eligible employees, stock-based compensation cost is measured at grant date based on the fair value of the award, and is recognized as expense over the employee requisite service period, reduced by an estimated forfeiture rate.

At September 30, 2015, 7,956,296 authorized but unissued shares of common stock were reserved for issuance under DeVry Group’s stock incentive plans.

The following is a summary of options activity for the three months ended September 30, 2015:

					Weighted
			Weighted		Average		Aggregate
			Average		Remaining		Intrinsic
	Options		Exercise		Contractual		Value
	Outstanding		Price		Life (in Years)		(in thousands)
Outstanding at July 1, 2015		3,148,087	$	34.86
Options Granted		416,000		26.23
Options Exercised		(12,081)		21.07
Options Forfeited		(4,723)		24.48
Options Expired		(12,742)		40.18
Outstanding at September 30, 2015		3,534,541		33.89		5.90	$	6,708
Exercisable at September 30, 2015		2,505,594	$	36.11		4.75	$	4,776

The following is a summary of stock appreciation rights activity for the three months ended September 30, 2015:

					Weighted
	Stock		Weighted		Average		Aggregate
	Appreciation		Average		Remaining		Intrinsic
	Rights		Exercise		Contractual		Value
	Outstanding		Price		Life (in Years)		(in thousands)
Outstanding at July 1, 2015		118,065	$	42.74
Rights Granted		-		-
Rights Exercised		-		-
Rights Canceled		-		-
Outstanding at September 30, 2015		118,065		42.74		4.45	$	-
Exercisable at September 30, 2015		113,444	$	43.25		4.18	$	-

The total intrinsic value of options exercised for the three months ended September 30, 2015 and 2014 was $0.1 million and $1.8 million, respectively.

The fair value of DeVry Group’s stock option awards was estimated using a binomial model. This model uses historical cancelation and exercise experience of DeVry Group to determine the option value. It also takes into account the illiquid nature of employee options during the vesting period.

The weighted average estimated grant date fair values for options granted at market price under DeVry Group’s stock-based incentive plans during the first three months of fiscal years 2016 and 2015 were $10.17 and $17.17, per share, respectively. The fair value of DeVry Group’s stock option grants were estimated assuming the following weighted average assumptions:

	Fiscal Year
	2016			2015
Expected Life (in Years)		6.78			6.73
Expected Volatility		41.35	%		42.04	%
Risk-free Interest Rate		1.85	%		2.03	%
Dividend Yield		1.01	%		1.03	%
Pre-vesting Forfeiture Rate		3.00	%		3.00	%

The expected life of the options granted is based on the weighted average exercise life with age and salary adjustment factors from historical exercise behavior. DeVry Group’s expected volatility is computed by combining and weighting the implied market volatility, the most recent volatility over the expected life of the option grant and DeVry Group’s long-term historical volatility. The pre-vesting forfeiture rate is based on DeVry Group’s historical stock option forfeiture experience.

If factors change and different assumptions are employed in the valuation of stock-based grants in future periods, the stock-based compensation expense that DeVry Group records may differ significantly from what was recorded in previous periods.

During the first three months of fiscal year 2016, DeVry Group granted 523,340 shares of restricted stock to selected employees. Of these, 168,390 are performance-based shares which are earned by the recipients over a three-year period based on achievement of certain academic goals when a minimum level of DeVry Group return on invested capital is attained. The remaining 354,950 shares and all other previously granted shares of restricted stock are subject to restrictions which lapse ratably over one, three and four-year periods on the grant anniversary date based on the recipient’s continued service on the Board of Directors or employment with DeVry Group or upon retirement. During the restriction period, the recipient of the non-performance based shares shall have the right to receive dividend equivalents. This right does not pertain to the performance-based shares. The following is a summary of restricted stock activity for the three months ended September 30, 2015:

			Weighted
	Restricted		Average
	Stock		Grant Date
	Outstanding		Fair Value
Nonvested at July 1, 2015		1,013,140	$	30.42
Shares Granted		523,340		26.16
Shares Vested		(327,338)		26.67
Shares Forfeited		(39,873)		22.67
Nonvested at September 30, 2015		1,169,269	$	28.87

The weighted average estimated grant date fair values for restricted stock granted at market price under DeVry Group’s stock-based incentive plans during the first three months of fiscal years 2016 and 2015 were $26.16 and $43.35, per share, respectively.

The following table shows total stock-based compensation expense included in the Consolidated Statements of Income (in thousands):

	For the Three Months Ended
	September 30,
	2015		2014
Cost of Educational Services	$	1,996	$	1,767
Student Services and Administrative Expense		4,242		3,755
		6,238		5,522
Income Tax Benefit		(2,204)		(2,041)
Net Stock-Based Compensation Expense	$	4,034	$	3,481

As of September 30, 2015, $31.4 million of total pre-tax unrecognized compensation costs related to non-vested grants is expected to be recognized over a weighted average period of 2.5 years. The total fair value of options and shares vested during the three months ended September 30, 2015 and 2014 was approximately $14.0 million and $15.4 million, respectively.

There were no capitalized stock-based compensation costs at September 30, 2015 and 2014.

DeVry Group has an established practice of issuing new shares of common stock to satisfy share option exercises. However, DeVry Group also may issue treasury shares to satisfy option exercises under certain plans.