Share-Based Compensation

6 Months Ended

Dec. 31, 2013

Share-based Compensation [Abstract]

Share-Based Compensation

SHARE-BASED COMPENSATION

2012 Omnibus Long-Term Incentive Plan

Effective in September 2012, the Company adopted the Education Management Corporation 2012 Omnibus Long-Term Incentive Plan (the “2012 Omnibus Plan”), which replaced the Education Management Corporation Omnibus Long-Term Incentive Plan (the "2009 Omnibus Plan") that was adopted in April 2009 and became effective upon the completion of the Initial Public Offering. The 2009 Omnibus Plan and the 2006 Stock Option Plan, which it replaced, are now frozen. The 2012 Omnibus Plan may be used to issue stock options, stock appreciation rights, restricted stock, restricted stock units and other forms of long-term incentive compensation.

The Company amended the 2012 Omnibus Plan in November 2013 to formally authorize the grant of cash and stock-based awards that generally have a performance period of one year and to increase the number of shares of Common Stock authorized for issuance by 4.0 million. As of December 31, 2013, approximately 5.6 million shares of Common Stock remain reserved for issuance under the 2012 Omnibus Plan.

Share-Based Compensation Activity

On November 8, 2013, the Company granted the share-based compensation awards presented in the table below. The fair value of the time-based stock options was determined using a Black-Scholes-Merton model in which the key assumptions are presented below.

	Time-Based Stock Options			Restricted Stock Units
Number granted (in millions)	1.5			0.6
Fair value per unit	$	7.66		$	12.74
Exercise price	$	12.74		N/A
Expected dividend yield	0		%	N/A
Expected volatility	64		%	N/A
Risk free interest rate	1.86		%	N/A
Expected term (yrs)	6.25 years			N/A

The above awards will vest 25 percent per year and will result in compensation expense of approximately $16.5 million over the four-year service period, net of expected forfeitures. The Company also granted 0.1 million shares of restricted stock to members of its Board of Directors on November 8, 2013, all of which will vest after one year.

The Company recognized $5.7 million and $4.1 million of share-based compensation expense during the three months ended December 31, 2013 and 2012, respectively, and $9.8 million and $7.7 million of share-based compensation expense during the six months ended December 31, 2013 and 2012, respectively. Compensation expense for the three and six months ended December 31, 2013 includes additional expense recognized upon the termination of former employees that are no longer required to provide services to obtain certain awards in accordance with the terms of their employment agreements.

The table below presents outstanding share units, unrecognized compensation expense (net of expected forfeitures) and stock options that are exercisable at December 31, 2013:

	Outstanding (in millions)	Unrecognized Compensation Expense (in millions)		Exercisable (in 000s)	Weighted Average Exercise Price / Share Price
Time-based stock options	11.3	$	27.0	3.6	$	3.58
Restricted stock units	2.5	$	12.6	N/A	$	5.90
Performance-based stock options	1.0	$	2.1	—	$	3.59
Total	14.8	$	41.7	3.6

During the six month period ended December 31, 2013, the Company issued 1.5 million shares of Common Stock and recorded a gross excess tax benefit of $3.4 million in connection with share-based compensation activity. The gross excess tax benefit is classified as a cash inflow from financing activities in the accompanying consolidated statement of cash flows.

Performance-based stock options vest upon the greater of (i) 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 (ii) certain return on investment hurdles achieved by the Principal Stockholders. As of December 31, 2013, the Company continues to defer recognizing expense on outstanding performance-based stock options until the relevant performance conditions become probable of being met.