SHARE-BASED COMPENSATION

Stock options and restricted stock

In August 2006, the Company’s Board of Directors approved the 2006 Stock Option Plan (the “2006 Plan”) for executive management and key personnel. Under the 2006 Plan, certain of the Company’s employees were granted a combination of time-based and performance-based options to purchase the Company’s common stock. In April 2009, the Company’s Board of Directors adopted the Omnibus Long-Term Incentive Plan (the “Omnibus Plan”), which became effective upon the completion of the initial public offering. Including forfeitures of options under the 2006 Plan, which can be used to issue new awards under the Omnibus Plan, approximately 1.6 million shares of common stock remain available for issuance under the Omnibus Plan at June 30, 2012. The Omnibus Plan may be used to issue stock options, stock-option appreciation rights, restricted stock, restricted stock units and other forms of long-term incentive compensation.

The Company recognized $13.3 million, $11.1 million and $21.7 million of share-based compensation expense related to outstanding time-based stock options, restricted stock and other awards during fiscal 2012, 2011 and 2010, respectively. Upon completion of the initial public offering in fiscal 2010, the Company recognized $15.2 million of previously deferred stock-based compensation costs due to the removal of certain conditions that existed related to the inability of option holders to obtain fair market value for stock options granted under the 2006 Plan. None of the share-based compensation expense the Company has recognized to date relates to outstanding performance-based stock options.

In April 2011, the Company’s Board of Directors approved a plan to modify the vesting conditions of the existing performance-based stock options. After giving effect to the modification, these options will vest upon the greater of the percentage of the Company’s common stock sold by certain investment funds affiliated with Providence Equity Partners and Goldman Sachs Capital Partners (together, the “Principal Stockholders”) or on certain return on investment hurdles achieved by the Principal Stockholders. The exercise price and contractual life of the performance-based stock options did not change. The Company continues to defer compensation expense related to these performance-based options because the performance conditions are not probable of being met at June 30, 2012. Net of estimated forfeitures, the Company had $28.6 million of unrecognized compensation cost relating to performance-based stock options and $29.8 million of unrecognized compensation cost relating to time-based stock options at June 30, 2012.

The Company issued 14,558 shares of common stock directly to members of the Board of Directors and 22,088 shares of restricted stock, which vest one year from the date of grant, during fiscal 2012. The shares of restricted stock were valued at $19.92 per share, the closing price of a share of the Company’s common stock on the date of grant. At June 30, 2012, there is $0.2 million of unrecognized compensation cost related to restricted stock, all of which will be recognized ratably through October 2012.

The Company utilizes the Black-Scholes method to estimate the fair value of time-based and performance-based options. The expected option term on the Company’s grants is determined using a simplified method based on the average of the weighted vesting terms and the contractual term of the options. Expected volatility is determined using the historical volatility of a seven-company peer group, all of which have publicly traded stock. The risk-free interest rate assumption is determined using the yield on a zero-coupon U.S. Treasury strip by extrapolating to a forward-yield curve. The forfeiture rate is determined using a historical rate based on actual experience. Finally, as the Company does not currently declare dividends and does not intend to do so in the short term, a dividend yield of zero is used.

Below is a summary of the weighted-average assumptions used for time-based options granted during the years ended June 30:



	2012			2011			2010
Weighted average fair value of options	$	9.29		$	6.77		$	8.50
Expected dividend yield	—		%	—		%	—		%
Expected volatility	45.0		%	44.0		%	44.2		%
Risk-free interest rate	1.5		%	1.9		%	2.9		%
Expected forfeiture rate	7.3		%	8.6		%	12.4		%
Expected term	6.25 yrs			6.25 yrs			6.25 yrs
Vesting periods	4.0 yrs			4.0 yrs			4.0 yrs

Time-based options granted, exercised and forfeited during fiscal 2012 are as follows:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding at June 30, 2011	7,408,172		$	14.24	7.25 yrs	$	71,871
Granted	2,408,010		$	20.48
Exercised	(199,038	)	$	13.52
Forfeited	(373,525	)	$	12.91
Outstanding at June 30, 2012	9,243,619		$	15.72	6.96 yrs	$	—
Vested at June 30, 2012 ^*	4,525,200		$	13.25	5.45 yrs	$	—

* The Company's stock price was less than the exercise price for all applicable option grants at June 30, 2012.

The Company received approximately $2.7 million from option holders in fiscal 2012 from the exercise of stock options, on which the actual tax benefits realized for tax deductions, including excess tax benefits, was $0.9 million.

Below is a summary of the weighted-average assumptions used for the Company’s existing performance-based options, all of which were originally granted before fiscal 2010 and were modified in April 2011. No performance-based options have been granted since fiscal 2009. Also presented below is a rollforward of performance-based option activity during fiscal 2012.



Weighted average fair value of options	$	9.14
Expected dividend yield	—		%
Expected volatility	47.4		%
Risk-free interest rate	1.7		%
Expected term	3.2 years



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding at June 30, 2011	3,309,064		$	12.38	5.39 yrs	$	38,257
Granted	—
Exercised	—
Forfeited	(191,477	)	$	15.47
Outstanding at June 30, 2012	3,117,587		$	12.19	4.48 yrs	$	—
Exercisable at June 30, 2012	—		—		—	—

Long-Term Incentive Compensation Plan

In fiscal 2007, EDMC adopted the Long-Term Incentive Compensation Plan (the “LTIC Plan”). The LTIC Plan consists of a bonus pool that is valued based on returns to Providence Equity Partners and Goldman Sachs Capital Partners in connection with a change in control of EDMC. Out of a total of 1,000,000 units authorized, approximately 518,000 units were outstanding under the LTIC Plan at June 30, 2012. Each unit represents the right to receive a payment based on the value of the bonus pool. Because the contingent future events that would result in value to the unit-holders are less than probable, no compensation expense has been recognized by the Company during any of the periods following the Transaction. The plan is being accounted for as an equity-based plan as the units may be settled in stock or cash at the Company’s discretion, and it is the Company’s intent to settle any future payment out of the LTIC Plan by issuing common stock. The total amount of unrecognized compensation cost over the vesting periods of all units, net of estimated forfeitures, is approximately $1.9 million at June 30, 2012.