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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

Commission File Number 0-23245

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

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 75 days.    Yes ý    No o

        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.    ý

        Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes ý    No o

        The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant, based upon the $34.15 per share closing sale price of the Registrant's Common Stock on June 30, 2003 (the last business day of the Registrant's most recently completed second quarter), was approximately $3,182,946,071. 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 10, 2004, was 100,312,362.

        Portions of the Registrant's Notice of Annual Meeting and Proxy Statement for the Registrant's Annual Meeting of Stockholders, scheduled to be held on May 21, 2004, are incorporated by reference into Part III of this Report.

CAREER EDUCATION CORPORATION

FORM 10-K

TABLE OF CONTENTS

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PART I

ITEM 1.    BUSINESS

        This Form 10-K contains "forward-looking statements," as defined in Section 21E of the Securities Exchange Act of 1934, that reflect our current expectations regarding our future growth, results of operations, performance and business prospects, and opportunities. We have tried to use words such as "anticipate," "believe," "plan," "expect," "intend," and similar expressions to identify these forward-looking statements. These statements are based on information currently available to us and are subject to risks and uncertainties, including those discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risks Related to Our Business", that could cause our actual growth, results of operations, performance and business prospects, and opportunities to differ from those expressed in, or implied by, these statements.

Overview

        We are a provider of private, for-profit, postsecondary education, with 78 campuses throughout the United States, Canada, France, the United Kingdom, and the United Arab Emirates. We also offer online education programs through our Online Education Group, which includes American InterContinental University Online and Colorado Technical University Online. Our total student population as of January 31, 2004, was approximately 83,200 students, including total student population of our Online Education Group as of January 31, 2004 of approximately 12,200 students. Our schools enjoy long operating histories and offer a variety of doctoral degree, master's degree, bachelor's degree, associate degree, and diploma programs in career-oriented disciplines within our core curricula of:

•

Visual Communication and Design Technologies: These programs include desktop publishing, graphic design, fashion design, interior design, graphic imaging, web page design, animation, photography, and visual journalism.



•

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



•

Business Studies: These programs include business administration, business operations, e-commerce, merchandising management, criminal justice, paralegal studies, education, and hospitality management.



•

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



•

Health Education: These programs include healthcare management, dental office administration, medical massage science, medical office administration, medical assisting, dental assisting, medical administrative assisting, and massage therapy.

        We have identified these career-oriented fields of study as areas with highly motivated students, strong entry-level employment opportunities, and ongoing career and salary advancement potential.

        We have experienced significant growth both organically and through acquisitions. Since our inception in January 1994, we have completed 26 acquisitions and have opened eight branch start-up campuses. We have acquired schools that we believe possess strong curricula, leading reputations, and broad marketability, but that have been under managed from a marketing and/or financial standpoint. We seek to apply our expertise in operations, marketing, and curriculum development, as well as our financial strength, to improve the performance of these schools.

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        Our schools are summarized in the following table:

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5

(1)

Our schools offer degree and diploma programs within our core curricula of business studies ("B"), culinary arts ("CA"), information technology ("IT"), visual communication and design technologies ("VC"), and health education ("HE").

(2)

The Washington, D.C. facility stopped admitting new students in 2001 and was closed in 2002 after existing students completed their programs pursuant to a teach-out agreement. Further references to this campus throughout this Annual Report on Form 10-K have been excluded.

(3)

These schools were not acquired but rather opened by us as new start-up campuses. New start-up campuses have been opened as branch campuses of an existing main campus location. The U.S. Department of Education considers the main campus and its branch campuses as one institution for reporting purposes.

(4)

We are currently in the process of renaming certain Ultrasound Diagnostic School campuses Sanford-Brown Institute.

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Industry Background

        Based on estimates for the 2001-2002 academic year by the U.S. Department of Education ("DOE"), postsecondary education is an approximately $315.5 billion industry in the U.S., with approximately 15.6 million students obtaining some form of postsecondary education. According to the DOE, the number of students within the postsecondary education industry is expected to grow by 17% to approximately 18.2 million students by 2012. In the 2000-2001 academic, the DOE estimated that approximately 3.6 million students were enrolled in 2,484 private, degree-granting schools.

        Total federal aid available to support postsecondary education was estimated to exceed $105 billion during the 2002-2003 academic year and has grown approximately 338% from $24 billion during the 1991-1992 academic year. Of the total amount of federal funding available, the federal government lent approximately $48 billion to qualified students during the 2002-2003 academic year, almost triple the amount lent to students during the 1991-1992 academic year. State, local, and third-party private lenders are also available to fund students' postsecondary education.

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

        Changes in Workplace Demands.    The workplace is becoming increasingly knowledge-intensive. Rapid advances in technology have intensified demands on employers and their employees, requiring many new workers to have some form of education beyond the high school level. More advanced technological skills required for entry-level jobs are spurring demand for specialized career-oriented training that may not be provided by many traditional two-year and four-year colleges. The Bureau of Labor Statistics, U.S. Department of Labor, projects that between 2000 and 2010, jobs requiring a bachelor's or higher degree are expected to increase approximately 22%, jobs requiring an associate degree are expected to increase approximately 32%, and jobs requiring postsecondary vocational training are expected to increase approximately 18%. Approximately 34% of the students in our U.S. accredited institutions are enrolled in bachelor's, master's, and doctoral degree programs, 48% are enrolled in associate degree programs, and 18% are enrolled in diploma/certificate programs. Our Canadian schools do not grant degrees, and, therefore, their programs are classified as "diploma/certificate" programs. Furthermore, career-oriented schools generally have the ability to react quickly to the changing needs of the business and industrial communities. Additionally, to meet new workplace demands, many major employers are now using career-oriented institutions on a contractual basis to provide customized training for their employees.

        Increasing Numbers of High School Graduates.    During the 2001-2002 academic year, U.S. high school graduates represented over 2.8 million new prospective postsecondary students. From the 2001-2002 academic year through the 2011-2012 academic year, the number of high school graduates is projected to increase by 11% to 3.1 million. During 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 contribute significantly to an increase in enrollment in postsecondary educational programs to as high as 18.2 million students by the 2011-2012 academic year, an increase of 17% from approximately 15.6 million in the 2001-2002 academic year.

        Growing Demand for Postsecondary Education.    High school graduates and adults are seeking postsecondary education in increasing numbers. The U.S. Department of Labor estimates that among the 2.8 million high school graduates in 2002, approximately 1.8 million or 65% pursued some form of postsecondary education the following fall. The U.S. Department of Labor projects the number of jobs requiring at least an associate degree to grow by 32% between 2000 and 2010. The continuing trend toward corporate downsizing and resulting layoffs is expected to increase enrollment in postsecondary programs as individuals seek to enhance their skills or re-train for new job requirements.

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        Proliferation of Online Education.    Over the years, many adults have suppressed desires to return to school due to the many challenges of integrating school-related responsibilities with the demands of families and employment. However, the recent proliferation of online learning and other distance education alternatives is now enabling many adults to pursue postsecondary education. The DOE estimates that the number of degree-seeking students taking online courses will grow at a compound rate of 33% per year during the next several years. According to the DOE's most recent study on online education, during the 2000-2001 academic year, enrollment in college-level, credit-granting, distance education courses totaled 2.9 million students. The types of online programs and offerings vary significantly and include, among others, (1) fully online programs that permit students to complete 100% of required coursework online with no campus based component, (2) hybrid programs that combine campus-based courses with an online component, and (3) supplemental online programs that enable campus-based students to complete some coursework online. Additionally, online programs often offer the convenience and flexibility of an asynchronous format, whereby students can log on at any time to participate in the learning process.

        Growing Demand for Health Education.    According to the National Center for Health Statistics, life expectancy in the U.S. has risen to 77 years. As Americans have aged, the demand for healthcare professionals has increased significantly. According to the U.S. Department of Labor, 13% of all newly created jobs in the U.S. between 2002 and 2012 are estimated to be in the healthcare field, and five of the 10 fastest-growing occupations in the U.S. are healthcare occupations. As a result, health education has become one of the fastest growing segments of the postsecondary education industry.

        Recognition of the Value of Postsecondary Education.    Over the years, the difference between the earnings of adults who have completed at least a bachelor's degree and the earnings of their counterparts who have completed no more than a high school education has increased. According to a 2002 U.S. Census Bureau survey, the average graduate with a bachelor's degree is expected to earn $1.0 million more during the course of his or her career than an individual with only a high school diploma. We believe that prospective students are increasingly cognizant of this income premium and other improvements in career prospects associated with postsecondary education. More specifically, according to the U.S. Department of Commerce, on average, in 1999, an individual with an associate degree earned approximately 25% more than did an individual who had completed no more than a high school education, and an individual with a bachelor's degree earned approximately 65% more than did an individual who had completed no more than a high school education. Independent research studies have demonstrated that prospective students consider these benefits when making their education decisions.

        Reduction in Public Education Funding.    The reduction of state or provincial and local funding of many public educational institutions in recent years has forced many such educational institutions to decrease spending on general operations and refrain from increasing capacity. As a result, some public schools have become under-funded and overcrowded. This trend, along with a general increase in postsecondary enrollment as a result of a projected increase in high school graduates, may provide an opportunity for proprietary institutions to serve the postsecondary education needs of individuals who would have otherwise attended public schools. For example, according to the National Center for Education Statistics, in 1995, no for-profit institutions ranked among the top 10 U.S. postsecondary institutions in terms of student population. However, by the fall of 2003, five for-profit institutions were listed among the 10 most densely populated U.S. postsecondary institutions.

        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, Europe, and other international markets.

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Business and Operating Strategy

        Our objective is to become the leading provider of quality, private, for-profit, postsecondary education. Our business and operating strategy is driven by this objective and 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 that are driving demand for career-oriented education, thereby strengthening our position as one of the premier, professionally-managed systems 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 one or more of the following five career-oriented fields of study:

•

visual communication and design technologies, offered at 42 schools



•

information technology, offered at 43 schools



•

business studies, offered at 44 schools



•

culinary arts, offered at 12 schools



•

health education, offered at 27 schools

        We perceive a growing demand and believe there are many entry-level positions and ongoing career and salary advancement potential for individuals who have received advanced training in these particular fields. We recognize that these employment opportunities attract highly interested and motivated students, including both recent high school graduates and adults, seeking formal training and degrees, diplomas, and certificates evidencing their knowledge and skills.

        Adapting and Expanding Educational Programs.    We strive to meet the changing needs of our students and the employment market. In doing so, 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 (1) revisions to existing classes and programs and (2) the introduction of new courses and programs of study within our core curricula. We are also able to leverage programs that have been successful at a particular school by selectively duplicating these programs at other schools within our system. In 2003, we successfully duplicated approximately 50 programs, and an additional 50 program duplications are expected in 2004.

        Investing for Future Growth.    We make substantial investments in our people, facilities, management information systems, and classroom technologies to prepare for continued growth. We devote particular attention to attracting and retaining quality, high-integrity managers at both the corporate and school level 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 in order to maintain effective and expedient communication within our organizational structure and to ensure the smooth integration of newly acquired schools and newly opened branch campuses. During 2003, the amount we invested in capital expenditures represented approximately 8.4% of our revenues, and we similarly expect the amount invested in capital expenditures during 2004 to represent approximately 8.5% of our revenues.

        Emphasizing School Management Autonomy and Accountability.    We provide significant autonomy and appropriate performance-based incentives to our campus-level managers. We believe these policies foster an important sense of local, school-level responsibility for achieving specific campus performance objectives. We also believe that our willingness to grant local autonomy provides us with a significant

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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 campus' operations and profitability. Divisional oversight ensures adherence to business plans, while business strategy, information technology, finance, and certain accounting functions are centralized at our executive offices in Hoffman Estates, Illinois. When a new school is acquired, we evaluate the capabilities of existing campus management personnel in order to determine the need for additional or stronger managers in key areas and, where necessary, take appropriate action by hiring new managers or assigning experienced personnel to the school's campuses. This strategy contributes to our ability to rapidly integrate acquired schools into our system.

        Direct Response Marketing.    We seek to increase school enrollment and profitability through intensive local, regional, national, and Internet-based direct response marketing programs designed to maximize each school's market penetration. Because many of our schools were significantly under-marketed prior to their acquisition, we believe that significant benefits can result from carefully-crafted, targeted marketing programs that leverage schools' curriculum strength and brand name recognition. We continually strive to design marketing programs tailored to each of our existing and newly acquired or opened schools to highlight their strengths and 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 television-based advertising, newspaper advertising, and other print media, to attract potential students from both the high school and adult population.

        Improving Student Retention.    We continually emphasize the importance of student retention at each of our schools. Because, as at any postsecondary educational institution, a portion of our students fail to complete their educational programs for a variety of personal, financial, or academic reasons, significant 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, we strive to improve retention by treating each student as a valued customer and directing school personnel to establish personal relationships with our students. 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

        In addition, our corporate staff regularly monitors the retention rates of each of our schools and provides feedback and support to local school administrators. During 2003, the retention rate of our Colleges, Schools and Universities segment was approximately 67%, and the retention rate of our Online Education Group segment was approximately 70%. This rate was determined in accordance with the standards set forth by the Accrediting Council for Independent Colleges and Schools, which determines annual retention rates by dividing the total number of student withdrawals or dismissals by the sum of (1) beginning student population, (2) new starts and (3) student re-enters and subtracting the resulting quotient from 1.

        Emphasizing Employment of Graduates.    We consider student placement a high priority. 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 federal student financial aid programs. As of December 31, 2003, approximately 93% of our Colleges, Schools and Universities segment graduates and 97% of our Online Education Group segment graduates who were available for employment for the academic year beginning July 1, 2002 and ended June 30, 2003, had found employment in their fields of study, or related fields of study. We are committed to maintaining or improving these graduate employment rates, and newly acquired or opened schools are expected to achieve similar graduate employment success standards.

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Growth Strategy

        We believe we can achieve superior long-term growth in revenue and profitability by continuing to exhibit strong organic growth, acquiring additional schools, and developing branch campuses of existing main campus locations. We also believe we can achieve additional growth by continuing to grow our Online Education Group and expanding our international presence. To most effectively manage our growth, we have segregated our operations into two distinct operating segments, the Colleges, Schools and Universities ("CSU") segment and the Online Education Group ("OEG") segment. The CSU segment represents an aggregation of our traditional brick-and-mortar, campus-based schools and provides educational services primarily in a classroom or laboratory setting. The OEG segment, which includes American InterContinental University Online and Colorado Technical University Online, delivers educational services online through internet-based courses.

        Continuing Organic Growth of Campus-Based Education.    We believe that our existing 78 campuses can continue to achieve significant organic 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.

        Acquiring Additional Schools.    To date, we have grown primarily by acquiring new schools in the U.S. and internationally, and then applying our expertise in marketing and school management to increase the enrollment, revenue, and profitability of those schools. We expect that acquisitions will continue to be an important element of our growth strategy. We have an active acquisition program and, on an ongoing basis, engage in evaluations of and discussions with possible acquisition candidates, including evaluations and discussions relating to acquisitions that may be material in size or scope.

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

•

"Schools of Choice"—Possessing leading reputations in career-oriented disciplines within local, regional, or 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—Capable of attracting recent high school graduates and adult students from local, national and international markets; and



•

Attractive Facilities and Geographic Locations—Providing geographically desirable locations and modern facilities to attract students.

        We analyze prospective acquisition targets for their long-term profit potential, enrollment potential, 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 prospective acquisition target for its history of regulatory compliance, both as an indication of future regulatory costs and compliance issues and the school's overall condition. Significant regulatory compliance issues in a school's past will generally remove a school from our consideration as an acquisition candidate.

        After we complete an acquisition, we immediately begin to apply our business strategy to increase enrollment and improve the acquired school's profitability. We assist acquired schools in achieving their potential through a highly focused and active management role and capital contributions. We selectively commit resources to improve marketing, advertising, student placement, administration, and regulatory

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compliance at each acquired school. We may also commit further resources to enhance management depth. We typically retain acquired schools' brand names to take advantage of their established reputations in local, regional, and national markets as "schools of choice."

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

        Opening New Start-up Campuses.    To date, we have opened eight new start-up campuses (four in 2003, two in 2002, and two in 2001), and we expect to continue to establish schools at new locations in the future. Our new start-up campuses are opened as branch campuses of an existing main campus location. The main campus and its branch campuses are considered by the DOE as one institution for reporting purposes. Opening branch campuses enables 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. We believe that opening new start-up campuses compliments our acquisition activity, as it allows us to continue our growth strategy even if appropriate acquisition opportunities within a particular geographic region or core curricula area are not readily available.

        Expanding our Online Education Group.    We continue to invest in our rapidly growing Online Education Group segment. In February 2001, we began enrolling full-time, degree-seeking students into 100% online, accelerated degree programs within American InterContinental University Online ("AIU Online"). AIU Online subsequently opened for instruction in April 2001. In July 2003, as part of our acquisition of the Whitman Education Group, Inc., we acquired Colorado Technical University ("CTU"), which has provided us with a new platform to further expand our online presence. CTU Online, CTU's online division, subsequently opened for instruction in October 2003. Our OEG segment offers 27 degree programs in business administration, information technology, visual communications, healthcare management, criminal justice, and education. As of January 31, 2004, we had a total online student population of approximately 12,200, compared to an online student population of approximately 3,000 as of January 31, 2003.

        Expanding Internationally and Recruiting International Students.    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 additional international opportunities in private, for-profit, postsecondary education. In February 2003, we acquired a group of schools in France and may continue to acquire operations outside of North America. We will also continue our marketing efforts in selected foreign countries to increase international student enrollments at our domestic schools and in our online education programs.

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. Each school's admissions office is responsible for identifying individuals interested in attending our schools ("leads") and acting as the prospective students' primary contact, providing information to help them in making an enrollment decision and assisting them with the completion of the enrollment process. Admissions representatives interview and advise prospective students interested in specific careers to determine the likelihood of success in completing their chosen educational programs. Our schools currently employ approximately 1,300 admissions representatives, each of whom focuses his or her efforts on one or more of the following recruiting areas:

•

Local market;



•

High school;

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•

Out-of-area;



•

International; and



•

Internet.

        Leads are generated in a number of ways, including:

        Referrals.    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.

        Collection of student interest cards at high school presentations made by our school representatives. High school presenters conduct informational programs at local secondary schools and collect student interest cards for future follow-up. The interpersonal relationships formed between students and high school counselors and faculty may have significant influence over a potential student's choice of school. We believe that the brand awareness of our schools assist presenters in gaining access to counselors and that the relationships of our schools' presenters with the counseling departments of local high schools are strong.

        Direct mail and e-mail solicitation campaigns.    We purchase direct mail and e-mail lists from a variety of sources, and we mail brochures and send e-mails to prospective students regularly during the course of the year.

        Advertising placed in a variety of media.    Each school develops advertising for a variety of media, including Internet-based, television, and print advertising, which is run locally, regionally, and, sometimes, nationally. Internet-based advertising consists of e-mail campaigns, as mentioned above, co-branded micro-sites, banner advertisements, and branded school web sites. We believe Internet-based advertising offers a fast and cost-effective way to reach a targeted population.

        We closely monitor the effectiveness of our marketing efforts. We estimate that in 2003, Internet-based leads were responsible for generating approximately 36% of our total starts, television and print media advertising leads were responsible for generating approximately 23% of our total starts, referral leads were responsible for generating approximately 20% of our total starts, high school leads were responsible for generating approximately 6% of our total starts, direct mailing leads were responsible for generating approximately 6% of our total starts, and leads from other marketing methods were responsible for generating approximately 9% of our total starts.

        Each school also has a website containing extensive information about the school and online enrollment capability. We expect this web-based information and enrollment capability to become an increasingly important, effective, and efficient aspect of our admissions activity.

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 and successfully complete their programs. In evaluating prospective students, we seek individuals with, among other things, a strong desire to learn, passion for their area of interest, and initiative. We believe that a success-oriented student body results in higher retention and placement rates, increased student and employer satisfaction, and lower student default rates on government loans. To be qualified for admission to one of our schools, each applicant must have received a high school diploma or a General Education Development certificate. Several of our schools also require applicants to obtain certain minimum scores on academic assessment examinations.

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        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. Student retention is considered the responsibility of each department within the school. To minimize student withdrawals, faculty and administrative staff members at each of our campuses strive to establish personal relationships with students. Each school devotes staff resources to advising students regarding academic and financial matters, part-time employment, and other factors that may affect their success. In addition, our corporate staff regularly monitors the retention rates at each of our schools and provides feedback and support to appropriate local school administrators.

Curriculum Development and Faculty

        We believe that curriculum is an important component of our operations, because students choose, and employers recruit from, career-oriented schools based on the type and quality of education offered and provided. 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 communities who are engaged in businesses directly related to the school's educational offerings. These boards provide valuable input to the school's education department, which allows the school to keep programs current and provide students with the training and skills that employers seek.

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

        Our school faculty members, many of whom are industry professionals, are in continuous contact and interact frequently with employers. Our schools hire a significant number of part-time faculty who hold positions in business and industry because specialized knowledge is required to teach many of the schools' courses and provide students with current, industry-specific training. Unlike traditional four-year colleges, instructors in our schools are not awarded tenure and are regularly evaluated based upon, in part, the results of student evaluations. As of January 31, 2004, our schools employed approximately 5,100 faculty members, of whom approximately 41% were full-time employees and approximately 59% were hired on a part-time, adjunct basis.

School Administration

        We provide significant operational autonomy and appropriate performance-based compensation to local school administrators who have demonstrated the ability to undertake this responsibility. Such a policy is based on our belief that success is driven by performance at the local level through enrollment growth and strong student retention and placement rates. In addition, while our schools tend to exhibit similar economic characteristics, each of our schools requires, to a certain extent, specific resources and operating strategies due to a variety of differing factors, including curriculum, demographics, geographic location, and size. Overall management of each of our schools is the primary responsibility of the school president, who is accountable for the school's operations and profitability. Each of our

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schools has five primary operating departments: admissions, financial aid, education, career services, and accounting.

        Business strategy, finance, and certain accounting functions are centralized at our corporate headquarters. Our corporate management develops long-term and short-term operating strategies for our 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 that track the key indicators of each school's operations, including, among others, leads, enrollments, retention rates, placements, and financial data. This allows corporate management to monitor the performance of each school. At regular intervals, each school-level operating department is also required to compile quantitative information, including information on admissions, financial aid, academic performance, and placement, which is subsequently reviewed at the corporate and school levels.

Tuition and Fees

        Our schools bill students for tuition and other institutional charges based on the specific instructional format or formats of the school's educational programs. Currently, total tuition for completion of a diploma or certificate program offered by our schools, assuming full time attendance, ranges from $1,000 to $61,200, total tuition for completion of an associate degree program ranges from $12,600 to $56,100, total tuition for completion of a bachelor's degree program ranges from $20,000 to $98,100, total tuition for completion of a master's degree program ranges from $13,400 to $54,000, and total tuition for completion of a doctoral degree program ranges from $24,800 to $31,400. Students at our schools typically must also purchase textbooks and supplies as part of their chosen educational programs.

Graduate Employment

        We believe that the employment of graduates of our schools in occupations in their fields of study or related fields of study is critical to the reputation of the schools and their ability to continue to successfully recruit new students. A strong career services office is important to maintain and elevate a school's reputation and manage the loan default rate of former students.

        We devote a significant amount of time and resources to student placement, which we believe to be the ultimate indicator of our success. Beginning on the first day of student enrollment, student placement is stressed as a top priority at each of our schools. This approach heightens the students' awareness of the career services department and focuses students on their ultimate goal—job placement within their field of study. Moreover, our schools provide career development instruction, which addresses, among other things, the preparation of résumés and cover letters, interviewing skills, networking, and other essential job-search tools, and ongoing placement resources, which are regularly available to both current students and graduates. With such assistance, our graduates find employment with a wide variety of businesses located not only within the schools' local markets but also regionally and nationally.

        Each schools' career services department also plays a role in marketing the schools' curriculum to the business community in order to produce job leads for graduates. Career services departments also assist current students in finding part-time employment while attending school. These part-time placements often lead to permanent positions. As of December 31, 2003, approximately 250 employees worked in the career services departments of our schools, of which, approximately 50 worked as student employment coordinators who are primarily responsible for aiding students in obtaining part-time employment while attending school. Career services 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

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through internships and curriculum development programs to facilitate the placement of graduates in local and regional businesses. Additionally, during 2002, we launched a career services intranet site that allows all of our campuses to share job opportunities and hosted our first online virtual job fair.

        Based on information collected by us from graduating students and employers, we believe that of the 23,488 CSU students and 885 OEG students who graduated from our schools during the academic year beginning July 1, 2002 and ended June 30, 2003, 92.8% and 97.3%, respectively, of the 20,903 CSU available graduates and 847 OEG available graduates obtained employment in their fields of study, or in related fields of study. This excludes students who are continuing their education, in active military service, are medically unable to work, are deceased or incarcerated, and students from foreign countries who are legally ineligible to work in the U.S. Our CSU placement results include the effect of our 2003 acquisition of Whitman Education Group, Inc.

Technology

        We are committed to providing our students with 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 of our schools provide their students with industry-current computer hardware and 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 use computer-related design and layout technologies and digital pre-press applications.

Employees

        As of December 31, 2003, we had a total of approximately 7,400 full-time employees and approximately 3,500 part-time employees. A limited number of our employees are represented by unions, although such employees are not currently subject to collective bargaining agreements. We consider our relations with our employees to be good.

Competition

        The postsecondary education industry is highly fragmented and competitive, with no single institution claiming a significant market share. Our schools compete with traditional public and private two-year and four-year colleges and universities, other proprietary schools, including those that offer online education programs, 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 offered by 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 the quality of their educational programs, their reputation in the business community, their costs of programs, and their 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 we have.

        Changes in the regulatory environment have stimulated continued 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, some

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career-oriented schools have been forced to close because they lacked sufficient quality or financial resources or could not manage the increased regulatory burden. None of our schools have been forced to close due to insufficient quality or financial resources or ineffective regulatory management. 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, as well as U.S. students at our schools in the United Kingdom, participate in a wide variety of government-sponsored financial aid programs (i.e., programs administered by federal, state, provincial, and local government agencies). For this reason, our schools are subject to extensive regulatory requirements imposed by government funding agencies and other bodies. During the 2003 fiscal year, we derived approximately 61% of our revenue on a cash basis from such government-sponsored financial aid received by our students, and we estimate that approximately 73% of our students receive government-sponsored financial aid.

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

        Students at our schools may receive grants, loans, and work opportunities to fund their education under the following Title IV Programs, although not every school 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 DOE. 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 DOE rather than from commercial lenders. The conditions on FDL loans are generally the same as those on loans made under the FFEL program.

        Pell.    Under the Pell program, the DOE 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.

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        Perkins.    Perkins loans are made from a revolving institutional account, 75% of which is capitalized by the DOE and the remainder of which is funded 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 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 provisions of the Higher Education Act and the DOE's extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance with these requirements to the DOE on an ongoing basis. These standards are applied primarily on an institutional basis, with an institution defined as a main campus and its additional branch campus locations, if any.

        The substantial amount of federal funds disbursed through the Title IV Programs, the large numbers of students and institutions participating in those programs, and instances of fraud, waste, and abuse by some schools and students in the past have caused the U.S. Congress ("Congress") to require the DOE to increase its level of regulatory oversight. Under the Higher Education Act, accrediting agencies and state licensing agencies also have responsibilities for overseeing institutions, and continued approval by such agencies is necessary for an institution to maintain eligibility to participate in the Title IV Programs. As a result, each of our institutions is subject to detailed oversight and review and must comply with a complex framework of laws and regulations. Because the DOE periodically revises its regulations and changes its interpretation of existing laws and regulations, we cannot predict with certainty how the Title IV Program requirements will be applied in all circumstances.

        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, and the last reauthorization took place in 1998. Consequently, Congress has begun the process of reviewing and reauthorizing the Higher Education Act again, a process that is expected to be concluded in late 2004 or in 2005. We believe that this reauthorization will likely result in numerous changes to the Higher Education Act, but at this time we cannot determine what changes Congress will make. In addition, Congress reviews and determines federal appropriations for the Title IV Programs on an annual basis. Congress can also make changes to the laws affecting the Title IV Programs in those annual appropriations bills and in other laws it enacts in 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 the 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 cash flows, or financial condition. Legislative action may also increase our administrative costs and require us to modify our practices in order for our schools to comply fully with the Title IV Program requirements.

        Student Loan Default Rates. A significant component of Congress' initiative to reduce abuse of the Title IV Programs has been the imposition of limitations on institutions whose former students' rates of default on the repayment of their federally guaranteed or funded student loans exceed specified levels. All of our institutions have implemented student loan default management programs aimed at reducing

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the likelihood of students failing to repay their loans in a timely manner. Those programs emphasize the importance of students complying with 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, FDL, or Pell programs for the remainder of the federal fiscal year in which the DOE 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 DOE.

        None of our 34 institutions participating in FFEL or FDL programs had an FFEL or FDL cohort default rate of 25% or greater during any of the last three federal fiscal years. The following table sets forth the FFEL and FDL cohort default rates for our institutions for federal fiscal years 2001, 2000, and 1999, the most recent years for which the DOE has published such rates:

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*

California School of Culinary Arts did not begin participating in the FFEL or FDL programs until being acquired by us in March 1998.

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        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 DOE for up to four years. Four of our institutions participated in the Perkins loan program prior to being acquired by us, three of which ceased participation in such program upon being acquired by us. These three institutions have Perkins cohort default rates in excess of 15% for students who were scheduled to begin repayment in the 2001-2002 federal award year, the most recent year for which such rates have been published. The Perkins cohort default rates for these three institutions ranged from 30% to 42%. Currently, the DOE has placed two of these institutions, Brown College and Gibbs-Melville, on provisional certification for their Perkins cohort default rates. Colorado Technical University is our only institution that continues to participate in the Federal Perkins Loan program and has a Perkins cohort default rate of 11% for students who were scheduled to begin repayment in the 2001-2002 federal award year. See "Eligibility and Certification Procedures."

        Financial Responsibility Standards.    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 annual audited financial statements of the institution or its parent corporation and following a change of control of the institution. In reviewing our financial statements, it has been the DOE's practice to measure financial responsibility on the basis of the financial statements of both our individual institutions and CEC on a consolidated basis.

        To be considered financially responsible, an institution must, among other things, (i) have sufficient cash reserves to make required refunds, (ii) be current on its debt payments, (iii) meet all of its financial obligations, and (iv) achieve a "composite score" of at least 1.5 based on the institution's annual financial statements. The DOE 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.

        If an institution's composite score, on a scale of -1.0 to 3.0, is 1.5 or greater and it satisfies all other DOE standards of financial responsibility, the institution is deemed financially responsible. 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 or posting such letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its prior fiscal year and accepting other conditions on its participation in the Title IV Programs. Our consolidated composite score as of and for the year ended December 31, 2003, was 2.6.

        Return and Refunds of Title IV Program Funds.    Institutions that receive Title IV Program funds that have been found during an audit or compliance review to have made late student refunds above a minimum threshold in either of their last two fiscal years must post a letter of credit with the DOE in an amount equal to 25% of the total Title IV Program refunds paid by the institution during its prior fiscal year. Based on this standard, we currently have posted a total of $4,100,066 in letters of credit with respect to 19 of our institutions.

        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 DOE. Upon such a change of control, an institution's eligibility to participate in the Title IV Programs is subject to review, and the institution could lose its eligibility unless it can

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re-establish its state authorization and accreditation and satisfy the other requirements to be recertified by the DOE as an eligible institution under our ownership. If an institution is recertified following a change of control, it will be recertified on a provisional basis.

        The DOE has the authority, under certain circumstances, to provisionally and temporarily certify an institution following a change of control under certain circumstances while the DOE reviews the institution's application. The DOE has provided such temporary certification to each institution we have acquired since January 1999 within periods of time ranging from 10 to 60 days after the change of ownership.

        Each U.S. institution we have acquired has undergone a certification review under our ownership and has been certified to participate in the Title IV Programs on a provisional basis. Twelve of our U.S. institutions are presently participating in the Title IV Programs under provisional certification due to change of ownership, and nineteen of our U.S. institutions have been granted regular certification.

        Other types of transactions can also cause a change of control. The DOE, 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, DOE regulations provide that a change of control occurs under either of two standards. First, a change of control occurs if a person acquires such ownership and control that the corporation is required to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing a change of control. Second, a change of control occurs if a shareholder (other than an institutional investor) that owns at least 25% of the corporation's voting stock and more voting stock than any other shareholder ceases to satisfy either of those conditions. 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.

        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 requirements. Our growth strategy is based, in part, on our ability to open new campuses as additional locations of our existing institutions. Under a regulation that took effect on July 1, 2001, an institution that satisfies certain conditions may open an additional location that may begin participation in the Title IV Programs as soon as the institution notifies the DOE of the opening of such location, rather than waiting for DOE approval.

        Generally, an institution that is eligible to participate in the Title IV Programs may add a new educational program without DOE 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 course 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 enrolled in that educational program. We do not believe that current DOE regulations will create significant obstacles to our plans to add new programs.

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        Some of the state education agencies and accrediting agencies with jurisdiction over our schools also have requirements that may affect schools' ability to open a new location, acquire an existing location, 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 growth strategy.

        "90/10 Rule."    Under a provision of the Higher Education Act commonly referred to as the "90/10 Rule," a proprietary institution, such as each of our institutions, would no longer be eligible to participate in the Title IV Programs if, on a cash accounting basis, it derived more than 90% of its revenue, as defined pursuant to applicable DOE regulations, 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 90% and is unable to apply to regain its eligibility until the next fiscal year. If one of our institutions violated the 90/10 Rule and became ineligible to participate in the Title IV Programs but continued to disburse Title IV Program funds, the DOE 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, for the years ended December 31, 2003 none of our U.S.-accredited institutions has derived more than 88% (representing the 2003 90/10 ratio for our Ultrasound Diagnostic School main campus in Atlanta, Georgia) of its cash-basis revenue from the Title IV Programs. 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 cash-basis 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. During 2003, 2002, and 2001, our U.S. institutions received approximately 58%, 53%, and 60% of total cash-basis revenue from the Title IV programs.

        Administrative Capability.    The DOE 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 DOE 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. A violation of these requirements could also subject the institution to other penalties. See "Compliance with Regulatory Standards and Effect of Regulatory Violations."

        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 demonstrated such a reasonable relationship for each of our applicable programs. Short-term educational programs that provide less than 600 clock hours, 16 semester hours, or 24 quarter hours of instruction must demonstrate that 70% of all students who enroll in such programs complete them within a prescribed time and that 70% of the graduates of such programs obtain employment in the occupation for which they were trained within a prescribed period of time. Some of the Gibbs institutions offer such short-term programs, but students enrolled in these programs represent a small percentage of our total enrollment.

        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. Due to Perkins default rates, two of our institutions have been placed on provisional certification, as discussed in "Student Loan Default Rates". This does not affect our ability to administer the FFEL and FDL programs.

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        Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments.    An institution participating in the Title IV Programs may not provide 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 recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. The DOE published new regulations, which took effect in July 2003, to attempt to clarify this so-called "incentive compensation" law. The new regulations identify twelve compensation arrangements that the DOE has determined are not in violation of the incentive compensation law, including the payment and adjustment of salaries, bonuses and commissions in certain circumstances. The DOE's new regulations do not establish clear criteria for compliance in all circumstances, and the DOE has announced that it will no longer review and approve individual schools' compensation plans. Nonetheless, we believe that our current compensation plans are in compliance with the Higher Education Act and the DOE's new regulations, although we cannot provide assurance that the DOE will not find deficiencies in our compensation plans.

        Eligibility and Certification Procedures.    The Higher Education Act and its implementing regulations require each institution 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. The DOE 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 DOE may withdraw an institution's provisional certification without advance notice if the DOE determines that the institution is not fulfilling all material requirements. Also, the DOE 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. In addition, an institution must obtain DOE approval for substantial changes (i.e., changes in an institution's accrediting agency or state authorizing agency or changes to an institution's structure or certain basic educational features).

        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 DOE will recertify the institution and remove the provisional status. Otherwise, the DOE may recertify the institution on a continued provisional basis. Each institution that we have acquired was initially certified by the DOE for participation in the Title IV Programs under our ownership on a provisional basis. Twelve of our institutions remain on provisional certification status because the initial period of their provisional certification has not expired. Three of our institutions have been recertified by the DOE on a provisional status for reasons other than change of ownership, two due to Perkins Loan default rates and one pending the completion of a DOE program review.

        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 DOE, state authorizing 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. The resulting audit report must be submitted to the DOE for review. If the DOE 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 DOE's regulations, that institution could be required to repay such funds, and could be assessed an administrative fine. The DOE could also subject the institution to a heightened level of cash monitoring, under which the institution's federal funding requests would be more carefully reviewed by the DOE, or the DOE could transfer the institution from the advance system of receiving Title IV Program funds to the reimbursement system, under which an institution must disburse its own funds to students and document the students' eligibility for Title IV Program funds before receiving such funds

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from the DOE. Violations of Title IV Program requirements could also subject us or our schools to other civil and criminal penalties.

        During a post-acquisition review of Western School of Health and Business Careers, Pittsburgh and Western School of Health and Business Careers, Monroeville, Pennsylvania (collectively "Western"), the Accrediting Commission of Career Schools and Colleges of Technology ("ACCSCT") identified discrepancies in accreditation documents related to seven of the thirty-one educational programs offered by Western at its two campuses. On March 8, 2004, ACCSCT notified the Accreditation and State Liaison Division of the DOE of the apparent discrepancies, that certain of the programs offered by Western may not have been approved by ACCSCT, and that as a result Western may have improperly disbursed Title IV Program funds. Inclusion of educational programs within the scope of institutional accreditation is a prerequisite for the eligibility of students enrolled in such programs to receive Title IV Program funds. Therefore, students enrolled in the identified programs may not have been eligible to receive previously disbursed Title IV Program funds, and, as a result, we may be required to repay all or a portion of such Title IV Program funds. Western has suspended marketing, new enrollments, and disbursement of Title IV Program funds for the seven programs pending further review. See Item 3. Legal Proceedings for additional discussion of this matter.

        Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by the DOE 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 cash flows, or financial condition.

State Authorization for U.S. Schools

        We are subject to extensive regulation in each of the 24 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. schools is authorized by the applicable state agency or agencies.

        The level of regulatory oversight varies substantially from state to state. In some states, our schools 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 schools' 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 DOE. We believe that each of our schools is in substantial compliance with state authorizing and licensure laws. If any one of our schools lost its state authorization, the school would be unable to offer its programs and we would be forced to close that school. Closing one of our schools for any reason could have a material adverse effect on our business, results of operations or cash flows, or financial condition.

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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 DOE is required for an institution to be certified to participate in the Title IV Programs. Accrediting agencies must adopt specific standards in connection with their review of postsecondary institutions to be recognized by the DOE. All of our U.S. schools are accredited by one or more of the following accrediting agencies recognized by the DOE:

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Accrediting Council for Independent Colleges and Schools ("ACICS"), 32 schools



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Accrediting Bureau of Health Education Schools ("ABHES"), 15 schools



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Accrediting Commission of Career Schools and Colleges of Technology ("ACCSCT"), 13 schools



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Southern Association of Colleges and Schools Commission on Colleges, eight schools



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North Central Association of Colleges and Schools-Commission on Institutions of Higher Education, five schools



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Accrediting Commission for Community and Junior Colleges of the Western Association of Schools and Colleges, two schools



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Middle States Association of Colleges and Schools—Commission on Higher Education, two schools



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National Association of Schools of Art and Design, one school



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New England Association of Schools and Colleges—Commission on Technical and Career Institutions, one school



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Council on Occupational Education ("COE"), one school

        In addition, programmatic accreditation, which is not recognized by the DOE, has been granted by the following accrediting agencies:

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Foundation for Interior Design Education Research, six of our schools' interior design programs



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American Culinary Federation Educational Institute Accrediting Commission, five of our schools' culinary arts programs



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Accrediting Board for Engineering and Technology, one of our schools' engineering programs



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Accrediting Bureau of Health Education Schools, five of our schools' medical assisting programs



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Joint Review Commission on Education in Radiologic Technology, three of our schools' diagnostic medical sonography programs



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CAAHEP-Committee on Accreditation for Respiratory Care, two of our schools' respiratory therapy programs



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CAAHEP-Accreditation Review Committee on Education in Surgical Technology, two of our schools' surgical technology programs

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•

American Dental Association-Commission on Dental Accreditation, one of our schools' dental assisting programs



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American Association of Health Systems Pharmacists, one of our schools' pharmacy assistant programs



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CAAHEP-Joint Review Committee on Education in Cardiovascular Technology, one of our schools' cardiovascular technology programs



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CAAHEP-Joint Review Committee on Education in Diagnostic Medical Sonography, one of our schools' diagnostic medical sonography programs

        An accrediting agency may place a school on "reporting" status to monitor one or more specified areas of performance. A school placed on reporting status is required to report periodically to its accrediting agency on that school's performance in the specified areas for a period of one year, after which it is revaluated. We currently have 15 of our institutions, Texas Culinary Academy campus and all 14 of our Ultrasound Diagnostic School campuses, on reporting status with their respective accrediting agencies. Our Texas Culinary Academy campus was placed on reporting status prior to our acquiring the school in 2001, and our Ultrasound Diagnostic School campuses were placed on reporting status upon our acquisition of them during 2003.

        On March 4, 2004, ACCSCT notified us that during a post-acquisition review of Western, ACCSCT had identified discrepancies in accreditation documents related to seven of the thirty-one educational programs offered by Western at its two campuses. ACCSCT has issued a Show Cause order directing Western to respond to its concerns, which will be addressed at the May, 2004 ACCSCT meeting. A Show Cause order means that if the subject matter is not satisfactorily addressed ACCSCT may place the institution on warning or probation or may withdraw its accreditation. See Item 3. Legal Proceedings for additional discussion of this matter.

        If any of our schools loses its accreditation, the school would be ineligible to continue its participation in the Title IV Programs. The loss of Title IV Program funding for any of our schools could have a material adverse effect on our business, results of operations or cash flows, or financial condition.

Canadian Regulation

        Our Canadian schools are subject to regulation in the provinces in which they operate and in the provinces in which they recruit students. Depending on their province of residence, our Canadian students may receive loans under the Canada Student Loans Program, the Ontario Student Loans Plan, the Quebec Loans and Bursaries Program, and/or provincial funding from their province of residence (if not Ontario or Quebec). 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 cash flows, or financial condition.

        Ontario.    The Ontario Ministry of Training, Colleges and Universities ("Ontario Ministry") provides financial assistance to eligible students through the Ontario Student Assistance Program ("OSAP"). This program includes two main components, the Canada Student Loans Program and the Ontario Student Loans Plan. To maintain the right to administer OSAP, our schools located in Ontario, International Academy of Design and Technology in Ottawa and Toronto and the SoftTrain Institute (the "Ontario Schools"), must, among other things, be registered and in good standing under the Private Career Colleges Act (Ontario) and abide by the rules, regulations, and administrative manuals

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of the Canada Student Loans Program, Ontario Student Loans Plan, and other OSAP-related programs. In order to attain initial eligibility, an institution has to (1) establish that it has been in operation for at least two years with at least 15 students enrolled in each year, (2) provide audited financial statements for each year of operation, and (3) achieve overall graduation and graduate employment rates in each of the two years that are no more than 33% below the average rates for public colleges. It is only after another probationary year that full OSAP eligibility will be granted. During this probationary year, the institution's programs must continue to meet the threshold for graduation and graduate employment rates. Pursuant to Ontario Ministry rules, a full population audit must be conducted upon completion of the probationary period, followed by standard audit requirements in subsequent years. Our Ontario Schools have been granted full eligibility. Under Ontario Ministry rules, our Ontario Schools must advise the Ontario Ministry before they take any material action that may result in their failure or inability to meet any rules, regulations, or requirements related to OSAP.

        In order for our Ontario Schools to establish any new branches, they must meet the OSAP eligibility criteria on their own merit. We do not believe that OSAP's requirements will create significant obstacles to any of our plans to acquire additional institutions or open new branches in Ontario.

        Once full eligibility is achieved, an institution must comply with similar requirements to maintain its eligibility. It must achieve overall graduation and graduate employment rates of no more than 33% below the average graduation and graduate employment rates for public colleges in at least one out of every two years. It is also required to derive no more than 90% of its cash basis revenue from OSAP. Failing this 90/10 requirement means that the institution's designation will be revoked until it submits a viable revenue/enrollment plan.

        It should be noted that a maximum amount of tuition fees is recognized by OSAP for students enrolled in Ontario's private career colleges. The maximum is $4,500 per academic year.

        Our Ontario Schools 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 Institutions and Student Protection 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 obstacles 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 annual filing 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 interpretation of each requirement.

        Our Ontario Schools are required to audit their 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 Ontario schools are in substantial compliance with OSAP requirements, and we believe that the schools continue 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

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in nature, 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 more serious in nature, the Ontario Ministry has the authority to (1) condition our continued OSAP designations upon our meeting specific requirements during a specific time frame, (2) suspend our OSAP designations, or (3) revoke our OSAP designations. 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 to, at our expense, conduct a full audit in order to quantify the deficiencies and to require repayment of all loan amounts plus interest. In addition, the Ontario Ministry may impose a penalty up to the amount of the damages assessed in connection with the independent audit.

        Adopting a practice similar to that of the DOE's, the Ontario Ministry 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 during the 1998-99 award year (August 1, 1998 to July 31, 1999), institutions with a 1997 default rate that is 15 percentage points or more above the 1997 provincial average of 23.5% or 38.5% were required to share the cost of defaults. The rates for subsequent years are as follows:

•

In the 1999-2000 award year, this policy applied to institutions with a 1998 default rate 10 percentage points or more above 23.5% or 33.5%.



•

In the 2000-2001 award year, this policy applied to institutions with a 1999 default rate above 28.5%.



•

In the 2001-2002, 2002-2003, 2003-2004, and 2004-2005 award years, this policy applied or will apply to institutions with a default rate during 2001, 2002, or 2003, respectively, of 25.0% or above.

        The two branches of our International Academy of Design and Technology school in Toronto had an average overall default rate of 18.9% in 2003, 20.7% in 2002, 21.6% in 2001, 18.1% in 2000, 16.7% in 1999, and 23.8% in 1998. Our International Academy of Design and Technology school in Ottawa ("IADT-Ottawa") had an overall default rate of 27.0% in 2003, 28.6% in 2002, 14.3% in 2001, 13.0% in 2000 and 15.4% in 1999. IADT-Ottawa posted security to indemnify the government for costs above the threshold based on the 2002 rate and will post a similar security based on the 2003 rate with the Ontario Ministry of Training, Colleges and Universities. The default rate for our SoftTrain Institute in Toronto was 15.4% in 2003, 9.1% in 2002, 0.00% in 2001, and was not recorded by the Ontario Ministry in previous years, as the number of student loans issued by the institution was less than five.

        For the purpose of calculating default rates, student loan recipients/defaulters are assigned to the last institution they attended. An Ontario student loan is in default when the Ontario government has paid a bank's claim for an inactive loan. A loan is inactive when the student has made no payments for at least 90 days. The overall 2003 default rate for Ontario postsecondary institutions, which includes universities, colleges, and private career colleges, is 13.5%, a decrease from the 2002 default rate of 13.9%. The 2003 default rate for the private career college sector, as a whole, is 23.5%.

        The Ontario Ministry has stated that while the decrease in the overall default rate is encouraging, it remains, from the Ontario government's perspective, unacceptably high. The Ontario Ministry's business plan requires that the overall default rate for Ontario postsecondary institutions be reduced to 10.0%, with institutions with default rates in excess of 10% responsible for sharing the cost of defaults.

        On December 20, 2000, the Ontario government passed the Ministry of Training, Colleges and Universities Statute Law Amendment Act, 2000, the last two parts of which were proclaimed in force on October 1, 2001. This legislation has brought about several changes to Ontario's postsecondary school system. The legislation and changes will expand Ontario students' access to degree programs by allowing the establishment of privately-funded, degree-granting institutions in the province, as well as permitting Ontario community colleges to offer applied degrees. The legislation permits the Minister of

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Training, Colleges and Universities to appoint inspectors to ensure that institutions are administering OSAP properly and is part of the government's commitment to ensure both the viability of postsecondary school institutions and the protection of both taxpayers and students.

        The legislation also creates new provincial offenses to prevent OSAP abuse (for example, obtaining awards, grants and student loans to which a person is not entitled, for assisting a person in obtaining an award, grant or loan to which the person is not entitled, for failing to provide information when required, and for providing false information in connection with an award, grant, or student loan). An individual convicted of any one of the offenses could be subject to a fine of not more than $25,000 Canadian and/or a term of imprisonment of not more than one year. A corporation convicted of an offense could be subject to a fine of not more than $100,000 Canadian.

        Federal bankruptcy legislation exempts federal and provincial student loans from being included in bankruptcy proceedings for a 10-year period following a student's completion of his or her studies.

        On June 27, 2001, the Ontario government passed the Ontario Student Loan Harmonization Act, 2001, which was proclaimed in force on June 29, 2001. The legislation, among other things, permits the Ontario Ministry to enter into agreements with one or more persons (including financial institutions) respecting the administration of loans to students and respecting such other matters relating to the loans as the Ontario Ministry considers proper. The legislation also requires that such agreements and student loans contain all terms as may be prescribed by regulation and such other terms as the Ontario Ministry considers proper. The Government Efficiency Act, 2002, which became effective on November 26, 2002, clarified that these agreements may impose performance or other requirements on a private career college that must be met in order for students of the institution to be eligible to apply for awards, grants, or student loans. These requirements may include, among other things, a performance bond and a loan default sharing arrangement. If one of our schools ceases to meet any condition of any such agreement, the Ontario Ministry may withdraw the school's OSAP eligibility.

        The Ontario government passed regulations, effective August 1, 2001, relating to Ontario student loans made after July 31, 2001 and Ontario student loans made before August 1, 2001. These regulations, among other things, clarify the requirements and process for an individual obtaining a student loan and maintaining his or her status as a qualifying student. The regulations also address what constitutes default on a student loan and the consequences of such a default for the student.

        The Canadian government also passed regulations, effective October 31, 2001, relating to the credit screening of student loan applicants to prevent credit abuse and improve the overall integrity of the Canada Student Loans Program.

        The Ontario Government amended the Private Vocational Schools Act in 2002. Among other things, the Act was renamed the Private Career Colleges Act. The amending legislation, the Keeping the Promise for Growth and Prosperity Act (2002 Budget), 2002, which was passed on June 27, 2002, also provides for the enactment of new regulations prescribing forms of security or other methods of protecting the financial interest of students other than the bonding requirements discussed below. No regulations have been passed by the Ontario government to date under this provision.

        We may only operate a private career college in Ontario if the school is registered under the Private Career Colleges Act (Ontario). Upon payment of the prescribed fee and satisfaction of the conditions prescribed by the regulations under the Private Career College Act (Ontario) and by the Private Institutions and Student Protection Unit of the Ontario Ministry, an applicant or registrant, such as one of our Ontario Schools, is entitled to registration or renewal of registration to conduct or operate a private career college unless:

•

the school cannot reasonably be expected to be financially responsible in the conduct of the private career college school,

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•

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 Private Career Colleges Act (Ontario) or the regulations under that Act.

        An applicant for registration to conduct or operate a private career college is required to submit with the application a bond in an amount determined in accordance with the regulations under the Private Career College Act (Ontario). Our Ontario Schools are currently registered under the Private Career College Act (Ontario) for all locations, and we do not believe that there will be any impediment to renewal of such registrations on an annual basis.

        The Private Career College Act (Ontario) provides that a "registration" is not transferable. However, the Private Institutions and Student Protection Unit of the Ontario Ministry takes the position that a purchase of shares of a private career college does not invalidate the school's registration under the Private Career Colleges Act. We do not believe that this annual filing will invalidate the registrations of our Ontario Schools.

        If one of our Ontario Schools were ever convicted of violating the Private Career Colleges Act (Ontario) or the regulations under that Act, the school can be fined up to $25,000 Canadian.

        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, as well as any change in the school's name. 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 become insolvent. We must be provided with a chance to present our views before our permit can be revoked.

Other International Regulations

        Our schools that operate in France, the United Kingdom, and the United Arab Emirates are subject to local regulations. Each of these schools currently holds all necessary domestic authority to operate within their respective jurisdictions, and the schools work closely with the local regulators to ensure that they are in compliance with domestic regulations. Additionally, our American InterContinental University ("AIU") in the United Kingdom and our American University in Dubai in the United Arab Emirates are accredited by a U.S. regional accrediting association, the Commission on Colleges of the Southern Association of Colleges and Schools ("SACS") as branches of AIU, whose main campus is located in Atlanta, Georgia. During 2002, SACS granted AIU's six schools a 10-year reaffirmation.

        France.    The INSEEC Group consists of nine campuses and is recognized as a leading provider of higher education in France. Eight of the campuses are governed by the French Ministry of Education, while the remaining campus is accredited by the National Professional Committee for Medical Visits for its pharmaceutical test preparation and continuing education classes. There are three-tiers of French Ministry approval: state recognition (Level III), diploma endorsement (Level II), and diploma stamp (Level I, the highest recognition). Currently, two campuses have the highest recognition with Level I approval, three campuses have Level II approval, and three campuses have Level III approval.

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The campuses that have lower level approvals have submitted applications to the French Ministry of Education to be granted higher degree-granting authority. These applications were prepared and submitted to the Ministry of Education after the campuses were acquired by the INSEEC Group. The regulation of tertiary (postsecondary) education in France is undergoing reorganization. Changes in the organic laws governing the authority of institutions to operate within France and the terms and conditions under which such institutions operate may be changed as a result of such reorganization. The effects of any such changes on our schools in France, the nature of which are unknown at the present time, are uncertain.

        United Kingdom.    American InterContinental University London (AIU London) has been authorized by the cognizant U.S. and United Kingdom agencies to grant academic credentials. AIU London is authorized to grant academic degrees by the Nonpublic Postsecondary Education Commission of the State of Georgia. U.S. students that attend AIU London are eligible to participate in the U.S. Title IV programs through AIU London's status as an additional branch location of AIU Buckhead. AIU London is a "Listed Body" pursuant to The Education (Listed Bodies) (England) Order 2002, and approved by the Open University (U.K.) Validation Services as an appropriate organization to offer higher education programs.

        United Arab Emirates.    Our American University in Dubai (AU Dubai) is authorized to grant academic credentials by both the Nonpublic Postsecondary Education Commission of the State of Georgia and the Education Licensure Commission of the District of Columbia. AU Dubai does not participate in the U.S. Title IV programs. AU Dubai has been granted domestic programmatic accreditation by the United Arab Emirates Ministry of Higher Education and Scientific Research and has authority to operate through a grant from the Emir (the head of state) of Dubai.

Available Information

        Our investor relations website is http://www.careered.com. We make available on this website under the caption "Financial Information," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission.

ITEM 2.    PROPERTIES

        Our corporate headquarters are located in Hoffman Estates, Illinois, which is near Chicago, and our 78 campus-based schools are located throughout the United States, Canada, France, the United Kingdom, and the United Arab Emirates. Each campus contains teaching facilities, including modern classrooms, laboratories, and, in the case of schools with culinary arts programs, large, well-equipped kitchens. Admissions and administrative offices are also located at each campus. Additionally, the Brooks College campus in Long Beach, California includes a dormitory and student cafeteria. Atlantic Culinary Academy, Brown College, Texas Culinary Academy, Western Culinary Institute, Scottsdale Culinary Institute, California School of Culinary Arts, California Culinary Academy, Le Cordon Blue College of Culinary Arts Atlanta, Le Cordon Blue College of Culinary Arts Las Vegas, and The Cooking and Hospitality Institute of Chicago utilize leased space to operate restaurants in conjunction with their culinary arts programs.

        We lease all of our facilities, except the primary Gibbs facility in Montclair, New Jersey, a facility at Brooks Institute of Photography in Santa Barbara, California, a facility at the American InterContinental University in Houston, Texas, and a facility at the Cooking and Hospitality Institute of Chicago, which we own. As of December 31, 2003, we owned real property covering approximately 115,000 square feet, all of which is attributable to our Colleges, Schools and Universities segment. As of December 31, 2003, we had entered into leases for approximately 4.2 million square feet of real

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property, of which 3.9 million square feet is leased by schools within our Colleges, Schools and Universities segment, 0.2 million square feet is leased by schools within our Online Education Group segment, and 0.1 million square feet is leased by our corporate locations. The leases have remaining terms ranging from less than one year to 25 years.

        We actively monitor facility capacity in light of our current utilization and projected student enrollment growth. We believe that our schools can acquire any necessary additional facility capacity on reasonably acceptable terms. We devote capital resources to facility improvements and expansions as we deem necessary.

ITEM 3.    LEGAL PROCEEDINGS

        We are a party to the following legal proceedings:

Qui Tam Proceeding

        As previously disclosed by Whitman Education Group prior to being acquired by us on July 1, 2003, several of our newly acquired subsidiaries have been named as defendants in a lawsuit styled United States ex. rel. Shauntee A. Payne v. Whitman Education Group, Inc. et. al. The action is a qui tam proceeding that was filed under seal by a former employee of one of Whitman's schools on December 3, 2002 in the Galveston Division of the United States District Court for the Southern District of Texas on behalf of herself and the federal government. A qui tam action is a civil lawsuit brought by one or more individuals (a qui tam "relator") on behalf of the federal government for an alleged submission to the federal government of a false claim for payment. According to court documents, the federal government has notified the court that it has declined to intervene in the action.

        The lawsuit alleges, among other things, violations of the False Claims Act by Whitman in connection with how it compensated its admissions representatives. The action seeks treble the amount of unspecified damages sustained by the federal government, a civil penalty for each violation of the False Claims Act, attorneys' fees, costs, and interest. In July 2003, the plaintiff filed a motion to stay the proceeding pending the outcome of an unrelated case currently pending in the Fifth Circuit Court of Appeals, which raises similar issues of law. On August 4, 2003, the Galveston District Court Judge assigned to the case, granted the motion to stay the proceedings and, on his own motion, transferred the case to the Houston Division of the Southern District of Texas, where it is stayed until the Fifth Circuit appeal is decided.

Employment Litigation

        On October 31, 2003, a purported class action complaint captioned Finnigan, et al. v. American InterContinental University Online ("AIU Online") was filed in the Circuit Court of Cook County, Chancery Division by three former Admissions Advisors of AIU Online, Jane Finnigan, Michael Barrett and D'Andre Stinnette. The case is brought on behalf of current and former Admissions Advisors who were purportedly similarly denied overtime pay in 2002 and continuing to the present. Plaintiffs allege that AIU Online violated the Illinois Minimum Wage Law by failing to pay them overtime wages for work they performed. Plaintiffs further allege that AIU Online violated the Illinois Wage Payment and Collection Act by failing to pay for overtime work pursuant to an alleged contract or agreement. Plaintiffs claim lost wages for the class in excess of $800,000, plus punitive damages, attorneys' fees and injunctive relief. We have filed our answer denying the material allegations of this complaint and refuting the existence of a class. We currently are in the discovery phase of the litigation relating to whether the suit should be allowed to proceed as a "class action" lawsuit or whether claims need to be brought individually.

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Securities Litigation

        Between December 9, 2003 and February 5, 2004, six purported class action lawsuits were filed in the United States District Court for the Northern District of Illinois by certain alleged purchasers of our common stock against us and certain of our executive officers, John M. Larson and Patrick K. Pesch. The cases purportedly are brought on behalf of all persons who acquired shares of our common stock during a specified class period in 2003. The complaints allege that in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Act") and Rule 10b-5 promulgated thereunder by the SEC, the defendants made certain material misrepresentations and failed to disclose certain material facts about the condition of our business and prospects during the putative class period, causing the respective plaintiffs to purchase our common stock at artificially inflated prices. The plaintiffs further claim that John M. Larson and Patrick K. Pesch are liable under Section 20(a) of the Act. The plaintiffs ask for unspecified amounts in damages, interest, and costs, as well as ancillary relief. Five of these lawsuits were found to be related to the first filed lawsuit, captioned Taubenfeld v. Career Education Corporation et al. (No. 03 CV 8884), and have been reassigned to the same judge. The court is in the process of determining the appointment of a lead plaintiff and lead and liason counsel, at which time a consolidated complaint will be filed. We intend to move the court for an order dismissing any consolidated complaint filed in these related actions.

        On January 5, 2004, a derivative action captioned McSparran v. John M. Larson, et al. was filed in the United States District Court for the Northern District of Illinois on behalf of the stockholders of CEC against John M. Larson, Patrick K. Pesch, Wallace O. Laub, Keith K. Ogata, Dennis H. Chookaszian, Robert E. Dowdell, Thomas B. Lally, Nick Fluge, Jacob P. Gruver, and Todd H. Steele, and CEC as a nominal defendant. Each individual defendant is one of our current officers and/or directors. The lawsuit alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and breach of fiduciary duties for insider selling and misappropriation of information, essentially based on the same allegations of conduct complained of in the foregoing securities class action complaints.

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

        On March 12, 2004, Career Education Corporation and WAI, Inc., a wholly owned subsidiary of CEC, filed suit in the United States District Court for the Western District of Pennsylvania, Pittsburgh Division, against the former owners of Western School of Health and Business Careers ("Western"), with campuses located in Pittsburgh and Monroeville, Pennsylvania. The suit alleges the former owners made material misrepresentations of fact and breached certain representations and warranties regarding the accreditation of several programs of study being offered by the school. CEC and WAI, Inc. seek to recover damages resulting from the former owners' misrepresentations. The alleged misrepresentations came to light during a routine change of ownership review undertaken by the Accrediting Commission of Career Schools and Colleges of Technology ("ACCSCT") subsequent to CEC's acquisition of Western in August 2003. ACCSCT notified CEC on March 4, 2004, of discrepancies in accreditation documents related to several academic programs. While the ACCSCT review is underway, Western has suspended marketing, new enrollments and disbursement of Title IV federal financial aid funds for the programs being reviewed at that school. We are working in close cooperation with accreditors and DOE officials to resolve any discrepancies in a manner that will best serve the interests of the students at Western. Western had a population of approximately 650 students at January 31, 2004.

Other

        On January 7, 2004, we received notification from the Midwest Regional Office of the Securities and Exchange Commission that it was conducting an inquiry concerning the Company and requested that we voluntarily provide certain information. We believe that the inquiry was prompted by news

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reports concerning our Gibbs College/Montclair and Brooks Institute of Photography schools. We are fully and voluntarily cooperating with the SEC in this inquiry.

        In addition to the legal proceedings and other matters described above, in the ordinary conduct of our business, we and our schools are subject to various other lawsuits, investigations and claims, covering a wide range of matters, including, but not limited to, claims involving students or graduates and routine employment matters. Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of these matters. An unfavorable outcome could have a material adverse impact on our business, results of operations and financial condition.

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 2003.

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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 National Market for the periods indicated. All share prices reflect our 2-for-1 stock split affected in the form of a stock dividend in August 2003. The split-adjusted initial public offering price of our common stock on January 28, 1998, was $2.00 per share.

        The closing price of our common stock as reported on the National Market on March 10, 2004, was $47.50 per share. As of March 10, 2004, there were 183 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. Rather, we plan to retain our earnings to finance future growth. Our ability to pay cash dividends on our common stock is also limited under the terms of our existing credit agreements. The declaration and payment of dividends on our common stock are subject to the discretion of our board of directors. Our board of director's decision to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition, and other factors the board of directors may consider to be relevant.

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ITEM 6.    SELECTED 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 income data set forth below for each of the five years ended December 31, 2003, and the balance sheet data as of December 31, 2003, 2002, 2001, 2000, and 1999, are derived from our audited consolidated financial statements.

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(1)

For any period, Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA") equals the sum of net income, cumulative net effect of change in accounting principle, provision for income taxes, interest income, interest expense, and depreciation and amortization, as follows: