
12.	SHARE-BASED COMPENSATION

Overview

The Company awards share-based compensation under 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 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 increase the number of shares of Common Stock authorized for issuance by 4.0 million and to allow the Company the ability to grant future cash and stock-based awards that generally have a performance period of one year. As of June 30, 2014, approximately 7.7 million shares of Common Stock remain reserved for issuance under the 2012 Omnibus Plan.

The Company recognized $16.4 million, $17.1 million and $13.3 million of share-based compensation expense related to outstanding time-based stock options, restricted stock and other awards during fiscal 2014, 2013 and 2012, respectively. Compensation expense for fiscal 2014 and 2013 includes additional expense recognized upon the termination of former employees who are were no longer required to provide services to obtain certain awards in accordance with the terms of their employment agreements.

During the fiscal year ended June 30, 2014, the Company issued 1.7 million shares of Common Stock related to share-based compensation activity that resulted in gross excess tax benefits of $3.4 million and stock-option exercise proceeds of $3.0 million. The Company received approximately $2.4 million from option holders in fiscal 2012 from the exercise of stock options, on which the excess tax benefit was $0.3 million. Share-based compensation activity was not significant in fiscal 2013. Gross excess tax benefits and stock-option exercise proceeds are classified as cash inflows from financing activities in the accompanying consolidated statement of cash flows.

In connection with the vesting of restricted stock units that occurred in the fiscal year ended June 30, 2014, the Company paid $3.3 million in minimum tax withholdings on behalf of its employees, which is classified as a cash outflow from financing activities. In exchange, the Company retained 0.3 million shares, which was equal to the value of the required tax withholding payments on the vesting dates.

Time-based Stock Options

The Company utilizes the Black-Scholes-Merton method to estimate the fair value of time-based options. The expected term of the Company's options 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 six-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 Company has not historically declared dividends and does not intend to do so in the foreseeable future; therefore, a dividend yield of zero is used. Finally, the forfeiture rate at the date of grant (as depicted in the table below) is generally determined using a historical rate based on actual experience; however, management reviews actual forfeitures on a periodic basis and updates actual and estimated future compensation expense accordingly. Below is a summary of the weighted-average assumptions used for time-based options granted during the years ended June 30, which excludes the replacement options granted in fiscal 2013 in connection with the Options Exchange that is explained separately below:



	2014			2013			2012
Weighted average fair value of options	$	7.66		$	2.76		$	9.29
Expected dividend yield	—		%	—		%	—		%
Expected volatility	64.0		%	78.6		%	45.0		%
Risk-free interest rate	1.9		%	1.2		%	1.5		%
Expected forfeiture rate at the date of grant	12.9		%	—		%	7.3		%
Expected term	6.25 years			7.5 years			6.25 years
Vesting periods	4 years			4 years			4 years

A roll forward of time-based option activity during fiscal 2014 is presented below.



	Options (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding at June 30, 2013	10,989		$	4.06	7.5 years	$	17,120
Granted	1,534		$	12.74
Forfeited	(911	)	$	5.54
Exercised	(753	)	$	3.58
Expired	(159	)	$	3.57
Outstanding at June 30, 2014	10,700		$	4.81	6.9 years
Exercisable at June 30, 2014	4,498		$	3.61	4.7 years	$	—

Restricted Stock Units

A roll forward of restricted stock units ("RSU") activity during fiscal 2014 is presented below.



	RSUs (in thousands)		Weighted Average Share Price
Outstanding at June 30, 2013	3,020		$	3.47
Granted	668		$	12.74
Vested	(968	)	$	3.64
Forfeited	(648	)	$	4.45
Outstanding at June 30, 2014	2,072		$	6.04

During fiscal 2014, the Company used a weighted average expected forfeiture rate for restricted stock units on their grant dates of 15.2%.

Performance-based Stock Options

Performance-based stock options 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. No performance-based options have been granted since fiscal 2009 except for the replacement options granted in connection with the Options Exchange in fiscal 2013 explained below. At June 30, 2014, approximately 920,000 performance-based stock options with a weighted average exercise price of $3.59 per share and expiration dates ranging from August 2016 through October 2018 remain outstanding.

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 367,000 units remain outstanding under the LTIC Plan at June 30, 2014. 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 LTIC 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. At June 30, 2014, there is less than $1 million in unrecognized compensation expense related to the LTIC Plan.

Unrecognized Compensation Expense

Net of expected forfeitures, the Company's unrecognized compensation expense was as follows at June 30, 2014 for each type of award outstanding (in thousands):



Time-based stock options	$	19,149
Restricted stock units	8,627
Performance-based stock options	2,019
Total unrecognized compensation expense	$	29,795

Compensation expense on time-based stock options and restricted stock units will be recognized over the remaining vesting period for each applicable grant. Compensation expense on performance-based stock options and the LTIC Plan will be recognized once the performance conditions described above become probable of being met. However, pursuant to the debt restructuring described in Note 2, "Significant Accounting Policies," under "Basis of Presentation," any future change in control of EDMC would cause all outstanding stock-options to become fully vested, which would result in the unrecognized compensation expense at the date of a change in control being recognized immediately at this time.

Option Exchange

In August 2012, the Company's Board of Directors authorized a program (the "Option Exchange") to allow eligible option holders the opportunity to exchange their existing EDMC stock options for replacement stock options having an exercise price of $3.59 per share, which was the closing price for a share of the Company's Common Stock on the Nasdaq Global Select Market ("NASDAQ") on September 13, 2012, the date on which the offer expired.

In connection with the Option Exchange, the Company granted approximately 6.3 million time-based and 2.0 million performance-based replacement stock options in return for the cancellation of approximately 8.5 million time-based and 3.0 million performance-based stock options. The Option Exchange was accounted for as a modification of the original awards. Consequently, incremental value to the option holders was calculated using a Black-Scholes-Merton pricing model by taking the value of all time-based stock options on September 13, 2012 using the original option award terms and comparing that to the value of the modified time-based stock options using the new option award terms on September 13, 2012. Because the original awards had exercise prices well in excess of the price of a share of Common Stock on the modification date, the Company used a lattice model to determine the appropriate expected term to use in the Black-Scholes-Merton model. The modification of the original awards resulted in $2.2 million of incremental compensation expense for time-based options, net of expected forfeitures, that is being recognized over the applicable employee service periods, which range from one year to four years.