CAREER EDUCATION CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998
Commission File Number 0-23245

CAREER EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 39-3932190
(State of Incorporation) (I.R.S. Employer ID No.)

2800 West Higgins Road, Suite 790, Hoffman Estates, Illinois 60195
(Address of principal executive offices) (zip code)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)

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 ____
---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant, based upon the $29.25 per share closing sale price
of the registrant's Common Stock on March 17, 1999, was approximately
$160,830,511. For purposes of this calculation, the Registrant's directors and
executive officers have been assumed to be affiliates.

The number of shares outstanding of the registrant's Common Stock, par value
$.01, as of March 17, 1999 was 7,218,046.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Notice of Annual Meeting and Proxy Statement for our Annual
Meeting of Stockholders, scheduled to be held on May 20, 1999, are incorporated
by reference into Part III of this Report.

CAREER EDUCATION CORPORATION

FORM 10-K

TABLE OF CONTENTS

PART I................................................................... 3
ITEM 1. BUSINESS................................................. 3
ITEM 2. PROPERTIES...............................................28
ITEM 3. LEGAL PROCEEDINGS........................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......29

PART II..................................................................29
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..............................29
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA..........30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................41

PART III.................................................................42
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......42
ITEM 11. EXECUTIVE COMPENSATION...................................42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT....................................42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........42

PART IV..................................................................43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................43

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PART I

ITEM 1. BUSINESS

The discussion below contains certain forward-looking statements, as such
term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on the beliefs of our management, as well as assumptions
made by, and information currently available to, our management. Our actual
growth, results, performance and business prospects and opportunities in 1998
and beyond could differ materially from those expressed in, or implied by, any
such forward-looking statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Special Note Regarding Forward-
looking Statements" on page 40 for a discussion of risks and uncertainties that
could cause or contribute to such material differences.

Overview

We are a provider of private, for-profit postsecondary education in North
America, with approximately 15,900 students enrolled as of October 31, 1998. We
operate 13 schools, with 22 campuses located in 14 states and two Canadian
provinces. Our schools enjoy long operating histories and offer a variety of
bachelor's degree, associate degree and non-degree programs in career-oriented
disciplines. We have experienced significant growth both internally and through
acquisitions with our net revenue increasing from $7.5 million in 1994 to $144.2
million in 1998. In addition, our net income increased to $4.3 million in 1998
from a net loss of $1.6 million in 1994.

Career Education Corporation was founded in January 1994 by John M. Larson,
our President and Chief Executive Officer, who has over 24 years of experience
in the career-oriented education industry. We were formed to capitalize on
opportunities in the large and highly fragmented postsecondary school industry.
Since our inception, we have completed 13 acquisitions. We have acquired schools
that we believe possess strong curricula, leading reputations and broad
marketability but that have been undermanaged from a marketing and financial
standpoint. We seek to apply our expertise in operations, marketing and
curricula development, as well as our financial strength, to improve the
performance of these schools.

Our schools offer educational programs principally in the following four
career-related fields of study--identified by us as areas with highly interested
and motivated students, strong entry-level employment opportunities and ongoing
career and salary advancement potential:

. Information Technologies: These programs include PC/LAN, PC/Net, computer
technical support, computer network operation, computer information
management and computer programming.

. Visual Communication and Design Technologies: These programs include desktop
publishing, graphic design, fashion design, interior design, graphic imaging,
webpage design and animation.

. Business Studies: These programs include business administration and business
operations.

. Culinary Arts: These programs include culinary arts, culinary arts and
restaurant management and pastry arts.

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The schools acquired by us are summarized in the following table:

School Year Month Principal Degree
- ------------------------------------------------- ------- -------- ------------ --------
Founded Acquired Curricula(1) Granting
------- -------- ------------ --------

Al Collins Graphic Design School 1978 1/94 IT, VC Yes
Tempe, AZ
Brooks College 1970 6/94 VC Yes
Long Beach, CA
Allentown Business School 1869 7/95 B, IT, Yes
Allentown, PA S, VC
Brown Institute 1946 7/95 CA, E, Yes
Mendota Heights, MN IT, RTB,
VC
Western Culinary Institute 1983 10/96 CA No
Portland, OR
School of Computer Technology 1967 2/97 CA, IT Yes
Fairmont, WV
Pittsburgh, PA
The Katharine Gibbs Schools 1911 5/97 B, IT, Yes
Boston, MA S, VC
Melville, NY
Montclair, NJ
New York, NY
Norwalk, CT (2)
Piscataway, NJ (3)
Providence, RI (3)
International Academy of Merchandising & Design 1977 6/97 VC Yes
Chicago, IL
Tampa, FL
International Academy of Design 1983 6/97 VC No
Montreal, PQ
Toronto, ON
Southern California School of Culinary Arts 1994 3/98 CA No
South Pasadena, CA
Scottsdale Culinary Institute 1986 7/98 CA Yes
Scottsdale, AZ
Harrington Institute of Interior Design 1931 1/99 VC Yes
Chicago, IL
McIntosh College 1896 3/99 B, IT, CA Yes
Dover, NH

- ---------------

(1) The programs offered by our schools include business studies ("B"), culinary
arts ("CA"), electronics ("E"), information technologies ("IT"), radio and
television broadcasting ("RTB"), secretarial studies ("S") and visual
communication and design technologies ("VC").
(2) The Gibbs campus in Norwalk, Connecticut is now using the name Gibbs
College.
(3) Does not offer degree programs.

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Industry Background

Based on estimates for 1996 by the Department of Education's National Center
for Education Statistics, postsecondary education is a $225 billion industry in
the U.S., with over 14 million students obtaining some form of postsecondary
education. Of this total, approximately 3.2 million students are enrolled in
approximately 4,600 private, degree-granting schools. Federal funds available to
support postsecondary education exceed $40 billion each year and have grown
steadily over the last two decades. Additionally, the federal government
guaranteed over $32 billion in student loans in 1997 and is expected to
guarantee loans at comparable levels in the future. State, local and private
funds for career-oriented training are also available.

Several national economic, demographic and social trends are converging to
contribute to growing demand for career-oriented school education:

Changes in Workplace Demands. The workplace is becoming increasingly
knowledge-intensive. Rapid advances in technology have increased demands on
employers and their employees, requiring many new workers to have some form of
training or education beyond the high school level. The increasing technological
skills required for entry level jobs are spurring demand for specialized
training which, in many cases, is not provided by traditional two and four year
colleges. The U.S. Department of Labor projects that between 1996 and 2006 jobs
requiring (1) a bachelor's degree are expected to increase approximately 25%,
(2) an associate degree are expected to increase approximately 22% and (3)
postsecondary vocational training are expected to increase approximately 7%. As
of December 31, 1998, approximately 70% of our U.S. students were enrolled in
bachelor's degree programs or associate degree programs and the remaining 30% of
our U.S. students were enrolled in vocational diploma/certificate programs. As
of December 31, 1998, approximately 11% of our students were enrolled in our
Canadian schools. Furthermore, career-oriented schools generally have the
ability to react quickly to the changing needs of the nation's business and
industrial communities. Additionally, to meet the new workplace demands, many
major companies are now using career-oriented institutions to provide customized
training for their employees on a contractual basis. Small to medium-sized
companies are also using proprietary career-oriented schools to fill their needs
for training to maintain or increase the skill levels of their employees.

Increasing Numbers of High School Graduates. Currently, U.S. high school
graduates represent over 2.6 million new prospective postsecondary students each
year, the largest pool of potential enrollees. Over the 18 years prior to 1993,
the number of high school graduates had been declining. However, this trend has
changed favorably as children of the "baby boom" generation are entering their
high school years. These members of the "echo boom," as it is commonly known,
are expected to boost enrollment in postsecondary educational programs to as
high as 15.8 million students by 2006, an increase of over 10% from
approximately 14.3 million in the fall of 1996.

Growing Demand for Postsecondary Education. High school graduates and adults
are seeking postsecondary education in increasing numbers. According to the U.S.
Department of Commerce, approximately 65% of all 1996 high school graduates
continued their education that same year, compared with 53% a decade earlier.
The Department of Labor projects the number of jobs requiring at least an
associate degree or higher to grow by more than 14% between 1996 and 2006. In
addition, enrollment in postsecondary programs is expected to increase
substantially as individuals seek to enhance their skills or re-train for new
job requirements. In part because of the recent trend toward corporate
downsizing, the National Center for Education Statistics estimates that over the
next several years initial enrollments in postsecondary education institutions
by working adults will increase more rapidly than initial enrollments by recent
high school graduates. The number of adults enrolled in postsecondary education
programs in the U.S. is estimated by the National Center for Education
Statistics to reach 6.3 million by 2000, or 43% of the total number of people
enrolled.

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Recognition of the Value of Postsecondary Education. We believe that
prospective students are increasingly recognizing the income premium and other
improvements in career prospects associated with a postsecondary education. On
average, (1) a female with an associate's degree earns 33% more than a female
high school graduate, and a male with an associate's degree earns 19% more than
a male high school graduate, while (2) a female with a bachelor's degree earns
57% more than a female high school graduate, and a male with a bachelor's degree
earns 53% ore than a male high school graduate. Independent research studies
have demonstrated that prospective students consider these benefits in making
their education decisions.

Reduction in Public Education Funding. The reduction of federal, state or
provincial and local funding of public educational institutions in recent years
has forced educational institutions to cut back spending on general operations.
As a result, some schools have become underfunded and overcrowded. This trend
may provide an opportunity for proprietary institutions to serve, at more
competitive prices, the postsecondary education needs of individuals who would
have otherwise attended public schools.

Decreasing Size of Military Forces. Due to defense budget cuts and the
corresponding reduction in the U.S. armed forces, the U.S. military, a
traditional provider of technical and career-oriented training, is able to
provide fewer educational opportunities. According to the U.S. Department of
Defense, the aggregate number of military personnel has declined by 32% since
1987, with the aggregate number of individuals on active duty in the military
services declining from 2.2 million in 1987 to 1.5 million in 1996. This has
left an educational void to be filled by other sources, including proprietary
career-oriented schools.

We believe that private, for-profit, career-oriented schools are uniquely
positioned to take advantage of these national trends. We also believe that
similar factors are creating a favorable climate for career-oriented
postsecondary education in Canada and other international markets.

Business and Operating Strategy

We were founded based upon a business and operating strategy which we believe
has enabled us to achieve significant improvements in the performance of our
schools. We believe this strategy will enable us to continue to capitalize on
the favorable economic, demographic and social trends which are driving demand
for career-oriented education, thereby strengthening our position as a premier,
professionally managed system of career-oriented postsecondary educational
institutions. The key elements of our business and operating strategy are as
follows:

Focusing on Core Curricula. Our schools offer educational programs principally
in four career-related fields of study:

. information technologies, including Internet and intranet technologies,
offered at 15 campuses

. visual communication and design technologies, offered at 14 campuses

. business studies, offered at ten campuses

. culinary arts, offered at six campuses

We perceive a growing demand by employers for individuals possessing skills in
these particular fields. We also believe there are many entry-level positions
and ongoing career and salary advancement potential for individuals who have
received advanced training in these areas. We recognize that these employment

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opportunities have attracted highly interested and motivated students. These
students include both recent high school graduates and adults seeking formal
training in these fields as well as degrees, diplomas and certificates
evidencing their knowledge and skills. Our experience and expertise in these
attractive areas of study enable us to differentiate ourself from many of our
competitors and to effectively tailor our acquisition and marketing plans.

Adapting and Expanding Educational Programs. We strive to meet the changing
needs of our students and the employment market. We continually refine and adapt
our courses to ensure that both students and employers are satisfied with the
quality and breadth of our educational programs. Through various means,
including student and employer surveys and curriculum advisory boards comprised
of business and community members, our schools regularly evaluate their program
offerings and consider revisions to existing classes and programs, as well as
the introduction of new courses and programs of study within our core curricula.
We selectively duplicate programs that have been successful elsewhere in our
school system. In 1998, we successfully duplicated nine programs and plan to
continue this curricula transfer in the future. For example, we introduced
information technology programs at Gibbs similar to those already offered at
Brown and culinary arts programs at Brown like those offered at Western.

Investing for Future Growth. We make substantial investments in our people,
facilities, management information systems and classroom technologies to prepare
our company for continued growth. We devote particular attention to attracting
and retaining both corporate and school level management, and focus on employee
development in order to facilitate internal promotions. We make substantial
investments in facilities and classroom technologies to attract, retain and
prepare students for the increasing technical demands of the workplace.
Additionally, we have made significant investments in our management information
systems to standardize applications and processes across our schools in order to
maintain effective and expedient communication between our schools and corporate
management, as well as to ensure the smooth integration of newly acquired
schools.

Emphasizing School Management Autonomy and Accountability. We provide
significant autonomy and appropriate performance-based incentives to our campus-
level managers, which we believe offers important benefits for the organization.
We believe these policies foster an important sense of personal responsibility
for achieving campus performance objectives. We also believe our willingness to
grant local autonomy provides us and our schools with a significant advantage in
recruiting and retaining highly-motivated individuals with an entrepreneurial
spirit. Management of each of our campuses is principally directed by a campus
president and local managers, who are accountable for the campuses' operations
and profitability. Business strategy, finance and consolidation accounting
functions are, however, centralized at our executive offices in Hoffman Estates,
Illinois. When a new school is acquired, we evaluate the capabilities of
existing campus management personnel, and typically retain a significant
portion, which contributes to our ability to rapidly integrate acquired schools
into our system. We also determine the acquired school's needs for additional or
stronger managers in key areas and, where necessary, take appropriate action by
hiring new managers or assigning experienced staff to the school's campuses.

Direct Response Marketing. We seek to increase school enrollment and
profitability through intensive local, regional and national direct response
marketing programs designed to maximize each school's market penetration. We
also use the Internet to attract potential students and believe that this medium
will be an increasingly important marketing tool. Because many of our schools
have been significantly undermarketed prior to their acquisition, we believe
that major benefits can result from carefully crafted, targeted marketing
programs that leverage schools' curriculum strength and brand name recognition.
After every school acquisition, we design a marketing program tailored to the
particular school to highlight its strengths and to improve student lead
generation and student enrollment rates. Our management uses a diversified
media, direct response approach, including direct mail, Internet-based
advertising, infomercials, other

7

television-based advertising, newspaper advertising and other print media, to
attract potential students. We place particular emphasis on high school
recruitment because it produces a steady supply of new students.

Improving Student Retention. We emphasize the retention of students, from
initial enrollment to completion of their courses of study, at each of our
schools. Because, as at any postsecondary educational institution, a substantial
portion of our students never finish their educational programs for personal,
financial or academic reasons, substantial increases in revenue and
profitability can be achieved through modest improvements in student retention
rates. Our costs to keep current students in school are much less than the
expense of the marketing efforts associated with attracting new students;
therefore, student retention efforts, if successful, are extremely beneficial to
operating results. We strive to improve retention by treating students as valued
customers. We consider student retention the responsibility of the entire staff
of each school, from admissions to faculty and administration to career
counseling services, and provide resources and support for the retention efforts
developed by our local school administrators. School personnel typically employ
an approach based upon establishing personal relationships with students; for
example, students may receive a telephone call from a school counselor or
faculty member if they miss classes. In addition, our corporate staff regularly
tracks retention rates at each school and provides feedback and support to the
efforts of local school administrators. As of December 31, 1998, our retention
rate was approximately 77%. This rate was determined in accordance with the
standards of the Accrediting Council for Independent Colleges and Schools, which
determines retention rates by dividing the total number of student dropouts by
the sum of (1) beginning student population, (2) new starts and (3) student re-
enters.

Emphasizing Employment of Graduates. We believe that the high rates of
employment for graduates of our schools enhance the overall reputation of the
schools as well as their ability to attract new students. High placement rates
also lead to low student loan default rates, which are necessary to allow our
schools to continue to participate in the federal student financial aid
programs. We consider student placement to be a high priority and allocate a
significant amount of time and resources to placement services. Due at least in
part to this emphasis, 92.5% of our graduates for the 1998 academic year who
were available for employment had found employment relating to their fields of
study within six months of graduation. We are committed to maintaining or
improving these graduate employment rates and newly acquired schools will be
expected to meet similar graduate employment success standards.

Growth Strategy

We believe we can achieve superior long-term growth in revenue and
profitability by continuing to expand existing operations and acquire additional
schools in attractive North American markets. We believe we can achieve
additional growth in the future by establishing new campuses and also by
entering new service areas and expanding internationally.

Expanding Existing Operations. We believe that our existing 22 campuses can
achieve significant internal growth in enrollment, revenue and profitability. We
are executing our business and operating strategy, including all of the elements
described above, to accomplish this growth. We believe that expansion of
operations at our existing schools, along with acquisitions of new schools, will
be the primary generators of our growth in the near term.

Acquiring Additional North American Schools. To date, we have grown by
acquiring new schools in the U.S. and Canada and then applying our expertise in
marketing and school management to increase enrollment, revenue and
profitability at those schools. We expect that this process will continue to be
one of the most important elements of our growth strategy. We have an active
acquisition program and from time to time engage in, and are currently engaged
in, evaluations of, and discussions with, possible

8

acquisition candidates, including evaluations and discussions relating to
acquisitions that may be material in size or scope. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations--
Acquisitions."

We make selective acquisitions of for-profit, career-oriented schools which
have capable faculty and operations staff, as well as quality educational
programs, which stand to benefit from our educational focus, marketing and
operating strengths. We target schools which we believe have the potential to
generate superior financial performance. Generally, such schools demonstrate the
following characteristics:

. "Schools of Choice" --Possessing leading reputations in career-oriented
disciplines within local, regional and national markets

. Success--Demonstrating the ability to attract, retain and place students,
while meeting applicable federal and state regulatory criteria and
accreditation standards

. Marketable Curricula--Offering programs that provide students with relevant
training and the skills necessary to obtain attractive jobs and advance in
their selected fields

. Broad Marketability--Attracting students from each of the high school,
adult,foreign and contract training market segments

. Attractive Facilities and Geographic Locations--Providing geographically
desirable locations and modern facilities to attract and prepare students
for the demands of the increasingly competitive workplace

We believe that significant opportunities exist for growth through
acquisition. Some opportunities result from institutions having limited
resources to manage increasingly complex regulations or to fund the significant
cost of developing new educational programs necessary to meet changing demands
of the employment market. We believe that a substantial number of schools
exhibiting the characteristics described above exist in the U.S. and Canadian
markets and that such schools can be successfully integrated into our marketing
and administrative structure. We believe that competition in Canada is not
currently as intense as in the U.S. Few of the largest U.S. operators of
postsecondary career-oriented schools currently have a significant Canadian
presence. We believe that, given our existing Canadian operations, we are well-
positioned to take advantage of these opportunities.

We analyze acquisition targets for their long-term profit potential,
enrollment potential and long-term demographic trends, concentration of likely
employers within the region, level of competition, facility costs and
availability and quality of management and faculty. We carefully investigate any
potential acquisition target for its history of regulatory compliance, both as
an indication of future regulatory costs and compliance issues and as an
indication of the school's overall condition. Significant regulatory compliance
issues in the school's past will generally remove a school from our
consideration as an acquisition candidate.

After we have completed an acquisition, we immediately begin to apply our
business strategy to boost enrollment and improve the acquired schools'
profitability. We assist acquired schools in achieving their potential through a
highly focused and active management role, as well as through capital
contributions. We selectively commit resources to improve marketing,
advertising, administration and regulatory compliance at each acquired school.
Further resources may also be committed to enhance management depth. We retain
acquired schools' brand names to take advantage of their established reputation
in local, regional and national markets as "schools of choice."

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By acquiring new schools, we are also able to realize economies of scale in
terms of our management information systems, accounting and audit functions,
employee benefits and insurance procurement. We also benefit from the exchange
of ideas among school administrators regarding faculty development, student
retention programs, recruitment, curriculum, financial aid and student placement
programs.

Establishing New Campuses. Although, to date, we have added new campuses only
through acquisitions, in the future we expect to develop, open and operate new
campuses ourselves. These new campuses will most likely be established as
additional locations of existing institutions, but also may be established as
entirely separate, free-standing institutions. Opening new campuses would enable
us to capitalize on new markets or geographic locations that exhibit strong
enrollment potential and/or the potential to establish a successful operation in
one of our core curricula areas. We believe that this strategy will allow us to
continue to grow rapidly even if appropriate acquisition opportunities are not
readily available. We have not yet developed specific plans for any new
campuses, nor made any determination as to when we will first develop, open and
operate a new campus.

Entering New Service Areas. While we expect that our current career-oriented
school operations will continue to provide the substantial majority of our
revenue in the near term, we plan to develop new education-related services
which we believe offer strong long-term growth potential. Among the service
areas being actively considered is distance learning, which offers educational
products and services through video, Internet and other distribution channels.
We also plan to expand our contract training business, which provides customized
training on a contract basis for business and government organizations, and
which is currently a limited part of the operations of a few of our schools.
Although we have not yet actively targeted the growing market for contract
training services, we believe that contract training can become a much more
significant part of our business.

Expanding Internationally. Although all of our current operations are located
in North America, we believe that trends similar to those impacting the market
for postsecondary career-oriented education in the U.S. and Canada are occurring
outside of North America. As a result, we believe that there may be significant
international opportunities in private, for-profit postsecondary education. To
take advantage of these opportunities, we may at some time in the future elect
to acquire or establish operations outside North America.

Student Recruitment

Our schools seek to attract students with both the desire and ability to
complete their academic programs. Therefore, to produce interest among potential
students, each of our schools engages in a wide variety of marketing activities.

We believe that the reputation of our schools in local, regional and national
business communities and the recommendations of satisfied former students are
important factors contributing to success in recruiting new students. Each
school's admissions office is charged with marketing the school's programs
through a combination of admissions representatives, direct mailings and radio,
Internet, television and print media advertising, in addition to providing the
information needed by prospective students to assist them in making their
enrollment decisions.

As of December 31, 1998, our schools employed approximately 200 admissions
representatives, each of whom focuses his or her efforts on the following areas:
(1) out-of-area/correspondence recruiting, (2) high school recruiting or (3) in-
house/local recruiting. Correspondence representatives work with students who
live outside of the immediate school area to generate interest through
correspondence with potential enrollees who have learned of the school through
regional or national advertising. We believe we are able

10

to significantly boost enrollment by targeting students outside of the local
population. High school recruiting representatives conduct informational
programs at local secondary schools and follow up with interested students
outside of school, either at their homes or on our school campus. The
interpersonal relationships formed with high school counselors and faculty may
have significant influence over a potential student's choice of school. We
believe that the relationships of our schools' representatives with the
counseling departments of high schools are good and that the brand awareness and
placement rates of our schools assist representatives in gaining access to
counselors. In-house representatives are also available to speak with
prospective students who visit campuses and to respond to calls generated
through the school's advertising campaigns. Representatives interview and advise
students interested in specific careers to determine the likelihood of their
success in completing their educational programs. The admissions representatives
are full-time, salaried employees of the schools. Regulations of the Department
of Education prevent us from giving our U.S. employees incentive compensation
based, directly or indirectly, upon the number of students recruited.

We also engage in significant direct mail campaigns. Mailing lists are
purchased from a variety of sources, and brochures are mailed regularly during
the course of the year, with frequency determined by the number of school starts
in a given year. We believe direct mailings offer a fast and cost-effective way
to reach a targeted population.

In addition, each school develops advertising for a variety of media,
including radio, television and the Internet, which is run locally, regionally
and sometimes nationally. While multi-media advertising is generally more
appropriate for local markets, some initiatives have been successfully utilized
on a national basis. We have found infomercials to be a particularly effective
tool nationally because their length enables schools to convey a substantial
amount of information about their students, their faculty, their facilities and,
most importantly, their course offerings. We also believe that the personal
flavor of the presentation typical of infomercials is well-suited to attracting
potential applicants. As an additional marketing tool, all of our schools have
established web sites, which can be easily accessed for information about these
schools and their educational programs. Although we retain independent
advertising agencies, we design and produce a portion of our direct marketing
and multi-media advertising and communications in-house, through Market Direct,
Inc., a wholly-owned subsidiary. While a majority of Market Direct's operations
involve designing and producing advertising for us, Market Direct also provides
these services to other businesses outside of the postsecondary education
industry as opportunities arise.

We closely monitor the effectiveness of our marketing efforts. We estimate
that, in 1998, admissions representatives were responsible for attracting
approximately 37% of student enrollments, direct mailings were responsible for
approximately 13%, television, radio and print media advertising were
responsible for approximately 37%, and the remaining approximately 13% was
attributable to various other methods.

Student Admissions and Retention

The admissions and entrance standards of each school are designed to identify
those students who are best equipped to meet the requirements of their chosen
fields of study. The most important qualifications for students include a strong
desire to learn, passion for their area of interest, initiative and a high
likelihood of successfully completing their programs. These characteristics are
generally identified through personal interviews by admissions representatives.
We believe that a success-oriented student body results in higher retention and
placement rates, increased satisfaction on the part of students and their
employers and lower student default rates on government loans. To be qualified
for admission to one of our schools, each applicant must have a high school
diploma or a General Education Development certificate. Many of our schools also
require that applicants obtain certain minimum scores on academic assessment

11

examinations. For 1998, approximately 39% of entering students at our campuses
enrolled directly from high school.

We recognize that our ability to retain students until graduation is an
important indicator of our success and that modest improvements in retention
rates can result in meaningful increases in school revenue and profitability. As
with other postsecondary educational institutions, many of our students do not
complete their programs for a variety of personal, financial or academic
reasons. As a result, student retention is considered an entire school's
responsibility, from admissions to faculty and administration to career
counseling services. To minimize student withdrawals, faculty and staff members
at each of our campuses strive to establish personal relationships with
students. Each campus devotes staff resources to advising students regarding
academic and financial matters, part-time employment and other matters that may
affect their success. However, while there may be many contributors, each campus
has one administrative employee specifically responsible for monitoring and
coordinating the student retention efforts. In addition, our corporate staff
regularly tracks retention rates at each campus and provides feedback and
support to appropriate local campus administrators.

Curriculum Development and Faculty

We believe that curriculum is the single most important component of our
operations, because students choose, and employers recruit from, career-oriented
schools based on the type and quality of technical education offered. The
curriculum development efforts of our schools are a product of their operating
partnership with students and the business and industrial communities.

The relationship of each of our schools with the business community plays a
significant role in the development and adaptation of school curriculum. Each
school has one or more program advisory boards composed of members of the local
and regional business community who are engaged in businesses directly related
to the educational offerings provided by the school. These boards provide
valuable input to the school's education department, which allows the school to
keep our programs current and provide graduates with the training and skills
that these employers seek.

We also endeavor to enhance and maintain the relevancy of our curricula by
soliciting ideas through student and employer surveys and by requiring students
in selected programs to complete an internship during their school experience.
We have developed a number of techniques designed both to gain valuable industry
insight for ongoing curriculum development and enhance the overall student
experience. These techniques include (1) classroom discussions with industry
executives, (2) part-time job placement within a student's industry of choice
and (3) classroom case studies that are based upon actual industry issues.

Our schools are in continuous contact with employers through their faculty,
many of whom are industry professionals. The schools hire a significant number
of part-time faculty holding positions in business and industry because
specialized knowledge is required to teach many of the schools' courses and to
provide students with current, industry-specific training. The schedules of
business and industry professionals often permit them to teach the many evening
courses offered by our schools. Unlike traditional four-year colleges,
instructors in our schools are not awarded tenure and are evaluated, in part,
based upon student evaluations. As of December 31, 1998, our schools employed
approximately 1,460 faculty and staff members, of which approximately 32% were
full-time employees and approximately 68% had been hired on a part-time, adjunct
basis.

12

School Administration

We provide significant operational autonomy and appropriate performance-based
compensation to local school administrators who have demonstrated the ability to
undertake such responsibility, based on our belief that success is driven by
performance at the local level through enrollment growth, student retention
rates and placement rates. In addition, each of our schools requires, to a
certain extent, different resources and operating tactics due to a variety of
factors, including curriculum, demographics, geographic location and size.
Management of each of our schools is principally in the hands of a school
president who has accountability for the school's operations and profitability.
Each of our schools has five primary operating departments: admissions,
financial aid, education, placement and accounting.

Business strategy, finance and consolidation accounting functions are
centralized at our corporate headquarters. Our corporate staff develops long-
term and short-term operating strategies for the schools and works closely with
local administrators to accomplish their goals and ensure adherence to our
strategy. We maintain stringent quality standards and controls at both the
corporate and individual school levels. Activities at the corporate level
include regular reporting processes which track the vital statistics of each
school's operations, including leads, enrollments, retention rates, placements,
and financial data. These reports provide real-time data which allow management
to monitor the performance of each campus. Each operating department at the
campus level is also required to compile quantitative reports at regular
intervals, including reports on admissions, financial aid, academic performance
and placement.

We use a number of quality and financial controls. Information is tracked
through an advanced, PC-based management information system, which currently
runs on a decentralized basis, but also allows centralized access to account
information.

Tuition and Fees

Currently, total tuition for completion of a diploma/certificate program
offered by our schools, assuming full time attendance, ranges from $5,400 to
$23,000, for completion of an associate degree program ranges from $13,000 to
$23,000, and for completion of a bachelor's degree program ranges from $32,000
to $49,500. In addition to these tuition amounts, students at our schools
typically must purchase textbooks and supplies as part of their educational
programs.

Our institutions bill students for their tuition and other institutional
charges based on the specific instructional format or formats of the school's
educational programs. Each institution's refund policies must meet the
requirements of the Department of Education and such institution's state and
accrediting agencies. Generally, under the Department of Education's
requirements, if a first-time student ceases attendance before the point in time
that is 60% of the period of enrollment for which the student has been charged,
the institution will refund institutional charges based on the amount of time
for which the student was charged but did not attend. After a student has
attended 60% or more of such period of enrollment, the institution will retain
100% of the institutional charges for that period of enrollment. After the
student's first enrollment period, the institution refunds institutional charges
for subsequent periods of enrollment based on the number of weeks remaining in
the period of enrollment in which the student withdrew. In certain
circumstances, institutions must apply state refund requirements when
determining refunds for students.

Graduate Employment

We believe that employment of graduates of our schools in occupations related
to their fields of studies is critical to the reputation of the schools and
their ability to continue to recruit students successfully. We

13

believe that our schools' most successful form of recruiting is through
referrals from satisfied graduates. A strong placement office is important to
maintain and elevate the school's reputation, as well as managing the rate at
which former students default on their loans.

We devote a significant amount of time and resources to student placement,
which we believe to be the ultimate indicator of our success. We believe that
our average placement rate is attractive to prospective students. Student
placement is a top priority of each of our schools beginning on the first day of
student enrollment. This approach heightens the students' awareness of the
placement department and keeps students focused on their goal--job placement
within their field of choice. Moreover, each of our schools includes career
development instruction in our curricula, which includes the preparation of
resumes, cover letters, networking and other essential job-search tools.
Placement office resources are regularly available to our graduates. With such
assistance, our graduates find employment with a wide variety of businesses
located not only in the schools' local markets but also regionally and
nationally.

Each campus' placement department also plays a role in marketing the campus'
curriculum to the business community to produce job leads for graduates. As of
December 31, 1998, approximately 65 employees worked in the placement
departments of our campuses. Placement counselors participate in professional
organizations, advisory boards, trade shows and community events to keep
apprised of industry trends and maintain relationships with key employers.
Partnerships with local and regional businesses are established through
internships and curriculum development programs and facilitate placement of
graduates in local and regional businesses. The placement department also
assists current students in finding part-time jobs while attending school. These
part-time placements often lead to permanent positions.

Based on survey information received from graduating students and employers,
we believe that of the 6,615 students graduating from our schools during the
1998 academic year, 92.5% of the 6,088 available graduates, which excludes
students who are continuing their education, are in active military service or
are disabled or deceased, as well as students from foreign countries who are
legally ineligible to work in the U.S., obtained employment in fields related to
their program of study within six months following their graduation.

The reputation of Gibbs allows it to charge fees to employers upon placement
of many of its students. Our other schools do not currently receive such
placement fees, nor, we believe, do any of our principal proprietary
competitors. We believe that, as an additional source of revenue, we may be able
to replicate the Gibbs' placement fee program at some of our other schools.

Technology

We are committed to providing our students access to the technology necessary
for developing skills required to succeed in the careers for which they are
training. Through regular consultation with business representatives, we ensure
that all our schools provide their students with industry-current computer
hardware, computer software and equipment meeting industry-specific technical
standards. In each program, students use the types of equipment that they will
eventually use in their careers of choice. For example, graphic animation
students use sophisticated computer multimedia animation and digital video
editing equipment and supplies, and visual communication and design technologies
students make significant use of technologies for computer-related design and
layout and digital pre-press applications.

14

Employees

As of December 31, 1998, Career Education Corporation and our schools had a
total of approximately 1,200 full-time and 985 part-time employees. Neither
Career Education Corporation nor any of our schools has any collective
bargaining agreements with our employees. We consider our relations with our
employees to be good.

Competition

The postsecondary education market is highly fragmented and competitive, with
no single institution having a significant market share. Our schools compete
with traditional public and private two-year and four-year colleges and
universities, other proprietary schools and alternatives to higher education
such as immediate employment and military service. Private and public colleges
and universities may offer courses of study similar to those of our schools.
Some public institutions are able to charge lower tuition than our schools due
in part to government subsidies, government and foundation grants, tax-
deductible contributions and other financial sources not available to
proprietary schools. However, tuition at private, non-profit institutions is, on
average, higher than the average tuition rates of our schools. Other proprietary
career-oriented schools also offer programs that compete with those of our
schools. We believe that our schools compete with other educational institutions
principally based upon quality of their educational programs, reputation in the
business community, costs of programs and graduates' ability to find employment.
Some of our competitors in both the public and private sectors may have
substantially greater financial and other resources than us.

Changes in the regulatory environment have stimulated consolidation in the
postsecondary education industry. Regulations adopted in recent years have
tightened standards for educational content, established strict standards for
student loan default rates, required intensified scrutiny by state education
agencies and accrediting agencies and created more stringent standards for the
evaluation of an institution's financial responsibility and administrative
capability. As a result, career-oriented schools have been forced to close
because they lacked sufficient quality or financial resources or could not
manage the increased regulatory burden. At the same time, despite increasing
demand, potential new entrants face significant barriers to entry due to the
highly regulated nature of the industry and the considerable expense of start-up
operations.

Financial Aid and Regulation

Our schools and students in the U.S. and Canada participate in a wide variety
of government-sponsored financial aid programs. For this reason, our schools are
subject to extensive regulatory requirements imposed by government funding
agencies and other bodies. For the 1997-98 award year, which is July 1, 1997 to
June 30, 1998, we derived approximately 70% of our total net revenue on a cash
basis from such financial aid received by our students. We estimate that over
70% of our students receive government-sponsored financial aid. Our students
also finance their education through family contributions and individual
resources.

Nature of Federal Support for Postsecondary Education in the U.S. While many
states support public colleges and universities primarily through direct state
subsidies, the federal government provides a substantial part of its support for
postsecondary education in the form of grants and loans to students who can use
those funds at any institution that has been certified as eligible by the
Department of Education. These federal programs are authorized by Title IV of
the Higher Education Act of 1965, as amended, and are collectively referred to
as the "Title IV Programs."

Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the Higher Education Act as the difference between
the cost of attending the institution and the amount a student can reasonably
contribute to that cost. All recipients of Title IV Program funds must

15

maintain a satisfactory grade point average and progress in a timely manner
toward completion of their program of study.

Students at our schools receive grants, loans and work opportunities to fund
their education under the following Title IV Programs, although not every campus
participates in all programs: (1) the Federal Family Education Loan ("FFEL")
program, (2) the William D. Ford Federal Direct Loan ("FDL") program, (3) the
Federal Pell Grant ("Pell") program, (4) the Federal Supplemental Educational
Opportunity Grant ("FSEOG") program, (5) the Federal Perkins Loan ("Perkins")
program and (6) the Federal Work-Study ("FWS") program.

FFEL. Loans made under the FFEL program are federally guaranteed. Loans are
made by banks and other lending institutions, but if a student or parent
defaults on a loan, payment is guaranteed by a federally recognized guaranty
agency, which is then reimbursed by the Department of Education. Students with
financial need qualify for interest subsidies while in school and during grace
periods. Our schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make and guarantee FFEL loans.

FDL. Under the FDL program, students or their parents may obtain loans
directly from the Department of Education rather than from commercial lenders.
The conditions on FDL loans are generally the same as on loans made under the
FFEL program.

Pell. Under the Pell program, the Department of Education makes grants to
students who demonstrate financial need.

FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. An institution is required to make a 25% matching contribution for all
federal funds received under this program.

Perkins. Perkins loans are made from a revolving institutional account, 75% of
which is capitalized by the Department of Education and the remainder by the
institution. Each institution is responsible for collecting payments on Perkins
loans from its former students and lending those funds to currently enrolled
students.

FWS. Under the FWS program, federal funds are used to pay up to 75% of the
cost of part-time employment of eligible students to perform work for the
institution or certain off-campus organizations. The remaining 25% is paid by
the institution or the employer.

Regulation of Federal Student Financial Aid Programs for U.S. Schools. To
participate in the Title IV Programs, an institution must be authorized to offer
its programs of instruction by the relevant agencies of the state in which it is
located, accredited by an accrediting agency recognized by the Department of
Education and certified as eligible by the Department of Education. The
Department of Education will certify an institution to participate in the Title
IV Programs only after the institution has demonstrated compliance with the
Higher Education Act and the Department of Education's extensive regulations
regarding institutional eligibility. An institution must also demonstrate its
compliance to the Department of Education on an ongoing basis. These standards
are applied primarily on an institutional basis, with an institution defined as
a main campus and its additional locations, if any. Under this definition, each
of our U.S. campuses is a separate institution, except for Gibbs-Piscataway,
which is an additional location of Gibbs-Montclair, and the School of Computer
Technology-Fairmont, which is an additional location of the School of Computer
Technology-Pittsburgh. All of our U.S. schools currently participate in the
Title IV Programs, except McIntosh College, which we recently acquired.

16

The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to instances of fraud, waste and abuse.
As a result, Congress has required the Department of Education to increase its
level of regulatory oversight of institutions to ensure that public funds are
properly used. Under the Higher Education Act, accrediting agencies and state
licensing agencies also have responsibilities for overseeing institutions'
compliance with Title IV Program requirements. As a result, each of our
institutions is subject to frequent reviews and detailed oversight and must
comply with a complex framework of laws and regulations. Because the Department
of Education periodically revises its regulations and changes its interpretation
of existing laws and regulations, we cannot assure you that the Department of
Education will agree with our understanding of each Title IV Program
requirement.

Significant factors relating to the Title IV Programs that could adversely
affect us include the following:

Legislative Action. Political and budgetary concerns significantly affect the
Title IV Programs. Congress must reauthorize the Higher Education Act
approximately every six years. The most recent reauthorization in October 1998
reauthorized the Higher Education Act for an additional five years. Congress
reauthorized all of the Title IV Programs in which our schools participate,
generally in the same form and at funding levels no less than for the prior
year. While the 1998 reauthorization of the Higher Education Act made numerous
changes to Title IV Program requirements, we believe that these changes will not
have a material adverse effect on our business, results of operations or
financial condition. Changes made by the 1998 reauthorization of the Higher
Education Act include:

. expanding the adverse effects on schools of high student loan default rates,

. increasing from 85% to 90% the portion of a proprietary school's revenue
that may be derived each year from the Title IV Programs,

. revising the refund standards that require an institution to return a
portion of the Title IV Program funds for students who withdraw from school,

. giving the Department of Education flexibility to continue an institution's
Title IV participation without interruption in some circumstances following
a change of ownership or control,

. changing the formula for calculating the interest rate on FFEL and FDL
loans and

. modifying the definition of default from 180 days to 270 days past due for
loans payable in monthly installments.

In addition, Congress reviews and determines federal appropriations for the
Title IV Programs on an annual basis. Congress can also make changes in the laws
affecting the Title IV Programs in those annual appropriations bills and in
other laws it enacts between the Higher Education Act reauthorizations. Since a
significant percentage of our revenue is derived from the Title IV Programs, any
action by Congress that significantly reduces Title IV Program funding or the
ability of our schools or students to participate in the Title IV Programs could
have a material adverse effect on our business, results of operations or
financial condition. Legislative action may also increase our administrative
costs and require us to adjust our practices in order for our schools to comply
fully with the Title IV Program requirements.

Cohort Default Rates. A significant component of Congress' initiative to
reduce abuse in the Title IV Programs has been the imposition of limitations on
institutions whose former students default on the

17

repayment of their federally guaranteed or funded student loans above specific
rates. All of our institutions have implemented aggressive student loan default
management programs aimed at reducing the likelihood of students failing to
repay their loans in a timely manner. Those programs emphasize the importance of
students meeting loan repayment requirements and provide for extensive loan
counseling, methods to increase student persistence and completion rates and
graduate employment rates, and proactive borrower contacts after students cease
enrollment.

An institution's cohort default rate under the FFEL and FDL programs is
calculated on an annual basis as the rate at which student borrowers scheduled
to begin repayment on their loans in one federal fiscal year default on those
loans by the end of the next federal fiscal year. An institution whose cohort
default rates equal or exceed 25% for three consecutive years will no longer be
eligible to participate in the FFEL or FDL programs, and beginning with fiscal
year 1996 cohort default rates, the Pell program, for the remainder of the
federal fiscal year in which the Department of Education determines that such
institution has lost its eligibility and for the two subsequent federal fiscal
years. An institution whose cohort default rate under the FFEL or FDL program
for any federal fiscal year exceeds 40% may have its eligibility to participate
in all of the Title IV Programs limited, suspended or terminated by the
Department of Education.

None of our institutions has FFEL or FDL cohort default rates of 25% or
greater for three consecutive years. The following table sets forth the FFEL and
FDL cohort default rates for our institutions for federal fiscal years 1994,
1995 and 1996, the most recent years for which the Department of Education has
published such rates:

School FFEL and FDL Cohort Default Rate
------ --------------------------------
1996 1995 1994
------ ------ ------

Al Collins Graphic Design School
Tempe, AZ 15.4% 13.8% 19.3%
Allentown Business School
Allentown, PA 9.7 10.7 7.1
Brooks College
Long Beach, CA 21.1 17.8 18.3
Brown Institute
Mendota Heights, MN 17.4 18.1 19.6
Harrington Institute of Interior Design
Chicago, IL 8.9 5.6 0.0
International Academy of Merchandising & Design
Chicago, IL 13.8 15.5 13.3
Tampa, FL 12.0 13.3 15.0
The Katharine Gibbs Schools
Boston, MA 16.2 16.5 16.7
Melville, NY 12.7 15.8 17.7
Montclair, NJ and Piscataway, NJ 14.5 15.8 16.2
New York, NY 17.3 14.5 18.9
Norwalk, CT 16.0 27.0 17.8
Providence, RI 14.9 14.7 13.1
McIntosh College
Dover, NY 6.8 11.3 10.1
School of Computer Technology

18

Pittsburgh, PA and Fairmont, WV 12.9 11.2 9.3
Scottsdale Culinary Institute
Scottsdale, AZ 4.0(1) 6.1 5.6
Western Culinary Institute
Portland, OR 9.8 14.3 11.4

- ---------------

(1) This is a preliminary rate. The Department of Education has not yet
published a final 1996 rate for this institution.

An institution whose cohort default rate under the FFEL or FDL program equals or
exceeds 25% for any one of the three most recent federal fiscal years, or whose
cohort default rate under the Perkins program exceeds 15% for any year, may be
placed on provisional certification status by the Department of Education for up
to four years. Nine of our institutions have Perkins cohort default rates in
excess of 15% for students who were scheduled to begin repayment in the 1996-97
federal award year, the most recent year for which such rates have been
calculated. The Perkins cohort default rates for these nine institutions ranged
from 20.7% to 100.0%. To date, the Department of Education has placed only two
of our institutions, Gibbs-Melville and Gibbs-Montclair, on provisional
certification for their cohort default rates. Both institutions were placed on
provisional certification for their Perkins default rates, either alone or in
combination with other reasons. Total Perkins loans disbursed during 1997-98
represented less than 1% of our total net revenue. See "--Eligibility and
Certification Procedures."

Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy specific standards of financial responsibility.
The Department of Education evaluates institutions for compliance with these
standards each year, based on the institution's annual audited financial
statements, and following a change of ownership of the institution.

Under new regulations which took effect July 1, 1998, the Department of
Education calculates the institution's composite score based on its:

. equity ratio, which measures the institution's capital resources, ability
to borrow and financial viability,

. primary reserve ratio, which measures the institution's ability to support
current operations from expendable resources and

. net income ratio, which measures the institution's ability to operate at a
profit.

An institution that does not meet the Department of Education's minimum
composite score may demonstrate its financial responsibility by posting a letter
of credit in favor of the Department of Education in an amount equal to at least
50% of the Title IV Program funds received by the institution during its prior
fiscal year and possibly accepting other conditions on its participation in the
Title IV Programs.

In periodic reviews of our financial statements for 1997 and prior years, as
well as our February 28, 1998 balance sheet reflecting the results of our
initial public offering, the Department of Education has questioned certain
accounting issues and has found that we and some of our institutions when
measured on an individual basis failed the numeric tests under the Department of
Education's former and current standards of financial responsibility. To satisfy
the Department of Education's concerns, we have posted letters of credit on
behalf of all institutions we have acquired since October 1996. The Department
of Education reduced the number and amount of our letters of credit in September
1998 following its review

19

of our 1997 financial statements and our February 28, 1998 balance sheet. The
Department of Education also noted that the funds derived from our initial
public offering, shortly after the close of our 1997 fiscal year, would have a
positive effect on our financial responsibility. As a result, we currently have
posted letters of credit totaling approximately $17.6 million on behalf of the
following schools, which represent 11 institutions as defined by the Department
of Education:

. Gibbs -- $8.9 million
. International Academy of Merchandising & Design -- $3.4 million
. Scottsdale Culinary -- $1.3 million
. Southern California School of Culinary Arts -- $2.0 million
. Western -- $2.0 million

In addition, in December 1998 when the Department of Education certified the
Southern California School of Culinary Arts to participate in the Title IV
Programs under our ownership, it imposed a condition providing that school may
not disburse more than $2.0 million in Title IV Program funds during its initial
period of certification ending June 30, 2000. We believe the Department of
Education added this condition because the Southern California School of
Culinary Arts had not participated in the Title IV Programs under its prior
owner. For a period of time during 1997 and 1998, the Department of Education
imposed a similar limitation on the total Title IV Program funding at three of
our other schools: Gibbs, the School of Computer Technology and the
International Academy of Merchandising & Design. In June 1998, the Department of
Education removed the limitation on Title IV Program funding for these three
schools.

We believe our 1998 audited financial statements conform with generally
accepted accounting principles and demonstrate that we and most if not all of
our institutions satisfy the Department of Education's composite score for
financial responsibility, without any conditions. We filed our 1998 financial
statements with the Department of Education in February 1999 and asked it to
release most, if not all, of our outstanding letters of credit and to increase
or eliminate the Title IV Program funding limitation for the Southern California
School of Culinary Arts. We cannot assure you that we or our institutions will
satisfy the numeric standards or that the Department of Education will take any
action with respect to the letters of credit or funding limitation.

Under a separate standard of financial responsibility, an institution that has
made late student refunds in either of its last two fiscal years must post a
letter of credit with the Department of Education in an amount equal to 25% of
the total Title IV Program refunds paid by the institution in its prior fiscal
year. Based on this standard, we currently have posted a total of $120,000 in
letters of credit with respect to two Gibbs campuses and one International
Academy of Merchandising & Design campus.

Change of Ownership or Control. When we acquire an institution that is
eligible to participate in the Title IV Programs, that institution undergoes a
change of ownership resulting in a change of control as defined by the
Department of Education. Upon such a change of control, an institution's
eligibility to participate in the Title IV Programs is generally suspended until
it has applied for and been recertified by the Department of Education as an
eligible institution under our ownership, which requires that the institution
also reestablish its state authorization and accreditation. The time required to
act on such an application may vary substantially. Pending recertification by
the Department of Education, the institution may receive and disburse Title IV
Program funds to its students only if those funds were committed prior to the
change of control. If an institution is recertified following a change of
control, it will be on a provisional basis.

20

The 1998 reauthorization of the Higher Education Act provides that the
Department of Education may provisionally and temporarily certify an institution
undergoing a change of control under certain circumstances while the Department
of Education reviews the institution's application. The Department of Education
has not yet issued regulations regarding how it will interpret or apply this
amendment to the Higher Education Act.

Each of the U.S. institutions we have acquired has undergone a certification
review under our ownership and has been certified to participate in the Title IV
Programs, with the exception of Harrington and McIntosh College. We acquired
Harrington in January 1999 and the Department of Education has granted it
temporary and provisional certification, pending a full certification review. We
acquired McIntosh in March 1999 and it has only recently applied for
certification. Nine of our U.S. institutions are presently participating in
Title IV Programs under provisional certification and the remaining eight have
been granted regular certification.

Some other types of transactions can also cause a change of control. The
Department of Education, the state education agencies and the accrediting
agencies that accredit our schools have their own definitions of when a
transaction is deemed a change of control. With respect to a publicly traded
corporation, such as us, Department of Education regulations provide that a
change of control occurs when there is an event that would obligate that
corporation to file a Current Report on Form 8-K with the Securities and
Exchange Commission disclosing a change of control. This standard is subject to
interpretation by the Department of Education. We cannot predict how the
Department of Education will apply this standard in the future, or whether the
Department of Education will change this standard. A significant purchase or
disposition of our common stock could be determined by the Department of
Education to be a change of control under this standard. Most of the states and
accrediting agencies include the sale of a controlling interest of common stock
in the definition of a change of control. A change of control under the
definition of one of these agencies would require the affected institution to
reaffirm its state authorization or accreditation. The requirements to obtain
such reaffirmation from the states and accrediting agencies with jurisdiction
over our schools vary widely.

We have been advised by the Department of Education that this offering will
not be a change of control under its standard. We believe that this offering
will be a change of control under the standards of the Arizona State Board for
Private Postsecondary Education and the Illinois State Board of Education, but
will not be a change of control under the standards of any other applicable
state education agencies or the accrediting agencies that accredit our schools.
As a result, Collins and Scottsdale Culinary, our only campuses in Arizona, and
International Academy of Merchandising & Design-Chicago, our only campus
authorized by the Illinois State Board, will be required to be reauthorized by
the Arizona State Board and the Illinois State Board, respectively. We believe
that this offering will not affect the ability of those three campuses to
participate in the Title IV Programs unless the Arizona State Board or the
Illinois State Board fails to reauthorize any of those campuses in a timely
manner. The failure of any of those campuses to reobtain state authorization
could have a material adverse effect on our business, results of operations or
financial condition. We believe this offering will not affect the ability of our
other institutions to participate in the Title IV Programs.

The potential adverse effects of a change of control could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our capital stock.

Opening Additional Schools and Adding Educational Programs. The Higher
Education Act generally requires that proprietary institutions be fully
operational for two years before applying to participate in the Title IV
Programs. However, an institution that is certified to participate in the Title
IV Programs may establish an additional location and apply to participate in the
Title IV Programs at that location without reference to the two-year
requirement, if such additional location satisfies all other applicable
eligibility

21

requirements. Our expansion plans are based, in part, on our ability to open new
campuses as additional locations of our existing institutions.

Generally, an institution that is eligible to participate in the Title IV
Programs may add a new educational program without Department of Education
approval if that new program leads to an associate level or higher degree and
the institution already offers programs at that level, or if it prepares
students for gainful employment in the same or related occupation as an
educational program that has previously been designated as an eligible program
at that institution and meets minimum length requirements. If an institution
erroneously determines that an educational program is eligible for the Title IV
Programs, the institution would likely be liable for repayment of the Title IV
Program funds provided to students in that educational program. We do not
believe that current Department of Education regulations will create significant
obstacles to our plans to add new programs.

Some of the state education agencies and accrediting agencies with
jurisdiction over our campuses also have requirements that may affect schools'
ability to open a new campus, acquire an existing campus, establish an
additional location of an existing institution or begin offering a new
educational program. We do not believe that these standards will have a material
adverse effect on our expansion plans.

The "85/15 Rule." Under a provision of the Higher Education Act commonly
referred to as the " 85/15 Rule," a proprietary institution, such as each of
our institutions, would cease being eligible to participate in the Title IV
Programs if, on a cash accounting basis, it derived more than 85% of its revenue
for any fiscal year from the Title IV Programs. Any institution that violates
this rule becomes ineligible to participate in the Title IV Programs as of the
first day of the fiscal year following the fiscal year in which it exceeds 85%,
and is unable to apply to regain its eligibility until the next fiscal year. If
one of our institutions violated the 85/15 Rule and became ineligible to
participate in the Title IV Programs but continued to disburse Title IV Program
funds, the Department of Education would require the institution to repay all
Title IV Program funds received by the institution after the effective date of
the loss of eligibility.

We have calculated that, since this requirement took effect in 1995, none of
our institutions has derived more than 83% of its revenue from the Title IV
Programs for any fiscal year. The 1998 reauthorization of the Higher Education
Act increased the percentage of applicable revenue that a for-profit institution
can derive from the Title IV Programs from 85% to 90%. We regularly monitor
compliance with this requirement to minimize the risk that any of our
institutions would derive more than the maximum percentage of its revenue from
the Title IV Programs for any fiscal year. If an institution appeared likely to
approach the maximum percentage threshold, we would evaluate making changes in
student funding and financing to ensure compliance with the rule.

Administrative Capability. The Department of Education assesses the
administrative capability of each institution that participates in the Title IV
Programs under a series of separate standards. Failure to satisfy any of the
standards may lead the Department of Education to find the institution
ineligible to participate in the Title IV Programs or to place the institution
on provisional certification as a condition of its participation. One standard
which applies to programs with the stated objective of preparing students for
employment requires the institution to show a reasonable relationship between
the length of the program and the entry-level job requirements of the relevant
field of employment. We believe we have made the required showing for each of
our applicable programs. Short-term educational programs that provide less than
600 clock hours of instruction must demonstrate that 70% of all students who
enroll in such programs complete them within a prescribed time and 70% of the
graduates of such programs obtain employment in the occupation for which they
were trained within a prescribed time. Some of the Gibbs institutions offer such
short-term programs, but students enrolled in these programs represent a small
percentage of our total

22

enrollment. To date, the applicable institutions have been able to establish
that their short-term educational programs meet the required completion and
placement percentages.

Other standards provide that an institution may be found to lack
administrative capability and be placed on provisional certification if its
student loan default rate under the FFEL and FDL programs is 25% or greater for
any of the three most recent federal fiscal years, or if its Perkins cohort
default rate exceeds 15% for any federal award year. Two of our institutions
have been placed on provisional certification or determined by the Department of
Education to lack administrative capability due to their Perkins default rates,
either alone or in conjunction with other reasons.

An additional standard prohibits an institution from providing any commission,
bonus or other incentive payment based directly or indirectly on success in
securing enrollments or financial aid to any person or entity engaged in any
student recruitment, admission or financial aid awarding activity. We believe
that our current compensation plans are in compliance with the Higher Education
Act standards, although the regulations of the Department of Education do not
establish clear criteria for compliance.

Eligibility and Certification Procedures. The Higher Education Act and its
implementing regulations require each institution to apply to the Department of
Education for continued certification to participate in the Title IV Programs at
least every six years, or when it undergoes a change of control, opens an
additional location or raises the highest academic credential it offers. The
Department of Education may place an institution on provisional certification
status if it finds that the institution does not fully satisfy all of the
eligibility and certification standards. The Department of Education may
withdraw an institution's provisional certification without advance notice if
the Department of Education determines that the institution is not fulfilling
all material requirements, and may more closely review an institution that is
provisionally certified if it applies for approval to open a new location or
make any other significant change. Provisional certification does not otherwise
limit an institution's access to Title IV Program funds.

An institution seeking certification to participate in the Title IV Programs
after a change of control will be provisionally certified for a limited period,
following which the institution must reapply for continued certification. If at
that time the institution satisfies all conditions for full certification, the
Department of Education will recertify the institution and remove the
provisional status. Otherwise, the Department of Education may recertify the
institution on a continued provisional basis. Each institution that we have
acquired was initially certified by the Department of Education for
participation in the Title IV Programs under our ownership on a provisional
basis, except for McIntosh College which we recently acquired and which has not
been certified under our ownership. Seven of our institutions remain on
provisional certification status because the initial period of their provisional
certification has not expired. Two institutions have been recertified by the
Department of Education upon the expiration of their initial provisional period,
but remain on provisional status for other reasons. Gibbs-Melville is on
provisional certification status because its Perkins cohort default rate at the
time of the Department of Education's review was above 30%, and the institution
was told that it would remain on provisional certification until it reduced its
Perkins default rate below 30%. Gibbs-Montclair is on provisional certification
status because its Perkins cohort default rate is above 30% and because of other
reasons that we believe are now fully resolved.

Compliance with Regulatory Standards and Effect of Regulatory Violations. Our
schools are subject to audits and program compliance reviews by various external
agencies, including the Department of Education, state education agencies,
guaranty agencies and accrediting agencies. The Higher Education Act and its
implementing regulations also require that an institution's administration of
Title IV Program funds be audited annually by an independent accounting firm,
and the resulting audit report submitted to the Department of Education for
review. If the Department of Education or another regulatory agency determined
that one of our institutions improperly disbursed Title IV Program funds or
violated a provision of the Higher Education Act or the Department of
Education's regulations, that institution could be required

23

to repay such funds, and could be assessed an administrative fine. The
Department of Education could also subject the institution to heightened cash
monitoring, under which the institution's federal funding requests are more
carefully reviewed by the Department of Education, or the Department of
Education could transfer the institution from the advance system of receiving
Title IV Program funds to the reimbursement system, under which a institution
must disburse its own funds to students and document the students' eligibility
for Title IV Program funds before receiving such funds from the Department of
Education. Violations of Title IV Program requirements could also subject us or
our schools to other civil and criminal penalties.

Significant violations of Title IV Program requirements by us or any of our
institutions could be the basis for a proceeding by the Department of Education
to limit, suspend or terminate the participation of the affected institution in
the Title IV Programs. Generally, such a termination extends for 18 months
before the institution may apply for reinstatement of its participation. There
is no proceeding pending to fine any of our institutions or to limit, suspend or
terminate any of our institutions' participation in the Title IV Programs, and
we have no reason to believe that any such proceeding is contemplated. Any such
action that substantially limited our schools' participation in the Title IV
Programs could have a material adverse effect on our business, results of
operations or financial condition.

State Authorization for U.S. Schools

We are subject to extensive regulation in each of the 14 states in which we
currently operate schools and in other states in which our schools recruit
students. Each of our campuses must be authorized by the applicable state agency
or agencies to operate and grant degrees or diplomas to its students. In
addition, state authorization is required for an institution to become and
remain eligible to participate in the Title IV Programs. Currently, each of our
U.S. campuses is authorized by the applicable state agency or agencies.

The level of regulatory oversight varies substantially from state to state. In
some states, the campuses are subject to licensure by an agency that regulates
proprietary schools and also by a separate higher education agency. State laws
establish standards for instruction, qualifications of faculty, location and
nature of facilities, financial policies and other operational matters. State
laws and regulations may limit our ability to operate or to award degrees or
diplomas or offer new degree programs. Some states prescribe standards of
financial responsibility that are different from those prescribed by the
Department of Education. We believe that each of our campuses is in substantial
compliance with state authorizing and licensure laws. If any one of our campuses
lost its state authorization, the campus would be unable to offer its programs
and we would be forced to close that campus. Closing one of our campuses for any
reason could have a material adverse effect on our business, results of
operations or financial condition.

Accreditation for U.S. Schools

Accreditation is a non-governmental process through which an institution
submits to a qualitative review by an organization of peer institutions.
Accrediting agencies primarily examine the academic quality of the institution's
instructional programs, and a grant of accreditation is generally viewed as
confirmation that an institution's programs meet generally accepted academic
standards. Accrediting agencies also review the administrative and financial
operations of the institutions they accredit to ensure that each institution has
the resources to perform its educational mission.

Accreditation by an accrediting agency recognized by the Department of
Education is required for an institution to be certified to participate in the
Title IV Programs. Accrediting agencies must adopt specific

24

standards in connection with their review of postsecondary institutions to be
recognized by the Department of Education. All of our U.S. campuses are
accredited by an accrediting agency recognized by the Department of Education.
Thirteen of our campuses are accredited by the Accrediting Council for
Independent Colleges and Schools ("ACICS"), four of our campuses are accredited
by the Accrediting Commission of Career Schools and Colleges of Technology
("ACCSCT"), one of our campuses is accredited by the Accrediting Commission for
Community and Junior Colleges of the Western Association of Schools and
Colleges, one of our campuses is accredited by the National Association of
Schools of Art and Design and one of our campuses is accredited by the New
England Association of Schools and Colleges--Commission on Technical and Career
Institutions. In addition, four of our campuses' interior design programs are
accredited by the Foundation for Interior Design Education Research and two of
our campuses' culinary arts programs are accredited by the American Culinary
Federation Educational Institute Accrediting Commission, accrediting agencies
which are not recognized by the Department of Education.

An accrediting agency may place a campus on "reporting" status to monitor one
or more specified areas of performance. A campus placed on reporting status is
required to report periodically to its accrediting agency on that campus'
performance in the specified areas. ACICS has placed five campuses,
International Academy of Merchandising & Design-Chicago, International Academy
of Merchandising & Design-Tampa, Gibbs-Boston, Gibbs-Melville, and Gibbs-
Providence, on financial reporting status, and one campus, Gibbs-Montclair, on
placement reporting status. ACCSCT has placed one campus, Brown, on completion
and placement reporting status. Each of these campuses has submitted all
requested data in the identified area to its accrediting agency. Similarly, WASC
may issue a warning to an institution to change its policies or practices when
WASC is concerned that the institution's conduct has deviated from WASC's
standards. WASC has issued a warning to Brooks to correct certain deficiencies
in its policies for awarding academic credit, the number and role of its full-
time faculty members and the nature of its general education curriculum. Brooks
is required to report on its corrective actions by September 1999. The placement
of these eight campuses on reporting status and this issuance of a warning by
the accrediting agencies has not had a material adverse effect on our business,
results of operations or financial condition, and we do not believe that it will
have that effect in the future.

Canadian Regulation

Depending on their province of residence, our Canadian students may receive
loans under the Canada Student Loan Program, the Ontario Student Loans Plan and
the Quebec Loans and Bursaries Program. Canadian schools must meet eligibility
standards to administer these programs and must comply with extensive statutes,
rules, regulations and requirements. We believe our Canadian schools currently
hold all necessary registrations, approvals and permits and meet all eligibility
requirements to administer these governmental financial aid programs. If our
Canadian schools cannot meet these and other eligibility standards or fail to
comply with applicable requirements, it could have a material adverse effect on
our business, results of operations or financial condition.

Ontario. The Ontario Ministry of Education and Training provides financial
assistance to eligible students through the Ontario Student Assistance Plan
("OSAP"). This plan includes two main components, the Canada Student Loan
Program and the Ontario Student Loans Plan. For our International Academy of
Design school in Toronto to maintain its right to administer OSAP it must, among
other things, be registered and in good standing under the Ontario Private
Vocational Schools Act and abide by the rules, regulations and administrative
manuals of the Canada Student Loan Program, Ontario Student Loans Plan and other
OSAP-related programs. In order to attain initial eligibility, an institution
has to establish that it has (1) been in good standing under the Ontario Private
Vocational Schools Act for at least 12 months, (2) offers an eligible program
for at least 12 months and (3) graduates at least one class in an eligible
program that satisfied specific requirements with respect to class size and
graduation rate. Pursuant to Ontario Ministry rules, during the first two years
of initial eligibility, an institution has its administration of OSAP
independently audited, and full eligibility is not granted until these audits
confirmed that the school is properly administering OSAP. Our International
Academy of Design school in Toronto has been

25

granted full eligibility. Under Ontario Ministry rules, our Toronto school must
advise the Ontario Ministry before the school takes any material action that may
result in its failure or inability to meet any rules, regulations or
requirements related to OSAP.

In order for our International Academy of Design school in Toronto to
establish a new branch, it must obtain OSAP-designation from the Ontario
Ministry. We do not believe that OSAP's requirements will create significant
obstacles to our plans to acquire additional institutions or open new branches
in Ontario.

Our International Academy of Design school in Toronto may submit
applications for loans only to students enrolled in educational programs that
have been designated as OSAP-eligible by the Ontario Ministry. To be eligible,
among other things, a program must be registered with the Private Vocational
Schools Unit of the Ontario Ministry, must be of a minimum length and must lead
to a diploma or certificate. We do not anticipate that these program approval
requirements will create significant problems with respect to our plans to add
new educational programs.

Under Ontario Ministry rules, an institution cannot automatically acquire
OSAP designation through the acquisition of other OSAP-eligible institutions.
When there is a change of ownership, including a change in controlling interest,
in a non-incorporated OSAP-eligible institution, the Ontario Ministry will
require evidence of the institution's continued capacity to properly administer
the program before extending OSAP designation to the new owner. We do not
believe that this offering will be considered a change of ownership for purposes
of OSAP. Given that the Ontario Ministry periodically revises its regulations
and other requirements and changes its interpretations of existing laws and
regulations, we cannot assure you that the Ontario Ministry will agree with our
understanding of each requirement.

Our International Academy of Design school in Toronto is required to audit
its OSAP administration annually and the Ontario Ministry is authorized to
conduct its own audits of our administration of these programs. We have complied
with these requirements on a timely basis. Based on the most recent annual
compliance audits, our International Academy of Design school in Toronto is in
substantial compliance with OSAP requirements and we believe that the school
continues to be in substantial compliance with these requirements.

The Ontario Ministry has the authority to take any measures it deems
necessary to protect the integrity of the administration of OSAP. If the Ontario
Ministry deems a failure to comply to be minor, the Ontario Ministry will advise
us of the deficiency and provide us with an opportunity to remedy it. If the
Ontario Ministry deems the failure to comply to be serious in nature, the
Ontario Ministry has the authority to: (1) condition our continued OSAP
designation upon our meeting specific requirements during a specific time frame;
(2) suspend our OSAP designation; or (3) revoke our OSAP designation. When the
Ontario Ministry determines that any non-compliance in our OSAP administration
is serious, the Ontario Ministry has the authority to contract with an
independent auditor, at our expense, to conduct a full audit in order to
quantify the deficiencies and to require repayment of all loan amounts. In
addition, the Ontario Ministry may impose a penalty up to the amount of the
damages assessed in the independent audit.

Adopting a practice similar to that of the U.S. Department of Education,
the Ontario Ministry now calculates for each school student loan default rates
on the basis of incidences of default and expresses the default rates as a
percentage of the total number of loans issued to students attending that
school. Beginning with loans issued in the 1998-99 award year, August 1, 1998 to
July 31, 1999, institutions with a 1997 default rate which is 15 percentage
points or more above the 1997 provincial average of 23.5% will be required to
share the cost of defaults. In the 1999-2000 award year, this policy will also
apply to institutions with a 1997 default rate 10 percentage points or more
above 23.5%. Our International Academy of Design school in Toronto had an
average program-wide total default rate for 1998 of 23.8%.

26

We may only operate a private vocational school in Ontario if the school is
registered under the Ontario Private Vocational Schools Act. Upon payment of the
prescribed fee and satisfaction of the conditions prescribed by the regulations
under the Ontario Private Vocational Schools Act and by the Private Vocational
Schools Unit of the Ontario Ministry, an applicant or registrant such as our
International Academy of Design school in Toronto is entitled to registration or
renewal of registration to conduct or operate a private vocational school
unless:

. the school cannot reasonably be expected to be financially responsible in
the conduct of the private vocational school,

. the past conduct of the officers or directors provides reasonable grounds
for belief that the operations of the school will not be carried on in
accordance with relevant law and with integrity and honesty,

. it can reasonably be expected that the course or courses of study or the
method of training offered by the school will not provide the skill and
knowledge requisite for employment in the vocation or vocations for which
the applicant or registrant is offering instruction and

. the applicant is carrying on activities that are, or will be, if the
applicant is registered, in contravention of the Ontario Private
Vocational Schools Act or the regulations under that Act.

An applicant for registration to conduct or operate a private vocational
school is required to submit with the application a bond in an amount determined
in accordance with the regulations under the Ontario Private Vocational Schools
Act. Our International Academy of Design school in Toronto is currently
registered under the Ontario Private Vocational Schools Act for both of its
locations, and we do not believe that there will be any impediment to renewal of
such registrations on an annual basis.

The Ontario Private Vocational Schools Act provides that a "registration"
is not transferable. However, the Private Vocational Schools Unit of the Ontario
Ministry takes the position that a purchase of shares of a private vocational
school does not invalidate the school's registration under the Ontario Private
Vocational Schools Act. We do not believe that this offering will invalidate the
registrations of our International Academy of Design school in Toronto.

If our International Academy of Design school in Toronto is convicted of
violating the Ontario Private Vocational Schools Act or the regulations under
that Act, the school can be fined up to $25,000 Canadian dollars.

Quebec. Our Quebec students may receive loans under the Quebec Loans and
Bursaries Program subject to student eligibility criteria. Under an Act
Respecting Private Education, our International Academy of Design school in
Montreal may not operate as a private educational institution without holding a
permit issued by the Quebec Minister of Education. Permits cannot be transferred
without the written authorization of the Quebec Minister and we must notify that
Minister of any amalgamation, sale or transfer affecting our Quebec school. The
Quebec Minister can modify or revoke our permit in certain circumstances, such
as if we do not comply with the conditions, restrictions or prohibitions of the
permit or if we are to become insolvent. We must be provided with a chance to
present our views before our permit can be revoked.

We do not believe that this offering will be considered a "sale or
transfer" affecting our International Academy of Design school in Montreal, for
the purposes of applicable law; however, because the Quebec Minister
periodically revises its legal requirements and changes its interpretation of
existing law, we cannot

27

assure you that the Quebec Minister will agree with our understanding of each
requirement. We also do not believe that there will be any impediment to renewal
of the permit issued to our International Academy of Design school in Montreal
or that the Quebec Minister's requirements will create significant obstacles to
our plans to open new branches or add new educational programs at our
International Academy of Design school in Montreal, or to acquire additional
schools in Quebec.

The Canadian, Ontario and Quebec governments are currently in the process
of changing the legislative, regulatory and other requirements relating to
student financial assistance programs due to political and budgetary pressures.
Although we do not anticipate a significant reduction in the funding for these
programs, any change that significantly reduces funding or the ability of our
schools to participate in these programs could have a material adverse effect on
our business, results of operations or financial condition.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Hoffman Estates, Illinois, near
Chicago, and our 22 campuses are located in 14 states and two Canadian
provinces. Each campus contains teaching facilities, including modern
classrooms, laboratories and, in the case of the schools with culinary arts
programs, large, well-equipped kitchens. Admissions and administrative offices
are also located at each campus. Additionally, Brooks' campus includes a
dormitory and student cafeteria, and Western and Scottsdale Culinary lease and
operate restaurants in conjunction with their culinary arts program.

We lease all of our facilities, except the primary Gibbs facility in
Montclair, New Jersey, which we own. As of December 31, 1998, we owned
approximately 19,000 square feet and leased approximately 809,000 square feet.
The leases have remaining terms ranging from less than one year to eleven years.

We actively monitor facility capacity in light of our current utilization
and projected enrollment growth. We have plans to lease at least 90,000
additional square feet in 1999 to accommodate our growth. We believe that our
schools can acquire any necessary additional capacity on reasonably acceptable
terms. We devote capital resources to facility improvements and expansions as
necessary.

ITEM 3. LEGAL PROCEEDINGS

We and our institutions are subject to occasional lawsuits, investigations
and claims arising out of the ordinary conduct of our business, including the
following:

On February 24, 1997, 30 former and current students in Brown's PC/LAN
program brought a suit entitled Peter Alsides, et al. v. Brown Institute, Ltd.
in the Fourth Judicial District in Hennepin County, Minnesota against Brown
alleging breach of contract, fraud, misrepresentation, violation of the
Minnesota Consumer Fraud Act, violation of the Minnesota Deceptive Trade
Practices Act and negligent misrepresentation. Plaintiffs allege that Brown
failed to provide them with the education for which they contracted and which
had been represented to them upon enrollment. There are currently 41 plaintiffs,
who are seeking to recover their tuition, interest and costs. Brown believes
that all of these claims are frivolous and without merit and is vigorously
contesting the allegations. Brown's motion for summary judgment was granted in
May 1998. Plaintiffs have appealed the motion and the appeal is pending.

Although outcomes cannot be predicted with certainty, we do not believe
that the above-described matter or any other legal proceeding to which we are a
party will have a material adverse effect on our business, results of operations
or financial condition.

28

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the
fourth quarter of 1998.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock has been quoted on the Nasdaq National Market (the "National
Market") under the symbol "CECO" since January 29, 1998.

The following table sets forth the range of high and low sales prices per
share for our common stock as reported on The Nasdaq National Market, where the
stock trades under the symbol "CECO," for the periods indicated. The initial
public offering price of our common stock on January 28, 1998 was $16.00 per
share.

High Low
------ ------
1998:

First Quarter (from January 29, 1998)... $22.12 $17.62
Second Quarter.......................... 27.50 21.50
Third Quarter........................... 26.75 17.37
Fourth Quarter.......................... 30.00 14.12

1999:
First Quarter (through March 17, 1999).. $31.50 $27.50

The closing price of our Common Stock as reported on the National Market on
March 17, 1999 was $29.25 per share. As of March 17, 1999, there were 27
holders of record of our Common Stock.

We have never paid a cash dividend on our common stock. We do not anticipate
paying any cash dividends on our common stock in the foreseeable future and we
plan to retain our earnings to finance future growth. The declaration and
payment of dividends on our common stock are subject to the discretion of our
board of directors. Our board's decision to pay future dividends will depend on
general business conditions, the effect on our financial condition and other
factors our board may consider to be relevant. Our ability to pay dividends on
our common stock is limited if we are not in compliance with the terms of our
credit agreement or we fail to meet a specified leverage ratio.

29

ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the related notes thereto appearing
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Our selected statement of operations data
set forth below for the years ended December 31, 1998, 1997, and 1996 and the
balance sheet data as of December 31, 1998, 1997, and 1996 are derived from our
audited consolidated financial statements.

Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- -------
(Dollars in thousands)
Statement of Operations Data:
Revenue:

Tuition and registration fees, net................................................... $132,926 $ 74,842 $29,269
Other, net............................................................................ 11,306 7,756 4,311
-------- -------- -------
Total net revenue.................................................................... 144,232 82,598 33,580
Operating Expenses:
Educational services and facilities.................................................. 57,151 34,620 14,404
General and administrative............................................................ 63,856 37,542 14,622
Depreciation and amortization......................................................... 12,163 8,121 2,134
Compensation expense related to the initial public offering........................... 1,961 -- --
-------- -------- -------
Total operating expenses............................................................. 135,131 80,283 31,160
-------- -------- -------
Income from operations................................................................ 9,101 2,315 2,420
Interest expense...................................................................... 1,250 3,108 717
-------- -------- -------
Income (loss) before provision for income taxes, extraordinary item and cumulative
effect of change in accounting principle............................................. 7,851 (793) 1,703
Provision (benefit) for income taxes.................................................. 3,350 (331) 208
-------- -------- -------
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle................................................................. 4,501 (462) 1,495
Extraordinary loss on early extinguishment of debt (net of taxes of $233)............. -- (418) --
-------- -------- -------
Income (loss) before cumulative effect of change in accounting principle.............. 4,501 (880) 1,495
-------- -------- -------
Cumulative effect of change in accounting principle (net of taxes of $149)............ (205) -- --
-------- -------- -------
Net income (loss)..................................................................... $ 4,296 $ (880) $ 1,495
======== ======== =======
Income (loss) attributable to common stockholders:
Income (loss) before extraordinary item, and cumulative effect of change in
accounting principle................................................................. $ 4,501 $ (462) $ 1,495
Dividends on preferred stock (1)...................................................... (274) (2,159) (1,128)
Accretion to redemption value of preferred stock and warrants (2)..................... (2,153) (6,268) (230)
-------- -------- -------
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle, attributable to common stockholders............................ 2,074 (8,889) 137
Extraordinary loss, net............................................................... -- (418) --
Cumulative effect of change in accounting principle, net.............................. (205) -- --
-------- ------- -------
Net income (loss) attributable to common stockholders................................. $ 1,869 $ (9,307) $ 137
======== ======== =======
Net income (loss) attributable to common stockholders:
Basic................................................................................ $ 0.29 $ (12.12) $ 0.18
======== ======== =======
Diluted.............................................................................. $ 0.27 $ (12.12) $ 0.13
======== ======== =======
Other Data:
EBITDA (3)............................................................................ $ 21,264 $ 10,436 $ 4,554
EBITDA margin (3)..................................................................... 14.7% 12.6% 13.6%
Capital expenditures, net............................................................. 6,383 3,822 1,231
Student population (4)................................................................ 15,900 10,889 4,537
Number of Campuses (5)................................................................ 20 18 5

30

December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands)

Balance Sheet Data:
Cash and cash equivalents.......................... $ 23,548 $ 18,906 $ 7,798
Working capital.................................... 15,994 13,806 1,379
Total assets....................................... 132,887 117,617 36,208
Long-term debt..................................... 22,617 64,035 16,459
Redeemable preferred stock and warrants............ -- 40,160 14,561
Total stockholders' investment..................... 84,636 (7,404) (2,589)

__________________
(1) Represents the dividends paid on, or added to the redemption value of
outstanding preferred stock. See Note 3 of the Notes to our Consolidated
Financial Statements.
(2) See Note 3 of the Notes to our Consolidated Financial Statements.
(3) For any period, EBITDA equals earnings before interest expense, taxes,
depreciation and amortization, including amortization of debt discount and
deferred financing costs. EBITDA margin equals EBITDA as a percentage of
net revenue. We have included information concerning EBITDA and EBITDA
margin because we believe they allow for a more complete analysis of our
results of operations. EBITDA and EBITDA margin should not be considered as
alternatives to, nor is there any implication that they are more meaningful
than, any measure of performance or liquidity as promulgated under GAAP.
(4) Represents the approximate total student population at our schools as of
October 31.
(5) Represents the total number of campuses operated by us as of the end of
the period.

31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that are
based on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. Our actual growth, results,
performance and business prospects and opportunities in 1999 and beyond could
differ materially from those expressed in, or implied by, any such forward-
looking statements. See "Special Note Regarding Forward-Looking Statements" on
page 40 for a discussion of risks and uncertainties that could cause or
contribute to such material differences.

The following discussion and analysis should be read in conjunction with
the Selected Historical Consolidated Financial Data and our Consolidated
Financial Statements and Notes thereto appearing elsewhere herein.

Background and Overview

We are a provider of private, for-profit postsecondary education in North
America, with approximately 15,900 students enrolled as of October 31, 1998. We
operate 13 schools, with 22 campuses located in 14 states and two Canadian
provinces. Our schools enjoy long operating histories and offer a variety of
bachelor's degree, associate degree and non-degree programs in career-oriented
disciplines within our core curricula of:

.information technologies

.visual communication and design technologies

.business studies

.culinary arts

We have experienced significant growth both internally and through
acquisitions. Net revenue and EBITDA have increased in each of the years we have
operated. Our net revenue increased to $144.2 million in 1998, from $7.5 million
in 1994 and EBITDA increased to $21.3 million in 1998, from a loss of $0.5
million in 1994. We have invested significant amounts of capital in the hiring
of additional personnel and increased marketing and capital improvements at each
of the schools we have acquired. We have also hired additional corporate staff
to support our continued growth. The increased costs of personnel and marketing
are expensed as incurred and are reflected in general and administrative
expenses. Additional depreciation and amortization is reflected as a result of
the capital improvements.

We believe that EBITDA, while not a substitute for generally accepted
accounting principles' measures of operating results, is an important measure of
our financial performance and that of our schools. Our management believes that
EBITDA is particularly meaningful due principally to the role acquisitions have
played in our development. Our rapid growth through acquisitions has resulted in
significant non-cash depreciation and amortization expense, because a
significant portion of the purchase price of a school acquired by us is
generally allocated to fixed assets, goodwill and other intangible assets. As a
result of our ongoing acquisition strategy, non-cash amortization expense may
continue to be substantial.

Our principal source of revenue is tuition collected from our students. The
academic year is at least 30 weeks in length, but varies both by individual
school and program of study. The academic year is

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divided by term, which is determined by start dates which vary by school and
program. Payment of each term's tuition may be made by full cash payment,
financial aid and/or an installment payment plan. If a student withdraws from
school prior to the completion of the term, we refund the portion of tuition
already paid which is attributable to the period of the term that is not
completed. Revenue is recognized ratably over the period of the student's
program.

Our campuses charge tuition at varying amounts, depending not only on the
particular school, but also upon the type of program and the specific
curriculum. Each of our campuses typically implements one or more tuition
increases annually.

Other revenue consists of bookstore sales, placement fees, dormitory and
cafeteria fees and restaurant revenue. Other revenue is recognized during the
period services are rendered.

Educational services and facilities expense includes costs directly
attributable to the educational activity of our schools, including salaries and
benefits of faculty, academic administrators and student support personnel.
Educational services and facilities expense also includes costs of educational
supplies and facilities (including rents on school leases), certain costs of
establishing and maintaining computer laboratories, costs of student housing and
all other physical plant and occupancy costs, with the exception of costs
attributable to our corporate offices.

General and administrative expense includes salaries and benefits of
personnel in recruitment, admissions, accounting, personnel, compliance and
corporate and school administration. Costs of promotion and development,
advertising and production of marketing materials, and occupancy of the
corporate offices are also included in this expense category.

Depreciation and amortization includes costs associated with the
depreciation of purchased computer laboratories, equipment, furniture and
fixtures, courseware, owned facilities, capitalized equipment leases and
amortization of intangible assets, primarily goodwill and non-competition
agreements with the previous owners of our schools.

Acquisitions

On February 28, 1997, we acquired all of the outstanding capital stock of
the School of Computer Technology for a purchase price of approximately $4.9
million. In addition, we paid approximately $1.8 million to the former owners of
the School of Computer Technology pursuant to non-competition agreements.

Effective May 31, 1997, we acquired all of the outstanding capital stock of
Gibbs for a purchase price of approximately $19.0 million. In addition, we paid
$7.0 million to the former owner of Gibbs pursuant to a non-competition
agreement.

On June 30, 1997, we acquired all of the outstanding capital stock of the
International Academy of Merchandising & Design for an initial purchase price of
$3.0 million, which amount was further increased by $4.7 million during 1998,
based on the results of the International Academy of Merchandising & Design
operations and the calculation of the final purchase price adjustment. In
addition, we paid $2.0 million to the former owners of the International Academy
of Merchandising & Design pursuant to covenants not-to-compete.

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Also on June 30, 1997, we acquired all of the capital stock of
International Academy of Design for a purchase price of $6.5 million. In
addition, we paid $2.0 million to the former owners of International Academy of
Design pursuant to covenants not-to-compete.

On March 13, 1998, we acquired all of the outstanding capital stock of
Southern California School of Culinary Arts for a purchase price of
approximately $1.0 million.

On July 31, 1998, we acquired certain assets and assumed certain
liabilities of Scottsdale Culinary. The purchase price was approximately $9.9
million.

On January 4, 1999, we acquired all of the outstanding capital stock of
Harrington for a purchase price of approximately $3.3 million, subject to
adjustment.

On March 9, 1999, we acquired certain assets and assumed certain
liabilities of McIntosh College. The purchase price was approximately $5.0
million, subject to adjustment.

Results of Operations

The following table summarizes our operating results as a percentage of net
revenue for the periods indicated.

Year Ended December 31,
-----------------------------
1998 1997 1996
----- ----- -----

Revenue:
Tuition and registration, net.............................. 92.2% 90.6% 87.2%
Other, net................................................. 7.8 9.4 12.8
----- ----- -----
Net revenue............................................... 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Educational services and facilities........................ 39.6 41.9 42.9
General and administrative................................. 44.3 45.5 43.5
Depreciation and amortization.............................. 8.4 9.8 6.4
Compensation related to the initial public offering........ 1.4 -- --
----- ----- -----
Total operating expenses.................................. 93.7 97.2 92.8
----- ----- -----
Income from operations...................................... 6.3 2.8 7.2
Interest expense, net....................................... 0.9 3.8 2.1
----- ----- -----
Income (loss) before provision for taxes, extraordinary
item and cumulative effect of change in accounting
principle................................................. 5.4 (1.0) 5.1
Provision (benefit) for income taxes........................ 2.3 (0.4) 0.6
----- ----- -----
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle.................. 3.1 (0.6) 4.5
Extraordinary loss on early extinguishment of debt (net of
taxes).................................................... -- (0.5) --
Cumulative effect of change in accounting principle (net of
taxes).................................................... (0.1) -- --
----- ----- -----
Net income (loss)........................................... 3.0 (1.1) 4.5
===== ===== =====
Net income (loss) attributable to common stockholders....... 1.3% (11.3)% 0.4%
===== ===== =====

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

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Revenue. Net tuition revenue increased 78%, from $74.8 million in 1997 to
$132.9 million in 1998, due to an approximately 20.5% increase in the average
number of students attending the schools which were owned by us during 1997 and
tuition increases effective in 1998 for these schools, as well as added net
tuition revenue of $42.8 million for schools acquired during and after 1997.
Other net revenue increased 46%, from $7.8 million in 1997 to $11.3 million in
1998, due to an increase in student population for schools owned during the 1997
period.

Educational Services and Facilities Expense. Educational services and
facilities expense increased 65%, from $34.6 million in 1997 to $57.2 million in
1998. Of this increase, $5.9 million was attributable to the increase in student
population for schools owned during 1997 and $16.6 million was attributable to
the addition of educational services and facilities for schools acquired during
and after 1997.

General and Administrative Expense. General and administrative expense
increased 70%, from $37.5 million in 1997 to $63.9 million in 1998. The increase
was primarily attributable to $11.9 million of expenses for schools acquired
during and after 1997, costs totaling $3.9 million related to increased
personnel at the corporate level to enhance our infrastructure, and increased
advertising and marketing (including admissions) of $8.8 million for schools
owned during 1997. The increase in advertising and marketing expenses reflected,
in part, the fact that the former owners of the acquired schools had reduced
their expenditures in these areas prior to our acquisition of the schools.

Depreciation and Amortization Expense. Depreciation and amortization
expense increased 50%, from $8.1 million in 1997 to $12.2 million in 1998. The
increase was due to increased capital expenditures for schools owned during 1997
and related increased depreciation expense of $0.3 million in 1998.
Additionally, depreciation expense increased $2.2 million due to the
depreciation expense for schools acquired during and after 1997. Amortization
expense increased from $3.5 million in 1997 to $5.1 million in 1998, primarily
due to additional amortization of non-competition agreements and goodwill for
the acquisition of schools after 1997.

Compensation Expense Related to the Initial Public Offering. Pursuant to
amended stock option agreements with two stockholders, compensation expense
totaling approximately $2.0 million was recognized upon consummation of our
initial public offering in February 1998.

Interest Expense. Interest expense decreased 60%, from $3.1 million in 1997
to $1.3 million in 1998. The decrease was primarily due to a reduction of
indebtedness resulting from the application of the net proceeds of our initial
public offering in February 1998.

Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes increased from a $0.3 million benefit in 1997 to a $3.4 million provision
in 1998 as a result of changes in pretax income (loss).

Net Income (Loss) before Extraordinary Item and Cumulative Effect of Change
in Accounting Principle. Net income (loss) before extraordinary item and
cumulative effect of change in accounting principle increased to a net income of
$4.5 million in 1998 from a net loss of $0.5 million in 1997.

Extraordinary Item. During 1997, we recorded an extraordinary expense of
$0.4 million, net of tax, due to the early retirement of debt related to a
credit facility which was terminated and replaced by our current credit
facility.

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Cumulative Effect of Change in Accounting Principle. During 1998, we
adopted Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." In connection therewith, we recorded a charge of $0.2 million, net
of tax.

Net Income (Loss). Net income (loss) increased to a net income of $4.3
million in 1998 from a net loss of $0.9 million in 1997, due to the factors
noted above.

Net Income (Loss) Attributable to Common Stockholders. Net income (loss)
attributable to common stockholders increased from a loss of $9.3 million in
1997 to net income of $1.9 million in 1998. The primary reason for this increase
was due to the increase in net income (loss) discussed above and decreases in
dividends on preferred stock and accretion to redemption value of preferred
stock and warrants in connection with our initial public offering.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Revenue. Net tuition revenue increased 156% from $29.3 million in 1996 to
$74.8 million in 1997, due to an approximately 18% increase in the average
number of students attending the schools which were owned by us during 1996 and
tuition increases effective in 1997 for these schools, as well as added net
tuition revenue of $34.2 million for schools acquired after 1996. Other net
revenue increased 80%, from $4.3 million in 1996 to $7.8 million in 1997, due to
an increase in student population for schools owned during 1996 and the addition
of $2.0 million from schools acquired after 1996.

Educational Services and Facilities Expense. Educational services and
facilities expense increased 140%, from $14.4 million in 1996 to $34.6 million
in 1997. Of this increase, $5.2 million was attributable to the increase in
student population and associated facility costs for schools owned during 1996
and $15.0 million was attributable to the addition of educational services and
facilities for schools acquired after 1996.

General and Administrative Expense. General and administrative expense
increased 157%, from $14.6 million in 1996 to $37.5 million in 1997. The
increase was primarily attributable to costs totaling $1.1 million related to
increased personnel at the corporate level to enhance our infrastructure and
increased advertising and marketing, including admissions, of $1.9 million for
schools owned during 1996, as well as the addition of $17.9 million of expenses
for schools acquired after 1996. The increase in advertising and marketing
expenses reflected, in part, the fact that the former owners of the acquired
schools had reduced their expenditures in these areas prior to their acquisition
by us.

Depreciation and Amortization Expense. Depreciation and amortization
expense increased 281%, from $2.1 million in 1996 to $8.1 million in 1997. The
increase was due to increased capital expenditures for schools owned during 1996
and related increased depreciation expense of $0.2 million in 1997.
Additionally, depreciation expense increased $2.3 million due to the
depreciation expense for schools acquired after 1996. Amortization expense
increased from an immaterial amount in 1996 to $3.5 million in 1997, primarily
due to additional amortization of non-competition agreements for the acquisition
of schools after 1996.

Interest Expense. Interest expense increased 333% from $0.7 million in 1996
to $3.1 million in 1997. The increase was primarily due to interest expense on
borrowings used to finance the acquisition of schools after 1996.

Provision (Benefit) for Income Taxes. The benefit for income taxes
increased from a provision in 1996 of $0.2 million to a benefit of $0.3 million
in 1997.

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Income (Loss) before Extraordinary Item. Net income (loss) before
extraordinary item decreased to a net loss of $0.5 million in 1997 from net
income before extraordinary item of $1.5 million in 1996, due to the factors
noted above.

Extraordinary Item. During 1997, we recorded an extraordinary expense of
$0.4 million, net of tax, due to the early retirement of debt related to a
credit facility which was terminated and replaced by our current credit
facility.

Net Income (Loss). Net income (loss) decreased to a net loss of $0.9
million in 1997 from net income of $1.5 million in 1996, due to the factors
noted above.

Net Income (Loss) Attributable to Common Stockholders. Net income
attributable to common stockholders decreased from $0.1 million in 1996 to a
loss of $9.3 million in 1997. The primary reasons for this decrease were the
extraordinary item referred to above; increased dividends on preferred stock,
primarily due to the issuance of additional shares; and increased accretion in
the redemption value of preferred stock and warrants as a result of our growth.
All outstanding preferred stock converted into common stock and all outstanding
warrants were exercised prior to the consummation of our initial public
offering.

Seasonality

Our results of operations fluctuate primarily as a result of changes in the
level of student enrollment at our schools. Our schools experience a seasonal
increase in new enrollments in the fall, traditionally when the largest numbers
of new high school graduates begin postsecondary education. Furthermore,
although we encourage year-round attendance at all schools, some schools have
summer breaks for some of their programs. As a result of these factors, total
student enrollment and net revenue are typically highest in the fourth quarter,
which is October through December, and lowest in the second quarter, which is
April through June, of our fiscal year. Our costs and expenses do not, however,
fluctuate as significantly on a quarterly basis. We anticipate that these
seasonal trends will continue.

Liquidity and Capital Resources

On February 4, 1998, we sold 3,277,500 of our shares of common stock at
$16.00 per share pursuant to our initial public offering. We used net proceeds
from that offering totaling $45.6 million to repay borrowings of $41.5 million
under our former credit facility and amounts owed to former owners of acquired
businesses of $4.1 million which were outstanding at that time. Prior to that
offering, we financed our operating activities through cash generated from
operations, and we financed acquisitions through a combination of additional
equity investments and credit facilities. Net cash provided by operating
activities increased to $22.2 million in 1998 from net cash used of $0.2 million
in 1997, due primarily to increases in net income and depreciation and
amortization and the result of the non-cash compensation expense related to
options.

Capital expenditures increased to $6.4 million in 1998 from $3.8 million in
1997. These increases were primarily due to investments in capital equipment as
a result of increasing student population. We expect capital expenditures to
continue to increase as new schools are acquired, student population increases
and current facilities and equipment are upgraded and expanded.

Our net receivables as a percentage of net revenue decreased to 9% in 1998
from 15% in 1997. This change was primarily due to increased revenues at schools
acquired during 1997. Based upon past

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experience and judgment, we establish an allowance for doubtful accounts with
respect to tuition receivables. When a student withdraws, the receivable balance
attributable to such student is charged to this allowance for doubtful accounts.
Our historical bad debt expense as a percentage of revenue for the years ended
December 31, 1996, 1997 and 1998 has ranged from 1.8% to 3.6%.

In October 1998, we refinanced our credit agreement. We can borrow up to
$60 million under a revolving credit facility ($10 million of which may be drawn
in Canadian Dollars), such amount is reduced by outstanding letters of credit.
We can obtain up to $35 million in letters of credit. The credit agreement
matures on October 26, 2003. Our borrowings under the credit agreement bear
interest, payable quarterly, at either (1) the bank's base or prime rate
depending on whether the particular loan is denominated in U.S. or Canadian
dollars, plus a specified number of basis points, ranging from 0 to 75, based
upon our leverage ratio or (2) LIBOR, plus a specified number of basis points,
ranging from 75 to 200 based upon our leverage ratio. Under the credit
agreement, we are required, among other things, to maintain (1) financial ratios
with respect to debt to EBITDA and interest coverage and (2) a specified level
of net worth. We are also subject to limitations on, among other things, payment
of dividends, disposition of assets and incurrence of additional indebtedness.
We are required to pledge the stock of our subsidiaries as collateral for the
repayment of our obligations under the credit agreement. At December 31, 1998,
we had approximately $28.9 million of outstanding letters of credit and $11.3
million of outstanding borrowings under our credit facility. As a result, at
December 31, 1998, our remaining credit availability under the credit agreement
was approximately $19.8 million. We are currently in the process of amending the
credit agreement to increase the credit facility from $60 million to $90
million. We cannot assure you that the credit facility will be increased.

Market Risk

We are exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the market value of our investments. We have not
entered into interest rate caps or collars or other hedging instruments.

Our exposure to changes in interest rates is limited to borrowings under
revolving credit agreements, which have variable interest rates tied to the
prime and LIBOR rates. The weighted average annual interest rate of these credit
agreements and bank note payables was 8.25% at December 31, 1998. In addition,
we had debt with fixed annual rates of interest of 7.0% totaling $10.8 million
at December 31, 1998. We estimate that the fair value of each of our debt
instruments approximated its market value at December 31, 1998.

We are subject to fluctuations in the value of the Canadian dollar vis-a-
vis the U.S. dollar. Our investment in our Canadian operations is not
significant and the fair value of the assets and liabilities of these operations
at December 31, 1998 approximated their fair value.

Year 2000 Compliance

The Year 2000 Problem. Many IT hardware and software systems and non-IT
systems containing embedded technology, such as microcontrollers and microchip
processors, can only process dates with six digits, for example, 03/17/98,
instead of eight digits, for example, 03/17/1998. This limitation may cause IT
systems and non-IT systems to experience problems processing information with
dates after December 31, 1999. For example, 01/01/00 could be processed as
01/01/2000 or 01/01/1900. There could also be problems with other dates,
such as September 9, 1999, which was a date traditionally used as a default date
by computer

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programmers. These problems may cause IT systems and non-IT systems to suffer
miscalculations, malfunctions or disruptions. These problems are commonly
referred to as "Year 2000" problems. In late 1997, we began our audit, testing
and remediation project to assess our exposure to Year 2000 problems both
because of our own IT systems and non-IT systems and because of the systems of
our significant vendors, including those who process and disburse student
financial aid for us. The discussion below details our efforts to ensure Year
2000 compliance.

Our State of Readiness. Through our audit, testing and remediation project,
we have identified and evaluated the readiness of our IT systems and non-IT
systems, which, if not Year 2000 compliant, could have a material adverse effect
on us. We held planning strategy sessions in the first quarter of 1998 and
conducted our Year 2000 audits, upgrade assessments and budget alignments during
the remainder of 1998. Our evaluation indicated that our administrative IT
systems are Year 2000 compliant, but identified the following areas of concern:

. our accounting and financial reporting system

. our student database system

. the systems of third party vendors which process student financial aid
applications and loans for us

. the Department of Education's systems for processing and disbursing student
financial aid

. financial institutions which provide loans to our students

Based on our assessment and vendors' representations, we believe that the
financial and accounting systems, including those necessary for financial aid,
of our significant third party vendors will be Year 2000 compliant by mid-year
1999.

We believe that the material non-IT systems that we control are Year 2000
compliant and have begun the process of surveying our landlords, utility
providers and other providers of non-IT systems to confirm that such systems are
compliant. We expect to complete this process in the second quarter of 1999.

We also expect that all of our Year 2000 testing will be completed by the
second quarter of 1999.

The Risks Associated with Our Year 2000 Issues. Although we are unable at
this time to quantify with certainty our internal costs resulting from our Year
2000 problems, we do not believe that the cost of remediating our internal Year
2000 problems or the lost opportunity costs arising from any necessary diversion
of our personnel to Year 2000 problems will have a material adverse effect on
our business, results of operations or financial condition. We estimate that the
cost of replacing non-compliant servers and desktop computers to be
approximately $200,000. Alternatively, we estimate that the cost of upgrading
such servers and desktop computers to be approximately $100,000. The choice to
replace or upgrade these servers and computers will be made on a case-by-case
basis.

We believe the greatest Year 2000 compliance risk, in terms of magnitude,
is that the Department of Education may fail to complete its remediation efforts
in a timely manner and federal student financial aid funding for our students
could be interrupted for a period of time. During any such time, students may
not be able to pay their tuition in a timely matter. Because we derive
approximately 70% of our revenue from U.S. federal student financial aid
programs, such delay is likely to have a material adverse effect on our
business, results of operations and financial condition. Other than public
comments provided by the

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Department of Education that contingency plans have been drafted and will be
tested by March 31, 1999, we are unable to predict the likelihood of this risk
occurring. According to the Department of Education, its systems should be
brought into certifiable compliance by the end of March, 1999.

Contingency Plans. At this time, we expect to be Year 2000 compliant and
are satisfied that our significant vendors are or will be compliant. However, to
avoid interruptions of our operations, we have begun developing contingency
plans in the event that we experience any Year 2000 problems. With respect to
IT-systems, we have distributed guidelines to each of our campuses regarding
data backup practices to store the information for our critical business
processes in case any of them experience Year 2000 problems. Our contingency
plan with respect to the material non-IT systems that we control includes, among
other things, investigating the availability and replacement cost of such non-IT
systems that have Year 2000 problems, isolating such systems that are not Year
2000 compliant so that they do not affect other systems and adjusting the clocks
on such non-IT systems that are not date sensitive. We do not believe that the
total costs of such Year 2000 compliance activities will be material.

Special Note Regarding Forward-Looking Statements

This Form 10-K contains certain statements which reflect our expectations
regarding our future growth, results of operation, performance and business
prospects and opportunities. Wherever possible, words such as "anticipate,"
"believe," "plan," "expect" and similar expressions have been used to identify
these "forward-looking" statements. These statements reflect our current beliefs
and are based on information currently available to us. Accordingly, these
statements are subject to risks and uncertainties which could cause our actual
growth, results, performance and business prospects and opportunities to differ
from those expressed in, or implied by, these statements. These risks and
uncertainties include implementation of our operating and growth strategy, risks
inherent in operating private for-profit postsecondary education institutions,
risks associated with general economic and business conditions, charges and
costs related to acquisitions, and our ability to: successfully integrate our
acquired institutions and continue our acquisition strategy, attract and retain
students at our institutions, meet regulatory and accrediting agency
requirements, compete with enhanced competition and new competition in the
education industry, and attract and retain key employees and faculty. We are not
obligated to update or revise these forward-looking statements to reflect new
events or circumstances.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated balance sheets are as of December 31, 1998 and 1997 and the
consolidated statements of operations, cash flows and stockholders' investment
are for each of the years ended December 31, 1998, 1997 and 1996:

Report of Independent Public Accountants, page F-1.

Consolidated Balance Sheets, page F-2.

Consolidated Statements of Operations, page F-5.

Consolidated Statements of Cash Flows, page F-7.

Consolidated Statements of Stockholders' Investment, page F-8.

Notes to Consolidated Financial Statements, page F-10.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information in response to this item is incorporated by reference from
the sections captioned "PROPOSAL NO. 1--ELECTION OF DIRECTORS" and "EXECUTIVE
OFFICERS" of the definitive Proxy Statement to be filed in connection with our
1999 Annual Meeting of Stockholders (the "1999 Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

The information in response to this item is incorporated by reference from
the section of the 1999 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information in response to this item is incorporated by reference from
the section of the 1999 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information in response to this item is incorporated by reference from
the sections of the 1999 Proxy Statement captioned "EXECUTIVE COMPENSATION AND
CERTAIN TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION."

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K or
incorporated by reference as set forth below:

1. Financial Statements of Career Education Corporation and its
subsidiaries.

Report of Independent Public Accountants, page F-1.

Consolidated Balance Sheets at December 31, 1998 and 1997, page
F-2.

Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996, page F-5.

Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996, page F-7.

Consolidated Statements of Stockholders' Investment for the years
ended December 31, 1998, 1997 and 1996, page F-8.

Notes to Consolidated Financial Statements, page F-10.

2. Financial Statement Schedules:

Report of Independent Public Accountants, page S-1.

Valuation and Qualifying Accounts, page S-2.

3. (a) Exhibits:

*2.1 Asset Purchase Agreement dated as of September 30, 1996,
among the Registrant, WCI Acquisition, Ltd., Phillips
Educational Group of Portland, Inc., and Phillips
Colleges, Inc. Schedules and exhibits to this Asset
Purchase Agreement have not been included herewith, but
will be furnished supplementally to the Commission upon
request.

*2.2 Stock Sale Agreement dated as of April 7, 1997, between
K-III Prime Corporation, Inc. and the Company. Schedules
and exhibits to this Stock Sale Agreement have not been
included herewith, but will be furnished supplementally
to the Commission upon request.

*2.3 Stock Purchase Agreement dated as of June 30, 1997, among
IAMD Acquisition I, Ltd. and Clem Stein, Jr., Marion
Stein, Leonard Rutstein, Barbara Ann Scott King, Thomas
V. King, William W. Wirtz and David Powell. Schedules and
exhibits to this Stock Purchase Agreement have not been
included herewith but will be furnished supplementally to
the Commission upon request.

*2.4 Share Purchase Agreement dated as of June 30, 1997, among
the Company and Clem Stein, Jr., Leonard Rutstein,
Barbara Ann

43

Scott King and Lawrence N. Gross. Schedules and exhibits
to this Share Purchase Agreement have not been included
herewith, but will be furnished supplementally to the
Commission upon request.

**2.5 Asset Purchase Agreement dated as of July 1, 1998 by and
among Scottsdale Institute, Inc., an Arizona corporation,
The Frank G. and Elizabeth S. Leite Revocable Trust dated
April 14, 1992, Frank G. Leite and Elizabeth S. Leite,
and SCI Acquisition I, Ltd., a Delaware Corporation.
Schedules and exhibits to this Asset Purchase Agreement
have not been included herewith, but will be furnished
supplementally to the Commission upon request.

+3.1 Amended and Restated Certificate of Incorporation of the
Company.

+3.2 Amended and Restated By-laws of the Company.

*4.1 Form of specimen stock certificate representing Common
Stock.

***4.2 Credit Agreement dated as of October 26, 1998 among the
Company, as borrower, the Co-Borrowers named therein, the
lenders named therein, LaSalle National Bank, as
administrative agent and The Bank of Nova Scotia as
foreign currency agent. Schedules and exhibits to this
Credit Agreement have not been included herewith, but
will be furnished supplementally to the Commission upon
request.

*10.1 Career Education Corporation 1995 Stock Option Plan, as
amended.

*10.2 Form of Option Agreement under the Company's 1995 Stock
Option Plan.

*10.3 Career Education Corporation 1998 Employee Incentive
Compennsation Plan.

*10.5 Career Education Corporation 1998 Non-Employee Directors'
Stock Option Plan.

*10.6 Form of Option Agreement under the Company's 1998 Non-
Employee Directors' Stock Option Plan.

*10.7 Career Education Corporation 1998 Employee Stock Purchase
Plan.

*10.8 Amended and Restated Option Agreement dated as of July
31, 1995, between the Company and John M. Larson, and
Amendment thereto dated as of October 20, 1997.

*10.9 Supplemental Option Agreement dated July 31, 1995,
between the Company and John M. Larson.

*10.10 Amended and Restated Option Agreement dated as of July
31, 1995, between the Company and Robert E. Dowdell, and
Amendment thereto dated as of October 20, 1997.

*10.11 Employment and Non-Competition Agreement dated as of
October 9, 1997, between the Company and John M. Larson.

44

*10.12 Form of Indemnification Agreement for Directors and Executive
Officers.

*10.13 Career Education Corporation Amended and Restated Stockholders'
Agreement dated as of July 31, 1995, as amended on February 28,
1997 and May 30, 1997.

*10.14 Registration Rights Agreement dated as of July 31, 1995, between
the Company, Electra Investment Trust P.L.C. and Electra
Associates, Inc., and Amendment No. 1 thereto.

*10.15 Securities Purchase Agreement dated as of July 31, 1995 among the
Company, Electra Investment Trust P.L.C. and Electra Associates,
Inc. (the "Electra 1995 Agreement").

*10.16 Securities Purchase Agreement dated as of February 28, 1997,
among the Company, Heller Equity Capital Corporation, Electra
Investment Trust P.L.C., Robert E. Dowdell, John M. Larson,
Wallace O. Laub and Constance L. Laub and William A. Klettke (the
"February 1997 Agreement").

*10.17 Securities Purchase Agreement dated as of May 30, 1997 among the
Company, Heller Equity Capital Corporation, Electra Investment
Trust P.L.C. and William A. Klettke (the "May 1997 Agreement").

*10.18 Form of Management Fee Agreement between the Company and each of
its subsidiaries.

*10.19 Form of Tax Sharing Agreement between the Company and each of its
subsidiaries.

+10.20 Registration Rights Agreement between the Company and Heller
Equity Capital Corporation.

+10.21 Agreement between the Company and Heller Equity Capital
Corporation, regarding designation of directors of the Company.

++10.22 Stock Purchase Agreement dated as of November 25, 1998 by and
between the Company and Robert C. Marks and the Robert C. Marks
Trust dated October 9, 1997.

***21 Subsidiaries of the Company.

23.1 Consent of Arthur Andersen LLP with respect to financial
statements of Career Education Corporation and Subsidiaries.

27 Financial Data Schedule.
__________________
* Incorporated herein by reference to our Registration Statement on Form S-1,
effective as of January 28, 1998.
** Incorporated herein by reference to our Report on Form 8-K dated August 14,
1998.
*** Incorporated herein by reference to our Registration Statement on Form S-1,
effective as of March 17, 1999.
+ Incorporated herein by reference to our Annual Report on Form 10-K for the
year ended December 31, 1997.
++ Incorporated herein by reference to our Report on Form 8-K dated January
19, 1999.

45

(b) Reports on Form 8-K:

During the last quarter of the period covered by this Form
10-K, we did not file any Current Reports on Form 8-K.

46

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 18th day of
March, 1999.

CAREER EDUCATION CORPORATION

By: /s/ WILLIAM A. KLETTKE
----------------------------------------
William A. Klettke, Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.

Signature Title Date
--------- ----- ----

/s/ JOHN M. LARSON President, Chief Executive Officer (Principal March 18, 1999
- ------------------------ Executive Officer) and a Director
John M. Larson

/s/ WILLIAM A. KLETTKE Senior Vice President and Chief Financial Officer March 18, 1999
- ------------------------ (Principal Financial and Accounting Officer)
William A. Klettke

/s/ ROBERT E. DOWDELL Director March 18, 1999
- ------------------------
Robert E. Dowdell

/s/ THOMAS B. LALLY Director March 18, 1999
- ------------------------
Thomas B. Lally

/s/ WALLACE O. LAUB Director March 18, 1999
- ------------------------
Wallace O. Laub

/s/ KEITH K. OGATA Director March 18, 1999
- ------------------------
Keith K. Ogata

/s/ PATRICK K. PESCH Director March 18, 1999
- ------------------------
Patrick K. Pesch

47

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Career Education Corporation:

We have audited the accompanying consolidated balance sheets of CAREER
EDUCATION CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1998 and 1997 and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Career
Education Corporation and Subsidiaries as of December 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.

As described in Note 4 to the consolidated financial statements, effective
January 1, 1998, the Company adopted the provisions of Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities."

Arthur Andersen LLP

Chicago, Illinois
January 29, 1999

F-1

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

December 31,
---------------------
1998 1997
-------- --------

ASSETS
CURRENT ASSETS:
Cash................................................... $ 23,548 $ 18,906
Receivables--
Students, net of allowance for doubtful accounts of
$2,127 and $1,516 at December 31, 1998 and 1997,
respectively........................................ 11,408 10,812
Other................................................ 999 1,346
Inventories, prepaid expenses and other current assets. 4,514 2,232
Deferred offering costs................................ -- 2,900
Deferred income tax assets............................. 459 406
-------- --------
Total current assets............................... 40,928 36,602
-------- --------
PROPERTY AND EQUIPMENT, net ............................. 46,403 45,555
INTANGIBLE ASSETS, net................................... 42,645 33,579
DEFERRED INCOME TAX ASSETS............................... 865 --
OTHER ASSETS............................................. 2,046 1,881
-------- --------
TOTAL ASSETS............................................. $132,887 $117,617
======== ========

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

F-2

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in thousands)

December 31,
-------------------
1998 1997
------- -------

LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt..................... $ 317 $ 3,888
Accounts payable......................................... 2,425 3,580
Accrued expenses--
Payroll and related benefits........................... 2,944 1,605
Offering costs......................................... -- 2,447
Other.................................................. 9,089 3,800
Deferred tuition revenue................................. 10,159 7,476
------- -------
Total current liabilities............................ 24,934 22,796
------- -------
LONG-TERM DEBT, net of current maturities.................. 22,300 60,147
OTHER LONG-TERM LIABILITIES................................ 1,017 703
DEFERRED INCOME TAX LIABILITIES............................ -- 1,215
COMMITMENTS AND CONTINGENCIES..............................
REDEEMABLE PREFERRED STOCK AND WARRANTS
Redeemable Series A preferred stock, $0.01 par value;
no shares authorized or outstanding at December 31, 1998;
50,000 shares authorized; 7,852 shares outstanding
at December 31, 1997, at liquidation value
(stated value plus accumulated dividends)............... -- 10,112
Redeemable Series B preferred stock, $0.01 par value;
no shares authorized or outstanding at December 31, 1998;
1,000 shares authorized; no shares outstanding
at December 31, 1997.................................... -- --
Redeemable Series C preferred stock, $0.01 par value;
no shares authorized or outstanding at December 31, 1998;
5,000 shares authorized; 4,954 shares outstanding at
December 31, 1997, at liquidation value (stated value
plus accumulated dividends)............................. -- 4,784
Redeemable Series D preferred stock, $0.01 par value; no
shares authorized or outstanding at December 31, 1998;
25,000 shares authorized; 22,500 shares outstanding at
December 31, 1997, at liquidation value (stated value
plus accumulated dividends)............................. -- 22,175
No warrants outstanding at December 31, 1998; warrants
exercisable into 202,297 shares of Class D common stock
at December 31, 1997, at an exercise price of $0.01 per
share, at estimated redemption value.................... -- 2,659
No warrants outstanding at December 31, 1998; warrants
exercisable into 32,947 shares of Class E common stock
at December 31, 1997, at an exercise price of $0.01 per
share, at estimated redemption value.................... -- 430
------- -------
Total redeemable preferred stock and warrants........ -- 40,160
------- -------

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

F-3

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in thousands)

December 31,
-----------------------
1998 1997
-------- --------

STOCKHOLDERS' INVESTMENT:
Common stock, $0.01 par value; 50,000,000 shares
authorized; 7,152,896 shares issued and outstanding
at December 31, 1998................................ $ 72 $ --
Class A common stock, $0.01 par value; no shares
authorized or outstanding at December 31, 1998;
5,625,600 shares authorized; 49,224 shares issued
and outstanding at December 31, 1997................ -- 1
Class B common stock, $0.01 par value; no shares
authorized or outstanding at December 31, 1998;
937,600 shares authorized; 47,818 shares issued and
outstanding at December 31, 1997.................... -- 1
Class C common stock, $0.01 par value; no shares
authorized or outstanding at December 31, 1998;
937,600 shares authorized; 655,382 shares issued and
outstanding at December 31, 1997.................... -- 7
Class D common stock, $0.01 par value; no shares
authorized or outstanding at December 31, 1998;
937,600 shares authorized; no shares issued and
outstanding at December 31, 1997.................... -- --
Class E common stock, $0.01 par value; no shares
authorized or outstanding at December 31, 1998;
1,875,200 shares authorized; 16,380 shares issued
and outstanding at December 31, 1997................ -- --
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding at
December 31, 1998................................... -- --
Warrants............................................. -- 4,777
Additional paid-in capital........................... 95,481 71
Accumulated other comprehensive income............... (822) (297)
Accumulated deficit.................................. (10,095) (11,964)
-------- --------
Total stockholders' investment................... 84,636 (7,404)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT......... $132,887 $117,617
======== ========

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

F-4

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

For the Years Ended
December 31,
--------------------------
1998 1997 1996
-------- ------- -------

REVENUE:
Tuition and registration fees, net................. $132,926 $74,842 $29,269
Other, net......................................... 11,306 7,756 4,311
-------- ------- -------
Total net revenue.............................. 144,232 82,598 33,580
OPERATING EXPENSES:
Educational services and facilities................ 57,151 34,620 14,404
General and administrative......................... 63,856 37,542 14,622
Depreciation and amortization...................... 12,163 8,121 2,134
Compensation expense related to the initial public
offering.......................................... 1,961 -- --
-------- ------- -------
Total operating expenses....................... 135,131 80,283 31,160
-------- ------- -------
Income from operations......................... 9,101 2,315 2,420
INTEREST EXPENSE.................................... 1,250 3,108 717
-------- ------- -------
Income (loss) before provision for income
taxes, extraordinary item and cumulative
effect of change in accounting principle...... 7,851 (793) 1,703
PROVISION (BENEFIT) FOR INCOME TAXES................ 3,350 (331) 208
-------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle..................................... 4,501 (462) 1,495
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
net of taxes of $233............................... -- (418) --
-------- ------- -------
Income (loss) before cumulative effect of
change in accounting principle................ 4,501 (880) 1,495
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
net of taxes of $149............................... (205) -- --
-------- ------- -------
NET INCOME (LOSS)................................... $ 4,296 $ (880) $ 1,495
======== ======= =======

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

F-5

CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS--(continued)
(In thousands, except per share amounts)

For the Years Ended
December 31,
-----------------------
1998 1997 1996
------ ------- ------

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle......................................... $4,501 $ (462) $1,495
Dividends on preferred stock....................... (274) (2,159) (1,128)
Accretion to redemption value of preferred stock
and warrants...................................... (2,153) (6,268) (230)
------ ------- ------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle attributable to common stockholders.. 2,074 (8,889) 137
Extraordinary loss................................. -- (418) --
Cumulative effect of change in accounting
principle......................................... (205) -- --
------ ------- ------
Net income (loss) attributable to common
stockholders................................... $1,869 $(9,307) $ 137
====== ======= ======
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle........................................ $ 0.32 $(11.58) $ 0.18
Extraordinary loss................................ -- (0.54) --
Cumulative effect of change in accounting
principle........................................ (0.03) -- --
------ ------- ------
Net income (loss)............................... $ 0.29 $(12.12) $ 0.18
====== ======= ======
Diluted--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle........................................ $ 0.30 $(11.58) $ 0.13
Extraordinary loss................................ -- (0.54) --
Cumulative effect of change in accounting
principle........................................ (0.03) -- --
------ ------- ------
Net income (loss)............................... $ 0.27 $(12.12) $ 0.13
====== ======= ======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.............................................. 6,521 768 761
====== ======= ======
Diluted............................................ 6,797 768 1,030
====== ======= ======

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

F-6

CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

For the Year Ended
December 31
--------------------------
1998 1997 1996
------- -------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 4,296 $ (880) $ 1,495
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities--
Depreciation, amortization and debt discount... 12,163 8,239 2,188
Warrants issued to a bank...................... -- 180 --
Deferred income taxes.......................... (1,311) (1,013) (208)
Extraordinary loss on early extinguishment of
debt.......................................... -- 418 --
Cumulative effect of change in accounting
principle..................................... 205 -- --
Compensation expense related to options........ 2,212 -- --
Gain on sale of property and equipment......... (14) -- --
Changes in operating assets and liabilities,
net of acquisitions--
Receivables, net............................. (4,237) (5,208) 385
Inventories, prepaid expenses and other
current assets.............................. 814 (3,959) (237)
Deposits and other non-current assets........ (352) -- --
Accounts payable............................. (1,383) 4,808 (138)
Accrued expenses and other liabilities....... 8,031 392 752
Deferred tuition revenue..................... 1,803 (3,171) 1,038
------- -------- -------
Net cash provided by (used in) operating
activities................................ 22,227 (194) 5,275
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash............... (5,860) (39,855) (8,250)
Acquisition and financing transaction costs...... (372) (1,516) --
Purchase of property and equipment, net.......... (6,383) (3,822) (1,231)
Other assets..................................... (73) (21) (37)
Proceeds from sale of property and equipment..... 332 -- --
------- -------- -------
Net cash used in investing activities...... (12,356) (45,214) (9,518)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock......................... 52,765 30 --
Issuance of warrants............................. -- 4,789 --
Issuance of redeemable preferred stock and
warrants........................................ -- 17,556 --
Dividends paid on preferred stock................ (47) (495) (495)
Equity and debt financing costs.................. (7,085) (1,021) (553)
Book overdraft................................... -- (683) 683
Payments of long-term debt....................... (8,295) (513) (1,309)
Net proceeds from (payments on) revolving credit
facility........................................ -- (8,239) 1,500
Proceeds from term loan facility................. -- 3,400 8,250
Repayments of term loan facility................. -- (11,650) --
Net proceeds from (payments on) revolving loans
under Credit Agreement.......................... (28,735) 39,985 --
Proceeds from issuance of term loans under Credit
Agreement....................................... -- 15,000 --
Payments on term loans under Credit Agreement.... (13,500) (1,500) --
------- -------- -------
Net cash provided by (used in) financing
activities................................ (4,897) 56,659 8,076
------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ (332) (143) --
------- -------- -------
NET INCREASE IN CASH............................... 4,642 11,108 3,833
CASH, beginning of year............................ 18,906 7,798 3,965
------- -------- -------
CASH, end of year.................................. $23,548 $ 18,906 $ 7,798
======= ======== =======

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

F-7

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT

Common Stock
-------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class D Class E Common Stock
---------------- ---------------- ------------------ ---------------- ---------------- ------------------
5,625,600 $0.01 937,600 $0.01 937,600 $0.01 937,600 $0.01 1,875,200 $0.01 50,000,000 $0.01
Shares Par Shares Par Shares Par Shares Par Shares Par Shares Par
Authorized Value Authorized Value Authorized Value Authorized Value Authorized Value Authorized Value
---------- ----- ---------- ----- ---------- ------- ---------- ----- ---------- ----- ---------- -------

BALANCE, December
31, 1995........... 49,224 $ 492 47,818 $ 478 655,382 $ 6,554 -- $-- 7,726 $ 78 -- $ --
Net income........ -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
stock............. -- -- -- -- -- -- -- -- 7,726 77 -- --
Dividends paid.... -- -- -- -- -- -- -- -- -- -- -- --
Dividends on
preferred stock
for the year...... -- -- -- -- -- -- -- -- -- -- -- --
Preferred stock
and warrant
accretion......... -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1996........... 49,224 492 47,818 478 655,382 6,554 -- -- 15,452 155 -- --
Net loss.......... -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation.......
Total
comprehensive
income..........
Issuance of
warrants.......... -- -- -- -- -- -- -- -- -- -- -- --
Exercise of
warrants.......... -- -- -- -- -- -- -- -- 928 9 -- --
Dividends paid.... -- -- -- -- -- -- -- -- -- -- -- --
Dividends on
preferred stock... -- -- -- -- -- -- -- -- -- -- -- --
Preferred stock
and warrant
accretion......... -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1997........... 49,224 492 47,818 478 655,382 6,554 -- -- 16,380 164 -- --
Net income........ -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation....... -- -- -- -- -- -- -- -- -- -- -- --
Total
comprehensive
income..........
Preferred stock
and warrant
accretion......... -- -- -- -- -- -- -- -- -- -- -- --
Dividends......... -- -- -- -- -- -- -- -- -- -- -- --
Compensatory
options........... -- -- -- -- -- -- -- -- -- -- -- --
Conversion of
preferred and
common stock...... (49,224) (492) (47,818) (478) (655,382) (6,554) -- -- (16,380) (164) 3,192,037 31,920
Issuance of
common stock...... -- -- -- -- -- -- -- -- -- -- 3,288,279 32,883
Warrants
exercised......... -- -- -- -- -- -- -- -- -- -- 657,267 6,573
Options
exercised......... -- -- -- -- -- -- -- -- -- -- 15,313 153
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1998........... -- $ -- -- $ -- -- $ -- -- $-- -- $ -- 7,152,896 $71,529
======= ===== ======= ===== ======== ======= === ==== ======= ===== ========= =======

Total
Amount
-------

BALANCE, December
31, 1995........... $ 7,602
Net income........ --
Issuance of
stock............. 77
Dividends paid.... --
Dividends on
preferred stock
for the year...... --
Preferred stock
and warrant
accretion......... --
-------
BALANCE, December
31, 1996........... 7,679
Net loss.......... --
Foreign currency
translation.......
Total
comprehensive
income..........
Issuance of
warrants.......... --
Exercise of
warrants.......... 9
Dividends paid.... --
Dividends on
preferred stock... --
Preferred stock
and warrant
accretion......... --
-------
BALANCE, December
31, 1997........... 7,688
Net income........ --
Foreign currency
translation....... --
Total
comprehensive
income..........
Preferred stock
and warrant
accretion......... --
Dividends......... --
Compensatory
options........... --
Conversion of
preferred and
common stock...... 24,232
Issuance of
common stock...... 32,883
Warrants
exercised......... 6,573
Options
exercised......... 153
-------
BALANCE, December
31, 1998........... $71,529
=======

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

F-8

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (Continued)

Preferred Stock Warrants
---------------- ----------- Accumulated
$0.01 par value, Class E Additional Other Total
1,000,000 shares Common Paid-in Comprehensive Accumulated Stockholders'
authorized Stock Capital Income Deficit Investment
---------------- ----------- ----------- ------------- ------------ -------------

BALANCE, December 31,
1995................... $-- $ -- $ 29,904 $ -- $ (2,793,833) $(2,756,327)
Net income............ -- -- -- -- 1,494,666 1,494,666
Issuance of stock..... -- -- 29,905 -- -- 29,982
Dividends paid........ -- -- -- -- (495,400) (495,400)
Dividends on preferred
stock................ -- -- -- -- (632,417) (632,417)
Preferred stock and
warrant accretion.... -- -- -- -- (229,975) (229,975)
---- ----------- ----------- --------- ------------ -----------
BALANCE, December 31,
1996................... -- -- 59,809 -- (2,656,959) (2,589,471)
---- ----------- ----------- --------- ------------ -----------
Net loss.............. -- -- -- -- (879,608) (879,608)
Foreign currency
translation.......... -- -- -- (296,602) -- (296,602)
-----------
Total comprehensive
income............. (1,176,210)
Issuance of warrants.. -- 4,788,563 -- -- -- 4,788,563
Exercise of warrants.. -- (11,136) 11,127 -- -- --
Dividends paid........ -- -- -- -- (495,400) (495,400)
Dividends on preferred
stock................ -- -- -- -- (1,663,137) (1,663,137)
Preferred stock and
warrant accretion.... -- -- -- -- (6,268,478) (6,268,478)
---- ----------- ----------- --------- ------------ -----------
BALANCE, December 31,
1997................... -- 4,777,427 70,936 (296,602) (11,963,582) (7,404,133)
---- ----------- ----------- --------- ------------ -----------
Net income............ -- -- -- -- 4,296,048 4,296,048
Foreign currency
translation.......... -- -- -- (525,238) -- (525,238)
-----------
Total comprehensive
income............. 3,770,810
Preferred stock and
warrant accretion.... -- -- -- -- (2,152,834) (2,152,834)
Dividends............. -- -- -- -- (274,424) (274,424)
Compensatory options.. -- -- 2,171,635 -- -- 2,171,635
Conversion of
preferred and common
stock................ -- -- 38,746,072 -- -- 38,770,304
Issuance of common
stock................ -- -- 45,786,186 -- -- 45,819,069
Warrants exercised.... -- (4,777,427) 8,540,301 -- -- 3,769,447
Options exercised..... -- -- 165,499 -- -- 165,652
---- ----------- ----------- --------- ------------ -----------
BALANCE, December 31,
1998................... $-- $ -- $95,480,629 $(821,840) $(10,094,792) $84,635,526
==== =========== =========== ========= ============ ===========

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

F-9

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998, 1997 and 1996

1. DESCRIPTION OF THE COMPANY

Career Education Corporation ("CEC", collectively with its subsidiaries "we"
or "our") owns and operates companies, which provide private, for-profit
postsecondary education in North America. We operate 11 schools with 20
campuses that offer bachelor's degree, associate degree and non-degree programs
in information technologies, visual communications and design technologies,
business studies and culinary arts.

2. INITIAL PUBLIC OFFERING

On February 4, 1998, we sold 3,277,500 shares of our common stock at $16.00
per share pursuant to an initial public offering ("IPO"). The net proceeds from
the offering of $45.6 million were used to repay borrowings under the Credit
Agreement (Note 6) totaling $41.5 million and amounts owed to former owners of
acquired businesses of $4.1 million (Note 6) which were outstanding at that
time. Prior to the consummation of the IPO, all outstanding shares of all
series of preferred stock and accumulated dividends were converted into
2,423,485 shares of common stock and warrants (except for redeemable warrants
exercisable into 32,947 shares of Class E common stock) to purchase 624,320
shares of common stock were exercised. Subsequent to December 31, 1997 and
prior to the consummation of the IPO, we also authorized one class of preferred
stock and one class of common stock, increased the number of authorized shares
of common stock to 50,000,000 and completed a 9.376-for-1 stock split. The
effect of the split has been retroactively reflected for all periods presented
in the accompanying consolidated financial statements.

3. SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The consolidated financial statements include the accounts of CEC and our
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in the consolidation. The results of operations
of all acquired businesses have been consolidated for all periods subsequent to
the date of acquisition.

b. Concentration of Credit Risk

We extend unsecured credit for tuition to a significant portion of the
students who are in attendance at the campuses operated by our subsidiaries. A
substantial portion of credit extended to students is repaid through the
students' participation in various federally funded financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs"). The following table presents the amounts and percentages of the
Company's U.S. institutions' cash receipts collected from Title IV Programs for
the years ended December 31, 1998, 1997 and 1996 (such amounts were determined
based upon each U.S. institution's cash receipts for the twelve-month period
ended December 31, pursuant to the regulations of the United States Department
of Education ("DOE") at 34 C.F.R. (S) 600.5):

For the Years Ended December 31,
------------------------------------
1998 1997 1996
------------ ----------- -----------

Total Title IV funding.............. $ 90,086,463 $54,963,232 $26,931,030
Total cash receipts................. $132,552,679 $85,046,951 $38,036,509
Total Title IV funding as a
percentage of total cash receipts.. 68% 65% 71%

F-10

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

We generally complete and approve the financial aid packet of each student
who qualifies for financial aid prior to the student's beginning class in an
effort to enhance the collectibility of our unsecured credit. Transfers of
funds from the financial aid programs are made in accordance with DOE
requirements. Changes in DOE funding of Title IV Programs could impact our
ability to attract students.

c. Marketing and Advertising Costs

Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
$16,915,000, $10,640,000 and $3,494,000 for the years ended December 31, 1998,
1997 and 1996, respectively.

d. Inventories

Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out basis, or
market.

e. Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the useful lives of the
related assets. Leasehold improvements and assets recorded under capital leases
are amortized on a straight-line basis over their estimated useful lives or
lease terms, whichever is shorter. Maintenance, repairs and minor renewals and
betterments are expensed; major improvements are capitalized. The estimated
cost basis and useful lives of property and equipment at December 31, 1998 and
1997, are as follows (dollars in thousands):

December 31,
---------------
1998 1997 Life
------- ------- ----------

Buildings..................................... $ 846 $ 1,190 31 years
Classroom equipment, courseware and other
instructional materials...................... 44,754 39,518 3-15 years
Furniture, fixtures and equipment............. 7,722 7,768 3-10 years
Leasehold improvements........................ 7,266 4,325 1-7 years
Vehicles...................................... 17 17 5 years
------- -------
60,605 52,818
Less--Accumulated depreciation and
amortization................................. 14,202 7,263
------- -------
$46,403 $45,555
======= =======

The gross cost of assets recorded under capital leases included above
amounts to $1,291,000 and $2,075,000 at December 31, 1998 and 1997,
respectively.

f. Intangible Assets

Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the business purchases described in Note
5. Goodwill is being amortized on a straight-line basis over their estimated
useful lives. Covenants not-to-compete entered into before 1997 are being
amortized on a straight-line basis over their useful lives. Those entered into
during and after 1997 are being amortized on an

F-11

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

accelerated method over their estimated useful lives. At December 31, 1998 and
1997, the cost basis and useful lives of intangible assets consist of the
following (dollars in thousands):

December 31,
--------------- Estimated
1998 1997 Lives
------- ------- ---------

Goodwill........................................ $38,080 $24,358 40 years
Covenants not-to-compete........................ 13,055 13,250 3-5 years
------- -------
51,135 37,608
Less--Accumulated amortization.................. 8,490 4,029
------- -------
$42,645 $33,579
======= =======

On an ongoing basis, we review intangible assets and other long-lived assets
for impairment whenever events or circumstances indicate that carrying amounts
may not be recoverable. To date, no such events or changes in circumstances
have occurred. If such events or changes in circumstances occur, we will
recognize an impairment loss if the undiscounted future cash flows expected to
be generated by the asset (or acquired business) are less than the carrying
value of the related asset. The impairment loss would adjust the asset to its
fair value.

g. Revenue Recognition

Revenue is derived primarily from programs taught at our schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable course. Dormitory and cafeteria revenues charged to students are
recognized on a straight-line basis over the length of the students' program.
Other dormitory and cafeteria revenues are recognized as earned. Textbook sales
and other revenues are recognized as services are performed. If a student
withdraws, future revenue is reduced by the amount of the refund due to the
student. Refunds are calculated in accordance with federal, state and
accrediting agency standards. Deferred tuition revenue represents the portion
of payments received but not earned and is reflected as a current liability in
the accompanying consolidated balance sheets as such amount is expected to be
earned within the next year.

h. Management's Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements
and reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.

i. Income Taxes

We file a consolidated federal income tax return and provide for deferred
income taxes under the asset and liability method of accounting. This method
requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.

F-12

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

j. Fair Value of Financial Instruments

The carrying value of current assets and liabilities reasonably approximates
their fair value due to their short maturity periods. The carrying value of our
debt obligations reasonably approximates their fair value as the stated
interest rate approximates current market interest rates of debt with similar
terms.

k. Accretion to Redemption Value of Preferred Stock and Warrants

Accretion to redemption value of redeemable preferred stock and warrants
represents the change in the redemption value of outstanding preferred stock
and warrants, which is being accreted over the earliest period redemption can
occur using the effective interest method. The redemption values are based on
the estimated fair market values of the classes of stock and consider the
amounts we have received for the sale of equity instruments, prices paid for
acquired businesses and our operations.

l. Income (Loss) Per Share Attributable to Common Stockholders

We compute earnings per share in accordance with Financial Accounting
Standard No. 128 "Earnings Per Share" which requires two calculations: basic
earnings per share and diluted earnings per share. The calculations primarily
differ by excluding dilutive common stock equivalents, convertible securities
and contingently issuable securities using the treasury method, when computing
basic earnings per share. The weighted average number of common shares used in
determining basic and diluted net income (loss) per share attributable to
common stockholders for the years ended December 31, 1998, 1997 and 1996 is as
follows (in thousands):

For the Years
Ended December
31,
----------------
1998 1997 1996
----- ---- -----

Common shares outstanding (basic)........................ 6,521 768 761
Common stock equivalents................................. 259 -- 269
Common stock contingently issuable....................... 17 -- --
----- --- -----
Diluted.................................................. 6,797 768 1,030
===== === =====

For the year ended December 31, 1997, antidilutive common stock equivalents
totaling 568,332 were excluded from diluted weighted average number of common
shares outstanding.

Supplemental pro forma diluted income (loss) before extraordinary item and
cumulative effect of change in accounting principle and net income (loss) per
share attributable to common stockholders, had the debt retirement in
connection with the consummation of the IPO occurred at the beginning of the
year, would have been $0.33 and $0.30, respectively, for the year ended
December 31, 1998 and $(2.59) and $(2.73), respectively, for the year ended
December 31, 1997. This earnings per share data is computed based upon
historical information adjusted for the reduction in interest expense resulting
from the application of net proceeds from the IPO to reduce our indebtedness
and pro forma weighted average number of shares of common stock outstanding
which reflect the assumed sale of common stock in the IPO resulting in net
proceeds sufficient to pay indebtedness as described in Note 2.

F-13

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

m. Stock-Based Compensation

We account for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS
No. 123) related to options and warrants issued to employees and directors.
Expense associated with stock options and warrants issued to non-employees/non-
directors is recorded in accordance with SFAS No. 123.

n. Comprehensive Income

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for the reporting of comprehensive
income. This pronouncement requires that all items recognized under accounting
standards as components of comprehensive income, as defined in the
pronouncement, be reported in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income includes
all changes in equity during a period except those resulting from investments
by owners and distributions to owners. We have adopted SFAS No. 130 at December
31, 1998 and have restated the Statements of Stockholders' Investment for all
periods presented to reflect comprehensive income and accumulated other
comprehensive income.

o. Foreign Currency Translation

We acquired the International Academy of Design, an entity with operations
in Canada, on June 30, 1997. At December 31, 1998 and 1997, revenues and
expenses related to these operations have been translated at average exchange
rates in effect at the time the underlying transactions occurred. Transaction
gains or losses are included in income. Assets and liabilities of this
subsidiary have been translated at the year-end exchange rate, with gains and
losses resulting from such translation being included in stockholders'
investment at December 31, 1998 and 1997.

p. Supplemental Disclosures of Cash Flow Information

For the Year Ended
December 31
------------------
1998 1997 1996
------ ------ ----

CASH PAID FOR--
Interest................................................ $1,534 $3,008 $407
Taxes, excluding a refund of $900 in 1998............... 1,860 2,446 80
====== ====== ====
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock and
warrants................................................. $2,153 $6,268 $230
Dividends on preferred stock added to liquidation value... 227 1,663 632
Conversion of all Class A, B, C, and E common stock and
all series of redeemable preferred stock into 3,192,037
shares of common stock in connection with the IPO. Value
of the redeemable preferred stock at the date of
conversion............................................... 38,776 -- --
====== ====== ====

q. Segment Information

We operate in one industry segment. Operations in geographic regions outside
the United States are not significant.

F-14

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

4. CHANGE IN ACCOUNTING PRINCIPLE

In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-
Up Activities." SOP 98-5 requires that all nongovernmental entities expense the
costs of start-up activities (which include organization costs) as these costs
are incurred. As prescribed by the literature, we adopted the provisions of SOP
98-5 in the fourth quarter of 1998, effective January 1, 1998, and recorded a
net of tax charge of $205,000 representing the cumulative effect of the change
in accounting principle.

5. BUSINESS ACQUISITIONS

Western Culinary Institute (Western)

On October 21, 1996, we acquired certain assets and assumed certain
liabilities of Western Culinary Institute, a wholly owned subsidiary of
Phillips College, Inc. This acquisition was accounted for as a purchase and,
accordingly, the purchased assets and assumed liabilities have been recorded at
their estimated fair market values at the date of the acquisition. The purchase
price, as adjusted, of approximately $7,477,000 exceeded the fair market value
of net assets acquired, resulting in goodwill of approximately $646,000. In
connection with the purchase, the former owner of the school entered into a
four-year covenant not-to-compete agreement with us for a total price of
$400,000. At closing, we paid $7,000,000 to the former owner with funds
obtained through bank financing, assumed a $150,000 obligation and deposited
$1,250,000 into escrow.

School of Computer Technology, Inc. (SCT)

On February 28, 1997, through SCT Acquisition, Ltd., we acquired 100% of the
outstanding shares of capital stock of School of Computer Technology, Inc. This
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair
market values at the date of the acquisition. The purchase price, as adjusted,
of approximately $4,944,000 exceeded the estimated fair market value of net
assets acquired and liabilities assumed, resulting in goodwill of approximately
$3,111,000. In connection with the purchase, we entered into a three-year
covenant not-to-compete agreement with each of the former owners of the school
for a total price of $1,750,000.

At closing, we paid $400,000 to the former owners, deposited $5,000,000 into
escrow, and assumed a $1,800,000 note payable due to the former owners. Funds
paid were raised through the issuance of $2,000,000 of Series D preferred stock
and warrants and $3,400,000 of bank borrowings. The note was paid subsequent to
December 31, 1998.

The Katharine Gibbs Schools, Inc. (Gibbs)

On May 31, 1997, we acquired 100% of the outstanding shares of capital stock
of The Katharine Gibbs Schools, Inc. Gibbs has seven wholly-owned subsidiaries,
each of which owns and operates separate campuses. This acquisition was
accounted for as a purchase and, accordingly, the acquired assets and assumed
liabilities have been recorded at their estimated fair market values at the
date of the acquisition. The estimated fair market values of certain assets are
based upon preliminary appraisal reports. The purchase price, as adjusted, of
approximately $19,029,000 exceeded the fair market value of net assets acquired
and liabilities assumed, resulting in goodwill of approximately $8,434,000. In
connection with the purchase, we also entered into a covenant not-to-compete
agreement with the former owner of the schools in exchange for $7,000,000. The
covenant not-to-compete restricts the former owners' ability to own or operate
some types of for-profit postsecondary schools for five years.

F-15

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

At closing, we paid $5,400,000 to the former owner and deposited $18,850,000
into escrow with borrowings of $12,500,000 from a new bank financing
arrangement and $15,000,000 which was raised through the issuance of Series D
preferred stock.

International Academy of Merchandising & Design (IAMD)

On June 30, 1997, through IAMD, Acquisition I, Ltd. we acquired 100% of the
outstanding shares of capital stock of International Academy of Merchandising &
Design for $3,000,000. Subsequent to the purchase, IAMD Acquisition I, Ltd.
merged with and into International Academy of Merchandising & Design and
assumed its name. In 1998, the purchase price was increased by approximately
$4,700,000, pursuant to the earn-out provision in the purchase agreement. This
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair
market values at the date of the acquisition. The purchase price exceeded the
fair market value of net assets acquired and liabilities assumed, resulting in
goodwill of approximately $8,395,000.

In connection with the purchase, we also entered into covenant not-to-
compete agreements with the former owners of the school in exchange for
$2,000,000. The covenant not-to-compete restricts the former owners' ability to
own or operate some types of for-profit postsecondary schools for four years.

On June 30, 1997, we paid $100,000 to the former owners, issued $1,500,000
in notes payable to the former owners and issued letters of credit totaling
$3,400,000 to secure amounts owed to the former owners to consummate these
transactions. The funds to consummate these transactions were obtained through
the issuance of Series D preferred stock and warrants and bank borrowings. The
notes and amounts owed to former owners were paid upon the consummation of the
IPO (Note 2).

International Academy of Design (IAD)

On June 30, 1997, we purchased 100% of the capital stock of International
Academy of Design for $6,500,000. This acquisition was accounted for as a
purchase and, accordingly, the acquired assets and assumed liabilities have
been recorded at their estimated fair market values at the date of the
acquisition. The estimated fair market values of certain assets are based upon
preliminary appraisal reports. The purchase price, subject to certain
modifications, exceeded the fair market value of net assets acquired and
liabilities assumed, resulting in goodwill of approximately $5,648,000.

In connection with the purchase, we entered into covenant not-to-compete
agreements with the former owners of the school in exchange for $2,000,000. The
covenant not-to-compete restricts the former owners' ability to own or operate
certain types of postsecondary vocational schools for four years.

On June 30, 1997, we paid $3,820,000 to the former owners, deposited
$2,120,000 into escrow, and issued $2,550,000 in notes payable to the former
owners to consummate these transactions. The funds to consummate these
transactions were obtained through the issuance of Series D preferred stock and
warrants and bank borrowings. The notes were paid upon consummation of the IPO
(Note 2).

Southern California School of Culinary Arts (SCSCA)

On March 13, 1998, we purchased 100% of the outstanding shares of capital
stock of Southern California School of Culinary Arts for $1,000,000. The
acquisition was accounted for as a purchase and the purchase price exceeded the
fair value of assets acquired and liabilities assumed resulting in goodwill of
approximately $1,301,000.

F-16

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

Scottsdale Culinary Institute, Inc. (Scottsdale Culinary)

On July 31, 1998, we acquired certain assets and assumed certain liabilities
of Scottsdale Culinary Institute, Inc. for approximately $9,900,000. The
acquisition was accounted for as a purchase and the purchase price exceeded the
fair value of assets acquired and liabilities assumed, resulting in goodwill of
approximately $7,900,000.

Harrington Institute of Interior Design, Inc. (Harrington)

On January 4, 1999, we acquired 100% of the outstanding shares of capital
stock of the Harrington Institute of Interior Design, Inc. for $3,300,000,
subject to adjustment. The acquisition will be accounted for as a purchase,
with the excess of the purchase price over the net assets acquired, currently
estimated to be $2,800,000, recorded as goodwill.

Pro Forma Results of Operations

The following unaudited pro forma results of operations (in thousands,
except per share amounts) for the years ended December 31, 1998, 1997 and 1996,
assume that the business acquisitions subsequent to January 1, 1996 described
above occurred at the beginning of the year preceding the year of the
acquisition. The pro forma results below are based on historical results of
operations, include adjustments for depreciation, amortization, interest and
taxes and do not necessarily reflect actual results that would have occurred.

For the Years Ended
December 31,
--------------------------
1998 1997 1996
-------- -------- -------
(Unaudited)

Net revenue........................................ $147,577 $111,310 $87,476
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle......................................... 4,565 (1,516) (5,051)
Net income (loss).................................. 4,360 (1,934) (5,051)
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle attributable to common stockholders..... 2,138 (9,944) (6,409)
Net income (loss) attributable to common
stockholders...................................... 1,933 (10,362) (6,409)
======== ======== =======
Basic income (loss) per share attributable to
common stockholders--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle....................................... $ 0.33 $ (12.95) $ (8.42)
======== ======== =======
Net income (loss).................................. $ 0.30 $ (13.49) $ (8.42)
======== ======== =======
Diluted income (loss) per share attributable to
common stockholders--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle....................................... $ 0.31 $ (12.95) $ (8.42)
======== ======== =======
Net income (loss)................................ $ 0.28 $ (13.49) $ (8.42)
======== ======== =======

F-17

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

6. DEBT

Our long-term debt at December 31, 1998 and 1997, consists of the following:

December 31,
---------------
1998 1997
------- -------
(in thousands)

Borrowings under Credit Agreement with a syndicate of banks as
discussed below--
Revolving loans.............................................. $11,250 $39,985
Term loans................................................... -- 13,500
Note payable to former owners of SCI, secured by bank letters
of credit, bearing annual interest of 7%, currently payable... 9,029 --
Notes payable to former owners of SCT, bearing annual interest
of 7%, principal due February 28, 2001, secured by bank letter
of credit..................................................... 1,800 1,800
Notes payable to former owners of IAMD, bearing annual interest
of 7%, repaid in connection with the IPO...................... -- 1,500
Amounts due to former owners of IAMD non-interest bearing,
repaid in connection with the IPO............................. -- 3,400
Notes payable to former owners of IAD bearing annual interest
of 7%, repaid in connection with the IPO...................... -- 2,550
Equipment under capital leases, secured by related equipment,
discounted at a weighted average interest rate of 10.5%....... 523 1,279
Other.......................................................... 15 21
------- -------
22,617 64,035
Less--Current portion.......................................... 317 3,888
------- -------
$22,300 $60,147
======= =======

On May 30, 1997, we entered into a new credit agreement (the "Credit
Agreement") with a bank (syndicated on September 25, 1997) and prepaid
approximately $21,187,000 of outstanding revolving credit notes, term loans and
other obligations under our previous credit agreement with borrowings from term
loans and revolving credit notes which were permitted under the Credit
Agreement at that time. On October 26, 1998, the Credit Agreement was amended.
We can borrow, under the amended Credit Agreement, up to $60,000,000 under a
revolving credit facility ("Revolving Loans") and can obtain up to $35,000,000
in letters of credit, however, outstanding letters of credit reduce the
revolving credit facility availability. The amended Credit Agreement matures on
October 26, 2003. Borrowings under the amended Credit Agreement bear interest,
payable quarterly, at the bank's prime rate plus 0.50% (8.25% at December 31,
1998) or at LIBOR plus 1.75% (6.85% at December 31, 1998), at our election.
Interest rates are subject to change based upon our funded debt levels relative
to consolidated earnings before interest, taxes, depreciation and amortization
on a pro forma basis for the last four fiscal quarters. We are also required to
pay annual commitment fees of 0.25% on unused availability under the revolver
and 1.5% for unused letters of credit.

At December 31, 1998, we had outstanding, $11,250,000 in revolving credit
borrowings and outstanding letters of credit totaling approximately $28,935,000
(to meet certain Department of Education financial responsibility requirements
and to guarantee certain purchase price payments) under the Credit Agreement.
At December 31, 1998, all borrowings were at the bank's prime rate plus 0.50%.

Under our previous bank credit agreement, which we entered into in 1995,
(the "Agreement") we were permitted to borrow, on a consolidated basis,
$8,000,000 under a revolving credit note and $12,000,000 through a term loan.
On May 30, 1997, in connection with entering into the Credit Agreement and
prepaying

F-18

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

all amounts outstanding under the Agreement, we expensed prepayment penalty
fees and unamortized deferred financing costs and recorded an extraordinary
loss on the early extinguishment of debt of $651,000, net of related tax
benefit of $233,000.

CEC and our subsidiaries have collectively guaranteed repayment of amounts
outstanding under the Credit Agreement. In addition, we have pledged the stock
of our subsidiaries as collateral for repayment of the debt. We may voluntarily
make principal prepayments. Mandatory principal prepayments are required if we
generate excess cash flows, as defined, sell certain assets, or upon the
occurrence of certain other events. Under the Credit Agreement we are limited
in our ability to take certain actions, including paying dividends, as defined,
selling or disposing of certain assets or subsidiaries, making annual rental
payments in excess of 15% of consolidated revenues in any given year, and
issuing subordinated debt in excess of $5,000,000, among other things. We are
required to maintain certain financial ratios, including a quarterly interest
coverage ratio of at least 1.75:1, certain levels of consolidated net worth,
and funded debt to consolidated earnings before interest, taxes, depreciation,
and amortization of 3.50:1, among others. At December 31, 1998, we were in
compliance with the covenants of the Credit Agreement, as amended.

We intend to refinance amounts owed to former owners of acquired businesses
as noted above through availability under our Credit Agreement and, therefore,
such amounts have been classified as long-term.

At December 31, 1998, future annual principal payments of long-term debt are
as follows (in thousands):

1999............................. $ 317
2000............................. 153
2001............................. 1,861
2002............................. 7
2003............................. 20,279
-------
$22,617
=======

7. STOCKHOLDERS' INVESTMENT

In connection with the consummation of the IPO on February 4, 1998, we
amended and restated our certificate of incorporation to authorize a total of
50,000,000 shares of common stock ("Common Stock") and authorize 1,000,000
shares of preferred stock, with a par value of $0.01, and converted all classes
of common stock described below into one class of Common Stock, with a par
value of $0.01, at a rate of 9.376 shares of Common Stock for every share of
existing common stock. The shares of common stock disclosed in these financial
statements and notes hereto retroactively reflect this split.

Prior to the IPO we had Class A, B, C, D, and E common stock. Class A and
Class B common stock had voting rights while Class C, D and E common stock was
nonvoting. Class B common stock was convertible into shares of Class A common
stock at any time at the discretion of the holder at a ratio of 1:1. Class C
common stock was convertible into shares of either Class A common stock or
Class B common stock at any time at the discretion of the holder at a ratio of
1:1. Class D common stock was convertible into shares of Class A common stock,
subject to certain restrictions. Class E common stock could only be converted
into shares of Class A common stock upon the occurrence of certain events.

8. REDEEMABLE PREFERRED STOCK

In connection with the IPO consummated on February 4, 1998, all classes of
redeemable preferred stock described below were converted into 2,423,233 shares
of Common Stock by dividing the liquidation value of preferred stock on that
date (including all accrued paid-in-kind dividends) by $16.00, the initial
public offering price of the common stock.

F-19

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

Series A

Series A and D preferred stock had a stated value of $1,000 per share, and
its holders were entitled to receive dividends at an annual rate of 7% of the
liquidation value per share ($1,000 per share plus dividends as defined).
Dividends were paid in equal semiannual installments on January 31 and July 31
of each year by increasing the liquidation value of the Series A and D
preferred stock. The mandatory redemption value of the Series A and D preferred
stock was increased to reflect these dividends.

On February 28, 1997, we entered into a securities purchase agreement with
existing common and preferred stockholders to raise funds for acquisitions. The
securities purchase agreement gave the stockholders the right to purchase up to
7,500 shares of Series D preferred stock for $1,000 per share and receive
warrants to purchase 83,671 shares of Class E common stock at an exercise price
of $.01 per share. Under this securities purchase agreement, we issued 7,500
shares of Series D preferred stock and warrants to purchase 83,671 shares of
Class E common stock to existing stockholders in connection with the
acquisition of SCT and Gibbs. The proceeds were allocated to preferred stock
and warrants based upon their relative market values after considering issuance
costs.

On May 30, 1997, we entered into another securities purchase agreement with
existing common and preferred stockholders to raise funds for additional
acquisitions. The securities purchase agreement gave the stockholders the right
to purchase up to an additional 15,000 shares of Series D preferred stock for
$1,000 per share and receive warrants to purchase 339,280 shares of Class E
common stock at an exercise price of $.01 per share. Under this securities
purchase agreement, we issued 15,000 shares of Series D preferred stock and
warrants to purchase 339,280 shares of Class E common stock to existing
stockholders in connection with the acquisitions of Gibbs, IAMD and IAD. The
proceeds were allocated to preferred stock and warrants based upon their
relative market values after considering issuance costs.

Series B

Series B preferred stock had a stated value of $1,000 per share, and its
holders were not entitled to any dividends on any outstanding shares.

Series C

Series C preferred stock had a stated value of $1,000 per share, and its
holders were entitled to receive cash dividends at an annual rate of 10% of the
liquidation value per share ($1,000 per share plus undeclared dividends as
defined). Dividends were payable in equal quarterly installments on each March
31, June 30, September 30 and December 31. To the extent dividends were
declared and not paid, they were added to the liquidation value. The Company
paid all dividends through December 31, 1997 on Series C preferred stock. In
July 1996, we increased the number of authorized shares of Series C preferred
stock and completed a 10-for-1 stock split. The stock split has been
retroactively reflected in the accompanying financial statements.

9. REDEEMABLE WARRANTS

In connection with the issuance of Series C preferred stock during 1995, we
issued warrants exercisable into 237,072 shares of Class D common stock. These
warrants were subject to adjustment, exercisable at any time, and had an
exercise price of $.01 per share. These warrants were adjusted to be 202,297
based upon the results of our operations through December 31, 1997 and were
exercised in connection with the IPO (Note 2) during 1998. We accreted the
difference between the value of the warrants at the date of issuance and the
IPO date using the effective interest method.

F-20

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

In connection with our previous credit agreement (Note 6), we issued
warrants exercisable into 20,618 shares (subject to adjustment under certain
circumstances) of Class D common stock. The warrants were exercisable at any
time and had an exercise price of $.01 per share. Based upon the terms and
provisions of the credit and warrant agreements, we assigned a value (based
upon the relative fair market value of the debt and warrants) of $79,997 to
these warrants. The fair market value of the warrants was determined with
reference to the exercise price of the warrants, the fair market value of our
common stock at the date the warrants were issued (considering its recent sale
of stock to third parties) and the period the warrants can be exercised. In
connection with the sales of Series D preferred stock through the various
securities purchase agreements, the warrants were exchanged for warrants (with
similar put and call features) to purchase 20,618 shares of Class E common
stock and also increased to include additional warrants to purchase 12,329
shares of Class E common stock. The value of these additional warrants,
totaling approximately $180,000 (based upon a Black-Scholes option pricing
model with assumptions as described in Note 10) was recorded as interest
expense in 1997. The warrant holder exercised the warrants in 1998.

10. STOCK OPTIONS AND WARRANTS

Stock Options

During 1994, certain stockholders were granted options to purchase up to a
total of approximately 13.5% of the outstanding shares of our common stock.
These options, which have an exercise price of $.10 per share, were to be
earned and become exercisable based upon certain financial returns earned and
realized in a cash payment by certain stockholders and are subject to other
conditions. In July 1995, the option agreements were amended to reduce the
total number of shares of common stock for which the options could be exercised
to 11.5% of the outstanding shares, and a supplemental option agreement was
entered into entitling one of these stockholders to purchase 20,618 shares of
common stock at $0.01 per share. The supplemental option vests over a five year
period. Under the supplemental option agreement, additional options to purchase
a total of 8,579 shares of common stock at an exercise price of $0.01 per share
were issued in 1997. These options vest over the same period as the initial
supplemental option.

On October 20, 1997, the original option agreements were further amended to
fix the number of shares that the stockholders may exercise only upon
completion of the IPO. Under these amended agreements, in addition to the
options issued under the supplemental option agreement, the stockholders may
purchase an aggregate of 122,615 shares of our common stock at any time after
the IPO closing, but prior to January 1, 2004. These options fully vested upon
the IPO closing. We recorded compensation expense of approximately $2.0 million
related to these agreements in 1998.

During 1995, we adopted the 1995 Stock Option Plan. Under this plan we can
grant up to 160,568 options exercisable into shares of Class E common stock to
certain members of management. The options vest and become exercisable in five
equal annual installments commencing with the first anniversary of the grant,
and expire 10 years from the date of grant, or earlier under certain
circumstances. Options issued under the 1995 Stock Option Plan to purchase
92,101 shares of common stock were fully vested upon the consummation of the
IPO.

During 1998, we approved the 1998 Employee Incentive Compensation Plan. The
plan provides for us to grant stock options, stock appreciation rights,
restricted stock, deferred stock and other awards which are exercisable into
shares of common stock to our directors, officers, employees and consultants.
Stock options may be either incentive stock options or nonqualified stock
options. No stock option or appreciation right shall be exercisable more than
ten years after the date of grant. We have reserved 600,000 shares of common
stock for distribution pursuant to awards issued under the plan.

F-21

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

During 1998, we approved the 1998 Non-Employee Directors' Stock Option
Plan. The plan provides for us to grant options to purchase shares of common
stock to directors. Each person who is a non-employee director shall be
granted an option to purchase 8,000 shares of common stock upon becoming a
director and on an annual basis, as long as such director continues to serve
as a director, shall receive an option to purchase 3,000 shares of common
stock. Each option becomes exercisable in three equal annual installments and
expires ten years from the date of grant. We have reserved 200,000 shares of
common stock for issuance under the plan.

Stock option activity under all of our stock option plans for the years
ended December 31, 1996, 1997 and 1998, was as follows:

Weighted
Average
Exercise
Shares Price Range Price
------- ------------ --------

Outstanding as of December 31, 1995............ 54,334 $ 3.88 $ 3.88
Granted...................................... 30,922 3.88 3.88
-------
Outstanding as of December 31, 1996............ 85,256 3.88 3.88
Granted...................................... 68,782 13.85-14.71 14.59
Cancelled.................................... (2,672) 3.88 3.88
-------
Outstanding as of December 31, 1997............ 151,366 3.88-14.71 8.75
Granted...................................... 638,050 16.00-26.25 22.47
Exercised.................................... (9,313) 3.88-16.00 13.44
Cancelled.................................... (16,531) 14.71-26.25 16.95
-------
Outstanding as of December 31, 1998............ 763,572 $ 3.88-26.25 $19.50
======= ============ ======
Stock options exercisable at
December 31, 1997............................ 26,853 $ 3.88 $ 3.88
======= ============ ======
December 31, 1998............................ 126,450 $ 3.88-26.25 $ 8.07
======= ============ ======

The following table summarizes information about all stock options
outstanding as of December 31, 1998:

Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Number Weighted Number
Outstanding Weighted Average Exercisable Weighted
as of Average Remaining at Average
Exercise Price Ranges December 31, 1998 Exercise Price Contractual Life December 31, 1998 Exercise Price
- --------------------- ----------------- -------------- ---------------- ----------------- --------------

$ 0.01-$ 3.88........... 226,520 $ 1.39 6.73 214,681 $ 1.46
$13.85-$16.00........... 301,914 15.70 8.95 43,741 14.98
$19.25-$26.25........... 380,950 25.82 9.55 2,000 26.25
------- ------ ---- ------- ------
$ 0.01-$26.25........... 909,384 $16.38 8.64 260,422 $ 3.93
======= ====== ==== ======= ======

F-22

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model and assumptions used to value the options.
The weighted average fair value of the options granted during the years ended
December 31, 1998, 1997 and 1996 and assumptions used to value the options are
as follows:

For the Years
Ended
--------------------
1998 1997 1996
------ ----- -----

Dividend yield............................................ -- -- --
Risk-free interest rate................................... 8.0% 6.8% 5.7%
Volatility................................................ 60% -- --
Expected life............................................. 10 10 10
Weighted average fair value of options granted............ $14.48 $2.58 $1.80

Warrants

During 1997, in connection with the issuance of Class D preferred stock
through the various securities purchase agreements, we issued warrants
exercisable into a total of 422,951 shares of Class E common stock. These
warrants were exercisable at any time, had an exercise price of $.01 per share
and were exercised in connection with the consummation of the IPO.

A summary of warrant activity, including redeemable warrants, for the years
ended December 31, 1996, 1997 and 1998, is as follows:

Shares Under Warrant
-------------------------------
Class D Class E
Common Stock Common Stock
--------------- ---------------
Shares Price Shares Price
-------- ----- -------- -----

Outstanding as of December 31, 1995.......... 257,690 $0.01 -- $ --
Issued..................................... -- -- -- --
-------- ----- -------- -----
Outstanding as of December 31, 1996.......... 257,690 0.01 -- --
Issued..................................... -- -- 435,281 0.01
Cancelled.................................. (34,776) 0.01 -- --
Exercised.................................. -- -- (928) 0.01
Exchanged.................................. (20,618) 0.01 20,618 0.01
-------- ----- -------- -----
Outstanding as of December 31, 1997.......... 202,296 0.01 454,971 0.01
Exercised.................................. (202,296) 0.01 (454,971) 0.01
-------- ----- -------- -----
Outstanding as of December 31, 1998.......... -- $ -- -- $ --
======== ===== ======== =====
Warrants exercisable at December 31, 1997.... 202,296 $0.01 454,971 $0.01
======== ===== ======== =====

The fair value of each warrant is estimated on the date of grant based on
the Black-Scholes option pricing model assuming among other things, no dividend
yield, a risk-free interest rate of 6.59%, an expected volatility of 0.70 and
expected life of 8-10 years.

F-23

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

Pro Forma Results

Had we accounted for our stock options in accordance with SFAS No. 123, pro
forma income (loss) before extraordinary item and cumulative effect of change
in accounting principle and net income (loss), and pro forma income (loss)
before extraordinary item and cumulative effect of charge in accounting
principle and net income (loss) attributable to common stockholders would have
been as follows (in thousands, except per share data):

December 31,
-----------------------
1998 1997 1996
------ ------- -------

Pro forma income (loss) before extraordinary item
and cumulative effect of change in accounting
principle....................................... $3,754 $ (505) $ 1,475
Pro forma net income (loss)...................... 3,549 (923) 1,475
Pro forma income (loss) before extraordinary item
and cumulative effect of change in accounting
principle attributable to common stockholders... 1,327 (8,932) 117
Pro forma net income (loss) attributable to
common stockholders............................. 1,122 (9,350) 117
====== ======= =======
Pro forma diluted income (loss) before
extraordinary item and cumulative effect of
change in accounting principle per share
attributable to common stockholders............. $0.20 $(11.63) $ 0.11
====== ======= =======
Pro forma diluted net income (loss) per share
attributable to common stockholders............. $0.17 $(12.17) $ 0.11
====== ======= =======

The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the options
vest and additional awards may also be granted.

11. INCOME TAXES

The provision (benefit) for income taxes for the years ended December 31,
1998, 1997 and 1996, consists of the following (in thousands):

For the Year Ended
December 31,
---------------------
1998 1997 1996
------ ------- ----

Current--
Federal.......................................... $3,688 $ 685 $150
State and local.................................. 973 (3) 260
------ ------- ----
Total current.................................. 4,661 682 410
------ ------- ----
Deferred--
Federal.......................................... (923) (578) (172)
State and local.................................. (182) (76) (30)
Foreign.......................................... (206) (359) --
------ ------- ----
Total deferred................................. (1,311) (1,013) (202)
------ ------- ----
Total provision (benefit) for income taxes......... $3,350 $ (331) $208
====== ======= ====

F-24

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate for the years ended December 31, 1998, 1997 and 1996,
is as follows:

Year Ended
December 31,
-------------------
1998 1997 1996
---- ----- -----

Statutory U.S. Federal income tax rate.............. 34.0% (34.0)% 34.0 %
Foreign taxes....................................... (0.3) (8.7) --
State income taxes, net of Federal benefit.......... 6.7 (6.6) 10.0
Permanent differences and other..................... 2.3 7.6 4.8
Valuation allowance................................. -- -- (36.6)
---- ----- -----
Effective income tax rate........................... 42.7% (41.7)% 12.2%
==== ===== =====

Components of deferred income tax assets and liabilities consist of the
following at December 31, 1998 and 1997 (in thousands):

December 31,
-------------
1998 1997
------ ------

Deferred income tax assets:
Tax net operating loss carryforwards.......................... $1,788 $ 891
Stock options................................................. 872 --
Allowance for doubtful accounts............................... 320 285
Amortization on covenants not-to-compete...................... 2,086 926
Other......................................................... 488 121
------ ------
Total deferred income tax assets............................ 5,554 2,223
------ ------
Deferred income tax liabilities:
Depreciation and amortization................................. 4,134 3,032
Other......................................................... 95 --
------ ------
Total deferred income tax liabilities....................... 4,229 3,032
------ ------
Net deferred income tax (liability) asset................... $1,325 $ (809)
====== ======

We have purchased certain tax net operating loss carryforwards in connection
with our business acquisitions. At December 31, 1998 we have federal and state
net operating loss carryforwards totalling $1.5 million and $8.4 million
respectively. We have not recorded a valuation allowance because we believe
that deferred income tax assets will be realized in the future.

12. COMMITMENTS AND CONTINGENCIES

Litigation

We are subject to occasional lawsuits, investigations and claims arising out
of the normal conduct of our business. In some cases, claims against acquired
businesses relating to events which occurred during the periods we did not own
them are indemnified by the former owners. Management does not believe the
outcome of any pending claims will have a material adverse impact on our
financial position or results of operations.

Leases

We rent most of our school facilities and certain equipment under non-
cancelable operating leases expiring at various dates through 2009. The
facility leases require us to make monthly payments covering rent, taxes,
insurance and maintenance costs. Rent expense, exclusive of taxes, insurance
and maintenance of the facilities and equipment for the years ended December
31, 1998, 1997 and 1996 was approximately $14,304,000, $8,049,000, and
$2,649,000, respectively.

F-25

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

Future minimum lease payments under these leases as of December 31, 1998,
are as follows (in thousands):

Capital Operating
Leases Leases Total
------- --------- -------

1999........................................... $382 $14,375 $14,757
2000........................................... 193 13,468 13,661
2001........................................... 75 11,550 11,625
2002........................................... 9 8,822 8,831
2003........................................... -- 7,833 7,833
2004 and thereafter............................ -- 24,432 24,432
---- ------- -------
659 $80,480 $81,139
======= =======
Less--Portion representing interest at a
weighted average rate of 10.5%................ 136
----
Principal payments............................. 523
Less--Current portion.......................... 302
----
$221
====

On October 29, 1998, we entered into an agreement with Le Cordon Bleu
Limited granting us exclusive rights to use the "Le Cordon Bleu" name in the
United States and Canada in connection with our culinary education programs. We
are developing a curriculum with Le Cordon Bleu for use at our culinary schools
and upon approval of the curriculum, we will issue Le Cordon Bleu 50,601 shares
of Common Stock and one year later an additional 50,601 shares of Common Stock.
Under this agreement we will also pay Le Cordon Bleu royalties based on tuition
collected from students enrolled in Le Cordon Bleu programs at our schools. The
agreement expires on December 31, 2008 but can be renewed for two successive
five year terms.

13. REGULATORY

CEC and our U.S. schools are subject to extensive regulation by federal and
state governmental agencies and accrediting bodies. In particular, the Higher
Education Act ("HEA"), and the regulations promulgated thereunder by the U.S.
Department of Education ("DOE") subject our U.S. schools to significant
regulatory scrutiny on the basis of numerous standards that schools must
satisfy in order to participate in the various federal student financial
assistance programs under Title IV of the HEA ("Title IV Programs").

To participate in the Title IV Programs, an institution must be authorized
to offer its programs of instruction by the relevant agencies of the state in
which it is located, accredited by an accrediting agency recognized by the DOE
and certified as eligible by the DOE. The DOE will certify an institution to
participate in the Title IV Programs only after the institution has
demonstrated compliance with the HEA and the DOE's extensive regulations
regarding institutional eligibility. An institution must also demonstrate its
compliance to the DOE on an ongoing basis.

Political and budgetary concerns significantly affect the Title IV Programs.
Congress must reauthorize the HEA approximately every six years. The most
recent reauthorization in October 1998 reauthorized the HEA for an additional
five years (the "1998 HEA Reauthorization"). Congress reauthorized all of the
Title IV Programs in which our schools participate, generally in the same form
and at funding levels no less than for the prior year. Changes made by the 1998
HEA Reauthorization include (i) expanding the adverse effects on schools of
high student loan default rates, (ii) increasing from 85% to 90% the portion of
a proprietary school's revenue that may be derived each year from the Title IV
Programs, (iii) revising the refund standards that require an

F-26

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

institution to return a portion of the Title IV Program funds for students who
withdraw from school and (iv) giving the Department of Education flexibility to
continue an institution's Title IV participation without interruption in some
circumstances following a change of ownership or control.

A significant component of Congress' initiative to reduce abuse in the Title
IV Programs has been the imposition of limitations on institutions whose former
students default on the repayment of their federally guaranteed or funded
student loans above specific rates (cohort default rate). An institution whose
cohort default rates equal or exceed 25% for three consecutive years will no
longer be eligible to participate in the FFEL or FDL programs. An institution
whose cohort default rate under certain Title IV programs for any federal
fiscal year exceeds 40% may have its eligibility to participate in all of the
Title IV Programs limited, suspended or terminated by the DOE.

All institutions participating in the Title IV Programs must satisfy
specific standards of financial responsibility. The DOE evaluates institutions
for compliance with these standards each year, based on the institution's
annual audited financial statements and following a change of ownership of the
institution. In reviewing our financial statements, it has been the DOE's
practice to measure financial responsibilities on the basis of the financial
statements of both our institutions and CEC on a consolidated basis.

Under new regulations which took effect July 1, 1998, the DOE calculates the
institution's composite score based on its (i) equity ratio, which measures the
institution's capital resources, ability to borrow and financial viability;
(ii) primary reserve ratio, which measures the institution's ability to support
current operations from expendable resources; and (iii) net income ratio, which
measures the institution's ability to operate at a profit. An institution that
does not meet the DOE's minimum composite score may demonstrate its financial
responsibility by posting a letter of credit in favor of the DOE in an amount
equal to at least 50% of the Title IV Program funds received by the institution
during its prior fiscal year and possibly accepting other conditions on its
participation in the Title IV Programs.

In periodic reviews of our financial statements for 1997 and prior years, as
well as our February 28, 1998 balance sheet reflecting the results of our
initial public offering, the DOE has questioned certain accounting matters and
has found that we and certain of our institutions, when measured on an
individual basis failed the numeric tests under the DOE's former and current
standards of financial responsibility. To satisfy the DOE's concerns, we have
posted letters of credit on behalf of all institutions we have acquired since
October 1996 except Harrington. The DOE reduced the number and amount of our
letters of credit in September 1998 following its review of our 1997 financial
statements and our February 28, 1998 balance sheet. The DOE also noted that the
funds derived from our initial public offering, shortly after the close of our
1997 fiscal year, would have a positive effect on our financial responsibility.
As a result, we currently have posted letters of credit totaling approximately
$17.6 million on behalf of Gibbs, IAMD, Scottsdale, SCSCA, and Western.

We intend to file our audited 1998 financial statements with the DOE early
in 1999 and to ask it to release most, if not all, of our outstanding letters
of credit and to increase or eliminate the Title IV Program funding limitation
for SCSCA. At December 31, 1998, we believe, based on our audited 1998
financial statements, that we satisfy each of the DOE's standards of financial
responsibility and may participate in Title IV Programs without additional
monitoring. However, we believe that two of our institutions, while considered
financially responsible, may be subject to additional monitoring by the DOE. In
the event that the DOE does not measure the financial responsibility of such
institutions on the basis of the financial position of CEC, the DOE may require
us to post letters of credit on behalf of such institutions. Such letters of
credit, which would be calculated on an institution-specific basis, would be in
amounts substantially less than the letters of credit we

F-27

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

currently have outstanding. To the extent the outstanding letters of credit are
reduced or eliminated based upon the DOE's review, we will have additional
availability under the Credit Agreement.

The DOE also assesses the administrative capability of each institution that
participates in the Title IV Program. In addition, each institution is required
to apply to the DOE for continued certification to participate in the Title IV
Programs at least every six years, or when it undergoes a change of control,
opens an additional location or raises the highest academic credential it
offers.

When we acquire an institution that is eligible to participate in the Title
IV Programs, that institution undergoes a change of ownership resulting in a
change of control ("change of control") as defined by the DOE. Upon a change of
control, an institution's eligibility to participate in the Title IV Programs
is generally suspended until it has applied for and been recertified by the DOE
as an eligible institution under our ownership, which requires that the
institution also reestablish its state authorization and accreditation. If an
institution is recertified following a change of control, it will be on a
provisional basis. The 1998 HEA Reauthorization provides that the DOE may
provisionally and temporarily certify an institution undergoing a change of
control under certain circumstances while the DOE reviews the institution's
application. The DOE has not yet issued regulations or guidance regarding how
it will interpret or apply this amendment to the HEA. Each of the U.S.
institutions we have acquired has undergone a certification review under our
ownership and has been certified to participate in the Title IV Programs, with
the exception of Harrington, which we acquired in January, 1999.

Each of the U.S. institutions we have acquired has undergone a certification
review under our ownership and has been certified to participate in the Title
IV Programs, with the exception of Harrington, which we acquired in January
1999.

In Canada, there are several government programs which provide students
attending eligible institutions with government funding. The provisions
governing an eligible institution vary by province and generally require an
institution's programs qualifying for funding to meet certain rules and
regulations and also to have the administration of the program independently
audited.

14. RELATED-PARTY TRANSACTIONS

We have short-term employment and consulting agreements with certain
stockholders. Total expenses under these agreements were approximately
$493,000, $367,000 and $298,000, for the years ended December 31, 1998, 1997
and 1996, respectively.

15. EMPLOYEE BENEFIT PLANS

We maintain a contributory profit sharing plan established pursuant to the
provisions of Section 401(k) of the Internal Revenue Code that provides
retirement benefits for our eligible employees. This plan requires matching
contributions to eligible employees. Our matching contributions were $699,000,
$400,000, and $279,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.

F-28

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998, 1997 and 1996

We maintain an employee stock purchase plan which provides for the issuance
of up to 500,000 shares of common stock to be purchased by our eligible
employees through periodic offerings. Our employees may purchase common stock
through payroll deductions (not to exceed $20,000 per person within any
calendar year) at 85% of the fair market value.

F-29

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

FINANCIAL STATEMENT SCHEDULE

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Career Education Corporation:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Career Education Corporation and
Subsidiaries and issued our unqualified opinion thereon dated January 29, 1999.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Valuation and Qualifying Account
Schedule is presented for purposes of additional analysis and is not a required
part of the basic financial statements. This information has been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
January 29, 1999

S-1

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

FINANCIAL STATEMENT SCHEDULE

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

Balance at Charges to Increase Due Balance at
Beginning Operating to Amounts End of
of Period Expenses Acquisitions Written-off Period
---------- ---------- ------------ ----------- ----------
(in thousands)

Student receivable
allowance activity for
the year ended
December 31, 1996..... $ 258 $ 760 $ 30 $ (593) $ 455
Student receivable
allowance activity for
the year ended
December 31, 1997..... 455 1,400 1,040 (1,379) 1,516
Student receivable
allowance activity for
the year ended
December 31, 1998..... 1,516 4,983 71 (4,443) 2,127

S-2

INDEX TO EXHIBITS

Sequential
Exhibits Description Page No.
- ---------- ---------------------------------------------------------------------- ----------

23.1 Consent of Arthur Andersen LLP with respect to financial statements of
Career Education Corporation and Subsidiaries.

27 Financial Data Schedule.