Welcome to the Career Education Corp. third quarter conference call. My name is Dawn, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Mike Graham. Mr. Graham, you may begin.

Thanks, Dawn. I'd like to start by expressing our appreciation for joining today's call in relatively short notice. As always, we value your interest in Career Education Corp. The purpose of today's call is to provide you with information about the change in leadership at Career Education and a commentary on the company's third quarter performance. The Chairman of our Board of Directors and Chief Executive Officer, Steve Lesnik, will provide you details of the change. Before I turn the call over to Steve, let me remind you that yesterday's press releases, as well as our remarks made today, may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on information currently available to us and about risks and uncertainties that could cause our actual future results, performance, and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified on our quarterly filings, our quarterly earnings release, our annual report filed on Form 10-K for the year ended December 31, 2010, and other filings with the Securities and Exchange Commission. Except as expressly required by securities laws, we undertake no obligation to update those risk factors or publicly announce the results of any of these forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. At the conclusion of Steve's remarks, I'll provide commentary on our third quarter performance and provide an update on key matters we have discussed in previous quarters earnings calls. Last night, we reported our third quarter operating results. We intend to file our Form 10-Q for the quarter ended September 30, 2011, with the Securities and Exchange Commission on or before November 9. As I will be discussing our results in today's call, we will no longer hold our call previously scheduled for November 10. We understand that this information is a lot to absorb in a short time and to cover in a 1-hour call. Since we have a limited amount of time for this call, we may not get to all your questions and recognize you may have follow-up items. As always, Jason Friesen and I will be able to answer your question and can be reached through our Investor Relations department. Now, let me turn the call over to Steve Lesnick.

Thanks, Mike, and good morning to all of you for the first time. I'm Steve Lesnik, Chairman of the Board and now also the company's President and Chief Executive Officer. The board has appointed me to these roles succeeding Gary McCullough, following his resignation. As CEO, I'll deal with the day-to-day management of Career Corporation -- Career Ed Corporation, as well as dealing with the development and implementation of strategic business initiatives to move career education forward in a rapidly changing competitive environment. It's an important time for CEC. And as CEO, it'll be my job to make sure that across the entire enterprise, we are focused on serving our 100,000 students through providing them with high-quality educational experiences that are useful to them. I'll be working closely with our board and experienced members of our senior management to make sure we keep our sights on that central focus of our mission. We have, throughout this enterprise, experienced highly dedicated management professionals and we have a solid foundation of educational institutions and brands. I'd like to thank Gary for his years of service to our company. Gary joined Career Education in March of 2007, and worked hard to professionalize and improve the management of the company at both the corporate and operating levels during a difficult period and he succeeded in doing that. The board and I are committed to ensuring that Career Education's future is dependent on our institution's ability to provide quality education and services to our students. This is absolutely critical to enable the company to achieve increased value over the long term for all our constituencies. Turning to the mandate that I have been given by the board. It is as follows: First, assure that our corporate governance, including our adherence to strict regulatory compliance, is…

Thanks, Steve. The third quarter presented challenges for both CEC and the industry as other private-sector schools have recently disclosed weak new student demand, lengthening student decision-making processes and operating deleverage that had significant impacts on operating results. During the third quarter, our teams continue to execute the actions required to optimize our near-term business goals and objectives, while also implementing strategies and business models necessary to effectively compete and continue, as Steve said, to provide high-quality education for our students. Before I discuss a few of the actions we have taken and provide you an update on our placement rate review, let me recap the results for the third quarter. During the third quarter, our revenue decreased 18% versus the third quarter 2010. We earned operating income of $16 million. Operating income for this third quarter reflected the pricing of $11 million of charges related to various regulatory matters. First, approximately $2 million in outside legal fees associated with responding to the New York Attorney General's subpoena requests. Second, roughly $3 million in charges associated with conducting our internal placement rate review. And third, a reserve for $5 million related to potential return of veterans affair funds, which I'll speak to later. Our operating margin for the quarter was 3.7%, a 380 basis point decrease from the third quarter last year. The $11 million I just noted decreased operating margin by 260 basis points and reduced reported earnings per share by $0.10 per share. Student population was approximately 104,000 students, down 12% from the third quarter of 2010, and our new student starts for the third quarter of 2011 were down 22% versus last year. And remember, this includes a negative impact of our Student Orientation and Readiness program, known as SOAR, in AIU and CTU and as well…

Thanks, Mike, for that update. I'd like to conclude by affirming that the Board of Directors and my management colleagues at Career Education are fully focused on continuing to position the organization, to build potential for the longer term. Each of us believes that education is one of the most vital sectors of our society and central to this country's economy. Its education that fuels broader opportunity and fuller employment. We're confident that private sector education, despite all of the recent turmoil, has an important and growing role to play, not only in America but in a number of other countries, and that Career Education can be among the best and brightest performers. Having just come through a period of heightened government scrutiny and regulatory upheaval, private-sector education is, I believe, at an inflection point in moving into a new educational climate. I believe this environment will offer enhanced opportunities for students and educators and will undoubtedly serve as a significant driver of economic growth and economic return for us. I know that I speak on behalf of our entire board in saying that we expect our company to lead the way using improved teaching techniques, research and technology to be increasingly effective in achieving concrete and useful learning outcomes. Career Education recently became a founding member of the coalition for educational success and I wanted to take a moment to speak about that. We adopted the coalition's new standards of responsible conduct and transparency. We will continue to be a strong advocate for the very high standards of conduct and accountability and support government policies that enable wider access to higher education, particularly for nontraditional students. And with that, let me open up the line for a limited number of questions until 8:30.

[Operator Instructions] Our first question comes from Gary Bisbee from Barclays Capital.

I guess, the question, one for each of you. Steve, you mentioned that one of your goals will be to ensure that the company has strong and well-defined strategy and I think you insinuated that maybe new leadership, new thinking at the top would be necessary to achieve that. From your time on the board, can you give us some impressions of where there were shortcomings in the strategy or you know what you think needs to be done?

I don't think I wanted to go into specifics on the contours of the strategy right at the moment. Suffice it to say, that a strategic review has been underway now for some time within the company and we hope to bring that review to a conclusion as quickly as possible and adopt a very definitive strategic plan that will enable everybody in the company to rally around it.

Okay. And then, Mike, I guess just on the expected spending around all of this, that the margins took a big step backwards. I guess not unexpected given the recent start trends, but did you -- how should we think about potential for cost saving in the short term versus investments to accomplish the strategic review and all the other things that are going on with the business?

Sure. Again, first and foremost, everything is centered around the student and taking care of all the issues that we have, as Steve said. So we look at those costs as investments. We don't try to minimize those costs at all. We spend everything we need to, as you saw in this quarter, to address the matters head on and do everything we can. We'll continue to experience deleveraging as the population goes down. We've been active in taking costs out of system. We'll continue to take metrical-driven cost out of the system. You've seen that from the admissions and the marketing. Occupancy remains somewhat fixed and our student-teacher ratios obviously decrease as our population goes down and we don't change the instructor level, so we're going to continuing to experience de-leverage as we go forward. In the forward quarter, I think, you will see continued cost related to our investigation. Obviously, the $5 million for the VA [ph], if we need to step up and help our students with that, is a one-time event. You will continue to see regulatory cost from the fourth quarter. You'll also see for Gary's employment agreement, the cost related to that, which you can get an estimate from it from the proxy statement.

Our next question comes from Jeff Silber from BMO Capital Markets. n

Mike, you just mentioned that your focus is on the students. I'm just curious in terms of displacement investigation, how have these results have been communicated to the students at these schools and what are plans, if they need to notify perspective students of this issue?

Sure. Jeff, as we've just recently completed the investigation for both Health and Art & Design and then moving promptly within Culinary, AIU and CTU, we just put together the data. And our first approach was to share that with the New York AG and then share that with the ACICS. We will appropriately change any placement websites that we have, be it that the DoE mandated ones or student ones that are on their own websites and in the process of doing so as we speak.

Okay. And in terms of the investigation at the other units, do you have any time frame when those will be completed?

They're being done very, very promptly. As you can imagine, with the size of AIU and CTU from a relative population, that takes longer than the other ones. And we hope and our expectation is that those will be completed within probably the next 30 to 45 days.

Our next question comes from Bob Craig from Stifel, Nicolaus. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Mike, some of your commentary earlier about leads being down substantially and conversions fairly stable differ from what we're hearing from many other organizations. Might that give you pause to rethink your marketing spend strategy and perhaps increased that spending going forward?

Yes, just to clarify, Bob, I think on the conversion rate, I spoke to a basic AIU, experiencing the same on a sequential basis. But across the board, our conversion rate was down between 5% and 10% across the companies. I think we're seeing what everyone is seeing. Our lead volume was down probably somewhere between 15% and 20%. So I think the strategy that we put in place, spending appropriately, not additional advertising spending behind lower quality leads, continue to find the best and highest-qualified students through the best trusted lead sources we have is the path we'll continue on. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Is it possible to give us any specifics or further specifics on the changes you're making on Art & Design, what the likely impact of that is going to be on future results?

I think we'll have to wait until next year. As we've talked about -- as we've gone through significant changes in Culinary, changing all the institutions, changing the programs. We've gotten some data. We know how to do this. Art & Design is just starting as we speak. And as we go into next year, it will be a more definitive to probably give some information. Again, our goal always is to make sure these units -- each unit, at least, generates the cost of capital and is accretive to our shareholders and that's our goal as we complete it up.

Our next question comes from Brandon Dobell with William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Mike, if maybe we can focus on the health business for one second, magnitude of potential either program closures or teach outs. Maybe also any color or commentary for us on kind of how the fixed cost, the lease terms, look at that business if you are in a position where you have the downside of the population a lot or give a lot of leases coming up in near term, a lot of them 5 years out. Just trying to get a sense of how the fixed costs could change in that business if population changes a lot.

Again, we're not necessary saying population is going to change a lot. What I did speak to was we're looking at teaching out certain programs that putting caps in certain programs and not looking at institutions themselves. So right now, as we look at the -- I can't comment in detail about which those would be -- we're still in conversations with various parties to make sure that they agree with the steps that we're taking. The leases for the 40 different Health campuses are obviously staggered. We will look at a campus-by-campus basis as we always do in terms of the student outcomes, the financial return to shareholders, the programs and the lease term to make sure the campus is as viable as it can be as we serve the students and we make those on a one-by-one basis. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: And just one clarifying point. Of the time frame you just gave in response to Jeff's question around the rest of the inquiries or investigations in the placement rates, is Culinary in the same kind of schedule there or do you expect that to be sooner or later or is there anything else different that you're doing with that business convert to AIU, CTU regarding placement rates?

We're along the same schedule. Our investigation is progressing well and I think as a whole, those 3 SBUs will be completed in 30 to 45 days.

Our next question comes from Sara Gubins from Bank of America Merrill Lynch.

Could you give some more clarity on what type of placement issues were found and have you spoken with the Department of Education about this yet?

The answer is yes. We have spoken to the Department of Education and all of our appropriate regulators and accreditors about the situation.

And just some more clarity on what the actual issues -- the kind of issues that you're finding are?

I think, Sara, as we said on our remarks, across the Health unit, we saw improper actions that were being taken and employees that were involved in any of those improper actions we've dealt with and addressed the employee matters. There was also across the institutions in Health and Art & Design, some inconsistencies and some inconsistencies in the reporting and the support. So as our team, our independent team looked at the placement rate, they went through and did a very thorough job to make sure every piece of documentation, every piece of placement information was provided. If, for some reason, the file was incomplete, even though there was a placement, we determine that would not be counted as a placement. So the team did a very thorough review on some improper actions in Health as we talked about and then inconsistent policy application, we look at in field and related-field placement data.

Okay. And then maybe just following up on some other questions about your costs. As we think about it for the company, as a whole, is there any way to give us a rule of thumb for what you view as fixed versus variable as you face most likely continued revenue declines in the next year?

No different than the color I've been able to provide to different analysts and yourself in the past around or the amount of our occupancy cost that is relatively fixed, administrative cost which is semi-fixed and our academic and admissions and marketing cost that is highly variable.

Our next question comes from Trace Urdan from Wunderlich.

Just following up on Sara's question, do you see the issues surrounding the improper placement rate reporting? Are these control issues or communication issues or cultural issues? Like how did this happen? I mean, firing some employees, I think seems to understate how widespread the issue is across 2 different school brands. So I'm wondering if you've spent any time thinking about a root cause here?

I think the company spent a lot of time on root cause analysis, both for the investigators and ourselves. I think the point that I talked about in terms of remediation speak to where the issues would've been. We talked about personnel. We talked about employee training. We talked about clarifying the policy. We talked about fixing and looking at the compliance oversight of those placement rates. We talked about certain programs that you maybe teach at out of that [ph]. If you look at those remediation steps, we'll then tell you what the issues we found out and we address those head on.

In your conversations with the ACICS, do you have a sense on when they are going to come back to you with what they believe to be the appropriate remedy for the schools in question?

We expect to have a dialogue with ACICS as quickly as we possibly can and I think we have already scheduled a meeting with them. This is Steve speaking. And with respect to your question, I would say that we have gone to extraordinary lengths to try to investigate this matter and identify the causes of why it cropped up in a number of places in our company. I believe that a report the we have received from independent counsel to the Board of Directors was just extraordinary. The independent counsel literally went student-by-student, so I'm not sure anybody has ever investigated its placement activities as closely as Career Education has done. And we have uncovered the fact that we’re going to be reported as placements in a number of cases and a number of places were not genuine placements according to our standards as a company. We have reported therefore accurate numbers to ACIS (sic) [ACICS] at the appropriate time, the time to report to them was 1 week or 2 ago. And we did that on time and with the results of this investigation. We have identified as you stated a myriad of possible causes of this. And as Mike has tried to detail, we have addressed all of the causes that we have been able to identify and we will continue to work on this problem until we are certain that we have it completely rooted out.

Our next question comes from Suzanne Stein from Morgan Stanley.

This is actually Thomas Allen, filling in for Susie. Can you just talk about your start trends for AIU and CTU? I believe if you adjust out the SOAR program, you'd still seen, I think, 3 or 4 quarters of down base start. Should we expect to lap that and then maybe start to improve backing out SOAR?

Yes, I think SOAR will be comparable all the way through at the beginning of the third quarter next year. The starts on adjusted basis at SOAR were around negative 20%, and you continue to see that level in the fourth quarter. As we start getting next year, the comparables will change and we're hoping that we start seeing market trend changes in terms of student interest as well as those comparables are lapping as we go to '12.

And then just in terms of revenue per student, we obviously adjusted our model for the changes you are making, but it seems like it was weaker than expected across the board, was there anything else that's going on there?

There was not -- in terms of -- you've got the credit hour changes in the AIU, which you need to look at. Again, just make sure your models are sensitive enough that you -- as you have student count, you may have student count of students that are in the SOAR program for which there'll be no revenue. So there could be noise around the recognition of revenue between the start -- the student population date and the revenue data.

Our next question comes from Amy Junker with Baird & Co. Amy W. Junker - Robert W. Baird & Co. Incorporated, Research Division: Mike, can you talk about how many of the ACICS accredited schools passed on the placement rate metric, if you go back to '09, that's the '09-'10 school year? And assuming you've had some schools still on the past, how did they treat those cases?

Amy, the investigation focused on the current year's reporting. As you can imagine by going back and having the independent team reaffirm everyone of our placements across everyone in the institutions that focuses on the current year and the current year data, and that is what we supplied ACICS on an adjusted basis. So I don't have the data and I wouldn't speculate on the data going backwards. We know the issue. We've given new data to ACICS and we go forward with the plans to get above 65% this year. Amy W. Junker - Robert W. Baird & Co. Incorporated, Research Division: Have there ever been though -- since at least you've been there, Mike, any cases where they have failed regardless of the integrity of the data?

If you look across our OPE IDs, remember the OPE ID structure we had with the number of different OPE IDs, within certain programs, because the placement rates are measured on program-by-program basis, there have been instances where we've been below 65% in a year and we've worked really hard to make sure that we're process in place for the next year, we're back above 65%. It's really difficult. This time though, as you look back across my past with the really soft economic environment and the difficulties for students to get jobs, the comparability of data.

Our next question comes from Kelly Flynn with Crédit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: Just a quick one on starts. I think you've given a lot of color but I just want to clarify, for Q4, basically do you expect them to be a lot worse year-over-year than the decline was in Q3? I think you just said in response to another question that x SOAR that will down about the same, so just the SOAR impact get worse or for Q3, it was bad, the full impact?

The SOAR impact doesn't get worse because you do had the full cohorts in the third quarter. Remember the second quarter we didn't have full cohorts, so the third quarter is the first one. So we, right now, believe we'll have comparable starts in the fourth quarter as we did in the third. Kelly A. Flynn - Crédit Suisse AG, Research Division: So down about the same amount year-over-year, you mean?

I'm not sure if I would say down or up versus the number of a comparable and overall trend that we have now.

Our next question comes from Corey Greendale from First Analysis.

I just wanted to go back to questions that Jeff asked earlier, specifically interested in what your messaging is to current students, if the question is raised over, we thought for placement it sounds like we maybe -- we weren't informed properly, how are you messaging the changes you're making and trying to ensure that those students stick around?

These numbers are current numbers. So what we'll be reporting to students is current numbers and they are to the best of our ability and to the best of the ability of independent counsel, very accurate numbers and so we will be reporting these current accurate numbers to students.

And then Mike, if I could. Some people would ask about the cost structure generally. I want to ask specifically about the Health Education segment, which I don't think you called out any nonrecurring items as being responsible for the loss in the quarter. So do you think given this level of revenue, there's a way of getting that business to become sustainably profitable?

I fully believe we can be sustainably profitable as we have been in the past with the business. I think we a significant amount of deleveraging going on. We have the startup campuses. We've invested in the last several years that we tell you about the startup number, which is the most recent year. Remember, our start up's one year after opening with campuses start ups. We have many campuses. If you look at our account that are maybe 2 years old, which aren't up to the full profitability levels of a mature campus. So once those campuses continue to grow, we'll do well. Also additionally, this has been a very thorough investigation by the Board of Directors and counsel and throughout the Health units, there has been distraction and there have been priorities to make sure that we did everything working on the investigation, the placement data issues. Everything else you've heard about that may have taken the ball up some of operations of the campuses, that as we clear this up, will be behind us.

Our next question comes from James Samford from Citigroup.

Just at a high level, Steve, you've been at the company for quite a while and seen the company go through some pretty significant changes. I was wondering if you could comment on -- interested in the magnitude of what you're facing today versus maybe some of the challenges that the company's faced in the past, perhaps 3 to 5 years ago?

I'm very optimistic today certainly compared to 3 to 5 years ago, but in the context of today, I'm very optimistic. As I point that out, I think that there's an opportunity here for the entire sector even in the aftermath of the changes that have been imposed on the industry by the Department of Education. So I think that we and other companies have a real opportunity to grow and expand and to serve a larger population of students. So when you have that fundamental belief that you're in an area that needs to grow, that needs to serve more people, more students, more consumers, you have an optimistic view. I also said earlier and meant it, that this company has broad resources including financial resources. And I think that they can be put to work for the company in meaningful ways that are going to enable it to be successful. I also tried to indicate that there's going to be a balance between dealing with our near-term compliance issues, and the longer-term need to put a strategy in place around which we can rally as an organization. And we have a head start on developing that strategy and I think that we can distinguish this company and move ahead and grow profitably in the long term.

Our next question comes from Peter Appert from Piper Jaffray.

This is George Tong for Peter Appert. I know you touched on this a bit earlier, but could you give us additional clarity on how you expect starts and enrollment trends to play out specifically whether you have any views on when either it will turn positive? And could you tell us, if you feel comfortable, reiterating your prior revenue with operating income guidance?

I don't think I can give any more color about the market trends and start trends that I have already given. In terms of our guidance, we've never given our guidance. As you know we've given out some milestones. In the beginning of the year, we've given out some milestones. You now can see that we had cost in this quarter that we're trying -- anticipated. We'll have cost in the fourth quarter in terms of Gary's employment agreement, we haven't anticipated. So I think it's important to look at where the business is after 3 quarters and to build your model and anything you need in terms of Health filling in that mosaic, we're happy to help you with.

Got it. And what are the implications of having for the 36 schools and Health and Arts & Design that didn't meet the 65% minimum placement rate standard? And could you -- do you have any specific plans on how to bring those into compliance?

I think the plans, agreement and compliance are exactly what I spoke to earlier about the change in personnel, the increase training, bringing in more career services people, making sure the policy definitions are proper, teaching out certain programs, capping certain programs. I think those all are in the right place. ACICS has a variety of different steps that they can take. Again, given the circumstances that we have, that we've been open, we've been very forthright, we've gone to them on a very proactive basis that the overall numbers for both Health and Art & Design are not materially different than 65%. We will talk to them on the individual institution-by-institution basis, and put in remedies and do as much as we can to make sure that for this year, we're above 65%.

That is all of the questions for today. I will now turn the call over back to Mr. Lesnik for closing remarks.

Thank you, Dawn. On behalf of the board, as well as our employees, I'd like to thank you, all, for joining us today and your interest in the company. As I said a couple of times, I believe we have a fundamentally strong institution and I believe we have a lot of talents among the 13,000 people who work here. As a company, we've always been transparent with you and with our other constituencies and open with all investors. And we've hopefully continued that approach today in our remarks. We appreciate that you'll have questions as you further review and think about our remarks and the materials we've issued last night. So if you do, please contact our Investors Relations team to answer any questions you may have. As they say, they'll be ready at the phones anytime. This concludes our call for this morning. Thanks for joining us and thanks for your continued interest in Career Education.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.