Edgar Filing: CAREER EDUCATION CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

o 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.)
2895 Greenspoint Parkway, Suite 600, Hoffman Estates, Illinois 60169
(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 x No o

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

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares of registrant’s common stock, par value $0.01, outstanding as of November 6, 2006: 94,774,003

CAREER EDUCATION CORPORATION

INDEX

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Income	4
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
Item 4.	Controls and Procedures	74
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	76
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 6.	Exhibits	77
SIGNATURES		78

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

	September 30,				December 31,
	2006				2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	116,157			$	132,308
Investments		328,328				272,093
Total cash and cash equivalents and investments		444,485				404,401
Receivables:
Students, net of allowance for doubtful accounts of $37,902 and $44,839 as of September 30, 2006, and December 31, 2005, respectively		76,076				76,447
Other, net		8,494				5,015
Prepaid expenses		39,141				37,412
Inventories		13,839				14,090
Deferred income tax assets		10,122				10,122
Other current assets		19,021				31,067
Total current assets		611,178				578,554
PROPERTY AND EQUIPMENT, net		400,431				411,144
GOODWILL		349,459				443,584
INTANGIBLE ASSETS, net		34,559				35,286
OTHER ASSETS		31,844				37,537
TOTAL ASSETS		$	1,427,471			$	1,506,105
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	572			$	627
Accounts payable		30,544				28,627
Accrued expenses:
Payroll and related benefits		30,653				39,471
Income taxes		2,618				23,509
Other		75,652				82,513
Deferred tuition revenue		177,419				152,007
Total current liabilities		317,458				326,754
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities		13,737				16,358
Deferred rent obligations		97,453				89,680
Deferred income tax liabilities		31,212				31,212
Other		5,769				5,854
Total long-term liabilities		148,171				143,104
SHARE-BASED AWARDS SUBJECT TO REDEMPTION		15,641				—
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; 103,819,031 and 103,384,741 shares issued, 94,696,546 and 98,112,741 shares outstanding as of September 30, 2006, and December 31, 2005, respectively		1,038				1,033
Additional paid-in capital		616,679				591,287
Accumulated other comprehensive income		1,127				1,989
Retained earnings		652,360				642,096
Cost of 9,122,485 and 5,272,000 shares in treasury as of September 30, 2006, and December 31, 2005, respectively		(325,003		)		(200,158		)
Total stockholders’ equity		946,201				1,036,247
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,427,471			$	1,506,105

CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2006			2005			2006			2005
REVENUE:
Tuition and registration fees	$	437,996		$	472,231		$	1,413,074		$	1,433,044
Other	24,389			25,251			64,726			72,337
Total revenue	462,385			497,482			1,477,800			1,505,381
OPERATING EXPENSES:
Educational services and facilities	159,519			154,797			478,017			464,596
General and administrative	251,903			238,075			765,105			718,468
Depreciation and amortization	21,886			20,899			64,837			57,933
Goodwill and intangible asset impairment charge	785			—			96,149			—
Total operating expenses	434,093			413,771			1,404,108			1,240,997
Income from operations	28,292			83,711			73,692			264,384
OTHER INCOME (EXPENSE):
Interest income	4,491			1,890			13,469			7,877
Interest expense	(322		)	(343		)	(1,010		)	(1,199		)
Share of affiliate earnings	510			428			2,109			3,670
Miscellaneous income (expense)	120			228			(9		)	(530		)
Total other income	4,799			2,203			14,559			9,818
Income before provision for income taxes	33,091			85,914			88,251			274,202
PROVISION FOR INCOME TAXES	12,376			30,979			62,346			104,882
Income from continuing operations	20,715			54,935			25,905			169,320
DISCONTINUED OPERATIONS:
Loss from discontinued operations	—			—			—			(5,700		)
NET INCOME	$	20,715		$	54,935		$	25,905		$	163,620
NET INCOME PER SHARE—BASIC:
Income from continuing operations	$	0.22		$	0.55		$	0.27		$	1.66
Loss from discontinued operations	—			—			—			(0.06		)
Net income	$	0.22		$	0.55		$	0.27		$	1.60
NET INCOME PER SHARE—DILUTED:
Income from continuing operations	$	0.22		$	0.53		$	0.26		$	1.62
Loss from discontinued operations	—			—			—			(0.05		)
Net income	$	0.22		$	0.53		$	0.26		$	1.57
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	94,721			100,540			96,605			101,966
Diluted	96,195			103,125			98,556			104,489

CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)

	Common Stock			Treasury Stock					Additional		Accumulated Other
	Issued Shares	$0.01 Par Value		Purchased Shares		Cost			Paid-in Capital		Comprehensive Income (Loss)			Retained Earnings			Total
BALANCE, December 31, 2005	103,385	$	1,033	(5,272	)	$	(200,158	)	$	591,287	$	1,989		$	642,096			$	1,036,247
Net income	—	—		—		—			—		—			25,905				25,905
Foreign currency translation loss	—	—		—		—			—		(841		)	—				(841		)
Unrealized loss on investments	—	—		—		—			—		(21		)	—				(21		)
Total comprehensive income																		25,043
Treasury stock purchased	—	—		(3,850	)	(124,845		)	—		—			—				(124,845		)
Share-based compensation:
Stock options	—	—		—		—			13,139		—			—				13,139
Nonvested stock	—	—		—		—			834		—			—				834
Employee stock purchase plan	—	—		—		—			676		—			—				676
Common stock issued under:
Stock option plans	295	3		—		—			4,671		—			—				4,674
Employee stock purchase plan	139	2		—		—			3,971		—			—				3,973
Tax benefit of options exercised	—	—		—		—			2,101		—			—				2,101
Adjustment of share-based awards
subject to redemption	—	—		—		—			—		—			(15,641		)		(15,641		)
BALANCE, September 30, 2006	103,819	$	1,038	(9,122	)	$	(325,003	)	$	616,679	$	1,127		$	652,360			$	946,201

CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2006			2005			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	20,715		$	54,935		$	25,905		$	163,620
Adjustments to reconcile net income to net cash provided by operating activities:
Goodwill and intangible asset impairment charge	785			—			96,149			—
Loss from discontinued operations	—			—			—			5,700
Depreciation and amortization expense	21,886			20,899			64,837			57,933
Compensation expense related to share-based awards	6,163			—			14,649			—
Loss on disposition of property and equipment	5			22			260			572
Share of affilate earnings, net of dividends received	3,633			(428		)	2,034			(1,810		)
Tax benefit associated with stock option exercises	—			2,410			—			4,826
Other	(234		)	193			236			593
Changes in operating assets and liabilities	30,273			28,202			10,617			55,886
Net cash provided by operating activities	83,226			106,233			214,687			287,320
CASH FLOWS FROM INVESTING ACTIVITIES:
Business disposition	—			26			—			(908		)
Purchases of property and equipment	(16,870		)	(28,336		)	(60,021		)	(99,232		)
Purchases of available-for-sale investments	(249,160		)	(284,012		)	(801,610		)	(700,636		)
Sales of available-for-sale investments	208,241			272,629			745,526			447,024
Other	(254		)	46			(364		)	1,504
Net cash used in investing activities	(58,043		)	(39,647		)	(116,469		)	(352,248		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock	—			(200,158		)	(124,845		)	(200,158		)
Issuance of common stock	1,236			5,051			8,647			12,003
Tax benefit associated with stock option exercises	51			—			2,101			—
Payments of revolving loans	(3,487		)	(181		)	(3,487		)	(2,060		)
Proceeds from the issuance of other long-term debt	—			2,431			—			2,431
Payments of capital lease obligations and other long-term debt	(69		)	(248		)	(253		)	(1,753		)
Net cash used in financing activities	(2,269		)	(193,105		)	(117,837		)	(189,537		)
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS:	2,654			(284		)	3,468			(4,752		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	25,568			(126,803		)	(16,151		)	(259,217		)
CASH AND CASH EQUIVALENTS, beginning of the period	90,589			217,044			132,308			349,458
CASH AND CASH EQUIVALENTS, end of the period	$	116,157		$	90,241		$	116,157		$	90,241

CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

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

We are a dynamic educational services company committed to quality, career-focused learning and led by passionate professionals who inspire individual worth and lifelong achievement. Since our founding in 1994, we have progressed toward our goal of becoming the world’s leading provider of quality educational services. We are one of the world’s leading on-ground providers of private, for-profit postsecondary education and have a substantial presence in online education. Our schools and universities prepare students for professionally and personally rewarding careers through the operation of 84 on-ground campuses located throughout the United States and in France, Canada, and the United Kingdom and two fully-online academic platforms.

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 those of a normal recurring nature, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The condensed consolidated balance sheet as of December 31, 2005, has been derived from the audited consolidated financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements. For additional information, refer to the consolidated financial statements and notes to consolidated financial statements as of and for the year ended December 31, 2005, included in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission (“SEC”) on March 6, 2006.

The unaudited condensed consolidated financial statements presented herein include the accounts of CEC and our wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated.

Certain amounts in our prior period financial statements have been reclassified to conform to the current period presentation.

2. GOODWILL IMPAIRMENT

Changes in the carrying amount of goodwill during the three months and nine months ended September 30, 2006, by reportable segment are as follows (in thousands):

								Culinary						Health
	Academy				Colleges			Arts			Gibbs			Education				INSEEC				University
	segment				segment			segment			segment			segment				segment				segment			Total
Goodwill balance as of June 30, 2006		$	14,231			$	28,029		$	75,148	$	—			$	131,060			$	13,548			$	87,566	$	349,582
Effect of foreign currency exchange rate changes		(5		)		—			—		—				—				(118		)		—		(123		)
Goodwill balance as of September 30, 2006		$	14,226			$	28,029		$	75,148	$	—			$	131,060			$	13,430			$	87,566	$	349,459
Goodwill balance as of December 31, 2005		$	14,074			$	28,029		$	75,148	$	10,389			$	216,035			$	12,343			$	87,566	$	443,584
Goodwill impairment charge		—				—			—		(10,389		)		(84,975		)		—				—		(95,364		)
Effect of foreign currency exchange rate changes		152				—			—		—				—				1,087				—		1,239
Goodwill balance as of September 30, 2006		$	14,226			$	28,029		$	75,148	$	—			$	131,060			$	13,430			$	87,566	$	349,459

On the first day of January of each year, our goodwill balances are reviewed for impairment through the application of a fair-value-based test. The results of the test as of January 1, 2006, indicated no goodwill impairment, as, for all reporting units, which we define as our school operating divisions, our estimate of reporting unit fair value exceeded the carrying value of the reporting unit. Our estimate of fair value for each of our reporting units was based primarily on projected future operating results and cash flows and other assumptions. Although we believe our projections and resulting estimates of fair value are reasonable, historically, our projections have not always been achieved. For our Health Education and Gibbs reporting units, estimated fair values exceeded carrying values by a relatively small margin as of January 1, 2006.

Health Education Reporting Unit

Our Health Education reporting unit revenue and income from operations increased during the six months ended June 30, 2006, relative to revenue and loss from operations during the six months ended June 30, 2005. Additionally, our Health Education reporting unit achieved projected operating result and cash flow targets during the three months ended March 31, 2006. However, our Health Education reporting unit did not achieve projected student enrollment, operating result, and cash flow targets during the second quarter of 2006, and, accordingly, we concluded that the reporting unit will be unable to achieve full-year 2006 projected operating result and cash flow targets. Our Health Education reporting unit’s inability to achieve projected 2006 operating results and cash flows is primarily attributable to weak student population and start volume at certain of its schools during the second quarter of 2006, relative to projected student population and start volume during the second quarter of 2006.

In consideration of our Health Education reporting unit’s operating results during the second quarter of 2006 relative to projections and the small margin between the reporting unit’s carrying value and estimated fair value as of January 1, 2006, we retested the reporting unit’s goodwill balance for impairment as of May 31, 2006. The preliminary results of the test as of May 31, 2006, indicated that the value of goodwill attributable to our Health Education reporting unit of approximately $216.0 million had been impaired, as our estimate of the reporting unit’s fair value was less than the carrying value of the reporting unit. Thus, we recorded an estimated goodwill impairment charge during the second quarter of 2006 of $85.0 million, pretax, or $0.85 per diluted share, approximately $6.5 million of which we believe will be deductible for income tax reporting purposes.

During the third quarter of 2006, we finalized our test of our Health Education reporting unit’s goodwill balance. The test included a valuation of tangible and intangible assets attributable to the reporting unit. Completion of the test of the reporting unit’s goodwill balance did not result in a change to the $85.0 million, pretax, goodwill impairment charge recognized during the second quarter of 2006. However, as part of our overall test of the Health Education reporting unit’s goodwill balance, we were required to estimate the fair value of the reporting unit’s identifiable intangible assets, including trade names and accreditation, licensing, and Title IV Program participation rights. Upon finalizing our test of the Health Education reporting unit’s goodwill balance during the third quarter of 2006, we recorded an impairment charge of approximately $0.8 million, pretax, attributable to the identifiable intangible assets of our Health Education reporting unit, as the fair value of the identifiable intangible assets were less than the carrying value of the identifiable intangible assets as of May 31, 2006.

Gibbs Reporting Unit

Our Gibbs reporting unit did not achieve its projected student enrollment, operating result, and cash flow targets during the four months ended April 30, 2006, which, we believe, indicated that the reporting unit will be unable to achieve full-year 2006 projected operating results and cash flows. As previously disclosed, there are several key factors that have contributed to the continuing weakness in our Gibbs reporting unit’s operating results during 2006, including (1) significant actual and expected future declines in student population relative to student population in prior periods, (2) negative press coverage in 2004 and 2005 regarding us and certain of our Gibbs reporting unit campuses, and (3) the overall strengthening of economic conditions in the markets that our Gibbs reporting unit campuses serve.

In consideration of our Gibbs reporting unit’s weak 2006 operating results relative to projections and the small margin between the reporting unit’s carrying value and estimated fair value as of January 1, 2006, we retested the reporting unit’s goodwill balance for impairment as of April 1, 2006. The results of the test as of April 1, 2006, which was finalized prior to the filing of our Quarterly Report on Form 10-Q for the three months ended March 31, 2006, indicated that the value of goodwill attributable to our Gibbs reporting unit of approximately $10.4 million had been impaired, as our estimate of the reporting unit’s fair value was less than the carrying value of the reporting unit. Thus, we recorded a goodwill impairment charge during the first quarter of 2006 of $10.4 million, pretax, or $0.06 per diluted share, during the first quarter of 2006 to reduce the carrying value of our Gibbs reporting unit goodwill to zero as of March 31, 2006. We believe that this charge is deductible for income tax reporting purposes.

3. FINANCIAL INSTRUMENTS

Cash and Cash Equivalents and Investments

Cash equivalents include short-term investments with a term to maturity of less than 90 days. The U.S. Department of Education (“ED”) requires that funds from various federal financial aid programs authorized by Title IV of the Higher Education Act of 1965, as amended (“HEA”), which we refer to as “Title IV Programs,” collected in advance of student billings be kept in a separate cash account until the students are billed for the portion of their program related to those Title IV Program funds collected. The ED further requires that Title IV Program funds be disbursed to students within three business days of receipt. We do not recognize restricted cash balances on our consolidated balance sheets until all restrictions have lapsed. As of September 30, 2006, and December 31, 2005, the amount of restricted cash balances kept in separate cash accounts was not significant. Restrictions on cash balances have not affected our ability to fund daily operations.

Investments, which primarily consist of municipal auction rate securities and asset-backed securities, are classified as “available-for-sale” in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities ,

and are recorded at fair value. Any unrealized gains or temporary unrealized losses, net of income taxes, are reported as a component of accumulated other comprehensive income on our consolidated balance sheets. Realized gains and losses are computed on the basis of specific identification and are included in miscellaneous other income (expense) in our consolidated statements of income. Cash and cash equivalents and investments consist of the following as of September 30, 2006, and December 31, 2005 (in thousands):

	September 30, 2006
			Gross Unrealized
	Cost		Gain		(Loss)			Fair Value
Cash and cash equivalents:
Cash	$	25,502	$	—	$	—		$	25,502
Money market funds	70,956		—		—			70,956
Commercial paper	19,699		—		—			19,699
Total cash and cash equivalents	116,157		—		—			116,157
Investments (available-for-sale):
Auction rate municipal bonds (1)	315,902		7		—			315,909
Asset-backed securities	8,869		5		(1		)	8,873
Mortgage-backed securities	3,551		1		(6		)	3,546
Total investments	328,322		13		(7		)	328,328
Total cash and cash equivalents and investments	$	444,479	$	13	$	(7	)	$	444,485

	December 31, 2005
			Gross Unrealized
	Cost		Gain		(Loss)			Fair Value
Cash and cash equivalents:
Cash	$	64,367	$	—	$	—		$	64,367
Money market funds	44,513		—		—			44,513
Commercial paper	23,427		1		—			23,428
Total cash and cash equivalents	132,307		1		—			132,308
Investments (available-for-sale):
Auction rate municipal bonds (1)	239,003		—		(3		)	239,000
Asset-backed securities	30,444		85		(41		)	30,488
Mortgage-backed securities	2,619		—		(14		)	2,605
Total investments	272,066		85		(58		)	272,093
Total cash and cash equivalents and investments	$	404,373	$	86	$	(58	)	$	404,401

(1) Investments in auction rate municipal bonds generally have stated terms to maturity of greater than one year. However, we classify investments in auction rate municipal bonds as current on our consolidated balance sheets because we are generally able to divest our holdings at auction 30 days from our purchase date.

Student Receivables Valuation Allowance

Changes in our student receivables allowance during the three months and nine months ended September 30, 2006 and 2005, were as follows (in thousands):

	Balance, Beginning of Period		Charges to Expense		Amounts Written-off			Balance, End of Period
For the three months ended September 30, 2006	$	38,716	$	18,196	$	(19,010	)	$	37,902
For the three months ended September 30, 2005	$	50,726	$	22,685	$	(22,785	)	$	50,626
For the nine months ended September 30, 2006	$	44,839	$	50,460	$	(57,397	)	$	37,902
For the nine months ended September 30, 2005	$	61,136	$	61,719	$	(72,229	)	$	50,626

Credit Agreements

As of September 30, 2006, we have outstanding under our $200.0 million U.S. Credit Agreement revolving loans totaling $11.0 million and letters of credit totaling $16.1 million. Credit availability under our U.S. Credit Agreement as of September 30, 2006, is $172.9 million.

On February 18, 2003, our Canadian subsidiaries entered into an unsecured credit agreement (“Canadian Credit Agreement”) with a syndicate of financial institutions, represented by, among others, a Canadian administrative agent. On September 29, 2006, our Canadian subsidiaries executed an amendment to the Canadian Credit Agreement. Under the original Canadian Credit Agreement, our Canadian subsidiaries were able to borrow up to the U.S. dollar equivalent of 10.0 million in Canadian dollars under a revolving credit facility. Under the Canadian Credit Agreement, as amended, our Canadian subsidiaries may borrow up to the U.S. dollar equivalent of 2.5 million in Canadian dollars. The amendment to our Canadian Credit Agreement did not change any of the other substantive terms of the agreement. For a detailed discussion of the terms of the Canadian Credit Agreement, refer to Note 12. “Debt and Credit Agreements,” to the consolidated financial statements as of and for the year ended December 31, 2005, included in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2005.

As of September 30, 2006, we have no revolving loans outstanding under our $2.5 million (USD) Canadian Credit Agreement, as amended.

4. RECOURSE LOAN AGREEMENTS

We have entered into agreements with Sallie Mae and Stillwater National Bank and Trust Company (“Stillwater”) to provide private recourse loans to qualifying students.

Sallie Mae. Our original recourse loan agreement with Sallie Mae was effective for loans originated from July 1, 2002, to February 28, 2006. We have entered into a new recourse loan agreement with Sallie Mae, effective March 1, 2006, which has an expiration date of June 30, 2009. Under both our original and new recourse loan agreements with Sallie Mae, we are required to deposit 20% of all recourse loans funded under the agreement into a Sallie Mae reserve account.

Under our original recourse loan agreement, loans funded were intended for students whose credit scores were less than the credit score required under Sallie Mae’s non-recourse loan program for our students. A student was generally eligible for a Sallie Mae recourse loan under the original agreement if (1) the student demonstrated a specified minimum credit score, (2) any bankruptcy proceeding involving the student had been discharged for at least 18 months, and (3) the student was not in default or delinquent with respect to any prior student loan. Under the terms of the original agreement, we are obligated to purchase, with funds that have been deposited into the reserve account as discussed above,

recourse loans funded under the original agreement (a) that have been delinquent for 150 days or (b) upon the bankruptcy, death, or total and permanent disability of the borrower. The amount of our repurchase obligation under the original agreement may not exceed 20% of loans funded under the original agreement, which also represents the amount that is withheld by Sallie Mae and deposited into the reserve account. Any balance remaining in the reserve account after all recourse loans have been either repaid in full or repurchased by us will be paid to us. Our new recourse loan agreement with Sallie Mae has substantially similar terms, with the exception that students and, if applicable, their qualified co-borrowers, must demonstrate a slightly higher specified minimum credit score than the credit score required under the original agreement to be eligible for a recourse loan.

We record amounts withheld by Sallie Mae in the reserve account as a deposit in long-term assets on our consolidated balance sheet. Amounts on deposit may ultimately be utilized to purchase loans in default, in which case recoverability of such amounts would be in question. Therefore, we establish a 100% reserve against amounts on deposit through the use of a deposit contra-account. We believe that costs associated with our Sallie Mae recourse loan programs are directly attributable to the educational activity of our schools and the support of our students. Therefore, such costs are classified as educational services and facilities expense in our consolidated statements of income. Costs are recognized on a straight-line basis over the course of the instructional term for which the underlying loan was granted as the related revenues are earned. Upon purchasing Sallie Mae loans in default, we transfer an amount equal to the total balance of the loans purchased from the deposit account to a long-term recourse loan receivable account and transfer an offsetting amount from the deposit contra-account to a long-term recourse loan receivable contra-account, such that the net book value of the purchased loans is generally zero.

In October 2006, we negotiated an amendment to our loan agreement that reduced the minimum credit score required for our students to qualify for a non-recourse loan under Sallie Mae’s non-recourse loan program. The amendment also reduced loan fees and interest rates charged to our students for both non-recourse and recourse loans funded by Sallie Mae. Under the amendment, we will pay Sallie Mae a fee equal to 25% of all recourse loans funded under the agreement after February 1, 2007. Pursuant to the amendment, we will no longer be required to deposit a portion of loans funded under the agreement into a Sallie Mae reserve account. In addition, we will no longer be required to repurchase any loans funded under the agreement after February 1, 2007. The amendment is subject to further negotiation between Sallie Mae and us.

Stillwater. The private student loans subject to the Stillwater purchase agreement are made by Stillwater, and serviced by Sallie Mae, to students at our schools if (1) the student demonstrates a specified minimum credit score, which is less than the minimum credit score required pursuant to our recourse loan agreement with Sallie Mae, (2) any bankruptcy proceeding involving the student has been discharged for at least 18 months, and (3) the student is not in default or delinquent with respect to any prior student loan. Under the terms of the purchase agreement, Stillwater retains 50% of the loan amounts disbursed and deposits this amount into a reserve account. Under the terms of the purchase agreement, Stillwater has an option, but not an obligation, to sell to us 100% of these private student loans on a monthly basis. We are required to purchase all eligible private student loans offered for sale by Stillwater for a price equal to the current principal balance plus accrued interest. A private student loan funded by Stillwater becomes eligible for sale (a) 180 days after the loan is disbursed or (b) upon us notifying Stillwater that the applicable student has graduated or dropped below half-time enrollment at one of our schools. To date, Stillwater has sold to us all private student loans that were eligible for sale. Upon purchase of private student loans from Stillwater, we receive all funds that were placed into the reserve account with respect to the specific loans purchased.

Amounts held in reserve with Stillwater will be used to finance 50% of the principal balance of any loans that we are required to purchase pursuant to the agreement. We record such amounts as a deposit in long-term assets on our consolidated balance sheet. Based on our collection experience, we establish a 100% reserve against Stillwater funds on deposit. Due to the high level of uncollectible amounts expected under the Stillwater agreement, the associated costs are classified as a reduction of the related tuition revenue in our consolidated statements of income. Costs are recognized on a straight-line basis over the course of the instructional term for which the underlying loan was granted as the related revenues are earned. Upon purchasing Stillwater loans in default, we record the total balance of the loans as a long-term recourse loan receivable and transfer the reserve for recourse loans withheld by the lender, totaling approximately 50% of the related principal balance, from the deposit contra-account to the long-term loan receivable contra-account, such that the net book value of the purchased loans is approximately 50% of the related principal balance. Based on our collections experience, we believe that the 50% reserve is reasonable to provide for Stillwater loans that have been purchased or that may be purchased and that may be ultimately uncollectible. We evaluate the collectibility of our Stillwater loan receivables on a periodic basis and may adjust our reserve estimates in future periods based on collections experience.

The following table reflects selected information with respect to each of our recourse loan agreements, including cumulative loan disbursements and purchase activity under the agreements from inception through September 30, 2006 (in millions, except for cumulative loan limits per student):

	Lender	Agreement Effective Date	Disbursed Loan Limit		Cumulative Loan Limit Per Student(5)	Loans Disbursed		Loans Purchased	Loans We May be Required to Purchase (6)
Sallie Mae		July 2002 to June 2009(1)	$ 180.0	(3)	$ 12,000 to $28,000	$ 111.6	(3)	$ 22.3	$ —
Stillwater		Commenced December 2003(2)	$ 20.0	(4)	$ 7,500 to $13,500	$ 24.2		$ 26.3	$ 3.2

(1) Our original recourse loan agreement with Sallie Mae was effective for loans originated from July 1, 2002, to February 28, 2006. We entered into a new recourse loan agreement effective March 1, 2006, that expires on June 30, 2009.

(2) The Stillwater agreement commenced in December 2003 and has no stated termination date. We or Stillwater may terminate the agreement 90 days after notifying the other party of our or its intention to do so.

(3) Our original recourse loan agreement with Sallie Mae had no stated limit for the amount of loans to be disbursed under the agreement. Loans funded prior to March 1, 2006, were subject to this previous agreement. Under our new recourse loan agreement with Sallie Mae, the total amount of loans that may be funded may not exceed $180.0 million through June 30, 2008. The new agreement provides for funding limits of $20.0 million for the period of March 1, 2006, to June 30, 2006, $80.0 million for the period of July 1, 2006, to June 30, 2007, and $80.0 million for the period of July 1, 2007, to June 30, 2008. There is currently no stated loan funding limit for the period of July 1, 2008, to June 30, 2009. Instead, any funding limit for this period must be negotiated by both parties prior to July 1, 2008. Of the total $111.6 million of loans disbursed from inception of our original recourse loan agreement through September 30, 2006, approximately $22.1 million has been disbursed under the new agreement.

(4) Under the Stillwater agreement, the total amount of loans held by Stillwater at any time cannot exceed $20.0 million.

(5) Loan limit per student generally represents the maximum loan amount available to an individual student during his or her complete academic program at one of our schools. Loan limits vary based on the length and cost of the student’s academic program.

(6) Loans we may be required to purchase represents the maximum principal amount of loans under each agreement that we may be required to purchase in the future based on cumulative loans disbursed and purchased through September 30, 2006.

Costs associated with our recourse loan agreements for the three months and nine months ended September 30, 2006 and 2005, are set forth below (in thousands). As discussed above, costs incurred in connection with our Sallie Mae agreement are classified as a component of educational services and facilities expense in our consolidated statements of income, and costs incurred in connection with our Stillwater agreement are classified as a reduction of tuition and registration fee revenue in our consolidated statements of income.

	For the Three Months ended September 30,				For the Nine Months ended September 30,
	2006		2005		2006		2005
Sallie Mae	$	2,042	$	1,737	$	5,472	$	6,969
Stillwater	$	468	$	1,240	$	2,532	$	4,627

Outstanding recourse loan deposit, contra-deposit, loan receivable, and contra-loan receivable balances as of September 30, 2006, and December 31, 2005, are set forth below (in thousands).

	Deposits		Contra-Deposits			Net Book Value
Sallie Mae
As of September 30, 2006	$	—		$	—	$	—
As of December 31, 2005	$	6,893		6,702		$	191
Stillwater
As of September 30, 2006	$	1,594		$	1,470	$	124
As of December 31, 2005	$	3,072		2,721		$	351

	Loan Receivable		Allowance For Uncollectible Loans		Net Book Value
Sallie Mae
As of September 30, 2006	$	22,320	$	22,320	$	—
As of December 31, 2005	$	9,583	9,583		$	—
Stillwater
As of September 30, 2006	$	29,072	$	19,783	$	9,289
As of December 31, 2005	$	17,747	11,181		$	6,566

5. COMMITMENTS AND CONTINGENCIES

Litigation

We are, or were, a party to the following pending legal proceedings that are outside the scope of ordinary routine litigation incidental to our business.

Employment Litigation

Vander Vennet, et al. v. American InterContinental University, Inc., et al. As previously disclosed, on August 24, 2005, former admissions advisors of American InterContinental University (“AIU”) Online filed a lawsuit in the United States District Court for the Northern District of Illinois alleging that we, AIU Online, and the President of our University division, violated the Fair Labor Standards Act (“FLSA”), the Illinois Minimum Wage Law, and the Illinois Wage Payment and Collection Act by failing to pay the plaintiffs for all of the overtime hours they allegedly worked. Plaintiffs seek unspecified lost wages, liquidated damages, attorneys’ fees, and injunctive relief. The plaintiffs are also seeking certification as a class under the FLSA. On December 22, 2005, and April 7, 2006, the Court granted plaintiffs’ motions to send FLSA Notice, and plaintiffs’ counsel has distributed such notice to certain current and former admissions advisors. On April 7, 2006, the Court granted the plaintiffs’ motion to expand the class to include temporary admissions advisors. The deadline for potential plaintiffs to opt-in to this lawsuit was June 23, 2006. Less than 10 percent of the persons to whom notice of the suit was sent, including current and former admissions advisors, have joined the litigation. Defendants deny all of the material allegations in the complaint and are vigorously defending the claims and opposing class certification.

Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of this matter. An unfavorable outcome could have a material adverse impact on our business, results of operations, cash flows, and financial position.

Securities Litigation

In re Career Education Corporation Securities Litigation. As previously disclosed, In re Career Education Corporation Securities Litigation represents the consolidation into one suit of six purported class action lawsuits filed between December 9, 2003, and February 5, 2004, in the United States District Court for the Northern District of Illinois by and on behalf of certain purchasers of our common stock against us and two of our executive officers, John M. Larson and Patrick K. Pesch. The suits purportedly were brought on behalf of all persons who acquired shares of our common stock during specified class periods. The complaints allege that in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, the defendants made certain material misrepresentations and failed to disclose certain material facts about the condition of our business and prospects during the putative class periods, causing the respective plaintiffs to purchase shares of our common stock at artificially inflated prices. The plaintiffs further claim that John M. Larson and Patrick K. Pesch are liable as control persons under Section 20(a) of the Exchange Act. The plaintiffs ask for unspecified amounts in damages, interest, and costs, as well as ancillary relief. Five of these lawsuits were found to be related to the first filed lawsuit, captioned Taubenfeld v. Career Education Corporation et al. (No. 03 CV 8884), and were reassigned to the same judge. On March 19, 2004, the Court ordered these six cases to be consolidated and appointed Thomas Schroeder as lead plaintiff. On April 6, 2004, the Court appointed the firm of Labaton Sucharow & Rudoff LLP, which represents Mr. Schroeder, as lead counsel. Subsequently, the Court issued an order changing the caption of this lawsuit to In re Career Education Corporation Securities Litigation.

On June 17, 2004, plaintiffs filed a consolidated amended complaint. On February 11, 2005, defendants’ motion to dismiss was granted, without prejudice. On April 1, 2005, plaintiffs filed a second amended complaint. On March 28, 2006, defendants’ motion to dismiss the second amended complaint was granted, without prejudice. On May 1, 2006, plaintiffs filed a third amended complaint. Defendants filed their motion to dismiss the third amended complaint on August 2, 2006. Plaintiffs filed their response to defendants’ motion to dismiss the third amended complaint on October 18, 2006. Defendants’ reply brief in support of the motion to dismiss is due on November 22, 2006.

Derivative Actions. As previously disclosed, on January 5, 2004, a derivative action captioned McSparran v. John M. Larson, et al. (“McSparran”), was filed in the United States District Court for the

Northern District of Illinois on behalf of CEC, against John M. Larson, Patrick K. Pesch, Wallace O. Laub, Keith K. Ogata, Dennis H. Chookaszian, Robert E. Dowdell, Thomas B. Lally, Nick Fluge, Jacob P. Gruver, and Todd H. Steele, and CEC as a nominal defendant. Each individual defendant in this action is or was one of our officers or directors. The lawsuit alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and breach of fiduciary duties for insider stock sales and misappropriation of information, generally based on allegations of conduct similar to that complained of in the In re Career Education Corporation Securities Litigation matter described above. The plaintiffs ask for unspecified amounts in damages, interest, and costs, as well as ancillary relief.

On October 1, 2004, the court ordered the McSparran lawsuit to be consolidated with the derivative action captioned Ulrich v. John M. Larson, et al., which was filed in the United States District Court for the Northern District of Illinois on July 20, 2004, and names the same defendants and asserts the same claims as alleged in the McSparran lawsuit. On November 5, 2004, plaintiffs filed an amended consolidated complaint. On March 24, 2005, the Court stayed discovery pending resolution of defendants’ motion to dismiss. On January 27, 2006, the Court issued an order denying defendants’ motion to dismiss. On May 12, 2006, the Court granted defendants’ motion for reconsideration of the order denying their motion to dismiss, and dismissed the complaint. On June 8, 2006, the Court granted the plaintiffs’ leave to file an amended complaint. Plaintiffs filed their amended complaint the same day. Defendants filed a motion to dismiss the amended complaint on August 25, 2006. Plaintiffs filed their response to defendants’ motion to dismiss on October 13, 2006. Defendants’ reply brief in support of the motion to dismiss is due on November 10, 2006.

As previously disclosed, on July 2, 2004, a derivative action captioned Xiao-Qiong Huang v. John M. Larson, et al., was filed in the Circuit Court of Cook County, Illinois, Chancery Division, on behalf of CEC, against John M. Larson, Patrick K. Pesch, Wallace O. Laub, Keith K. Ogata, Dennis H. Chookaszian, Robert E. Dowdell, Thomas B. Lally, Nick Fluge, and Jacob P. Gruver, and CEC as a nominal defendant. Each of the individual defendants is or was one of our officers and/or directors. The lawsuit alleges breach of fiduciary duty and misappropriation of confidential information for personal profit by the individual defendants and seeks contribution and indemnification on behalf of CEC. On February 17, 2005, plaintiffs filed an amended derivative complaint in this lawsuit, which the defendants moved to dismiss on April 4, 2005. On September 12, 2005, the Court denied defendants’ motion to dismiss, but ordered a stay of the action until further order of the Court in deference to the prior-filed McSparran lawsuit.

As previously disclosed, on November 10, 2004, a derivative suit captioned Nicholas v. Dowdell, et al., was filed in the Chancery Court of New Castle County, Delaware, on behalf of CEC against John M. Larson, Patrick K. Pesch, Wallace O. Laub, Keith K. Ogata, Dennis H. Chookaszian, Robert E. Dowdell, Thomas B. Lally, Nick Fluge, and Jacob P. Gruver, and CEC as a nominal defendant. The complaint alleges breach of fiduciary duty for insider stock sales and misappropriation of confidential information, breach of fiduciary duty of good faith, and unjust enrichment and seeks a constructive trust, disgorgement of profits, damages, costs, and attorneys’ fees. On December 20, 2004, defendants filed a motion to dismiss. On March 17, 2005, the Court granted the parties’ joint motion to stay the action pending final resolution of the McSparran lawsuit described above.

As previously disclosed, on June 3, 2005, a derivative suit captioned Romero v. Dowdell, et al., was filed in the Chancery Court of New Castle County, Delaware, on behalf of CEC against John M. Larson, Patrick K. Pesch, Wallace O. Laub, Keith K. Ogata, Dennis H. Chookaszian, Robert E. Dowdell, Thomas B. Lally, and CEC as a nominal defendant. Each of the individual defendants is or was one of our officers or directors. The complaint alleged breach of fiduciary duty for insider stock sales, misappropriation of information for personal profit and breach of fiduciary duty of good faith, generally based on allegations of conduct similar to that complained of in the lawsuits captioned In re Career Education Corporation Securities Litigation, McSparran v. John M. Larson, et al., Xiao-Qiong Huang v. John M. Larson, et al., and Nicholas v. Dowdell, et al. On July 17, 2006, the Court granted plaintiffs’ motion

to consolidate the Romero action with Neel v. Dowdell, et al., which was filed on May 15, 2006, in the Chancery Court of New Castle County, Delaware, on behalf of CEC against Robert E. Dowdell, Thomas B. Lally, John M. Larson, Wallace O. Laub, Keith K. Ogata and Patrick K. Pesch, and CEC as a nominal defendant. Each of the individual defendants in the Neel action is or was one of our officers or directors. The Neel lawsuit alleged breach of fiduciary duties and unjust enrichment based on allegations of conduct similar to that complained of in the Romero action. On July 18, 2006, plaintiffs filed a consolidated derivative complaint under the caption In re Career Education Corporation Securities Litigation Derivative Litigation. The consolidated derivative complaint alleges claims that are generally similar to those alleged in the original Romero complaint, and seeks imposition of a constructive trust and disgorgement of profits, unspecified damages, and equitable relief and reimbursement of the plaintiffs’ costs and disbursement of the action. Defendants filed a motion to dismiss the consolidated derivative complaint on August 1, 2006, and a brief in support of that motion on September 25, 2006. Plaintiffs’ response to the motion to dismiss is due November 20, 2006, and defendants’ reply brief in support of the motion is due December 18, 2006.

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.

Special Committee Investigation

As previously disclosed, our Board of Directors formed a special committee to conduct an independent investigation of allegations of securities laws violations against us. These allegations were asserted in the In re Career Education Corporation Securities Litigation matter described above (the “Class Action”). The Special Committee retained the law firm of McDermott, Will & Emery LLP, which in turn retained the forensic accounting firm Navigant Consulting, Inc., to assist in the investigation. Among other things, the investigation reviewed the allegations related to our accounting practices and reported statistics relating to starts, student population, and placement.

As previously disclosed, the Special Committee did not find support for the claims that CEC or its senior management engaged in the securities laws violations alleged in the Class Action. The Special Committee did find wrongful conduct by individual employees of CEC but specifically found that the wrongful activity was not directed or orchestrated by our senior management.

The Special Committee conducted a further investigation of assertions related to the claims of securities laws violations made for the first time, and not previously examined, in the second and third amended complaints filed in the Class Action. The Special Committee completed its investigation of these new assertions and concluded that it did not find support for them. In so doing, the Special Committee reaffirmed its prior conclusion that it did not find support for the claims that CEC or its senior management engaged in the securities laws violations alleged in the Class Action.

We have undertaken a number of steps to improve our internal controls in the areas of finance and compliance, including the further development and expansion of our compliance, legal, and internal audit infrastructure processes. The Special Committee recommended additional improvements relating to our financial, compliance, and other controls. Our Board of Directors and senior management are continuing to evaluate the results and recommendations of the Special Committee. Our Board of Directors has requested that the Special Committee and its counsel remain in place and available, as needed.

Action against Former Owners of Western School of Health and Business Careers

As previously disclosed, on March 12, 2004, we and WAI, Inc. (“WAI”), our wholly-owned subsidiary, filed a lawsuit in the United States District Court for the Western District of Pennsylvania, Pittsburgh Division, against the former owners of Western School of Health and Business Careers (“Western”), located in Pittsburgh, Pennsylvania. In the lawsuit, we allege that the former owners of Western made

material misrepresentations of fact and breached certain representations and warranties regarding the accreditation and approval of several programs of study offered by Western and seek full indemnification for all losses, costs, and damages, including attorneys’ fees, resulting from the alleged misrepresentation and breaches. On July 12, 2004, we filed a similar complaint in the Court of Common Pleas of Allegheny County, Pennsylvania, and subsequently voluntarily dismissed the federal lawsuit. The defendants filed an Answer and New Matter in response to the state court complaint on December 3, 2004. On January 24, 2005, we filed a response to the New Matter, which is a series of factual assertions akin to affirmative defenses. On July 28, 2006, the Court granted our motion to amend the complaint to assert a claim for breach of contract against Western’s former accounting firm. This motion is currently pending before the Court. Discovery is in progress.

The misrepresentations we allege in this matter came to light during a routine change of ownership review undertaken by the Accrediting Commission of Career Schools and Colleges of Technology (“ACCSCT”), subsequent to our acquisition of Western. On March 4, 2004, the ACCSCT notified us of discrepancies in accreditation and approval documents related to several academic programs. Immediately thereafter, Western suspended marketing, new enrollments, and disbursement of funds issued under Title IV Programs for all affected academic programs. Western promptly applied for approval of all academic programs referenced in the lawsuit, and, in June 2004, both the ACCSCT and the ED issued approvals for the diploma programs. Western then resumed marketing, enrolling new students, and disbursement of Title IV Program aid to students in the diploma programs. On July 12, 2004, the ACCSCT approved the degree programs effective upon a demonstration that several stipulations had been addressed. Western addressed these stipulations to the satisfaction of the ACCSCT, and marketing, enrollment of new students, and disbursing of Title IV Program funds to students in the degree programs has since resumed.

We are working in close cooperation with ED officials to resolve any remaining issues in a manner that will best serve the interest of our students at Western. As a result of this matter, we may be required to reimburse the ED for Title IV Program funds improperly disbursed in relation to the affected programs. The pending lawsuit seeks to recover any such funds from the former owners of Western and its former accounting firm.

Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of this matter.

Student Litigation

Laronda Sanders, et al. v. Ultrasound Technical Services, Inc. et al. On March 15, 2006, 12 former students of the Landover, Maryland campus of Sanford-Brown Institute (“SBI”), one of our schools, filed a class action complaint, on behalf of themselves and all others similarly situated, against us and Ultrasound Technical Services, Inc. (“UTS”), one of our subsidiaries, in the Circuit Court for Prince George’s County, Maryland. The complaint alleges that the defendants made fraudulent misrepresentations and violated the Maryland consumer fraud act by misrepresenting or failing to disclose, among other things, details regarding instructors’ experience or preparedness, availability of clinical externship assignments, and estimates for the dates upon which the plaintiffs would receive their certificates and be able to enter the work force. Plaintiffs further allege that defendants failed to maintain accurate attendance records, and that the defendants negligently or deliberately dropped students without justification. The complaint also alleges that defendants breached the enrollment contract with plaintiffs by failing to provide the promised instruction, training, externships, and placement services. Plaintiffs seek actual damages, punitive damages, and costs. Defendants removed the action to the United States District Court for the District of Maryland, Greenbelt Division, and filed a motion to dismiss significant portions of the complaint. Plaintiff moved to remand the action to state court. On September 18, 2006, the Court denied plaintiffs’ motion to remand. The Court also granted defendants’ motion to dismiss the common law and statutory fraud counts of the complaint, with leave to amend. On October 17, 2006, plaintiffs filed an amended complaint.

McCarten, et al. v. Allentown Business School, Ltd. t/a Lehigh Valley College. As previously disclosed, on September 28, 2005, a complaint was filed against Allentown Business School, Ltd. (“Allentown”), one of our subsidiaries, in the Court of Common Pleas of Lehigh County, Pennsylvania. The complaint purports to be brought on behalf of all former students of Allentown, now known as Lehigh Valley College, who received allegedly “high interest private loans” to fund their tuition requirements. The complaint alleges that Allentown violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law and engaged in intentional misrepresentation, negligent misrepresentation, and negligence by allegedly rushing students through a loan application process, through which students applied for and accepted “private, non-federal, non-state loans” at times when such students were allegedly eligible for low interest federal or state guaranteed education loans. The plaintiffs, on behalf of the putative class, seek compensatory and punitive damages in an unspecified amount. On December 12, 2005, the plaintiffs filed an amended complaint asserting the same claims as set forth in the initial compliant. On December 14, 2005, Allentown moved to compel arbitration. Oral argument on the motion to compel arbitration was heard on August 16, 2006, and the parties are awaiting a decision from the Court.

Bradley, et al. v. Sanford Brown-College, Inc., et al. As previously disclosed, on August 25, 2005, eight former students of the radiography program at our Sanford-Brown College (“SBC”) school in Kansas City, Missouri filed a complaint in the Circuit Court of Clay County, Missouri against us, SBC, one of our subsidiaries, and Whitman Education Group, Inc. The complaint alleges that the defendants made fraudulent misrepresentations and violated the Missouri Merchandising Practices Act by misrepresenting or failing to disclose, among other things, details regarding instructors’ experience or preparedness, estimates for starting salaries of program graduates, that the curriculum would prepare the students for the state board exams for radiography, that credit hours earned at SBC were transferable, and that SBC reported false expense estimates and false class credits in applications for federal and state grant and loan programs, and that admissions representatives had sales quotas for enrolling new students. The complaint also alleges that the defendants breached enrollment contracts with the plaintiffs by failing to provide the promised instruction, training, and placement services. Plaintiffs seek actual damages, punitive damages, and attorneys’ fees and costs, and other relief. On October 5, 2005, defendants removed the case to the United States District Court for the Western District of Missouri, and on October 13, 2005, filed a motion to dismiss. Pursuant to the Court’s order, plaintiffs filed an amended complaint on December 16, 2005, which the defendants have answered. On July 13, 2006, plaintiffs filed a second amended complaint, adding Marlin Acquisition Corp., one of our subsidiaries, and Colorado Technical University, Corp., one of our subsidiaries, as defendants. Motions for summary judgment have been filed on behalf of us, Colorado Technical University, Inc., and Marlin Acquisition Corp. Discovery is in progress.

Benoit, et al. v. Career Education Corporation, et al. As previously disclosed, on June 24, 2005, a purported class action was filed in Hillsborough County, Florida against us and UTS. The action is purportedly brought on behalf of all persons who have been enrolled in the Medical Billing and Coding Program (“MBC Program”) at our SBI—Tampa campus in the last four years. The complaint alleges that the defendants breached enrollment contracts with the plaintiffs and other class members and violated the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) by, among other things, failing to properly train students, offer and require sufficient hours of course work, provide properly trained instructors, provide appropriate curriculum consistent with the represented degree, award the represented degree, provide adequate career placement services, and by misrepresenting that they would provide such services. The complaint also alleges that the defendants “padded” the MBC Program curriculum to charge greater tuition, purportedly in violation of the FDUTPA. Plaintiffs seek actual damages, attorneys’ fees and costs, and other relief. On October 11, 2005, the Court ordered that the lawsuit be stayed pending completion of arbitration pursuant to the arbitration agreement contained within the plaintiffs’ enrollment agreements. The plaintiffs have not yet filed a demand to initiate the arbitration proceedings.

Thurston, et al. v. Brooks College, Ltd., et al. As previously disclosed, on March 21, 2005, a purported class action complaint was filed in the Superior Court for the State of California, County of Los Angeles, against Brooks College, one of our schools. The complaint was purportedly filed on behalf of all current and former attendees of Brooks College. The complaint alleges that Brooks College violated the California Business and Professions Code and Consumer Legal Remedies Act by allegedly misleading potential students regarding Brooks College’s admission criteria, transferability of credits, and retention and placement statistics, and by engaging in false and misleading advertising. Plaintiffs seek injunctive relief, restitution, unspecified punitive and exemplary damages, attorneys’ fees, interest, costs, and other relief. On June 24, 2005, the Court ruled that this action was related to the case captioned Outten, et al. vs. Career Education Corporation, et al., which is described below. Brooks College filed an answer to the complaint on May 31, 2006. The parties are engaged in pre-trial discovery. The Court has ordered plaintiffs to file a motion for class certification on December 18, 2006. No trial date has been set for this matter.

Nilsen v. Career Education Corporation, et al. As previously disclosed, on February 4, 2005, three former students of Brooks Institute of Photography (“BIP”), one of our schools, filed a purported class action complaint in the Superior Court of the State of California, County of Santa Barbara, against us and BIP. The action was purportedly brought on behalf of all students who attended BIP from February 4, 2001, to the present.

Plaintiffs’ third amended complaint states causes of action for: (1) violations of the California Education Code; (2) violations of the Consumer Legal Remedies Act; (3) fraud; (4) false advertising in violation of California Business and Professions Code §§17500, et seq.; and (5) unfair competition in violation of California Business and Professions Code §§17200, et seq. The plaintiffs primarily allege that BIP violated the California Education Code, the California Consumer Legal Remedies Act, and California’s Unfair Competition Law by allegedly misleading potential students regarding BIP’s placement rates and by engaging in false and misleading advertising. The plaintiffs seek injunctive relief, disgorgement of profits, punitive damages, interest, and attorneys’ fees and costs. On October 11, 2006, the Court overruled the defendants’ demurrers and motion to strike a portion of the third amended complaint.

The Court has ordered plaintiffs to file their motion for class certification on February 14, 2007, and scheduled a hearing on February 27, 2007, at which time the Court will set a briefing schedule for the opposition and reply to plaintiffs’ motion as well as a hearing date. We have initiated discovery of the class representatives.

Viles v. Ultrasound Technical Services, Inc., et al. As previously disclosed, on October 13, 2004, a purported class action was filed in Broward County, Florida against us and UTS. The action was purportedly brought on behalf of all persons who attended UTS’ Diagnostic Medical Sonography Program or Cardiovascular Technology Program in the State of Florida at any time during the period of October 12, 2000, to the present. The complaint alleges that UTS violated the FDUTPA by misrepresenting placement rates, potential salaries, and accreditation, falsifying clinical training records, failing to properly supervise students, failing to provide competent faculty and proper equipment, and admitting more students than UTS had space to properly educate. The plaintiff seeks damages, attorneys’ fees, costs, and other relief. On April 7, 2005, defendants filed motions to compel arbitration and transfer venue to Miami-Dade County, Florida. On April 4, 2006, plaintiffs filed a response in which plaintiffs agreed to the motion to transfer venue, but indicated an intention to contest arbitration. It is expected that the matter will be transferred to Miami-Dade County, where the court will address potential arbitration.

Outten, et al. v. Career Education Corporation, et al. As previously disclosed, on July 19, 2004, an amended complaint was filed in the Superior Court of the State of California, County of Los Angeles, against us and AIU, one of our schools. We filed an answer to the amended complaint, denying all material allegations therein, and have raised various affirmative defenses. On October 6, 2004, plaintiffs filed a second amended complaint, which added individuals who are current and former employees of AIU. The

second amended complaint alleges that AIU violated the California Unfair Competition Law (California Business and Professions Code), the California Consumer Legal Remedies Act, and the California Education Code, and engaged in common law consumer fraud by allegedly misleading potential students regarding AIU’s placement, retention, and matriculation rates, and engaging in financial aid and admission improprieties. The lawsuit appears to have been brought on behalf of all current and prior attendees of AIU residing in California. The plaintiffs, on behalf of the putative class, seek injunctive relief, restitution, unspecified punitive and exemplary damages, attorneys’ fees and costs, interest, and other relief. On March 10, 2005, defendants filed an answer to the second amended complaint as well as a cross-complaint. On June 24, 2005, the Court ruled that this action was related to another action captioned Thurston, et al. v. Brooks College, Ltd., et al., which is described above. The parties are engaged in pre-trial and class-related discovery. Defendants’ opposition to plaintiffs’ class certification motion is due December 18, 2006. No trial date has been set for this matter.

Other Litigation

In addition to the legal proceedings and other matters described above, we are also subject to a variety of other claims, suits, and investigations that arise from time to time in the ordinary conduct of our business, including, but not limited to, claims involving students or graduates 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, the litigation and other claims noted above 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 reasonably estimable.

Federal, State, and Accrediting Body Regulatory Actions

Our schools are subject to extensive regulation by federal and state governmental agencies and accrediting bodies. See Note 11 “Regulation of the U.S. Post-secondary Education Industry” of these notes to our unaudited condensed consolidated financial statements for a detailed discussion of such regulation.

On an ongoing basis, we evaluate the results of our internal compliance monitoring activities and those of applicable regulatory agencies, and, when appropriate, record liabilities to provide for the estimated costs of any necessary remediation.

The following is an update of selected recent regulatory and accreditation actions affecting us and certain of our schools:

Federal Regulatory Actions

U.S. Department of Education. As previously disclosed, the ED notified us in June 2005 that it is reviewing our previously announced restated consolidated financial statements and our annual compliance audit opinions for the years 2000 through 2003. At the same time, the ED also advised us that it was evaluating pending school program reviews that have taken place at Collins College in Tempe, Arizona (“Collins”), Pennsylvania Culinary Institute in Pittsburgh, Pennsylvania (“PCI”), and Brooks College in Long Beach, California (“Brooks College”). The ED indicated that until these matters were addressed to its satisfaction, it will not approve any new applications by us for pre-acquisition review or change of ownership. The ED has further advised us that during this period, it will not approve applications for any additional branch campuses, which the ED refers to generally in its regulations as “additional locations.”

However, the ED confirmed that it would not delay its review and certification of certain of our previously submitted and pending applications for additional branch campuses. As previously disclosed, the program reviews for Collins, PCI, and Brooks College described above have been completed and are now closed.

In February 2006, we received a letter from the ED notifying us that it is reviewing our 2004 compliance audit opinions and that the general restrictions imposed pursuant to its letter to us in June 2005 will remain in place as it continues its review. However, making an exception to its position stated in its June 2005 letter, the ED agreed to consider and evaluate, but not necessarily approve, any applications that we may submit for new campus locations in San Antonio, TX and Sacramento, CA. On August 8, 2006, the ED notified us that it had approved our applications for new International Academy of Design and Technology campus locations in San Antonio, TX and Sacramento, CA to participate in Title IV Programs.

In May 2006, we received a letter from the ED notifying us that it intends to review our 2005 compliance audits and that the general restrictions imposed pursuant to its letter to us in June 2005 will remain in place as it continues its review.

An additional ED program review is currently pending for Gibbs College in Livingston, New Jersey, and its branch campus, Katharine Gibbs School in Piscataway, New Jersey. In January 2004, we responded to the ED’s initial findings report. In June 2005, the ED performed a follow-up review, and, in September 2005, the ED notified the school that additional information was required in response to its initial findings report. In November 2005, we provided the ED with the requested additional information, and we are awaiting a response from the ED.

In July 2006, Briarcliffe College, one of our schools, was notified by the ED that it intends to conduct a program review. The ED has since completed its program review and the school is awaiting the ED’s program review report.

In October 2006, the Cooking and Hospitality Institute of Chicago, one of our schools, was notified by the ED that it intends to conduct a program review beginning in November 2006. The ED has yet to begin this program review.

We expect that the outcomes of these and other program reviews will be considered by the ED in connection with its evaluation of the general restrictions imposed pursuant to its June 2005 letter.

We are committed to resolving all issues identified in connection with these program reviews and ensuring that our schools operate in compliance with all applicable Title IV Program requirements.

We cannot predict the outcome of these ED actions, and any unfavorable outcomes could have a material adverse effect on our business, results of operations, cash flows, and financial position. We have evaluated these matters in connection with our ongoing evaluation of goodwill and indefinite-lived intangible assets for impairment, when applicable.

SEC and Department of Justice Investigations. As previously disclosed, on January 7, 2004, we received notification from the Midwest Regional Office of the SEC that it was conducting an inquiry concerning us and requested that we voluntarily provide certain information. On June 22, 2004, the SEC notified us that it was conducting a formal investigation. On April 5, 2006, we disclosed that we were advised by the staff of the Midwest Regional Office of the SEC that the staff intends to recommend to the SEC that it terminate its investigation of us. The staff of the SEC also advised us that it will recommend that no enforcement action be taken against us. Recommendations by the SEC staff do not constitute final action by the SEC, as the SEC thereafter makes its own determination as to whether to follow the recommendations of the SEC staff.

As previously disclosed, the U.S. Department of Justice (“Justice Department”) is conducting an investigation concerning us. Upon request, we have voluntarily provided the Justice Department with

certain information that we had provided to the SEC. The Justice Department investigation is ongoing, and we intend to continue to cooperate fully with the Justice Department.

On May 30, 2006, we received a letter from the Civil Division of the Justice Department advising us that it is reviewing allegations that certain of our schools may have submitted false claims or statements to the ED. The letter requests that we provide documents relating to representations made to current or prospective students at certain designated schools regarding job placement or placement rates and the costs of attending school. The letter also requests that we provide documents relating to the compensation structure of admissions personnel, the use of Pell Grant funds at one school and the calculation of student refunds at another school. The Justice Department has indicated that this review is informational in nature. We are in the process of voluntarily responding to the Justice Department’s request for information, and we intend to continue to cooperate fully with it.

State Regulatory Actions

Katharine Gibbs-New York (“Gibbs-NY”). On April 20-21, 2006, the Office of College and University Evaluation of the New York State Education Department (the “Education Department”) conducted a site visit to Gibbs-NY. The purpose of the visit was to examine Gibbs-NY’s compliance with the regulations of the Education Department. On June 28, 2006, the Education Department issued a draft report relating to its site visit. The draft report included a number of findings and recommendations, and indicated that Gibbs-NY may be out of compliance with Education Department regulations in several areas. Gibbs-NY submitted a response to the draft report within the prescribed time period, and is awaiting a response from the Education Department.

Texas Culinary Academy (“TCA”). On October 21, 2005, the Texas Higher Education Coordinating Board (“THECB”) conducted an unannounced visit to TCA. Two follow-up visits were held in November. On January 13, 2006, representatives from TCA and CEC met with the THECB to review the school’s compliance with the Texas Success Initiative. The Texas Success Initiative is a state-legislated program designed to improve student success in college. The program requires that an institution perform an assessment of every student to diagnose the student’s basic skills in reading, mathematics, and writing, and provide developmental instruction to strengthen academic skills that need improvement. TCA was given 90 days, until May 26, 2006, to perform remediation or risk losing degree-granting authority. In March 2006, TCA submitted a remediation plan to the THECB and, the school has since been in the process of implementing such plan. To date, the school has addressed the findings of the THECB and has implemented changes intended to minimize the risk of future noncompliance. Additionally, the school has corrected a majority of the deficiencies outstanding as of the date of the submission to the THECB of its remediation plan and continues to address the remaining deficiencies.

Lehigh Valley College (“Lehigh”). As previously disclosed, on July 20, 2005, the Bureau of Consumer Protection of the Office of Attorney General in Pennsylvania (“Pennsylvania AG”) notified Lehigh that it had begun a review of the business practices of the school. The Pennsylvania AG requested certain documents, including information relating to Lehigh’s recruitment practices, student complaints, and financial aid policies and procedures, which we provided in August 2005.

In a May 31, 2006, subpoena, the Pennsylvania AG requested that Lehigh provide additional documents and information and appear to answer certain inquiries. Lehigh has produced documents responsive to the Pennsylvania AG’s additional requests and has made a former senior administrator available to answer the Pennsylvania AG’s inquiries. In October 2006, the Pennsylvania AG alleged that Lehigh and CEC violated Pennsylvania consumer protection laws. The Pennsylvania AG has offered us and Lehigh the opportunity to resolve this matter by entering into an assurance of voluntary compliance and paying a fine. We are currently reviewing the matter. If a resolution cannot be reached, the Pennsylvania AG may commence civil litigation for injunctive relief, costs, and fines.

We do not believe that we or Lehigh have violated Pennsylvania consumer protection laws. We intend to vigorously defend this matter if a resolution cannot be reached and the Pennsylvania AG commences civil litigation.

Brooks Institute of Photography (“BIP”). As previously disclosed, on July 11, 2005, BIP received a notice of conditional approval (“Notice”) to operate from the California Bureau for Private Postsecondary and Vocational Education (“BPPVE”) for a period of two years, through June 30, 2007. BIP requested an administrative hearing to contest what it believed to be unfair, unwarranted, and unsupported findings and conditions. The administrative law judge assigned to preside over this matter bifurcated this administrative hearing. On February 2, 2006, the parties tried the sole issue of whether the BPPVE’s notice is void because the BPPVE violated its own enabling legislation by its admitted failure to conduct a qualitative review of BIP’s renewal application by a “visiting committee” of independent experts. On March 16, 2006, the administrative law judge ruled that the BPPVE improperly issued the Notice and that the Notice is invalid. The administrative law judge found that the BPPVE failed to follow the California Education code and its own regulations.

On May 20, 2006, the California Department of Consumer Affairs (“CDCA”), which is the final decision maker in these proceedings, issued its final decision in a written opinion in favor of BIP. The CDCA’s opinion largely tracked the opinion of the administrative law judge, and concluded that the Notice is void and that BIP’s approval to operate remains in effect pending a proper review by the BPPVE. BPPVE has tentatively proposed that the proper review take place in January 2007.

We cannot predict the outcome of pending state regulatory matters, and an unfavorable outcome of any one or more of these matters could have a material adverse effect on our business, results of operations, cash flows, and financial position. We have evaluated these matters in connection with our ongoing evaluation of goodwill and indefinite-lived intangible assets for impairment, when applicable.

Accrediting Body Actions

American InterContinental University London (“AIU—London”). AIU—London has been authorized by the applicable U.S. and United Kingdom agencies to grant academic credentials. AIU—London is authorized to grant academic degrees by the Nonpublic Postsecondary Education Commission of the State of Georgia. U.S. students that attend AIU—London are eligible to participate in Title IV Programs through AIU—London’s status as branch campus of AIU—Buckhead. As previously disclosed, on December 12, 2005, AIU—London entered into an accreditation agreement with London South Bank University, which is currently reviewing AIU—London’s programs in order to validate student degrees in those programs. AIU—London’s prior accreditation agreement with The Open University has terminated. On June 23, 2006, AIU—London filed a lawsuit against The Open University alleging wrongful termination of the accreditation agreement and wrongful denial by The Open University of its obligations to confer degrees on AIU—London students. AIU—London is a “Listed Body” pursuant to The Education (Listed Bodies) (England) Order 2002. The Open University served its defense and counterclaim on August 17, 2006, denying AIU—London’s claims and alleging that AIU—London was in repudiatory breach of the accreditation agreement. On October 10, 2006, AIU—London served The Open University with its reply and defense to counterclaim, denying The Open University’s claims, and also served a request for further information relating to the defense and counterclaim. The Open University served its response to the request for further information on October 31, 2006. A trial in this matter is scheduled to begin in March 2007.

American InterContinental University (“AIU”). As previously disclosed, the Commission on Colleges of the Southern Associations of Colleges and Schools (“SACS”) placed AIU on Warning status in June 2004. In December 2002, AIU’s accreditation was reaffirmed for the normal 10-year period, through 2012. In the course of the accreditation process, SACS requested that AIU provide additional information

on several accreditation matters, with the expectation that those matters be addressed within a two-year timeframe. In placing AIU on Warning status, SACS advised AIU that it had satisfactorily addressed a majority of those matters. SACS requested AIU to satisfy the remaining accreditation matters by December 2004, the end of the two-year period. As requested by SACS, AIU submitted its report to SACS in September 2004, and, on December 10, 2004, SACS provided written notification that AIU was removed from Warning status.

In addition, SACS deferred consideration of substantive changes and authorized a SACS special committee to visit the school in 2005. The SACS’ special committee was directed to visit AIU and evaluate the school regarding certain of SACS Principles of Accreditation. The SACS special committee completed its visits to certain of our AIU campuses in July 2005, and delivered a formal report. In September 2005, AIU submitted its response to the SACS special committee’s recommendations included in the July 2005 visit formal report. Subsequently, on December 6, 2005, SACS notified AIU that it had placed the school on Probation status for one year. A formal letter from SACS dated January 5, 2006, notified AIU that only two of the 18 response items from AIU’s September 2005 submission were accepted. In August 2006, AIU submitted its formal response to SACS’ January 5, 2006, letter. In October 2006, a SACS special committee completed site visits of selected AIU campuses. In November 2006, the SACS special committee provided AIU with a draft of the report that will be submitted to SACS, and AIU is in the process of preparing a response. A status review of AIU’s Probation status is currently scheduled for SACS December 2006 meeting. AIU is committed to resolving all issues identified by SACS.

We cannot predict the outcome of any pending accreditation actions, and an unfavorable outcome of any one or more of these matters could have a material adverse effect on our business, results of operations, cash flows, and financial position. We have evaluated these matters in connection with our ongoing evaluation of goodwill and indefinite-lived intangible assets for impairment, when applicable.

6. STOCK REPURCHASE PROGRAM

In July 2005, our Board of Directors authorized us to use up to $300.0 million for the repurchase of shares of our outstanding common stock (the “repurchase program”). Pursuant to the repurchase program, we may repurchase shares of our outstanding common stock on the open market or in private transactions from time to time, depending on certain factors including market conditions and corporate and regulatory requirements. The repurchase program does not have an expiration date and may be suspended or discontinued at any time. During the year ended December 31, 2005, we repurchased 5.3 million shares of our common stock for approximately $200.2 million at an average price of $37.97 per share. In February 2006, our Board of Directors authorized us to use an additional $200.2 million for the repurchase of shares of our outstanding common stock under the repurchase program. This authorization was in addition to the $99.8 million that was still available, as of December 31, 2005, under our original $300.0 million repurchase program authorization.

During the three months ended September 30, 2006, we did not repurchase any shares of our common stock. During the nine months ended September 30, 2006, we repurchased 3.9 million shares of our common stock for approximately $124.8 million at an average price of $32.44 per share.

From July 2005 through September 30, 2006, we repurchased 9.1 million shares of our common stock for approximately $325.0 million at an average price of $35.63 per share. As of September 30, 2006, we may purchase up to an additional $175.1 million of shares of our common stock under the repurchase program.

The repurchase of shares of our common stock reduces the amount of cash available to pay cash dividends to our common stockholders. We have never paid cash dividends on our common stock.

7. SHARE-BASED COMPENSATION

Overview of Share-Based Compensation Plans

Under our 1998 Employee Incentive Compensation Plan, as amended, (the “Employee Plan”) and our 1998 Non-Employee Directors’ Stock Option Plan (the “Directors Plan”), (collectively, the “plans”) non-employee members of our Board of Directors, officers and other employees may receive grants of incentive stock options, nonqualified stock options, shares of nonvested stock, stock appreciation rights, and other awards. We are authorized to grant up to approximately 26.9 million shares of common stock under the plans and, as of September 30, 2006, we have reserved approximately 9.6 million shares of common stock for the exercise of options outstanding as of September 30, 2006, and approximately 2.1 million additional shares of common stock for future stock option awards under the plans.

Stock Options. The exercise price of stock options granted under the plans is equal to the fair market value of our common stock on the date of grant. Employee stock options become exercisable ratably over a four-year period from the date of grant and expire ten years after the date of grant, unless an earlier expiration date is set at the time of the grant. Non-employee directors’ stock options expire ten years after the date of grant and are generally exercisable as follows: one-third on the grant date, one-third on the first anniversary of the grant date, and one-third on the second anniversary of the grant date. Both employee stock options and non-employee director stock options are subject to possible earlier exercise and termination in certain circumstances. Since the inception of the plans, grants of stock options have only been subject to the service conditions discussed previously. No stock option grants have included performance or market conditions that affect the stock options vesting or other pertinent factors.

Nonvested Stock. Shares of nonvested stock become vested three years after the date of grant. If a participant terminates his or her employment for any reason during the vesting period other than by death or disability, he or she forfeits the right to all shares of nonvested stock. Shares of nonvested stock are subject to possible acceleration in certain circumstances. Certain of the shares of nonvested stock that we have granted to participants are subject to performance conditions that may affect the number of shares of nonvested stock that will ultimately vest at the end of the requisite service period. These awards are henceforth referred to as “performance-vesting nonvested stock.”

Change in Control Provision. In addition to the conditions discussed above, each of the share-based awards granted under the plans, including stock options and shares of nonvested stock, are subject to a “change in control” provision included in our share-based compensation plans. As defined by the plans, a change in control is deemed to have occurred if, among other things, any corporation, person or other entity (other than CEC, a majority-owned subsidiary of CEC or any of CEC’s subsidiaries, or an employee benefit plan sponsored or maintained by CEC), including a “group” as defined in Section 13(d)(3) of the Exchange Act, becomes the beneficial owner of our common stock representing more than 20 percent of the combined voting power of our then outstanding securities.

Under the Employee Plan, in the event of a change in control:

· Any stock options outstanding as of the date of the change in control and not then exercisable would become fully exercisable to the full extent of the original grant.

· The restrictions applicable to any outstanding shares of nonvested stock awards would lapse, and the shares of nonvested stock would become fully vested and transferable to the full extent of the original grant.

· The performance goals and other conditions with respect to any performance vesting nonvested stock or stock options subject to performance vesting conditions would be deemed to have been satisfied in full, and such awards would generally become fully distributable.

· Plan participants holding share-based awards as of the date of the change in control would have the right, by giving notice to CEC during the 60-day period from and after the date of a change in control, to elect to surrender all or part of a share-based award to CEC and receive, within 30 days of such notice, cash in an amount equal to the amount by which the per share change in control price, as defined below, exceeds the per share amount that the employee must pay to exercise the award, multiplied by the number of awards for which the employee has exercised this right.

Under the Director Plan, in the event of a change in control, any stock options outstanding as of the date of such change in control and not then exercisable will become fully exercisable to the full extent of the original grant. In addition, our Board of Directors will have full discretion to do, among other things, any or all of the following with respect to an outstanding stock option:

· To cause any stock option awarded under the Director Plan to be cancelled, provided notice of at least 15 days thereof is provided before the date of cancellation;

· To grant the participant, by giving notice during a pre-set period, the right to surrender all or part of a stock option to us and to receive cash in an amount equal to the amount by which the change in control price per share on the date of such election exceeds the amount which the participant must pay to exercise the stock option per share of our common stock, multiplied by the number of shares of our common stock for which the director has exercised this right; and

· To take any other action our Board of Directors determines to take.

In the event of a change in control, as described above, the change in control price is defined by the plans as the greatest reported sales price of a share of our common stock in any transaction reported on the principal exchange that our shares are listed during the 60-day period prior to and including the date of the change in control event.

As of September 30, 2006, we are not aware of any person or entity, including a group, who beneficially owns, or at any point previously owned, 20 percent or more of the combined voting power of our outstanding common stock. As of June 30, 2006, the most recent date of disclosure required under the Exchange Act, no individual shareholder owned more than 19.08 percent of the combined voting power of our then outstanding common stock. If any person or entity, including a group, beneficially owned 20 percent or more of the combined voting power of our then outstanding common stock as of September 30, 2006, triggering the change in control provisions discussed above, we would have recognized additional share-based compensation expense of $80.5 million. The estimated additional share-based compensation expense represents, for each outstanding share-based award, the greater of (a) the unrecognized grant date compensation expense for the share-based award as of September 30, 2006, or (b) the fair value of the cash redemption value of the share-based award as of September 30, 2006, less share-based compensation expense previously recorded under SFAS No. 123 (revised), Share-Based Payment (“SFAS 123R”) or disclosed as pro forma compensation expense under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), based on a change in control price of $28.66 per share, the highest reported share price of a share of our common stock in a transaction reported on the NASDAQ Global Select Market, during the 60-day period prior to and including September 30, 2006.

Our estimation of additional expense that we would have recorded as of September 30, 2006, upon the occurrence of a change in control triggering event assumes that we would not be required to recognize share-based compensation expense of $33.1 million that had been previously disclosed as pro forma expense under SFAS 123. If we were required to record in our income statement share-based compensation expense that we had previously disclosed as pro forma expense under SFAS 123, we would have recognized additional share-based compensation expense of $113.6 million during the third quarter of 2006.

The appropriate application of SFAS 123R and its interpretations in this instance is not specifically addressed by existing authoritative guidance, and we are still in the process of determining the amount of compensation expense that we would have been required to recognize assuming a September 30, 2006, change in control triggering event. However, based on our interpretation of existing authoritative guidance, we believe we would have been required to recognize compensation expense of $80.1 million or $113.6 million.

Additionally, if the change in control provisions had been triggered as of September 30, 2006, or if we determined that the occurrence of a change in control event was probable, we would have recognized a liability of $91.5 million as of September 30, 2006, representing the estimated fair value of the obligation that would be due to participants who are eligible to surrender all or part of a share-based award to us in exchange for cash. Our estimation of this cash liability assumes that participants would elect to redeem for cash all nonvested shares outstanding as of September 30, 2006, and all stock options outstanding as of September 30, 2006, with an exercise price less than the change in control price. The amount of our potential cash redemption liability associated with share-based awards outstanding as of September 30, 2006, is unaffected by the ultimate resolution of the accounting question discussed above.

Shared-based Awards Activity. Stock option activity during the nine months ended September 30, 2006, under the plans is as follows:

						Weighted
						Average
			Weighted			Remaining		Aggregate
			Average Exercise			Contractual		Intrinsic Value
	Options		Price			Term		(in thousands)
Outstanding as of December 31, 2005	9,485,769			$	25.62
Granted	704,675			30.72
Exercised	(295,137	)		15.84					$	2,427
Forfeited	(256,126	)		40.37
Cancelled	(38,894	)		33.65
Outstanding as of September 30, 2006	9,600,287			$	25.87		6.2 years		$	50,295
Exercisable as of September 30, 2006	7,522,524			$	23.94		5.5 years		$	50,282

The following table summarizes information with respect to stock options outstanding under the plans as of September 30, 2006:

	Options Outstanding					Options Exercisable
				Weighted
				Average
	Number of		Weighted	Remaining			Weighted
	options		Average Exercise	Contractual Life		Number	Average Exercise
Exercise Price Ranges	outstanding		Price	(Years)		Exercisable	Price
$1.84-4.66		727,425	$ 3.45		2.6	727,425	$ 3.45
$6.00-10.23		1,316,000	6.11		3.8	1,316,000	6.11
$12.63-17.08		1,440,000	12.71		4.6	1,440,000	12.71
$18.25-27.40		1,353,950	21.99		5.6	1,340,450	21.98
$28.19-29.54		1,171,292	29.30		6.8	849,467	29.35
$30.62-39.47		2,366,645	33.83		8.8	664,332	34.77
$40.25-68.24		1,224,975	61.51		7.7	1,184,850	62.22
		9,600,287	$ 25.87		6.2	7,522,524	$ 23.94

Nonvested stock activity during the nine months ended September 30, 2006, under the Employee Plan is as follows:

		Weighted Average
		Grant-Date Fair
	Number of Shares	Value Per Share
Outstanding as of December 31, 2005	5,000	$	35.29
Granted
Service vesting only:	261,050	29.10
Service and performance vesting:	134,275	29.28
	395,325	29.16
Outstanding as of September 30, 2006	400,325	$	29.24

All awards of nonvested stock prior to December 31, 2005, were service vesting only.

Balance Sheet Presentation of Share-based Awards Subject to Redemption

As discussed above, a participant in the plans has the right, upon the occurrence of a change in control event, to surrender all or part of his or her share-based awards to us in exchange for cash. The grant-date cash redemption value of each outstanding share-based award is currently recorded as “Share-based awards subject to redemption” on our consolidated balance sheets on a pro rata basis over the requisite service period. Total grant-date cash redemption value for each outstanding share-based award represents the intrinsic value of the award as of the grant date, assuming that a change in control event occurred on the grant date. Share-based awards subject to redemption as of September 30, 2006, recorded as a reduction of retained earnings, represents the portion of the total grant-date cash redemption value for all share-based awards outstanding as of September 30, 2006, earned by plan participants as a result of services rendered through such date. Prior to our adoption of SFAS 123R, we were not required to record an amount for share-based awards subject to redemption on our consolidated balance sheets.

Modifications to Outstanding Stock Options

On December 15, 2005, we accelerated the vesting of all outstanding, unvested stock options with a per share exercise price greater than $32.63, the market closing price of our common stock as of December 15, 2005 that were previously awarded to employees, including executive officers, and directors, during 2003 and 2004 under the plans, such that all such options became immediately exercisable.

Stock options to purchase approximately 1.0 million shares of our common stock, or approximately 26% of the total outstanding unvested stock options as of December 15, 2005, were subject to the vesting acceleration. This amount includes approximately 336,000 stock options held by our executive officers and directors. The weighted average exercise price of the stock options that were subject to the vesting acceleration was $60.38, and the individual exercise prices of such stock options ranged from $35.73 to $68.24. The exercise price of all stock options subject to the vesting acceleration held by our executive officers and directors was $62.56. As of December 15, 2005, the weighted average exercise price of $60.38 per share of the stock options subject to the accelerated vesting exceeded the current per share market value of our common stock of $32.63 by approximately 85%.

The primary purpose of the vesting acceleration of these options was to eliminate the recognition of compensation expense associated with these options that we would be required to recognize in our consolidated statements of income under SFAS 123R. Future pre-tax compensation expense that has been eliminated as a result of the acceleration of the vesting of these stock options, which otherwise would have been recognized as compensation expense during the original vesting periods, totals approximately $18.0 million, including a reduction of expense of approximately $8.2 million in 2006, approximately

$7.5 million in 2007, and approximately $2.3 million in 2008. Pre-tax compensation expense that has been eliminated as a result of the acceleration of the vesting of these stock options during the three months and nine months ended September 30, 2006, was approximately $2.0 and $6.2 million, respectively.

Implementation of SFAS 123R

On January 1, 2006, we adopted the provisions of SFAS 123R. SFAS 123R, which is a revision of SFAS 123, replaces our previous method of accounting for share-based awards under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“Opinion 25”), for periods beginning in 2006. SFAS 123R requires that all share-based payments to employees, including grants of stock options, shares of nonvested stock and the compensatory elements of employee stock option plans, be recognized in the financial statements based on the estimated fair value of the equity or liability instrument issued.

We previously accounted for share-based compensation using the intrinsic value method as defined in Opinion 25. Prior to January 1, 2006, no share-based employee compensation cost, other than the insignificant costs associated with issuances of shares of nonvested stock, was reflected in our statements of income. SFAS 123R requires that we report the tax benefit from the tax deduction related to share-based compensation that is in excess of recognized compensation costs as a financing cash flow rather than as an operating cash flow in our consolidated statements of cash flows. Prior to January 1, 2006, Opinion 25 required that we report the entire tax benefit related to the exercise of stock options as an operating cash flow.

We adopted SFAS 123R using the modified prospective transition method. Under this method, employee compensation cost recognized during 2006 includes (1) compensation cost for all share-based payments granted prior to, but not yet vested, as of January 1, 2006, based on grant date fair value estimated in accordance with the provisions of SFAS 123 and (2) compensation cost for all share-based awards granted on or subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Under the modified prospective transition method, the provisions of SFAS 123R were not applied to periods prior to adoption, and, thus, prior period financial statements have not been restated.

In accordance with SFAS 123R, the fair value of options grants is estimated on the date of grant using the Black-Scholes-Merton option pricing model. Consistent with our approach under the disclosure only provisions of SFAS 123, we will continue to recognize the value of share-based compensation as expense during the vesting period of the underlying share-based awards using the straight-line method. SFAS 123R requires forfeitures of share-based awards to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Consistent with our approach under the disclosure only provisions of SFAS 123, we will continue to estimate forfeitures at the time of grant.

Our adoption of SFAS 123R on January 1, 2006, resulted in decreases of our income before provision for income taxes and net income for the three months ended September 30, 2006, of $6.2 million and $3.9 million, respectively, and a reduction of our income before provision for income taxes and net income for the nine months ended September 30, 2006, of $14.6 million and $9.2 million. In addition, our adoption of SFAS 123R resulted in a reduction of $0.04 to both basic and diluted net income per share for the three months ended September 30, 2006, and a reduction of $0.09, to both basic and diluted net income per share for the nine months ended September 30, 2006.

The following table summarizes share-based compensation expense recognized during the three months and nine months ended September 30, 2006, related to share-based awards subject to SFAS 123R (in thousands):

	Three Months Ended September 30, 2006		Nine Months Ended September 30, 2006
Share-based compensation expense included in operating expenses:
Educational services and facilities	$	144	$	408
General and administrative	6,019		14,241
	6,163		14,649
Tax benefit	2,305		5,479
Share-based compensation expense, net of tax	$	3,858	$	9,170

The table below reflects net income and net income per share for the three months and nine months ended September 30, 2006, compared to pro forma net income and net income per share for the three months and nine months ended September 30, 2005, presented as if we had applied the fair value recognition provisions of SFAS 123 to share-based employee compensation during the three months and nine months ended September 30, 2005 (in thousands, except per share amounts):

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2006		2005			2006		2005
	Actual		Pro Forma			Actual		Pro Forma
Net income, as previously reported (1)			$	54,935				$	163,620
Share-based employee compensation expense determined under fair value method for all awards, net of tax effect (2)			(4,309		)			(12,137		)
Net income, including the effect of share-based employee compensation expense	$	20,715	$	50,626		$	25,905	$	151,483
Basic net income per share—
Net income (1)	$	0.22	$	0.55		$	0.27	$	1.60
Net income, including the effect of share-based employee compensation expense	$	0.22	$	0.50		$	0.27	$	1.49
Diluted net income per share—
Net income (1)	$	0.22	$	0.53		$	0.26	$	1.57
Net income, including the effect of share-based employee compensation expense	$	0.22	$	0.49		$	0.26	$	1.45

(1) Net income and net income per share prior to 2006 does not include share-based employee compensation expense under SFAS 123, as we had adopted the disclosure only provisions of SFAS 123.

(2) Share-based employee compensation expense prior to 2006 was calculated in accordance with SFAS 123.

The fair value of each stock option award granted during the three months and nine months ended September 30, 2006 and 2005, was estimated on the date of grant using the Black-Scholes-Merton option pricing model. Our determination of the fair value of stock options on the date of grant is affected by our

stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected life of the awards and actual and projected employee stock option exercise behavior. The weighted average fair value per share of stock options granted during the three months and nine months ended September 30, 2006 and 2005, and assumptions used to value stock options are as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2006			2005			2006			2005
Dividend yield	—			—			—			—
Risk-free interest rate	4.66		%	4.0		%	5.12		%	3.8		%
Weighted average volatility	50.6		%	50.0		%	53.8		%	50.0		%
Expected life (in years)	5.5			4.0			5.6			4.0
Weighted average grant date fair value per share of options granted	$	14.59		$	16.43		$	16.87		$	15.01

Volatility is calculated based on the actual historical daily prices of our common stock over the expected term of the option. During the nine months ended September 30, 2006, we utilized a range of expected volatility assumptions for stock options issued during the period, volatility assumptions ranged from 50.6% to 55.2%.

Expected life is calculated based on historical director and employee exercise behavior and cancellations of vested stock options.

Under the Employee Plan, the fair value of each share of nonvested stock is equal to the fair market value of our common stock as of the date of grant. During the second quarter of 2006, under the Employee Plan, we granted shares of nonvested stock to executive officers and certain other employees.

All shares of performance-vesting nonvested stock granted during 2006 are subject to performance conditions based on the results of school-level independent compliance audits and the compliance of our schools with federal, state, and accrediting body regulations. Share-based compensation associated with performance-vesting nonvested stock awards is recognized only to the extent that we believe performance conditions attributable to such awards will ultimately be satisfied.

As of September 30, 2006, we estimate that pre-tax compensation expense for all unvested share-based award grants, including both stock options and shares of nonvested stock, in the amount of approximately $29.6 million will be recognized in future periods. This expense will be recognized over the remaining requisite service period applicable to the grantees, which, on a weighted-average basis, is approximately 2.5 years. We expect to satisfy the exercise of stock options and future grants of shares of nonvested stock by issuing new shares of common stock.

8. WEIGHTED AVERAGE COMMON SHARES

The weighted average numbers of common shares used to compute basic and diluted income per share during the three months and nine months ended September 30, 2006 and 2005, were as follows (in thousands):

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2006		2005	2006	2005
Basic common shares outstanding		94,721	100,540	96,605	101,966
Common stock equivalents		1,474	2,585	1,951	2,523
Diluted common shares outstanding		96,195	103,125	98,556	104,489

During the three months and nine months ended September 30, 2006 and 2005, we issued 0.05 million and 0.3 million shares, respectively, of our common stock upon the exercise of employee stock options and the purchase of common stock pursuant to our employee stock purchase plan.

Included in stock options outstanding as of September 30, 2006 and 2005, are options to purchase 4.8 million and 1.3 million shares, respectively, of our common stock that were not included in the computation of diluted net income per share during the three months ended September 30, 2006 and 2005. Included in stock options outstanding as of September 30, 2006 and 2005, are options to purchase 3.6 million and 1.3 million shares, respectively, of our common stock that were not included in the computation of diluted net income per share during the nine months ended September 30, 2006 and 2005. The outstanding stock options were excluded from the computation of diluted net income per share during the three months and nine months ended September 30, 2006 and 2005, because the options’ exercise prices were greater than the average market price of our common stock during the periods, and, therefore, the effect would have been anti-dilutive.

9. DISCONTINUED OPERATIONS

Sale of International Academy of Design and Technology Montreal

During the first quarter of 2005, our management began to pursue the divestiture of the International Academy of Design and Technology Montreal (“IADT—Montreal”), which had begun teach-out activities in January 2005. On March 16, 2005, we sold our ownership interest in IADT—Montreal to a third party. As a result of that transaction, we recorded a loss from discontinued operations of $5.1 million, which represented the difference between the net proceeds received and the book value of the net assets sold. The total loss includes an approximate $2.9 million charge related to the write-off of goodwill attributable to IADT—Montreal.

Completion of International Academy of Design and Technology Ottawa Teach Out

During the first quarter of 2005, we completed all teach-out activities at the International Academy of Design and Technology Ottawa (“IADT—Ottawa”). As a result, we recorded a discontinued operations charge of approximately $1.0 million, of which $0.6 million related to the write-off of goodwill attributable to IADT—Ottawa.

Revenue and income from operations of our discontinued operations were not significant to our overall consolidated results. We did not record an income tax benefit related to losses from discontinued operations because we do not believe that we will be able to utilize these losses in the future. This treatment is consistent with the valuation allowance we have historically recorded in connection with losses incurred by our Canadian subsidiaries in prior years.

10. SEGMENT REPORTING

Prior to the first quarter of 2006, based on our interpretation of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), we had identified two reportable segments: Colleges, Schools and Universities, which represented our on-ground schools that provide educational services primarily in a classroom or laboratory setting and offer a variety of degree and non-degree certificate and diploma programs in each of our core career-oriented disciplines, and the Online Education Group, which represented the fully-online academic platforms offered by American Intercontinental University (“AIU”), AIU Online, and Colorado Technical University (“CTU”), CTU Online and Stonecliffe College Online (an academic division of CTU). The on-ground campuses of AIU and CTU were included as part of the Colleges, Schools and Universities segment.

During the first quarter of 2006, we completed a reorganization of our management structure, specifically with respect to the management of our University division schools, AIU and CTU, and those universities’ fully-online academic platforms. Pursuant to the reorganization, both the on-ground campuses and the fully-online academic platforms of AIU and CTU are analyzed as one operating segment, the University segment, by our chief operating decision maker (“CODM”). Prior to the first quarter of 2006, our identification of reportable segments had been based primarily upon the fact that our CODM previously evaluated our overall business based on the service delivery method, on-ground or online, used by our schools to provide educational programs to our students. As a result of certain recent business developments, including the introduction in 2005 of hybrid learning programs, which allow our students to take a portion of their academic program online and a portion on-ground, and plans to expand hybrid offerings to many of our schools in the future, service delivery method is no longer a key differentiator utilized by our CODM to evaluate and segment components of our business. In addition, although AIU and CTU are currently our only schools that offer fully-online academic platforms, we expect in the future that certain of our other schools will also offer fully-online learning options.

During the third quarter of 2006, we completed a reorganization of the management structure of our Colleges division. Our Colleges division is comprised of multiple schools located throughout the U.S., which provide a variety of academic programs in each of our core career-oriented disciplines. Pursuant to this reorganization, all schools within the Colleges Division are managed by a single divisional management team and the divisions’ results are analyzed as a single operating segment, the Colleges Division, by our CODM. Prior to the reorganization, the operations of the Colleges division were segregated into two divisions based on the geographic locations of the schools, the College East division and the College West division. Both the College East division and the College West division were formerly managed by separate divisional management teams and were analyzed independently by our CODM.

Upon completion of our reorganizations, we also evaluated the other operating segments reviewed by our CODM in accordance with the provisions of SFAS 131. Our CODM reviews our business based on our operating segments, which we define as our school operating divisions. Each of our school operating divisions represents a group of for-profit, postsecondary schools that offer a variety of degree and non-degree academic programs and are differentiated based on a variety of criteria including, but not limited to, brand name, academic offerings, and geographic location. Based on our interpretation of SFAS 131 as of September 30, 2006, we identified seven school reportable segments: the Academy segment, the Colleges segment, the Culinary Arts segment, the Gibbs segment, the Health Education segment, the INSEEC segment, and the University segment and one non-school reportable segment: the JDV Online segment. All prior period financial and population information included herein has been restated to reflect our new internal management structure as reviewed by our CODM and resulting changes in the composition of our reportable segments.

The Academy segment includes our International Academy of Design and Technology (“IADT”) campuses that collectively offer academic programs primarily in the career-oriented discipline of visual communications and design technologies in a classroom setting.

The Colleges segment includes schools that collectively offer academic programs in each of our core career-oriented disciplines of business studies, culinary arts, health education, information technology, and visual communications and design technologies in a classroom or laboratory setting.

The Culinary Arts segment includes our Le Cordon Bleu and Kitchen Academy schools that collectively offer culinary arts academic programs in the career-oriented disciplines of culinary arts, pastry arts, and hotel and restaurant management primarily in a classroom or kitchen setting.

The Gibbs segment includes our Gibbs College and Katharine Gibbs School campuses that collectively offer academic programs in the career-oriented disciplines of business studies, visual

communication and design technologies, health education, and information technology in a classroom setting.

The Health Education segment primarily includes our Sanford-Brown schools that collectively offer academic programs in the career-oriented disciplines of health education, business studies, visual communication and design technologies, and information technology in a classroom or laboratory setting.

The INSEEC segment includes our INSEEC Group schools that are located throughout France and collectively offer academic programs in the career-oriented disciplines of business studies, health education, and visual communication and technologies in a classroom or laboratory setting.

The University segment includes our AIU and CTU universities that collectively offer academic programs in the career-oriented disciplines of business studies, visual communication and design technologies, health education, information technology, criminal justice, and education in an online, classroom or laboratory setting.

The JDV Online segment was launched in October 2004 and focuses on the development of a range of short-term online learning and informational programs that will generate revenue through the sale of products, premium digital content, and advertising space.

Our CODM evaluates segment performance based on pretax segment profit or loss. This measure of profit or loss includes share of affiliate earnings for the University segment and excludes interest income, interest expense, miscellaneous income and expense, and any unallocated corporate expenses. Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate and other”, which primarily includes unallocated corporate activity and eliminations.

The accounting policies of each segment are consistent with those described in the summary of significant accounting policies in Note 2 “Significant Accounting Policies” of the notes to our consolidated financial statements in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2005. Transactions between segments, which are not significant, are consummated on a basis intended to reflect the market value of the underlying products or services. A majority of corporate expenses have been charged to the segments as part of a general allocation.

The results of operations of our schools’ on-ground campuses fluctuate on a quarterly basis, primarily as a result of changes in the level of student enrollment. Our schools’ on-ground campuses typically experience a seasonal increase in student population in the fall, traditionally when the largest number of new high school graduates begin postsecondary education. Furthermore, although our schools encourage year-round attendance at all campuses, certain programs at certain schools include summer breaks. As a result of these factors, total student population and revenue at our schools’ on-ground campuses are typically highest in the fourth quarter (October through December) and lowest in the second quarter (April through June). The operating costs of our schools’ on-ground campuses do not fluctuate as significantly on a quarterly basis, except for admissions and advertising expenses, which are typically higher during the second quarter and third quarter (April through September) in support of seasonally high enrollment. We anticipate that these seasonal trends will continue.

The results of operations of AIU Online, which is included in our University segment, fluctuate on a quarterly basis, primarily as a result of AIU Online’s academic calendar and, more specifically, the number of instructional days in each quarter. Historically, the number of revenue-generating instructional days has been highest during the first and second quarters (January through June), lower in the third quarter (July through September), and lowest in the fourth quarter (October through December). Operating costs for AIU Online do not fluctuate as significantly on a quarterly basis. We anticipate that these seasonal trends will continue.