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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER: 0-21039
STRAYER EDUCATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 52-1975978
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1025 FIFTEENTH STREET, N.W., WASHINGTON, D.C. 20005
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (202) 408-2424
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE NONE
(TITLE OF CLASS:) (NAME OF EACH EXCHANGE ON
WHICH REGISTERED:)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of
Registrant is $215,955,817 (based upon the last sale price of the Common Stock
as reported on the Nasdaq National Market System on February 28, 2001). The
total number of shares of Common Stock outstanding as of February 28, 2001 was
15,498,364.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for its 2001
Annual Meeting of Stockholders (which is expected to be filed with the
Commission within 120 days after the end of the Registrant's 2000 fiscal year)
are incorporated by reference into Part III of this Report.
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PART I
ITEM I. BUSINESS.
OVERVIEW
Strayer Education, Inc. (the "Company"), through its wholly-owned
subsidiary, Strayer University, Inc., operates Strayer University ("Strayer" or
the "University"), a regional institution of higher education that offers
undergraduate and graduate degree programs to approximately 12,100 students at
fourteen campuses in Washington, D.C., Maryland and Virginia. Strayer also
offers real-time online courses via the Internet through Strayer Online. The
University is accredited by the Middle States Commission on Higher Education
("Middle States"), one of the six regional collegiate accrediting agencies
recognized by the U.S. Department of Education ("Department of Education" or
"Department"). The majority of Strayer students are working adults pursuing
their first college degree to improve their job skills and advance their
careers. Of students enrolled in Strayer programs at the beginning of the 2000
Fall Quarter, approximately 61% were age 30 or over and approximately 73% were
engaged in a part-time course of study. The University considers a full-time
undergraduate and graduate student to be one who completes 13.5 and 9.0 course
credits in an academic quarter, respectively. In the 2000 Fall Quarter, Strayer
students registered for an average of 8.8 course credits.
The Company has two additional wholly-owned subsidiaries, Education Loan
Processing, Inc. ("ELP") and Professional Education, Inc. ("ProEd"). ELP is a
finance company that purchases and services student loans, principally for the
University, and administers the Strayer Education Loan Program (the "SEL
Program"). ProEd was formed for the purpose of acquiring an information
technology training company. No such acquisitions have been made as of the date
of this report.
RECENT DEVELOPMENTS
On November 28, 2000, following approval by the Company's board of
directors, the Company entered into a preferred stock purchase agreement
pursuant to which it agreed to issue to New Mountain Partners, L.P. and DB
Capital Investors, L.P. (the "Investors") a total of 5,769,231 shares of the
Company's series A preferred stock at a purchase price of $26.00 per share, for
aggregate proceeds of $150 million. The new securities will be entitled to
payment of a preferential dividend with a weighted average dividend rate of 5%
per year. The issuance of the series A preferred stock is subject to the
approval of the holders of a majority of the Company's outstanding capital
stock, and a special meeting of the stockholders is scheduled for March 16, 2001
to vote on the transaction. Ron K. Bailey, the Company's president and chief
executive officer, and Beverly W. Bailey, his wife, control approximately 53.4%
of the Company's outstanding common stock and have agreed to vote their shares
in favor of the transaction. The Company intends to use the proceeds from the
sale of its series A preferred stock, combined with most of its cash on hand, to
effect a tender offer to purchase up to 8.5 million shares of the Company's
common stock at a price of $25.00 per share. All stockholders will have the
opportunity to participate pro rata in the tender offer.
If the transaction is approved by the Company's stockholders at the special
meeting and subject to the satisfaction of certain other conditions, the
Investors will deposit the purchase price for the securities in escrow and the
Company will commence the tender offer. At the same time, Mr. Bailey will
deliver an irrevocable proxy to the Investors to vote his shares of common stock
on all matters presented to the stockholders for approval, and the Company's
board of directors will appoint up to 50% of the members comprising the board.
The Company will complete the tender offer on the later to occur of the end of
the statutory tender offer period and the time at which all conditions to
closing have been met, including receipt of approval by the Department of
Education.
If the tender offer to purchase the shares of the Company's common stock is
fully subscribed, after the tender offer is completed, the Investors will own
securities initially convertible into approximately 46.0% of the Company's
issued and outstanding common stock. Ron K. Bailey has agreed to tender
7,175,000 of the 8,175,000 shares held by him and his family in the tender
offer. Mr. Bailey has also granted to the Investors a three-year option to
purchase up to 1,000,000 additional shares of common stock at a purchase price
of $30.00 per share. If no other stockholders tender their shares, the Investors
will own securities initially convertible into approximately 41.5% of the
Company's issued and outstanding common stock. In any case, the Investors will
be entitled initially to elect one-half of the directors on the Company's board
of directors.
Following the completion of the transaction, Robert S. Silberman, the former
President and Chief Operating Officer of CalEnergy Company Inc. and former
Assistant Secretary of the Army, will be named President and Chief Executive
Officer of the Company. Scott W. Steffey, former Vice Chancellor of the State
University of New York system, will be named Executive Vice President and Chief
Operating Officer. Steven B. Klinsky, Founder and Chief Executive Officer of New
Mountain Capital, LLC, will be named non-executive Chairman of the Company's
Board of Directors. Mr. Bailey will retire from his positions with the Company
and the University at closing.
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CAMPUS ORGANIZATION
The University organizes its academic programs and administrative operations
on a decentralized campus basis to increase its responsiveness to student needs.
A Campus Dean and a Campus Coordinator oversee the academic and administrative
functions, respectively, at each campus. Each campus is staffed with personnel
performing admissions, academic advising, financial aid, student services, and
career development functions. A learning resources center at each campus
supports the University's instructional programs. Each learning resources center
contains a library and computer laboratories and is operated by a full-time
manager and support staff.
CURRICULUM
The University offers information technology and business-oriented curricula
to equip students with specialized knowledge and skills for careers in business,
industry and government. The Academic Curriculum Committee reviews and revises
the University's course offerings periodically to improve the educational
programs and respond to changing and competitive job markets. The University
formed a Curriculum Advisory Board in 1993 to support the program evaluation
process. The Curriculum Advisory Board consists of University faculty, current
and former Strayer students, and representatives from more than a dozen private
and federal sector employers in Maryland, Virginia, and the District of
Columbia. The Curriculum Advisory Board also studies the career progress of
University alumni. The University uses these studies to make decisions about
curriculum development, resource allocation and faculty appointments.
The University offers programs in the following areas:
BACHELOR OF SCIENCE (B.S.) DEGREE MASTER OF SCIENCE (M.S.) DEGREE ASSOCIATE IN ARTS (A.A.) DEGREE*
Accounting* Business Administration Accounting
Business Administration Communications Technology Acquisition and Contract
Computer Information Systems Information Systems Management
Computer Networking Professional Accounting* Business Administration
Economics* Computer Information Systems
International Business DIPLOMA (D.P.)* Computer Networking
Accounting Economics
Computer Information Systems General Studies
Marketing
*not offered at Anne Arundel Campus
Each undergraduate degree program emphasizes oral and written communication
skills as well as mathematics and various disciplines in the humanities and
social sciences. In addition to its degree and diploma programs, the University
offers classes to non-degree, non-program students wishing to take courses for
personal or professional enrichment.
Although all of the University's programs and courses are offered at each campus
(with the exception of the Anne Arundel Campus, see above), the University
adapts its offerings to the preferences of the student population at each
location. In addition, Strayer students may enroll in courses at more than one
campus.
In 2000, the Company opened the Chesterfield Campus in Richmond, Virginia,
and began recruiting students for the Summer Quarter. The Company received
approval to open the Owings Mills Campus in Baltimore, Maryland and the
Chesapeake and Newport News campuses in the Tidewater region of Virginia. It is
anticipated that these campuses will open in 2001, Owings Mills and Chesapeake
for the Summer Quarter and Newport News for the Fall Quarter.
In August, 1997, the Company began operation of Strayer Online, a division
of the University. Through Strayer Online, the University offers courses and
degree programs via the Internet using a real-time interactive approach to
online learning. Students may take courses solely through Strayer Online or in
addition to traditional, on-site courses. A student taking classes through
Strayer Online has the same admission and financial aid requirements, policies
and procedures, and student services as other University students. During the
Fall 2000 quarter, the University had 2,020 students participating in the
University's distance learning program, of whom 495 students took class solely
through Strayer Online.
The University allows students to apply credits earned in one program toward
attainment of a more advanced degree. For example, a student originally pursuing
a Diploma in Computer Information Systems can extend his or her original
objective by taking additional courses leading to an A.A. degree in Computer
Information Systems, a B.S. degree in Computer Information Systems, and
ultimately an M.S. degree in Information Systems. The curriculum design provides
students a level of competency and a measure of attainment in the event they
interrupt their education or choose to work in their field of concentration
prior to obtaining their final degree.
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FACULTY
The University seeks to appoint faculty who hold appropriate academic
credentials, are dedicated, active professionals in their field, and are
committed to teaching working adults. In accordance with its educational
mission, the University focuses the efforts of its faculty on teaching. The
normal course load for a full-time faculty member is four courses per quarter
for each of three quarters, or 12 courses per academic year. With the approval
of the Campus Deans, faculty members may teach a fifth course per quarter and
extra courses during the summer quarter for additional compensation. The
University requires full-time faculty members to hold counseling hours at least
two hours per week for each course they teach.
Strayer provides financial support for faculty members seeking to update
their skills and knowledge. The University maintains a tuition plan that
reimburses instructors enrolled in advanced degree programs for one-half of
their tuition charges. Strayer conducts annual in-house faculty workshops in
each discipline. The University also fully reimburses its faculty for their
costs in receiving computer-related instruction and training to keep current in
information technology developments.
REGULATORY ENVIRONMENT
The Higher Education Act of 1965, as amended ("HEA"), and the regulations
promulgated thereunder subject the University and all other higher education
institutions that participate in the various federal student financial aid
programs under Title IV of the HEA ("Title IV Programs") to significant
regulatory scrutiny. The HEA mandates specific regulatory responsibility for
each of the following components of the higher education regulatory triad: (i)
the federal government through the Department of Education; (ii) the accrediting
agencies recognized by the Department of Education; and (iii) state higher
education regulatory bodies. The regulations, standards, and policies of these
regulatory agencies frequently change. In October 1998, Congress reauthorized
the HEA and amended numerous provisions of the HEA.
ACCREDITATION AND APPROVALS
The University has been accredited since 1981 by Middle States, a regional
accrediting agency recognized by the Department of Education. Accreditation is a
system for recognizing educational institutions and their programs for
performance, integrity and quality that entitles them to the confidence of the
educational community and the public. In the United States, this recognition
comes primarily through private voluntary associations of institutions and
programs of higher education. These associations establish criteria for
accreditation, evaluate institutions and professional programs for
accreditation, and publicly designate those institutions that meet their
criteria. Accredited schools are subject to periodic review by accrediting
bodies to ensure that the schools maintain the performance, integrity and
quality required for accreditation.
Middle States reaffirmed the University's accreditation in 2000.
Middle States is the same accrediting agency that grants institutional
accreditation to other degree-granting public and private colleges and
universities in its region. Accreditation by Middle States is an important
attribute of the University. Colleges and universities depend on accreditation
in evaluating transfers of credit and applications to graduate schools.
Employers rely on the accredited status of institutions when evaluating a
candidate's credentials, and parents and high school counselors look to
accreditation for assurance that an institution has quality educational
standards. Moreover, scholarship commissions often restrict their awards to
students attending accredited institutions, and institutional accreditation is
necessary to qualify for eligibility for federal student financial assistance.
The University is authorized to offer its programs, including those offered
through Strayer Online, by the D.C. Education Licensure Commission, the Virginia
State Council of Higher Education, and the Maryland Higher Education Commission.
The University is authorized by the Immigration and Naturalization Service
(the "INS") of the U.S. Department of Justice to admit foreign students. The
University also employs foreign faculty members and administrators in accordance
with U.S. immigration laws. In addition, Strayer is approved by appropriate
authorities for the education of veterans and members of the selective reserve
and their dependents, as well as for the rehabilitation of handicapped students.
Approximately 8% of the University's students are veterans or reservists.
STUDENT ADMISSIONS
The University seeks to ensure that incoming students have the necessary
academic background to succeed in their course of study at Strayer. Students
attending the University's undergraduate programs must possess a high school
diploma or a General Educational Development Certificate. Students attending the
University's graduate programs must have a bachelor's degree from an accredited
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institution. If a student's undergraduate major varies widely from the
student's proposed graduate course of study, certain undergraduate foundation
courses may be necessary for admission to some of the highly technical courses
offered at the graduate level.
International students applying for admission must meet the same admission
requirements as other students. Those students whose native language is not
English must provide evidence that they are able to use the English language
with sufficient facility to do college-level work in an English-speaking
institution.
TUITION AND FEES
Strayer charges tuition by the credit hour. All courses offered are 4.5
credit hours. As of January 1, 2001, undergraduate, full-time students are
charged at the rate of $210 per credit hour. Undergraduate, part-time students
are charged at the rate of $220 per credit hour. Courses in graduate programs
are charged at the rate of $280 per credit hour. Accordingly, a full-time
student seeking to obtain a bachelor's degree in four years currently would pay
approximately $9,450 per year in tuition. The University implemented a tuition
increase of $10.00 per credit hour for 2001.
SEL PROGRAM
In 1995, Strayer began the SEL Program of loans for eligible students as an
alternative to government-sponsored student loans. The SEL Program enables the
University to reduce the significant administrative costs it incurs in
processing loans under Title IV Programs and lessens the University's dependence
on federal student financial aid programs. The University believes that the SEL
Program also helps it to attract and retain qualified students.
The Company designed the SEL Program for working adult students. The loans
generally have maturities ranging from one to four years after graduation and
bear interest at a fixed rate that is competitive with rates under Title IV
Programs. Monthly loan payments begin the first month after the loan date and
generally vary between $200 and $300, including loan principal as well as
interest. Borrowers make payments while still enrolled, thereby reducing the
debt they otherwise would assume upon completion of their studies. At December
31, 2000, there was a total of 2,501 loans outstanding with an aggregate loan
balance of approximately $7.8 million and an average individual loan balance of
approximately $3,100.
Loans under the SEL Program are unsecured. Strayer's underwriting involves a
credit evaluation of each applicant. Student defaults on loans extended under
the SEL Program have not been material.
CAREER DEVELOPMENT SERVICES
The University actively assists its students and alumni with job placement
and other career-related matters through career development offices in each
region where the University has campuses. Strayer's career development personnel
conduct workshops on employment-related topics (including resume preparation,
interviewing techniques and job search strategies), maintain job listings,
arrange campus interviews by employers and provide other placement assistance.
The University sponsors career fairs in the fall and spring quarters for
students and alumni to discuss career opportunities with companies and
governmental agencies in Maryland, Virginia, and the District of Columbia.
The University conducts annual alumni surveys to monitor the career
progression of its graduates and to comply with Middle States and state
requirements to perform outcome assessments. The reliability of the survey data
largely depends on the information reported to the University. The 1999 alumni
survey, which had an approximately 14% overall response rate, indicated that 95%
of those responding were employed. In addition, approximately 79% of
undergraduate alumni and 80% of the graduate alumni who responded credit Strayer
for the achievement of their professional goals. According to the survey,
Strayer's greatest assets, in order of importance, are campus location, schedule
variety, instructor knowledge, course selection, and small class sizes.
Strayer students and graduates are employed in a wide range of regional and
local companies, many of which are in the information technology industry.
Federal governmental agencies also provide a significant source of employment.
COMPETITION
The post-secondary education market in Strayer's market area is highly
competitive. The University competes with traditional public and private
two-year and four-year colleges, other for-profit schools and alternatives to
higher education, such as employment and military service. Public colleges may
offer programs similar to those of the University at a lower tuition level, due
to government subsidies, government and foundation grants, tax-deductible
contributions and other financial aid sources not available to proprietary
institutions. Tuition at private institutions generally is higher, and in some
cases significantly higher, than the tuition at the University.
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The University competes with other educational institutions primarily based
on the quality of its business-oriented curriculum and instruction, its flexible
schedules and convenient classroom locations, and its responsiveness to changing
educational requirements of the workplace. Few of the University's competitors
have modified their programs to meet the special needs of working adult
students, although management believes that more may do so in the future.
EMPLOYEES
During 2000, the University employed 442 faculty members, of whom 114 were
full-time and 328 part-time, and 411 non-faculty staff in information systems,
financial aid, recruitment and admissions, payroll and human resources,
corporate accounting, and other administrative functions. Of the University's
non-faculty staff, 293 were employed full-time and 118 part-time.
LICENSING, ACCREDITATION AND FINANCIAL AID REGULATION
STATE LICENSURE
The University is dependent on the authorization of each state within which
the University offers educational programs to allow it to operate and to grant
degrees or diplomas to students. The University is subject to extensive
regulation in each of the three jurisdictions (the District of Columbia,
Virginia and Maryland) in which it currently operates. State laws and
regulations affect the University's operations and may limit the ability of the
University to introduce educational programs or establish new campuses. State
authorization also is required in order for an institution to become and remain
eligible to participate in Title IV Programs.
FINANCING STUDENT EDUCATION
In the 2000 Fall quarter, approximately 43% of the University's students
participated in one or more of the federally supported student financial aid
programs. A substantial portion (approximately 51% in 2000) of the University's
revenues are derived from tuition financed under Title IV Programs.
The University's financial aid programs are designed to assist eligible
students whose financial resources are inadequate to meet the cost of education.
Aid is awarded on the basis of financial need, generally defined under the HEA
as the difference between the cost of attending a program of study and the
amount a student reasonably can be expected to contribute to those expenses. All
recipients of financial aid must maintain a satisfactory grade point average and
progress in a timely manner toward completion of a program of study.
Generally, tuition must be paid (or arrangements made for payment) prior to
the beginning of a quarter. Before October 7, 2000, the HEA required that an
institution have a "fair and equitable" refund policy, limiting the amount that
an institution could charge a student who withdrew from the institution. A
student was obligated only for a pro rata portion of the tuition and other fees
charged by the institution if the student withdrew during the first 60% of the
student's first period of enrollment at that institution. A student who withdrew
after the first period of enrollment was also entitled to a refund, but a pro
rata refund calculation was not required. If a student who was owed a refund
received Title IV Program funds, the institution was required to allocate the
refund to the appropriate lenders or Title IV Programs, in a specified order
which excluded the Federal Work-Study Program.
1998 HEA amendments that took effect on October 7, 2000 address an
institution's refund policy with regard to Title IV Programs only. Under the new
provision, the institution must first determine the amount of Title IV Program
funds that the student "earned." If the student withdraws during the first 60%
of any period of enrollment or payment period, the amount of Title IV Program
funds that the student earned is equal to a pro rata portion of the funds for
which the student would otherwise be eligible. If the student withdraws after
the 60% point, then the student has earned 100% of the Title IV Program funds.
The institution must return to appropriate lenders or Title IV Programs, in a
specified order and excluding the Federal Work-Study Program, the lesser of the
unearned Title IV Program funds or the institutional charges incurred by the
student for the period multiplied by the percentage of unearned Title IV Program
funds. The Company believes that the University's refund policy is consistent
with the current HEA.
Students finance their Strayer education in a variety of ways. A significant
number of students utilize federal financial aid. In addition, many of Strayer's
working adult students finance their own education or receive full or partial
tuition reimbursement from their employers. Congress recently extended the
Internal Revenue Code's educational assistance provision under which an employee
may exclude from wages up to $5,250 of tuition reimbursement per year. In
addition, Congress recently created several tax credits for students pursuing
higher education and added a deduction for interest on student loans. Strayer
offers grants, loans (including loans under the SEL Program), scholarships and
work-study programs as financing options for its students.
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Title IV Programs
The University maintains eligibility for its students to participate in the
following Title IV Programs:
Federal Family Education Loans. Pursuant to the Federal Family Education
Loan Program (the "FFEL Program"), which includes the Federal Stafford Loan
("Stafford") program and the Federal PLUS (the "Parent Loan for Undergraduate
Students") program, students and their parents can obtain from lending
institutions subsidized and unsubsidized student loans, which are guaranteed by
the federal government. Students who demonstrate financial need may qualify for
a subsidized Stafford loan, and the federal government will pay the interest on
the loan while the student is in school and until the borrower's obligation to
repay the loan begins. Unsubsidized Stafford loans are available to students who
do not qualify for a subsidized Stafford loan or in some cases in addition to a
subsidized Stafford loan. The unsubsidized Stafford loan program now
incorporates the former Federal Supplemental Loans for Students program.
Pell Grants. Grants under the Federal Pell Grant ("Pell") program are
available to eligible students based on financial need and other factors.
Campus-Based Programs. The "campus-based" Title IV Programs include the
Federal Supplemental Educational Opportunity Grant program, the Federal
Work-Study program, and the Federal Perkins Loan ("Perkins") program.
Direct Student Loans. In 1993, Congress enacted the William D. Ford Federal
Direct Loan Program (the "Direct Loan Program"), under which the Department of
Education makes loans directly to students, rather than guaranteeing loans made
by lending institutions. The Direct Loan Program was phased in beginning in
1994-95. The University was approved to participate in this program beginning
July 1, 1996. The University has not originated any loans under this program.
Other Financial Aid Programs
In addition to the University's own student loan and scholarship programs,
eligible students at the University may participate in educational assistance
programs administered by the U.S. Department of Veterans Affairs, the U.S.
Department of Defense, the District of Columbia and private organizations.
FINANCIAL AID REGULATION
To be eligible to participate in Title IV Programs, the University must
comply with specific standards and procedures set forth in the HEA and the
regulations issued thereunder by the Department of Education. An institution
must, among other things, be authorized by each state within which it operates
to offer its educational programs and be accredited by a recognized accrediting
agency. The institution also must be certified by the Department of Education to
participate in Title IV Programs, based on a determination that, among other
things, the institution meets certain standards of administrative capability and
financial responsibility. For purposes of the Title IV Programs, the University
and all of its campuses are considered to be a single "institution of higher
education" so that Department of Education requirements applicable to an
"institution of higher education" are applied to all of the University's
campuses in the aggregate rather than on an individual basis. The University
currently is certified to participate in Title IV Programs.
In October 1998, Congress reauthorized and amended the HEA. While the 1998
HEA amendments made numerous changes to Title IV Program requirements, the
Company believes that these changes have not and will not have a material
adverse effect on the University. The Company believes that the University is in
material compliance with the HEA.
Congress reauthorizes the HEA every five to six years. In addition Congress
reviews and determines appropriations for Title IV Programs on an annual basis.
An elimination of certain Title IV Programs, a reduction in federal funding
levels of such programs, material changes in the requirements for participation
in such programs, or the substitution of materially different programs could
reduce the ability of certain students to finance their education, which in turn
could lead to lower enrollments at the University or require the University to
increase its reliance upon alternative sources of student financial aid. Given
the significant percentage of the University's revenues that are derived
indirectly from the Title IV Programs, the loss of or a significant reduction in
Title IV Program funds available to the University's students could have a
material adverse effect on the Company. In addition, the regulatory scheme
applicable to the University has been subject to frequent revisions, many of
which have increased the level of scrutiny to which higher education
institutions are subjected and have raised the applicable standards. Congress
and the Department of Education recently have focused in particular upon the
operations of proprietary institutions, such as the University. The University's
compliance with such regulations may affect the operations of the University and
its ability to participate in Title IV Programs. Certain elements of the
regulatory scheme applicable to the University are described below.
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Increased Regulatory Scrutiny
The 1992 amendments to the HEA formalized, modified and strengthened the
regulatory structure known as the "Program Integrity Triad," which consists of
the Department of Education, recognized accrediting agencies, and state higher
education regulatory bodies. Congress intended this initiative to increase the
regulatory scrutiny of post-secondary educational institutions. The 1998 HEA
amendments preserve the "Program Integrity Triad" with some refinements. In
addition to the Program Integrity Triad, other participants in Title IV
Programs, notably student loan guarantee agencies, also have enforcement
authority.
Administrative Capability
Department of Education regulations specify extensive criteria by which an
institution must establish that it has the requisite "administrative capability"
to participate in Title IV Programs. To meet the administrative capability
standards, an institution, among other things, must not have cohort default
rates above specified levels, must have various procedures in place for
safeguarding federal funds, must not be, and not have any principal or affiliate
who is, debarred or suspended from federal contracting or engaging in activity
that is cause for debarment or suspension, and must not otherwise appear to lack
administrative capability.
In certain circumstances, including a change in ownership resulting in a
change of control, the Department of Education may certify the institution's
continuing eligibility to participate in Title IV Programs on a provisional
basis for no more than three years. During the period of provisional
certification, the institution must comply with any additional conditions
included in its program participation agreement. If the Department of Education
determines that a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may revoke the
institution's certification to participate in Title IV Programs.
Department of Education regulations permit an institution to enter into a
written contract with a third-party servicer for the administration of any
aspect of the institution's participation in Title IV Programs. The third-party
servicer must, among other obligations, comply with Title IV requirements and be
jointly and severally liable with the institution for any violation by the
servicer of any Title IV provision. The University has written contracts with
three third-party servicers: Financial Aid Management for Education, Inc.,
Post-secondary Education Assistance Corporation, and Weber and Associates, Inc.
The servicers each perform activities related to the University's participation
in Title IV Programs, such as certifying FFEL Program loan applications,
preparing reports from the University to the Department of Education, issuing
checks for the Pell and campus-based programs, and issuing and collecting
Perkins loans.
Financial Responsibility
The HEA and Department of Education regulations establish extensive
standards of financial responsibility that institutions such as the University
must satisfy to participate in Title IV Programs. These standards generally
require that an institution provide the services described in its official
publications and statements; provide the administrative resources necessary to
comply with Title IV requirements; and meet all of its financial obligations,
including required refunds and any repayments to the Department of Education for
debts and liabilities incurred in programs administered by the Department.
In addition, Department of Education standards, which took effect July 1,
1998, utilize a complex formula to assess financial responsibility. The
standards focus on three financial ratios: (i) equity ratio (which measures the
institution's capital resources, ability to borrow and financial viability);
(ii) primary reserve ratio (which measures the institution's financial viability
and liquidity); and (iii) net income ratio (which measures the institution's
ability to operate at a profit or within its means). An institution's financial
ratios must yield a composite score of at least 1.5 for the institution to be
deemed financially responsible without the need for further federal oversight.
The University has applied the financial responsibility standards to its audited
financial statements as of and for the year ended December 31, 2000 and
calculated a composite score of 3.0. The Company therefore believes that the
University meets the Department's financial responsibility standards.
Student Loan Defaults
Under the HEA, an educational institution may lose its eligibility to
participate in some or all of the Title IV Programs if defaults on the repayment
of federally guaranteed student loans by its students exceed certain rates. A
rate of student defaults (known as a "cohort default rate") is calculated for
each institution annually by determining the rate at which borrowers who become
subject to their repayment obligation in one federal fiscal year default by the
end of the following federal fiscal year. For certain purposes described below,
the Department of Education calculates a weighted average cohort default rate
for the institution's students who enter repayment and default on a FFEL Program
or Direct Loan Program loan.
If the Department of Education notifies an institution that its cohort
default rate for FFEL Program loans equals or exceeds 25%
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for each of the three most recent federal fiscal years, the institution's
participation in the FFEL Program ends 30 days after the notification, unless
the institution timely appeals that determination on specified grounds and
according to specified procedures. An institution's participation in the Direct
Loan Program ends 30 days after notification that any combination of its FFEL
Program cohort default rate, its Direct Loan Program cohort default rate, or its
weighted average cohort default rate equals or exceeds 25% for each of the three
most recent federal fiscal years, unless the institution timely appeals. An
institution whose participation terminates under these provisions may not
participate in the relevant program for a period of up to three federal fiscal
years. The Department of Education also may initiate a proceeding to limit,
suspend or terminate an institution's participation in the FFEL Program if it
has any combination of a FFEL Program, Direct Loan Program or weighted average
cohort default rate that is equal to or greater than 25% for each of the three
most recent federal fiscal years. The Department of Education may initiate a
proceeding to limit, suspend or terminate an institution's participation in all
Title IV Programs if it has a FFEL Program, Direct Loan Program or weighted
average cohort default rate that exceeds 40% for any federal fiscal year.
If an institution's FFEL Program, Direct Loan Program or weighted average
cohort default rate equals or exceeds 25% in any of the three most recent
federal fiscal years, the institution may be placed on provisional certification
status. Provisional certification does not limit an institution's access to
Title IV Program funds; however, an institution with provisional status is under
closer review by the Department of Education and may be subject to summary
adverse action if it violates Title IV Program requirements. The University's
cohort default rates on FFEL Program loans for the 1996, 1997, and 1998 federal
fiscal years, the three most recent years for which this information is
available, were 14.2%, 14.5%, and 12.1%, respectively. The average default rates
for proprietary institutions nationally were 18.2%, 15.4%, and 11.4% in fiscal
years 1996, 1997, and 1998, respectively.
The "90/10 Rule"
Under what is commonly referred to as the "90/10 Rule," the HEA provides
that proprietary institutions, such as the University, are eligible to
participate in Title IV Programs only if they derive no more than 90% of their
revenues from Title IV Programs, as determined in accordance with a formula in
the regulations. A proprietary institution that violates the "90/10 Rule" loses
its eligibility to participate in Title IV Programs for at least one year.
During 2000, the University derived 51% of its revenues from tuition financed
under Title IV Programs.
Incentive Compensation
As a part of an institution's program participation agreement with the
Department of Education, the institution must certify that it will neither
provide, nor contract with any entity that provides, any commission, bonus or
other incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity. The Department of
Education recently found that a compensation plan of Computer Learning Centers,
Inc. ("CLC"), a publicly traded company that operates educational learning
centers, violated this provision. The compensation plan related to admissions
representatives. Based on its finding, the Department determined that CLC was
liable to the Department for all Title IV Program funds received for each
student who was recruited under the compensation plan. The Department calculated
that amount to be approximately $187.5 million. CLC reportedly has appealed the
Department's decision and has also filed for Chapter 7 federal bankruptcy
protection to liquidate its assets. Although there can be no assurance that the
Department of Education would not find deficiencies in the University's present
or former compensation plans, the University believes that its compensation plan
complies with the HEA.
Potential Effect of Regulatory Violations
If the University fails to comply with the regulatory standards governing
Title IV Programs, the Department of Education could impose one or more
sanctions, including transferring the University to the reimbursement or cash
monitoring system of payment, requiring repayment of certain Title IV funds,
certifying the University's eligibility on a provisional basis, taking emergency
action, referring the matter for criminal prosecution, or initiating proceedings
to impose a fine or to limit, suspend or terminate the participation of the
University in Title IV Programs. In addition, the University's guarantee
agencies could limit, suspend or terminate the University's eligibility to
provide guaranteed student loans in the event of certain regulatory violations.
Although there are no such sanctions currently in force, and the University does
not believe any such sanctions are contemplated, if such sanctions were imposed
against the University and resulted in a substantial curtailment of the
University's participation in Title IV Programs, the University would be
materially and adversely affected.
If the University lost its eligibility to participate in Title IV Programs,
or if the amount of available federal student financial aid were reduced, the
University would seek to arrange or provide alternative sources of revenue or
financial aid for students. The SEL Program would provide one such alternative,
but there can be no assurance that the SEL Program could provide loans
sufficient to make up for the loss of Title IV Program funds. Although the
University believes that one or more private organizations would be willing to
provide financial assistance to students attending the University, there is no
assurance that this would be the case, and the
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interest rate and other terms of such student financial aid might not be as
favorable as those for Title IV Program funds. The University may be required to
guarantee all or part of such alternative assistance or might incur other
additional costs in connection with securing alternative sources of financial
aid. Accordingly, the loss of eligibility of the University to participate in
Title IV Programs would be expected to have a material adverse effect on the
University even if it could arrange or provide alternative sources of revenue or
student financial aid.
During 1999, the Department of Education conducted a program review of the
University. The Department of Education issued a final program review
determination letter indicating that the University satisfactorily responded to
the findings in the program review report. Based on the responses and
representations submitted by the University, the Department of Education now
considers the findings closed with no additional action required. In addition,
no payments or refunds are required to be made to the Department of Education or
lending institutions as a result of this program review.
RESTRICTIONS ON ADDING LOCATIONS AND EDUCATIONAL PROGRAMS
State requirements and accrediting agency standards may in certain instances
limit the ability of the University to establish additional locations and
programs. District of Columbia regulations require institutions to submit an
application for an amended license in order to add a new program or location.
The Virginia State Council of Higher Education requires institutions to obtain
approval prior to offering new educational programs at existing sites or
instruction for degree credit at a new site located more than 25 miles or 30
minutes' travel time from an existing location. Maryland law and regulations
require institutions to obtain the approval of the Maryland Higher Education
Commission in order to offer an instructional program not specified in its
certificate of approval or to offer more than one-third of the credit-bearing
coursework leading toward a certificate or degree at a location not specified in
its certificate of approval. Middle States requires institutions that it
accredits to notify it in advance of implementing new programs or locations, and
upon notification may undertake a review of the institution's accreditation.
Based on its current understanding of how these standards will be applied, the
University does not believe that these standards will have a material adverse
effect on the University or its expansion plans.
The HEA requires proprietary institutions of higher education to be in full
operation for two years before qualifying to participate in Title IV Programs.
However, the applicable regulations permit an institution that is already
qualified to participate in Title IV Programs to establish an additional
location that may immediately qualify, unless the location was acquired from
another institution that has ceased offering educational programs at that
location and has unpaid Title IV liabilities, and the acquiring institution does
not agree to be responsible for certain liabilities of the acquired institution.
The new location must satisfy all other applicable requirements for
institutional eligibility, including approval of the additional location by the
relevant state authorizing agency and the institution's accrediting agency. In
addition, a location that qualifies as a "branch campus" must meet extensive
regulatory requirements, including the standards of administrative capability
and financial responsibility discussed above. The University's expansion plans
assume its continued ability to establish new campuses as additional locations
of the University without incurring the two-year delay in participation in Title
IV Programs. The loss of state authorization or accreditation by the University
or an existing campus, or the failure of the University or a new campus to
obtain state authorization or accreditation, would render the University
ineligible to participate in Title IV Programs in that state or at that
location.
The Department of Education requires an institution to provide notice of an
additional location that offers at least 50%, but less than 100%, of an
educational program. The Department of Education may, in its discretion, require
the institution to apply for approval before it awards or disburses Title IV
Program funds to students enrolled at such location. The Department of Education
regulations provide that the Department's determination is based on the
percentage of an educational program that is offered at the new location and on
the financial and administrative capability of the institution. An institution
must apply to the Department of Education for approval before it awards or
disburses Title IV Program funds to students enrolled at a new branch campus or
a new location at which it offers 100% of an educational program. The Company
does not believe that the Department of Education's regulations will create
significant obstacles to the University's plans to add new campuses.
The Department of Education recently issued new regulations that may reduce
regulatory burdens related to adding new locations. Under the new regulations,
institutions must report to the Department a new additional location at which at
least 50% of an eligible program will be offered, if the institution wants to
disburse Title IV Program funds to students enrolled at that location. Once it
reports the location to the Department, the institution may disburse Title IV
Program funds to eligible students at that location if the location is licensed
and accredited, unless in certain circumstances Department of Education approval
is required. Institutions are responsible for knowing whether they need
approval, and institutions that add locations and disburse Title IV Program
funds when they knew or should have known that they were required to obtain
Department of Education approval may be subject to administrative repayments and
other sanctions. These regulations are supposed to take effect on July 1, 2001.
However, the Bush Administration recently ordered federal agencies to postpone
temporarily the effective dates of published regulations for sixty days. It is
currently unclear what effect, if any, this postponement will have on the
regulations.
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Generally, if an institution eligible to participate in Title IV Programs
adds an educational program after it has been designated as an eligible
institution, the institution must apply to the Department of Education to have
the additional program designated as eligible. However, an institution is not
obligated to obtain Department of Education approval of an additional program
that leads to an associate, baccalaureate, professional or graduate degree or
which prepares students for gainful employment in the same or related recognized
occupation as an educational program that has previously been designated as an
eligible program at that institution and meets certain minimum length
requirements. In the event that an institution erroneously determines that an
educational program is eligible for Title IV funds without the Department of
Education's express approval, the institution may be liable for repayment of
Title IV aid received by the institution in connection with that program. The
Company does not believe that the Department of Education's regulations will
create significant obstacles to the University's plans to add new programs.
DISTANCE LEARNING
In 1997, the University received regulatory approval from the D.C. Education
Licensure Commission, Virginia State Council of Higher Education, Maryland
Higher Education Commission, and Middle States to offer all of its existing
degree and diploma programs through Strayer Online via Internet-based
telecommunications instruction. Instruction for this program is delivered from
the Company's Distance Learning Center in Lorton, Virginia. During the Fall 2000
quarter, the University had 2,020 students participating in the distance
learning program, of whom 495 students took classes solely through Strayer
Online.
In addition to the regulation of distance education by state education
licensure agencies and Middle States, the HEA imposes a limit on the amount of
correspondence study an institution participating in Title IV Programs may
offer. The HEA also excludes from Title IV Program participation institutions at
which 50% or more of the institution's students are enrolled in correspondence
courses, except that the Secretary of Education is authorized to waive this
limitation at his/her discretion in the case of institutions offering two- or
four-year programs leading to an associate or bachelor degree. Department of
Education regulations grant an automatic waiver for these degree-granting
institutions if students enrolled in correspondence courses receive five percent
or less of the total Title IV Program funds received by all students enrolled at
the institution. In accordance with HEA regulations, the Department of Education
considers a telecommunications course to be a correspondence course if the sum
of telecommunications courses and other correspondence courses the institution
provided during an award year equaled or exceeded 50% of the total number of
courses it provided during that year. In addition, a student is not eligible for
Title IV Program funds for a correspondence course unless such course is part of
a program leading to an associate, bachelor or graduate degree. The HEA states
that a student enrolled in a course of instruction that is offered in whole or
in part through telecommunications and leads to a recognized certificate for a
program of study of one year or longer, or a recognized associate, bachelor or
graduate degree conferred by such institution, is not considered to be enrolled
in a correspondence course, unless the total number of telecommunications and
correspondence courses offered by the institution equals or exceeds 50% of the
total number of courses offered by the institution. The University does not
anticipate that the number of students enrolled in Strayer Online courses will
equal or exceed one half of the University's total enrollment, or that the
number of courses offered through Strayer Online will equal or exceed one half
of the total number of courses offered by the institution. The University will
monitor enrollment in and the offering of courses through Strayer Online to
ensure that the prescribed limits are not exceeded.
CHANGE IN OWNERSHIP RESULTING IN A CHANGE OF CONTROL
Many states and accrediting agencies require institutions of higher
education to report or obtain approval of certain changes in ownership or other
aspects of institutional status, but the types of and triggers for such
reporting or approval vary among states and accrediting agencies. The D.C.
Education Licensure Commission may require an institution licensed by it to
apply to amend its license prior to a change in ownership. The applicable laws
and regulations of Virginia and Maryland do not specifically address reporting
of changes in ownership. The University's accrediting agency, Middle States,
requires institutions that it accredits to inform it in advance of any
substantive change, including a change that significantly alters the ownership
or control of the institution. Examples of substantive changes requiring advance
notice to Middle States include changes in the legal status, ownership or form
of control of the institution, such as the sale of a proprietary institution.
Middle States must approve a substantive change in advance in order to include
the change in the institution's accreditation status.
The HEA provides that an institution that undergoes a change in ownership
resulting in a change of control loses its eligibility to participate in the
Title IV Programs and must apply to the Department of Education in order to
reestablish such eligibility. An institution is ineligible to receive Title IV
Program funds during the period prior to recertification. The HEA provides that
the Department of Education may provisionally certify an institution seeking
approval of a change of ownership and control based on preliminary review by the
Department of a materially complete application received by the Department
within ten business days after the transaction. The Department may continue such
provisional certification on a month-to-month basis until it has rendered a
decision on the institution's recertification application. The HEA defines one
of the events that would trigger a change in ownership resulting in a change of
control as the transfer of the controlling interest of the stock of the
institution or its parent corporation. For a publicly-traded corporation, the
securities of which are required to be registered under the Exchange Act, such
as the Company, the
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Department of Education regulations implementing the HEA define a change in
ownership resulting in a change of control as occurring when a change of control
of the corporation takes place that gives rise to the obligation on the part of
the corporation to file a Form 8-K with the SEC notifying that agency of the
change of control.
Under INS regulations, if a school that is approved to admit foreign
students changes ownership, approval will be automatically withdrawn 60 days
after the change of ownership unless the school files a new petition for school
approval within 60 days after that change of ownership. If, after conducting a
review, the INS district director finds that the school's approval should not be
continued, the district director must institute proceedings to withdraw the
school's approval. The University currently has INS approval to admit foreign
students.
Pursuant to federal law providing benefits for veterans and reservists, the
University is approved for education of veterans and members of the selective
reserve and their dependents by the state approving agency in the District of
Columbia, Maryland, and Virginia. In certain circumstances, state approving
agencies may require an institution to obtain approval for a change in ownership
and control.
In order to complete the transactions discussed above (see Recent
Developments), the University is required to make a number of submissions to
educational regulatory bodies, including, among others, (1) filing a
"substantive change" report with Middle States; (2) filing an application for
approval to participate in federal student financial aid programs with the
Department of Education; (3) filings with the D.C. Education Licensure
Commission, the Maryland Higher Education Commission, and the Virginia State
Council of Higher Education; and (4) filings with the INS and approving agencies
for veterans benefits in the District of Columbia, Maryland, and Virginia. To
the extent that those regulatory bodies are required to approve the
transactions, completion of the transactions is conditioned on receipt of their
approvals.
On December 1, 2000, the University filed a "substantive change" report with
Middle States, and Middle States approved the change at its meeting on or about
March 2, 2001. The University filed an application for approval to participate
in federal student financial aid programs under the new ownership on January 4,
2001. By letter dated February 12, 2001, the Department of Education indicated
that there were no material barriers to the University obtaining a temporary
provisional program participation agreement after the change in ownership and
control occurs. The D.C. Education Licensure Commission approved the proposed
transactions at its December 28, 2000 meeting. By letter dated December 19,
2000, the Maryland Higher Education Commission indicated that it had taken all
required action with respect to the proposed transactions and that the
University's licensure will remain in good standing after the change in
ownership and control. The University notified the approving agency for veterans
benefits in Virginia of the transactions, and the agency indicated that no
further action is required.
The Virginia State Council of Higher Education has indicated that the
transactions will constitute a change in control under Council policies. The
University therefore must and will seek Council approval within thirty days
after Mr. Bailey gives the Investors a proxy to vote his shares of the Company
stock.
The INS has also indicated that the transactions will constitute a change in
ownership under its regulations. Therefore, the University plans to file a new
petition for school approval within 60 days after Mr. Bailey gives the Investors
a proxy to vote his shares of the Company stock.
The Company is continuing to seek necessary approvals from the other
regulatory bodies identified above. In addition, the University has notified its
guarantee agencies of the transaction.
If the University underwent a change of control that required re-approval by
any state authority, Middle States or any federal agency, and any required
regulatory approval were significantly delayed, limited or denied, there could
be a material adverse effect on the University's ability to offer certain
educational programs, award certain degrees or diplomas, operate one or more of
its locations, admit certain students or participate in Title IV Programs, which
in turn would materially and adversely affect the University's operations. A
change that required approval by a state regulatory authority, Middle States or
a federal agency could also delay the University's ability to establish new
campuses or educational programs and may have other adverse regulatory effects.
Furthermore, the suspension from Title IV Programs and the necessity of
obtaining regulatory approvals in connection with a change of control may
materially limit the University's flexibility in future financing or acquisition
transactions.
TAX REFORM ACT OF 1997
In August 1997, Congress passed the Tax Reform Act of 1997 ("Act") which
extended benefits associated with employer-provided educational assistance and
added several new tax credits and incentives for students. The Act continues the
exclusion from wages of up to $5,250 of tuition reimbursement per year under the
educational assistance programs provision. This provision does not apply to
graduate level programs beginning after June 30, 1996, and it expires with
respect to courses beginning after December 31,
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2001. The Hope Scholarship Credit provides a tax credit of up to $1,500 per year
per eligible student for tuition and related expenses in the first two years of
post-secondary education in a degree or certificate program. The Lifetime
Learning Credit provides a tax credit of up to $1,000 per year ($2,000 for
taxable years beginning on or after January 1, 2003) per taxpayer for tuition
and related expenses for all post-secondary education, including graduate
studies. Both of these credits are phased out for taxpayers with high modified
adjusted gross income. The Act also provides that individuals can deduct
interest paid on their student loans in the first five years of repayment,
beginning with the 1998 federal income tax return. The deduction is phased out
for taxpayers with high modified adjusted gross income.
ITEM 2. PROPERTIES.
The University leases eleven of its fourteen campuses, four of which are
owned by corporations controlled by the Company's President and CEO, Ron K.
Bailey. The leases with these corporations have ten-year terms expiring in 2006,
with three five-year renewal terms. See "Certain Transactions -- Lease of Campus
Facilities" and Note 7 to the Company's consolidated financial statements. The
table below sets forth certain information regarding each of Strayer University,
Inc.'s properties at December 31, 2000:
AREA IN LEASE EXPIRES
LOCATION SQUARE FEET YEAR
- --------------------------------- ----------- ----
Washington, D.C................... 33,000 2006
Alexandria, Virginia.............. 22,000 Facility is owned
Arlington, Virginia............... 26,000 2002
Woodbridge, Virginia.............. 20,800 2006
Manassas, Virginia................ 20,800 2006
Loudoun Campus (Ashburn, Virginia). 33,000 Facility is owned
Fredericksburg, Virginia.......... 17,500 2006
Takoma Park (Washington, D.C.).... 21,800 Facility is owned
Prince George's County, Maryland.. 18,000 2003
Henrico County (Glen Allen, Virginia) 19,000 2003
Montgomery County (Germantown, MD).. 17,000 2005
Anne Arundel County, Maryland.... 17,000 2004
White Marsh (Baltimore, MD)...... 20,000 2010
Chesterfield,Virginia............ 11,000 2005
Distance Learning (Lorton, Virginia) 16,200 2004
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation and other legal
proceedings arising out of the ordinary course of its business. There are no
pending material legal proceedings to which the Company is subject or to which
the Company's property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the Nasdaq National Market under the symbol
"STRA." The following table sets forth, for the periods indicated, the high and
low sale prices of the Company's Common Stock, as reported on the Nasdaq
National Market. All sale price information has been restated to reflect the
Company's November 18, 1997 3-for-2 stock split.
HIGH LOW
---------- ---------
1996:
Third Quarter (July 25 through September
30)................................... $ 17.88 $ 10.25
Fourth Quarter.......................... $ 23.00 $ 16.38
1997:
First Quarter........................... $ 17.92 $ 13.08
Second Quarter.......................... $ 26.33 $ 13.08
Third Quarter........................... $ 30.33 $ 23.08
Fourth Quarter.......................... $ 36.00 $ 28.00
1998:
First Quarter........................... $ 34.75 $ 30.00
Second Quarter.......................... $ 38.50 $ 33.00
Third Quarter........................... $ 35.00 $ 25.88
Fourth Quarter.......................... $ 39.75 $ 25.63
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1999:
First Quarter........................... $ 39.63 $ 31.13
Second Quarter.......................... $ 37.50 $ 26.25
Third Quarter........................... $ 32.81 $ 19.88
Fourth Quarter.......................... $ 23.00 $ 12.87
2000:
First Quarter........................... $ 31.63 $ 18.56
Second Quarter.......................... $ 27.13 $ 20.05
Third Quarter........................... $ 26.00 $ 20.63
Fourth Quarter.......................... $ 27.00 $ 17.50
The last sales price of the Common Stock on February 28, 2001, as reported
on the Nasdaq National Market, was $29.8125 per share. As of February 28, 2001,
there were approximately 52 holders of record and 2,869 non-objecting beneficial
shareholders. The Company believes that there are a number of holders of Common
Stock whose shares are held in nominee accounts by brokers.
The Company has established a policy of declaring quarterly cash dividends
at the rate of $0.065 per share ($0.26 annually) on the Company's Common Stock.
The amount of dividends payable in the future will be reviewed periodically by
the Company's Board of Directors in light of the Company's earnings, financial
condition, capital needs and regulatory considerations. There is no requirement
or assurance that dividends will be paid.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND
OPERATING DATA AMOUNTS).
The following table sets forth, for the periods and at the dates indicated,
selected consolidated financial data for the Company. The financial information
has been derived from the Company's consolidated financial statements. The
information set forth below is qualified by reference to and should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this annual report.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Total revenues........................ $45,005 $53,131 $62,872 $69,776 $78,214
------- ------- ------- ------- -------
Costs and expenses
Instruction and educational support. 17,808 19,738 22,355 25,082 28,187
Selling and promotion............... 4,457 5,476 5,923 7,765 8,480
General and administration.......... 6,749 7,232 8,387 9,405 10,620
----- ----- ----- ----- ------
29,014 32,446 36,665 42,252 47,287
------ ------ ------ ------ ------
Income from operations................. 15,991 20,685 26,207 27,524 30,927
Investment and other income............ 1,061 2,764 3,180 4,302 4,756
----- ----- ----- ----- -----
Income before income taxes............. 17,052 23,449 29,387 31,826 35,683
Provision for income taxes............. 2,740 9,012 11,440 12,500 13,974
----- ----- ------ ------ ------
Net income............................. $14,312 $14,437 $17,947 $19,326 $21,709
======= ======= ======= ======= =======
Cash dividends per common share $0.04 $0.17 $0.23 $0.24 $0.25
===== ===== ===== ===== =====
PRO FORMA DATA (1)
Income before income taxes............. $17,052
Income taxes........................... 6,649
-----
Net income............................. $10,403
=======
NET INCOME PER SHARE (PRO FORMA FOR 1996)
Basic.................................. $0.84 $0.96 $ 1.15 $1.25 $1.42
===== ===== ====== ===== =====
Diluted................................ $0.83 $0.93 $ 1.12 $1.23 $1.41
===== ===== ====== ===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING(2)
Basic.................................. 12,425 15,037 15,626 15,505 15,324
====== ====== ====== ====== ======
Diluted................................ 12,593 15,590 16,063 15,711 15,451
====== ====== ====== ====== ======
OPERATING DATA:
Enrollment(3) ......................... 8,200 9,400 10,400 11,500 12,100
AT DECEMBER 31,
---------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 11,777 $ 15,934 $18,614 $12,213 $25,190
Working capital........................ 15,574 20,600 23,363 18,170 26,742
Total assets........................... 47,822 78,248 97,146 98,096 119,139
Long-term liabilities.................. 189 137 330 141 -
Total liabilities...................... 12,411 13,125 15,501 17,035 21,395
Total stockholders' equity............. 35,411 65,123 81,645 81,061 97,744
================================================================================
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(1) Reflects the formation of the Company and the acquisition of the University
by the Company as if those events had taken place on January 1, 1996.
Following the termination of their status as S Corporations prior to
completion of the Company's initial public offering, the University and ELP
became subject to federal and state income tax. The pro forma data reflects
the application of statutory corporate income tax rates to income before
income taxes as if the termination of the S Corporation status of the
University and ELP had occurred on January 1, 1996. The effective pro forma
income tax rate for the year ended December 31, 1996 was 39%.
(2) Pro forma weighted average shares outstanding reflect the acquisition of the
University by the Company in exchange for 8,998,500 shares of common stock,
as if it had occurred on January 1, 1996. Subsequent to the closing of the
initial public offering, the Company made a distribution to the stockholders
of the University in respect of earnings previously subject to income tax
during the University's period as an S Corporation (the "S Corp.
Distribution"). As a result, pro forma weighted average shares outstanding
also give effect to the increase in the number of shares which, when
multiplied by the net per share proceeds of the offering, would have been
necessary to fund distributions to the stockholders, including the S Corp.
Distribution, during the twelve months ended July 1996, to the extent that
such distributions exceeded net income during the same period.
(3) Reflects student enrollment as of the beginning of the Fall academic quarter
for each year indicated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion contains statements that are forward looking. They
are based on the Company's current expectations and are subject to a number of
uncertainties and risks. The Company's actual results may differ materially. The
uncertainties and risks include the pace of growth of student enrollment, our
continued compliance with Title IV of the Higher Education Act, and the economic
environment. Further information about these and other relevant risks and
uncertainties may be found in the Company's other filings with the Securities
and Exchange Commission, all of which are available from the Commission and from
the Company's worldwide web site at http://www.strayeredu.com, as well as from
other sources.
BACKGROUND AND OVERVIEW
The University is a regional institution of higher education offering
undergraduate and graduate degree programs at fourteen campuses in Maryland,
Virginia, and the District of Columbia and online. The Company was incorporated
in May 1996 to acquire all of the outstanding capital stock of Strayer
University, Inc. and ELP from Mr. and Mrs. Ron K. Bailey. Upon completion of the
Company's initial public offering in July 1996, Strayer University, Inc. and
ELP, which administers the SEL Program, became direct subsidiaries of the
Company.
Revenues, operating income, and net income have increased in each of the
last three years. From 1997 through 2000, revenues increased approximately
47.2%, operating income increased approximately 49.5%, and net income increased
50.4%. The number of students increased approximately 28.7% from 9,400 at the
beginning of the 1997 Fall quarter to 12,100 at the beginning of the 2000 Fall
quarter, and tuition rates increased approximately 18.5% over the last three
years.
The University's principal source of revenue is tuition collected from its
students. The academic year of the University is divided into four quarters,
which approximately coincide with the four quarters of the calendar year.
Students generally must pay the entire tuition for each course prior to the
beginning of the quarter. If a student withdraws from a course prior to
completion, the University refunds a portion of the tuition. When students
register for courses, tuition is recorded as unearned tuition, which is
recognized as courses are taught through the academic quarter. Revenues also
consist in part of fees and other revenues derived principally from application
fees, "no show" fees, and bookstore sales. When a student registers for a course
but does not attend any classes, the University may have no place in the course
for another student and therefore imposes a "no show" fee on the registered
student. Beginning in 1998, the Company contracted out its bookstore operations
to a third party. Unless otherwise indicated, student enrollment information
presented herein reflects enrollment as of the beginning of the Fall academic
quarter for the applicable year, which is the beginning of the academic year and
the industry practice for measuring enrollments at educational institutions.
The University records tuition receivable when students register for the
academic quarter, generally prior to the end of the previous academic quarter.
Because the University's academic quarters coincide with the calendar quarters,
tuition receivable at the end of any calendar quarter largely represents student
tuition due for the following academic quarter. Based upon past experience and
judgment, the University establishes an allowance for doubtful accounts with
respect to accounts receivable not included in unearned tuition. Any uncollected
account more than six months past due is charged against the allowance. The
University's historical bad debt expense related to tuition receivable as a
percentage of revenue for the years ended December 31, 1998, 1999, and 2000 was
2.9%, 2.4%, and 2.7%, respectively.
15
16
The University's expenses consist of instruction and educational support
expenses, selling and promotional expenses, and general and administration
expenses. Instruction and educational support expenses generally contain items
of expense directly attributable to the educational activity of the University.
This expense category includes salaries and benefits of faculty, academic
administrators, and student support personnel. Instruction and educational
support expenses also include costs of educational supplies and facilities,
including rent on campus leases, certain costs of establishing and maintaining
computer laboratories, and all other physical plant and occupancy costs, with
the exception of costs attributable to the Jessup, Maryland and Newington,
Virginia facilities.
Selling and promotional expenses include salaries and benefits of personnel
engaged in recruitment, admissions, promotion and development, as well as costs
of advertising and production of marketing materials.
General and administration expenses include salaries and benefits of
personnel engaged in accounting, personnel, compliance and other business
functions, and plant and occupancy costs attributable to such functions.
Investment and other income consist primarily of earnings on investments.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage
of revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
1998 1999 2000
--------- --------- -------
Net revenues: 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Instruction and educational
support...................... 35.6 35.9 36.0
Selling and promotional....... 9.4 11.1 10.8
General and administration.... 13.3 13.5 13.6
---- ---- ----
Income from operations.......... 41.6 39.5 39.5
Investment and other income..... 5.1 6.2 6.1
---- ---- ----
Income before taxes............. 46.7 45.7 45.6
Provision for income taxes...... 18.2 18.0 17.9
---- ---- ----
Net income...................... 28.5% 27.7% 27.8%
===== ===== =====
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues increased 12.1% from $69.8 million in 1999 to $78.2
million in 2000 due to an increase in the number of students and a 5% tuition
increase in 2000.
Instruction and educational support expenses. Instruction and educational
support expenses increased 12.4% from $25.1 million in 1999 to $28.2 million in
2000 due to an increase in the number of personnel to support increased
enrollment, salary increases and the addition of a new campus in Chesterfield,
Virginia.
Selling and promotional expenses. Selling and promotional expenses increased
9.2% from $7.8 million in 1999 to $8.5 million in 2000 due principally to
increased advertising costs, and the addition of admissions personnel.
General and administration expenses. General and administration expenses
increased 12.9% from $9.4 million in 1999 to $10.6 million in 2000 due
principally to the addition of administrative personnel in order to support
increased enrollments and the addition of a new campus in Chesterfield,
Virginia.
Income from operations. Income from operations increased 12.4% from $27.5
million in 1999 to $30.9 million in 2000. This increase was primarily due to the
increases in student enrollment and tuition in 2000.
Provision for income taxes. Income tax expense increased 11.8% from $12.5
million in 1999 to $14.0 million in 2000. This increase was primarily due to the
increase in income before taxes attributable to the factors discussed above.
Net income. Net income increased 12.3% from $19.3 million in 1999 to $21.7
million in 2000 because of the factors discussed above.
16
17
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues increased 11.0% from $62.9 million in 1998 to $69.8
million in 1999 due to an increase in the number of students and a 5% tuition
increase in 1999.
Instruction and educational support expenses. Instruction and educational
support expenses increased 12.2% from $22.4 million in 1998 to $25.1 million in
1999 due to an increase in the number of personnel to support increased
enrollment, salary increases and the addition of the three new campuses.
Selling and promotional expenses. Selling and promotional expenses increased
31.1% from $5.9 million in 1998 to $7.8 million in 1999 due principally to
increased advertising costs, and the addition of admissions personnel.
General and administration expenses. General and administration expenses
increased 12.1% from $8.4 million in 1998 to $9.4 million in 1999 due
principally to the addition of administrative personnel in order to support
increased enrollments and the addition of three new campuses.
Income from operations. Income from operations increased 5.0% from $26.2
million in 1998 to $27.5 million in 1999. This increase was primarily due to the
increase in student enrollment and tuition in 1999.
Provision for income taxes. Income tax expense increased 9.3% from $11.4
million in 1998 to $12.5 million in 1999. This increase was primarily due to the
increase in income before taxes attributable to the factors discussed above.
Net income. Net income increased 7.7% from $17.9 million in 1998 to $19.3
million in 1999 because of the factors discussed above.
SEASONALITY
The Company's quarterly results of operations tend to vary significantly
within a year because of student enrollment patterns. Enrollment generally is
highest in the fourth, or Fall, quarter, and lowest in the third, or Summer,
quarter. In 2000, enrollments at the beginning of the Winter, Spring, Summer and
Fall academic quarters were 11,200, 10,700, 7,900 and 12,100, respectively.
Costs generally are not affected by the seasonal factors and do not vary
significantly on a quarterly basis. To some extent, however, instructional and
educational support expenses are lower in the third quarter because fewer
part-time faculty are needed.
The following table sets forth the Company's revenues on a quarterly basis
for the years ended December 1998, 1999, and 2000.
QUARTERLY REVENUE
(DOLLARS IN THOUSANDS)
1998 1999 2000
------------------ ------------------ -------------------
THREE MONTHS ENDED AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- --------------------- -------- -------- --------- -------- -------- ---------
March 31............ $ 16,849 27% $ 18,914 27% $ 21,128 27%
June 30............. 16,375 26 17,643 25 20,325 26
September 30........ 11,783 18 12,866 19 14,691 19
December 31......... 17,865 29 20,353 29 22,070 28
-------- --- -------- --- -------- ---
Total for Year...... $ 62,872 100% $ 69,776 100% $ 78,214 100%
======== === ======== === ======== ===
LIQUIDITY AND CAPITAL RESOURCES
During 2000, the Company generated cash of $27.3 million from operating
activities. Investing activities used cash of $9.1 million, principally for the
purchase of property and equipment and marketable securities. Cash used by
financing activities was $5.2 million for dividend payments of $3.8 million and
repurchase of $2.0 million of common stock, offset by proceeds from the exercise
of stock options of $.6 million.
At December 31, 2000, the Company had cash and cash equivalents and
marketable securities of $75.1 million compared to $57.5 million at December 31,
1999. In addition, the Company has available a $10.0 million credit facility
from a bank. The Company intends to use the proceeds from the sale of its series
A preferred stock, combined with most of its cash and marketable securities, to
effect a tender offer to purchase up to 8.5 million shares of the Company's
common stock at a price of $25.00 per share in the second
17
18
quarter of 2001. The Company believes that existing cash and cash equivalents,
marketable securities, cash generated from operating activities and, if
necessary, cash borrowed under the credit facility, will be sufficient to meet
the Company's requirements for at least the next 24 months. If the University
decides to purchase additional campus facilities, it may finance such
acquisitions with indebtedness.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes and changes in
the market values of its investments. The Company invests its excess cash in
marketable securities and certificates of deposit. At December 31, 2000 the
Company's investments include certificates of deposit, money market funds, U.S.
Government obligations (primarily fixed income securities) and high-quality
equity securities. The Company employs established policies and procedures to
manage its exposure to changes in the market risk of its marketable securities,
which are classified as available-for-sale as of December 31, 2000. The Company
has not used derivative financial instruments in its investment portfolio.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. These securities may have their fair market value adversely
impacted due to a rise in interest rates. Investments in certificates of deposit
and money market funds may adversely impact future earnings due to a decrease in
interest rates. Due in part to these factors, the Company's future investment
income may fall short of expectations due to changes in interest rates or the
Company may suffer losses in principal if forced to sell securities which have
declined in market value due to changes in interest rates. As of December 31,
2000, a 10% increase or decline in interest rates will not have a material
impact on the Company's future earnings, fair values, or cash flows related to
investments in certificates of deposit or interest earning marketable
securities. In addition, as of December 31, 2000, a 10% decrease in market
values would not have a material impact on the Company's future earning, fair
values, financial position or cash flows related to investments in marketable
equity securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Strayer Education, Inc.
Report of Independent Accountants..................................... 19
Consolidated Balance Sheets as of December 31, 1999 and 2000.......... 20
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2000...................................... 21
Consolidated Statements of Comprehensive Income for each of the three
years in the period ended December 31, 2000......................... 21
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 2000......................... 22
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2000.................................. 23
Notes to Consolidated Financial Statements............................ 24-29
Schedule II -- Valuation and Qualifying Accounts...................... 30
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
18
19
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Strayer Education, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Strayer Education, Inc. and its subsidiaries (the "Company") as of December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Washington, D.C.
February 9, 2001
19
20
STRAYER EDUCATION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------
1999 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents............................................... $12,213 $25,190
Marketable securities available for sale, at fair value................. 5,901 5,918
Short-term investments -- restricted.................................... 959 1,008
Tuition receivable, net of allowances for doubtful accounts of $605 and
$489 in 1999 and 2000, respectively................................. 14,997 15,264
Income taxes receivable................................................. 201 -
Other current assets.................................................... 793 757
------- -------
Total current assets............................................ 35,064 48,137
Student loans receivable, net of allowances for losses.................... 6,436 7,288
Property and equipment, net............................................... 16,837 19,469
Marketable securities available for sale, at fair value................... 39,440 43,982
Other assets.............................................................. 319 263
------- -------
Total assets.................................................... $98,096 $119,139
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $183 $769
Accrued expenses........................................................ 423 1,325
Income taxes payable.................................................... - 323
Dividends payable....................................................... 917 995
Unearned tuition........................................................ 15,371 17,983
------- -------
Total current liabilities....................................... 16,894 21,395
Deferred income taxes..................................................... 141 -
------- -------
Total liabilities............................................... 17,035 21,395
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01; 5,000,000 shares authorized, no shares
issued or outstanding................................................. -- --
Common stock, par value $.01; 50,000,000 shares authorized; 15,277,251
and 15,303,166 shares issued and outstanding in 1999 and 2000,
respectively.......................................................... 153 153
Additional paid-in capital.............................................. 34,175 33,119
Retained earnings....................................................... 46,194 64,069
Accumulated other comprehensive income.................................. 539 403
------- -------
Total stockholders' equity...................................... 81,061 97,744
------- -------
Total liabilities and stockholders' equity...................... $98,096 $119,139
======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
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21
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
---- ---- ----
Revenues $ 62,872 $ 69,776 $ 78,214
-------- -------- --------
Costs and expenses:
Instruction and educational support........ 22,355 25,082 28,187
Selling and promotion...................... 5,923 7,765 8,480
General and administration................. 8,387 9,405 10,620
------ ------- -------
36,665 42,252 47,287
------ ------- -------
Income from operations..................... 26,207 27,524 30,927
Investment and other income.................. 3,180 4,302 4,756
------ ------- ------
Income before income taxes................. 29,387 31,826 35,683
Provision for income taxes................... 11,440 12,500 13,974
------ ------- -------
Net income................................. $17,947 $19,326 $21,709
======= ======= =======
NET INCOME PER SHARE:
Basic...................................... $1.15 $1.25 $1.42
Diluted.................................... $1.12 $1.23 $1.41
The accompanying notes are an integral part of these
consolidated financial statements.
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
---- ---- ----
Net income.............................................. $17,947 $19,326 $21,709
Other comprehensive income (loss):
Unrealized gains (losses) on investments, net of taxes. 460 (204) (136)
------- -------- --------
Comprehensive income.................................. $18,407 $19,122 $21,573
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
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STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ACCUMULATED
------------------------ ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
---------- ---------- ----------- ---------- ------ -----------
Balance, December 31, 1997 15,542,105 $156 $48,762 $15,922 $283 $65,123
Exercise of stock options..... 303,872 3 2,096 - - 2,099
Repurchase of common stock.... (71,500) (1) (2,388) - - (2,389)
Dividends ($0.23 per share).... - - - (3,595) - (3,595)
Tax benefit from exercise of
stock options............... - - 2,000 - - 2,000
Net unrealized gains on
marketable securities...... - - - - 460 460
Net income.................... - - - 17,947 - 17,947
------------ --------- --------- --------- -------- ----------
Balance, December 31, 1998 15,774,477 158 50,470 30,274 743 81,645
Exercise of stock options..... 133,203 1 903 - - 904
Repurchase of common stock.... (630,429) (6) (17,723) - - (17,729)
Dividends ($0.24 per share).... - - - (3,406) - (3,406)
Tax benefit from exercise of
stock options............... - - 525 - - 525
Net unrealized losses on
marketable securities....... - - - - (204) (204)
Net income.................... - - - 19,326 - 19,326
------------ --------- --------- --------- -------- ----------
Balance, December 31, 1999 15,277,251 153 34,175 46,194 539 81,061
Exercise of stock options..... 88,615 1 590 - - 591
Repurchase of common stock.... (62,700) (1) (2,028) - - (2,029)
Dividends ($0.25 per share).... - - - (3,834) - (3,834)
Tax benefit from exercise of
stock options............... - - 382 - - 382
Net unrealized losses on
marketable securities....... - - - - (136) (136)
Net income.................... - - - 21,709 - 21,709
------------ --------- --------- --------- -------- ----------
Balance, December 31, 2000 15,303,166 $153 $33,119 $64,069 $403 $97,744
============ ========= ========= ========= ======== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income................................................. $17,947 $19,326 $21,709
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 1,625 1,894 2,063
Provision for student loan losses....................... 353 216 172
Deferred income taxes................................... (147) (248) (147)
Other non-cash charges.................................. 75 -- --
Changes in assets and liabilities:
Short-term investments -- restricted.................... (43) (37) (49)
Tuition receivable, net................................. (1,749) (3,185) (267)
Inventories............................................. 1,018 -- --
Income taxes............................................ 1,725 599 906
Other current assets.................................... 238 (114) 42
Other assets............................................ 10 (97) 56
Accounts payable........................................ (214) 17 279
Accrued expenses........................................ 114 (520) 902
Unearned tuition........................................ 1,494 2,098 2,612
Student loans originated or acquired....................... (4,293) (5,124) (5,499)
Collections on student loans receivable.................... 2,854 3,996 4,475
----- ----- -----
Net cash provided by operating activities.......... 21,007 18,821 27,254
------ ------ ------
Cash flows from investing activities:
Purchases of property and equipment........................ (7,392) (4,851) (4,388)
Purchases of marketable securities......................... (19,739) (9,298) (14,157)
Maturities of marketable securities........................ 11,975 9,030 9,462
------ ----- -----
Net cash used in investing activities.............. (15,156) (5,119) (9,083)
-------- ------- -------
Cash flows from financing activities:
Dividends paid............................................. (2,806) (3,278) (3,756)
Proceeds from exercise of stock options.................... 2,024 904 591
Repurchase of common stock................................. (2,389) (17,729) (2,029)
------- -------- -------
Net cash used in financing activities.............. (3,171) (20,103) (5,194)
------- -------- -------
Net increase (decrease) in cash and cash requirements 2,680 (6,401) 12,977
Cash and cash equivalents -- beginning of year............... 15,934 18,614 12,213
------ ------ ------
Cash and cash equivalents -- end of year..................... $18,614 $12,213 $25,190
======= ======= =======
Non-cash transaction:
Property and equipment included in accounts payable....... $ - $ - $ 307
The accompanying notes are an integral part of these
consolidated financial statements.
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STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Strayer Education, Inc. (the Company), a Maryland corporation, conducts its
operations though its subsidiaries, Strayer University, Inc. (the University)
and Education Loan Processing, Inc. (ELP). The University is an accredited
institution of higher education that provides undergraduate and graduate degrees
in various fields of study through its fourteen campuses in the District of
Columbia, Maryland and Virginia. ELP provides student loans for the University's
students. For purposes of the consolidated balance sheets, all of ELP's assets
and liabilities have been classified as current assets and liabilities with the
exception of student loans receivable, which have been classified as non-current
consistent with industry practice.
In November 2000, the Company and an investment group signed a definitive
agreement whereby the investment group will make an investment of $150 million
in the Company. Under the terms of the agreement approved by the Company's Board
of Directors, the investment group will purchase 5,769,231 shares of series A
preferred stock from the Company with a weighted average dividend rate of 5.32%
and convertible into common stock at a price of $26.00 per share. The Company
will use the $150 million, together with approximately $62.5 million of its cash
and marketable securities, to repurchase up to 8.5 million shares of outstanding
common stock of the Company. All stockholders will have the opportunity to
participate pro rata in the tender offer. In connection with the definitive
agreement, the Company's majority stockholder agreed to tender 7.2 million
shares. The transaction is subject to satisfaction of certain closing
conditions, including stockholder and regulatory approvals. It is expected that
the transaction will close in escrow and the tender offer will be commenced
during the first quarter of 2001, and final regulatory approvals will be
received in the second quarter of 2001.
Principles of Consolidation
The consolidated financial statements include the accounts of Strayer
Education, Inc. and its subsidiaries, the University, ELP, and Professional
Education, Inc. All inter-company accounts and transactions have been eliminated
in the consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of operating cash and cash invested in
U.S. government obligations. The Company places its cash and temporary cash
investments with high quality credit institutions. The Company considers all
highly liquid instruments purchased with a maturity of three months or less at
the date of purchase to be cash equivalents.
Investments
The Company's investments in marketable securities are considered
"available-for-sale," and, as such, are stated at fair value. The net unrealized
gains and losses are reported as a component of accumulated comprehensive income
in stockholders' equity. Realized gains or losses from the sale of marketable
securities are based on the specific identification method.
Tuition Revenues
Tuition income is deferred at the time of registration and is recognized as
income, net of any refunds or withdrawals, throughout each respective quarter
session. Advance registrations for the next quarter are shown as unearned
tuition.
Student Loans Receivable
Student loans receivable are stated at the amount of unpaid principal,
reduced by an allowance for loan losses. Interest income from student loans is
recognized using the interest method.
Provisions for estimated losses on student loans are charged to income in
amounts sufficient to maintain the allowance at a level considered adequate to
cover the losses of principal and interest in the existing loan portfolio, based
upon historical trends, economic conditions and other information. ELP's
charge-off policy is based on a loan-by-loan review; however, any loan with
payments more than 120 days past due is written off against the allowance.
24
25
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Concentration of Credit Risk
The Company places its cash and temporary cash investments with high credit
quality institutions. At times cash and cash equivalent balances may be in
excess of the FDIC insurance limit. The Company has not experienced any losses
on its cash and cash equivalents.
Tuition receivables are not collateralized; however, credit risk is
minimized as a result of the diverse nature of the University's student base in
Maryland, Virginia, and the District of Columbia. The University establishes an
allowance for doubtful tuition accounts based upon historical trends and other
information.
Student loans are receivable from the University's students. The Company
performs credit evaluations and requires cosigners in some instances to minimize
credit risk.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives ranging from 3 to 40 years. Depreciation and amortization amounted to
$1,625,000, $1,894,000, and $2,063,000 for the years ended December 31, 1998,
1999, and 2000, respectively.
Income Taxes
The Company provides for deferred income taxes based on temporary
differences between financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
Net Income Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the periods. Diluted
earnings per share is computed by dividing net income by the weighted average
common and potentially dilutive common equivalent shares outstanding, determined
as follows (in thousands):
1998 1999 2000
---- ---- ----
Weighted average shares outstanding
used to compute basic earnings per
share 15,626 15,506 15,324
Incremental shares issuable upon the
assumed exercise of stock options.. 437 205 127
--- --- ---
Shares used to compute diluted
earnings per share................. 16,063 15,711 15,451
====== ====== ======
Incremental shares issuable upon the assumed exercise of outstanding stock
options is computed using the average market price during the related periods.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of expenses during the period reported. Actual results could differ from
those estimates.
Comprehensive Income
Comprehensive income consists of net income and unrealized gains (losses) on
investments in marketable securities, net of income taxes.
25
26
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Reclassification
The income tax benefits realized by the Company from employee exercises of
stock options for the years ended December 31, 1998 and 1999 have been
reclassified to operating activities on the consolidated statements of cash
flows to conform with the December 31, 2000 presentation.
2. INVESTMENTS
Short-Term Investments -- Restricted
The U.S. Department of Education requires Title IV Program loan funds
collected in excess of amounts due for tuition to be kept in a cash or cash
equivalent account until such amounts are required to be remitted to students.
These funds are invested in short-term U.S. Treasury Notes.
Marketable Securities
The cost and fair value for each class of investments as of December 31, 1999
and 2000 are as follows (in thousands):
1999
-----------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
Certificates of deposit and money
market funds....................... $8,852 $ -- $ -- $ 8,852
Fixed income investments............ 23,835 23 435 23,423
Equity securities................... 11,771 1,295 -- 13,066
------ ------- ------ --------
Total..................... $44,458 $ 1,318 $ 435 $ 45,341
======= ======= ====== ========
2000
------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
Certificates of deposit and money
market funds....................... $20,580 $ -- $ -- $ 20,580
Fixed income investments............ 20,591 183 124 20,650
Equity securities................... 8,068 651 49 8,670
------- ------ ------ --------
Total..................... $49,239 $ 834 $ 173 $ 49,900
======= ====== ====== ========
3. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1999 and 2000 is as
follows (in thousands):
1999 2000
------ ------
Land....................................... $4,014 $4,208
Buildings.................................. 5,414 5,414
Furniture and equipment.................... 11,155 13,921
Leasehold improvements..................... 3,967 5,702
Vehicles................................... 22 22
-------- -------
24,572 29,267
Less accumulated depreciation and
amortization..................... (7,735) (9,798)
-------- -------
$16,837 $19,469
======== =======
4. STUDENT LOANS RECEIVABLE
The loans receivable under the Strayer Education Loan Program as of December 31,
1999 and 2000 are as follows (in thousands):
1999 2000
------ ------
Student loans receivable outstanding, including
accrued interest............................... $6,847 $7,753
Allowance for loan losses....................... (411) (465)
----- -----
Student loans receivable, net.............. $6,436 $7,288
====== ======
26
27
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The interest rate on these student loans is generally 7.5%. The Company
believes the carrying value of the student loans approximates their fair value.
The loans require a minimum monthly payment of the greater of $50 or 3% of the
outstanding loan balance, plus interest while the student is in attendance. Upon
the student's graduation or withdrawal, the loans become due in equal monthly
installments of principal plus interest over 33.3 months.
5. STOCK OPTION PLAN
In July 1996, the Company set aside 1,500,000 shares of common stock for
shares to be issued under the Company's 1996 Stock Option Plan (the Plan) that
provided for the grant of options intended to qualify as incentive stock
options, and also provided for the grant of non-qualifying options to directors
and employees of the Company. Options may be granted to eligible employees of
the Company at the discretion of the Board of Directors, at option prices based
on the fair market value of the shares at the date of grant. Vesting provisions
are at the discretion of the Board of Directors. Stock option activity for the
years ended December 31, 1998, 1999, and 2000 as follows:
NUMBER OF SHARES
----------------
Balance, December 31, 1997 727,058
Grants......................... 11,324
Exercises...................... (303,872)
Forfeitures.................... -
--------
Balance, December 31, 1998 434,510
Grants......................... 2,759
Exercises...................... (133,203)
Forfeitures.................... -
--------
Balance, December 31, 1999 304,066
Grants......................... -
Exercises...................... (88,615)
Forfeitures.................... -
--------
Balance, December 31, 2000 215,451
========
At December 31, 2000, the 215,451 stock options outstanding are exercisable.
All of the options have an exercise price of $6.67 per share and expire on July
25, 2001.
The Company accounts for the fair value of its stock options granted to
employees and directors in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
expense has been recognized for the Plan, since the exercise price of the
options was equal to the fair value of the underlying common stock on the date
of grant. Had compensation expense been determined based on the fair value of
the options at the grant dates consistent with that method of accounting under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," the Company's pro forma net income and net income per share for
the years ended December 31, 1998, 1999, and 2000 would have been decreased as
indicated below (in thousands):
1998 1999 2000
---- ---- ----
Net income:
As reported............... $17,947 $19,326 $21,709
Pro forma................. $17,574 $19,283 $21,530
Net income per common share:
Basic:
As reported............... $ 1.15 $1.25 $1.42
Pro forma................. $ 1.12 $1.24 $1.40
Diluted:
As reported............... $ 1.12 $1.23 $1.41
Pro forma................. $ 1.09 $1.23 $1.39
The fair value of each option granted in 1999 was estimated on the date of
grant using the Black-Scholes option-pricing model using the following
assumptions: dividend yield of 1.0%; expected volatility of 47%; risk-free
interest rate of 5.25%; expected term of 2.1 years. The fair value at date of
grant was $25.55 per share. The fair value of each option granted in 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model
using the following assumptions: dividend yield 1.0%; expected volatility of
35%; risk-free interest rate of 4.17%; expected term of 2 years. The fair value
at date of grant was $20.08 per share. The remaining contractual life of the
options as of December 31, 2000 was .58 years.
27
28
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. OTHER EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing trust covering all eligible
employees of the Company. Participants may defer a percentage of their salaries
or make contributions up to 10% of their total compensation. Employee
contributions are voluntary. Discretionary contributions are made by the Company
in the fourth quarter of each year, and were $185,000, $186,000 and $195,000 for
the years ended December 31, 1998, 1999 and 2000, respectively.
In May 1998, the Company adopted the Strayer Education Employee Stock
Purchase Plan (ESPP). Under the ESPP, eligible employees may purchase shares of
the Company's common stock, subject to certain limitations, at 90 percent of its
market value at the date of purchase. Purchases are limited to 10 percent of an
employee's eligible compensation. The aggregate number of shares of Common Stock
that may be made available for purchase by participating employees under the
ESPP is 2,500,000 shares. During 1998, 1999 and 2000, 4,116, 11,962 and 10,297
shares, respectively, were purchased in the open market for employees, at
average prices of $31.81, $26.13 and $23.93 per share, respectively.
7. COMMITMENTS AND CONTINGENCIES
The University participates in various federal student financial assistance
programs which are subject to audit. Management believes that the potential
effects of audit adjustments, if any, for the periods currently under audit will
not have a material adverse effect on the Company's financial position, results
of operations or cash flows.
The Company has long-term operating leases for eleven of its fourteen
campuses and other administrative locations. Rent expense was $3,658,000,
$4,227,000 and $4,770,000 for the years ended December 31, 1998, 1999 and 2000,
respectively. The University has the option to buy certain of these campus
properties at their fair market value as determined by independent appraisal.
The Washington D.C. campus and three of the Virginia campuses are leased from
companies owned by the President and Chief Executive Officer and a majority
stockholder of the Company. Rent paid to these companies was $2,199,363,
$2,040,167 and $1,836,565 for the years ended December 31, 1998, 1999 and 2000,
respectively. During 1999, the Company acquired its Takoma Park Campus from its
majority stockholder for $1,024,000.
The rents on these leases are subject to an annual increase based on a
stipulated price index. The minimum rental commitments for the Company as of
December 31, 2000 are as follows (in thousands):
TOTAL AMOUNT PAYABLE
TOTAL TO RELATED PARTIES
--------- ------------------
2001...................... $5,029 $1,881
2002...................... 4,554 1,881
2003...................... 4,106 1,881
2004...................... 3,274 1,881
2005...................... 2,988 1,881
Thereafter................ 2,231 849
----- -------
$22,182 $ 10,254
======== ========
In addition, the Company has a credit facility from a bank in the amount of
$10.0 million. Interest on any borrowings under the facility will accrue at an
annual rate not to exceed 0.75% above the London Interbank Offered Rate. The
Company does not pay a fee for this facility, but in the event of any
borrowings, an origination fee of 1% will be due on the amounts borrowed from
time to time thereunder. There have been no borrowings by the Company under the
credit facility.
On October 2, 1998, the Board of Directors authorized the Company to
repurchase up to five percent of its outstanding common stock at market prices,
not to exceed a total cost of $24 million. The timing of stock purchases are
made at the discretion of management. The Company repurchased 630,429 shares and
62,700 shares during the years ended December 31, 1999 and 2000, respectively.
During the year 2000, the Board authorized an additional stock repurchase
program in an amount of up to $40,000,000. The Company suspended the repurchase
plan from February to September of the year 2000 and again in December of 2000.
28
29
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES
The income tax provision for the years ended December 31, 1998, 1999 and
2000 is summarized below (in thousands).
Current: 1998 1999 2000
----- ----- ----
Federal............................ $ 9,620 $10,453 $11,637
State.............................. 1,967 2,295 2,484
------- ------- -------
11,587 12,748 14,121
------- ------- -------
Deferred:
Federal............................ (129) (203) (132)
State.............................. (18) (45) (15)
------- ------- ----
(147) (248) (147)
------- ------- -------
$11,440 $12,500 $13,974
======= ======= =======
The tax effects of the principal temporary differences that give rise to the
Company's deferred tax assets (liabilities) are as follows as of December 31,
1999 and 2000 (in thousands):
1999 2000
---- ----
Tuition receivable and student loans ......................... $396 $372
Property and equipment........................................ 203 283
Accrued vacation payable...................................... 45 50
Unrealized gains on marketable securities..................... (344) (258)
----- -----
Net deferred tax asset........................................ $ 300 $ 447
===== =====
A reconciliation between the Company's statutory tax rate and the effective
tax rate for the years ended December 31, 1998, 1999, and 2000 is as follows:
1998 1999 2000
---- ---- ----
Statutory federal rate........................................ 35% 35% 35%
State income taxes, net of federal benefits................... 5% 5% 5%
Effect of prior year accruals................................. (1%) (1%) (1%)
----- ----- -----
Effective tax rate............................................ 39% 39% 39%
===== ===== =====
Cash payments for income taxes were $9,552,000 in 1998, $12,674,000 in 1999
and $13,628,000 in 2000.
9. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for 1999 and 2000 is as follows (in
thousands except per share data):
1999 QUARTER
- ----------------------- --------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Total revenues......... $18,914 $17,643 $12,866 $20,353
Income from operations. 9,275 7,692 1,379 9,178
Net income............. 6,158 5,511 1,509 6,147
Net income per share:
Basic.......... $ 0.39 $ 0.35 $ 0.10 $ 0.41
Diluted........ $ 0.39 $ 0.35 $ 0.10 $ 0.40
2000 QUARTER
- ----------------------- --------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Total revenues......... $21,128 $20,325 $14,691 $22,070
Income from operations. 10,423 8,432 2,192 9,880
Net income............. 6,810 5,878 2,126 6,895
Net income per share:
Basic.......... $ 0.45 $ 0.38 $ 0.14 $ 0.45
Diluted........ $ 0.44 $ 0.38 $ 0.14 $ 0.45
29
30
STRAYER EDUCATION, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE ADDITIONS BALANCE
BEGINNING OF CHARGED TO END OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS PERIOD
- -------------------------------- ------------ ----------- ---------- ---------
Deduction from asset account:
Allowance for doubtful accounts:
Year ended December 31, 2000 $605 $2,147 ($2,263) $489
Year ended December 31, 1999 295 1,695 (1,385) 605
Year ended December 31, 1998 230 1,302 (1,237) 295
Allowance for loan losses:
Year ended December 31, 2000 411 172 (118) 465
Year ended December 31, 1999 353 216 (158) 411
Year ended December 31, 1998 283 353 (283) 353
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
NAME AGE POSITION
- -------------------- ------ -----------------------------------
Ron K. Bailey....... 60 Chief Executive Officer, President,
Director
Harry T. Wilkins.... 44 Chief Financial Officer
Stanley G. Elmore... 59 Chairman of the Board of Directors
Todd A. Milano...... 48 Director, Treasurer
Jennie D. Seaton.... 71 Director
Roland Carey........ 61 Director
Donald T. Benson.... 57 Director
G. Thomas Waite, III 49 Director
Charlotte Beason.... 53 Director
Stephen C. Eastham.. 56 Director
Ron K. Bailey is the Chief Executive Officer and President and has been a
director of the Company since its formation. Mr. Bailey is currently the
Chairman of the University and was the President and a trustee of the University
from 1989 to 1997. He has been the President and a director of ELP since its
formation in 1994. From 1980 to 1989, Mr. Bailey held a variety of
administrative positions with the University, including the position of Vice
President of the University. Before assuming his first full-time position with
the University in 1980, Mr. Bailey was a part-time faculty member of the
University and served as Director of Data Processing of the National Association
of Home Builders.
Harry T. Wilkins is the Chief Financial Officer of the Company and has been
the Director of Financial Affairs of the University since 1992. Prior to joining
the University, Mr. Wilkins was a Director with the accounting firm of Wooden &
Benson, Chartered from 1984 to 1992 and a member of the consulting practice of
the accounting firm of Deloitte Touche (then Deloitte, Haskins and Sells) from
1979 to 1984. Mr. Wilkins is a Certified Public Accountant.
Stanley G. Elmore has been a director of the Company since July 1996. Mr.
Elmore served as the Chairman of the Board of Trustees of the University from
1989 to 1997. Mr. Elmore retired in 1998 from his position as Vice President,
Citibank Mid-Atlantic, a position he had held since 1989.
Todd A. Milano is the Treasurer of the Company and has been a director of
the Company since July 1996. Mr. Milano also served as the Vice Chairman of the
Board of Trustees of the University from 1992 to 1999. Mr. Milano has been the
President and Chief Executive Officer of Central Pennsylvania College since
1989.
30
31
Dr. Jennie D. Seaton has been a director of the Company since July 1996. Dr.
Seaton has been a member of the Board of Trustees of the University since 1990
and was elected to Vice Chairman of the Board of Trustees of the University in
1999. Dr. Seaton is retired and was an Assistant Dean of Virginia Commonwealth
University from 1975 to 1994.
Roland Carey has been a director of the Company since July 1996. Mr. Carey
has been a member of the Board of Trustees of the University since 1990. Since
August 1999, Mr. Carey has been an Instructor with the Louisa County Public
School System of Virginia and Chairman of the Middle School Leadership Team.
Prior to his current position, Mr. Carey was the Program Coordinator, Carl
Sandburg School for more than twelve years, and served 23 years as an Army
officer.
Donald T. Benson has been a director of the Company since July 1996. Mr.
Benson has been a member of the Board of Trustees of the University since 1992.
Mr. Benson serves as Senior Vice President, Human Resources and Real Estate
Investment of Methodist Health Care System in Houston, Texas. From 1997 to 1998,
Mr. Benson was Vice President, Human Resources and Administration of Coventry
Corporation. Mr. Benson was Vice President, Human Resources of Aetna Inc. from
1992 to 1997.
G. Thomas Waite III, CPA, has been a director of the Company since July
1996. Mr. Waite has been a member of the Board of Trustees of the University
since 1994. Mr. Waite has served as Treasurer and Chief Financial Officer,
Humane Society of the United States since 1993. Prior to his current position,
Mr. Waite was the Director of Commercial Management of The National Housing
Partnership and practiced with the firm of Main Hurdman & Company (now KPMG).
Dr. Charlotte Beason has been a director of the Company since July 1996. Dr.
Beason has been a member of the Board of Trustees of the University since 1995.
Dr. Beason is a Nurse at the U.S. Department of Veterans Affairs, a position she
has held for more than five years.
Stephen C. Eastham has been director of the Company since May 2000. Mr.
Eastham has been the sole proprietor of Eastham & Associates since 1989. Mr.
Eastham assists early-stage companies in fund raising and financial strategy.
From 1974 to 1989, Mr. Eastham served as President, General Counsel and Director
of Finalco Group, Inc. Mr. Eastham serves as an adjunct professor at Johns
Hopkins University, where he teaches graduate courses in emerging markets and
transitional economics.
Directors of the Company are elected at the annual meeting of stockholders
and serve until their successors are duly elected and qualified or until their
earlier resignation or removal. Executive officers serve at the discretion of
the Board of Directors.
CERTAIN SIGNIFICANT EMPLOYEES OF THE UNIVERSITY
The following information is supplied with respect to certain other
significant employees of the University:
Dr. Donald Stoddard, Ph.D., 64, is the President of Strayer University. He
was a director of the Company from July 1996 to July 1997. Dr. Stoddard has been
a member of the Board of Trustees of the University since 1995. Dr. Stoddard was
a Professor, Department of English, Anne Arundel Community College from 1990 to
1997. From 1979 to 1990, Dr. Stoddard was the Coordinator, Collegiate
Institutional Approval, of the Maryland Higher Education Commission.
Robert E. Farmer, 62, is Director of Operations of the University, a
position to which he was appointed in 2000. Previously, Mr. Farmer was the
Director of Human Resources, a position he held since 1995. Mr. Farmer was the
Campus Coordinator of the Arlington campus from 1992 until 1995, and was the
Director of Admissions at that campus from 1990 to 1992. Mr. Farmer is a
certified Professional in Human Resources (PHR).
Marla Boulter, 45, is the University's Director of Public Relations, a
position she has held since 1995. Ms. Boulter joined the University in 1990 as
an accountant and was the University's Director of Marketing from 1991 to 1995.
Michael O. Williams, 47, is the newly appointed Director of Human Resources,
employed at the University since 1992. Mr. Williams, an alumnus of the graduate
program at Strayer University, was a former Campus Coordinator of the Washington
Campus, 1995-2000, and previously an admissions representative.
Weicheng Huynh, 28, is the University's Director of Information Technology,
a position to which he was appointed in 2000, previously serving on the staff of
the Management Information Systems department since 1999.
31
32
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, an Executive
Committee and a Compensation Committee.
Audit Committee. The Audit Committee consists of G. Thomas Waite, Roland
Carey, Charlotte Beason, Stanley Elmore, and Stephen Eastham. This committee
makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants and reviews the adequacy of the Company's
internal accounting controls.
Executive Committee. The Executive Committee consists of Stanley Elmore, Ron
Bailey and Jennie Seaton. This committee exercises such authority as is
delegated to it.
Compensation Committee. The Compensation Committee consists of Donald Benson
and Todd Milano. The Compensation Committee determines the compensation of the
Company's executive officers, subject to the provisions of any employment
agreements, and administers the Company's Stock Option Plan.
COMPENSATION OF THE BOARD OF DIRECTORS
Directors are reimbursed for expenses incurred in connection with their
attendance at Board and Committee meetings and currently receive compensation of
$2,000 per meeting.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by reference
from the information to be contained under the caption "Compensation" in the
Company's 2000 Proxy Statement which will be filed no later than 120 days
following December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the ownership
of Common Stock as of February 28, 2001, by each person known by the Company to
be the beneficial owner of more than five percent (5%) of the outstanding shares
of Common Stock, each director of the Company, and all executive officers and
directors as a group. The information presented in the table is based upon the
most recent filings with the Securities and Exchange Commission by such persons
or upon information otherwise provided by such persons to the Company. Except as
noted below, the address for all 5% beneficial owners is: 1025 Fifteenth Street,
N.W., Washington, D.C. 20005.
SHARES BENEFICIALLY OWNED
-------------------------
NAMES OF BENEFICIAL OWNERS (1) NUMBER PERCENT OF CLASS
- --------------------------------------------------- ---------- ----------------
Ron K. Bailey and Beverly W. Bailey (2)............ 8,175,000 52.7%
Kayne Anderson Investment Management, LLC. (3)
1800 Avenue of the Stars
Los Angeles, CA 90067......................... 1,373,719 8.97%
T. Rowe Price Associates, Inc. (4)
100 East Pratt Street
Baltimore, MD 21202........................... 1,447,600 9.5%
Harry T. Wilkins................................... 47,000 *
Stanley G. Elmore.................................. 1,350 *
Todd A. Milano..................................... 14,410 *
Jennie D. Seaton................................... 2,050 *
Roland Carey....................................... 0 *
Donald T. Benson................................... 1,575 *
G. Thomas Waite III................................ 3,128 *
Charlotte Beason................................... 2,550 *
Stephen C. Eastham................................. 7,500 *
----- ----
All directors and executive officers as a group (10
persons) (5)....................................... 8,254,563 53.3%
========= =====
- ----------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or warrants currently exercisable or exercisable within 60 days
are deemed outstanding for purposes of computing the percentage ownership of
the person holding such option or warrant but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Except
where indicated otherwise, and subject to community property laws where
applicable, the persons named in
32
33
the table above have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them.
(2) Includes 292,500 shares held by the Bailey Family Foundation.
(3) Based on a Schedule 13G filed with the Securities and Exchange Commission on
February 14, 2001. These securities are owned by various individual and
institutional investors, which Kayne Anderson Investment Management, LLC.
serves as investment adviser with power to direct investments and/or sole
power to vote the securities. For purposes of the reporting requirements of
the Securities and Exchange Act of 1934, Kayne Anderson Investment
Management is deemed to be a beneficial owner of such securities; however,
Kayne Anderson Investment Management expressly disclaims that it is, in
fact, the beneficial owner of such securities.
(4) Based on a Schedule 13G filed with the Securities and Exchange Commission on
February 12, 2001. These securities are owned by various individual and
institutional investors, which T. Rowe Price Associates, Inc. ("Price
Associates") serves as investment adviser with power to direct investments
and/or sole power to vote the securities. For purposes of the reporting
requirements of the Securities and Exchange Act of 1934, Price Associates is
deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, the beneficial owner of
such securities.
(5) Includes currently exercisable options to purchase the following shares for
each listed individual: Wilkins (0); Elmore (0); Milano (0); Seaton (0);
Carey (0); Benson (0); Waite (0); Beason (800); and Eastham (0).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
LEASE OF CAMPUS FACILITIES
The Company has long-term non-cancelable operating leases for eleven of its
various campus locations. The rents on these leases are subject to an annual
increase based on a stipulated price index. Of the eleven leased properties
(including the Distance Learning Center in Lorton, Virginia), four of the
campuses, including the Washington, D.C. campus and three of the Virginia
campuses, were leased from corporations which are owned by Mr. Bailey, the
Company's President, CEO and majority stockholder. Rent paid to Mr. Bailey under
these operating leases and the Takoma Park lease prior to its purchase for the
years ended December 31, 1998, 1999 and 2000 was $2,199,363, $2,040,167, and
$1,836,565, respectively. During 1999, the Company acquired its Takoma Park
Campus from its majority stockholder for $1,024,000. Future minimum rental
commitments for all of the Company's eleven leases, including the four campuses
leased from Mr. Bailey, as of December 31, 2000 was as follows (in thousands):
TOTAL AMOUNT PAYABLE
TOTAL TO RELATED PARTIES
-------- ------------------
2001............ $5,029 $1,881
2002............ 4,554 1,881
2003............ 4,106 1,881
2004............ 3,274 1,881
2005............ 2,988 1,881
Thereafter...... 2,231 849
----- ---
$ 22,182 $ 10,254
======== ========
Each of the four leases with Mr. Bailey has a 10-year term expiring in 2006.
The Company has the option under each such lease to purchase at any time during
the term of the lease the related campus facility at its discretion at the fair
market value of such facility as determined by independent appraisers.
The Company may lease additional campus facilities from entities owned or
controlled by Mr. Bailey. Any such leases will have market terms as determined
by an independent appraiser and be subject to the approval by a majority of
independent directors.
33
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
All required financial statements of the registrant are set forth under Item 8
of this report on Form 10-K.
(a)(2) Financial Statement Schedules
All required financial statement schedules of the registrant are set forth under
Item 8 of this report on Form 10-K.
(a)(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------
3.01* -- Articles of Incorporation of the Company.
3.02* -- Amended and Restated Bylaws of the Company.
4.01* -- Specimen Stock Certificate.
10.01* -- Lease Agreement, dated as of June 1, 1996, between Strayer University, Inc.
and Fredericksburg Investments, Inc.
10.02* -- Lease Agreement, dated as of June 1, 1996, between Strayer University, Inc.
and Battleview Investments, Inc.
10.03* -- Lease Agreement, dated as of June 1, 1996, between Strayer University, Inc.
and Central Investments, Inc.
10.04* -- Employment Agreement, dated as of June 1, 1996, between Strayer Education,
Inc. and Ron K. Bailey.
10.05* -- Employment Agreement, dated as of June 1, 1996, between Strayer University,
Inc. and Harry T. Wilkins.
10.06* -- 1996 Stock Option Plan
10.07* -- Form of Tax Indemnification Agreement
23.01 -- Consent of PricewaterhouseCoopers LLP
24.01 -- Power of Attorney (contained in signature page).
- ----------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-3967).
** Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-23601).
+ Included in electronic filing via EDGAR.
(b) Report on Form 8-K
Form 8-K (items 5 and 7 reported) filed on December 8, 2000.
34
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STRAYER EDUCATION, INC.
Date: March 16, 2001 By: /s/ RON K. BAILEY
---------------------
Ron K. Bailey
Chief Executive Officer and
Director
35
36
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ron K. Bailey and Harry T. Wilkins, and each of
them individually, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and his name, place and
stead in any and all capacities, to sign the report and any and all amendments
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
date indicated.
SIGNATURES TITLE DATE
- -------------------------------- --------------------------- -----------------
/s/ RON K. BAILEY Chief Executive Officer and MARCH 16, 2001
- --------------------------- Director (Principal
Ron K. Bailey Executive
Officer)
Chief Financial Officer
/s/ HARRY T. WILKINS (Principal Financial MARCH 16, 2001
- ---------------------------- and Accounting Officer)
Harry T. Wilkins
/s/ STANLEY G. ELMORE Director MARCH 16, 2001
- -----------------------------
Stanley G. Elmore
/s/ TODD A. MILANO Director MARCH 16, 2001
- ---------------------------
Todd A. Milano
/s/ JENNIE D. SEATON Director MARCH 16, 2001
- ----------------------------
Jennie D. Seaton
/s/ ROLAND CAREY Director MARCH 16, 2001
- --------------------------
Roland Carey
/s/ DONALD T. BENSON Director MARCH 16, 2001
- ----------------------------
Donald T. Benson
/s/ G. THOMAS WAITE Director MARCH 16, 2001
- ----------------------------
G. Thomas Waite
/s/ CHARLOTTE BEASON Director MARCH 16, 2001
- ----------------------------
Charlotte Beason
/s/ STEPHEN C. EASTHAM Director MARCH 16, 2001
- ------------------------------
Stephen C. Eastham