CAREER EDUCATION CORP - 10-Q Quarterly Report

Career Education Corporation
(Exact name of registrant as specified in its charter)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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

As of August 6, 2004, 102,373,348 shares of the registrant's Common Stock, par value $.01, were outstanding.

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	3
	Unaudited Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2004 and 2003	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2004 and 2003	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 6.	Exhibits and Reports on Form 8-K	35
SIGNATURES	36

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

The accompanying notes are an integral part of these unaudited
condensed consolidated balance sheets.

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

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

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

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

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the six months ended June 30, 2004, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004. The condensed consolidated balance sheet as of December 31, 2003, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For additional information, refer to the consolidated financial statements and notes to consolidated financial statements as of and for the year ended December 31, 2003, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 12, 2004.

The unaudited condensed consolidated financial statements include the accounts of Career Education Corporation and our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The results of operations of all acquired businesses have been consolidated for all periods subsequent to the date of acquisition.

On July 22, 2003, our Board of Directors approved a two-for-one stock split to be affected in the form of a stock dividend. The dividend was paid on August 22, 2003, to shareholders of record on August 5, 2003. All share and per share amounts in the accompanying unaudited condensed consolidated financial statements and notes thereto have been retroactively adjusted to reflect this stock dividend.

All of our acquisitions to date have been accounted for as purchases. Accordingly, in connection with each acquisition, the purchase price has been allocated to the estimated fair values of all acquired tangible and intangible assets and assumed liabilities as of the date of the acquisition. As necessary, liabilities have been established at the acquisition dates to provide for restructuring liabilities and certain long-term contractual obligations.

On February 18, 2003, we acquired 100% of the issued and outstanding stock of Formastrat SA and its subsidiaries, also known as the INSEEC Group, for approximately $18.9 million, including assumed debt of $3.2 million, primarily with funds obtained under our U.S. Credit Agreement. We acquired the company primarily because of its potential for market leadership, the economic attractiveness of the educational markets that it serves, and its potential for strong returns on invested capital. The acquisition of the INSEEC Group also provides us with a platform for additional expansion in Europe. We have promoted continued growth of the INSEEC Group since the acquisition date by expanding its marketing channels and adding new programs.

The purchase price, including acquisition costs of approximately $2.3 million and excluding assumed debt, of approximately $18.0 million was allocated to the estimated fair values of acquired tangible and intangible assets of approximately $21.5 million and assumed liabilities of approximately $15.0 million as of February 18, 2003. Intangible assets acquired include, among others, trade names with a total estimated fair value of approximately $1.8 million. Based on our purchase price allocation, we have recorded goodwill of approximately $11.4 million. We do not expect any portion of this goodwill balance to be deductible for tax purposes.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of February 18, 2003 (in thousands):

Current assets		$	9,585
Property and equipment			9,917
Intangible assets not subject to amortization—
	Trade names		1,774
Intangible asset subject to amortization
	Covenant not to compete (5-year useful life)		54
Goodwill			11,385
Other assets			219

	Total assets acquired		32,934

Current liabilities			10,582

	Total liabilities		14,972

	Net assets acquired	$	17,962

On July 1, 2003, we acquired 100% of the issued and outstanding stock of Whitman Education Group, Inc. ("Whitman") for approximately $267.8 million in cash and stock. In connection with the acquisition, Whitman shareholders received an aggregate of approximately 4.4 million shares of our common stock (0.276 shares of our common stock for each share of Whitman common stock owned at closing) and approximately $95.4 million in cash ($6.00 for each share of Whitman common stock owned at closing). Whitman is a proprietary provider of career-oriented postsecondary education. Through three wholly owned subsidiaries, Whitman operates 22 schools in 13 states that offer a range of health education, information technology, and business studies. We acquired Whitman primarily because of its schools' potential for market leadership, the economic attractiveness of the educational markets that it serves, and its potential for strong returns on invested capital. Our acquisition of Whitman also allows us to enhance our position in the health education field and further expand our presence in the fields of information technology and business studies. We have increased the schools' enrollments since the acquisition date by expanding the schools' marketing capabilities, entering new geographic markets, augmenting program offerings, and expanding Whitman's regionally accredited online learning platform.

Additionally, each outstanding option to purchase Whitman stock, whether vested or unvested, was cancelled by Whitman upon consummation of the acquisition and exchanged for cash equal to the positive difference, if any, between (1) the equivalent cash value of the per share consideration of approximately $14.82 and (2) the per share exercise price of the option in accordance with Whitman's option plan and purchase agreement. Cash consideration of approximately $23.4 million was paid to Whitman option holders. This amount was recorded as a liability on Whitman's balance sheet prior to the acquisition.

Cash consideration paid to Whitman shareholders and option holders of approximately $118.8 million was funded primarily with borrowings under our U.S. Credit Agreement.

The purchase price, including acquisition costs of approximately $4.9 million and excluding the $23.4 million paid to Whitman option holders, of approximately $249.3 million was preliminarily allocated to the estimated fair value of acquired tangible and intangible assets of approximately $87.2 million and assumed liabilities of approximately $60.5 million as of July 1, 2003. Intangible assets acquired include, among others, accreditation, licensing, and Title IV participation rights with an approximate fair value of $5.0 million and trade names with an approximate fair value of $16.9 million. Based on our purchase price allocation, we have recorded goodwill of approximately $222.6 million. We do not expect any portion of this goodwill balance to be deductible for tax purposes.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of July 1, 2003 (in thousands):

Current assets		$	48,906
Property and equipment			14,790
Intangible assets not subject to amortization—
	Accreditation, licensing, and Title IV participation rights		5,000
	Trade names		16,900
Intangible asset subject to amortization
	Covenant not to compete (2-year useful life)		50
	Student contracts (6-month useful life)		500
Goodwill			222,625
Other assets			1,077

	Total assets acquired		309,848

Current liabilities			50,523

	Total liabilities		60,509

	Net assets acquired	$	249,339

The following unaudited pro forma consolidated results of operations for the three months and six months ended June 30, 2003, assume that the Whitman acquisition occurred at the beginning of the year preceding the year of acquisition. Actual results of operations for the three months and six months ended June 30, 2004, are presented for comparative purposes. The unaudited pro forma results of operations are based on historical results of operations, include adjustments for depreciation, amortization, interest, taxes, and shares of our common stock issued in connection with the acquisition, and do not necessarily reflect the actual results that would have occurred.

	Three Months Ended June 30,				Six Months Ended June 30,
	2004 Actual		2003 Pro Forma		2004 Actual		2003 Pro Forma
	(In thousands, except per share amounts)
Revenue	$	409,368	$	286,144	$	812,144	$	561,757
Income from operations		65,455		36,930		134,416		72,433
Net income	$	39,713	$	22,160	$	81,472	$	43,214

Basic earnings per share	$	0.39	$	0.23	$	0.81	$	0.46

Diluted earnings per share	$	0.38	$	0.22	$	0.78	$	0.44

On August 5, 2003, we acquired certain assets and assumed certain liabilities of Western School of Health and Business Careers ("Western") for approximately $8.0 million primarily with funds borrowed under our U.S. Credit Agreement. Western, based in Pittsburgh, Pennsylvania, provides private, for-profit, postsecondary education leading to an associate degree or a diploma in the career-oriented disciplines of health education and business studies. We acquired Western primarily because of its potential for market leadership, the economic attractiveness of the educational markets that it serves, and its potential for strong returns on invested capital. Our acquisition of Western also expands our national presence in the health education field. We plan to increase the school's enrollments by enhancing the school's marketing capabilities and augmenting program offerings.

The purchase price, including acquisition costs of approximately $0.4 million, of approximately $8.4 million was allocated to the estimated fair values of acquired tangible and intangible assets of approximately $5.6 million and assumed liabilities of approximately $1.8 million as of August 5, 2003. Intangible assets acquired include, among others, accreditation, licensing, and Title IV participation rights with an approximate fair value of $0.9 million and trade names with an approximate fair value of $2.5 million. Based on our preliminary purchase price allocation, we have recorded goodwill of approximately $4.6 million. We expect the goodwill balance to be deductible for income tax purposes. Subsequent adjustments may be made to the purchase price and purchase price allocation based upon, among other things, the ultimate resolution of certain regulatory compliance matters existing as of the date of the acquisition. However, we do not believe that any such adjustments will be material.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of August 5, 2003 (in thousands):

Current assets		$	995
Property and equipment			1,296
Intangible assets not subject to amortization—
	Accreditation, licensing, and Title IV participation rights		860
	Trade names		2,450
Intangible asset subject to amortization
	Covenant not to compete (2-year useful life)		20
Goodwill			4,639

	Total assets acquired		10,260

Current liabilities			282

	Total liabilities		1,848

	Net assets acquired	$	8,412

We account for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") related to options issued to employees. For options issued to employees during the six months ended June 30, 2004 and 2003, no stock-based employee compensation is reflected in net income in the accompanying unaudited condensed consolidated statements of income, as all such options had an exercise price equal to the market value of the underlying common stock on the date of the grant. Had we applied the fair value recognition provisions of SFAS 123 to stock-based

employee compensation during the three months and six months ended June 30, 2004 and 2003, net income and earnings per share would have been as follows:

During the three months and six months ended June 30, 2004 and 2003, the fair value of each option was estimated on the date of grant based on the Black-Scholes option pricing model. The weighted average fair value of the options granted during the three months and six months ended June 30, 2004 and 2003, and assumptions used to value the options are as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2004			2003			2004			2003
Dividend yield		—			—			—			—
Risk-free interest rate		3.4	%		3.0	%		3.3	%		3.0	%
Volatility		50	%		50	%		50	%		50	%
Expected life (in years)		4			4			4			4
Weighted average fair value of options granted	$	21.28		$	12.34		$	21.27		$	12.29

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

Costs associated with stock options issued to non-employees are recorded in accordance with SFAS 123. Such costs were not significant during the three months and six months ended June 30, 2004 and 2003.

Comprehensive income, which includes net income, foreign currency translation adjustments, and unrealized gains and losses on marketable securities, for the three months and six months ended June 30, 2004 and 2003, is as follows:

		For the Three Months Ended June 30,					For the Six Months Ended June 30,
		2004			2003		2003			2004
		(In thousands)
Net income		$	39,713		$	19,605	$	81,472		$	38,831
Other comprehensive income (loss)
	Foreign currency translation adjustment		(397	)		2,972		(1,459	)		3,697
	Unrealized gain (loss) on marketable securities		(54	)		—		149			—

Comprehensive income		$	39,262		$	22,577	$	80,162		$	42,528

The weighted average numbers of common shares used to compute basic and diluted income per share for the three months and six months ended June 30, 2004 and 2003, are as follows:

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2004	2003	2004	2003
	(In thousands)
Basic common shares outstanding	101,471	93,203	100,877	92,752
Common stock equivalents	4,013	4,430	4,151	4,195

Diluted common shares outstanding	105,484	97,633	105,028	96,947

As of June 30, 2004, we have outstanding under our $200.0 million U.S. Credit Agreement revolving loans totaling $14.0 million and letters of credit totaling $19.0 million. The availability under our U.S. Credit Agreement as of June 30, 2004, is $167.0 million.

As of June 30, 2004, we have outstanding under our $10.0 million Canadian Credit Agreement revolving loans totaling $2.6 million. The availability under the Canadian Credit Agreement as of June 30, 2004 is $7.4 million.

We have two reportable segments: the Colleges, Schools, and Universities ("CSU") segment and the Online Education Group ("OEG") segment. Both segments are comprised of for-profit, postsecondary schools that offer a variety of degree and diploma programs. The CSU segment represents an aggregation of our campus-based operating divisions that provide educational services primarily in a classroom or laboratory setting. The OEG segment delivers educational services online through internet-based courses.

Our reportable segments have been determined based on the methodology used by management to evaluate performance and allocate resources. Management, including our chief operating decision maker, evaluates segment performance based on segment profit. This measure of profit excludes

interest income, interest expense, and any unallocated corporate expenses. For the CSU segment, segment profit also includes share of affiliate earnings, which was $1.2 million and $0.9 million for the three months ended June 30, 2004 and 2003, respectively, and $2.6 million and $2.1 million for the six months ended June 30, 2004 and 2003, respectively. Adjustments to reconcile segment results to consolidated results are reflected in "Corporate expenses and other, net," which includes unallocated corporate expenses and eliminations.

The accounting policies of each segment are consistent with those described in the summary of significant accounting policies in Note 3 of our Annual Report on Form 10-K filed with the SEC on March 12, 2004. Transactions between segments, which are not significant, are consummated on a basis intended to reflect the market value of the underlying products or services. A majority of corporate expenses have been charged to the segments as part of a general allocation.

			Three Months Ended June 30,						Six Months Ended June 30,
			2004			2003			2004			2003
			(In thousands)
Revenue:
	CSU		$	316,282		$	223,496		$	643,292		$	448,189
	OEG			93,086			32,578			168,852			53,428

		Total revenue	$	409,368		$	256,074		$	812,144		$	501,617

Segment Profit:
	CSU		$	36,905		$	27,711		$	83,591		$	61,275
	OEG			40,540			16,719			76,084			20,900

				77,445			44,430			159,675			82,175
Reconciling items:
	Corporate expenses and other, net			(10,805	)		(11,159	)		(22,669	)		(16,799	)
	Interest income			538			288			890			837
	Interest expense			(713	)		(609	)		(1,542	)		(951	)

Total earnings before provision for income taxes			$	66,465		$	32,950		$	136,354		$	65,262

Depreciation and Amortization:
	CSU		$	11,159		$	8,427		$	22,146		$	16,345
	OEG			553			240			1,058			455
	Corporate & other			1,508			1,176			2,783			2,228

		Total depreciation and amortization	$	13,220		$	9,843		$	25,987		$	19,028

Our principal operations are located in the United States, and our results of operations and long-lived assets in geographic regions outside of the United States are not significant. During the three months and six months ended June 30, 2004 and 2003, no individual customer accounted for more than 10% of our total revenue.

In the ordinary conduct of our business, we and our schools are subject to various 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 concerning pending litigation and investigations, 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.

The composition of accrued expenses as of June 30, 2004, March 31, 2004, and December 31, 2003, is as follows:

	As of June 30, 2004		As of March 31, 2004		As of December 31, 2003
	(In thousands)
Payroll and related benefits	$	40,711	$	25,533	$	25,671
Income taxes		—		31,100		14,472
Other		55,168		55,645		42,419

	$	95,879	$	112,278	$	82,562

Changes in our student receivable allowance during the three and six months ended June 30, 2004, are as follows:

	Balance, Beginning of Period		Charges to Expense		Amounts Written-off			Balance as of 6/30/04
	(In thousands)
For the three months ended June 30, 2004	$	45,462	$	20,756	$	(21,363	)	$	44,855
For the six months ended June 30, 2004	$	47,467	$	40,612	$	(43,224	)	$	44,855

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion below contains certain forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934) that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual growth, results, performance, and business prospects and opportunities in 2004 and beyond could differ materially from what is expressed in, or implied by, any such forward-looking statements. See "Special Note Regarding Forward-Looking Statements" on page 30 for a discussion of risks and uncertainties that could cause or contribute to such material differences.

The following discussion and analysis should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and attached Notes to Unaudited Condensed Consolidated Financial Statements appearing elsewhere herein.

We are a provider of private, for-profit, postsecondary education with 81 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 ("AIU") Online and Colorado Technical University ("CTU") Online. Our total student population as of July 31, 2004, was approximately 81,000 students, including total student population of AIU Online of approximately 15,500 students, total student population of CTU Online of approximately 2,100 students, and total student population of the former Whitman schools (excluding CTU Online) of approximately 11,100 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:

We have experienced significant growth both organically and through acquisitions and have invested significant financial resources in marketing, capital improvements, and human resources in connection with each of the schools that we have acquired or opened.

Our principal source of revenue is tuition collected from our students. The academic year is at least 30 weeks in length but varies both by individual school and program of study and is divided by term, which is determined by start dates, which also vary by school and program. Payment of each term's tuition may be made by financial aid, full cash payment, an installment payment plan, or a combination thereof. Our schools charge tuition at varying amounts, depending on not only the particular school but also the type of program and the specific curriculum. Our schools typically increase tuition at least once per year.

Tuition revenue and one-time fees, such as application fees, are recognized on a straight-line basis over the length of the applicable period of instruction. The portion of tuition payments received but not earned is recorded as deferred revenue. If a student withdraws from school prior to the completion of the term, we refund the portion of tuition already paid that, pursuant to our schools' refund policies and applicable federal and state law and accrediting agency standards, we are not entitled to retain.

Once a student completes a certain minimum portion of the term, as defined pursuant to our school's refund policies and applicable federal and state law and accrediting agency standards, he or she is not entitled to any refund of tuition paid.

Other revenue consists primarily of bookstore sales, student laptop computer sales, dormitory revenue, contract training revenue, restaurant revenue, cafeteria revenue, rental income, and placement revenue. Revenue from dormitory and cafeteria fees charged to students is recognized on a straight-line basis over the term of a student's dormitory and cafeteria use. Other dormitory and cafeteria revenue is recognized upon delivery of goods or services. Bookstore sales, student laptop computer sales, contract training revenue, restaurant revenue, and placement revenue are recognized when services are performed or goods are delivered. While the reputations of some of our schools allow them to charge fees to employers for placement of our students, a majority of our placement services are provided at no cost to employers and do not result in the recognition of placement revenue. We do not charge fees to students as a result of a student's placement. Placement revenue for the second quarter 2004 and 2003, was $0.1 million and $0.5 million, respectively, and placement revenue for the six months ended June 30, 2004 and 2003, was $0.4 million and $0.8 million, respectively. Placement revenue during the year ended December 31, 2003, was $1.5 million.

Educational services and facilities expense includes costs directly attributable to the educational activity of our schools, including salaries and benefits of faculty, academic administrators, and student support personnel. Educational services and facilities expense also includes, among other things, costs of educational supplies and facilities, including rents on school leases, distance learning costs, certain costs of establishing and maintaining computer laboratories, costs of student housing, and owned and leased facility costs. Royalty fees paid to Le Cordon Bleu Limited and student financing costs are also included in this expense category.

General and administrative expense includes salaries and benefits of personnel in corporate and school administration, marketing, admissions, accounting, human resources, financial aid, career services, legal and compliance. Costs associated with advertising, development and production of marketing materials, occupancy of the corporate offices, and bad debt are also included in this expense category.

Depreciation expense includes costs associated with the depreciation of, among other things, purchased computer laboratories, equipment, furniture and fixtures, courseware, owned facilities, and capitalized leased equipment. Depreciation is recognized using the straight-line method over the useful lives or lease terms of the related assets for financial reporting purposes and an accelerated method for income tax reporting purposes. Amortization expense includes the amortization of certain intangible assets, excluding goodwill and indefinite-lived intangible assets. Goodwill and indefinite-lived intangible assets are reviewed for impairment by applying a fair-value-based test on, at least, an annual basis.

Share of affiliate earnings represents our share of the income of American University in Dubai, United Arab Emirates ("AU Dubai"), in which we hold a 30% minority interest. Our interest in AU Dubai is accounted for using the equity method, and, therefore, the entity's results of operations are not consolidated into our results of operations.

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting policies generally accepted in the United States ("GAAP"). The application of GAAP may

require management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience, assessment of current conditions, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and are not readily apparent from other sources. Critical accounting policies are defined as those that are reflective of significant judgments by management and uncertainties, and that could potentially result in materially different results under different assumptions and conditions. Although, historically, actual results have not deviated significantly from those determined using management's estimates, as discussed below, our consolidated financial position or results of operations could be materially different if we were to report under different conditions or using different assumptions in the application of our critical accounting policies. The critical accounting policies discussed herein are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management's judgment in the application of such principles.

There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result from the result derived from the application of our critical accounting policies. We believe that the following accounting policies are most critical to us, in that they represent the primary areas where financial information is subject to the application of management's estimates, assumptions, and judgment in the preparation of our consolidated financial statements. Our significant accounting policies are discussed in Note 3 to our consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2004.

Revenue is derived primarily from programs taught at our schools or online. Tuition revenue and one-time fees, such as application fees, are recognized on a straight-line basis over the length of the applicable period of instruction. Revenue from dormitory and cafeteria fees charged to students is recognized on a straight-line basis over the term of a student's dormitory and cafeteria use. Other dormitory and cafeteria revenue is recognized upon delivery of goods or services. Other revenue, such as bookstore sales, student laptop computer sales, contract training revenue, restaurant revenue, and placement revenue, is recognized as services are performed or goods are delivered. The portion of payments received but not earned is recorded as deferred revenue and reflected as a current liability on our consolidated balance sheet; as such amount represents revenue that we expect to earn within the next year. Refunds are calculated and paid in accordance with applicable federal, state, and accrediting agency standards and school policy.

Based upon past experience and judgment, we establish an allowance for doubtful accounts with respect to tuition receivables. Our schools calculate and record allowances for doubtful accounts based on a standard allowance methodology developed by corporate financial management. Our standard allowance methodology considers, among other things, a student's status (in-school or out-of-school), whether or not additional financial aid funding will be collected from Title IV programs or other sources, whether or not a student is currently making payments, and overall collections history. Changes in trends in any of these factors or adjustments to our standard allowance methodology, which is evaluated for propriety on a regular basis and amended as necessary, may impact our allowance for doubtful accounts. In accordance with our standard allowance methodology, we fully reserve for the receivable balances of withdrawn students with outstanding obligations of sixty days or more within

thirty days following the student's withdrawal date. Corporate financial management reviews the allowance calculations completed by each of our schools to ensure compliance with our standard reserve methodology and, based on judgment and consideration of emerging trends and existing facts and circumstances, may increase the allowance to ensure the adequacy of the consolidated balance.

Our bad debt expense as a percentage of revenue for the three months ended June 30, 2004 was 5.1%, relative to a bad debt expense percentage of 4.9% for the three months ended March 31, 2004, 5.1% for the three months ended December 31, 2003, and 3.9% for the three months ended June 30, 2003.

Because a substantial portion of our revenue is derived from Title IV programs, any legislative or regulatory action that significantly reduces the funding available under Title IV programs or the ability of our students or schools to participate in Title IV programs could have a material effect on the realizability of our receivables.

Goodwill and other indefinite-lived intangible assets are reviewed for impairment on, at least, an annual basis by applying a fair-value-based test. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of our reporting units and our indefinite-lived intangible assets. If our fair value estimates or related assumptions change in the future, we may be required to record impairment charges related to goodwill or other indefinite-lived intangible assets.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.

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

In evaluating the recoverability of long-lived assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of such assets. If our fair value estimates or related assumptions change in the future, we may be required to record impairment charges related to long-lived assets.

We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires the recognition of deferred income taxes based upon the tax consequences of temporary differences between financial reporting and income tax reporting by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized.

In connection with the preparation of our consolidated financial statements, we are required to estimate our income tax liability for each of the tax jurisdictions in which we operate. This process involves estimating our actual current income tax expense and assessing temporary differences resulting

from differing treatment of certain income or expense items for income tax reporting and financial reporting purposes. We also recognize as deferred tax assets the expected future tax benefits of net operating loss carry forwards. In evaluating the realizability of deferred tax assets associated with net operating loss carry forwards, we consider, among other things, expected future taxable income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future tax benefits. Changes in, among other things, income tax legislation, statutory income tax rates, or future taxable income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.

Whitman option holders. This amount was recorded as a liability on Whitman's balance sheet prior to the acquisition.

Cash consideration paid to Whitman shareholders and option holders of approximately $118.8 million was funded primarily with borrowings under our U.S. Credit Agreement.

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

			Three Months Ended June 30,				Six Months Ended June 30,
			2004		2003		2004		2003
REVENUE:
	Tuition and registration fees		93.1	%	91.6	%	92.7	%	91.4	%
	Other		6.9		8.4		7.3		8.6

		Total revenue	100.0		100.0		100.0		100.0

OPERATING EXPENSES:
	Educational services and facilities		33.5		35.9		32.6		36.7
	General and administrative		47.3		47.6		47.6		46.9
	Depreciation and amortization		3.2		3.9		3.2		3.8

		Total operating expenses	84.0		87.4		83.4		87.4

		Income from operations	16.0		12.6		16.6		12.6
OTHER INCOME (EXPENSE):
	Interest income		0.1		0.1		0.1		0.2
	Interest expense		(0.2	)	(0.2	)	(0.2	)	(0.2	)
	Share of affiliate earnings		0.3		0.4		0.3		0.4

		Total other income	0.2		0.3		0.2		0.4

		Income before provision for income taxes	16.2		12.9		16.8		13.0
PROVISION FOR INCOME TAXES			6.5		5.2		6.8		5.3

NET INCOME			9.7	%	7.7	%	10.0	%	7.7	%

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Colleges, Schools and Universities Revenue. Revenue for the Colleges, Schools and Universities ("CSU") segment for the three months ended June 30, 2004 and 2003, was as follows:

CSU tuition and registration fee revenue increased $89.3 million or 44%, from $204.9 million in the second quarter of 2003 to $294.2 million in the second quarter of 2004. The increase is primarily attributable to revenue generated by CSU schools acquired or opened after April 1, 2003 (Whitman Education Group, Western School of Health and Business Careers, Le Cordon Bleu College of Culinary Arts Las Vegas, IADT Detroit, AIU Houston, Le Cordon Bleu College of Culinary Arts Atlanta, IADT Las Vegas, and Le Cordon Bleu College of Culinary Arts Miami, collectively discussed as "CSU new schools"). Also contributing to the CSU tuition and registration revenue increase was an increase in CSU tuition and registration fee revenue on a same-school basis (i.e., CSU schools acquired or opened on or prior to April 1, 2003, collectively discussed as "CSU same schools"). The CSU same-school revenue increase is attributable to an approximate 10% increase in average student population during the second quarter of 2004 relative to average student population during the second quarter of 2003, and increases associated with 2004 tuition price increases and a shift in student enrollment mix.

CSU other revenue increased $3.5 million or 19%, from $18.6 million in the second quarter of 2003 to $22.1 million in the second quarter of 2004. This increase is attributable to other revenue generated by CSU new schools and CSU same-school other revenue growth, which is due primarily to the increase in CSU same-school student population mentioned above.

Online Education Group Revenue. Revenue for the Online Education Group ("OEG") segment for the three months ended June 30, 2004 and 2003, was as follows:

OEG tuition and registration fee revenue increased $57.0 million or 192%, from $29.7 million in the second quarter of 2003 to $86.7 million in the second quarter of 2004. The OEG revenue growth is primarily attributable to an approximate 196% increase in average student population during the second quarter of 2004 relative to average student population during the second quarter of 2003.

OEG other revenue increased $3.5 million or 122%, from $2.9 million in the second quarter of 2003 to $6.4 million in the second quarter of 2004. This increase is primarily attributable to the increase in OEG average student population mentioned above.

Educational Services and Facilities Expense. Educational services and facilities expense increased $45.1 million or 49%, from $92.0 million in the second quarter of 2003 to $137.1 million in the second quarter of 2004. The increase is primarily attributable to a $36.6 million increase in CSU segment

educational services and facilities expense, due primarily to educational services and facilities expense incurred by CSU new schools. A significant portion of this increase is also attributable to increases in variable expenses necessary to support the increase in CSU same-school student population mentioned above, additional student service activities designed to improve retention, an increase in curriculum development activities, and increased occupancy costs associated with facility upgrades and expansions during 2003 and 2004. The increase in CSU educational services and facilities expense accounted for approximately 40 percentage points of the total 49% increase. Approximately $7.8 million or 8 percentage points of the total increase is attributable to additional educational services and facilities expense incurred by the OEG segment, associated primarily with increases in variable expenses necessary to support the increase in OEG student population mentioned above.

General and Administrative Expense. General and administrative expense increased $71.8 million or 59%, from $121.8 million in the second quarter of 2003 to $193.6 million in the second quarter of 2004. The increase is primarily attributable to a $44.5 million increase in CSU segment general and administrative expense, due primarily to general and administrative expense incurred by CSU new schools. A significant portion of this increase is attributable to an increase in advertising, marketing, and admissions costs incurred in support of increased CSU student lead, enrollment, and start volume, an increase in financial aid and career services costs necessary to support the increase in CSU student population mentioned above, an increase in legal and other professional service fees, and an increase in bad debt expense, as discussed below. The increase in CSU general and administrative expense accounted for approximately 37 percentage points of the total 59% increase. Approximately $28.6 million or 24 percentage points of the total increase is attributable to additional general and administrative expense incurred by our OEG segment, associated primarily with an increase in advertising, marketing, and admissions costs incurred in support of increased OEG student lead, enrollment, and start volume, an increase in financial aid and career services costs necessary to support the increase in OEG student population mentioned above, and an increase in bad debt expense. Increases in CSU and OEG general and administrative expense were offset, in part, by a $1.3 million decrease in net unallocated corporate general and administrative expense, representing 1 percentage point of the total 59% increase. The decrease in net unallocated corporate general and administrative expense is attributable to a $9.9 million or 77% increase in management fees charged to our schools, offset, in part, by an $8.6 million or 39% increase in corporate general and administrative expenses. We expect legal and other professional service fees to continue to increase for the foreseeable future as a result of the legal matters discussed in "Item 1. Legal Proceedings" in Part II of this Form 10-Q.

Bad debt expense, which is included in general and administrative expense, increased $10.8 million or 108%, from $10.0 million in the second quarter of 2003 to $20.8 million in the second quarter of 2004, and bad debt expense as a percentage of revenue increased from 3.9% during the second quarter of 2003 to 5.1% during the second quarter of 2004. This increase in bad debt expense as a percentage of revenue is primarily attributable to a higher rate of attrition, due to, among other things, the introduction by our CSU schools during the third quarter of 2003 of tougher credit standards and more aggressive cash collection practices, which caused a larger portion of our receivables to be due from students who did not complete their programs. These students represent a greater credit risk than do those who complete their programs. Also contributing to the increase in bad debt as a percentage of revenue, rising tuition rates have increased the gap between program costs and available financial aid funding, requiring a significant percentage of our students to enter into payment arrangements with larger monthly payments and terms that may extend beyond their scheduled graduation dates.

Depreciation and Amortization Expense. Depreciation and amortization expense increased $3.4 million or 34%, from $9.8 million in the second quarter of 2003 to $13.2 million in the second quarter of 2004. Depreciation expense increased $3.5 million or 37%, from $9.6 million in the second quarter of 2003 to $13.1 million in the second quarter of 2004, primarily as a result of depreciation expense recorded in connection with 2003 and 2004 capital expenditures. Amortization expense

decreased $0.1 million or 41%, from $0.3 million in the second quarter of 2003 to $0.2 million in the second quarter of 2004.

Income from Operations. Income from operations during the three months ended June 30, 2004 and 2003, was as follows:

	2004			2003
	(In thousands)
CSU	$	35,720		$	26,806
OEG		40,540			16,719
Corporate, eliminations, and other		(10,805	)		(11,159	)

Total income from operations	$	65,455		$	32,366

Income from operations increased $33.1 million or 102%, from $32.4 million in the second quarter of 2003 to $65.5 million in the second quarter of 2004. Approximately $8.9 million or 27 percentage points of the total increase is attributable to an increase in CSU operating income and approximately $23.8 million or 74 percentage points of the total increase is attributable to the growth of OEG operating income. The remaining 1 percentage point of the total increase is attributable to a decrease in net unallocated corporate expenses.

Interest Income. Interest income increased $0.3 million or 87%, from $0.3 million in the second quarter of 2003 to $0.5 million in the second quarter of 2004, attributable to higher invested cash balances.

Interest Expense. Interest expense increased $0.1 million or 17% from $0.6 million in the second quarter of 2003 to $0.7 million in the second quarter of 2004.

Share of Affiliate Earnings. Share of affiliate earnings from our 30% minority interest in American University in Dubai, United Arab Emirates, which is included in the results of our CSU segment, increased $0.3 million or 31%, from $0.9 million during the second quarter of 2003 to $1.2 million during the second quarter of 2004.

Provision for Income Taxes. Provision for income taxes increased $13.4 million or 101%, from $13.3 million in the second quarter of 2003 to $26.8 million in the second quarter of 2004, primarily as a result of an increase in pretax income during the second quarter of 2004 of $33.5 million, offset, in part, by a reduction of our effective income tax rate from 40.50% during the second quarter of 2003 to 40.25% during the second quarter of 2004. Future changes in the proportionate distribution of our total pretax income among the tax jurisdictions in which we operate may impact our effective income tax rate.

Net Income. Net income increased $20.1 million or 103%, from $19.6 million in the second quarter of 2003 to $39.7 million in the second quarter of 2004, due to the cumulative effect of the factors noted above.

CSU Revenue. Revenue for the CSU segment for the six months ended June 30, 2004 and 2003, was as follows:

CSU tuition and registration fee revenue increased $187.1 million or 46%, from $410.0 million for the six months ended June 30, 2003, to $597.0 million for the six months ended June 30, 2004. The increase is primarily attributable to revenue generated by CSU schools acquired or opened after January 1, 2003 (the INSEEC Group, Whitman Education Group, Western School of Health and Business Careers, Le Cordon Bleu College of Culinary Arts Las Vegas, IADT Detroit, AIU Houston, Le Cordon Bleu College of Culinary Arts Atlanta, IADT Las Vegas, and Le Cordon Bleu College of Culinary Arts Miami, collectively discussed as "CSU new schools"). Also contributing to the CSU tuition and registration revenue increase was an increase in CSU tuition and registration fee revenue on a same-school basis (i.e., CSU schools acquired or opened on or prior to January 1, 2003, collectively discussed as "CSU same schools"). The CSU same-school revenue increase is attributable to an approximate 11% increase in average student population during the six months ended June 30, 2004, relative to average student population during the six months ended June 30, 2003, and increases associated with 2004 tuition price increases and a shift in student enrollment mix.

CSU other revenue increased $8.0 million or 21%, from $38.2 million for the six months ended June 30, 2003, to $46.3 million for the six months ended June 30, 2004. This increase is attributable to other revenue generated by CSU new schools and CSU same-school other revenue growth, which is due primarily to the increase in CSU same-school student population mentioned above.

Online Education Group Revenue. Revenue for the OEG segment for the six months ended June 30, 2004 and 2003, was as follows:

OEG tuition and registration fee revenue increased $107.6 million or 221%, from $48.7 million for the six months ended June 30, 2003 to $156.2 million for the six months ended June 30, 2004. The OEG revenue growth is primarily attributable to an approximate 217% increase in average student population during the six months ended June 30, 2004, relative to average student population during the six months ended June 30, 2003.

OEG other revenue increased $7.9 million or 165%, from $4.8 million for the six months ended June 30, 2003, to $12.6 million for the six months ended June 30, 2004. This increase is primarily attributable to the increase in OEG average student population mentioned above.

Educational Services and Facilities Expense. Educational services and facilities expense increased $81.1 million or 44%, from $184.2 million for the six months ended June 30, 2003, to $265.3 million for

the six months ended June 30, 2004. The increase is primarily attributable to a $70.1 million increase in CSU segment educational services and facilities expense, due primarily to educational services and facilities expense incurred by CSU new schools. A significant portion of this increase is also attributable to increases in variable expenses necessary to support the increase in CSU same-school student population mentioned above, additional student service activities designed to improve retention, an increase in curriculum development activities, and increased occupancy costs associated with facility upgrades and expansions during 2003 and 2004. The increase in CSU educational services and facilities expense accounted for approximately 38 percentage points of the total 44% increase. Approximately $10.0 million or 5 percentage points of the total increase is attributable to additional educational services and facilities expense incurred by the OEG segment, associated primarily with increases in variable expenses necessary to support the increase in OEG student population mentioned above.

General and Administrative Expense. General and administrative expense increased $151.3 million or 64%, from $235.1 million for the six months ended June 30, 2003, to $386.4 million for the six months ended June 30, 2004. The increase is primarily attributable to a $97.4 million increase in CSU segment general and administrative expense, due primarily to general and administrative expense incurred by CSU new schools. A significant portion of this increase is attributable to an increase in advertising, marketing, and admissions costs incurred in support of increased CSU student lead, enrollment, and start volume, an increase in financial aid and career services costs necessary to support the increase in CSU student population mentioned above, an increase in legal and other professional service fees, and an increase in bad debt expense, as discussed below. The increase in CSU general and administrative expense accounted for approximately 41 percentage points of the total 64% increase. Approximately $49.6 million or 21 percentage points of the total increase is attributable to additional general and administrative expense incurred by our OEG segment, associated primarily with an increase in advertising, marketing, and admissions costs incurred in support of increased OEG student lead, enrollment, and start volume, an increase in financial aid and career services costs necessary to support the increase in OEG student population mentioned above, and an increase in bad debt expense. The remaining $4.3 million increase, representing 2 percentage points of the total 64% increase, is attributable an increase in net unallocated corporate general and administrative expense. The increase in net unallocated corporate general and administrative expense is attributable to a $21.8 million or 45% increase in corporate general and administrative expenses, offset, in part, by a $17.5 million or 67% increase in management fees charged to our schools. We expect legal and other professional service fees to continue to increase for the foreseeable future as a result of the legal matters discussed in "Item 1. Legal Proceedings" in Part II of this Form 10-Q.

Bad debt expense, which is included in general and administrative expense, increased $21.2 million or 110%, from $19.4 million for the six months ended June 30, 2003, to $40.6 million for the six months ended June 30, 2004, and bad debt expense as a percentage of revenue increased from 3.9% during the six months ended June 30, 2003, to 5.0% during the six months ended June 30, 2004. This increase in bad debt expense as a percentage of revenue is primarily attributable to a higher rate of attrition, due to, among other things, the introduction by our CSU schools during the third quarter of 2003 of tougher credit standards and more aggressive cash collection practices, which caused a larger portion of our receivables to be due from students who did not complete their programs. These students represent a greater credit risk than do those who complete their programs. Also contributing to the increase in bad debt as a percentage of revenue, rising tuition rates have increased the gap between program costs and available financial aid funding, requiring a significant percentage of our students to enter into payment arrangements with larger monthly payments and terms that may extend beyond their scheduled graduation dates.

Depreciation and Amortization Expense. Depreciation and amortization expense increased $7.0 million or 37%, from $19.0 million for the six months ended June 30, 2003, to $26.0 million for the six months ended June, 30 2004. Depreciation expense increased $7.1 million or 39%, from $18.5 million for the six months ended June 30, 2003, to $25.6 million for the six months ended June 30, 2004, primarily as a result of depreciation expense recorded in connection with 2003 and 2004 capital expenditures. Amortization expense decreased $0.2 million or 35%, from $0.5 million for the six months ended June 30, 2003 to $0.3 million for the six months ended June 30, 2004.

Income from Operations. Income from operations during the six months ended June 30, 2004 and 2003, was as follows:

	2004			2003
	(In thousands)
CSU	$	81,001		$	59,204
OEG		76,084			20,900
Corporate, eliminations, and other		(22,669	)		(16,799	)

Total income from operations	$	134,416		$	63,305

Income from operations increased $71.1 million or 112%, from $63.3 million for the six months ended June 30, 2003, to $134.4 million for the six months ended June 30, 2004. Approximately $21.8 million or 34 percentage points of the total increase is attributable to an increase in CSU operating income, and approximately $55.2 million or 87 percentage points of the total increase is attributable to the growth of OEG operating income. Increases in CSU and OEG income from operations were offset, in part, by an increase in net unallocated corporate expenses, intercompany eliminations, and other items of approximately $5.9 million, which accounted for 9 percentage points of the total 112% operating income increase.

Interest Income. Interest income increased $0.1 million or 6%, from $0.8 million for the six months ended June 30, 2003, to $0.9 million for the six months ended June 30, 2004.

Interest Expense. Interest expense increased $0.6 million or 62% from $1.0 million for the six months ended June 30, 2003, to $1.5 million for the six months ended June 30, 2004, attributable primarily to an increase in average revolving borrowings under our outstanding credit agreements, offset, in part, by a decrease in the average interest rate paid on such revolving borrowings.

Share of Affiliate Earnings. Share of affiliate earnings from our 30% minority interest in American University in Dubai, United Arab Emirates, which is included in the results of our CSU segment, increased $0.5 million or 25%, from $2.1 million for the six months ended June 30, 2003, to $2.6 million for the six months ended June 30, 2004.

Provision for Income Taxes. Provision for income taxes increased $28.5 million or 108%, from $26.4 million for the six months ended June 30, 2003, to $54.9 million for the six months ended June 30, 2004, primarily as a result of an increase in pretax income during the six months ended June 30, 2004, of $71.1 million, offset, in part, by a reduction of our effective income tax rate from 40.50% during the six months ended June 30, 2003 to 40.25% during the six months ended June 30, 2004. Future changes in the proportionate distribution of our total pretax income among the tax jurisdictions in which we operate may impact our effective income tax rate.

Net Income. Net income increased $42.6 million or 110%, from $38.8 million for the six months ended June 30, 2003, to $81.5 million for the six months ended June 30, 2004, due to the cumulative effect of the factors noted above.

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

As of June 30, 2004, we had cash and cash equivalents of $187.4 million, compared to cash and cash equivalents of $161.2 million as of December 31, 2003. Our cash flows from operations have been highly reliable and adequate relative to our liquidity requirements. We finance our operating activities and our organic growth primarily through cash generated from operations. We finance acquisitions primarily through funding from a combination of equity issuances, credit facility borrowings, and cash generated from operations. Management anticipates that we will be able to satisfy the cash requirements of our ongoing business for the foreseeable future primarily with cash generated by operations, existing cash balances, and, if necessary, borrowings under our existing credit agreements.

Our primary source of cash is tuition collected from our students. Our students finance tuition costs through the use of a variety of fund sources, including, among others, federal loan and grant programs, state grant programs, private loans and grants, private and institutional scholarships, and cash payments.

The U.S. Department of Education ("DOE") requires that we keep Title IV program funds collected in satisfaction of unbilled program charges in separate cash accounts until the students are billed for the program costs related to the Title IV program funds collected. In addition, all funds transferred to our schools through electronic funds transfer programs are held in a separate cash account until certain conditions are satisfied. As of June 30, 2004, the balance of such funds held in separate cash accounts is not significant. The restrictions on any cash held in these accounts have not significantly affected our ability to fund daily operations.

Operating Activities. Net cash provided by operating activities increased $9.0 million or 25%, from $35.4 million during the second quarter of 2003 to $44.4 million during the second quarter of 2004. The increase is primarily attributable to an increase in net income of approximately $20.1 million and depreciation and amortization expense of $3.4 million, offset, in part, by a $8.8 million increase in net operating assets and liabilities during the second quarter of 2004 relative to a $5.6 million decrease in net operating assets and liabilities during the second quarter of 2003.

Net receivables decreased $5.8 million or 5%, from $117.4 million as of December 31, 2003 to $111.6 million as of June 30, 2004. Quarterly Days Sales Outstanding (DSO) were 25 days as of June 30, 2004. This represents an eight-day decrease from DSO as of June 30, 2003, of 33 days and a four-day decrease from DSO as of December 31, 2003, of 29 days. The decreases in DSO are attributable primarily to the implementation during the third quarter of 2003 of more aggressive cash collections practices and stricter credit standards. We calculate DSO by dividing net receivables by quarterly average daily revenue. Quarterly average daily revenue is computed by dividing total quarterly revenue by the total number of days in the quarter.

Investing Activities. Capital expenditures increased $20.1 million or 148%, from $13.6 million during the second quarter of 2003 to $33.7 million during the second quarter of 2004. Capital expenditures during the second quarter of 2004, which represented approximately 8.2% of total revenue during the three months ended June 30, 2004, included, among other things, investments in leasehold improvements in connection with new and expanded facilities and capital equipment purchases necessitated by increasing student population. Approximately 50% of our total capital expenditures during the first quarter of 2004 were made in connection with expansion projects. We expect capital expenditures to be approximately 8.5% of total revenue during the year ended December 31, 2004, as additional schools are opened, student population increases, and current facilities and equipment are upgraded and expanded. We finance capital expenditures primarily with cash generated from operations.

On February 18, 2003, we acquired 100% of the issued and outstanding stock of Formastrat SA and its subsidiaries, also known as the INSEEC Group, for approximately $19.8 million, including assumed debt of $3.2 million and excluding estimated acquisition costs of approximately $2.3 million, primarily with funds obtained under our U.S. Credit Agreement.

On July 1, 2003, we acquired 100% of the issued and outstanding stock of Whitman Education Group, Inc. for approximately $267.8 million, excluding estimated acquisition costs of approximately $4.9 million. The cash portion of the purchase price of approximately $95.4 million and cash consideration paid to Whitman option holders of approximately $23.4 million was paid primarily with funds obtained under our U.S. Credit Agreement. Whitman shareholders also received an aggregate of approximately 4.4 million shares of our common stock in connection with the transaction.

On August 5, 2003, we acquired certain assets and assumed certain liabilities of Western School of Health and Business Careers for approximately $8.0 million, excluding estimated acquisition costs of $0.4 million, primarily with funds obtained under our U.S. Credit Agreement.

Financing Activities and Capital Resources. On December 19, 2002, we entered into an unsecured credit agreement (the "U.S. Credit Agreement") with a syndicate of financial institutions, represented by, among others, a U.S. administrative agent. Under our U.S. Credit Agreement, we may borrow up to the U.S. dollar equivalent of $200.0 million in U.S. dollars and various foreign currencies under a revolving credit facility and obtain up to the U.S. dollar equivalent of $100.0 million in standby letters of credit in U.S. dollars and various foreign currencies. Outstanding letters of credit reduce the availability of borrowings under the revolving credit facility. At any time during the three-year period after December 19, 2002, provided no default under the U.S. Credit Agreement then exists and subject to adequate subscription fulfillment, we may, upon notice to, but without the consent of, the administrative agent and the lenders, increase the revolving credit facility under our U.S. Credit Agreement up to the U.S. dollar equivalent of $275.0 million. Subject to the satisfaction of certain conditions precedent under the U.S. Credit Agreement, we may prepay outstanding loans under the U.S. Credit Agreement at any time and without penalty. The stated maturity of our U.S. Credit Agreement is December 19, 2007.

Borrowings under the U.S. Credit Agreement bear interest at variable rates per annum that are tied to the prime rate and the eurocurrency rate as follows:

Subject to the terms of the U.S. Credit Agreement, we may elect which of the foregoing types of interest rates applies to a particular borrowing made under the U.S. Credit Agreement. Interest on

each borrowing bearing interest at the prime rate (as specified in (1) above) is payable quarterly and at maturity. Interest on each borrowing bearing interest at the eurocurrency rate (as specified in (2) above) is payable every one, two or three months, depending on the interest period applicable to such borrowing, and at maturity.

Our domestic subsidiaries, jointly and severally, have guaranteed repayment of our obligations under the U.S. Credit Agreement. Under the U.S. Credit Agreement, we are limited in our ability to take certain actions, including, among other things, consummating certain acquisitions or mergers, paying cash dividends, selling or disposing of certain assets or subsidiaries, incurring other debt in excess of specified amounts, prepaying other debt, and making certain investments. We are also required to satisfy certain financial covenants on a periodic basis, including the maintenance of a maximum consolidated leverage ratio of 2.25:1, a minimum fixed charge coverage ratio of 1.50:1, a minimum level of consolidated net worth, and a minimum annual consolidated Department of Education financial responsibility composite score of 1.50. As of June 30, 2004, we were in compliance with the covenants of our U.S. Credit Agreement.

As of June 30, 2004, we had outstanding under our U.S. Credit Agreement revolving loans totaling $14.0 million and outstanding letters of credit totaling $19.0 million. The availability under our U.S. Credit Agreement as of June 30, 2004 was $167.0 million.

During the first quarter of 2003, we entered into an interest rate swap agreement to effectively fix at 3.76% the rate of interest payable by us on a certain portion of the $16.4 million, denominated in €13.5 million, borrowed during 2003 under our U.S. Credit Agreement to finance our acquisition of the INSEEC Group. Approximately €2.0 million of this borrowing was repaid during the second quarter of 2004. The notional amount of the interest rate swap, originally €12.0 million, decreased to €10.5 million on June 28, 2004, subsequent to the debt repayment discussed above, and will continue to decrease by €1.5 million every three months through the March 28, 2006, expiration date. The impact of the interest rate swap agreement on our consolidated financial position and results of operations and cash flows during the three months and six months ended June 30, 2004, was not significant.

On February 18, 2003, our Canadian subsidiaries entered into an unsecured credit agreement ("Canadian Credit Agreement") with a syndicate of financial institutions, represented by, among others, a Canadian administrative agent. Under our Canadian Credit Agreement, our Canadian subsidiaries may borrow up to the U.S. dollar equivalent of $10.0 million in Canadian dollars under a revolving credit facility. Subject to the satisfaction of certain conditions precedent under the Canadian Credit Agreement, we may prepay outstanding loans under the Canadian Credit Agreement at any time and without penalty. The stated maturity of our Canadian Credit Agreement is December 19, 2007.

Borrowings under the Canadian Credit Agreement bear interest at variable rates per annum that are tied to the prime rate and the eurocurrency rate as follows:

Subject to the terms of the Canadian Credit Agreement, our Canadian subsidiaries may elect which of the foregoing types of interest rates applies to a particular borrowing made under the Canadian Credit Agreement. Interest on each borrowing bearing interest at the prime rate (as specified in (1) above) is payable quarterly and at maturity. Interest on each borrowing bearing interest at the eurocurrency rate (as specified in (2) above) is payable every one, two or three months, depending on the interest period applicable to such borrowing, and at maturity.

CEC has guaranteed repayment of our Canadian subsidiaries' obligations under the Canadian Credit Agreement. Under the Canadian Credit Agreement, our Canadian subsidiaries are limited in their ability to take certain actions, including, among other things, paying cash dividends, selling or disposing of certain assets or subsidiaries, incurring other debt in excess of specified amounts, prepaying other debt, and making certain investments. As of March 31, 2004, our Canadian subsidiaries were in compliance with the covenants of our Canadian Credit Agreement.

As of June 30, 2004, we had outstanding under our Canadian Credit Agreement revolving loans totaling $2.6 million. The availability under our Canadian Credit Agreement as of June 30, 2004, was $7.4 million.

On December 10, 2003, we entered into an agreement with Stillwater National Bank and Trust Company ("Stillwater") to purchase certain private student loans originated by Stillwater. The private student loans subject to this purchase agreement are made by Stillwater to students at our schools whose credit score is less than the minimum credit score required under our recourse loan agreement with Sallie Mae. Under the terms of the purchase agreement, Stillwater retains 50% of the loan amounts disbursed and deposits this amount into a reserve account. We consider the amounts withheld by Stillwater to be an educational services and facilities expense, and we recognize this expense on a straight-line basis over the length of the applicable student's program.

Under the terms of the purchase agreement, Stillwater has an option, but not an obligation, to sell to CEC these private student loans on a monthly basis. We are required to purchase all private student loans offered for sale by Stillwater for a price equal to the current principal balance plus accrued interest. Upon purchase of private student loans from Stillwater, we receive all funds that were placed into the reserve account with respect to the specific loans purchased.

The purchase agreement has a $20.0 million funding limit, and, as of June 30, 2004, loans totaling approximately $3.0 million had been funded by Stillwater under the agreement. As of June 30, 2004, we had not received a request from Stillwater to purchase any private student loans under the purchase agreement.

As of June 30, 2004, minimum future cash payments due under contractual obligations, including, among others, our credit agreements, non-cancelable operating and capital lease agreements, and long-term arrangements, are as follows (in thousands):

We rent most of our facilities and certain equipment under non-cancelable operating lease agreements that expire at various dates through 2028. We also finance the acquisition of certain equipment through capital lease agreements and have assumed capital lease obligations in connection with certain acquisitions. As of June 30, 2004, the principal balance of outstanding capital lease obligations was approximately $5.7 million.

CEC, and in some cases its officers and directors, are defendants in multiple civil lawsuits, and CEC is the subject of an SEC investigation. For more detail regarding these matters, see Item 1.

"Legal Proceedings" in Part II of this Form 10-Q. We cannot predict what the outcome of these lawsuits or investigations will be, and it is possible that such outcome could have a material adverse effect on our business, results of operations, and financial condition.

This Form 10-Q contains "forward-looking statements," as defined in Section 27A of the Securities Act of 1933 and 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 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. These risks and uncertainties, the outcomes of which could materially and adversely affect our financial condition and operations, include the following:

You should not place undue reliance on forward-looking statements. Except as otherwise specifically required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or otherwise.

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We may use derivative financial instruments for the express purpose of mitigating our exposure to these risks. We do not use derivative financial instruments for speculative purposes.

Interest Rate Exposure. Our borrowings under our credit agreements bear annual interest at variable rates tied to the prime rate and the eurocurrency rate. The outstanding borrowings under these credit agreements were $16.6 million as of June 30, 2004.

on June 28, 2004, subsequent to the debt repayment discussed above, and will continue to decrease by €1.5 million every three months through the March 28, 2006, expiration date. The impact of the interest rate swap agreement on our consolidated financial position and results of operations and cash flows during the three months and six months ended June 30, 2004, was not significant.

The weighted average annual interest rate of borrowings under our credit agreements, including the effect of the interest rate swap agreement, was 3.64% as of June 30, 2004.

In addition, we had capital lease obligations totaling $5.7 million as of June 30, 2004, bearing interest at a weighted average rate of 8.3%.

We estimate that the book values of our debt instruments and related derivative financial instruments approximated the fair values of such instruments as of June 30, 2004. We believe that the exposure of our consolidated financial position and result of operations and cash flows to adverse changes in interest rates is not significant.

Foreign Currency Exposure. Certain of our foreign subsidiaries use functional currencies other than the U.S. dollar. We are subject to risks associated with fluctuations in the value of the Canadian dollar, the Euro, and the British pound vis-à-vis the U.S. dollar. Our investment in our foreign operations as of June 30, 2004, is not significant, and the book values of the assets and liabilities of such foreign operations as of June 30, 2004, approximated their fair values.

As of June 30, 2004, we had borrowings outstanding under our U.S. Credit Agreement of $14.0 million denominated in €11.5 million and borrowings outstanding under our Canadian Credit Agreement of $2.6 million denominated in $3.5 million Canadian.

We believe that the exposure of our consolidated financial position and results of operations and cash flows to adverse changes in foreign currency exchange rates is not significant.

CEC's management is responsible for designing and implementing disclosure controls and procedures to provide reasonable but not absolute assurances that desired control objectives are achieved, including:

When designing and evaluating controls and procedures, we make certain assumptions about the likelihood of future events. At the same time, we make judgments about the cost-benefit relationship of possible controls and procedures. We cannot assure that this design will succeed in achieving its stated goals under all potential future conditions. Similarly, we cannot assure that our evaluation of controls will detect all control issues or instances of fraud, if any.

We completed an evaluation as of the end of the period covered by this report under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis of material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2004, that has materially affected, or is reasonably likely to materially effect our internal control over financial reporting.

Developments have occurred with respect to the following legal proceedings to which we are a party. Our outstanding legal proceedings are discussed in further detail in Part I, Item 3 of our Annual Report on Form 10-K filed with the SEC on March 12, 2004, and in Part II, Item 1 of our Quarterly Report on Form 10-Q filed with the SEC on May 7, 2004.

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. On March 19, 2004, the court ordered these six cases to be consolidated and appointed Thomas Schroeder as lead plaintiff. On April 6, 2004, the court appointed the firm of Goodkind Labaton Rudoff & Sucharow LLP, which represents Mr. Schroder, as lead counsel. On June 17, 2004, plaintiffs filed a consolidated amended complaint. On July 30, 2004, we filed a motion to dismiss the 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 Company 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 a current officer and/or director of the Company. 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, based on allegations of conduct similar to that complained of in the Taubenfeld complaint. The plaintiffs ask for unspecified amounts in damages, interest, and costs, as well as ancillary relief. The case has been set for a status hearing on August 23, 2004.

On July 2, 2004, a derivative action captioned Xiao-Qiong Huang v. John M. Larson et al. was filed in the Circuit Court of Cook County, Illinois, Chancery Division, on behalf of CEC against John M. Larson, Patrick K. Pesch, Wallace O. Laub, Keith K. Ogata, Dennis H. Chookaszian, Robert E. Dowdell, Thomas B. Lally, Nick Fluge, and Jacob P. Gruver, and CEC as a nominal defendant. Each individual defendant is a current officer and/or directors of the Company. The lawsuit alleges breach of fiduciary duty and misappropriation of confidential information for personal profit by the individual defendants and seeks contribution and indemnification on behalf of CEC. Neither the individual defendants nor CEC has been served with the complaint.

On July 20, 2004, a derivative action captioned Ulrich v. John M. Larson et al. was filed in the United States District Court for the Northern District of Illinois, Eastern Division, on behalf of CEC against John M. Larson, Patrick K. Pesch, Wallace O. Laub, Keith K. Ogata, Dennis H. Chookaszian, Robert E. Dowdell, Thomas B. Lally, Nick Fluge, Jacob P. Gruver, and Todd H. Steele, and CEC as a

nominal defendant. The complaint alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and breach of fiduciary duty for insider trading, and misappropriation of information. The plaintiffs ask for unspecified amounts in damages, interest, and costs, as well as ancillary relief. CEC has not been served with the complaint.

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.

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

On March 12, 2004, Career Education Corporation and WAI, Inc. ("WAI"), 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"), located in Pittsburgh, Pennsylvania. The suit alleges that 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 filed an amended complaint on April 2, 2004, seeking full indemnification from the former owners for all losses, costs, and damages they have incurred, including attorneys' fees, as a result of the alleged misrepresentations and breaches. The suit was stayed by the court until July 13, 2004. On July 12, 2004, CEC filed a similar complaint in the Court of Common Pleas of Allegheny County, Pennsylvania and subsequently voluntarily dismissed the federal lawsuit. Defendants have 60 days from the date of filing to respond to the complaint. 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 our acquisition of Western in August 2003. ACCSCT notified us on March 4, 2004, of discrepancies in accreditation documents related to several academic programs, and Western immediately suspended marketing, new enrollments, and disbursement of Title IV federal student financial aid funds for all affected programs. Western promptly applied for approval of all programs referenced in the lawsuit, and, in June 2004, both ACCSCT and the United States Department of Education ("DOE") issued approval for the diploma programs. Western has resumed marketing, new enrollments, and disbursement of Title IV aid to students in the diploma programs. On July 12, 2004, ACCSCT approved the degree programs effective upon a demonstration that several stipulations have been addressed. Western is working to address these stipulations to the satisfaction of ACCSCT, and marketing, new enrollments, and disbursement of Title IV funds to students in the degree programs remains suspended until full approval is obtained. We are working in close cooperation with accreditors and DOE officials to resolve any remaining discrepancies in a manner that will best serve the interests of the students at Western.

On July 30, 2004, a purported class action was filed in the United States District Court for the Northern District of Illinois by a former CEC employee against CEC, CIGNA Corporation, John M. Larson, Patrick K. Pesch, Dennis H. Chookaszian, Robert E. Dowdell, Wallace O. Laub, Keith K. Ogata, Thomas B. Lally, Todd H. Steele, Nick Fluge, and Jacob Gruver. The class action is brought on behalf of the participants in and beneficiaries of the Company's contributory profit sharing plan and the employee stock purchase plan (the "Plans"). The complaint alleges that the defendants breached their fiduciary duties to the Plans by, inter alia, failing to properly monitor the Plans' fiduciaries and to provide complete and accurate information to the Plans' participants regarding the Plans' investment options, in violation of Sections 404 and 405 of the Employee Retirement Income Security Act. The plaintiffs ask for unspecified amounts in damages, interest, and costs, as well as ancillary relief.

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

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. On June 22, 2004, the SEC provided us with a copy of the formal order of investigation. On June 23, 2004, we received a subpoena requesting that we provide certain information regarding the SEC's investigation. We are in the process of producing documents to the SEC and intend to cooperate with the SEC in its investigation.

On July 19, 2004, an amended complaint captioned Outten, et al v. Career Education Corporation et al. was filed in the Superior Court of the State of California, County of Los Angeles, against CEC and American InterContinental University ("AIU"). The putative class action alleges that AIU violated the California Deceptive Practices Act, the California Consumer Legal Remedies Act, the California Education Code, and engaged in common law consumer fraud by allegedly misleading potential students regarding AIU's placement rates. The suit appears to have been brought on behalf of all current and prior attendees of AIU residing in California. The plaintiffs ask for unspecified amounts in damages, interest, and costs, as well as ancillary relief.

Due to the inherent uncertainties of litigation and the SEC investigation, 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.

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 pending or threatened litigation, investigations, or claims, 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.

Directors:		Votes For:		Authority Withheld:
Thomas B. Lally		86,211,867		3,046,065
John M. Larson		88,111,262		1,146,670

3.1		Amended and Restated Certificate of Incorporation, as amended.
10.14		Sixth Amendment to the Career Education Corporation 1998 Employee Incentive Compensation Plan
31.1		Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2		Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1		Certification of CEO pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2		Certification of CFO pursuant to Section 906 of Sarbanes-Oxley Act of 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2004
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to

Delaware		36-3932190
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2895 Greenspoint Parkway, Suite 600, Hoffman Estates, IL 60195 (Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 781-3600

			June 30, 2004		December 31, 2003
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	187,404	$	161,235
	Receivables—
		Students, net of allowance for doubtful accounts of $44,855 and $47,467 as of June 30, 2004 and December 31, 2003, respectively		106,226		110,445
		Other, net		5,327		6,915
	Inventories			12,858		11,652
	Prepaid expenses and other current assets			54,965		40,905
	Deferred income tax assets			5,029		4,639

		Total current assets		371,809		335,791

PROPERTY AND EQUIPMENT, net				291,531		263,925
GOODWILL, net				443,378		440,709
INTANGIBLE ASSETS, net				35,973		36,326
OTHER ASSETS				40,025		42,399

TOTAL ASSETS			$	1,182,716	$	1,119,150

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Current maturities of long-term debt		$	2,500	$	79,822
	Accounts payable			21,555		30,627
	Accrued expenses			95,879		82,562
	Deferred tuition revenue			102,619		113,610

		Total current liabilities		222,553		306,621

LONG-TERM LIABILITIES:
	Long-term debt, net of current maturities			21,069		25,453
	Long-term contractual obligations			9,679		9,679
	Deferred income tax liabilities			18,366		18,366
	Other			13,891		11,211

		Total long-term liabilities		63,005		64,709

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
	Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding as of June 30, 2004 and December 31, 2003		$	—	$	—
	Common stock, $.01 par value; 150,000,000 shares authorized; 102,318,809 and 100,194,857 shares issued and outstanding as of June 30, 2004 and December 31, 2003, respectively			1,023		1,002
	Additional paid-in capital			565,738		496,582
	Accumulated other comprehensive income			1,676		2,986
	Retained earnings			328,721		247,250

		Total stockholders' equity		897,158		747,820

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	1,182,716	$	1,119,150

				Three Months Ended June 30,						Six Months Ended June 30,
				2004			2003			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	39,713		$	19,605		$	81,472		$	38,831
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			13,220			9,843			25,987			19,028
		Deferred income taxes			—			(44	)		—			792
		Compensation expense related to stock options			13			160			26			173
		Amortization of deferred financing costs			117			64			202			125
		Royalty expense related to stock options			118			118			236			236
		Loss on sale of property and equipment			8			—			8			—
		Changes in operating assets and liabilities, net of acquisitions			(8,835	)		5,644			26,662			3,264

			Net cash provided by operating activities		44,354			35,390			134,593			62,449

CASH FLOWS FROM INVESTING ACTIVITIES:
	Business acquisitions, net of acquired cash				(511	)		—			(476	)		(7,730	)
	Acquisition transaction costs				(289	)		(215	)		(321	)		(1,476	)
	Purchases of property and equipment, net				(33,744	)		(13,602	)		(53,503	)		(27,865	)
	Change in investment in affiliate				28			128			(174	)		(148	)

			Net cash used in investing activities		(34,516	)		(13,689	)		(54,474	)		(37,219	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Issuance of common stock				23,621			8,937			27,011			11,822
	Net proceeds from (payments of) revolving loans				(1,119	)		16,105			(76,119	)		3,764
	Payments of capital lease obligations and other long-term debt				(3,670	)		(1,931	)		(4,529	)		(2,448	)

			Net cash provided by (used in) financing activities		18,832			23,111			(53,637	)		13,138

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS					18			1,333			(313	)		1,442

NET INCREASE IN CASH AND CASH EQUIVALENTS					28,688			46,145			26,169			39,810
CASH AND CASH EQUIVALENTS, beginning of period					158,716			27,139			161,235			33,474

CASH AND CASH EQUIVALENTS, end of period				$	187,404		$	73,284		$	187,404		$	73,284

		For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2004		2003		2004		2003
		(In thousands, except per share amounts)
Net income, as reported		$	39,713	$	19,605	$	81,472	$	38,831
Total stock based employee compensation expense determined under fair value method for all awards, net of tax effect			4,336		2,956		7,562		5,486

Pro forma net income		$	35,377	$	16,649	$	73,910		33,345

Basic earnings per share—
	As reported	$	0.39	$	0.21	$	0.81	$	0.42

	Pro forma	$	0.35	$	0.18	$	0.73	$	0.36

Diluted earnings per share—
	As reported	$	0.38	$	0.20	$	0.78	$	0.40

	Pro forma	$	0.34	$	0.17	$	0.70	$	0.34

	2004		2003
	(In thousands)
Tuition and registration fees	$	294,199	$	204,905
Other		22,083		18,591

Total revenue	$	316,282	$	223,496

	2004		2003
	(In thousands)
Tuition and registration fees	$	86,734	$	29,711
Other		6,352		2,867

Total revenue	$	93,086	$	32,578

	2004		2003
	(In thousands)
Tuition and registration fees	$	597,010	$	409,951
Other		46,282		38,238

Total revenue	$	643,292	$	448,189

	2004		2003
	(In thousands)
Tuition and registration fees	$	156,237	$	48,666
Other		12,615		4,762

Total revenue	$	168,852	$	53,428

	2004		2005		2006		2007		2008		2009 & Thereafter		Total
Revolving loans	$	—	$	—	$	—	$	16,656	$	—	$	—	$	16,656
Capital lease obligations		2,009		1,181		789		652		525		1,652		6,808
Other long-term debt		645		571		—		—		—		—		1,216
Operating lease obligations		44,244		90,114		90,461		87,970		83,968		604,935		1,001,692
Long-term contractual obligations		—		—		—		—		—		9,679		9,679

Total contractual cash obligations	$	46,898	$	91,866	$	91,250	$	105,278	$	84,493	$	616,266	$	1,036,051

	CAREER EDUCATION CORPORATION
Date: August 9, 2004	By:	/s/ JOHN M. LARSON John M. Larson Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date: August 9, 2004	By:	/s/ PATRICK K. PESCH Patrick K. Pesch Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)