15. SHARE-BASED COMPENSATION

Overview of Share-Based Compensation Plans

The Career Education Corporation 2008 Incentive Compensation Plan (the “2008 Plan”) authorizes awards of stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock, performance units, annual incentive awards, and substitute awards, which generally may be settled in cash or shares of our common stock. Any shares of our common stock that are subject to awards of stock options or stock appreciation rights payable in shares will be counted as 1.0 share for each share issued for purposes of the aggregate share limit and any shares of our common stock that are subject to any other form of award payable in shares will be counted as 1.67 shares for each share issued for purposes of the aggregate share limit. As of December 31, 2015, there were approximately 6.6 million shares of common stock available for future share-based awards under the 2008 Plan, which is net of 2.7 million shares issuable upon exercise of outstanding options. This amount does not reflect 0.6 million and 0.1 million shares underlying restricted stock units and deferred stock units, respectively, as of December 31, 2015, which will be settled in shares of our common stock if the vesting conditions are met and thus reduce the common stock available for future share-based awards under the 2008 Plan by the amount vested, multiplied by the applicable factor under the plan. The vesting of all types of equity awards (stock options, stock appreciation rights, restricted stock awards, restricted stock units and deferred stock units) is subject to possible acceleration in certain circumstances. Generally, if a plan participant terminates employment for any reason other than by death or disability during the vesting period, the right to unvested equity awards is forfeited.

As of December 31, 2015, we estimate that compensation expense of approximately $3.0 million will be recognized over the next four years for all unvested share-based awards that have been granted to participants, including stock options, shares of restricted stock and restricted stock units and deferred stock units to be settled in shares of stock but excluding restricted stock units to be settled in cash.

Stock Options. The exercise price of stock options and stock appreciation rights granted under each of the plans is equal to the fair market value of our common stock on the date of grant. Employee stock options generally become exercisable 25% per year over a four-year service period beginning on the date of grant and expire ten years from the date of grant. Non-employee directors’ stock options expire ten years from the date of grant and generally become exercisable as follows: 100% after the first anniversary of the grant date or one-fourth on the grant date and one-fourth for each of the first through third anniversary of the grant date. Grants of stock options are generally only subject to the service conditions discussed previously.

Stock option activity during the years ended December 31, 2015, 2014 and 2013 under all of our plans was as follows:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2012		2,591,887		$	25.96
Granted		1,934,005			2.58
Exercised		(1,275	)		3.08		$	3
Forfeited		(261,366	)		5.19
Cancelled		(362,816	)		31.60
Outstanding as of December 31, 2013		3,900,435		$	15.15
Granted		746,318			6.89
Exercised		(225,000	)		2.72		$	721
Forfeited		(299,577	)		4.94
Cancelled		(340,212	)		39.49
Outstanding as of December 31, 2014		3,781,964		$	12.88
Granted		848,705			4.83
Exercised		(303,035	)		2.73		$	620
Forfeited		(1,278,150	)		4.60
Cancelled		(391,761	)		20.87
Outstanding as of December 31, 2015		2,657,723		$	14.27	4.9 years	$	254
Exercisable as of December 31, 2015		1,819,466		$	18.71	3.1 years	$	154

The following table summarizes information with respect to all outstanding and exercisable stock options under all of our plans as of December 31, 2015:

				Options Outstanding						Options Exercisable
Range of Exercise Prices				Number of Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Number Exercisable		Weighted Average Exercise Price
$	2.65	$	2.82		285,416	$	2.74		7.13		176,708	$	2.76
$	3.93	$	4.15		467,364	$	4.06		9.56		-	$	-
$	5.00	$	6.51		269,474	$	6.04		7.87		101,701	$	6.43
$	7.33	$	7.33		151,230	$	7.33		6.37		62,874	$	7.33
$	8.63	$	8.63		291,563	$	8.63		1.64		285,507	$	8.63
$	13.32	$	21.80		335,112	$	17.66		2.59		335,112	$	17.66
$	22.04	$	22.13		276,000	$	22.08		3.52		276,000	$	22.08
$	26.15	$	30.67		305,564	$	29.50		3.27		305,564	$	29.50
$	30.80	$	33.96		258,000	$	32.30		0.83		258,000	$	32.30
$	34.86	$	34.86		18,000	$	34.86		0.12		18,000	$	34.86
					2,657,723	$	14.27		4.94		1,819,466	$	18.71

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

The following table summarizes information with respect to all outstanding restricted stock and restricted stock units to be settled in shares of stock under our plans during the years ended December 31, 2015, 2014 and 2013:

	Restricted Stock to be Settled in Shares of Stock
	Shares			Weighted Average Grant-Date Fair Value Per Share		Units			Weighted Average Grant-Date Fair Value Per Unit		Total
Outstanding as of December 31, 2012		854,291		$	24.74		1,143,933		$	8.27		1,998,224
Granted		—			—		43,313			2.72		43,313
Vested		(208,461	)		23.10		(306,605	)		8.60		(515,066	)
Forfeited		(424,268	)		27.01		(342,020	)		7.22		(766,288	)
Outstanding as of December 31, 2013		221,562		$	22.19		538,621		$	8.30		760,183
Granted		—			—		318,940			6.57		318,940
Vested		(136,133	)		22.94		(135,645	)		8.61		(271,778	)
Forfeited		(42,677	)		20.87		(165,776	)		7.90		(208,453	)
Outstanding as of December 31, 2014		42,752		$	21.63		556,140		$	7.35		598,892
Granted		—			—		645,332			5.62		645,332
Vested		(39,969	)		21.62		(197,609	)		7.94		(237,578	)
Forfeited		(2,783	)		21.80		(409,558	)		6.33		(412,341	)
Outstanding as of December 31, 2015		-		$	—		594,305		$	5.98		594,305

Deferred Stock Units to be Settled in Stock. During 2014 and for the first time since inception of any of our plans, we granted deferred stock units to our non-employee directors. The deferred stock units are to be settled in shares of stock and generally vest one-third per year over a three-year service period beginning on the date of grant. Settlement of the deferred stock units and delivery of the underlying shares of stock to the plan participants does not occur until he or she ceases to provide services to the Company in the capacity of a director, employee or consultant.

The following table summarizes information with respect to all deferred stock units during the years ended December 31, 2015 and 2014:

	Deferred Stock Units to be Settled in Shares			Weighted Average Grant-Date Fair Value Per Unit
Outstanding as of December 31, 2013		—		$	—
Granted		116,952			4.39
Vested		—			—
Forfeited		—			—
Outstanding as of December 31, 2014		116,952		$	4.39
Granted		2,928			5.73
Vested ⁽¹⁾		(19,492	)		4.39
Forfeited		(9,746	)		4.39
Outstanding as of December 31, 2015		90,642		$	4.43

(1)	The total vested awards exclude 0.3 thousand of vested but unreleased awards. These awards are included in total outstanding awards until they are released under the terms of the agreement.

Restricted Stock Units to be Settled in Cash. Restricted stock units to be settled in cash generally become fully vested 25% per year over a four-year service period beginning on the date of grant. Certain awards granted to our newly hired Chief Executive Officer outside of the 2008 Plan vest 50% per year over a two-year service period. Cash-settled restricted stock units are recorded as liabilities as the expense is recognized and the fair value for these awards is determined at each period end date with changes in fair value recorded in our statement of income (loss) and comprehensive income (loss) in the current period. Cash-settled restricted stock units are settled with a cash payment for each unit vested equal to the closing price on the vesting date. Cash-settled restricted stock units are not included in common shares reserved for issuance or available for issuance under the 2008 Plan.

The following table summarizes information with respect to all cash-settled restricted stock units for the years ended December 31, 2015, 2014 and 2013:

	Restricted Stock Units to be Settled in Cash
Outstanding as of December 31, 2012		—
Granted		2,938,283
Vested		—
Forfeited		(649,368	)
Outstanding as of December 31, 2013		2,288,915
Granted		981,136
Vested		(755,656	)
Forfeited		(671,940	)
Outstanding as of December 31, 2014		1,842,455
Granted		1,036,720
Vested		(444,499	)
Forfeited		(696,060	)
Outstanding as of December 31, 2015		1,738,616

Upon vesting, based on the conditions set forth in the award agreements, these units will be settled in cash. We valued these units in accordance with the guidance set forth by FASB ASC Topic 718 – Compensation-Stock Compensation and recognized $1.4 million, $4.8 million and $3.6 million of expense for the years ended December 31, 2015, 2014 and 2013, respectively, for all cash-settled restricted stock units.

Stock-Based Compensation Expense. Total stock-based compensation expense for the years ended December 31, 2015, 2014 and 2013 for all types of awards was as follows (dollars in thousands):

	December 31,
Award Type	2015 ⁽¹⁾		2014		2013
Stock Options	$	761	$	1,372	$	2,308
Restricted stock or units settled in stock		2,532		2,865		4,339
Restricted stock units settled in cash		1,447		4,514		3,452
Stock appreciation rights settled in cash		—		295		149
Total stock-based compensation expense	$	4,740	$	9,046	$	10,248

(1)	Stock-based compensation expense for 2015 does not reflect $1.5 million of forfeitures related to our former Chief Executive Officer’s departure which was applied against the separation agreement payment of $2.5 million.

Performance Unit Awards. Performance unit awards granted during 2013, 2014 and 2015 are long-term incentive, cash-based awards. Payment of these awards is based upon a calculation of Total Shareholder Return (“TSR”) of CEC as compared to TSR across a specified peer group of our competitors over a three-year performance period ending primarily on December 31, 2015, 2016 and 2017, respectively. These awards are recorded as liabilities as the expense is recognized and fair value for these awards is revalued at each period end date with changes in fair value recorded in our statement of income (loss) and comprehensive income (loss) in the current period. We recorded $2.1 million, $3.5 million and $1.1 million for expense related to these awards for the years ended December 31, 2015, 2014 and 2013, respectively.

Share-Based Awards Assumptions

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

The fair value of each stock option award granted during the years ended December 31, 2015, 2014 and 2013 was estimated on the date of grant using the Black-Scholes-Merton option pricing model. Our determination of the fair value of each stock option is affected by our stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected life of the awards and actual and projected stock option exercise behavior. The weighted average fair value per share of stock option awards granted during the years ended December 31, 2015, 2014 and 2013, and assumptions used to value stock options are as follows:

	For the Year Ended December 31,
	2015			2014			2013
Dividend yield		—			—			—
Risk-free interest rate		1.6	%		1.4	%		1.1	%
Weighted average volatility		73.2	%		73.0	%		64.6	%
Expected life (in years)		5.1			4.3			5.6
Weighted average grant date fair value per share of options granted	$	2.86		$	3.89		$	1.47

Volatility is calculated based on the actual historical daily prices of our common stock over the expected term of the stock option award. During the year ended December 31, 2015, we utilized a range of expected volatility assumptions for purposes of estimating the fair value of stock options awarded during the period. Such volatility assumptions ranged from 65.3% to 76.4%.

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

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