15. SHARE-BASED COMPENSATION

Overview of Share-Based Compensation Plans

The Career Education Corporation 2008 Incentive Compensation Plan (the “2008 Plan”) authorizes awards of stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock, performance units, annual incentive awards, and substitute awards, which generally may be settled in cash or shares of our common stock. Any shares of our common stock that are subject to awards of stock options or stock appreciation rights payable in shares will be counted as 1.0 share for each share issued for purposes of the aggregate share limit and any shares of our common stock that are subject to any other form of award payable in shares will be counted as 1.67 shares for each share issued for purposes of the aggregate share limit. As of December 31, 2013, there were approximately 6.4 million shares of common stock available for future share-based awards under the 2008 Plan, which is net of 3.9 million shares issuable upon exercise of outstanding options. This amount does not reflect 0.5 million shares underlying restricted stock units as of December 31, 2013, which upon vesting will be settled in shares of our common stock and thus reduce the common stock available for future share-based awards under the 2008 Plan by the amount vested, multiplied by the applicable factor under the plan.

As of December 31, 2013, we estimate that compensation expense of approximately $6.0 million will be recognized over the next four years for all unvested share-based awards that have been granted to participants, including stock options, shares of restricted stock and restricted stock units to be settled in shares of stock but excluding restricted stock units to be settled in cash.

Stock Options. The exercise price of stock options granted under each of the plans is equal to the fair market value of our common stock on the date of grant. Employee stock options generally become exercisable 25% per year over a four-year service period beginning on the date of grant and expire ten years from the date of grant. Non-employee directors’ stock options expire ten years from the date of grant and generally become exercisable as follows: one-third on the grant date, one-third on the first anniversary of the grant date, and one-third on the second anniversary of the grant date, or, one-fourth on the grant date and one-fourth for each of the first through third anniversaries of the grant date. Both employee stock options and non-employee director stock options are subject to possible earlier vesting and termination in certain circumstances. Generally, if a plan participant terminates his or her employment for any reason other than by death or disability during the vesting period, he or she forfeits the right to unvested stock option awards. Grants of stock options are generally only subject to the service conditions discussed previously.

Stock option activity during the years ended December 31, 2013, 2012 and 2011, under all of our plans was as follows:


	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2010		3,574,614		$	28.29

Granted		565,720			21.87
Exercised		(141,625	)		14.60			$	1,112
Forfeited		(456,459	)		24.69
Cancelled		(188,788	)		36.94

Outstanding as of December 31, 2011		3,353,462		$	27.79

Granted		534,895			7.91
Exercised		—			—			$	—
Forfeited		(196,400	)		18.52
Cancelled		(1,100,070	)		24.09

Outstanding as of December 31, 2012		2,591,887		$	25.96

Granted		1,934,005			2.58
Exercised		(1,275	)		3.08			$	3
Forfeited		(261,366	)		5.19
Cancelled		(362,816	)		31.60

Outstanding as of December 31, 2013		3,900,435		$	15.15		6.8 years	$	5,513

Exercisable as of December 31, 2013		2,203,417		$	23.42		5.0 years	$	1,116

The following table summarizes information with respect to all outstanding and exercisable stock options under all of our plans as of December 31, 2013:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Number Exercisable		Weighted Average Exercise Price
$ 2.20 $ 2.20		644,628	$	2.20		9.27		—	$	0.00
$ 2.62 $ 2.65		96,729	$	2.65		9.61		2,221	$	2.62
$ 2.72 $ 2.72		700,972	$	2.72		9.17		337,500	$	2.72
$ 2.82 $ 6.51		415,002	$	3.79		9.21		84,648	$	4.94
$ 8.63 $13.67		394,500	$	9.81		7.13		223,804	$	10.70
$14.96 $22.04		480,384	$	20.31		4.83		437,192	$	20.17
$22.13 $30.67		481,244	$	27.67		5.91		431,076	$	27.96
$30.80 $34.70		498,751	$	33.31		2.16		498,751	$	33.31
$34.86 $62.56		185,100	$	54.94		0.72		185,100	$	54.94
$68.24 $68.24		3,125	$	68.24		0.43		3,125	$	68.24

		3,900,435	$	15.15		6.76		2,203,417	$	23.42

Restricted Stock and Restricted Stock Units to be Settled in Stock. Restricted stock and restricted stock units to be settled in shares of stock generally become fully vested either three years after the date of grant or 25% per year over a four-year service period beginning on the date of grant. Generally, if a plan participant terminates his or her employment for any reason other than by death or disability during the vesting period, he or she forfeits the right to the unvested restricted stock and restricted stock units. The vesting of restricted stock and restricted stock units is subject to possible acceleration in certain circumstances. Certain restricted stock awarded to plan participants referred to as “performance-based restricted stock” are subject to performance conditions that, even if the requisite service period is met, may reduce the number of shares or units of restricted stock that vest at the end of the requisite service period or result in all shares or units being forfeited.

The following table summarizes information with respect to all outstanding restricted stock and restricted stock units to be settled in shares of stock under our plans during the years ended December 31, 2013, 2012 and 2011:


	Restricted Stock to be Settled in Shares of Stock
	Shares			Weighted Average Grant-Date Fair Value Per Share		Units			Weighted Average Grant-Date Fair Value Per Unit		Total
Outstanding as of December 31, 2010		2,188,636		$	23.17		—		$	—		2,188,636
Granted		1,266,170			21.83		—			—		1,266,170
Vested		(816,017	)		15.55		—			—		(816,017	)
Forfeited		(842,042	)		25.19		—			—		(842,042	)

Outstanding as of December 31, 2011		1,796,747		$	24.74		—		$	—		1,796,747

Granted		—			—		1,416,832			8.32		1,416,832
Vested		(374,260	)		24.74		—			—		(374,260	)
Forfeited		(568,196	)		24.73		(272,899	)		8.53		(841,095	)

Outstanding as of December 31, 2012		854,291		$	24.74		1,143,933		$	8.27		1,998,224

Granted		—			—		43,313			2.72		43,313
Vested		(208,461	)		23.10		(306,605	)		8.60		(515,066	)
Forfeited		(424,268	)		27.01		(342,020	)		7.22		(766,288	)

Outstanding as of December 31, 2013		221,562		$	22.19		538,621		$	8.30		760,183

2013 Annual Grants. During the first quarter of 2013, as part of our annual long term incentive grants to employees, we issued restricted stock units to be settled in cash and cash-based performance unit awards in addition to stock option grants. The cash-settled restricted stock units are recorded as liabilities as the expense is recognized and the fair value for these awards is determined at each period end date with changes in fair value recorded in our statement of (loss) income and comprehensive (loss) income in the current period. Cash-settled restricted stock units are settled with a cash payment for each unit vested equal to the closing price on the vesting date. Cash-settled restricted stock units are not included in common shares reserved for issuance or available for issuance under the 2008 Plan. For cash-settled restricted stock units granted in 2013, vesting is primarily 25% per year over the four year period beginning on the grant date.

The following table summarizes information with respect to all cash-settled restricted stock units during the year to date ended December 31, 2013:


	Restricted Stock Units to be Settled in Cash
Outstanding as of December 31, 2012		—
Granted		2,938,283
Vested		—
Forfeited		(649,368	)

Outstanding as of December 31, 2013		2,288,915

Upon vesting, based on the conditions set forth in the award agreements, these units will be settled in cash. We valued these units in accordance with the guidance set forth by FASB ASC Topic 718 – Compensation-Stock Compensation as of December 31, 2013 based upon our stock price as of December 31, 2013. The fair value for our outstanding cash-settled restricted stock units was $13.0 million as of December 31, 2013. The liability related to these outstanding units of $3.5 million was based on the number of days lapsed during the service period as of December 31, 2013.

The performance unit awards granted during 2013 are long-term incentive, cash-based awards. Payment of these awards is based upon a calculation of Total Shareholder Return (“TSR”) of CEC as compared to TSR across a specified peer group of our competitors over a three-year performance period ending primarily on December 31, 2015. These awards are recorded as liabilities and fair value for these awards is determined at each period end date with changes in fair value recorded in our statement of (loss) income and comprehensive (loss) income in the current period. The fair value of outstanding performance unit awards as of December 31, 2013 was $4.5 million. The liability for the outstanding performance unit awards of $1.1 million was based on the number of days lapsed during the service period as of December 31, 2013.

Stock Appreciation Rights. Stock Appreciation Rights (SAR) allow the recipient to receive stock or cash equal in value to the difference between the exercise price of the SAR and fair market value of our stock on the date of exercise. In the second quarter of 2013, and for the first time since inception of any of our plans, we granted approximately 0.2 million SARs to be settled in cash to our Chief Executive Officer with a grant date fair value of $0.2 million. These SARs vest 25% per year over a four year period beginning on the grant date and expire ten years from the date of grant.

Share-Based Awards Assumptions

In accordance with FASB ASC Topic 718, the fair value of each stock option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. We recognize the value of share-based compensation as expense in our consolidated statements of (loss) income and comprehensive (loss) income during the vesting periods of the underlying share-based awards using the straight-line method. FASB ASC Topic 718 requires companies to estimate forfeitures of share-based awards at the time of grant and revise such estimates in subsequent periods if actual forfeitures differ from original projections.

The fair value of each stock option award granted during the years ended December 31, 2013, 2012 and 2011 was estimated on the date of grant using the Black-Scholes-Merton option pricing model. Our determination of the fair value of each stock option is affected by our stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected life of the awards and actual and projected stock option exercise behavior. The weighted average fair value per share of stock option awards granted during the years ended December 31, 2013, 2012 and 2011, and assumptions used to value stock options are as follows:


	For the Year Ended December 31,
	2013			2012			2011
Dividend yield		—			—			—
Risk-free interest rate		1.1	%		0.6	%		2.2	%
Weighted average volatility		64.6	%		68.4	%		53.3	%
Expected life (in years)		5.6			5.2			5.5
Weighted average grant date fair value per share of options granted	$	1.47		$	4.10		$	10.89

Volatility is calculated based on the actual historical daily prices of our common stock over the expected term of the stock option award. During the year ended December 31, 2013, we utilized a range of expected volatility assumptions for purposes of estimating the fair value of stock options awarded during the period. Such volatility assumptions ranged from 59.4% to 67.5%.

The expected life of each stock option award is estimated based primarily on our actual historical director and employee exercise behavior.

The fair value of each share of restricted stock and restricted stock units to be settled in stock is equal to the fair market value of our common stock as of the date of grant, which is the closing price per share of our common stock on NASDAQ.

Outstanding performance-based restricted stock awards generally have three-year vesting provided that performance conditions are met based on total company performance. Share-based compensation expense associated with performance-based restricted stock awards is recognized only to the extent that we believe performance conditions attributable to such awards will ultimately be satisfied.