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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 0-23245

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

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

        The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant, based upon the $45.56 per share closing sale price of the Registrant's Common Stock on June 30, 2004 (the last business day of the Registrant's most recently completed second quarter), was approximately $4,417,604,028. For purposes of this calculation, the Registrant's directors and executive officers have been assumed to be affiliates.

        The number of shares outstanding of the Registrant's Common Stock, par value $0.01, as of March 11, 2005, was 102,641,406.

        Portions of the Registrant's Notice of Annual Meeting and Proxy Statement for the Registrant's Annual Meeting of Stockholders, scheduled to be held on May 20, 2005, are incorporated by reference into Part III of this Report.

CAREER EDUCATION CORPORATION
FORM 10-K

TABLE OF CONTENTS

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PART I

ITEM 1.    BUSINESS

Cautionary Note Regarding Forward-Looking Statements

        This Annual Report on Form 10-K contains "forward-looking statements," as defined in Section 21E of the Securities Exchange Act of 1934, that reflect our current expectations regarding our future growth, results of operations, performance and business prospects, and opportunities. We have used words such as "anticipate," "believe," "plan," "expect," "intend," and similar expressions, but these words are not the exclusive means of identifying these forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risks Related to Our Business", that could cause our actual growth, results of operations, performance and business prospects, and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the Federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events or developments or changed circumstances or for any other reason.

Overview

        We are one of the largest providers of private, for-profit, postsecondary education. We have segregated our operations into two distinct operating segments, our Colleges, Schools and Universities ("CSU") segment and our Online Education Group ("OEG") segment. Our CSU segment represents an aggregation of our traditional "brick-and-mortar" campuses through which we provide educational services primarily in a classroom or laboratory setting at 82 campuses located throughout the United States and in France, Canada, the United Kingdom, and the United Arab Emirates. Our OEG segment operates two online educational platforms, American InterContinental University Online and Colorado Technical University Online, that deliver educational services through internet-based courses.

        Our total student population as of January 31, 2005, was approximately 101,500 students, including total OEG student population as of January 31, 2005 of approximately 24,900 students. Many of our schools enjoy long operating histories, and our schools 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:

•

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



•

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



•

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



•

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



•

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

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        We have experienced significant growth both organically and through acquisitions. Since our inception in January 1994, we have completed 26 acquisitions and have opened 12 branch start-up campuses. We have acquired institutions that we believe possess strong curricula, leading reputations, and broad marketability. We seek to apply our experience in operations, marketing, and curriculum development, as well as our financial strength, to improve the performance of these institutions.

Campuses

        Our campuses are summarized in the following table:

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(1)

Our campuses offer degree and diploma programs within our core curricula of business studies ("B"), culinary arts ("CA"), health education, ("HE"), information technology ("IT"), and visual communication and design technologies ("VC"). All of our campuses are degree-granting with the exception of Katharine Gibbs School, Piscataway; Sanford-Brown College, Collinsville; and our Sanford-Brown Institute locations excluding those locations in Florida.

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(2)

Certain of our institutions are accredited by more than one accrediting body. In these cases, the accreditors are reported to the U.S Department of Education ("ED") as either primary or secondary for Title IV Program eligibility purposes. Below is a key to the accreditation abbreviations used in the table. For further discussion of accreditation, see "Accreditation for U.S. Schools," and for further regulatory discussion of our international schools, see "Other International Regulations," in this Annual Report on Form 10-K.

ABHES—Accrediting Bureau of Health Education Schools

ACCSCT—Accrediting Commission of Career Schools and Colleges of Technology

ACICS—Accrediting Council for Independent Colleges and Schools

COE—Council on Occupational Education

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

NASAD—National Association of Schools of Art and Design

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

NCA—North Central Association of Colleges and Schools, Higher Learning Commission

SACS—Southern Association of Colleges and Schools, Commission on Colleges

ACCJC—Western Association of Schools and Colleges, Accrediting Commission for Community and Junior Colleges

(3)

Status as of March 11, 2005.

(4)

Accreditation has been extended until the ongoing reaccreditation process is completed.

(5)

Location is considered a branch campus for regulatory purposes only. We do not include this location in our total campus count, as it is a satellite location of the main campus.

(6)

Accreditation for the Brooklyn Center satellite expires in 2005.

(7)

The North Kansas City branch was formerly part of Sanford-Brown College until January 1, 2005 at which time the campus became part of Colorado Technical University.

(8)

Represents the year that the first Gibbs school in Providence, RI, was founded.

(9)

Accreditation has been extended until April 30, 2005.

(10)

Accreditation for the Miramar branch expires in 2006.

(11)

Represents the year that the first Sanford-Brown location in New York, NY, was founded.

(12)

Accreditation for the Tucker branch expires in 2005.

(13)

Accreditation for the Monroeville branch expired in 2004, but has been extended.

        Also, not included in the table above are former and existing campuses where we have ceased admitting new students. These campuses include our Montreal and Ottawa, Canada, and Fairmont, West Virginia campuses of the International Academy of Design & Technology ("IADT"), which ceased admitting students in 2004. We will terminate the operation of these IADT campuses after existing students have completed their programs of study, or we may otherwise transfer ownership of the schools. We have a preliminary divestiture plan in place for the Montreal campus of the International Academy of Design & Technology.

Available Information

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

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Industry Background

        The postsecondary education market currently has approximately 6,500 Title IV Program eligible institutions (i.e., those participating in U.S. federal financial aid programs) with 17 million students and represents an estimated $350 billion industry in the U.S., according to the National Center for Education Statistics and the ED Projections, FY '05 Budget Summary. Of this total market, the current Title IV Program-eligible for-profit sector has approximately 2,500 institutions with approximately 1.6 million students, according to Eduventures, Inc., an information services company for the education market. It further estimates that the for-profit sector revenues in 2004 were $15.4 billion and will grow 14% to 15% annually through 2007, based on certain assumptions regarding population increases (9% to 10%) and tuition increases (4% to 5%).

        The College Board estimated that total federal aid available to support postsecondary education reached $122 billion during 2004, growing by 11% over the previous year. In 2004, loans represented the largest portion of federal aid, approximately 56%, grants represented approximately 38% of federal aid, and the remaining 6% of federal aid was derived from other sources. This shift from grants to loans has been driven by slower growth in grant aid over the last two years, the rising cost of education, and State, local, and third-party private lenders' increased willingness to fund students' postsecondary education.

        We believe that several national, economic, demographic, and social trends are converging to contribute to growing demand for career-oriented postsecondary education, including:

        Changes in Workplace Demands.    The workplace is becoming increasingly knowledge-intensive. Rapid advances in technology have intensified demands on employers and their employees, requiring many new workers to have some form of education beyond the high school level. More advanced technological skills required for entry-level jobs are spurring demand for specialized career-oriented training that may not be provided by many traditional two-year and four-year colleges.

        The College Board's report, Education Pays: The Benefits of Higher Education for Individuals and Society, indicates that students who attend colleges obtain a range of personal, financial, and other lifelong benefits. The U.S. Department of Labor's Bureau of Labor Statistics projects that between 2000 and 2010, jobs requiring at least a bachelor's degree are expected to increase approximately 22%, jobs requiring an associate degree are expected to increase approximately 32%, and jobs requiring postsecondary vocational training are expected to increase approximately 18%. Approximately 45% of the students in our U.S. accredited institutions are enrolled in bachelor's and master's degree programs, 41% are enrolled in associate degree programs, and 14% are enrolled in diploma/certificate programs. Furthermore, career-oriented schools generally have the ability to react quickly to the changing needs of the business and industrial communities. Additionally, to meet new workplace demands, many major employers are now using career-oriented institutions on a contractual basis to provide customized training for their employees.

        Growing Demand for Postsecondary Education.    High school graduates and adults are seeking postsecondary education in increasing numbers. The U.S. Census Bureau estimates that only 27% of the adult U.S. population, or 60 million people, have obtained a bachelor's degree or graduate-level degree. The continuing trend toward corporate downsizing and resulting layoffs is also expected to increase enrollment in postsecondary education programs as individuals seek to enhance their skills or re-train for new job requirements. Additionally, the number of high school students planning to attend college is projected to peak in 2009 at 3.3 million students per year, and postsecondary educational institutions are expected to benefit from this positive demographic trend.

        Proliferation of Fully Online Education.    The recent proliferation of fully online distance education is now enabling many adults to pursue both undergraduate and graduate-level education. According to Eduventures, Inc., projected enrollment in fully online distance education programs grew by 30% in 2004 to reach an estimated 915,000 students. The annual growth rate is expected to remain above 20% for at least the next three years, such that enrollment in fully online distance-education programs is expected to reach approximately 1.6 million students in 2007.

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        Growing Demand for Health Education.    According to the National Center for Health Statistics, average life expectancy in the U.S. has risen to 77 years. As Americans have aged, the demand for non-doctor healthcare professionals has increased significantly. According to the U.S. Bureau of Labor Statistics, six of the 10 fastest growing occupations between 2002 and 2012 are expected to be in the healthcare field, representing approximately 53% of the total growth in jobs for that period. Further, medical assisting has risen on the list to become the fastest-growing occupation, with the number of jobs expected to grow by 59% by 2012, according to the U.S Bureau of Labor Statistics. As a result, health education has become one of the fastest growing segments of the postsecondary education industry.

        Recognition of the Value of Postsecondary Education.    In recent years, the difference between the earnings of adults who have obtained at least a bachelor's degree and the earnings of their counterparts who have completed no more than a high school education has increased. According to a 2002 U.S. Census Bureau survey, the average graduate with a bachelor's degree is expected to earn over 70% more on average than those with a high school diploma. This earnings gap is estimated to result in an additional $1.0 million of income during the course of his or her career. We believe that prospective students are increasingly cognizant of this earnings gap and are becoming aware of other improvements in career prospects that are generally associated with obtaining a postsecondary education.

        Reduction in Public Education Funding.    The reduction of state or provincial and local funding of many public educational institutions in recent years has forced many such educational institutions to decrease spending on general operations and refrain from increasing capacity. As a result, some public educational institutions have become under-funded and overcrowded. This trend, along with an expected increase in postsecondary enrollment as a result of a projected increase in high school graduates, may provide an opportunity for proprietary institutions to serve the postsecondary education needs of individuals who would have otherwise attended public educational institutions.

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

Business and Operating Strategy

        Our objective is to become the leading provider of quality, private, for-profit, postsecondary education. Our business and operating strategy is driven by this objective and has enabled us to generally achieve significant improvements in the performance of our educational institutions. We believe our strategy will position us to continue to capitalize on the favorable economic, demographic, and social trends that are driving demand for career-oriented education, thereby strengthening our position as one of the premier, professionally-managed systems of career-oriented, postsecondary educational institutions. The key elements of our business and operating strategy are as follows:

        Focusing on Core Curricula.    Our campuses offer educational programs principally in one or more of the following five career-oriented fields of study:

•

Business Studies, offered at 51 campuses



•

Visual Communication and Design Technologies, offered at 43 campuses



•

Health Education, offered at 42 campuses



•

Information Technology, offered at 41 campuses



•

Culinary Arts, offered at 13 campuses

        We perceive a growing demand for the educational programs that we offer and believe there are many entry-level positions and ongoing career and salary advancement opportunities for individuals

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who have received advanced training in these particular fields. We believe that these employment opportunities attract highly interested and motivated students, including both recent high school graduates and adults, seeking formal training and degrees, diplomas, and certificates evidencing their knowledge and skills.

        Adapting and Expanding Educational Programs.    We strive to meet the changing needs of our students and the employment market. In doing so, we continually refine and adapt our courses to improve the quality and breadth of our educational programs. Through various means, including student and employer surveys and curriculum advisory boards comprised of business and community members, our schools regularly evaluate their program offerings and consider (1) revisions to existing classes and programs and (2) the introduction of new courses and programs of study within our core curricula. We are also able to leverage programs that have been successful at a particular school by selectively duplicating these programs at other schools within our system. In 2004, we successfully duplicated approximately 75 programs.

        Investing for Future Growth.    We make substantial investments in our people, facilities, management information systems, and classroom technologies to prepare for continued growth. We devote particular attention to attracting and retaining quality, high-integrity managers at both the corporate and campus level and focus on employee development in order to facilitate internal promotions. We make substantial investments in facilities and classroom technologies to attract and retain students and prepare students for the increasing technical demands of the workplace. Additionally, we have made significant investments in our management information systems to facilitate effective and expedient communication within our organizational structure and to facilitate the integration of newly acquired schools and newly opened branch campuses. During 2004, our capital expenditures represented approximately 8.3% of our total revenues.

        Emphasizing Campus Management Autonomy and Accountability.    We provide autonomy and appropriate performance-based incentives to certain of our campus-level managers. We believe these policies foster an important sense of responsibility for achieving specific campus performance objectives. We also believe that our willingness to grant local autonomy provides us with a significant advantage in recruiting and retaining highly-motivated individuals with an entrepreneurial spirit. Management of each of our campuses is principally directed by a campus president and local managers, who are accountable for the school's operations and performance. Divisional personnel provide oversight of business plans, while business strategy, information technology, finance, and certain accounting and financial aid processing functions are centralized at our executive offices in Hoffman Estates, Illinois. When educational institutions are acquired, we evaluate the capabilities of existing management personnel to determine the need for additional or stronger managers in key areas and, where necessary, take appropriate action by hiring new managers or assigning experienced personnel to the campuses. This strategy contributes to our ability to efficiently integrate acquired institutions into our system.

        Direct Response Marketing.    We seek to increase enrollment and profitability through intensive local, regional, national, and Internet-based direct response marketing programs designed to maximize each campus' market penetration. We continually strive to design marketing programs tailored to each of our existing and newly-acquired or opened campuses to highlight their strengths and improve student lead generation and student enrollment rates. We use a diversified media, direct response approach, including direct mail, Internet-based advertising, infomercials, other television-based advertising, newspaper advertising, and other print media, to attract potential students from both the high school and adult population.

        Improving Student Retention.    We continually emphasize the importance of student retention at each of our educational institutions. As at any postsecondary educational institution, a portion of our students fail to complete their educational programs for a variety of personal, financial, or academic

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reasons. Our experience indicates that significant increases in revenue and profitability can be achieved through modest improvements in student retention rates. Furthermore, our costs to retain current students are much less than the expense of the marketing efforts associated with attracting new students. We strive to improve retention by treating each student as a valued customer and directing campus personnel to establish personal relationships with our students. We consider student retention the responsibility of the entire campus staff and provide resources and support for the retention strategies developed by our campus-level administrators.

        In addition, our corporate staff evaluates the retention rates at each of our campuses and provides feedback and support to local administrators. During 2004 and 2003, our overall consolidated retention rate was approximately 65.5% and 67.3%, respectively. These rates were determined in accordance with the standards set forth by the Accrediting Council for Independent Colleges and Schools, which determines annual retention rates by dividing the total number of student withdrawals or dismissals during the year by the sum of (1) beginning student population, (2) new starts and (3) student re-enters and subtracting the resulting quotient from 1.

        Emphasizing Employment of Graduates.    We consider student placement a high priority. We believe that high rates of employment for our graduates will enhance the overall reputation of our campuses as well as the ability of our schools to attract new students. We are committed to maintaining or improving our graduates' employment rates within their field of study.

Growth Strategy

        We believe we can achieve superior long-term growth in revenue and profitability by continuing to exhibit strong organic growth (e.g., continued expansion of our OEG segment, continued growth of our existing campus-based schools, developing branch campuses of our existing campuses, and expanding our existing international operations), as well as by acquiring additional schools in the U.S. and internationally.

        Expanding our Online Education Group.    We continue to invest in our rapidly growing OEG segment. In February 2001, we began enrolling full-time, degree-seeking students into 100% online, accelerated degree programs within American InterContinental University Online ("AIU Online"). AIU Online subsequently opened for instruction in April 2001. In July 2003, as part of our acquisition of the Whitman Education Group, Inc., we acquired Colorado Technical University ("CTU"), which has provided us with a new platform to further expand our online presence. CTU Online, CTU's online division, subsequently opened for instruction in October 2003. Our OEG segment offers 39 degree programs in business administration, information technology, visual communications, and health education. We are currently exploring the option of expanding our online presence through the introduction of a new online platform. As of January 31, 2005, we had a total online student population of approximately 24,900, compared to an online student population of approximately 12,200 as of January 31, 2004.

        Continuing Organic Growth of Campus-Based Education.    We believe that our existing campuses can continue to achieve organic growth in enrollment, revenue, and profitability through the execution of our business and operating strategies. We will also continue our marketing efforts in selected foreign countries to increase international student enrollments at our domestic campuses and in our online education programs.

        Opening Start-up Campuses.    To date, we have opened 12 start-up campuses (four in 2004, four in 2003, two in 2002, and two in 2001), and we expect to continue to establish campuses at new locations in the future. Our start-up campuses are opened as branch campuses of an existing main campus location. Opening branch campuses enables us to capitalize on new markets or geographic locations that exhibit strong enrollment potential and/or the potential to establish a successful operation in one

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of our core curricula. We believe that opening new start-up campuses complements our acquisition activity, as it allows us to continue our growth strategy even if appropriate acquisition opportunities within a particular geographic region or core curricula area are not readily available.

        Expanding Internationally.    We believe that our existing international campuses can continue to achieve organic growth in enrollment, revenue, and profitability through the execution of our business and operating strategies. We will also continue our marketing efforts and expand our study abroad programs at certain U.S. campuses to increase student enrollments at our international campuses.

        Growth Through Acquisition.    To date, we have grown primarily by acquiring educational institutions both in the U.S. and internationally and then applying our experience in marketing and management to increase the enrollment, revenue, and profitability of acquired campuses. We expect that acquisitions will continue to be an important element of our overall growth strategy. On an ongoing basis, we engage in evaluations of and discussions with possible acquisition candidates, including evaluations and discussions relating to acquisitions that may be material in size or scope.

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

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"Schools of Choice"—Possessing leading reputations in career-oriented disciplines within local, regional, or national markets;



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



•

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



•

Broad Marketability—Capable of attracting recent high school graduates and adult students from local, national, and international markets; and



•

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

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

        We believe that trends similar to those impacting the market for postsecondary, career-oriented education in the U.S. and Canada are occurring outside of North America. As a result, we believe that there may be significant additional international opportunities in private, for-profit, postsecondary education. In February 2003, we acquired a group of schools in France, and we may continue to acquire operations outside of North America.

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

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may also commit further resources to enhance management depth and facilitate the training of certain campus personnel. We typically retain acquired brand names to take advantage of their established reputations in local, regional, and national markets as "schools of choice."

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

Student Recruitment

        Our campuses seek to attract students with both the desire and ability to complete their academic programs. Therefore, to produce interest among potential students, each of our schools engages in a wide variety of marketing activities. Each school's admissions office is responsible for identifying individuals interested in enrolling at one of our campuses ("leads") and serving as the prospective students' primary contact, providing information to help them in making an enrollment decision and assisting them with the completion of the enrollment process. Admissions representatives interview and advise prospective students interested in specific careers. Our institutions currently employ approximately 2,200 admissions representatives, each of whom generally focuses his or her efforts on one or more of the following recruiting areas: local market, high school, out-of-area, international, and internet.

        Campus leads are generated in a number of ways, including:

        Referrals.    We believe that the reputation of our campuses in local, regional, and national business communities, and the recommendations of satisfied current and former students, are important factors contributing to success in recruiting new students.

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

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

        Advertising placed in a variety of media.    Certain of our campuses develop advertising for a variety of media, including Internet-based, television, and print advertising, that is run locally, regionally, and, sometimes, nationally. Internet-based advertising consists of e-mail campaigns, as mentioned above, co-branded micro-sites, banner advertisements, and branded websites. We believe Internet-based advertising offers a fast and cost-effective way to reach a targeted population. Each campus' website contains extensive information about the school and includes online enrollment capability. We expect this web-based information and enrollment capability to become an increasingly important, effective, and efficient aspect of our admissions activity.

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        We closely monitor the effectiveness of our marketing efforts. The following table represents our estimated percentage of starts generated by leads obtained from our various media sources:

Student Admissions and Retention

        The admissions and entrance standards of each school are intended to identify students who are equipped to meet the requirements of their chosen fields of study. When evaluating prospective students, we seek individuals with, among other things, a strong desire to learn, passion for their area of interest, and initiative. We believe that a success-oriented student body results in higher retention and placement rates, increased student and employer satisfaction, and lower student default rates on government loans. To be qualified for admission to one of our schools, each applicant must have received a high school diploma or a General Education Development certificate. Several of our schools also require applicants to meet other admissions requirements, such as obtaining certain minimum scores on assessment examinations.

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

Curriculum Development and Faculty

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

        The relationship of each of our campuses with its business community plays a significant role in the development and adaptation of course curriculum. Each campus has one or more program advisory boards composed of members of the local and regional businesses who are engaged in businesses directly related to the campus' educational offerings. These boards provide valuable input to our education departments, which allows our campuses to keep program curricula current and provide students with the training and skills that employers seek.

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        We also endeavor to enhance and maintain the relevancy of our curricula by regularly soliciting feedback from students and employers. We have developed a number of techniques designed to gain valuable industry insight for ongoing curricula development and enhance the overall student experience. These techniques include classroom discussions with industry executives, part-time job placement within a student's industry of choice, and classroom analysis of case studies reflecting actual industry experiences.

        Our faculty members, many of whom are industry professionals, are in regular contact and interact frequently with employers. Our campuses hire a significant number of part-time faculty who hold positions in relevant business and industry because specialized knowledge is required to teach many of the campus' courses and provide students with current, industry-specific training. Unlike instructors at many traditional colleges and universities, instructors at our campuses are not awarded tenure and are regularly evaluated based upon, in part, the results of student evaluations.

School Administration

        We provide operational autonomy and appropriate performance-based compensation to certain of our campus-level managers. This approach is based on our belief that success is driven by performance at the campus-level through enrollment growth and student retention and placement. In addition, while our schools tend to exhibit similar economic characteristics, each of our campuses requires, to a certain extent, specific resources and operating strategies due to a variety of differing factors, including curriculum, demographics, geographic location, and size. Overall management of each of our institutions is the primary responsibility of the school president and local managers, who are responsible for the school's operations and performance. Each of our campuses has five primary operating departments: admissions, financial aid, education, career services, and accounting.

        Business strategy, information technology, finance, and certain accounting and financial aid processing functions are centralized at our corporate headquarters. Corporate and divisional management work with campus-level personnel to develop operating strategies for our campuses and work closely with local administrators to evaluate their accomplishments relative to their goals. We maintain stringent quality standards throughout our organization. Activities at the corporate and divisional levels include regular reporting processes that track the key indicators of each campus' operations, including, among others, leads, enrollments, retention rates, placements, and financial data. At regular intervals, each campus is also required to compile quantitative information, including information on admissions, financial aid, academic performance, and placement, which is subsequently reviewed by campus, divisional, and corporate management.

Corporate Compliance

        We have adopted a Code of Ethics that applies to our executive officers and senior financial officers and a Code of Business Conduct and Ethics that applies to all of our employees. These codes provide guidance with respect to our expectations that all of our employees will conduct business in a way that will merit the continued trust and confidence of the public. Both of these documents are available on our website at www.careered.com under the caption "Investor Relations."

        Our corporate compliance department provides assistance to our schools in preparing for or responding to accreditation visits, program reviews, financial aid audits, state licensure requirements, and student complaints, as well as in performing advertising and catalog reviews.

        In August 2004, we created the position of senior vice president of compliance, who reports independently to both the Audit Committee of the Board of Directors and the Executive Vice President of Administration. In addition, in the fourth quarter of 2004, we hired four vice presidents of compliance, each of whom reports independently to the senior vice president of compliance.

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Specifically, the senior vice president of compliance and the vice presidents of compliance are responsible for verifying that:

•

schools and their employees are in compliance with the rules and regulations of state and federal regulatory agencies and accrediting bodies;



•

company policies and procedures are being followed; and



•

behavior at the schools conforms to our Code of Business Conduct and Ethics.

        We have realigned our school compliance structure such that each of our campuses will have a full-time director of compliance ("DOC") who reports independently to a vice president of compliance. Previously, our DOCs reported directly to school presidents. This change was instituted to ensure the independence of the DOCs in addressing compliance-related issues that affect our schools. Our DOCs remain active and collaborative members of our campuses' senior management teams.

        Certain of our DOCs have been selected to serve on a DOC Advisory Council that works closely with our senior vice president of compliance and our vice presidents of compliance to identify best practices, share knowledge regarding how new compliance policies and procedures might work at the campus level, serve as mentors for newly-hired DOCs, and function as senior instructors for DOC training.

        In December 2004, we created a Corporate Compliance Policy Board comprised of vice president-level representatives from the major corporate departments. This board has been commissioned to share broad policy initiatives so that they may be assessed for compliance with regulatory and accrediting body requirements.

Tuition and Fees

        Our campuses bill students for tuition and other institutional charges based on the specific instructional format or formats of the school's educational programs. Students at our institutions also typically purchase textbooks, supplies, and other program materials as part of their chosen educational programs.

Graduate Employment

        We devote a significant amount of time and resources to student placement, which we believe to be a key indicator of our success. Throughout the duration of a student's program of study, student placement is emphasized as a top priority at each of our campuses. This approach heightens the students' awareness of the career services department and focuses students on job placement within their field of study. Moreover, our schools provide career development instruction, which addresses, among other things, the preparation of résumés and cover letters, interviewing skills, networking, and other essential job-search tools, and ongoing placement resources, which are regularly available to both current students and graduates. With such assistance, our graduates typically find employment with a wide variety of businesses located not only within the campus' local markets but also regionally and nationally. We also believe that the employment of graduates of our schools in occupations in their fields of study or related fields of study is critical to the reputation of the schools and the school's ability to continue to successfully recruit new students. A strong career services office is important to maintain and elevate a campus' reputation.

        Each of our school's career services department plays a role in marketing their curriculum to the business community in order to produce job leads for graduates. Career services departments also assist current students in finding part-time employment. These part-time placements in many cases lead to permanent positions. As of December 31, 2004, approximately 230 employees worked in the career services departments of our campuses, of which approximately 50 worked as student employment

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coordinators, who are primarily responsible for aiding students in obtaining part-time employment. Career services counselors participate in professional organizations, advisory boards, trade shows, and community events to keep apprised of industry trends and maintain relationships with key employers. Partnerships with local and regional businesses are established through internships and curriculum development programs to facilitate the placement of graduates in local and regional businesses.

Technology

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

Employees

        As of December 31, 2004, we had a total of approximately 15,500 employees, of which 9,000 were full-time employees and approximately 6,500 were part-time employees. A limited number of our employees are represented by unions, although such employees are not currently subject to collective bargaining agreements. We generally consider our relations with our employees to be good.

Competition

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

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

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Financial Aid and Regulation

        Our institutions and students in the U.S. and Canada, as well as U.S. students at our campus in the United Kingdom, participate in a wide variety of government-sponsored financial aid programs (i.e., programs administered by federal, state, provincial, and local government agencies). For this reason, we are subject to extensive regulatory requirements imposed by government funding agencies and other bodies. During the 2004 fiscal year, we derived approximately 60% of our revenue on a cash basis from such government-sponsored financial aid received by our students, and we estimate that approximately 80% of our students receive government-sponsored financial aid.

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

        Most aid under the Title IV Programs is awarded on the basis of financial need, generally defined under the Higher Education Act as the difference between the cost of attending the institution and the amount a student can reasonably be expected to contribute to that cost. All recipients of Title IV Program funds must maintain a satisfactory grade point average and progress in a timely manner toward completion of their program of study.

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

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

        Pell.    Under the Pell program, the ED makes grants to students who demonstrate financial need.

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

        Perkins.    Perkins loans are made from a revolving institutional account, 75% of which is capitalized by the ED and the remainder of which is funded by the institution. Each institution is responsible for collecting payments on Perkins loans from its former students and lending those funds to currently enrolled students. We currently have only one institution that continues to participate in the Perkins program.

        FWS.    Generally, under the FWS program, federal funds are used to pay 75% of the cost of part-time employment of eligible students to perform work for the institution or certain off-campus organizations. The remaining 25% is paid by the institution or the student's employer. In select cases, these federal funds under the FWS program are used to pay 100% of the cost of part-time employment of eligible students.

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        Regulation of Federal Student Financial Aid Programs for U.S. Institutions.    To participate in the Title IV Programs, an institution must be authorized to offer its programs of instruction by the relevant agencies of the state in which it is located, accredited by an accrediting agency recognized by the ED and certified as eligible by the ED. The ED will certify an institution to participate in the Title IV Programs only after the institution has demonstrated compliance with the provisions of the Higher Education Act and the ED's extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance with these requirements to the ED on an ongoing basis. These standards are applied primarily on an institutional basis, with an institution defined as a main campus and its additional campus locations, if any.

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

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

        Legislative Action.    Political and budgetary concerns significantly affect the Title IV Programs. Congress must reauthorize the Higher Education Act approximately every six years, and the last reauthorization took place in 1998. Consequently, Congress has begun the process of reviewing and reauthorizing the Higher Education Act again, a process that is expected to be concluded in 2005. We believe that this reauthorization will likely result in numerous changes to the Higher Education Act, but, at this time, we cannot determine what changes Congress will make. In addition, Congress reviews and determines federal appropriations for the Title IV Programs on an annual basis. Congress can also make changes to the laws affecting the Title IV Programs in those annual appropriations bills and in other laws it enacts in between the Higher Education Act reauthorizations. Since a significant percentage of our revenue is derived from the Title IV Programs, any action by Congress that significantly reduces funding for the Title IV Programs or the ability of our schools or students to participate in the Title IV Programs could have a material adverse effect on our business, results of operations or cash flows, or financial condition. Legislative action may also increase our administrative costs and require us to modify our practices in order for our schools to comply fully with the Title IV Program requirements.

        Student Loan Default Rates.    A significant component of Congress' initiative to reduce abuse of the Title IV Programs has been the imposition of limitations on institutions whose former students' rates of default on the repayment of their federally guaranteed or funded student loans exceed specified levels. All of our institutions have implemented student loan default management programs aimed at reducing the likelihood of students failing to repay their loans in a timely manner. Those programs emphasize the importance of students complying with loan repayment requirements and provide for extensive loan counseling, methods to increase student persistence and completion rates and graduate employment rates, and proactive borrower contacts after students cease enrollment.

        An institution's cohort default rate under the FFEL program is calculated on an annual basis as the rate at which student borrowers scheduled to begin repayment on their loans in one federal fiscal year default on those loans by the end of the next federal fiscal year. An institution whose cohort

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default rates equal or exceed 25% for three consecutive years will no longer be eligible to participate in the FFEL or Pell programs for the remainder of the federal fiscal year in which the ED determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. An institution whose cohort default rate under the FFEL program for any federal fiscal year exceeds 40% will no longer be eligible to participate in the FFEL program for the remainder of the federal fiscal year in which the ED determines that the institution has lost its eligibility and for the two subsequent federal fiscal years.

        None of our 34 institutions participating in the FFEL program had an FFEL cohort default rate of 25% or greater during any of the last three federal fiscal years. The following table sets forth the FFEL cohort default rates for our institutions for federal fiscal years 2002, 2001, and 2000, the most recent years for which the ED has published such rates:

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        An institution whose cohort default rate under the FFEL program equals or exceeds 25% for any one of the three most recent federal fiscal years, or whose cohort default rate under the Perkins loan program exceeds 15% for any year, may be placed on provisional certification status by the ED for up to four years. Four of our institutions have borrowers who entered repayment in the 2002-2003 award year, the most recent year for which we have calculated and reported to the ED Perkins loan default rates. The Perkins loan cohort default rates for these four institutions ranged from 9.47% to 54.55%. Currently, the ED has placed one of these institutions, Brown College, on provisional certification for its Perkins loan cohort default rates. Colorado Technical University is our only institution that continues to participate in the Federal Perkins Loan program and had a Perkins loan cohort default rate of 9.47% for students who were scheduled to begin repayment in the 2002-2003 federal award year.

        Financial Responsibility Standards.    All institutions participating in the Title IV Programs must satisfy specific standards of financial responsibility. The ED evaluates institutions for compliance with these standards each year, based on the annual audited financial statements of the institution or its parent corporation, and following a change of control of the institution. In reviewing our financial statements, it has been the ED's practice to measure financial responsibility on the basis of the financial statements of both our individual institutions and CEC on a consolidated basis.

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

•

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



•

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



•

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

        If an institution's composite score, on a scale of -1.0 to 3.0, is 1.5 or greater and it satisfies all other ED standards of financial responsibility, the institution is deemed financially responsible. An institution that does not meet the ED's minimum composite score of 1.0 may demonstrate its financial responsibility by posting a letter of credit in favor of the ED in an amount equal to at least 50% of the Title IV Program funds received by the institution during its prior fiscal year or posting such letter of credit in an amount equal to at least 10% of the Title IV Program funds received by the institution during its prior fiscal year and accepting other conditions on its participation in the Title IV Programs. Our consolidated composite score as of and for the year ended December 31, 2004, was 2.8.

        Return and Refunds of Title IV Program Funds.    Institutions that receive Title IV Program funds that have been found during an audit or compliance review to have made late student refunds above a minimum threshold in either of their last two fiscal years must post a letter of credit with the ED in an amount equal to 25% of the total Title IV Program refunds paid by the institution during its prior fiscal year. Based on this standard, we currently have posted a total of $6.5 million in letters of credit with respect to 14 of our institutions.

        Change of Ownership or Control.    When we acquire an institution that is eligible to participate in the Title IV Programs, that institution undergoes a change of ownership resulting in a change of control as defined by the ED. Upon such a change of control, an institution's eligibility to participate in the Title IV Programs is subject to review, and the institution could lose its eligibility unless it can re-establish its state authorization and accreditation and satisfy the other requirements to be re-certified by the ED as an eligible institution under our ownership. If an institution is re-certified following a change of control, it will be re-certified on a provisional basis.

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

        Each U.S. institution we have acquired has undergone a certification review under our ownership and has been certified to participate in the Title IV Programs on a provisional basis. Twelve of our U.S. institutions are presently participating in the Title IV Programs under provisional certification due to their change of ownership, and 22 of our U.S. institutions have been granted regular certification.

        Other types of transactions can also cause a change of control. The ED, state education agencies, and the accrediting agencies that accredit our schools have their own definitions of when a transaction is deemed a change of control. With respect to a publicly traded corporation, such as us, ED regulations provide that a change of control occurs under either of two standards. First, a change of control occurs if a person acquires such ownership and control that the corporation is required to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing a change of control. Second, a change of control occurs if a stockholder (other than an institutional investor) that

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owns at least 25% of the corporation's voting stock and more voting stock than any other stockholder ceases to satisfy either of those conditions. Most of the states and accrediting agencies include the sale of a controlling interest of common stock in the definition of a change of control. A change of control under the definition of one of these agencies would require the affected institution to reaffirm its state authorization or accreditation by the respective agency. The requirements to obtain such reaffirmation from the states and accrediting agencies with jurisdiction over our schools vary widely.

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

        Opening Additional Institutions and Adding Educational Programs.    The Higher Education Act generally requires that proprietary institutions be fully operational for two years before applying to participate in the Title IV Programs. However, an institution that is certified to participate in the Title IV Programs may establish an additional location and participate in the Title IV Programs at that location without reference to the two-year requirement if the institution has received all of the necessary state and accrediting agency approvals for that location and has reported that additional location to the ED, unless the institution will offer at least 50% of an entire educational program at that location, and any one of the following restrictions applies, in which case the ED must approve the additional location before it can participate in the Title IV Programs: (a) the institution is provisionally certified by the ED, (b) the institution receives Title IV Program funds under the ED's reimbursement or cash monitoring payment methods, (c) the institution acquired the assets of another institution that provided educational programs at that location and participated in the Title IV Programs during the preceding year, (d) the institution would be subject to loss of eligibility to participate in the Title IV Programs because the additional location lost its eligibility to participate in the Title IV Programs due to high FFEL cohort default rates, or (e) the ED previously notified the institution that it must apply for approval to establish an additional location. Our growth strategy is based, in part, on our ability to open new campuses as additional locations of our existing institutions.

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

        Some of the state education agencies and accrediting agencies with jurisdiction over our schools also have requirements that may affect our schools' ability to open a new location, acquire an existing location, establish an additional location of an existing institution, or begin offering a new educational program. We do not believe that these standards will have a material adverse effect on our growth strategy. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K for additional discussion of accreditation and regulatory matters.

        "90/10 Rule."    Under a provision of the Higher Education Act commonly referred to as the "90/10 Rule," a proprietary institution, such as each of our institutions, would no longer be eligible to participate in the Title IV Programs if, on a cash accounting basis, it derived more than 90% of its revenue, as defined pursuant to applicable ED regulations, for any fiscal year from the Title IV

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Programs. Any institution that violates this rule becomes ineligible to participate in the Title IV Programs as of the first day of the fiscal year following the fiscal year in which it exceeds 90% and is unable to apply to regain its eligibility until the next fiscal year. If one of our institutions violated the 90/10 Rule and became ineligible to participate in the Title IV Programs but continued to disburse Title IV Program funds, the ED would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility.

        We have calculated that, since the requirement took effect in 1995, none of our U.S. institutions has derived more than 88% of its cash-basis revenue from the Title IV Programs for any fiscal year. We regularly monitor compliance with this requirement to minimize the risk that any of our institutions would derive more than the maximum percentage of its cash-basis revenue from the Title IV Programs for any fiscal year. If an institution appeared likely to approach the maximum percentage threshold, we would evaluate making changes in student funding and financing to ensure compliance with the rule. During 2004, 2003, and 2002, our U.S. institutions received approximately 58%, 58%, and 53%, respectively, of their total cash-basis revenue from the Title IV programs.

        Administrative Capability.    The ED assesses the administrative capability of each institution that participates in the Title IV Programs under a series of separate standards. Failure to satisfy any of the standards may lead the ED to find the institution ineligible to participate in the Title IV Programs or to place the institution on provisional certification as a condition of its participation. A violation of these requirements could also subject the institution to other penalties. See "Compliance with Regulatory Standards and Effect of Regulatory Violations" discussed below.

        One standard, which applies to programs with the stated objective of preparing students for employment, requires the institution to show a reasonable relationship between the length of the program and the entry-level job requirements of the relevant field of employment. We believe we have demonstrated such a reasonable relationship for each of our applicable programs. Short-term educational programs that provide less than 600 clock hours, 16 semester hours, or 24 quarter hours of instruction must demonstrate that 70% of all students who enroll in such programs complete them within a prescribed time and that 70% of the graduates of such programs obtain employment in the occupation for which they were trained within a prescribed period of time. Some of our Gibbs institutions offer such short-term programs, but students enrolled in these programs represent a small percentage of our total enrollment.

        Other standards provide that an institution may be found to lack administrative capability and be placed on provisional certification if its student loan default rate under the FFEL program is 25% or greater for any of the three most recent federal fiscal years or if its Perkins cohort default rate exceeds 15% for any federal award year. Due to its Perkins cohort default rates, one of our institutions, Brown College, has been placed on provisional certification. See "Student Loan Default Rates" discussed previously. This provisional certification does not affect our ability to participate in the FFEL program.

        Restrictions on Payment of Commissions, Bonuses, and Other Incentive Payments.    An institution participating in the Title IV Programs may not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. The ED published regulations, which took effect in July 2003, to attempt to clarify this so-called "incentive compensation" law. These regulations identify twelve compensation arrangements that the ED has determined are not in violation of the incentive compensation law, including the payment and adjustment of salaries, bonuses, and commissions in certain circumstances. The ED's regulations do not establish clear criteria for compliance in all circumstances, and the ED has announced that it will no longer review and approve individual schools' compensation plans. Nonetheless, we believe that our current compensation plans are in compliance

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with the Higher Education Act and the ED's new regulations, although we cannot provide assurance that the ED will not find deficiencies in our compensation plans.

        Eligibility and Certification Procedures.    The Higher Education Act and its implementing regulations require each institution to apply to the ED for continued certification to participate in the Title IV Programs at least every six years or when it undergoes a change of control. The ED may place an institution on provisional certification status if it finds that the institution does not fully satisfy all of the eligibility and certification standards. The ED may withdraw an institution's provisional certification without advance notice if the ED determines that the institution is not fulfilling all material requirements. Also, the ED may more closely review an institution that is provisionally certified if it applies for approval to open a new location or make any other significant change. Provisional certification does not otherwise limit an institution's access to Title IV Program funds. In addition, an institution must obtain ED approval for substantial changes, including changes in an institution's accrediting agency or state authorizing agency or changes to an institution's structure or certain basic educational features.

        An institution seeking certification to participate in the Title IV Programs after a change of control will be provisionally certified for a limited period, following which the institution must reapply for continued certification. If, at that time, the institution satisfies all conditions for full certification, the ED will recertify the institution and remove the provisional status. Otherwise, the ED may re-certify the institution on a continued provisional basis. Each institution that we have acquired was initially certified by the ED for participation in the Title IV Programs under our ownership on a provisional basis. Currently, twelve of our institutions remain on provisional certification status because the initial period of their provisional certification has not expired. In addition to these twelve, we have two institutions that are on provisional certification due to late refunds of Title IV funds, one institution that is on provisional certification due to its Federal Perkins Loan default rate, and one institution that is on provisional certification due to an ongoing ED program review.

        Compliance with Regulatory Standards and Effect of Regulatory Violations.    Our institutions are subject to and have pending audits, program compliance reviews, inquiries, investigations, claims of non-compliance and lawsuits by the ED and other federal and state agencies, accrediting agencies, guaranty agencies and individuals or other third parties, which may allege violations of statutes, regulations, accreditation standards or other regulatory requirements applicable to us or our institutions. The Higher Education Act and its implementing regulations also require that an institution's administration of Title IV Program funds be audited annually by an independent accounting firm, and that the resulting audit report be submitted to the ED for review.

        If the ED or another regulatory agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the Higher Education Act or the ED's regulations, that institution could be required to repay such funds, and could be assessed an administrative fine. The ED could also subject the institution to a heightened level of cash monitoring, under which the institution's federal funding requests would be more carefully reviewed by the ED, or the ED could transfer the institution from the advance system of receiving Title IV Program funds to the reimbursement system, under which an institution must disburse its own funds to students and document the students' eligibility for Title IV Program funds before receiving such funds from the ED. Violations of Title IV Program requirements could also subject us or our campuses to other civil and criminal penalties. Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by the ED to limit, suspend, or terminate the participation of the affected institution in the Title IV Programs. Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its participation. There is no proceeding pending to fine any of our institutions or to limit, suspend, or terminate any of our institutions' participation in the Title IV Programs, and we have no reason to believe that any such proceeding is contemplated. Any such action that substantially limited our schools' participation in the

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Title IV Programs could have a material adverse effect on our business, results of operations or cash flows, or financial condition.

        If the results of any inquiries, investigations, claims of non-compliance or lawsuits by any agency or person are unfavorable to us, we may be required to pay money damages or may be subjected to fines, injunctions or other civil or criminal penalties that could have a material adverse effect on our business, results of operations, cash flows or financial condition. Even if we satisfactorily resolve the issues raised by any such matter, we may have to expend significant financial and personnel resources to do so, which could have an adverse effect on our business, results of operations, cash flows or financial condition. Adverse publicity regarding any such matters could also negatively affect our business. See Item 3 "Legal Proceedings" in this Annual Report on Form 10-K and Note 19 "Regulatory" in our accompanying consolidated financial statements for further information.

State Authorization for U.S. Schools

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

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

Accreditation for U.S. Schools

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

        Accreditation by an accrediting agency recognized by the ED is required for an institution to be certified to participate in the Title IV Programs. Accrediting agencies must adopt specific standards in connection with their review of postsecondary educational institutions to be recognized by the ED. All of our U.S. institutions are accredited by one or more accrediting agencies recognized by the ED. See the discussion in "Campuses" above for information concerning our campuses' accreditation.

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        In addition, programmatic accreditation, which is not a sufficient basis for institutional Title IV certification by the ED, has been granted by the following accrediting agencies to the following individual programs:

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        An accrediting agency may place an institution on "reporting" status to monitor one or more specified areas of performance. An institution placed on reporting status is required to report periodically to its accrediting agency on its performance in the specified areas for a period of one year, after which it is re-evaluated. See Note 19 "Regulatory" in our accompanying consolidated financial statements for further discussion of accreditation and regulatory actions at certain of our institutions.

        If any of our institutions loses its accreditation, it would be ineligible to continue its participation in the Title IV Programs. The loss of Title IV Program funding for any of our campuses could have a material adverse effect on our business, results of operations or cash flows, or financial condition. See Item 3 "Legal Proceedings" in this Annual Report on Form 10-K and Note 19 "Regulatory" in our accompanying consolidated financial statements for further detail.

Other International Regulations

        Our educational institutions that operate in Canada, France, the United Kingdom, and the United Arab Emirates are subject to local regulations. Each of these campuses currently holds all necessary domestic authority to operate within their respective jurisdictions, and campus administrators work closely with the local regulators to ensure that they are in compliance with domestic regulations. Additionally, our AIU campus in the United Kingdom and our American University in Dubai in the United Arab Emirates are accredited by a U.S. regional accrediting association. SACS, as branches of AIU, whose main campus is located in Atlanta, Georgia.

        Canada.    Our Canadian institutions are subject to regulation in the provinces in which they operate and in the provinces in which they recruit students. Depending on their province of residence, our Canadian students may receive loans under the Canada Student Loans Program, the Ontario Student Assistance Program ("OSAP"), the Quebec Loans and Bursaries Program, and/or provincial funding from their province of residence (if not Ontario or Quebec). Canadian institutions must meet eligibility standards to administer these programs and must comply with extensive statutes, rules, regulations, and requirements. We believe our Canadian institutions currently hold all necessary registrations, approvals, and permits and meet all eligibility requirements to administer these governmental financial aid programs. If our Canadian institutions cannot meet these and other eligibility standards or fail to comply with applicable requirements, it could have an adverse effect on our business, results of operations or cash flows, or financial condition.

        Ontario.    The Ontario Ministry of Training, Colleges and Universities ("Ontario Ministry") provides financial assistance to eligible students through the OSAP.

        Adopting a practice similar to that of the ED's, the Ontario Ministry calculates, for each institution, student loan default rates on the basis of incidences of default and expresses the default rates as a percentage of the total number of loans issued to students attending that school. Beginning with loans issued during the 1998-99 award year (August 1, 1998 to July 31, 1999), institutions with a 1997 default rate that is 15 percentage points or more above the 1997 provincial average of 23.5% or 38.5% were required to share the cost of defaults. The rates for subsequent years are as follows:

•

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



•

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



•

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

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        Our IADT campus in Toronto had an average overall default rate of 18.9% in 2003, 20.7% in 2002, 21.6% in 2001, 18.1% in 2000, 16.7% in 1999, and 23.8% in 1998. Our IADT campus in Ottawa had an overall default rate of 27.0% in 2003, 28.6% in 2002, 14.3% in 2001, 13.0% in 2000 and 15.4% in 1999. IADT-Ottawa posted security to indemnify the Canadian government for costs above the threshold based on the 2002 rate and will post a similar security with the Ontario Ministry based on the 2003 rate. As previously noted, IADT-Ottawa ceased admitting students in 2004, and we will terminate operation of the campus after existing students have completed their programs of study.

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

        France.    The INSEEC Group consists of nine campuses, all of which are governed by the French Ministry of Education, and two campuses that offer health education programs are co-governed by the French Ministry of Health and by the National Professional Committee for Medical Visits for its pharmaceutical test preparation and continuing education classes.

        There are three levels of French Ministry approval: diploma endorsement (Level III), state recognition (Level II), and diploma stamp (Level I, the highest level of French approval). In 1999, an additional grade entitled "Master", which represents the highest level of European approval, was added.

        Currently, two campuses of the INSEEC Group have the highest level of European approval (Master grade), four campuses have Level I approval, four campuses have Level II approval, and two campuses have Level III approval.

        These approvals are subject to regular renewal, the schedule for which depends on geographic zones. Four renewal applications are currently being processed.

        The Level III approval, which is co-governed by the French Ministry of Employment and the French Ministry of Education, is currently undergoing reorganization by the French Ministry, and the effect of such changes, the nature of which are unknown at the present time, are uncertain.

        With respect to Level II approval, Level I approval, and the European approvals, conditions that must be satisfied to obtain approvals are generally becoming more strict, requiring schools to, among other things, provide more financial support for research and hire more full-time faculty. We do not believe that these changes will have a significant impact on our operations or financial results.

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

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        United Arab Emirates.    Our American University in Dubai ("AU Dubai"), a branch campus of American InterContinental University, is authorized to grant academic credentials by both the Nonpublic Postsecondary Education Commission of the State of Georgia and the Education Licensure Commission of the District of Columbia. AU Dubai does not participate in the U.S. Title IV Programs. AU Dubai has been granted domestic programmatic accreditation by the United Arab Emirates Ministry of Higher Education and has authority to operate through a grant from the Emir (the head of state) of Dubai. AU Dubai received a new five-year, renewable license to operate the campus from the United Arab Emirates Ministry of Higher Education in December 2004. This license is also known as a "trade license" in the United Arab Emirates.

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ITEM 2.    PROPERTIES

        Our corporate headquarters are located in Hoffman Estates, Illinois, which is outside of Chicago, and our 82 campuses are located throughout the United States, and in France, Canada, the United Kingdom, and the United Arab Emirates. Each of our campuses contains teaching facilities, including modern classrooms, laboratories, and, in the case of campuses with culinary arts programs, large, well-equipped kitchens. Admissions and administrative offices are also located at each campus.

        Additionally, our Brooks College campus in Long Beach, California includes a dormitory and student cafeteria. Atlantic Culinary Academy, Brown College, Texas Culinary Academy, Western Culinary Institute, Scottsdale Culinary Institute, California School of Culinary Arts, California Culinary Academy, Le Cordon Bleu College of Culinary Arts Atlanta, Le Cordon Bleu College of Culinary Arts Las Vegas, and The Cooking and Hospitality Institute of Chicago utilize leased space to operate restaurants in conjunction with their culinary arts programs.

        We lease all of our facilities, except a facility at Brooks Institute of Photography in Santa Barbara, California, a facility at our AIU campus in Houston, Texas, a dormitory facility at the Pennsylvania Culinary Institute, and a facility at the Cooking and Hospitality Institute of Chicago, which we own. As of December 31, 2004, we owned real property covering approximately 208,000 square feet, all of which is attributable to our CSU segment. As of December 31, 2004, we held leases for approximately 6.3 million square feet of real property, of which approximately 5.6 million square feet is leased by our CSU segment, approximately 555,000 square feet is leased by our OEG segment, and approximately 120,000 square feet is leased for our corporate locations. The leases have remaining terms ranging from less than one year to 24 years.

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

ITEM 3.    LEGAL PROCEEDINGS

        We are a party to the following legal proceedings:

Qui Tam Proceeding

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

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

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transferred the case to the Houston Division of the Southern District of Texas, where it is stayed. The Fifth Circuit recently decided the unrelated case ruling in favor of defendants.

        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.

Employment Litigation

        On October 31, 2003, a purported class action complaint captioned Finnigan, et al. v. American InterContinental University Online ("AIU Online") was filed in the Circuit Court of Cook County, Chancery Division by three former Admissions Advisors of AIU Online, Jane Finnigan, Michael Barrett and D'Andre Stinnette. The case is brought on behalf of current and former Admissions Advisors who were purportedly similarly denied overtime pay in 2002 and continuing to the present. Plaintiffs allege that AIU Online violated the Illinois Minimum Wage Law by failing to pay them overtime wages for work they performed. Plaintiffs further allege that AIU Online violated the Illinois Wage Payment and Collection Act by failing to pay for overtime work pursuant to an alleged contract or agreement. Plaintiffs claim lost wages for the class in excess of $800,000, plus punitive damages, attorneys' fees and injunctive relief. We have filed our answer denying the material allegations of this complaint and denying the existence of a class. The parties have concluded the discovery phase of the litigation relating to whether the suit should be allowed to proceed as a "class action" lawsuit or whether claims need to be brought individually. On February 28, 2005, AIU Online filed (1) a motion for summary judgment and supporting memorandum, as to all claims of Plaintiffs Finnigan, Barrett and Stinnette; and (2) a Memorandum in Opposition to Plaintiffs' Motion for Class Certification. Plaintiffs will have an opportunity to file responsive papers prior to a court ruling on these issues.

        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.

Securities Litigation

        Between December 9, 2003 and February 5, 2004, six purported class action lawsuits were filed in the United States District Court for the Northern District of Illinois by certain alleged purchasers of our common stock against us and certain of our executive officers, John M. Larson and Patrick K. Pesch. The cases purportedly are brought on behalf of all persons who acquired shares of our common stock during a specified class period in 2003. The complaints allege that in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Act") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 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. Schroeder, 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. Plaintiffs filed their response to our motion to dismiss on September 17, 2004. We filed our reply in support of our motion to dismiss on October 8, 2004. On February 11, 2005, our motion to dismiss was granted, without prejudice. The court granted plaintiffs until April 1, 2005 to file an amended complaint.

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        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 our stockholders 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 in this action is one of our current officers and/or directors. The lawsuit alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and breach of fiduciary duties for insider selling and misappropriation of information, essentially based on 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. On October 1, 2004, the Court ordered the McSparran case to be consolidated with the derivative action captioned Ulrich v. John M. Larson et al., which was filed in the United States District Court for the Northern District of Illinois on July 20, 2004 and names the same defendants and asserts the same claims as McSparran. On November 5, 2004, plaintiffs filed an Amended Consolidated Complaint. On December 13, 2004, defendants filed their motion to dismiss. Plaintiffs filed their response to defendants' motion on February 11, 2005. Defendants' reply in support of their motion to dismiss was filed March 11, 2005, along with a motion for a protective order staying discovery pending resolution of defendants' motion to dismiss.

        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 in this action is one of our current officers and/or directors. 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. The individual defendants and CEC have been served with the complaint filed in this matter. On February 17, 2005, plaintiffs filed an amended derivative complaint. Defendants' motion to dismiss the amended complaint is due March 17, 2005.

        On November 10, 2004, a derivative suit captioned Nicholas v. Dowdell, et al. was filed in the Chancery Court of New Castle County, Delaware, 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. The complaint alleges breach of fiduciary duty for insider selling and misappropriation of confidential information, breach of directors' duty of good faith, and unjust enrichment and seeks a constructive trust, disgorgement of profits, damages, costs and attorneys' fees. Defendants were served with the complaint in this matter on November 29, 2004. On December 20, 2004, defendants filed a motion to dismiss the complaint. On February 15, 2005, defendants filed their brief in support of their motion to dismiss. Plaintiff's response to defendants' motion is due on March 15, 2005, and defendants' reply in support thereof is due on March 29, 2005.

        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, we and WAI, Inc. ("WAI"), our wholly owned subsidiary, 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. In the lawsuit, we allege that the former owners of Western made material misrepresentations of fact and breached certain representations and warranties regarding the accreditation of several programs of study being offered by the school and seek full indemnification for

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all losses, costs, and damages, including attorneys' fees, resulting from the alleged misrepresentation and breaches. On July 12, 2004, we filed a similar complaint in the Court of Common Pleas of Allegheny County, Pennsylvania and subsequently voluntarily dismissed the federal lawsuit. The defendants filed an Answer and New Matter in response to the state court complaint on December 3, 2004. On January 24, 2005, we filed a response to the New Matter, which is a series of factual assertions akin to affirmative defenses. 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 Program 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 ED issued approval for the diploma programs. Western then resumed marketing, enrolling new students, and disbursement of Title IV Program 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 addressed these stipulations to the satisfaction of the ACCSCT, and marketing, enrollment of new students, and disbursement of Title IV Program funds to students in the degree programs has since resumed. We are working in close cooperation with ACCSCT and ED officials to resolve any remaining issues in a manner that will be best serve the interest of our students at Western. As a result of this matter, we may be required to reimburse ED for Title IV Program funds improperly disbursed in relation to the affected programs. The pending lawsuit seeks to recover any such funds from the former owners of Western.

Other Litigation and Investigations

        On January 7, 2004, we received notification from the Midwest Regional Office of the Securities and Exchange Commission ("SEC") that it was conducting an inquiry concerning us and requested that we voluntarily provide certain information. On June 22, 2004, the SEC notified us that it was conducting a formal investigation. On June 23, 2004, we received a subpoena for documents from the SEC. The SEC's investigation is ongoing and we intend to cooperate with the SEC in its investigation.

        As a result of our inquiry to the Justice Department, we were advised that the Department is conducting an investigation concerning us. We made our inquiry to the Justice Department following published reports of an investigation. We were not provided with any information on the focus of the investigation.

        As previously reported, our Board of Directors formed a special committee to conduct an independent investigation of allegations of securities laws violations against us, including allegations relating to our accounting practices and reported statistics relating to starts, student population and placement. At that time, we announced that the special committee had retained the law firm of McDermott, Will & Emery LLP to represent and assist it in its review. Additionally, it was previously reported that, at the special committee's direction, McDermott, Will & Emery retained Navigant Consulting, Inc. to assist in the investigation and provide independent forensic accounting services in connection with the special committee's review of allegations relating to previously reported financial information and related matters. The special committee has informed us that it has substantially completed its investigation and that it has evaluated the preliminary results of that investigation. At the conclusion of its investigation, the special committee intends to make a final report of its findings, and any proposed recommendations, to our Board of Directors.

        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 us and AIU. We have answered the amended complaint, denying all material allegations therein, and have raised various affirmative defenses. On October 6, 2004, plaintiffs filed a second amended complaint

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which added individuals who are current and former employees of AIU. The second amended complaint alleges that AIU violated the California Unfair Competition Law, 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, retention, and matriculation rates, engaging in financial aid improprieties, and engaging in admission improprieties. The suit appears to have been brought on behalf of all current and prior attendees of AIU residing in California. The plaintiffs, on behalf of the putative class, purport to seek unspecified damages, interest, and costs, as well as injunctive relief. On March 10, 2005, we filed an answer to the amended complaint as well as a cross-complaint.

        On October 13, 2004, a class action complaint captioned Viles v. Ultrasound Technical Services, Inc, et al., was filed in Boward County, Florida against us and one of our subsidiaries, Ultrasound Technical Services, Inc., currently known as Sanford Brown Institute ("UDS"). We were served with the complaint filed in this matter on January 12, 2005. The class action is brought on behalf of all persons who attended UDS' Diagnostic Medical Sonography Program or Cardiovascular Technology Program in the State of Florida at any time during the period of October 12, 2000 to the present. The complaint alleges that UDS violated the Florida Trade and Deceptive Practices Act by misrepresenting placement rates, potential salaries and accreditation, falsifying clinical training records, failing to properly supervise students, failing to provide competent faculty and proper equipment, and by admitting more students than UDS had room to properly educate. Our response to the complaint is due on April 7, 2005.

        On February 4, 2005, a class action complaint captioned Nilsen v. Career Education Corporation et al. was filed in the Superior Court of the State of California, County of Santa Barbara, against us and one of our subsidiaries, Brooks Institute of Photography ("Brooks"). The complaint appears to have been brought on behalf of all individuals who attended Brooks from February 4, 2001 to the present. The complaint alleges that Brooks violated the California Education Code, Consumer Legal Remedies Act and California Unfair Competition Law by allegedly misleading potential students regarding Brooks' placement rates, and by engaging in false and misleading advertising. The plaintiffs seek injunctive relief, disgorgement of profits, punitive damages, interest, attorneys' fees and costs. Defendants are not yet required to respond to the complaint.

        In addition to the legal proceedings and other matters described above, in the ordinary conduct of our business, we and our schools are subject to various other lawsuits, investigations and claims, covering a wide range of matters, including, but not limited to, claims involving students or graduates and routine employment matters. Due to the inherent uncertainties of litigation and the SEC and Justice Department 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.

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

        No matters were submitted to a vote of our security holders during the fourth quarter of 2004.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our common stock has been quoted on the NASDAQ National Market (the "National Market") under the symbol "CECO" since January 29, 1998.

        The following table sets forth the range of high and low sales prices per share for our common stock as reported on the National Market for the periods indicated. All share prices reflect our 2-for-1 stock split affected in the form of a stock dividend in August 2003. The split-adjusted initial public offering price of our common stock on January 28, 1998, was $2.00 per share.

        The closing price of our common stock as reported on the National Market on March 11, 2005, was $33.22 per share. As of March 11, 2005, there were 190 holders of record of our common stock.

        We have never paid a cash dividend on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Rather, we plan to retain our earnings to finance future growth. Our ability to pay cash dividends on our common stock is also limited under the terms of our existing credit agreements. The declaration and payment of dividends on our common stock are subject to the discretion of our Board of Directors. Our Board of Director's decision to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition, and other factors the Board of Directors may consider to be relevant.

        We did not issue any unregistered shares of our common stock in 2004. We do not currently have a plan to repurchase shares of our common stock.

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ITEM 6.    SELECTED FINANCIAL DATA

        The following selected historical consolidated financial and other data are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes thereto appearing elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our selected statement of income data set forth below for each of the five years ended December 31, 2004, 2003, 2002, 2001, and 2000, and the balance sheet data as of December 31, 2004, 2003, 2002, 2001, and 2000, are derived from our consolidated financial statements. Balance sheet data as of December 31, 2003, 2002, 2001, and 2000, and statements of income data for the years then ended have been restated to reflect the change in our revenue recognition policy with respect to Culinary and Health Education programs with externships described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K and in Note 2 to our accompanying consolidated financial statements. We have not amended our previously filed annual reports on Form 10-K or quarterly reports on Form 10-Q for the periods affected by the restatement. The information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such previously filed reports should no longer be relied upon.

        In 2001 and 2000, the effect of goodwill amortization, after taxes, reduced net income by $3.9 million and $2.0 million, respectively. Due to a new accounting pronouncement adopted in 2002, goodwill is no longer amortized.

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(1)

For any period, earnings before interest, taxes, depreciation, and amortization ("EBITDA") equals income before cumulative effect of change in accounting principle, provision for income taxes, interest income, interest expense, and depreciation and amortization, as follows:

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        The following information is provided for purposes of comparing EBITDA as restated for each of the four years ended December 31, 2003, to EBITDA as previously reported for each of the four years ended December 31, 2003.

EBITDA margin equals EBITDA divided by total revenue. EBITDA and EBITDA margin should not be considered as alternatives to, nor is there any implication that they are more meaningful than, any measure of performance or liquidity promulgated under accounting principles generally accepted in the United States. We believe that EBITDA is particularly meaningful due principally to the role acquisitions have played in our development. Historically, our growth through acquisitions has resulted in significant non-cash depreciation and amortization expense because significant portions of the purchase price of an acquired school is generally allocated to depreciable fixed assets and amortizable intangible assets.

(2)

Represents the approximate total student population at our institutions as of October 31. Student population as of October 31, 2003, 2002, 2001, and 2000, has been restated to include students participating in externships as of such dates.

(3)

Represents the total number of campus-based institutions operated by us as of December 31.

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

        The discussion below contains certain forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934) that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual growth, results of operations, performance and business prospects, and opportunities in 2005 and beyond could differ materially from those expressed in, or implied by, any such forward-looking statements, including those set forth in the "Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Related to Our Business" in this Annual Report or Form 10-K. The following discussion and analysis should be read in conjunction with the Selected Historical Consolidated Financial Data and our Consolidated Financial Statements and Notes thereto appearing elsewhere herein.

Restatement of Previously Issued Consolidated Financial Statements

        During 2004, to comply with the specific provisions of Staff Accounting Bulletin No. 104, Revenue Recognition, we corrected our revenue recognition policy with respect to Culinary and Health Education programs with externships. These programs require students to complete externships upon conclusion of in-school instruction in order to satisfy graduation requirements. Previously, we recognized revenue related to these programs with required externships on a straight-line basis over the length of the applicable period of in-school instruction. In accordance with our newly adopted revenue recognition policy, we recognize revenue related to these programs on a straight-line basis over the length of the entire program, which includes the externship period.

        The change in our revenue recognition policy with respect to Culinary and Health Education programs with externships resulted in a reduction of revenue during 2004 of approximately $11.5 million and a reduction of net income during 2004 of approximately $6.9 million, or $0.07 per diluted share. Additionally, prior period financial statements and the related notes thereto presented herein have been restated to reflect the impact of the change in our revenue recognition policy. The effect of the change on 2003 net income was $6.4 million, or $0.07 per diluted share. Our 2003 net income per diluted share decreased from $1.19 as previously reported to $1.12 as a result of the restatement. The effect of the change on 2002 net income was $5.7 million, or $0.06 per diluted share. Our 2002 net income per diluted share decreased from $0.71 as previously reported to $0.65 as a result of the restatement. The change in our revenue recognition policy with respect to Culinary and Health Education programs with externships affected only our CSU segment financial results.

        Please refer to Note 2 of our accompanying consolidated financial statements for a summary of the impact of the restatement on December 31, 2003, and for each of the two years then ended, and to Note 20 to our accompanying consolidated financial statements for a summary of the impact of the restatement on our previously reported quarterly financial information in 2003 and 2004. Amounts

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previously reported for previous dates and periods that are included in the accompanying five-year summary of selected financial data are as follows:

        There are certain differences in the financial statements included herein, as restated, and the unaudited quarterly and year-end financial results set forth in our press release, dated February 15, 2005, which was attached as an exhibit to a Form 8-K, filed with the SEC on February 17, 2005. Among other things, our net income for the quarter and year ended December 31, 2004 and the year ended December 31, 2003 is greater than what was previously reported in our Form 8-K. As a result of these differences, the unaudited financial results contained in our Form 8-K should not be relied upon.

Change in Accounting Estimate

        Effective December 31, 2004, we increased our estimate of our allowance for doubtful accounts with respect to student receivables. We periodically evaluate our student receivables balances and establish an allowance for doubtful accounts based on estimates and assumptions, which we review and modify based on emerging information. We recently analyzed our student receivables collection rates, together with changes in financial aid funding sources, and determined that we should increase our estimate for our allowance for doubtful accounts and also modify our estimation methodology. Among other things, our recent analysis reflected a correlation between student funding sources and the ultimate collectibility of accounts due from our in-school student population. Based on the results of our analysis, we determined that it would be appropriate to utilize an allowance estimation methodology that segments our accounts receivable due from in-school students into groups according to each student's primary funding source, exclusive of Stafford loans and federal and state grants. In addition, we have modified our allowance methodology for out-of-school student accounts to segregate such accounts into two categories of students—those who complete their programs of study and those that do not. For more information concerning our allowance estimation methodology, please see "Summary of Critical Accounting Policies—Allowance for Doubtful Accounts."

        Our revised allowance estimation methodology has been applied to our financial statements as of and for the year ended December 31, 2004. The change in our estimate of our allowance for doubtful accounts resulted in additional bad debt expense being recorded in general and administrative expense during the fourth quarter of 2004 of approximately $18.9 million ($11.5 million after taxes, or $0.11 per diluted share).

        As previously reported, in connection with the special committee investigation described in "Legal Proceedings—Other Litigation and Investigations, " Navigant Consulting, Inc., at the request of the

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special committee, has reviewed our new estimation methodology and found it to be reasonable. Navigant's scope of work did not include calculating the amount of, or determining the timing or nature of, the expense we have recorded.

        The SEC's Division of Corporation Finance is undergoing a review of our Annual Report on Form 10-K for the year ended December 31, 2003 and subsequent quarterly reports in 2004. Among other things, the Division of Corporation Finance has inquired about our accounting for the change in our allowance for doubtful accounts in the fourth quarter of 2004 described above. We believe the accounting for our allowance for doubtful accounts and our financial statements overall are presented fairly in all material respects and in conformity with U.S. generally accepted accounting principles. However, we have not completed the review process with the Division of Corporation Finance and cannot predict the timing or outcome of their review, and there is no assurance that such outcome will not necessitate amendments or restatements of our previously filed periodic reports or financial statements, or of the financial statements included in this report.

Overview

        We are one of the largest providers of private, for-profit, postsecondary education. We have segregated our operations into two distinct operating segments, our CSU segment and our OEG segment. Our CSU segment represents an aggregation of our traditional "brick-and-mortar" campuses through which we provide educational services primarily in a classroom or laboratory setting at 82 campuses located throughout the United States and in France, Canada, the United Kingdom, and the United Arab Emirates. Our OEG segment operates two online educational platforms, American InterContinental University Online and Colorado Technical University Online, that deliver educational services through internet-based courses.

        Our total student population as of January 31, 2005, was approximately 101,500 students, including total OEG student population as of January 31, 2005 of approximately 24,900 students. Many of our schools enjoy long operating histories, and our schools 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:

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Business Studies



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Culinary Arts



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Health Education



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Information Technology



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Visual Communication and Design Technologies

        We have experienced significant growth both organically and through acquisitions. Since our inception in January 1994, we have completed 26 acquisitions and have opened 12 branch start-up campuses. Our annual revenue has increased from $19.9 million in 1995 to $1.7 billion in 2004, and our annual net income has increased from $0.1 million in 1995 to $179.6 million in 2004.

        In 2004, the student population declined at our Gibbs division schools, which are included in our CSU segment. This decline in student population resulted in decreased revenue for the division and negatively impacted the division's as well as our CSU segment's profitability for the period. We are expecting limited growth and low-levels of profitability from the Gibbs division in the near-term. Our management is devoting increased attention to the Gibbs division in order to improve the division's performance.

Revenue

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

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is divided by term, which is determined by start dates, which also vary by school and program. Our schools charge tuition at varying amounts, depending on the school and on the type of program and specific curriculum. 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. Our schools generally increase tuition one or more times annually.

        Other revenue consists primarily of bookstore sales, student laptop computer sales, dormitory revenue, restaurant revenue, contract training revenue, cafeteria revenue, rental income, and placement revenue. 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 any of our students as a result of a student's placement. Placement revenue for the years ended December 31, 2004 and 2003 was approximately $0.2 million and $1.5 million, respectively.

Operating Expenses

        Educational services and facilities expense includes costs directly attributable to the educational activity of our campuses, including among other things, salaries and benefits of faculty, academic administrators, student support personnel, 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, owned and leased facility costs, royalty fees paid to Le Cordon Bleu, and certain student financing costs. Also included in educational services and facilities expenses are costs of other goods and services provided by our schools, including costs of textbooks, laptop computers, dormitory services, restaurant services, contract training, cafeteria services, rental services, and printroom services.

        General and administrative expense includes salaries and benefits of personnel in corporate and school administration, marketing, admissions, accounting, human resources, and compliance. Costs of promotion and development, advertising and production of marketing materials, occupancy of the corporate offices, and bad debt expense are also included in this expense category. For information regarding our change in estimate of our allowance for doubtful accounts with respect to student receivables and the impact of such change on our bad debt expense, see our discussion of "Change in Accounting Estimate" above.

        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 definite-lived intangible assets.

Share of Affiliate Earnings

        Share of affiliate earnings represents our share of the income of 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 financial statements are not consolidated into our financial statements.

Other income (expense)

        Other income (expense) includes certain infrequent transactions, such as gains or losses on the disposition of property and equipment, gains or losses on foreign currency exchange, and gains or losses on assets held in our Rabbi Trust.

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Summary of Critical Accounting Policies

        We have identified the accounting policies listed below that we believe are most critical to our financial condition and results of operations, and that require management's most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 4 to our accompanying consolidated financial statements included in Item 15 "Exhibits and Financial Statement Schedules" in this Annual Report on Form 10-K, which includes other significant accounting policies.

Revenue Recognition

        Our revenue is derived primarily from academic programs taught to students who attend our schools, both "brick-and-mortar" and online. We generally segregate our revenue into two categories, (1) tuition and registration fees and (2) other revenues.

        Tuition and registration fees represent costs to our students of educational services provided by our schools. We generally bill a student for tuition at the beginning of an academic term, and we recognize the revenue on a straight-line basis over the academic term. The portion of tuition payments received from students but not earned is recorded as deferred revenue and reflected as a current liability in our consolidated balance sheet, as such amount represents revenue that we expect to earn within the next year. If a student withdraws from one of our schools prior to the completion of the academic term, we refund the portion of tuition already paid that, pursuant to our refund policy and applicable federal and state law and accrediting agency standards, we are not entitled to retain.

        Other revenue consists of, among other things, bookstore sales, student laptop computer sales, dormitory revenue, restaurant revenue, contract training revenue, cafeteria revenue, rental income, and placement service fees. Revenue from dormitory and cafeteria fees is generally billed to a student at the beginning of an academic term and is recognized on a straight-line basis over the term of a student's dormitory and cafeteria use. Other dormitory and cafeteria revenue, as well as student laptop computer sales, bookstore sales, placement revenue, restaurant revenue, rental income, and contract training revenue, is billed and recognized as services are performed or goods are delivered.

        Certain of our schools bill students a single charge that covers tuition and required program materials, such as textbooks and supplies. Such billings, which we treat as a single accounting unit in accordance with EITF Issue 00-21 Revenue Arrangements with Multiple Deliverables, are recognized as tuition and registration fee revenue on a straight-line basis over the applicable academic term.

Allowance for Doubtful Accounts

        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 estimation methodology developed by corporate financial management. As discussed in "Change in Accounting Estimate," we recently modified our allowance estimation methodology. Our standard allowance estimation methodology, effective as of December 31, 2004, considers a number of new factors that, based on our collections experience, we believe have an impact on our credit risk and the realizability of our student receivables. Among these factors are a student's status (in-school or out-of-school), anticipated funding source (for example, federal loan or grant, state grant, private loan, student cash payments, etc.), whether or not an out-of-school student has completed his or her program of study, and our overall collections history. Specifically, our allowance estimation methodology segments our accounts receivable due from in-school students into groups according to each student's primary funding source, exclusive of Stafford loans and federal and state grants. Our allowance methodology for out-of-school student accounts segments such accounts into two categories of students—those who complete their programs of study and those that do not. We apply allowable percentage estimates, which are based upon our historical collections experience, to each in-school student funding source group and out-of-school student category. Out-of-school students include

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students who have withdrawn from or completed their programs of study. All other students are classified as in-school students. On at least an annual basis, we intend to monitor our collections and write-off experience to assess whether adjustments to our allowance estimates are necessary. In this way, we believe that our allowance estimation methodology will reflect our most recent collections experience and will be responsive to changes in the total mix of student funding sources. Changes in trends in any of the factors that we believe impact the realizability of our student receivables, as noted above, or modifications to our credit standards, collection practices, and other related policies may impact our estimate of allowance for doubtful accounts and our financial results.

        Our standard allowance estimation methodology is evaluated for propriety by corporate financial management on a periodic basis and modified as necessary. Changes to the design of our standard allowance estimation methodology, including our allowance percentage estimates, may impact our estimate of allowance for doubtful accounts and our financial results.

        Corporate financial management reviews the allowance estimate calculations completed by each of our campuses to monitor compliance with our allowance estimation methodology and, based on judgment and consideration of emerging trends and existing facts and circumstances, may adjust the consolidated balance of our allowance estimate, as appropriate.

        Our bad debt expense as a percentage of school revenue for the year ended December 31, 2004, was 6.1%, relative to bad debt expense as a percentage of school revenue of 4.5% for the year ended December 31, 2003, and bad debt expense as a percentage of school revenue of 3.8% for the year ended December 31, 2002. The increase to the allowance for doubtful accounts of $18.9 million in the fourth quarter of 2004 added 1.1% to our year-end 2004 bad debt percentage. A one percentage point change in our allowance for doubtful accounts as a percentage of gross student receivables as of December 31, 2004 and as of December 31, 2003, would have resulted in a change in net income of $0.9 million during the years then ended.

        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 institutions to participate in Title IV Programs, would have a material effect on our business, results of operations and financial condition, including the realizability of our receivables.

Contingencies

        We accrue for costs associated with certain contingencies, including, but not limited to, settlement of legal proceedings and regulatory compliance matters, when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change.

Goodwill and Indefinite-Lived Intangible Assets

        Goodwill represents the excess of costs over fair market value of identifiable net assets acquired through business purchases. Effective January 1, 2002, pursuant to our adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), goodwill and indefinite-lived intangible assets are no longer subject to amortization. However, these 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 the fair value of our reporting units, as defined under SFAS 142. If our fair value estimates or related assumptions change in the future, we may be required to record impairment charges related to goodwill and other indefinite-lived intangible assets.

Long-lived Assets

        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

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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 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 and definite-lived intangible assets.

Income Taxes

        We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). This 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.

Acquisitions

        All of our acquisitions 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.

Missouri College

        On September 3, 2002, we acquired 100% of the issued and outstanding stock of Missouri College, Inc. for approximately $6.1 million in cash with funds obtained under our prior credit agreement. The school, based in St. Louis, Missouri, provides private, for-profit, postsecondary education leading to an associate degree or a diploma in the career-oriented disciplines of health education, information technology, and business studies. We acquired the school 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. In addition, the acquisition of Missouri College has provided us with access to an accredited institution in St. Louis, Missouri, a geographic location in which we seek to expand, and an opportunity to broaden our core curricula into the health education field. We have increased the school's enrollments significantly by expanding the school's marketing capabilities and offering more programs.

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The INSEEC Group

        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 schools' 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 has provided us with a platform for additional expansion into the European educational market. We have promoted continued growth of the INSEEC Group since the acquisition date by expanding its marketing channels and adding new programs.

Whitman Education Group, Inc.

        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 was a proprietary provider of career-oriented postsecondary education. Through three wholly owned subsidiaries, Whitman operated 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 has allowed 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 of its CTU subsidiary.

        Additionally, each outstanding option to purchase Whitman common 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 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.

Western School of Health and Business Careers

        On August 5, 2003, we acquired certain assets and assumed certain liabilities of Western School of Health and Business Careers ("Western") for approximately $7.7 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 has expanded our national presence in the health education field. We have increased the school's enrollments by enhancing the school's marketing capabilities and augmenting program offerings.

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Results of Operations

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