10-Q 1 ceco-10q_20170930.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 0-23245

CAREER EDUCATION CORPORATION

(Exact name of registrant as specified in its charter)

Delaware | 36-3932190
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
231 N. Martingale Road Schaumburg, Illinois | 60173
(Address of principal executive offices) | (Zip Code)

Registrant’s telephone number, including area code: (847) 781-3600

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer |  | ☐ |  | Accelerated filer | ☒
Non-accelerated filer |  | ☐ (Do not check if a smaller reporting company) |  | Smaller reporting company | ☐
Emerging growth company |  | ☐ |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒

Number of shares of registrant’s common stock, par value $0.01, outstanding as of October 27, 2017: 69,093,596

CAREER EDUCAT ION CORPORATION

FORM 10-Q

TABLE OF CONTENTS

|  | Page
PART I—FINANCIAL INFORMATION |
Item 1. | Financial Statements |
| Condensed Consolidated Balance Sheets | 1
| Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) | 2
| Unaudited Condensed Consolidated Statements of Cash Flows | 3
| Notes to Unaudited Condensed Consolidated Financial Statements | 4
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 35
Item 4. | Controls and Procedures | 35
PART II—OTHER INFORMATION |
Item 1. | Legal Proceedings | 36
Item 1A. | Risk Factors | 36
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36
Item 6. | Exhibits | 36
SIGNATURES | 38

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

|  | September 30, |  |  | December 31, |
|  | 2017 |  |  | 2016 |
ASSETS |  | (unaudited) |  |  |  |  |
CURRENT ASSETS: |  |  |  |  |  |  |  |
Cash and cash equivalents, unrestricted |  | $ | 16,276 |  |  | $ | 49,507 |
Restricted cash |  |  | 789 |  |  |  | 1,375 |
Restricted short-term investments |  |  | 7,070 |  |  |  | 8,597 |
Short-term investments |  |  | 151,803 |  |  |  | 147,681 |
Total cash and cash equivalents, restricted cash and short-term investments |  |  | 175,938 |  |  |  | 207,160 |
Student receivables, net of allowance for doubtful accounts of $22,611 and $21,376 as of September 30, 2017 and December 31, 2016, respectively |  |  | 21,134 |  |  |  | 22,825 |
Receivables, other, net |  |  | 996 |  |  |  | 929 |
Prepaid expenses |  |  | 8,769 |  |  |  | 14,446 |
Inventories |  |  | 991 |  |  |  | 1,868 |
Other current assets |  |  | 1,112 |  |  |  | 817 |
Assets of discontinued operations |  |  | 171 |  |  |  | 148 |
Total current assets |  |  | 209,111 |  |  |  | 248,193 |
NON-CURRENT ASSETS: |  |  |  |  |  |  |  |
Property and equipment, net of accumulated depreciation of $346,718 and $381,415 as of September 30, 2017 and December 31, 2016, respectively |  |  | 33,278 |  |  |  | 40,512 |
Goodwill |  |  | 87,356 |  |  |  | 87,356 |
Intangible assets, net of amortization of $1,400 and $800 as of September 30, 2017 and December 31, 2016, respectively |  |  | 7,900 |  |  |  | 8,500 |
Student receivables, net of allowance for doubtful accounts of $2,051 and $1,766 as of September 30, 2017 and December 31, 2016, respectively |  |  | 2,622 |  |  |  | 3,055 |
Deferred income tax assets, net |  |  | 147,990 |  |  |  | 158,272 |
Other assets |  |  | 7,018 |  |  |  | 7,608 |
Assets of discontinued operations |  |  | 5,922 |  |  |  | 6,105 |
TOTAL ASSETS |  | $ | 501,197 |  |  | $ | 559,601 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |
CURRENT LIABILITIES: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 11,780 |  |  | $ | 10,099 |
Accrued expenses: |  |  |  |  |  |  |  |
Payroll and related benefits |  |  | 31,646 |  |  |  | 41,203 |
Advertising and marketing costs |  |  | 10,732 |  |  |  | 10,253 |
Income taxes |  |  | 1,898 |  |  |  | 1,830 |
Other |  |  | 35,127 |  |  |  | 69,244 |
Deferred tuition revenue |  |  | 22,401 |  |  |  | 28,364 |
Liabilities of discontinued operations |  |  | 6,434 |  |  |  | 8,219 |
Total current liabilities |  |  | 120,018 |  |  |  | 169,212 |
NON-CURRENT LIABILITIES: |  |  |  |  |  |  |  |
Deferred rent obligations |  |  | 16,253 |  |  |  | 30,713 |
Other liabilities |  |  | 23,384 |  |  |  | 31,751 |
Liabilities of discontinued operations |  |  | 2,156 |  |  |  | 6,422 |
Total non-current liabilities |  |  | 41,793 |  |  |  | 68,886 |
STOCKHOLDERS' EQUITY: |  |  |  |  |  |  |  |
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding |  |  | - |  |  |  | - |
Common stock, $0.01 par value; 300,000,000 shares authorized; 84,254,021 and 83,538,033 shares issued, 69,093,603 and 68,519,005 shares outstanding as of September 30, 2017 and December 31, 2016, respectively |  |  | 843 |  |  |  | 835 |
Additional paid-in capital |  |  | 619,483 |  |  |  | 613,325 |
Accumulated other comprehensive income (loss) |  |  | 144 |  |  |  | (258 | )
Accumulated deficit |  |  | (63,745 | ) |  |  | (76,230 | )
Cost of 15,160,418 and 15,019,028 shares in treasury as of September 30, 2017 and December 31, 2016, respectively |  |  | (217,339 | ) |  |  | (216,169 | )
Total stockholders' equity |  |  | 339,386 |  |  |  | 321,503 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |  | $ | 501,197 |  |  | $ | 559,601 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
REVENUE: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tuition and fees |  | $ | 144,408 |  |  | $ | 166,819 |  |  | $ | 451,292 |  |  | $ | 546,036 |
Other |  |  | 578 |  |  |  | 806 |  |  |  | 2,025 |  |  |  | 3,101 |
Total revenue |  |  | 144,986 |  |  |  | 167,625 |  |  |  | 453,317 |  |  |  | 549,137 |
OPERATING EXPENSES: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Educational services and facilities |  |  | 37,788 |  |  |  | 51,393 |  |  |  | 114,367 |  |  |  | 170,993 |
General and administrative |  |  | 99,077 |  |  |  | 111,723 |  |  |  | 304,158 |  |  |  | 337,358 |
Depreciation and amortization |  |  | 3,582 |  |  |  | 5,215 |  |  |  | 11,368 |  |  |  | 16,986 |
Asset impairment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 237 |
Total operating expenses |  |  | 140,447 |  |  |  | 168,331 |  |  |  | 429,893 |  |  |  | 525,574 |
Operating income (loss) |  |  | 4,539 |  |  |  | (706 | ) |  |  | 23,424 |  |  |  | 23,563 |
OTHER INCOME: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  |  | 474 |  |  |  | 334 |  |  |  | 1,328 |  |  |  | 900 |
Interest expense |  |  | (114 | ) |  |  | (117 | ) |  |  | (340 | ) |  |  | (469 | )
Miscellaneous income (expense) |  |  | 196 |  |  |  | 10 |  |  |  | 489 |  |  |  | (4 | )
Total other income |  |  | 556 |  |  |  | 227 |  |  |  | 1,477 |  |  |  | 427 |
PRETAX INCOME (LOSS) |  |  | 5,095 |  |  |  | (479 | ) |  |  | 24,901 |  |  |  | 23,990 |
Provision for income taxes |  |  | 1,597 |  |  |  | 21 |  |  |  | 11,143 |  |  |  | 8,776 |
INCOME (LOSS) FROM CONTINUING OPERATIONS |  |  | 3,498 |  |  |  | (500 | ) |  |  | 13,758 |  |  |  | 15,214 |
LOSS FROM DISCONTINUED OPERATIONS, net of tax |  |  | (476 | ) |  |  | (186 | ) |  |  | (1,273 | ) |  |  | (1,050 | )
NET INCOME (LOSS) |  |  | 3,022 |  |  |  | (686 | ) |  |  | 12,485 |  |  |  | 14,164 |
OTHER COMPREHENSIVE INCOME, net of tax: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  |  | 105 |  |  |  | 47 |  |  |  | 368 |  |  |  | 143 |
Unrealized gains on investments |  |  | - |  |  |  | 370 |  |  |  | 34 |  |  |  | 824 |
Total other comprehensive income |  |  | 105 |  |  |  | 417 |  |  |  | 402 |  |  |  | 967 |
COMPREHENSIVE INCOME (LOSS) |  | $ | 3,127 |  |  | $ | (269 | ) |  | $ | 12,887 |  |  | $ | 15,131 |
NET INCOME (LOSS) PER SHARE - BASIC and DILUTED: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Income (loss) from continuing operations |  | $ | 0.05 |  |  | $ | (0.01 | ) |  | $ | 0.20 |  |  | $ | 0.22 |
Loss from discontinued operations |  |  | (0.01 | ) |  |  | - |  |  |  | (0.02 | ) |  |  | (0.01 | )
Net income (loss) per share |  | $ | 0.04 |  |  | $ | (0.01 | ) |  | $ | 0.18 |  |  | $ | 0.21 |
WEIGHTED AVERAGE SHARES OUTSTANDING: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 69,082 |  |  |  | 68,460 |  |  |  | 68,897 |  |  |  | 68,328 |
Diluted |  |  | 70,865 |  |  |  | 68,460 |  |  |  | 70,660 |  |  |  | 68,889 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

|  | For the Year to Date Ended September 30, |
|  | 2017 |  |  | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: |  |  |  |  |  |  |  |
Net income |  | $ | 12,485 |  |  | $ | 14,164 |
Adjustments to reconcile net income to net |  |  |  |  |  |  |  |
cash (used in) provided by operating activities: |  |  |  |  |  |  |  |
Asset impairment |  |  | - |  |  |  | 237 |
Depreciation and amortization expense |  |  | 11,368 |  |  |  | 16,986 |
Bad debt expense |  |  | 21,516 |  |  |  | 23,201 |
Compensation expense related to share-based awards |  |  | 3,616 |  |  |  | 2,251 |
Gain on disposition of property and equipment |  |  | - |  |  |  | (438 | )
Deferred income taxes |  |  | 10,282 |  |  |  | 7,373 |
Changes in operating assets and liabilities |  |  | (88,374 | ) |  |  | (47,510 | )
Net cash (used in) provided by operating activities |  |  | (29,107 | ) |  |  | 16,264 |
CASH FLOWS FROM INVESTING ACTIVITIES: |  |  |  |  |  |  |  |
Purchases of available-for-sale investments |  |  | (202,050 | ) |  |  | (137,755 | )
Sales of available-for-sale investments |  |  | 199,340 |  |  |  | 99,718 |
Purchases of property and equipment |  |  | (3,426 | ) |  |  | (3,352 | )
Proceeds on the sale of assets |  |  | - |  |  |  | 3,600 |
Payments of cash upon sale of businesses |  |  | - |  |  |  | (62 | )
Net cash used in investing activities |  |  | (6,136 | ) |  |  | (37,851 | )
CASH FLOWS FROM FINANCING ACTIVITIES: |  |  |  |  |  |  |  |
Issuance of common stock |  |  | 2,548 |  |  |  | 581 |
Payment on borrowings |  |  | - |  |  |  | (38,000 | )
Payments of employee tax associated with stock compensation |  |  | (1,170 | ) |  |  | (550 | )
Net cash provided by (used in) financing activities |  |  | 1,378 |  |  |  | (37,969 | )
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS: |  |  | 48 |  |  |  | (150 | )
NET DECREASE IN CASH AND CASH EQUIVALENTS |  |  | (33,817 | ) |  |  | (59,706 | )
CASH AND CASH EQUIVALENTS, beginning of the period |  |  | 50,882 |  |  |  | 116,740 |
CASH AND CASH EQUIVALENTS, end of the period |  | $ | 17,065 |  |  | $ | 57,034 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF THE COMPANY

Career Education’s academic institutions offer a quality education to a diverse student population in a variety of disciplines through online, campus-based and blended learning programs. Our two universities – American InterContinental University (“AIU”) and Colorado Technical University (“CTU”) – provide degree programs through the master’s or doctoral level as well as associate and bachelor’s levels. Both universities predominantly serve students online with career-focused degree programs that are designed to meet the educational demands of today’s busy adults. AIU and CTU continue to show innovation in higher education, advancing new personalized learning technologies like their intellipath™ adaptive learning platform. Career Education is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.

Additionally, CEC is in the process of teaching out campuses within our Transitional Group segment. Students enrolled at these campuses have been afforded the reasonable opportunity to complete their program of study prior to the final teach-out date.

A listing of individual campus locations and web links to Career Education’s colleges, institutions and universities can be found at www.careered.com.

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “the Company” and “CEC” refer to Career Education Corporation and our wholly-owned subsidiaries. The terms “college,” “institution” and “university” refer to an individual, branded, for-profit educational institution, owned by us and includes its campus locations. The term “campus” refers to an individual main or branch campus operated by one of our colleges, institutions or universities.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the quarter and year to date ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.

The unaudited condensed consolidated financial statements presented herein include the accounts of Career Education Corporation and our wholly-owned subsidiaries (collectively “CEC”). All intercompany transactions and balances have been eliminated.

Our reporting segments are determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 – Segment Reporting and are based upon how the Company analyzes performance and makes decisions. For the third quarter of 2017, we organized our business across four reporting segments: CTU, AIU (comprises University Group); Culinary Arts and Transitional Group (comprises Career Schools Group). Campuses included in our Transitional Group segment are currently being taught out and no longer enroll new students. These campuses employ a gradual teach-out process, enabling them to continue to operate while current students have a reasonable opportunity to complete their course of study. Campuses included in our Culinary Arts segment successfully completed their teach-outs as of September 30, 2017. As of the fourth quarter of 2017, Culinary Arts will no longer be its own operating segment.

During the third quarter of 2017, the Company completed the teach-out of 17 campuses: Sanford-Brown Las Vegas and the remaining 16 Le Cordon Bleu campuses, which continue to be reported within the Transitional Group and Culinary Arts segments, respectively, as of September 30, 2017 in accordance with ASC Topic 360 – Property, Plant and Equipment, which limits discontinued operations reporting.

Effective January 2017, the Company now accounts for cash flows related to cash payments for employee taxes made by the Company on the employees’ behalf for withheld shares related to stock settlements as a financing activity within the statement of cash flows. This change was a result of updated guidance issued by the FASB under Accounting Standards Update (“ASU”) No 2016-09, Compensation – Stock Compensation (Topic 718). Prior period amounts were recast to cash flows from financing activities from cash flows from operating activities to be comparable to current year reporting. See Note 3 “Recent Accounting Pronouncements” for further discussion.

Effective January 2017, the Company now accounts for cash flows related to changes in restricted cash and restricted cash equivalents within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This change was a result of updated guidance issued by the FASB under ASU No 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. Prior period amounts are now included in cash and cash equivalents, beginning and end of the period, which were previously presented within cash flows from financing activities for changes in balances, to be comparable to current year reporting. See Note 3 “Recent Accounting Pronouncements” for further discussion.

4

3. RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting guidance adopted in 2017

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this ASU provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. Stakeholders observed that the definition of the term modification is broad and that its interpretation results in diversity in practice. The amendments in this update provide further guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. For all public entities, ASU 2017-09 is effective for annual periods and interim periods beginning after December 15, 2017; early adoption is permitted. We have evaluated and early adopted this guidance. The adoption did not impact the presentation of our financial condition, results of operations and disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning fair value of a reporting unit to all its assets and liabilities as if that reporting unit had been acquired in a business combination, eliminating Step 2 from the goodwill impairment tests. For all public entities, ASU 2017-04 is effective for annual periods and interim periods beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. We have evaluated and adopted this guidance beginning 2017. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. The amendments in this ASU announced disclosure of the impact that recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. The amendment provides SEC staff views that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures and the potential material effects of those ASUs on the financial statements when adopted. The changes and corrections within this guidance did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. This ASU simplified several aspects of accounting for share-based payment award transactions including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, classification of employee taxes paid on the statement of cash flows when the employer withholds shares, forfeiture policy election and payroll minimum statutory withholding. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. We have evaluated each component of this guidance listed below and adopted the new standard beginning 2017.

| • | Accounting for Income Taxes: The primary impact of adoption is the recognition of excess tax benefits and tax deficiencies recorded in the statement of income (loss) and comprehensive income (loss) when stock awards vest or are settled, rather than paid-in capital for all periods beginning in 2017. For the current quarter we recognized less than $0.1 million of favorable adjustment within our tax provision with the adoption of 2016-09, which decreased our quarterly effective tax rate by 0.6%, and for the year to date ended September 30, 2017, we recognized a $1.1 million unfavorable adjustment within our tax provision associated with the adoption of ASU 2016-09, which increased the effective tax rate by 4.6%. The Company evaluated the unrecognized excess tax benefits as of December 31, 2016 on a cumulative retrospective basis and determined it did not have any impact to retained earnings and deferred tax assets as of the January 1, 2017 adoption date.

| • | Classification of Cash Flow: The adoption of this ASU has no material impact on our presentation of the statement of cash flows for the year to date ended September 30, 2017. We have elected to apply the presentation requirements for cash flows related to cash payments for employee taxes made by the Company on the employees’ behalf for withheld shares to be reported as financing activities for all periods presented. The presentation requirements for cash flows related to excess tax benefits have no impact to any of the periods presented on our consolidated cash flow statements.

| • | Accounting for Forfeitures: The Company accounted for estimated forfeitures in the amount of compensation cost recognized in each period, and has continued to do so under the new guidance; therefore, the adoption has had no impact related to forfeitures.

| • | Minimum Statutory Tax Withholding: The new guidance contains an option which allows employees to withhold tax amounts up to the employees’ maximum individual tax rate, which provides the Company an ability to repurchase more

5

|  | of its employees’ shares without triggering liability accounting. This change has not impacted the presentation of our financial statements or di sclosures.

| • | Earnings per Share (“EPS”): The primary impact of adoption is the elimination of the calculation of assumed proceeds from windfalls and shortfalls under the treasury stock method, which results in fewer hypothetical repurchases of shares and higher incremental shares being issued, having a dilutive effect on EPS. The impact of this change on our EPS is immaterial for the third quarter and year to date of 2017 and we expect it to continue to be immaterial for future periods.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For all public entities, ASU 2016-18 is effective for annual periods and interim periods beginning after December 15, 2017; early adoption is permitted for all organizations for annual periods and interim periods. We have evaluated and adopted this guidance beginning 2017 for all periods presented. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investments, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method was in effect during all previous periods. The amendment requires an equity method investor to add the cost of acquisition and requires available-for-sale equity securities that qualify for the equity method of accounting to recognize earnings as unrealized holding gains or losses in accumulated other comprehensive income. For all entities, ASU 2016-07 is effective for annual periods and interim periods beginning after December 15, 2016. We have evaluated and adopted this guidance beginning 2017. The adoption did not materially impact the presentation of our financial condition, results of operations and disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require an entity to measure inventory at the lower of cost and net realizable value, further clarifying consideration for net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. This ASU more closely aligns the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (“IFRS”). For public business entities, ASU 2015-11 is effective for annual periods and interim periods beginning after December 15, 2016. The amendment in this ASU is prospectively applied. We have evaluated and adopted this guidance beginning 2017. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

Recent accounting guidance not yet adopted

In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The amendments in this ASU clarify and provide guidance for partial sales of nonfinancial assets and recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. For all public entities, ASU 2017-05 is effective for annual reporting periods and interim periods beginning after December 15, 2017; early adoption is permitted for all organizations for annual periods and interim periods. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this ASU improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by reducing complexity in accounting standards. The amendments eliminate the exception prohibiting the recognition of current and deferred income taxes for an intra-entity transfer of an asset other than inventory until the asset has been sold to an outside party. For all public entities, ASU 2016-16 is effective for annual periods and interim periods beginning after December 15, 2017; early adoption is permitted for all organizations for annual periods and interim periods. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU address eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The eight topics include debt prepayment or extinguishments costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, proceeds from settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. For all public business

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entities, ASU 2016-15 is effective for annual periods and interim periods beginning after December 15, 2017; early adoption is permitted for all organizations for annual periods and interim periods. We are currently evaluating this guidance and believe th e adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected and credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. For all public business entities, ASU 2016-13 is effective for annual periods and interim periods beginning after December 15, 2019; early adoption is permitted for all organizations for annual periods and interim periods beginning after December 15, 2018. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The objective of Topic 842 is to establish transparency and comparability that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that lessees should recognize the assets and liabilities that arise from leases. All leases create an asset and liability for the lessee in accordance with FASB Concept Statements No. 6 Elements of Financial Statements, and, therefore, recognition of those lease assets and liabilities represents an improvement over previous GAAP. The accounting applied for lessors largely remained unchanged. The amendment in this ASU requires recognition of a lease liability and a right to use asset at the lease inception date. For all public business entities, ASU 2016-02 is effective for annual periods and interim periods beginning after December 15, 2018; early adoption is permitted. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact primarily relates to our accounting for real estate leases and real estate subleases. The Company expects to have a material amount now reported as a right of use asset and lease liability related to these leases as well as expects to separate lease components from the non-lease components for recognition. We will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach starting fiscal year 2017. We are currently evaluating this guidance and believe the adoption will significantly impact the presentation of our financial condition, results of operations and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), a new accounting standard intended to improve and converge the financial reporting requirements between U.S. GAAP and International Accounting Standards, which will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five step approach for the recognition of revenue.

Implementation Update

We have assigned internal resources and are in the assessment stage of our evaluation of the impact of the new standard on our accounting policies, processes and system requirements. While we continue to assess all potential impacts under the new standard, the Company has made progress as outlined in the below discussion and remains on schedule to implement the new revenue guidelines. This standard will be effective for us beginning in January 2018. We intend to adopt the new standard based on the modified retrospective transition method and accordingly the Company expects to complete the analysis of the cumulative effect adjustment to retained earnings (accumulated deficit), if applicable, as of the start of the first period for which it applies the new standard. While the Company continues to make progress to assess all potential impacts under the new revenue standard, including the areas described below, and have reached preliminary conclusions on key accounting assessments related to the standard, we do not know or cannot reasonably estimate quantitative information related to the impact of the new revenue standard on the Company’s financial statements and disclosures at this time.

Technical Analysis Update

The Company’s revenue is derived primarily from academic programs taught to its students. Tuition and other tuition-related fees are recognized as revenue on a straight-line basis over either the academic term or the program period based on number of days within such period. Non-tuition related revenue is recognized as services are performed or goods are delivered. See Note 2 “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on February 23, 2017. The Company is in the process of evaluating each source of revenue stream that will remain as of the implementation date to evaluate the five step approach from the principles-based guidance (Topic 606) and develop a preliminary assessment to determine any impact to existing practices for revenue recognition. The key revenue component considerations the Company is evaluating are as follows:

| • | Tuition and tuition-related fees

| • | Other revenue (‘non-tuition’), primarily ancillary sales of program related materials or supplies

| • | Types of funding a student receives, i.e. Title IV Program funds, Veterans’ Administration funds, employer reimbursement, personal loans, etc. See Item 1, “Business – Student Financial Aid and Related Federal Regulation” in

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|  | our Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion on various types of funding

| • | Types of institutional (i.e. non-third party) scholarships provided to students

| • | Student status, i.e. in-school or out-of-school

| • | Length of program or term

The Company is currently evaluating the assessment of various contractual arrangements and performance obligations for each type of revenue stream and it reasonably expects the core contractual or performance obligations to remain similar in substance and not differ materially from considering each contract or performance obligation separate. We expect to elect and utilize the ‘portfolio’ approach when analyzing our student contracts, policies, processes and controls for revenue recognition. We reasonably expect that the impact of applying the portfolio approach will not differ materially from considering each contract individually.

Our evaluation covered the collectability criteria under the new guidance. The Company believes it can apply the portfolio approach when assessing collectability due to the significant amount of historical data that the Company retains.

The Company is currently assessing the impacts related to the accounting for contract assets separate from accounts receivable and are evaluating the point at which a student’s contract asset becomes a receivable. Currently, a student’s entire accounts receivable balance is evaluated along with their entire deferred revenue balance to determine the net position of the two. Once the Company determines the point at which a contract asset becomes a receivable, this amount will no longer be offset with a student’s deferred revenue balance. This change in presentation is expected to have an immaterial impact to the statement of financial position.

Based on our ongoing assessment, we do not anticipate the adoption of ASU 2014-09 will have a significant material impact on the presentation of our results of operations; however, we expect additional modifications on the presentation of our financial condition and disclosures around certain policies, practices and systems, but we are still finalizing our assessment.

4. FINANCIAL INSTRUMENTS

Investments consist of the following as of September 30, 2017 and December 31, 2016 (dollars in thousands):

|  | September 30, 2017 |
|  |  |  |  |  | Gross Unrealized |  |  |  |  |
|  | Cost |  |  | Gain |  |  | (Loss) |  |  | Fair Value |
Short-term investments (available for sale): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal bonds |  | $ | 1,350 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,350 |
Non-governmental debt securities |  |  | 118,111 |  |  |  | 11 |  |  |  | (74 | ) |  |  | 118,048 |
Treasury and federal agencies |  |  | 32,462 |  |  |  | 4 |  |  |  | (61 | ) |  |  | 32,405 |
Total short-term investments |  |  | 151,923 |  |  |  | 15 |  |  |  | (135 | ) |  |  | 151,803 |
Restricted short-term investments (available for sale): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-governmental debt securities |  |  | 7,070 |  |  |  | - |  |  |  | - |  |  |  | 7,070 |
Total investments (available for sale) |  | $ | 158,993 |  |  | $ | 15 |  |  | $ | (135 | ) |  | $ | 158,873 |

|  | December 31, 2016 |
|  |  |  |  |  | Gross Unrealized |  |  |  |  |
|  | Cost |  |  | Gain |  |  | (Loss) |  |  | Fair Value |
Short-term investments (available for sale): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal bonds |  | $ | 4,050 |  |  | $ | - |  |  | $ | - |  |  | $ | 4,050 |
Non-governmental debt securities |  |  | 107,305 |  |  |  | 22 |  |  |  | (113 | ) |  |  | 107,214 |
Treasury and federal agencies |  |  | 36,480 |  |  |  | 10 |  |  |  | (73 | ) |  |  | 36,417 |
Total short-term investments |  |  | 147,835 |  |  |  | 32 |  |  |  | (186 | ) |  |  | 147,681 |
Restricted short-term investments (available for sale): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-governmental debt securities |  |  | 8,597 |  |  |  | - |  |  |  | - |  |  |  | 8,597 |
Total investments (available for sale) |  | $ | 156,432 |  |  | $ | 32 |  |  | $ | (186 | ) |  | $ | 156,278 |

In the table above, unrealized holding gains (losses) as of September 30, 2017 relate to short-term investments that have been in a continuous unrealized gain (loss) position for less than one year.

Our unrestricted non-governmental debt securities primarily consist of corporate bonds and commercial paper. Our treasury and federal agencies primarily consist of U.S. Treasury bills and federal home loan debt securities. We do not intend to sell our investments in these securities prior to maturity and it is not likely that we will be required to sell these investments before recovery of the amortized cost basis. Our restricted short-term investments are comprised entirely of certificates of deposit, which secure our letters of credit.

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Fair Value Measurements

FASB ASC Topic 820 – Fair Value Measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of September 30, 2017, we held investments that are required to be measured at fair value on a recurring basis. These investments (available-for-sale) consist of municipal bonds, non-governmental debt securities, and treasury and federal agencies securities. Available for sale securities included in Level 1 are valued at quoted prices in active markets for identical assets and liabilities. Available for sale securities included in Level 2 are estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for identical or similar assets or liabilities in inactive markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Investments measured at fair value on a recurring basis subject to the disclosure requirements of FASB ASC Topic 820 – Fair Value Measurements at September 30, 2017 and December 31, 2016 were as follows (dollars in thousands):

|  | As of September 30, 2017 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Municipal bonds |  | $ | - |  |  | $ | 1,350 |  |  | $ | - |  |  | $ | 1,350 |
Non-governmental debt securities |  |  | 42,097 |  |  |  | 83,021 |  |  |  | - |  |  |  | 125,118 |
Treasury and federal agencies |  |  | - |  |  |  | 32,405 |  |  |  | - |  |  |  | 32,405 |
Totals |  | $ | 42,097 |  |  | $ | 116,776 |  |  | $ | - |  |  | $ | 158,873 |
|  | As of December 31, 2016 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Municipal bonds |  | $ | - |  |  | $ | 4,050 |  |  | $ | - |  |  | $ | 4,050 |
Non-governmental debt securities |  |  | 33,597 |  |  |  | 82,214 |  |  |  | - |  |  |  | 115,811 |
Treasury and federal agencies |  |  | - |  |  |  | 36,417 |  |  |  | - |  |  |  | 36,417 |
Totals |  | $ | 33,597 |  |  | $ | 122,681 |  |  | $ | - |  |  | $ | 156,278 |

Equity Method Investment

Our investment in an equity affiliate, which is recorded within other noncurrent assets on our condensed consolidated balance sheets, is an international investment in a private company. As of September 30, 2017, our investment in an equity affiliate equated to a 30.7%, or $3.3 million, non-controlling interest in CCKF, a Dublin-based educational technology company providing intelligent adaptive systems to power the delivery of individualized and personalized learning.

During the quarters ended September 30, 2017 and 2016, we recorded approximately $0.1 million and $0.2 million of loss, respectively, and during the years to date ended September 30, 2017 and September 30, 2016, we recorded $0.2 million and $1.0 million of loss, respectively, related to our proportionate investment in CCKF within miscellaneous income (expense) on our unaudited condensed consolidated statements of income (loss) and comprehensive income (loss).

We make periodic operating maintenance payments related to proprietary rights that we use in our intellipathTM adaptive learning technology. The total fees paid to CCKF for the quarters and years to date ended September 30, 2017 and 2016 were as follows (dollars in thousands):

| Maintenance Fee Payments |
For the quarter ended September 30, 2017 | $ | 356 |
For the quarter ended September 30, 2016 | $ | 340 |
For the year to date ended September 30, 2017 | $ | 1,013 |
For the year to date ended September 30, 2016 | $ | 1,027 |

Credit Agreement

During the fourth quarter of 2015, the Company; its wholly-owned subsidiary, CEC Educational Services, LLC (“CEC-ES”); and the subsidiary guarantors thereunder entered into a Fourth Amendment to its Amended and Restated Credit Agreement dated as of December 30, 2013 (as amended, the “Credit Agreement”) with BMO Harris Bank N.A., in its capacities as the initial lender and letter of credit issuer thereunder and the administrative agent for the lenders which from time to time may be parties to the Credit Agreement, to among other things, decrease the revolving credit facility to $95.0 million and require pre-approval by the lenders for each credit extension (other than letter of credit extensions) occurring after December 31, 2015. The revolving credit facility under the

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Credit Agreement is scheduled to mature on December 31, 2018. The loans and letter of credit obligations under the Credit Agreement are required to be secured by 100% cash collateral. As of September 30, 2017 and December 31, 2016, there were n o outstanding borrowings under the revolving credit facility.

5. STUDENT RECEIVABLES

Student receivables represent funds owed to us in exchange for the educational services provided to a student. Student receivables are reflected net of an allowance for doubtful accounts and net of deferred tuition revenue as determined on a student-by-student basis at the end of the reporting period. Student receivables, net are reflected on our condensed consolidated balance sheets as components of both current and non-current assets. We do not accrue interest on past due student receivables; interest is recorded only upon collection.

Generally, a student receivable balance is written off once it reaches greater than 90 days past due. Although we analyze past due receivables, it is not practical to provide an aging of our non-current student receivable balances as a result of the methodology utilized in determining our earned student receivable balances. Student receivables are recognized on our condensed consolidated balance sheets as they are deemed earned over the course of a student’s program and/or term, and therefore cash collections are not applied against specifically dated transactions.

Our standard student receivable allowance estimation methodology considers a number of factors that, based on our collection experience, we believe have an impact on our repayment risk and ability to collect student receivables. Changes in the trends in any of these factors may impact our estimate of the allowance for doubtful accounts. These factors include, but are not limited to: internal repayment history, repayment practices of previous extended payment programs, changes in the current economic, legislative or regulatory environments and the ability to complete the federal financial aid process with the student. These factors are monitored and assessed on a regular basis. Overall, our allowance estimation process for student receivables is validated by trending analysis and comparing estimated and actual performance.

Student Receivables Under Extended Payment Plans and Recourse Loan Agreements

To assist students in completing their educational programs, we had previously provided extended payment plans to certain students and also had loan agreements with Sallie Mae and Stillwater National Bank and Trust Company (“Stillwater”) which required us to repurchase loans originated by them to our students after a certain period of time. We discontinued providing extended payment plans to students during the first quarter of 2011 and the recourse loan agreements with Sallie Mae and Stillwater ended in March 2008 and April 2007, respectively.

As of September 30, 2017 and December 31, 2016, the amount of non-current student receivables under these programs, net of allowance for doubtful accounts, was $2.6 million and $3.1 million, respectively.

Student Receivables Valuation Allowance

Changes in our current and non-current receivables allowance for the quarters and years to date ended September 30, 2017 and 2016 were as follows (dollars in thousands):

|  | Balance, Beginning of Period |  |  | Charges to Expense (1) |  |  | Amounts Written-off |  |  | Balance, End of Period |
For the quarter ended September 30, 2017 |  | $ | 24,574 |  |  | $ | 6,420 |  |  | $ | (6,332 | ) |  | $ | 24,662 |
For the quarter ended September 30, 2016 |  | $ | 21,008 |  |  | $ | 8,457 |  |  | $ | (8,407 | ) |  | $ | 21,058 |
For the year to date ended September 30, 2017 |  | $ | 23,142 |  |  | $ | 21,630 |  |  | $ | (20,110 | ) |  | $ | 24,662 |
For the year to date ended September 30, 2016 |  | $ | 20,229 |  |  | $ | 23,332 |  |  | $ | (22,503 | ) |  | $ | 21,058 |

(1) | Charges to expense include an offset for recoveries of amounts previously written off of $0.8 million and $1.3 million for the quarters ended September 30, 2017 and 2016, respectively, and $3.5 million and $4.9 million for the years to date ended September 30, 2017 and 2016, respectively.

Fair Value Measurements

The carrying amount reported in our condensed consolidated balance sheets for the current portion of student receivables approximates fair value because of the nature of these financial instruments as they generally have short maturity periods. It is not practicable to estimate the fair value of the non-current portion of student receivables, since observable market data is not readily available, and no reasonable estimation methodology exists.

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6. RESTRUCTURING CHARGES

During the past several years, we have carried out reductions in force related to the continued reorganization of our corporate and campus functions to better align with current total enrollments and made decisions to teach out a number of campuses, meaning gradually close the campuses through an orderly process. As part of the process to wind down these teach-out campuses, the Company also announced that it will align its corporate overhead to support a more streamlined and focused operating entity. Most notably, we have recorded charges within our Transitional Group and Culinary Arts segments and our corporate functions as we continued to align our overall management structure. Each of our teach-out campuses offer current students the reasonable opportunity to complete their course of study. The majority of these teach-out campuses have ceased operations as of September 30, 2017, with the remainder expected to cease operations through 2018.

The following table details the changes in our accrual for severance and related costs associated with all restructuring events for our continuing operations during the quarters and years to date ended September 30, 2017 and 2016 (dollars in thousands):

|  | Balance, Beginning of Period |  |  | Severance & Related Charges (1) (2) |  |  | Payments |  |  | Non-cash Adjustments (3) |  |  | Balance, End of Period |
For the quarter ended September 30, 2017 |  | $ | 4,969 |  |  | $ | - |  |  | $ | (1,715 | ) |  | $ | 23 |  |  | $ | 3,277 |
For the quarter ended September 30, 2016 |  | $ | 11,290 |  |  | $ | 117 |  |  | $ | (1,546 | ) |  | $ | 240 |  |  | $ | 10,101 |
For the year to date ended September 30, 2017 |  | $ | 8,686 |  |  | $ | - |  |  | $ | (5,166 | ) |  | $ | (243 | ) |  | $ | 3,277 |
For the year to date ended September 30, 2016 |  | $ | 18,985 |  |  | $ | 389 |  |  | $ | (9,176 | ) |  | $ | (97 | ) |  | $ | 10,101 |

(1) | Includes charges related to COBRA and outplacement services which are assumed to be completed by the third month following an employee’s departure.

(2) | Severance charges will result in future cash payments through 2018.

(3) | Includes cancellations due to employee departures prior to agreed upon end dates, employee transfers to open positions within the organization and subsequent adjustments to severance and related costs.

The current portion of the accrual for severance and related charges was $3.0 million and $7.3 million, respectively, as of September 30, 2017 and December 31, 2016, which is recorded within current accrued expenses – payroll and related benefits; the long-term portion of $0.3 million and $1.4 million is recorded within other non-current liabilities on our condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.

In addition, as of September 30, 2017, we have an accrual of approximately $1.4 million related to retention bonuses that have been offered to certain employees. These amounts are recorded ratably over the period the employees are retained.

Remaining Lease Obligations of Continuing Operations

We have recorded lease exit costs associated with the exit of real estate space for certain campuses related to our continuing operations. These costs are recorded within educational services and facilities expense on our unaudited condensed consolidated statements of income (loss) and comprehensive income (loss). The current portion of the liability for these charges is reflected within other accrued expenses under current liabilities and the long-term portion of these charges are included in other liabilities under the non-current liabilities section of our condensed consolidated balance sheets. Changes in our future minimum lease obligations for exited space related to our continuing operations for the quarters and years to date ended September 30, 2017 and 2016 were as follows (dollars in thousands):

|  | Balance, Beginning of Period |  |  | Charges Incurred (1) |  |  | Net Cash Payments |  |  | Other (2) |  |  | Balance, End of Period |
For the quarter ended September 30, 2017 |  | $ | 27,109 |  |  | $ | 9,422 |  |  | $ | (9,094 | ) |  | $ | 2,932 |  |  | $ | 30,369 |
For the quarter ended September 30, 2016 |  | $ | 17,140 |  |  | $ | 4,912 |  |  | $ | (3,476 | ) |  | $ | 1,303 |  |  | $ | 19,879 |
For the year to date ended September 30, 2017 |  | $ | 36,814 |  |  | $ | 14,628 |  |  | $ | (23,496 | ) |  | $ | 2,423 |  |  | $ | 30,369 |
For the year to date ended September 30, 2016 |  | $ | 12,892 |  |  | $ | 13,994 |  |  | $ | (11,476 | ) |  | $ | 4,469 |  |  | $ | 19,879 |

_____________

(1)Includes charges for newly vacated spaces and subsequent adjustments for accretion, revised estimates and variances between estimated and actual charges, net of any reversals for terminated lease obligations.

(2)Includes existing prepaid rent and deferred rent liability balances for newly vacated spaces that offset the losses incurred in the period recorded.

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In addition to the charges detailed above, a number of the teach-out campuses will have remaining lease obligations following the eventual campus closure, with the longest lease term being through 2023. The total remaining estimated charge as of September 30, 2017, for all restructuring events reported within continuing operations related to the remaining lease obligation for these leases, once the campus completes the close process, and adjusted for possible lease buyouts and sublease assumptions is approx imately $4 million - $6 million. The amount related to each campus will be recorded at each campus closure date based on current estimates and assumptions related to the amount and timing of sublease income. This is in addition to approximately $67.5 milli on of charges related to remaining obligations for continuing operations that were recorded during 2015 through the third quarter of 2017.

7. CONTINGENCIES

An accrual for estimated legal fees and settlements of $2.2 million and $34.5 million at September 30, 2017 and December 31, 2016, respectively, is presented within other current liabilities on our condensed consolidated balance sheets.

We record a liability when we believe that it is both probable that a loss will be incurred and the amount of loss can be reasonably estimated. We evaluate, at least quarterly, developments in our legal matters that could affect the amount of liability that was previously accrued, and make adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. We may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (1) if the damages sought are indeterminate; (2) if the proceedings are in early stages; (3) if there is uncertainty as to the outcome of pending appeals, motions, or settlements; (4) if there are significant factual issues to be determined or resolved; and (5) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.

Litigation

We are, or were, a party to the following legal proceedings that we consider to be outside the scope of ordinary routine litigation incidental to our business. Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of these matters. An unfavorable outcome of any one or more of these matters could have a material adverse impact on our business, results of operations, cash flows and financial position.

Surrett, et al. v. Western Culinary Institute, Ltd. and Career Education Corporation. On March 5, 2008, a complaint was filed in Portland, Oregon in the Circuit Court of the State of Oregon in and for Multnomah County naming Western Culinary Institute, Ltd. (“WCI”) and the Company as defendants. Plaintiffs filed the complaint individually and as a putative class action and alleged two claims for equitable relief: violation of Oregon’s Unlawful Trade Practices Act (“UTPA”) and unjust enrichment. Plaintiffs alleged WCI made a variety of misrepresentations to them, relating generally to WCI’s placement statistics, students’ employment prospects upon graduation from WCI, the value and quality of an education at WCI, and the amount of tuition students could expect to pay as compared to salaries they could expect to earn after graduation. On January 21, 2016, the Oregon appellate court reversed an earlier circuit court denying a motion to compel arbitration and held that the claims by 1,062 individual class members should be compelled to arbitration, which these individuals would have to pursue separately on their own behalf. On May 16, 2017, plaintiffs filed a seventh amended putative class complaint which seeks recovery based on a theory of diminished value and contains a claim for punitive damages. Defendants’ motion to dismiss the seventh amended complaint was denied and plaintiffs have moved for class certification, which defendants oppose. If class certification is granted, the size of the class would depend on the scope certified by the court but could consist of up to 1,275 members.

Because of the many questions of fact and law that have already arisen and that may arise in the future, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of potential loss, if any, for this action because of the inherent difficulty in assessing the appropriate measure of damages and the number of class members who might be entitled to recover damages, if we were to be found liable. Accordingly, we have not recognized any liability associated with this action.

United States of America, ex rel. Ann Marie Rega v. Career Education Corporation, et al. On May 16, 2014, relator Ann Marie Rega, a former employee of Sanford-Brown Iselin, filed an action in the U.S. District Court for the District of New Jersey against the Company and almost all of the Company’s individual schools on behalf of herself and the federal government. She alleges claims under the False Claims Act, including that the defendants allegedly provided false certifications to the federal government regarding compliance with certain provisions of the Higher Education Act and accreditation standards. Relator claims that defendants’ conduct caused the government to pay federal funds to defendants, and to make payments to third-party lenders, which the government would not have made if not for defendants’ alleged violation of the law. Relator seeks treble damages plus civil penalties and attorneys’ fees.

On October 6, 2017, the United States filed its Notice of Election to Decline Intervention in the matter. On October 10, 2017, the Court ordered that the complaint be unsealed. After the federal government declines to intervene in a case, the relator may elect to pursue the litigation on behalf of the federal government. If she is successful she will receive a portion of the federal government’s recovery. It is not clear whether this relator will elect to pursue the litigation.

Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of potential loss, if any, for this action because

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the complaint does not seek a specified amount of damages and it is unclear how damages would be calculated, if we were to be found liable. Moreover, the case presents novel legal issues. Accordingly, we have not recognized any liability associated with this action.

Other Litigation. In addition to the legal proceedings and other matters described above, we are also subject to a variety of other claims, lawsuits, arbitrations and investigations that arise from time to time out of the conduct of our business, including, but not limited to, matters involving prospective students, students or graduates, alleged violations of the Telephone Consumer Protection Act, both individually and on behalf of a putative class, and routine employment matters. While we currently believe that such claims, individually or in aggregate, will not have a material adverse impact on our financial position, cash flows or results of operations, these other matters are subject to inherent uncertainties, and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur in any one or more of these matters, there exists the possibility of a material adverse impact on our business, reputation, financial position, cash flows and the results of operations for the period in which the effect becomes probable and reasonably estimable.

State Investigations

The Attorney General of Connecticut is serving as the point of contact for inquiries received from the attorneys general of the following: Arkansas, Arizona, Connecticut, Idaho, Iowa, Kentucky, Missouri, Nebraska, North Carolina, Oregon, Pennsylvania, Washington (January 24, 2014); Illinois (December 9, 2011); Tennessee (February 7, 2014); Hawaii (May 28, 2014 ); New Mexico (May 2014); Maryland (March 16, 2015); and the District of Columbia (June 3, 2015) (these 18 attorneys general are collectively referred to as the “Multi-State AGs”). In addition, the Company has received inquiries from the attorneys general of Florida (November 5, 2010), Massachusetts (September 27, 2012), Colorado (August 27, 2013) and Minnesota (September 18, 2014, October 25, 2016). The inquiries are civil investigative demands or subpoenas which relate to the investigation by the attorneys general of whether the Company and its schools have complied with certain state consumer protection laws, and generally focus on the Company's practices relating to the recruitment of students, graduate placement statistics, graduate certification and licensing results and student lending activities, among other matters. Depending on the state, the documents and information sought by the attorneys general in connection with their investigations cover time periods as early as 2006 to the present. The Company continues to cooperate with the states involved with a view towards resolving these inquiries as promptly as possible. In this regard, the Company has participated in several meetings with representatives of the Multi-State AGs about the Company’s business and to engage in a dialogue towards a resolution of these inquiries.

We cannot predict the scope, duration or outcome of these attorneys general investigations. At the conclusion of any of these matters, the Company or certain of its schools may be subject to claims of failure to comply with state laws or regulations and may be required to pay significant financial penalties and/or curtail or modify their operations. Other state attorneys general may also initiate inquiries into the Company or its schools. Based on information available to us at present, we cannot reasonably estimate a range of potential monetary or non-monetary impact these investigations might have on the Company because it is uncertain what remedies, if any, these regulators might ultimately seek in connection with these investigations.

In addition to the aforementioned inquiries, from time to time, we receive informal requests from state attorneys general and other government agencies relating to specific complaints they have received from students or former students which seek information about the student, our programs, and other matters relating to our activities in the relevant state. These requests can be broad and time consuming to respond to, and there is a risk that they could expand and/or lead to a formal inquiry or investigation into our practices in a particular state.

Federal Trade Commission Inquiry

On August 20, 2015, the Company received a request for information pursuant to a Civil Investigative Demand from the U.S. Federal Trade Commission (“FTC”). The request was made pursuant to a November 2013 resolution by the FTC directing an investigation to determine whether unnamed persons, partnerships, corporations, or others have engaged or are engaging in deceptive or unfair acts or practices in or affecting commerce in the advertising, marketing or sale of secondary or postsecondary educational products or services, or educational accreditation products or services. The information request requires the Company to provide documents and information regarding a broad spectrum of the business and practices of its subsidiaries and institutions for the time period of January 1, 2010 to the present. The Company has responded to several requests for information but has received no further inquiries from the FTC since March 2017. Given the passage of time, it is not clear what additional requests or action, if any, may be undertaken by the FTC. Should the FTC have further inquiries in this regard, we cannot predict the outcome or estimate the nature or amount of possible remedies, if any, that the FTC might ultimately seek in connection with this matter.

Regulatory Matters

ED Inquiry and HCM1 Status

In December 2011, the U.S. Department of Education (“ED”) advised the Company that it is conducting an inquiry concerning possible violations of ED misrepresentation regulations related to placement rates reported by certain of the Company’s institutions to accrediting bodies, students and potential students. This inquiry stems from the Company’s self-reporting to ED of its internal

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investigat ion into student placement determination practices at the Company’s previous Health Education segment campuses and review of placement determination practices at all of the Company’s other domestic campuses in 2011. The Company has been cooperating with ED in connection with this inquiry. If ED determines that the Company or any of its institutions violated ED misrepresentation regulations with regard to the publication or reporting of placement rates or other disclosures to students or prospective students or finds any other basis in the materials we are providing, ED may revoke, limit, suspend, delay or deny the institution’s or all of the Company’s institutions’ Title IV eligibility, or impose fines. In addition, all of the Company’s institutions were iss ued provisional program participation agreements in May 2016 and this inquiry as well as other matters were cited as bases for that decision.

In December 2011, ED also moved all of the Company’s institutions from the “advance” method of payment of Title IV Program funds to cash monitoring status (referred to as Heightened Cash Monitoring 1, or HCM1, status). If ED finds violations of the Higher Education Act or related regulations, ED may impose monetary or program level sanctions, impose some period of delay in the Company’s receipt of Title IV funds or transfer the Company’s schools to the “reimbursement” or Heightened Cash Monitoring 2 (“HCM2”) methods of payment of Title IV Program funds. While on HCM2 status, an institution must disburse its own funds to students, document the students’ eligibility for Title IV Program funds and comply with certain waiting period requirements before receiving such funds from ED, which may result in a delay in receiving those funds. The process of re-establishing a regular schedule of cash receipts for the Title IV Program funds if ED places our schools on “reimbursement” or HCM2 payment status could take several months, and would require us to fund ongoing operations substantially out of existing cash balances. If our existing cash balances are insufficient to sustain us through this transition period, we would need to pursue other sources of liquidity, which may not be available or may be costly.

OIG Audit

Our schools and universities are subject to periodic audits by various regulatory bodies, including the U.S. Department of Education's Office of Inspector General ("OIG"). The OIG audit services division commenced a compliance audit of CTU in June 2010, covering the period July 5, 2009 to May 16, 2010 (the “Audit Period”), to determine whether CTU had policies and procedures to ensure that CTU administered Title IV Program and other federal program funds in accordance with applicable federal law and regulation. On January 13, 2012, the OIG issued a draft report identifying three findings, including one regarding the documentation of attendance of students enrolled in online programs and one regarding the calculation of returns of Title IV Program funds arising from student withdrawals without official notice to the institution. CTU submitted a written response to the OIG, contesting these findings, on March 2, 2012. On October 24, 2012, CTU provided a further response challenging the findings of the report directly to ED's Office of Federal Student Aid. As a result of ED’s review of these materials, on January 31, 2013, CTU received a request from ED that it perform two file reviews covering the Audit Period to determine potential liability on two discrete issues associated with one of the above findings. The Company completed these file reviews and provided supporting documentation to ED on April 10, 2013. On April 29, 2016, ED directed CTU to perform these same two file reviews for an additional time period that extended from the end of the Audit Period through June 30, 2011, which CTU has completed and submitted to ED. On April 29, 2016, ED also requested an additional file review related to whether CTU appropriately performed calculations regarding any required return of Title IV Program funds for students that failed to earn passing grades within a term. This additional file review covers the period from July 5, 2009 to June 30, 2011 and is a review of whether students should be deemed to have unofficially withdrawn from the institution based on each student’s last known academically-related activity. CTU is seeking reconsideration of the request for this additional file review. In the May 2017 semi-annual OIG update to Congress, the OIG reported that ED’s Office of Federal Student Aid expected to resolve the audit in about 30 days; however, we have not yet received any notification in this regard. As of September 30, 2017, the Company has a $1.0 million reserve recorded related to this matter. This reserve does not include any amount relating to the additional file review requested by ED on April 29, 2016 because it is uncertain.

8. INCOME TAXES

The determination of the annual effective tax is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which we operate and the ongoing development of tax planning strategies during the year. In addition, our provision for income taxes can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

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The following is a summary of our provision for income taxes and effective tax rate from continuing operations (dollars in thousands):

|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Pretax income (loss) |  | $ | 5,095 |  |  | $ | (479 | ) |  | $ | 24,901 |  |  | $ | 23,990 |
Provision for income taxes |  | $ | 1,597 |  |  | $ | 21 |  |  | $ | 11,143 |  |  | $ | 8,776 |
Effective rate |  |  | 31.3 | % |  |  | 4.4 | % |  |  | 44.7 | % |  |  | 36.6 | %

As of December 31, 2016, a valuation allowance of $49.7 million was maintained with respect to our foreign tax credits, separate state net operating losses and Illinois edge credits. After considering both positive and negative evidence related to the realization of these deferred tax assets, we have determined that it is necessary to continue to record the valuation allowance against these credits and separate state net operating losses as of September 30, 2017.

The effective tax rate for the quarter and year to date ended September 30, 2017, was primarily impacted by tax reserves and the tax effect of expenses that are not deductible for tax purposes. For the current quarter we recognized less than $0.1 million of benefit associated with the adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718), improvements to Employee Share-Based Payment Accounting, which decreased our quarterly effective tax rate by 0.6%. For the year to date ended September 30, 2017, we recognized a $1.1 million unfavorable adjustment associated with the adoption of ASU 2016-09, which increased the effective tax rate by 4.6%. For the year to date ended September 30, 2016, the effective tax rate includes a $2.1 million favorable tax adjustment related to the closure of a federal tax audit for the tax years 2013 and 2014. The effect of this discrete item was to decrease the year to date effective tax rate by 8.8%.

We estimate that it is reasonably possible that the gross liability for unrecognized tax benefits for a variety of uncertain tax positions will decrease by up to $1.8 million in the next twelve months as a result of the completion of various tax audits currently in process and the expiration of the statute of limitations in several jurisdictions. The income tax rate for the quarter and year to date ended September 30, 2017 does not take into account the possible reduction of the liability for unrecognized tax benefits. The impact of a reduction to the liability will be treated as a discrete item in the period the reduction occurs. We recognize interest and penalties related to unrecognized tax benefits in tax expense. As of September 30, 2017, we had accrued $1.9 million as an estimate for reasonably possible interest and accrued penalties.

Our tax returns are routinely examined by federal, state, local and foreign tax authorities and these audits are at various stages of completion at any given time. The Internal Revenue Service has completed its examination of our U.S. income tax returns through our tax year ended December 31, 2014.

9. SHARE-BASED COMPENSATION

Overview of Share-Based Compensation Plans

The Career Education Corporation 2016 Incentive Compensation Plan (the “2016 Plan”) was approved by the Company’s stockholders on May 24, 2016. The 2016 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 1.35 shares for each share issued for purposes of the aggregate share limit. As of September 30, 2017, there were approximately 4.0 million shares of common stock available for future share-based awards under the 2016 Plan, which is net of (i) 0.5 million shares issuable upon exercise of outstanding options and (ii) 0.3 million shares underlying restricted stock units, which will be settled in shares of our common stock if the vesting conditions are met and thus reduce the common stock available for future share-based awards under the 2016 Plan by the amount vested. These shares have been multiplied by the applicable factor under the 2016 Plan to determine the remaining shares available as of September 30, 2017. Additionally, as of September 30, 2017, there were approximately 2.4 million shares issuable upon exercise of outstanding options and 1.3 million shares underlying restricted and deferred stock units outstanding, which will be settled in shares of our common stock if the vesting conditions are met, under the previous Career Education Corporation 2008 Incentive Compensation Plan. This plan was replaced by the 2016 Plan and effective May 24, 2016, all future awards will be made under the 2016 Plan. The vesting of all types of equity awards (stock options, stock appreciation rights, restricted stock awards, restricted stock units and deferred stock units) is subject to possible acceleration in certain circumstances. Generally, if a plan participant terminates employment for any reason other than by death or disability during the vesting period, the right to unvested equity awards is forfeited.

As of September 30, 2017, 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, restricted stock units and deferred stock units to be settled in shares of stock but excluding restricted stock units to be settled in cash.

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Stock Options. The exercise price of stock options and stock appreciation rights 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 100% exercisable after the first anniversary of grant date. Grant s of stock options are generally only subject to the service conditions discussed previously.

Stock option activity during the year to date ended September 30, 2017 under all of our plans was as follows (options in thousands):

|  | Options |  |  | Weighted Average Exercise Price |
Outstanding as of December 31, 2016 |  |  | 3,086 |  |  | $ | 11.18 |
Granted |  |  | 360 |  |  |  | 8.60 |
Exercised |  |  | (274 | ) |  |  | 8.29 |
Cancelled |  |  | (295 | ) |  |  | 23.87 |
Outstanding as of September 30, 2017 |  |  | 2,877 |  |  | $ | 9.84 |
Exercisable as of September 30, 2017 |  |  | 1,779 |  |  | $ | 12.32 |

Restricted Stock Units to be Settled in Stock. Restricted stock units to be settled in shares of stock generally become fully vested as follows: 25% per year over a four-year service period or one-third for each of the first through third anniversary of the grant date. Certain awards granted in 2016 vest 20% after the first year, 50% after the second year and 30% after the third year and are “performance-based” awards which are subject to performance conditions that, even if the requisite service period is met, may reduce the number of units of restricted stock that vest at the end of the requisite service period or result in all units being forfeited. Also, certain awards granted in the second quarter of 2015 for retention purposes are subject to accelerated vesting and cash settlement in the event of an involuntary not-for-cause termination of employment by the Company.

The following table summarizes information with respect to all outstanding restricted stock units to be settled in shares of stock under our plans during the year to date ended September 30, 2017 (units in thousands):

|  | Restricted Stock Units to be Settled in Shares of Stock |  |
|  | Units |  |  | Weighted Average Grant-Date Fair Value Per Unit |  |
Outstanding as of December 31, 2016 |  |  | 1,712 |  |  | $ | 4.63 |  |
Granted |  |  | 275 |  |  |  | 8.30 |  |
Vested (1) |  |  | (417 | ) |  |  | 4.65 |  |
Forfeited |  |  | (125 | ) |  |  | 5.56 |  |
Outstanding as of September 30, 2017 |  |  | 1,445 |  |  | $ | 5.25 |  |

_____________________

| (1) | The total vested awards include 5.3 thousand of vested restricted stock units settled in cash. As a result of the termination provision for certain awards, in the event of an involuntary not-for-cause termination of employment by the Company certain termination scenarios allow for cash-settlement.

Deferred Stock Units to be Settled in Stock. We granted deferred stock units to our non-employee directors. The deferred stock units are to be settled in shares of stock and generally vest one-third per year over a three-year service period beginning on the date of grant. Settlement of the deferred stock units and delivery of the underlying shares of stock to the plan participants does not occur until he or she ceases to provide services to the Company in the capacity of a director, employee or consultant.

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The following table summarizes information with respect to all deferred stock units during the year to date ended September 30, 2017 (units in thousands):

|  | Deferred Stock Units to be Settled in Shares |  |  | Weighted Average Grant-Date Fair Value Per Unit |
Outstanding as of December 31, 2016 (1) |  |  | 76 |  |  | $ | 4.44 |
Granted |  |  | - |  |  |  | - |
Vested |  |  | - |  |  |  | - |
Forfeited |  |  | - |  |  |  | - |
Outstanding as of September 30, 2017 (1) |  |  | 76 |  |  | $ | 4.44 |

(1) | Includes vested but unreleased awards. These awards are included in total outstanding awards until they are released under the terms of the agreement.

Restricted Stock Units to be Settled in Cash. Restricted stock units to be settled in cash generally become fully vested 25% per year over a four-year service period beginning on the date of grant. Certain awards granted to our Chief Executive Officer in 2015 outside of the 2008 Plan vest 50% per year over a two-year service period. 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 unaudited condensed consolidated statements of income (loss) and comprehensive income (loss) 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 2016 Plan.

The following table summarizes information with respect to all cash-settled restricted stock units during the year to date ended September 30, 2017 (units in thousands):

|  | Restricted Stock Units to be Settled in Cash |
Outstanding as of December 31, 2016 |  |  | 1,192 |
Granted |  |  | - |
Vested |  |  | (647 | )
Forfeited |  |  | (66 | )
Outstanding as of September 30, 2017 |  |  | 479 |

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 and recognized $3.3 million of expense for the year to date 2017 for all cash-settled restricted stock units, of which $1.4 million was recorded during the quarter ended September 30, 2017.

Stock-Based Compensation Expense. Total stock-based compensation expense for the quarters and years to date ended September 30, 2017 and 2016 for all types of awards was as follows (dollars in thousands):

|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
Award Type |  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Stock options |  | $ | 382 |  |  | $ | 316 |  |  | $ | 1,178 |  |  | $ | 905 |
Restricted stock units settled in stock |  |  | 904 |  |  |  | 539 |  |  |  | 2,424 |  |  |  | 1,330 |
Restricted stock units settled in cash |  |  | 1,366 |  |  |  | 1,362 |  |  |  | 3,336 |  |  |  | 3,383 |
Total stock-based compensation expense |  | $ | 2,652 |  |  | $ | 2,217 |  |  | $ | 6,938 |  |  | $ | 5,618 |

Performance Unit Awards. Performance unit awards granted during 2015, 2016 and 2017 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, 2017, 2018 and 2019, respectively. These awards are recorded as liabilities as the expense is recognized and the fair value for these awards is

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determined at each period end date with changes in fair value recorded in our unaudited condensed consolidated statements of income (loss) and comprehensive income (loss) in the current period. We recorded $3.7 million and $2.6 million of expense related to these awards for the years to date ended September 30, 2017 and September 30, 2016, respectively, with $1.4 million and $1.7 million of expense for the quarters ended September 30, 2017 and September 30, 2016, respectively.

10. WEIGHTED AVERAGE COMMON SHARES

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of shares assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock Method and reflects the additional shares that would be outstanding if dilutive stock options were exercised and restricted stock units were settled for common shares during the period.

The weighted average number of common shares used to compute basic and diluted net income (loss) per share for the quarters and years to date ended September 30, 2017 and 2016 were as follows:

| For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
| 2017 |  |  | 2016 (1) |  |  | 2017 |  |  | 2016 |
Basic common shares outstanding |  | 69,082 |  |  |  | 68,460 |  |  |  | 68,897 |  |  |  | 68,328 |
Common stock equivalents |  | 1,783 |  |  |  | - |  |  |  | 1,763 |  |  |  | 561 |
Diluted common shares outstanding |  | 70,865 |  |  |  | 68,460 |  |  |  | 70,660 |  |  |  | 68,889 |

________________

| (1) | Due to the fact that we reported a loss from continuing operations for the quarter ended September 30, 2016, potential common stock equivalents are excluded from the diluted common shares outstanding calculation. Per FASB ASC Topic 260 – Earnings Per Share, an entity that reports discontinued operations shall use income or loss from continuing operations as the benchmark for calculating diluted common shares outstanding, and as such, we have zero common stock equivalents since these shares would have an anti-dilutive effect on our net loss per share for the quarter ended September 30, 2016.

For the quarter ended September 30, 2017 and the years to date ended September 30, 2017 and 2016, certain unexercised stock option awards are excluded from our computations of diluted earnings per share, as these shares were out-of-the-money and their effect would have been anti-dilutive. The anti-dilutive options that were excluded from our computations of diluted earnings per share were 1.1 million shares for the quarter ended September 30, 2017 and 1.1 million and 2.6 million shares for the years to date ended September 30, 2017 and 2016, respectively.

11. SEGMENT REPORTING

Our segments are determined in accordance with FASB ASC Topic 280—Segment Reporting and are based upon how the Company analyzes performance and makes decisions. Each segment represents a group of postsecondary education providers that offer a variety of degree and non-degree academic programs. These segments are organized by key market segments to enhance operational alignment and, for our two universities, to enhance brand focus within each segment to more effectively execute our strategic plan. As of September 30, 2017, our four segments are:

University Group:

| ♦ | Colorado Technical University (CTU) places a strong focus on providing industry-relevant degree programs to meet the needs of our students for career advancement and of employers for a well-educated workforce and offers academic programs in the career-oriented disciplines of business studies, nursing, computer science, engineering, information systems and technology, cybersecurity and healthcare management. Students pursue their degrees through fully-online programs, local campuses and blended formats, which combine campus-based and online education. As of September 30, 2017, students enrolled at CTU represented approximately 65% of our total enrollments. Approximately 93% of CTU’s enrollments are fully online.

| ♦ | American InterContinental University (AIU) focuses on helping busy professionals get the degree they need to move forward in their career as efficiently as possible and collectively offers academic programs in the career-oriented disciplines of business studies, information technologies, education and criminal justice. Students pursue their degrees through fully-online programs, local campuses and blended formats, which combine campus-based and online education. As of September 30, 2017, students enrolled at AIU represented approximately 34% of our total enrollments. Approximately 93% of AIU’s enrollments are fully online.

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Career Schools Group:

Campuses included in our Career School segments include those which are currently being taught out or those which have completed their teach-out activities or have been sold subsequent to January 1, 2015. As a result of a change in accounting guidance, campuses which have closed or have been sold subsequent to January 1, 2015 no longer meet the criteria for discontinued operations and remain reported within continuing operations on our consolidated financial statements. Campuses in teach-out employ a gradual teach-out process, enabling them to continue to operate while current students have a reasonable opportunity to complete their course of study; they no longer enroll new students.

| ♦ | Culinary Arts includes our Le Cordon Bleu institutions in North America (“LCB”) which offer hands-on educational programs in the career-oriented disciplines of culinary arts and patisserie and baking in the commercial-grade kitchens of Le Cordon Bleu. During the third quarter of 2017, the Company completed the teach-out activities of all remaining 16 Le Cordon Bleu campuses.

| ♦ | Transitional Group includes our non-LCB campuses which are in teach-out or those which have been closed or sold subsequent to January 1, 2015. Our Transitional Group offers academic programs in career-oriented disciplines complemented by certain programs in business studies and information technology. The campuses within the Transitional Group that have not yet ceased operations as of September 30, 2017 will complete their teach-outs on varying dates through 2018. As of September 30, 2017, students enrolled at the Transitional Group campuses represented approximately 1% of our total enrollments. During the third quarter of 2017, the Company completed the teach-out of 1 Transitional Group campus: Sanford-Brown Las Vegas, which continues to be reported as part of the Transitional Group as of September 30, 2017.

Summary financial information by reporting segment is as follows (dollars in thousands):

|  | For the Quarter Ended September 30, |
|  | Revenue |  |  | Operating Income (Loss) |
|  | 2017 |  |  | % of Total |  |  | 2016 |  |  | % of Total |  |  | 2017 |  |  | 2016 |
CTU |  | $ | 91,319 |  |  |  | 63.0 | % |  | $ | 90,921 |  |  |  | 54.2 | % |  | $ | 27,565 |  |  | $ | 21,486 |
AIU |  |  | 50,150 |  |  |  | 34.6 | % |  |  | 48,542 |  |  |  | 29.0 | % |  |  | 2,256 |  |  |  | 291 |
Total University Group |  |  | 141,469 |  |  |  | 97.6 | % |  |  | 139,463 |  |  |  | 83.2 | % |  |  | 29,821 |  |  |  | 21,777 |
Corporate and Other |  |  | - |  |  | NM |  |  |  | - |  |  | NM |  |  |  | (6,199 | ) |  |  | (5,587 | )
Subtotal |  |  | 141,469 |  |  |  | 97.6 | % |  |  | 139,463 |  |  |  | 83.2 | % |  |  | 23,622 |  |  |  | 16,190 |
Culinary Arts |  |  | 2,367 |  |  |  | 1.6 | % |  |  | 21,369 |  |  |  | 12.7 | % |  |  | (14,027 | ) |  |  | (1,801 | )
Transitional Group |  |  | 1,150 |  |  |  | 0.8 | % |  |  | 6,793 |  |  |  | 4.1 | % |  |  | (5,056 | ) |  |  | (15,095 | )
Total |  | $ | 144,986 |  |  |  | 100.0 | % |  | $ | 167,625 |  |  |  | 100.0 | % |  | $ | 4,539 |  |  | $ | (706 | )

|  | For the Year to Date Ended September 30, |
|  | Revenue |  |  | Operating Income (Loss) |
|  | 2017 |  |  | % of Total |  |  | 2016 |  |  | % of Total |  |  | 2017 |  |  | 2016 |
CTU |  | $ | 276,558 |  |  |  | 61.0 | % |  | $ | 274,623 |  |  |  | 50.0 | % |  | $ | 78,649 |  |  | $ | 70,693 |
AIU |  |  | 150,618 |  |  |  | 33.2 | % |  |  | 152,123 |  |  |  | 27.7 | % |  |  | 7,987 |  |  |  | 9,036 |
Total University Group |  |  | 427,176 |  |  |  | 94.2 | % |  |  | 426,746 |  |  |  | 77.7 | % |  |  | 86,636 |  |  |  | 79,729 |
Corporate and Other |  |  | - |  |  | NM |  |  |  | - |  |  | NM |  |  |  | (16,595 | ) |  |  | (17,160 | )
Subtotal |  |  | 427,176 |  |  |  | 94.2 | % |  |  | 426,746 |  |  |  | 77.7 | % |  |  | 70,041 |  |  |  | 62,569 |
Culinary Arts |  |  | 19,302 |  |  |  | 4.3 | % |  |  | 89,990 |  |  |  | 16.4 | % |  |  | (25,039 | ) |  |  | 1,666 |
Transitional Group |  |  | 6,839 |  |  |  | 1.5 | % |  |  | 32,401 |  |  |  | 5.9 | % |  |  | (21,578 | ) |  |  | (40,672 | )
Total |  | $ | 453,317 |  |  |  | 100.0 | % |  | $ | 549,137 |  |  |  | 100.0 | % |  | $ | 23,424 |  |  | $ | 23,563 |

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|  | Total Assets as of (1) |
|  | September 30, 2017 |  |  | December 31, 2016 |
CTU |  | $ | 72,589 |  |  | $ | 76,143 |
AIU |  |  | 65,275 |  |  |  | 66,081 |
Total University Group |  |  | 137,864 |  |  |  | 142,224 |
Corporate and Other |  |  | 292,929 |  |  |  | 334,945 |
Subtotal |  |  | 430,793 |  |  |  | 477,169 |
Culinary Arts (2) |  |  | 48,995 |  |  |  | 57,443 |
Transitional Group (2) |  |  | 15,316 |  |  |  | 18,736 |
Discontinued Operations |  |  | 6,093 |  |  |  | 6,253 |
Total |  | $ | 501,197 |  |  | $ | 559,601 |

(1) | Total assets do not include intercompany receivable or payable activity between schools and corporate and investments in subsidiaries.

(2) | Assets are primarily composed of deferred tax assets that may be utilized for the consolidated company to reduce future tax liabilities.

12. DISCONTINUED OPERATIONS

As of September 30, 2017, the results of operations for campuses that have ceased operations prior to 2015 are presented within discontinued operations. Prior to January 1, 2015, our Transitional Group campuses met the criteria for discontinued operations upon completion of their teach-out. Commencing January 1, 2015, in accordance with new guidance under ASC Topic 360, only campuses that meet the criteria of a strategic shift upon disposal will be classified within discontinued operations, among other criteria. Since the January 2015 effective date of the updated guidance within ASC Topic 360, we have not had any campuses that met the criteria to be considered a discontinued operation.

Results of Discontinued Operations

The summary of unaudited results of operations for our discontinued operations for the quarters and years to date ended September 30, 2017 and 2016 were as follows (dollars in thousands):

|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Total operating expenses |  | $ | 814 |  |  | $ | 295 |  |  | $ | 2,071 |  |  | $ | 1,676 |
Loss before income tax |  | $ | (771 | ) |  | $ | (295 | ) |  | $ | (2,028 | ) |  | $ | (1,676 | )
Benefit from income tax |  |  | (295 | ) |  |  | (109 | ) |  |  | (755 | ) |  |  | (626 | )
Loss from discontinued operations, net of tax |  | $ | (476 | ) |  | $ | (186 | ) |  | $ | (1,273 | ) |  | $ | (1,050 | )

Assets and Liabilities of Discontinued Operations

Assets and liabilities of discontinued operations on our condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016 include the following (dollars in thousands):

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|  | September 30, |  |  | December 31, |
|  | 2017 |  |  | 2016 |
Assets: |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Receivables, net |  | $ | 171 |  |  | $ | 148 |
Total current assets |  |  | 171 |  |  |  | 148 |
Non-current assets: |  |  |  |  |  |  |  |
Other assets, net |  |  | 300 |  |  |  | 483 |
Deferred income tax assets, net |  |  | 5,622 |  |  |  | 5,622 |
Total assets of discontinued operations |  | $ | 6,093 |  |  | $ | 6,253 |
Liabilities: |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable and accrued expenses |  | $ | 179 |  |  | $ | 76 |
Remaining lease obligations |  |  | 6,255 |  |  |  | 8,143 |
Total current liabilities |  |  | 6,434 |  |  |  | 8,219 |
Non-current liabilities: |  |  |  |  |  |  |  |
Remaining lease obligations |  |  | 2,156 |  |  |  | 6,331 |
Other |  |  | - |  |  |  | 91 |
Total liabilities of discontinued operations |  | $ | 8,590 |  |  | $ | 14,641 |

Remaining Lease Obligations of Discontinued Operations

A number of the campuses that ceased operations prior to January 1, 2015 have remaining lease obligations that expire over time with the latest expiration in 2019. A liability is recorded representing the fair value of the remaining lease obligation at the time the space is no longer being utilized. Changes in our future remaining lease obligations, which are reflected within current and non-current liabilities of discontinued operations on our condensed consolidated balance sheets, for the quarters and years to date ended September 30, 2017 and 2016, were as follows (dollars in thousands):

|  | Balance, Beginning of Period |  |  | Charges Incurred (1) |  |  | Net Cash Payments |  |  | Balance, End of Period |
For the quarter ended September 30, 2017 |  | $ | 9,698 |  |  | $ | 251 |  |  | $ | (1,538 | ) |  | $ | 8,411 |
For the quarter ended September 30, 2016 |  | $ | 16,149 |  |  | $ | (479 | ) |  | $ | (3,049 | ) |  | $ | 12,621 |
For the year to date ended September 30, 2017 |  | $ | 14,474 |  |  | $ | 769 |  |  | $ | (6,832 | ) |  | $ | 8,411 |
For the year to date ended September 30, 2016 |  | $ | 21,751 |  |  | $ | (78 | ) |  | $ | (9,052 | ) |  | $ | 12,621 |

(1) | Includes subsequent adjustments for accretion, revised estimates and variances between estimated and actual charges, net of any reversals for terminated lease obligations.

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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion below and other items in this Quarterly Report on Form 10-Q contain “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “outlook,” “should,” “will,” “focused on,” “continue to,” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those matters discussed in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2016 that could cause our actual growth, results of operations, cash flows, performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances, or for any other reason. Among the factors that could cause actual results to differ materially from those expressed in, or implied by, our forward-looking statements are the following:

| • | declines in enrollment or interest in our programs;

| • | our continued compliance with and eligibility to participate in Title IV Programs under the Higher Education Act of 1965, as amended, and the regulations thereunder (including the gainful employment, 90-10, financial responsibility and administrative capability standards prescribed by ED), as well as applicable accreditation standards and state regulatory requirements;

| • | the impact of recently issued “defense to repayment” regulations and any modifications thereto;

| • | rulemaking by the U.S. Department of Education (“ED”) or any state or accreditor and increased focus by Congress and governmental agencies on, or increased negative publicity about, for-profit education institutions;

| • | our ability to successfully defend litigation and other claims brought against us;

| • | the success of our initiatives to improve student experiences, retention and outcomes;

| • | the ability of our new student admissions and advising centers in Phoenix, Arizona, to achieve anticipated operating performance;

| • | negative trends in the real estate market which could impact the costs related to teaching out campuses and the success of our initiatives to reduce our real estate obligations;

| • | our ability to achieve anticipated cost savings and business efficiencies;

| • | increased competition;

| • | the impact of management changes; and

| • | changes in the overall U.S. economy.

Readers are also directed to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and its subsequent filings with the Securities and Exchange Commission for information about other risks and uncertainties, including, but not limited to, those matters discussed in Item 1A, “Risk Factors,” in our Form 10-K.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to help investors understand the results of operations, financial condition and present business environment. The MD&A is organized as follows:

| • | Overview

| • | Consolidated Results of Operations

| • | Segment Results of Operations

| • | Summary of Critical Accounting Policies and Estimates

| • | Liquidity, Financial Position and Capital Resources

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OVERVIEW

Our academic institutions offer a quality education to a diverse student population in a variety of disciplines through online, campus-based and blended learning programs. Our two universities – American InterContinental University (“AIU”) and Colorado Technical University (“CTU”) – provide degree programs through the master’s or doctoral level as well as associate and bachelor’s levels. Both universities predominantly serve students online with career-focused degree programs that are designed to meet the educational demands of today’s busy adults. AIU and CTU continue to show innovation in higher education, advancing new personalized learning technologies like their intellipath™ adaptive learning platform. Career Education is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.

In accordance with our strategic decision to focus our resources and attention on our two universities, we are in the process of teaching out campuses within our Transitional Group and have fully taught out our Culinary Arts campuses. Students enrolled at these campuses have been afforded the reasonable opportunity to complete their program of study prior to the final teach-out date. During the third quarter of 2017, the Company completed the teach-out of 17 campuses: Sanford-Brown Las Vegas and the remaining 16 Le Cordon Bleu campuses, which continue to be reported within the Transitional Group and Culinary Arts segments, respectively, as of September 30, 2017 in accordance with ASC Topic 360 – Property, Plant and Equipment, which limits discontinued operations reporting.

Regulatory Environment

We operate in a highly regulated industry, which has significant impacts on our business and creates risks and uncertainties. In recent years, there has been substantial and increasing focus by various members of the U.S. Congress and federal agencies, including ED, the Consumer Financial Protection Bureau and the Federal Trade Commission, on the role that for-profit educational institutions play in higher education. Congressional hearings and roundtable discussions have been held regarding various aspects of the education industry and reports have been issued that are highly critical of for-profit institutions and include a number of recommendations to be considered by Congress in connection with the upcoming reauthorization of the Higher Education Act. A group of influential U.S. senators has strongly and repeatedly encouraged the Departments of Education, Defense and Veterans Affairs to take action to limit or terminate the participation of for-profit educational institutions, including Career Education Corporation, in existing tuition assistance programs.

In addition, ED has formed an inter-agency task force focused on the for-profit sector involving multiple federal agencies and departments including the Federal Trade Commission, the U.S. Departments of Justice, Treasury and Veterans Affairs, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and numerous state Attorneys General, to coordinate activities and share information to protect students from unfair, deceptive and abusive policies and practices. We believe that the recent actions by the Federal Trade Commission and the multiple Attorney Generals’ offices may be related to or coordinated with this task force. At this time, the future direction of many of these initiatives is uncertain as they may be impacted by federal budget cuts and/or shifts in policy goals and administration priorities in connection with the new administration.

We encourage you to review Item 1, “Business,” and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K to learn more about our highly regulated industry and related risks and uncertainties, in addition to the MD&A in our 2017 Quarterly Reports on Form 10-Q.

Note Regarding Non-GAAP measures

We believe it is useful to present non-GAAP financial measures which exclude certain significant and non-cash items as a means to understand the performance of our core business. As a general matter, we use non-GAAP financial measures in conjunction with results presented in accordance with GAAP to help analyze the performance of our core business, assist with preparing the annual operating plan, and measure performance for some forms of compensation. In addition, we believe that non-GAAP financial information is used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance.

We believe certain non-GAAP measures allow us to compare our current operating results with respective historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of underlying operating performance, such as our teach-out campuses. In evaluating the use of non-GAAP measures, investors should be aware that in the future we may incur expenses similar to the adjustments presented below. Our presentation of non-GAAP measures should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine or non-recurring. A non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for net income (loss), operating income (loss), or any other performance measure derived in accordance with and reported under GAAP or as an alternative to cash flow from operating activities or as a measure of our liquidity.

Non-GAAP financial measures, when viewed in a reconciliation to respective GAAP financial measures, provide an additional way of viewing the Company's results of operations and the factors and trends affecting the Company's business. Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP.

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2017 Third Quarter Overview

We continued to experience better than expected enrollment trends and operating performance during the third quarter of 2017. Our third quarter operating income for the University Group and Corporate was $23.6 million and adjusted for certain items not considered reflective of underlying operating performance and certain non-cash items was $26.2 million, which was better than the high end of our operating income outlook of $21 million and adjusted operating income outlook of $24 million, respectively. We believe this performance was primarily driven by better than expected retention and new enrollment trends that positively impacted revenue as well as timing of certain operating expenses.

Within our CTU segment, total enrollments increased 0.9% and new enrollments increased 10.9% for the third quarter of 2017 as compared to the prior year quarter. We believe the increase in total enrollments was primarily driven by new enrollment growth and continued improvement in our retention trends. New enrollment growth benefitted from improved execution within our admissions operations, enhanced training and coaching as well as increasing tenure of our admissions personnel driving higher efficiency in our enrollment and onboarding processes. Improvements in technology has also helped drive better student engagement early in their decision process. The new admissions and advising center in Arizona which was fully operational during the quarter for CTU also contributed to the increase in new enrollments for the current quarter. Revenue increased by $0.4 million for the quarter and $1.9 million for the year to date as compared to the prior year periods while operating income increased $6.1 million and $8.0 million for the current quarter and year to date, respectively, as compared to the prior year periods.

Within our AIU segment, total enrollments increased 5.7% while new enrollments decreased 2.8%. The increase in total enrollments was primarily driven by the improvements made in our student support operations throughout the year. New enrollments for the quarter were impacted by the calendar redesign discussed in prior quarters which shifts new enrollments between quarters as compared to the prior year periods. The new admissions and advising center became fully operational at the end of the third quarter of 2017 for AIU. We expect to see positive impacts in future quarters as increased resources to serve prospective students is expected to support our objective of sustainable and responsible growth. Revenue increased by $1.6 million for the quarter and decreased by $1.5 million for the year to date as compared to the prior year periods while operating income increased $2.0 million and decreased by $1.0 million for the current quarter and year to date, respectively, as compared to the prior year periods.

We continue to focus on additional innovative ways to implement strategies, invest in new technology and appropriately staff our student support operations. During the third quarter, AIU announced a new specialization for its Bachelor of Business Administration degree program. The new program, Le Cordon Bleu Hospitality Management, provides a specialization which allows students to engage in an in-depth study in their areas of interest. Within both Universities we rolled out the faculty mobile application which allows faculty to engage more with students as well as track their progress more efficiently. We have also established advisor accountability for students based on their degree and program of study and promoted increased interaction and dialogue between advisors and faculty.

We expect to see quarterly variability driven by the timing of operating expenses and the varying impacts from our initiatives, including the ongoing impacts of the academic calendar redesign at AIU, yet we believe that the University Group is positioned well for long-term sustainable and responsible growth. In line with these expectations, we expect positive new and total enrollment growth at both AIU and CTU during the fourth quarter of 2017. This expectation is primarily driven by our ongoing initiatives and investments in student support operations, including our admissions and advising centers in Arizona as well as the academic calendar redesign at AIU.

We completed the teach-out of all remaining Culinary Arts campuses during the third quarter of 2017, which significantly lowered the remaining number of students involved in our teach-out campuses. At the end of 2017, we expect to have approximately 80 students remaining across seven teach-out campuses. Results for our teach-out campuses continue to track ahead of our expectations due to stronger than expected retention as well as better than expected occupancy costs as we work to exit leases prior to their end dates or secure sublease arrangements. We are continuing to terminate or sublease vacated space and further reduce our remaining contractual lease obligations, which will result in future cash savings.

Financial Highlights

Revenue from continuing operations declined $22.6 million or 13.5% due to an overall 9.9% decrease in total student enrollments for the third quarter of 2017 as compared to the prior year quarter, driven by our decision to teach-out our Career Schools. For the current quarter, we reported operating income of $4.5 million as compared to an operating loss of $0.7 million in the prior year quarter. This improvement was driven by increased revenue and operating efficiencies within our University Group as well as a result of growth investments made earlier in 2017. Lastly, we reported cash used in operations for the current year to date of $29.1 million, as compared to the prior year to date’s cash provided of $16.3 million. The increase in cash usage for the current year to date was primarily driven by payments of legal settlements of $32.0 million during the first quarter of 2017 as well as increased payments for exit of leased facilities and incentive-based compensation expenses as compared to the prior year.

For our University Group, revenue increased $2.0 million or 1.4% as compared to the prior year quarter, primarily driven by new and total enrollment growth as well as the timing impact of the calendar redesign for AIU which shifted revenue from the second quarter of 2017 to the third quarter of 2017. Total enrollments for the University Group increased by 2.5% as of the current year

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quarter end as compared to the prior year quarter end. Operating income for the University Group increased by $8.0 million, or 36.9%, for the current year quarter as compared to the prior year quarter d riven by the reasons discussed above.

Within our teach-out segments, operating loss for the Transitional Group improved by $10.0 million or 66.5% for the current quarter as compared to the prior year quarter, driven by reductions in expenses, particularly within administrative, occupancy and academic expenses. Operating loss for Culinary Arts increased by $12.2 million as a result of the reduction in revenue more than offsetting the reduction in expenses as the business completed its teach-out as well as lease charges recorded as campuses vacated facilities during the third quarter of 2017 upon teach-out completion. We have eight campuses remaining within the Transitional Group at the end of the third quarter of 2017, which will complete their teach-out at varying dates through 2018.

As discussed above, the Company believes it is useful to present non-GAAP financial measures, which exclude certain significant and non-cash items, as a means to understand the performance of its operations. (See tables below for a GAAP to non-GAAP reconciliation.) Operating income and adjusted operating income for the University Group and Corporate was $23.6 million and $26.2 million for the current quarter as compared to $16.2 million and $18.8 million in the prior year quarter, respectively. Adjusted operating loss for the Transitional Group and Culinary Arts increased to $10.8 million for the current year quarter as compared to an adjusted operating loss of $9.3 million in the prior year quarter as a result of the fixed costs not decreasing in line with revenue as we near the end of teach-out completion.

Outlook

The substantial completion of the teach-outs and continued execution against our strategy has provided us with further visibility into our anticipated operating results. As a result, we are providing an update to our previous outlook for adjusted operating losses related to our teach-out operations and for ending cash balances for 2017. We currently expect the following results, subject to the key assumptions identified below (see GAAP to non-GAAP reconciliation below):

| • | University Group and Corporate adjusted operating income in the range of $100 to $105 million for the full year 2017, compared to $89.3 million in 2016.

| • | New and total student enrollment growth at both Universities in the fourth quarter of 2017, primarily driven by our ongoing initiatives and investments in student support operations, including our Phoenix admissions and advising centers as well as the academic calendar redesign at AIU.

| • | Adjusted operating loss for our teach-out segments, comprised of the Transitional Group and Culinary Arts, to be in the range of $40 million to $45 million in 2017, as compared to adjusted operating loss of $29.8 million in 2016, and to be in the range of $10 million to $15 million in 2018 as we wind-down the remainder of our teach-out campuses, which reflects an improvement of $5 million in 2017 compared to our previously provided outlook.

| • | End of year cash, cash equivalents, restricted cash and available-for-sale short-term investments, net of any borrowings, as reported on the consolidated balance sheets of approximately $160 million to $165 million for the year ending December 31, 2017, which reflect an improvement of $5 million compared to our previously provided outlook, and expected to increase in 2018.

Forward looking adjusted operating income (loss) expectations are presented in the reconciliation of GAAP to non-GAAP items below. Operating income (loss), which is the most directly comparable GAAP measure to adjusted operating income (loss), may not follow the same trends as discussed in our outlook above because of adjustments made for unused space charges that represent the present value of future remaining lease obligations for vacated space less an estimated amount for sublease income as well as depreciation, amortization, asset impairment charges and significant legal settlements. The expectations provided in the paragraph above and table below for 2017 and 2018 are based on the following key assumptions and factors, among others: (i) prospective student interest in our programs continues to trend in line with recent experiences, (ii) modest total enrollment growth within the University Group, (iii) availability and retention of qualified personnel for ongoing investments in our student support operations, (iv) achievement of recovery rates for the Company’s real estate obligations and timing of any associated lease termination payments consistent with the Company’s historical experiences, (v) no material changes in the current legal or regulatory environment and excludes legal and regulatory liabilities which are not probable and estimable at this time, and any impact of new or proposed regulations, including the new “borrower defense to repayment” regulations and the gainful employment regulation, and any modifications thereto, and (vi) consistent working capital movements in line with historical operating trends and potential impacts of teach-out campuses on working capital in line with expectations. Although these estimates and assumptions are based upon management’s good faith beliefs regarding current events and actions that may be undertaken in the future, actual results could differ materially from these estimates.

Adjusted operating income (loss) for the quarters and years to date ended September 30, 2017 and 2016 as well as an outlook for the second half of 2017 and the years ending December 31, 2017 and 2018 is presented below (dollars in thousands, unless otherwise noted):

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|  | ACTUAL |  |  | ACTUAL |
|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
Adjusted Operating Income (Loss) |  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
University Group and Corporate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating income (1) (2) |  | $ | 23,622 |  |  | $ | 16,190 |  |  | $ | 70,041 |  |  | $ | 62,569 |
Depreciation and amortization (2) |  |  | 2,605 |  |  |  | 2,594 |  |  |  | 7,695 |  |  |  | 8,474 |
Asset impairments (2) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 237 |
Unused space charges (2) (3) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,118 |
Adjusted Operating Income -- University Group and Corporate |  | $ | 26,227 |  |  | $ | 18,784 |  |  | $ | 77,736 |  |  | $ | 72,398 |
Transitional Group and Culinary Arts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating loss (1) (4) |  | $ | (19,083 | ) |  | $ | (16,896 | ) |  | $ | (46,617 | ) |  | $ | (39,006 | )
Depreciation and amortization (4) |  |  | 977 |  |  |  | 2,621 |  |  |  | 3,673 |  |  |  | 8,512 |
Unused space charges (3) (4) |  |  | 7,347 |  |  |  | 4,983 |  |  |  | 11,158 |  |  |  | 14,123 |
Adjusted Operating Loss -- Transitional and Culinary Arts |  | $ | (10,759 | ) |  | $ | (9,292 | ) |  | $ | (31,786 | ) |  | $ | (16,371 | )

| ACTUAL |  |  | OUTLOOK |  | ACTUAL |  |  | OUTLOOK |
| For the Second Half July-December 31, |  | For the Year Ended December 31, |
Adjusted Operating Income (Loss) | 2016 |  |  | 2017 |  | 2016 |  |  | 2017 |  | 2018 |
University Group and Corporate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating income (2) | $ | (1,662 | ) |  | $43 - $48M |  | $ | 44,717 |  |  | $90-95M |  | Growth vs 2017 |
Depreciation and amortization (2) |  | 5,284 |  |  | 5M |  |  | 11,164 |  |  | 10M |  | 2017 Levels |
Asset impairments (2) |  | - |  |  | None Assumed |  |  | 237 |  |  | None Assumed |
Unused space charges (2) (3) |  | 16 |  |  | None Assumed |  |  | 1,134 |  |  | None Assumed |
Significant legal settlements (2) |  | 32,000 |  |  | None Assumed |  |  | 32,000 |  |  | None Assumed |
Adjusted Operating Income -- University Group and Corporate | $ | 35,638 |  |  | $48 - $53M |  | $ | 89,252 |  |  | $100 - $105M |  | Growth vs 2017 |
Transitional Group and Culinary Arts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating loss (4) | $ | (54,951 | ) |  | ($31 - $36M) |  | $ | (77,061 | ) |  | ($59 - $64M) |  | ($15 - $20M) |
Depreciation and amortization (4) |  | 5,692 |  |  | 1M |  |  | 11,583 |  |  | 4M |  |  | - |
Asset impairments (4) |  | 927 |  |  | None Assumed |  |  | 927 |  |  | None Assumed |
Unused space charges (3) (4) |  | 25,579 |  |  | 11M |  |  | 34,719 |  |  | 15M |  | 5M |
Adjusted Operating Loss -- Transitional and Culinary Arts | $ | (22,753 | ) |  | ($19 - $24M) |  | $ | (29,832 | ) |  | ($40 - $45M) |  | ($10 - $15M) |

_____________

(1) | Operating income for the University Group and Corporate and operating loss for the Transitional Group and Culinary Arts make up the components of operating income (loss). A reconciliation of these components for the quarters and years to date ended September 30, 2017 and 2016 is presented below:

|  | ACTUAL |  |  | ACTUAL |
|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
|  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Operating income for University Group and Corporate |  | $ | 23,622 |  |  | $ | 16,190 |  |  | $ | 70,041 |  |  | $ | 62,569 |
Operating loss for Culinary Arts and Transitional |  |  | (19,083 | ) |  |  | (16,896 | ) |  |  | (46,617 | ) |  |  | (39,006 | )
Operating income (loss) |  | $ | 4,539 |  |  | $ | (706 | ) |  | $ | 23,424 |  |  | $ | 23,563 |

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(2) | Amounts relate to the University Group and Corporate.

(3) | Unused space charges represent the net present value of remaining lease obligations for vacated space less an estimated amount for sublease income. These charges relate to exiting leased space as the Company continues to right-size the organization and therefore are not considered representative of ongoing operations.

(4) | Amounts relate to the Transitional Group and Culinary Arts.

Regulatory Updates

Borrower Defense to Repayment. In response to pending litigation challenging the borrower defense to repayment regulations, on June 14, 2017 ED announced an indefinite delay in the effective date of the regulations while it conducts further review and a new negotiated rulemaking process to amend the rules. On October 24, 2017 ED published two related notices in the Federal Register. The first, again citing the pending litigation and uncertain outcome, was an interim final rule setting the effective date of the delayed regulations as July 1, 2018. The second, was a proposed extension of the delay for an extra year, through July 1, 2019, to permit ED to conclude its previously announced negotiated rulemaking to amend the rules and to provide adequate time for institutions to prepare for the implementation of its modified requirements. Comments on the proposed extension through July 1, 2019 are due by November 24, 2017. These borrower defense to repayment regulations were previously set to take effect on July 1, 2017. Separately, a group of attorneys general filed a lawsuit on July 6, 2017 in federal court in the District of Columbia to challenge the legal authority for ED’s delay of the effectiveness of the regulations. The outcome of this legal challenge and the impact any ruling may have on the future effectiveness of the existing or modified regulations is uncertain at this time. See Item 1, “Business – Student Financial Aid and Related Federal Regulation – Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations – Borrower Defense to Repayment,” in our Annual Report on Form 10-K for more information about the borrower defense to repayment regulations.

Program Participation Agreements. All of our institutions, including AIU and CTU, are currently operating on a provisional program participation agreement. AIU and CTU each have a program participation agreement that expires on September 30, 2018. During the period of provisional certification, our institutions must obtain prior ED approval to add an educational program, open a new location or make any other significant change. Our ACICS-accredited institutions all have provisional program participation agreements that extend through the duration of their respective closure dates. Although we believe our institutions are in compliance with the terms of their respective provisional program participation agreements, ED may withdraw an institution’s provisional certification without advance notice if ED determines that the institution is not fulfilling all requirements.

Cohort Default Rates. In late September 2017, ED released the official three-year cohort default rates for the 2014 cohort. Each of our institutions had cohort default rates under the 30% threshold for the 2014 cohort. See Item 1, “Business – Student Financial Aid and Related Federal Regulation – Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations – Student Loan Default Rates” in our Annual Report on Form 10-K for the year ended December 31, 2016 for more information about cohort default rates, our prior year rates and ED’s related standards.

HLC Policy Making Initiatives. At its June 2017 board meeting, the Higher Learning Commission (“HLC”) proposed the addition of student consumer protection policies focused on recruiting, admissions and related institutional practices. Comments on the proposed policies were solicited through September 23, 2017 and the HLC Board of Trustees will consider adoption of the new policies at its November 2017 meeting. We believe our universities already substantially adhere to many of the proposed policies. However, some aspects of the policies and their application are unclear and our institutions have sought clarifications through the comment process. The proposed policies may preclude arbitration agreements in student enrollment agreements. As a result, the impact of these proposed policies, if any, is uncertain at this time, but they may require us to modify our practices and limit our ability to resolve student concerns efficiently and cost effectively. If adopted in November 2017, the new policies would be effective in December 2018.

27

CONSOLIDATED RESULTS OF OPERATIONS

The summary of selected financial data table below should be referenced in connection with a review of the following discussion of our results of operations for the quarters and years to date ended September 30, 2017 and 2016 (dollars in thousands):

|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
|  |  | 2017 |  |  | % of Total Revenue |  |  |  | 2016 |  |  | % of Total Revenue |  |  |  | 2017 |  |  | % of Total Revenue |  |  |  | 2016 |  |  | % of Total Revenue |
TOTAL REVENUE |  | $ | 144,986 |  |  |  |  |  |  | $ | 167,625 |  |  |  |  |  |  | $ | 453,317 |  |  |  |  |  |  | $ | 549,137 |  |  |  |  |
OPERATING EXPENSES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Educational services and facilities (1) |  |  | 37,788 |  |  |  | 26.1 | % |  |  | 51,393 |  |  |  | 30.7 | % |  |  | 114,367 |  |  |  | 25.2 | % |  |  | 170,993 |  |  |  | 31.1 | %
General and administrative: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Advertising |  |  | 33,927 |  |  |  | 23.4 | % |  |  | 45,272 |  |  |  | 27.0 | % |  |  | 105,759 |  |  |  | 23.3 | % |  |  | 122,088 |  |  |  | 22.2 | %
Admissions |  |  | 21,237 |  |  |  | 14.6 | % |  |  | 19,842 |  |  |  | 11.8 | % |  |  | 62,406 |  |  |  | 13.8 | % |  |  | 63,352 |  |  |  | 11.5 | %
Administrative |  |  | 37,493 |  |  |  | 25.9 | % |  |  | 38,152 |  |  |  | 22.8 | % |  |  | 114,363 |  |  |  | 25.2 | % |  |  | 128,586 |  |  |  | 23.4 | %
Bad debt |  |  | 6,420 |  |  |  | 4.4 | % |  |  | 8,457 |  |  |  | 5.0 | % |  |  | 21,630 |  |  |  | 4.8 | % |  |  | 23,332 |  |  |  | 4.2 | %
Total general and administrative expense |  |  | 99,077 |  |  |  | 68.3 | % |  |  | 111,723 |  |  |  | 66.7 | % |  |  | 304,158 |  |  |  | 67.1 | % |  |  | 337,358 |  |  |  | 61.4 | %
Depreciation and amortization |  |  | 3,582 |  |  |  | 2.5 | % |  |  | 5,215 |  |  |  | 3.1 | % |  |  | 11,368 |  |  |  | 2.5 | % |  |  | 16,986 |  |  |  | 3.1 | %
Asset impairment |  |  | - |  |  |  | 0.0 | % |  |  | - |  |  |  | 0.0 | % |  |  | - |  |  |  | 0.0 | % |  |  | 237 |  |  |  | 0.0 | %
OPERATING INCOME (LOSS) |  |  | 4,539 |  |  |  | 3.1 | % |  |  | (706 | ) |  |  | -0.4 | % |  |  | 23,424 |  |  |  | 5.2 | % |  |  | 23,563 |  |  |  | 4.3 | %
PRETAX INCOME (LOSS) |  |  | 5,095 |  |  |  | 3.5 | % |  |  | (479 | ) |  |  | -0.3 | % |  |  | 24,901 |  |  |  | 5.5 | % |  |  | 23,990 |  |  |  | 4.4 | %
PROVISION FOR INCOME TAXES |  |  | 1,597 |  |  |  | 1.1 | % |  |  | 21 |  |  |  | 0.0 | % |  |  | 11,143 |  |  |  | 2.5 | % |  |  | 8,776 |  |  |  | 1.6 | %
Effective tax rate |  |  | 31.3 | % |  |  |  |  |  |  | 4.4 | % |  |  |  |  |  |  | 44.7 | % |  |  |  |  |  |  | 36.6 | % |  |  |  |
INCOME (LOSS) FROM CONTINUING OPERATIONS |  |  | 3,498 |  |  |  | 2.4 | % |  |  | (500 | ) |  |  | -0.3 | % |  |  | 13,758 |  |  |  | 3.0 | % |  |  | 15,214 |  |  |  | 2.8 | %
LOSS FROM DISCONTINUED OPERATIONS, net of tax |  |  | (476 | ) |  |  | -0.3 | % |  |  | (186 | ) |  |  | -0.1 | % |  |  | (1,273 | ) |  |  | -0.3 | % |  |  | (1,050 | ) |  |  | -0.2 | %
NET INCOME (LOSS) |  | $ | 3,022 |  |  |  | 2.1 | % |  | $ | (686 | ) |  |  | -0.4 | % |  | $ | 12,485 |  |  |  | 2.8 | % |  | $ | 14,164 |  |  |  | 2.6 | %

(1) | Educational services and facilities expense includes costs directly attributable to the educational activities of our institutions, including: salaries and benefits of faculty, academic administrators and student support personnel, and costs of educational supplies and facilities, such as rents on campus leases, certain costs of establishing and maintaining computer laboratories and owned and leased facility costs. Also included in educational services and facilities expense are costs of other goods and services provided by our campuses, including costs of textbooks and laptop computers.

(2) | General and administrative expense includes salaries and benefits of personnel in corporate and campus administration, marketing, admissions, financial aid, accounting, human resources, legal and compliance. Other expenses within this expense category include costs of advertising and production of marketing materials, occupancy of the corporate offices and bad debt expense.

Revenue

Current quarter and current year to date revenue decreased 13.5% or $22.6 million and 17.4% or $95.8 million, respectively, as compared to the prior periods driven by the overall decline in total student enrollments. Excluding the Transitional Group and Culinary Arts, which no longer enroll new students as they teach out each campus, revenue increased approximately 1.4% or $2.0 million for the current quarter and 0.1% or $0.4 million for the current year to date as compared to the prior periods. The current quarter increase when excluding the Transitional Group and Culinary Arts was primarily driven by new and total enrollment growth as well as the calendar redesign at AIU which shifted more earnings days into the third quarter of 2017 as compared to 2016. The current year to date increase when excluding the Transitional Group and Culinary Arts was primarily driven by an overall increase in new and total student enrollments.

28

Educational Services and Facilities Expense (dollars in thousands)

|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
|  |  | 2017 |  |  | % of Total Revenue |  |  |  | 2016 |  |  | % of Total Revenue |  |  |  | 2017 |  |  | % of Total Revenue |  |  |  | 2016 |  |  | % of Total Revenue |
Educational services and facilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Academics & student related |  | $ | 21,319 |  |  |  | 14.7% |  |  | $ | 29,941 |  |  |  | 17.9% |  |  | $ | 72,700 |  |  |  | 16.0% |  |  | $ | 103,652 |  |  |  | 18.9% |
Occupancy |  |  | 16,469 |  |  |  | 11.4% |  |  |  | 21,452 |  |  |  | 12.8% |  |  |  | 41,667 |  |  |  | 9.2% |  |  |  | 67,341 |  |  |  | 12.3% |
Total educational services and facilities |  | $ | 37,788 |  |  |  | 26.1% |  |  | $ | 51,393 |  |  |  | 30.7% |  |  | $ | 114,367 |  |  |  | 25.2% |  |  | $ | 170,993 |  |  |  | 31.1% |

The decrease in educational services and facilities expense for the current quarter and current year to date as compared to the respective prior year periods is primarily driven by a decrease within academics and student related expenses for teach-out campuses as these campuses continue to wind-down their operations, which was slightly offset with an increase in academics and student related expenses for the University Group to support the increases in total student enrollment. Occupancy expenses also decreased for the current quarter and current year to date as compared to the respective prior year periods primarily due to decreases within our teach-out segments as a result of exiting facilities as campuses complete their teach-out.

General and Administrative Expense (dollars in thousands)

|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
|  |  | 2017 |  |  | % of Total Revenue |  |  |  | 2016 |  |  | % of Total Revenue |  |  |  | 2017 |  |  | % of Total Revenue |  |  |  | 2016 |  |  | % of Total Revenue |
General and administrative: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Advertising |  | $ | 33,927 |  |  |  | 23.4% |  |  | $ | 45,272 |  |  |  | 27.0% |  |  | $ | 105,759 |  |  |  | 23.3% |  |  | $ | 122,088 |  |  |  | 22.2% |
Admissions |  |  | 21,237 |  |  |  | 14.6% |  |  |  | 19,842 |  |  |  | 11.8% |  |  |  | 62,406 |  |  |  | 13.8% |  |  |  | 63,352 |  |  |  | 11.5% |
Administrative |  |  | 37,493 |  |  |  | 25.9% |  |  |  | 38,152 |  |  |  | 22.8% |  |  |  | 114,363 |  |  |  | 25.2% |  |  |  | 128,586 |  |  |  | 23.4% |
Bad Debt |  |  | 6,420 |  |  |  | 4.4% |  |  |  | 8,457 |  |  |  | 5.0% |  |  |  | 21,630 |  |  |  | 4.8% |  |  |  | 23,332 |  |  |  | 4.2% |
Total general and administrative expense |  | $ | 99,077 |  |  |  | 68.3% |  |  | $ | 111,723 |  |  |  | 66.7% |  |  | $ | 304,158 |  |  |  | 67.1% |  |  | $ | 337,358 |  |  |  | 61.4% |

General and administrative expenses decreased by 11.3% or $12.6 million for the current quarter as compared to the prior year quarter primarily driven by advertising and bad debt expenses. The lower advertising expense is related to decreased expenses for both AIU and CTU due to efficiencies developed within certain marketing channels that optimized our processes related to receiving prospective student inquiries. Admissions expenses increased slightly for the current quarter as compared to the prior year quarter due to the investments in our new admissions and advising centers in Arizona. Administrative expenses for the current quarter as compared to the prior year quarter decreased slightly primarily driven by reductions within Culinary Arts which completed their teach-outs during the current quarter.

General and administrative expenses decreased by 9.8% or $33.2 million for the current year to date as compared to the prior year to date primarily driven by advertising and administrative expenses. The lower advertising expenses and administrative expenses decreased for the reasons mentioned above. Admissions expenses decreased by approximately 1.5% or $0.9 million for the current year to date as compared to the prior year to date as the costs related to the investments in the admission and advising centers in Arizona during the past two quarters were more than offset with decreases in admissions expenses for our teach-out campuses as well as decreased costs within University in the early part of the current year. As a percentage of revenue, administrative expenses have increased for the current year periods as compared to the prior year periods due to certain fixed administrative costs for the consolidated organization that do not decline upon teach-out of campuses.

Bad debt expense incurred by each of our segments during the quarters and years to date ended September 30, 2017 and 2016 was as follows (dollars in thousands):

29

|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |
|  |  | 2017 |  |  | % of Segment Revenue |  |  |  | 2016 |  |  | % of Segment Revenue |  |  |  | 2017 |  |  | % of Segment Revenue |  |  |  | 2016 |  |  | % of Segment Revenue |
Bad debt expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
CTU |  | $ | 4,262 |  |  |  | 4.7 | % |  | $ | 5,758 |  |  |  | 6.3 | % |  | $ | 15,087 |  |  |  | 5.5 | % |  | $ | 15,599 |  |  |  | 5.7 | %
AIU |  |  | 2,129 |  |  |  | 4.2 | % |  |  | 1,497 |  |  |  | 3.1 | % |  |  | 6,654 |  |  |  | 4.4 | % |  |  | 5,259 |  |  |  | 3.5 | %
Total University Group |  |  | 6,391 |  |  |  | 4.5 | % |  |  | 7,255 |  |  |  | 5.2 | % |  |  | 21,741 |  |  |  | 5.1 | % |  |  | 20,858 |  |  |  | 4.9 | %
Corporate and Other |  |  | (140 | ) |  | NM |  |  |  | (57 | ) |  | NM |  |  |  | (270 | ) |  | NM |  |  |  | (3 | ) |  | NM |
Sub Total |  |  | 6,251 |  |  |  | 4.4 | % |  |  | 7,198 |  |  |  | 5.2 | % |  |  | 21,471 |  |  |  | 5.0 | % |  |  | 20,855 |  |  |  | 4.9 | %
Culinary Arts |  |  | 57 |  |  |  | 2.4 | % |  |  | 862 |  |  |  | 4.0 | % |  |  | 80 |  |  |  | 0.4 | % |  |  | 1,861 |  |  |  | 2.1 | %
Transitional Group |  |  | 112 |  |  |  | 9.7 | % |  |  | 397 |  |  |  | 5.8 | % |  |  | 79 |  |  |  | 1.2 | % |  |  | 616 |  |  |  | 1.9 | %
Total bad debt expense |  | $ | 6,420 |  |  |  | 4.4 | % |  | $ | 8,457 |  |  |  | 5.0 | % |  | $ | 21,630 |  |  |  | 4.8 | % |  | $ | 23,332 |  |  |  | 4.2 | %

Bad debt expenses decreased by 24.1% or $2.0 million and 7.3% or $1.7 million for the current quarter and current year to date, respectively, as compared to the prior year periods primarily driven by decreases related to our teach-out campuses as our total student enrollment continues to decrease within those campuses as they wind-down their teach-out operations. Additionally, CTU decreased by $1.5 million and $0.5 million for the current quarter and current year to date, respectively, as compared to the prior year periods due to improvements in collections as well as increased efforts to assist students with completing their funding packages at the beginning of their academic year. CTU’s improvement was slightly offset with increased bad debt expense within AIU for the current quarter and current year to date as compared to the prior year periods. AIU continues to focus on implementation of improvement to processes related to collection efforts and completion of funding packages for students.

Operating Income

The operating income reported for the current quarter improved to $4.5 million and remained relatively flat at $23.4 million for the current year to date, as compared to the respective prior periods. Operating losses within our Culinary Arts campuses, due to teach-outs and fixed costs associated with each campus, contributed to the decline in consolidated operating income. The operating losses from teach-out campuses were more than offset with operating income generated within our University Group, which was primarily driven by continued improvements in operating efficiencies and increased revenues.

Provision for Income Taxes

For the quarter ended September 30, 2017, we recorded a provision for income taxes of $1.6 million or 31.3% as compared to a provision for income taxes of less than $0.1 million or 4.4% for the prior year quarter. We recorded $11.1 million or 44.7% of provision for income taxes for the year to date ended September 30, 2017 as compared to a provision of $8.8 million or 36.6% for the year to date ended September 30, 2016. The effective tax rate for the quarter and year to date ended September 30, 2017 was impacted by tax reserves and the tax effect of expenses that are not deductible for tax purposes. For the current quarter we recognized less than $0.1 million of benefit associated with the adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718), which decreased our quarterly effective tax rate by 0.6%. For the year to date ended September 30, 2017, we recognized a $1.1 million unfavorable adjustment associated with the adoption of ASU 2016-09, which increased the effective tax rate by 4.6%. The effective tax rate for the year to date ended September 30, 2016 was reduced by 8.8%, due to a $2.1 million favorable tax adjustment upon completion of a federal tax audit.

SEGMENT RESULTS OF OPERATIONS

The following tables present unaudited segment results for the reported periods (dollars in thousands):

30

|  | For the Quarter Ended September 30, |
|  | REVENUE |  |  | OPERATING INCOME (LOSS) |  |  | OPERATING MARGIN (LOSS) |
|  |  | 2017 |  |  |  | 2016 |  |  | % Change |  |  |  | 2017 |  |  |  | 2016 |  |  | % Change |  |  |  | 2017 |  |  |  | 2016 |
REVENUE: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
CTU |  | $ | 91,319 |  |  | $ | 90,921 |  |  |  | 0.4 | % |  | $ | 27,565 |  |  | $ | 21,486 |  |  |  | 28.3 | % |  |  | 30.2 | % |  |  | 23.6 | %
AIU |  |  | 50,150 |  |  |  | 48,542 |  |  |  | 3.3 | % |  |  | 2,256 |  |  |  | 291 |  |  |  | 675.3 | % |  |  | 4.5 | % |  |  | 0.6 | %
Total University Group |  |  | 141,469 |  |  |  | 139,463 |  |  |  | 1.4 | % |  |  | 29,821 |  |  |  | 21,777 |  |  |  | 36.9 | % |  |  | 21.1 | % |  |  | 15.6 | %
Corporate and Other |  |  | - |  |  |  | - |  |  | NM |  |  |  | (6,199 | ) |  |  | (5,587 | ) |  |  | -11.0 | % |  | NM |  |  | NM |
Subtotal |  |  | 141,469 |  |  |  | 139,463 |  |  |  | 1.4 | % |  |  | 23,622 |  |  |  | 16,190 |  |  |  | 45.9 | % |  |  | 16.7 | % |  |  | 11.6 | %
Culinary Arts |  |  | 2,367 |  |  |  | 21,369 |  |  |  | -88.9 | % |  |  | (14,027 | ) |  |  | (1,801 | ) |  | NM |  |  |  | -592.6 | % |  |  | -8.4 | %
Transitional Group |  |  | 1,150 |  |  |  | 6,793 |  |  |  | -83.1 | % |  |  | (5,056 | ) |  |  | (15,095 | ) |  |  | 66.5 | % |  |  | -439.7 | % |  |  | -222.2 | %
Total |  | $ | 144,986 |  |  | $ | 167,625 |  |  |  | -13.5 | % |  | $ | 4,539 |  |  | $ | (706 | ) |  |  | 742.9 | % |  |  | 3.1 | % |  |  | -0.4 | %

|  | For the Year to Date Ended September 30, |
|  | REVENUE |  |  | OPERATING INCOME (LOSS) |  |  | OPERATING MARGIN (LOSS) |
|  |  | 2017 |  |  |  | 2016 |  |  | % Change |  |  |  | 2017 |  |  |  | 2016 |  |  | % Change |  |  |  | 2017 |  |  |  | 2016 |
REVENUE: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
CTU |  | $ | 276,558 |  |  | $ | 274,623 |  |  |  | 0.7 | % |  | $ | 78,649 |  |  | $ | 70,693 |  |  |  | 11.3 | % |  |  | 28.4 | % |  |  | 25.7 | %
AIU |  |  | 150,618 |  |  |  | 152,123 |  |  |  | -1.0 | % |  |  | 7,987 |  |  |  | 9,036 |  |  |  | -11.6 | % |  |  | 5.3 | % |  |  | 5.9 | %
Total University Group |  |  | 427,176 |  |  |  | 426,746 |  |  |  | 0.1 | % |  |  | 86,636 |  |  |  | 79,729 |  |  |  | 8.7 | % |  |  | 20.3 | % |  |  | 18.7 | %
Corporate and Other |  |  | - |  |  |  | - |  |  | NM |  |  |  | (16,595 | ) |  |  | (17,160 | ) |  |  | 3.3 | % |  | NM |  |  | NM |
Subtotal |  |  | 427,176 |  |  |  | 426,746 |  |  |  | 0.1 | % |  |  | 70,041 |  |  |  | 62,569 |  |  |  | 11.9 | % |  |  | 16.4 | % |  |  | 14.7 | %
Culinary Arts |  |  | 19,302 |  |  |  | 89,990 |  |  |  | -78.6 | % |  |  | (25,039 | ) |  |  | 1,666 |  |  | NM |  |  |  | -129.7 | % |  |  | 1.9 | %
Transitional Group |  |  | 6,839 |  |  |  | 32,401 |  |  |  | -78.9 | % |  |  | (21,578 | ) |  |  | (40,672 | ) |  |  | 46.9 | % |  |  | -315.5 | % |  |  | -125.5 | %
Total |  | $ | 453,317 |  |  | $ | 549,137 |  |  |  | -17.4 | % |  | $ | 23,424 |  |  | $ | 23,563 |  |  |  | -0.6 | % |  |  | 5.2 | % |  |  | 4.3 | %

|  | NEW STUDENT ENROLLMENTS |  |  | TOTAL STUDENT ENROLLMENTS |
|  | For the Quarter Ended September 30, |  |  | For the Year to Date Ended September 30, |  |  | As of September 30, |
|  |  | 2017 |  |  |  | 2016 |  |  | % Change |  |  |  | 2017 |  |  |  | 2016 |  |  | % Change |  |  |  | 2017 |  |  |  | 2016 |  |  | % Change |
CTU (1) |  |  | 5,980 |  |  |  | 5,390 |  |  |  | 10.9 | % |  |  | 16,170 |  |  |  | 15,240 |  |  |  | 6.1 | % |  |  | 21,600 |  |  |  | 21,400 |  |  |  | 0.9 | %
AIU (1) |  |  | 3,100 |  |  |  | 3,190 |  |  |  | -2.8 | % |  |  | 11,020 |  |  |  | 10,600 |  |  |  | 4.0 | % |  |  | 11,100 |  |  |  | 10,500 |  |  |  | 5.7 | %
Total University Group (1) |  |  | 9,080 |  |  |  | 8,580 |  |  |  | 5.8 | % |  |  | 27,190 |  |  |  | 25,840 |  |  |  | 5.2 | % |  |  | 32,700 |  |  |  | 31,900 |  |  |  | 2.5 | %
Culinary Arts (2) |  |  | - |  |  |  | - |  |  | NM |  |  |  | - |  |  |  | 990 |  |  | NM |  |  |  | - |  |  |  | 3,500 |  |  | NM |
Transitional Group (3) |  |  | - |  |  |  | 10 |  |  | NM |  |  |  | - |  |  |  | 90 |  |  | NM |  |  |  | 200 |  |  |  | 1,100 |  |  | NM |
Total |  |  | 9,080 |  |  |  | 8,590 |  |  |  | 5.7 | % |  |  | 27,190 |  |  |  | 26,920 |  |  |  | 1.0 | % |  |  | 32,900 |  |  |  | 36,500 |  |  |  | -9.9 | %

(1) | New student enrollments were impacted by a change to how the Company records certain cancelled students which began in the third quarter of 2016. There is no impact to the third quarter of 2017 as both the current year quarter and the prior year quarter are calculated on the same basis. Excluding the impact of this change new student enrollments would have increased 4.0 percent for CTU, decreased 0.9 percent for AIU and increased 2.0 percent for the University Group for the year to date ended September 30, 2017 as compared to the prior year to date.

(2) | Culinary Arts segment completed the teach-out of all remaining 16 Le Cordon Bleu campuses as of September 30, 2017.

(3) | Teach-out campuses within the Transitional Group segment no longer enroll new students upon teach out effective date. Students who re-enter after 365 days are reported as new student enrollments.

University Group. Current quarter and year to date revenue increased by $2.0 million or 1.4% and $0.4 million or 0.1%, respectively, as compared to the respective prior periods. The overall increase in revenue was primarily driven by the improvement in total student enrollments. AIU experienced positive total enrollments of 5.7% as compared to the prior period, while revenue decreased by $1.5 million or 1.0% in the current year to date as compared to prior period, partially due to changes in course

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sequencing made to assist students in progressing through their course of study. AIU experienced improvement in quarterly revenue by $1.6 million or 3.3% as compared to prior year quarter, primarily attributed to the shift in earnings days during the current quarter due to the calendar redesi gn as well as improved total student enrollments. We expect to experience continued variability in comparisons for AIU as a result of the academic calendar redesign. CTU contributed $0.4 million or 0.4% and $1.9 million or 0.7% to the increase for the curr ent quarter and year to date, respectively, while total enrollments increased 0.9%.

Current quarter and year to date operating income for the University Group increased $8.0 million or 36.9%, and $6.9 million or 8.7%, respectively, as compared to the respective prior year periods. Operating income increased within both segments for the current quarter with AIU contributing $2.0 million of the increase and CTU contributing $6.0 million of the increase as compared to the prior year quarter. CTU’s operating income improved by $8.0 million or 11.3% for the current year to date as compared to the prior period. AIU’s operating income decreased $1.0 million or 11.6% for the current year to date as compared to the prior year primarily driven by the decrease in revenue and the investments in our admissions and advising center in Phoenix. Operating margins for CTU and AIU have increased by 6.6% and 3.9% for the current quarter as compared to the prior year quarter, primarily due to increased revenues and improved efficiencies in advertising costs.

Culinary Arts. This segment includes our LCB campuses which were announced for teach-out during December 2015. The current quarter and year to date decline in revenue as compared to the corresponding prior periods is primarily a result of the decision to teach-out the campuses. During the third quarter of 2017, the Company completed the teach-out of all remaining campuses and as of the fourth quarter of 2017, Culinary Arts will no longer be its own operating segment.

Transitional Group. This segment includes our non-LCB campuses that are currently being taught-out. The current quarter and year to date decline in revenue as compared to the corresponding prior periods resulted from a decrease in total student enrollments. We expect revenue and operating expenses to continue to decline compared to prior periods as campuses wind down their operations through 2018.

Corporate and Other. This category includes unallocated costs that are incurred on behalf of the entire company. Corporate and Other operating loss for the current quarter increased by $0.6 million or 11.0% and improved by $0.6 million or 3.3% for the year to date, as compared to the respective prior periods. The increase in costs for the current quarter as compared to the prior year quarter was primarily driven by timing of incentive-based compensation expenses as compared to the prior year. The year to date overall decrease in cost compared to the prior year is primarily driven by reduced staff and other expenses.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A detailed discussion of the accounting policies and estimates that we believe are most critical to our financial condition and results of operations that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties is included under the caption “Summary of Critical Accounting Policies and Estimates” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016. Note 2 “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016 also includes a discussion of these and other significant accounting policies.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of September 30, 2017, cash, cash equivalents, restricted cash and available-for-sale short-term investments totaled $175.9 million. Restricted cash and investment balances as of September 30, 2017 approximate $7.9 million and include restricted short-term investments for certificates of deposit in addition to restricted cash to provide securitization for letters of credit. Our cash flows from operating activities have historically been adequate to fulfill our liquidity requirements. We have historically financed our operating activities, organic growth and acquisitions primarily through cash generated from operations, existing cash balances and credit facility borrowings. The recent losses from our Transitional Group and Culinary Arts campuses and associated lease payments for vacated spaces have driven a net cash usage in recent years as well as payment of a legal settlement during the current year. However, as we execute on our transformation strategy and complete the wind-down of our teach-out campuses, we expect our cash usage to moderate through the remainder of 2017 and to begin generating cash in 2018. We expect to end 2017 with cash, cash equivalents, restricted cash and available-for-sale short-term investments, net of borrowings, in the range of $160 million to $165 million. These expectations are based upon, and subject to, the updated key assumptions and factors discussed above in the Management’s Discussion and Analysis under the heading “2017 Third Quarter Overview.” We anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures and lease commitments through at least the next 12 months primarily with cash generated by operations and existing cash balances.

We continue to focus on our transformation strategy which we believe will transition CEC to a period of sustainable and responsible growth. Our credit facility allows us to borrow up to a maximum amount of $95 million and is scheduled to mature on December 31, 2018. Amounts borrowed under the Credit Agreement are required to be secured with 100% cash collateral.

The discussion above reflects management’s expectations regarding liquidity; however, we are not able to assess the effect of loss contingencies on future cash requirements and liquidity. See Note 7 “Contingencies” to our unaudited condensed consolidated

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financial statements. Further, as a result of the significance of the Title IV P rogram funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impact on timing or our ability to receive or retain Title IV Program funds, or any requirement to post a significant letter of credit to ED, may have a significant impact on our operations and our financial condition. In addition, our financial performance is dependent on the level of student enrollments which co uld be impacted by external factors. See Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Sources and Uses of Cash

Operating Cash Flows

During the year to date ended September 30, 2017, net cash flows used in operating activities totaled $29.1 million compared to net cash provided by operating activities of $16.3 million for the year to date ended September 30, 2016. The increase in cash usage from operations as compared to the prior year is primarily driven by $32.0 million of payments for legal settlements during the first quarter of 2017 as well as increased payments for exit of leased facilities and incentive-based compensation expenses as compared to the prior year.

Our primary source of cash flows from operating activities is tuition collected from our students. Our students derive the ability to pay tuition costs through the use of a variety of funding sources, including, among others, federal loan and grant programs, state grant programs, private loans and grants, institution payment plans, private and institutional scholarships and cash payments. For the year to date ended September 30, 2017 and 2016, approximately 77% of our institutions’ cash receipts from tuition payments came from Title IV Program funding.

For further discussion of Title IV Program funding and alternative private loan funding sources for our students, see Item 1, “Business - Student Financial Aid and Related Federal Regulation,” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Our primary uses of cash to support our operating activities include, among other things, cash paid and benefits provided to our employees for services, to vendors for products and services, to lessors for rents and operating costs related to leased facilities, to suppliers for textbooks and other institution supplies, and to federal, state and local governments for income and other taxes.

Investing Cash Flows

During the years to date ended September 30, 2017 and 2016, net cash flows used in investing activities totaled $6.1 million and $37.9 million, respectively.

Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash outflow of $2.7 million and $38.0 million, respectively, during the years to date ended September 30, 2017 and 2016.

Capital Expenditures. Capital expenditures remained relatively flat to $3.4 million for the years to date ended September 30, 2017 and 2016. Capital expenditures represented less than 1.0% of total revenue for each of the years to date ended September 30, 2017 and 2016.

Financing Cash Flows

During the year to date ended September 30, 2017, net cash flows provided by financing activities totaled $1.4 million compared to net cash flows used in financing activities of $38.0 million for the prior year to date.

Payments of employee tax associated with stock compensation. Payments of employee tax associated with stock compensation were $1.2 million for the year to date ended September 30, 2017 and $0.6 million for the year to date ended September 30, 2016. The Company now accounts for cash flows related to cash payments for employee taxes made by the Company on the employees’ behalf for withheld shares related to stock settlements as a financing activity. This change was a result of updated guidance issued by the Financial Accounting Standards Board (“FASB”) under Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718). Prior period amounts were recast to cash flows from financing activities from cash flows from operating activities to be comparable to current year reporting.

Credit Agreement. On December 11, 2015, we entered into an amendment to our Amended and Restated Credit Agreement with BMO Harris Bank N.A., in its capacities as the initial lender and letter of credit issuer thereunder and the administrative agent for the lenders which from time to time may be parties to the Credit Agreement which, among other things, decreased the revolving credit facility to $95.0 million. The revolving credit facility under the Credit Agreement is scheduled to mature on December 31, 2018. Amounts borrowed under the Credit Agreement are required to be secured with 100% cash collateral. The Credit Agreement, which includes certain financial covenants, requires that fees and interest are payable monthly and quarterly in arrears, respectively, and principal is payable at maturity. During the first quarter of 2016, we repaid the $38.0 million borrowed as of December 31, 2015. As of September 30, 2017, we have no outstanding borrowings under the revolving credit facility and we remain in compliance with the covenants of the Credit Agreement.

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Changes in Financial Position

Selected condensed consolidated balance sheet account changes from December 31, 2016 to September 30, 2017 were as follows (dollars in thousands):

|  | September 30, |  |  | December 31, |  |  |  |  |
|  | 2017 |  |  | 2016 |  |  | % Change |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
CURRENT ASSETS: |  |  |  |  |  |  |  |  |  |  |  |
Total cash and cash equivalents, restricted cash and short-term investments |  | $ | 175,938 |  |  | $ | 207,160 |  |  |  | -15 | %
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |  |  |  |  |
CURRENT LIABILITIES: |  |  |  |  |  |  |  |  |  |  |  |
Accrued expenses - payroll and related benefits |  |  | 31,646 |  |  |  | 41,203 |  |  |  | -23 | %
Accrued expenses - other |  |  | 35,127 |  |  |  | 69,244 |  |  |  | -49 | %
NON-CURRENT LIABILITIES: |  |  |  |  |  |  |  |  |  |  |  |
Deferred Rent |  |  | 16,253 |  |  |  | 30,713 |  |  |  | -47 | %

Total cash and cash equivalents, restricted cash and short-term investments: The decrease is driven by the $32.0 million of payments related to legal settlements during the current year.

Accrued expenses - payroll and related benefits: The decrease is driven by the payments during the first quarter of 2017 of annual incentive compensation items as well as decreases in severance accruals during the current year.

Accrued expenses – other: The decrease is driven by the payments of legal settlements during the current year.

Deferred Rent: The decrease is driven by the continued exit of leased space as campuses complete their teach-out.

Contractual Obligations

As of September 30, 2017, future minimum cash payments under contractual obligations for our non-cancelable operating lease arrangements were as follows (dollars in thousands):

|  | 2017 (5) |  |  | 2018 |  |  | 2019 |  |  | 2020 |  |  | 2021 & Thereafter |  |  | Total |
Gross operating lease obligations (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ongoing operations (2) |  | $ | 12,399 |  |  | $ | 12,835 |  |  | $ | 13,089 |  |  | $ | 10,446 |  |  | $ | 15,555 |  |  | $ | 64,324 |
Teach-out campuses and discontinued operations (3) |  |  | 58,845 |  |  |  | 29,168 |  |  |  | 14,171 |  |  |  | 7,455 |  |  |  | 5,677 |  |  |  | 115,316 |
Total gross operating lease obligations |  | $ | 71,244 |  |  | $ | 42,003 |  |  | $ | 27,260 |  |  | $ | 17,901 |  |  | $ | 21,232 |  |  | $ | 179,640 |
Sublease income (4) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ongoing operations (2) |  | $ | 612 |  |  | $ | 934 |  |  | $ | 426 |  |  | $ | 107 |  |  | $ | - |  |  | $ | 2,079 |
Teach-out campuses and discontinued operations (3) |  |  | 8,432 |  |  |  | 4,887 |  |  |  | 3,107 |  |  |  | 1,498 |  |  |  | 229 |  |  |  | 18,153 |
Total sublease income |  | $ | 9,044 |  |  | $ | 5,821 |  |  | $ | 3,533 |  |  | $ | 1,605 |  |  | $ | 229 |  |  | $ | 20,232 |
Net operating lease obligations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ongoing operations (2) |  | $ | 11,787 |  |  | $ | 11,901 |  |  | $ | 12,663 |  |  | $ | 10,339 |  |  | $ | 15,555 |  |  | $ | 62,245 |
Teach-out campuses and discontinued operations (3) |  |  | 50,413 |  |  |  | 24,281 |  |  |  | 11,064 |  |  |  | 5,957 |  |  |  | 5,448 |  |  |  | 97,163 |
Total net contractual lease obligations |  | $ | 62,200 |  |  | $ | 36,182 |  |  | $ | 23,727 |  |  | $ | 16,296 |  |  | $ | 21,003 |  |  | $ | 159,408 |

(1) | Amounts exclude certain costs associated with real estate leases, such as expense for common area maintenance (i.e., “CAM”) and taxes, as these amounts are undeterminable at this time and may vary based on future circumstances.

(2) | Amounts relate to ongoing operations which include University Group and Corporate.

(3) | Amounts relate to campuses announced for teach-out which include our Transitional Group and Culinary Arts segments as well as discontinued operations.

(4) | Amounts provided are for executed sublease arrangements.

(5) | Amounts provided are for the full year 2017.

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ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We use various techniques to manage our market risk, including, from time to time, the use of derivative financial instruments. We do not use derivative financial instruments for speculative purposes.

Interest Rate and Foreign Currency Exposure

Any outstanding borrowings under our revolving credit facility bear annual interest at fluctuating rates under either the Base Rate Loan or as determined by the London Interbank Offered Rate (LIBOR) for the relevant currency, plus the applicable rate based on the type of loan. As of September 30, 2017, we had no outstanding borrowings under this facility.

During 2017 we were subject to foreign currency exchange exposures arising from transactions denominated in currencies other than the U.S. dollar, and from the translation of foreign currency balance sheet accounts into U.S. dollar balance sheet accounts, primarily related to an equity investment. We are subject to risks associated with fluctuations in the value of the Euro or British pound versus the U.S. dollar.

Our financial instruments are recorded at their fair values as of September 30, 2017 and December 31, 2016. We believe that the exposure of our consolidated financial position and results of operations and cash flows to adverse changes in interest rates or foreign currency is not significant.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We completed an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q (“Report”) under the supervision and with the participation of management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of September 30, 2017 our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized, and reported within the time periods specified in the rules and forms provided by the U.S. Securities and Exchange Commission (“SEC”) and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II – OTHE R INFORMATION

Item 1. | Legal Proceedings

Note 7 “Contingencies” to our unaudited condensed consolidated financial statements is incorporated herein by reference.

Item 1A. | Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, Item 1A “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on February 23, 2017.

Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding purchases made by us of shares of our common stock on a monthly basis during the year to date ended September 30, 2017:

Issuer Purchases of Equity Securities

Period |  | Total Number of Shares Purchased (1) |  |  | Average Price Paid per Share |  |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) |  |  | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
December 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 183,296,772 |
January 1, 2017—January 31, 2017 |  |  | - |  |  | $ | - |  |  |  | - |  |  |  | 183,296,772 |
February 1, 2017—February 28, 2017 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 183,296,772 |
March 1, 2017—March 31, 2017 |  |  | 116,771 |  |  |  | 7.95 |  |  |  | - |  |  |  | 183,296,772 |
April 1, 2017—April 30, 2017 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 183,296,772 |
May 1, 2017—May 31, 2017 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 183,296,772 |
June 1, 2017—June 30, 2017 |  |  | 17,639 |  |  |  | 9.80 |  |  |  | - |  |  |  | 183,296,772 |
July 1, 2017—July 31, 2017 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 183,296,772 |
August 1, 2017—August 31, 2017 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 183,296,772 |
September 1, 2017—September 30, 2017 |  |  | 6,980 |  |  |  | 9.82 |  |  |  | - |  |  |  | 183,296,772 |
Total |  |  | 141,390 |  |  |  |  |  |  |  | - |  |  |  |  |

(1) | Includes 140,598 and 792 shares delivered back to the Company for payment of withholding taxes from employees for vesting restricted stock units pursuant to the terms of the Career Education Corporation 2008 Incentive Compensation Plan and 2016 Incentive Compensation Plan, respectively.

(2) | As of September 30, 2017, approximately $183.3 million was available under our previously authorized repurchase program. Stock repurchases under this program may be made on the open market or in privately negotiated transactions from time to time, depending on various factors, including market conditions and corporate and regulatory requirements. The stock repurchase program does not have an expiration date and may be suspended or discontinued at any time.

Item 6. | Exhibits

The exhibits required to be filed by Item 601 of Regulation S-K are listed in the “Exhibit Index,” which is attached hereto and incorporated by reference herein.

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|  | INDEX TO EXHIBITS |  |
Exhibit Number |  | Exhibit |  | Incorporated by Reference to:
+31.1 |  | Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |  |
+31.2 |  | Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |  |
+32.1 |  | Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |  |
+32.2 |  | Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |  |
+101 |  | The following financial information from our Quarterly Report on Form 10-Q for the nine months ended September 30, 2017, filed with the SEC on November 2, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and September 30, 2016, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and September 30, 2016, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements |  |
|  | ___ |  |
|  | * Management contract or compensatory plan or arrangement required to be filed as an Exhibit on this Form 10-Q. |  |
|  | +Filed herewith. |  |

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SIGNAT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| CAREER EDUCATION CORPORATION
Date: November 2, 2017 | By: |  | /s/ TODD S. NELSON
|  |  | Todd S. Nelson President and Chief Executive Officer (Principal Executive Officer)
Date: November 2, 2017 | By: |  | /s/ ASHISH R. GHIA
|  |  | Ashish R. Ghia Vice President and Interim Chief Financial Officer (Principal Financial Officer)

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