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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, 1998 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 $ 536,368,594 (based upon the last sale price of the Common Stock
as reported on the Nasdaq National Market System on February 26, 1999). The
total number of shares of Common Stock outstanding as of February 26, 1999 was
15,717,761.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for its 1999
Annual Meeting of Stockholders (which is expected to be filed with the
Commission within 120 days after the end of the Registrant's 1998 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. ("Strayer" or the "University") is a
regional proprietary institution of higher education that offers undergraduate
and graduate degree programs to more than 10,400 students at eleven campuses in
Washington, D.C., Maryland and Virginia. The University is accredited by the
Commission on Higher Education of the Middle States Association of Colleges and
Schools ("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
1998 Fall quarter, approximately 61% were age 30 or over and approximately 71%
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 1998 Fall
quarter, Strayer students completed an average of 9.0 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.
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 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 a business-oriented curriculum 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 of more than 23 private and federal sector
employers in the greater Washington, D.C. area. 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.
In 1998, the University added new Bachelor of Science degree programs in
Computer Networking and International Business.
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The University offers programs in the following areas:
BACHELOR OF SCIENCE (B.S.) DEGREE MASTER OF SCIENCE (M.S.) DEGREE
Accounting
Business Administration Business Administration
Computer Information Systems Information Systems
Computer Networking Professional Accounting
Economics
International Business
ASSOCIATE IN ARTS (A.A.) DEGREE DIPLOMA (CAREER DIVISION)
Accounting Computer Information Systems
Business Administration
Computer Information Systems
Economics
General Studies
Marketing
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, 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. The following table shows Strayer's enrollment by
major, program and campus location at the beginning of the 1998 Fall quarter:
UNIVERSITY ENROLLMENT BY MAJOR, PROGRAM
AND LOCATION -- 1998 FALL QUARTER
WASHINGTON, TAKOMA
MAJOR PROGRAM D.C. PARK ARLINGTON
- -------------------- ------- ----------- ------ ---------
Accounting.......... AA 36 21 10
BS 141 66 47
MS 26 12 12
Business
Administration.... AA 100 42 14
BS 320 151 177
MS 87 57 93
International Business.... BS 1 0 1
Computer Information
Systems........... * 143 178 90
AA 174 110 39
BS 435 285 330
Computer Networking.... BS 12 11 24
Information Systems....... MS 69 34 99
Economics........... AA 0 2 0
BS 11 3 3
General Studies..... AA 18 9 9
Marketing........... AA 14 3 3
Non-Degree/
Non-Program**..... -- 169 84 99
--- -- --
Total
Enrollment.... 1,756 1,068 1,050
===== ===== =====
MAJOR ALEXANDRIA WOODBRIDGE LOUDOUN
- -------------------- ---------- ---------- -------
Accounting.......... 9 14 4
70 71 55
20 11 5
Business
Administration.... 27 28 23
196 249 200
64 93 49
International Business.... 1 0 0
Computer Information
Systems........... 111 115 92
26 39 38
434 518 310
Computer Networking.... 63 40 34
Information Systems....... 95 81 60
Economics........... 1 0 0
4 1 2
General Studies..... 11 4 0
Marketing........... 4 2 2
Non-Degree/
Non-Program**..... 80 28 156
-- -- ---
Total
Enrollment.... 1,216 1,294 1,030
===== ===== =====
* Diploma program.
** Includes undeclared majors.
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UNIVERSITY ENROLLMENT BY MAJOR, PROGRAM
AND LOCATION -- 1998 FALL QUARTER
PRINCE
MAJOR PROGRAM MANASSAS FREDERICKSBURG GEORGE
- -------------------- ------- -------- -------------- ------
Accounting.......... AA 5 9 11
BS 77 56 27
MS 10 8 6
Business
Administration.... AA 21 29 32
BS 191 188 81
MS 60 64 17
International Business.... BS 0 0 0
Computer Information
Systems........... * 78 42 136
AA 17 44 38
BS 390 325 145
Computer Networking.... BS 22 14 3
Information Systems....... MS 78 44 17
Economics........... AA 0 0 0
BS 3 0 1
General Studies..... AA 5 1 3
Marketing........... AA 3 1 1
Non-Degree/
Non-Program**..... -- 103 50 157
--- -- ---
Total
Enrollment.... 1,063 875 675
===== === ===
DISTANCE CORPORATE TOTAL
MAJOR LEARNING OUTREACH HENRICO ENROLLMENT
- -------------------- -------- -------- ------- ----------
Accounting.......... 0 5 0 124
0 4 0 614
3 0 0 113
Business
Administration.... 1 70 0 387
15 49 3 1820
15 24 1 624
International Business.... 0 0 0 3
Computer Information
Systems........... 2 4 0 991
5 3 0 533
30 12 4 3218
Computer Networking.... 1 0 0 224
Information Systems....... 11 13 0 601
Economics........... 0 0 0 3
0 0 0 28
General Studies..... 1 2 0 63
Marketing........... 0 0 0 33
Non-Degree/
Non-Program**..... 9 122 13 1,070
- --- -- -----
Total
Enrollment.... 93 308 21 10,449
== === == ======
* Diploma program.
** Includes undeclared majors.
The Company also opened a campus in Montgomery County, Maryland in November
1998 to begin recruiting students for enrollment in the Winter Quarter 1999.
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.
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.
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REGULATORY ENVIRONMENT
The Higher Education Act of 1965 ("HEA"), as amended, and the
regulations promulgated thereunder subject to significant regulatory scrutiny
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"). 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 by Middle States, an accrediting agency
recognized by the Department of Education, since 1981. 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 1995. The
University submitted an interim status report to Middle States on March 26,
1997, which Middle States accepted. Middle States also conducted a site visit to
the Prince George's County, Maryland campus and the Distance Learning Center in
Lorton, Virginia, in November 1997, and included them within the College's
accreditation. The next scheduled evaluation visit by Middle States is currently
set for the academic year 1999-2000.
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 by the D.C. Education
Licensure Commission, the Virginia State Council of Higher Education and the
Maryland Higher Education Commission.
The Company is currently reviewing the University's need to obtain approval
to offer its courses through Strayer Online in other states. Because online
education is a recent development, its status under current educational
regulations is unsettled.
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 for the education
of veterans and members of the selective reserve and their dependents, as well
as for the rehabilitation of handicapped students. Approximately 7% of the
University's students are veterans or reservists.
STUDENT CHARACTERISTICS
The University's students primarily are working adults. At the beginning of
the 1998 Fall quarter, approximately 71% of the enrollment consisted of
part-time students, approximately 79% attended classes at night or on weekends,
and approximately 55% were women. The approximate age distribution of the
students was as follows:
PERCENTAGE
AGE OF STUDENTS
------------- -----------
21 or under.. 8%
22 to 29..... 31%
30 to 39..... 36%
40 to 49..... 20%
50 or over... 5%
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STUDENT RECRUITMENT
The University focuses its recruitment efforts on attracting students with
the motivation and ability to complete its business-oriented educational
programs. To generate interest among potential students, Strayer's marketing
staff primarily employs direct mailings and television, radio and newspaper
advertising. The University monitors the effectiveness of its various marketing
efforts in producing student enrollment. Referrals constitute the most important
source of inquiries from potential students.
The marketing department tracks and forwards to the University's admissions
representatives responses to its direct mail and advertising campaigns.
Admissions representatives at each campus pursue expressions of interest in
Strayer by arranging interviews for prospective students. The representatives
also conduct campus tours and otherwise assist prospective students in the
application process. At December 31, 1998, the University employed 57 admissions
representatives.
The University has entered into articulation agreements with Germanna
Community College, Northern Virginia Community College, Montgomery Community
College, Anne Arundel Community College and Prince George's Community College to
facilitate enrollment of students seeking to transfer course credits earned at
these institutions. The University sponsors recruitment events at the campuses
of each of these community colleges.
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. All students also must
pass placement exams or submit acceptable standardized test scores. For
admission to the University's programs, students must possess a certain level of
proficiency in English and mathematics. Students attending the University's
graduate programs must have a bachelor's degree from an accredited 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, 1999, undergraduate, full-time students are
charged at the rate of $190 per credit hour. Undergraduate, part-time students
are charged at the rate of $200 per credit hour. Courses in graduate programs
are charged at the rate of $260 per credit hour. Accordingly, a full-time
student seeking to obtain a bachelor's degree in four years currently would pay
approximately $8,550 per year in tuition. The University implemented a tuition
increase of $10.00 per credit hour for 1999.
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 principal payments while still enrolled, thereby
reducing the debt they otherwise would assume upon completion of their studies.
At December 31, 1998, there were a total of 1,824 loans outstanding with an
aggregate loan balance of approximately $5.9 million and an average individual
loan balance of approximately $3,222.
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.
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CAREER DEVELOPMENT SERVICES
The University actively assists its students and alumni with job placement
and other career-related matters through career development offices located at
each campus. 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 the greater
Washington, D.C. area.
The University conducts annual alumni surveys to monitor the career
progression of its graduates and to comply with the 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 1997 alumni
survey, which had an approximately 16% overall response rate, indicated that 94%
of those responding were employed. In addition, approximately 89% of
undergraduate alumni and 86% of the graduate alumni responding credit Strayer
for the achievement of their professional goals. According to the survey,
Strayer's greatest assets, in order of importance, are schedule variety, campus
locations, instructor knowledge, personal class sizes and course selection.
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.
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 1998, the University employed 596 faculty members, of whom 97 were
full-time and 499 part-time, and 377 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, 266 were employed full-time and 111 part-time.
LICENSING 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 1999 Winter quarter, approximately 41.4% of the University's students
participated in one or more of the federally supported student financial aid
programs. A substantial portion (approximately 48% in 1998) of the University's
revenues are derived from tuition financed under Title IV Programs.
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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 therefore) prior to
the beginning of a quarter. The HEA requires that an institution have a "fair
and equitable" refund policy, limiting the amount that an institution may charge
a student who withdraws from the institution. A student is obligated only for a
pro rata portion of the tuition and other fees charged by the institution if the
student withdraws during the first 60% of the student's first period of
enrollment at that institution. A student who withdraws after the first period
of enrollment is also entitled to a refund, but a pro rata refund calculation is
not required. If a student who is owed a refund received Title IV Program funds,
the institution must allocate the refund to the appropriate lenders or Title IV
Programs, in a specified order which excludes the Federal Work-Study Program.
The 1998 HEA amendments address an institution's refund policy with regard
to Title IV Program 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, 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 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. This HEA amendment takes effect October 7, 2000, but an
institution may choose to implement the provision earlier. The Company believes
that the University's refund policy is consistent with the current HEA and will
be updated to conform to the 1998 amendments.
Students finance their Strayer education in a variety of ways. A significant
number of students utilize federal financial aid programs. 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 programs 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.
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. The obligation to begin repaying Stafford loans is
deferred until six months after the student graduates, withdraws or ceases to be
enrolled on at least a half-time basis. 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 for six months after
the student's graduation or withdrawal. 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.
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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 will not have a material adverse effect on
the University. Most of the provisions of the 1998 HEA amendments were effective
October 1, 1998. However, the Department of Education is required to engage in
negotiated rulemaking with representatives of the higher education community
before issuing regulations to implement the 1998 HEA amendments to the Title IV
Programs. The Department must finalize those regulations by October 7, 1999. The
Company believes that in accordance with Department guidance, the University is
in the meantime making a good faith effort to comply with the new law.
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.
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.
9
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In certain circumstances, the Department 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
two third party loan servicers, Financial Aid Management for Education, Inc. and
Weber and Associates, Inc. The servicers certify FFEL Program loan applications,
prepare reports from the University to the Department of Education, issue checks
for the Pell and campus-based programs, and issue and collect 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. Under
standards that were effective prior to July 1, 1998, and may be applied to
demonstrate financial responsibility for an institution's fiscal year beginning
on or after July 1, 1996 and on or before June 30, 1998, for-profit institutions
such as the University must also: (i) demonstrate an "acid test" ratio (defined
as the ratio of cash, cash equivalents and current accounts receivable to
current liabilities) of at least 1-to-1 at the end of its latest fiscal year;
(ii) not have had operating losses in either or both of its two latest fiscal
years that in sum result in a decrease in tangible net worth in excess of 10% of
the institution's tangible net worth at the beginning of that two-year period;
and (iii) have had a positive tangible net worth for its latest fiscal year. For
the fiscal year ended December 31, 1998, the University's "acid test" ratio was
2.01. The University did not have operating losses in either of its two most
recent fiscal years and had a positive tangible net worth for its latest fiscal
year.
New Department of Education financial responsibility standards, which
took effect July 1, 1998, replace the three numeric tests described above with a
more complex formula. The new 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 must have a composite score of at least 1.5 to be deemed
financially responsible without the need for further federal oversight. The
Company has applied the new financial responsibility standards to its audited
financial statements as of and for the year ended December 31, 1998 and
calculated a composite score of 3.0. The Company therefore believes that the
University meets the Department's new 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.
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If the Department of Education notifies an institution that its cohort
default rate for FFEL Program loans equals or exceeds 25% 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 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 commits violations of Title IV
Program requirements. The University's cohort default rates on FFEL Program
loans for the 1993, 1994, 1995 and 1996 federal fiscal years, the most recent
years for which this information is available, were 16.6%, 16.0%, 15.2% and
14.5%, respectively. The average default rates for proprietary institutions
nationally were 23.9%, 21.1%, 19.9% and 18.2% in fiscal years 1993, 1994, 1995
and 1996, respectively.
The "85/15 Rule"
Under what is commonly referred to as the "85/15 Rule," the HEA until
recently provided that proprietary institutions, such as the University, were
eligible to participate in Title IV Programs only if they derive no more than
85% of their revenues from Title IV Programs, as determined in accordance with a
formula in the regulations. The 1998 HEA amendments increased the percentage of
revenues that a for-profit institution can derive from Title IV Programs from
85% to 90%. The Department of Education has not yet issued regulations
implementing this change, but the amendment was effective October 1, 1998. A
proprietary institution that violates the "85/15 Rule" loses its eligibility to
participate in Title IV Programs for at least one year. During 1998, the
University derived 48% 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. Although there can be
no assurance that the Department of Education will 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 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 its 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.
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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 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.
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. 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 that 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.
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 provided to students in 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.
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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 1998
Quarter, the University had 789 students participating in the distance learning
program, of whom 93 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. As amended in 1998, the HEA states that a student enrolled in a course of
instruction that is offered in whole or in part through telecommunications and
which 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 fifty percent of the total number of courses
offered by the institution. The HEA also excludes from Title IV Program
participation institutions at which more than one half of the enrolled 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
colleges offering two- or four-year programs leading to an associate or bachelor
degree. Department of Education regulations grant an automatic waiver for
degree-granting institutions where students enrolling in correspondence courses
receive five percent or less of the total Title IV Program funds received by all
students enrolled at 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 the total number of courses
offered on its campuses. 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 which 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 1998 HEA
amendments provide that the Department of Education may provisionally certify an
institution seeking approval of a change of ownership based on preliminary
review by the Department of a materially complete application received by the
Department within ten business days of 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 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.
As of December 31, 1998, Ron K. Bailey owned approximately 51.8% of the
Company's outstanding stock jointly with his wife. If Mr. or Mrs. Bailey were to
die, the surviving spouse would become the sole owner of those shares. The HEA
and Department of Education implementing regulations allow a change in ownership
upon the retirement or death of an owner to be treated as not resulting in a
change of control if it involves the sale or transfer of the owner's ownership
interest to a family member or to a person with an ownership interest who has
been involved in the management of the institution for at least two years.
However, the Department of Education requires schools to report such events to
the Department of Education for review. District of Columbia, Virginia and
Maryland law and Middle States policies do not specifically address changes in
ownership resulting from the retirement or death of an owner. However, it is
possible that one or more of these regulatory bodies would consider such a
change in ownership to be a substantive change that must be reported by the
institution and would require review or reauthorization of the institution.
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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 of 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.
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.
VETERANS BENEFITS
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.
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 programs beginning after May 31, 2000. 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 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 nine of its eleven campuses, five of which are owned
by corporations controlled by the Company's President and CEO, Ron K. Bailey.
The leases with these corporations all 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 the University's
properties at December 31, 1998:
AREA IN LEASE EXPIRES
LOCATION SQUARE FEET YEAR
-------- ----------- ----
Washington, D.C....................... 33,000 2006
Facility is owned
Alexandria, Virginia.................. 22,000 owned
Arlington, Virginia................... 26,000 2002
Woodbridge, Virginia.................. 20,800 2006
Manassas, Virginia.................... 20,800 2006
Facility is owned
Loudoun Campus (Ashburn, Virginia).... 33,000 owned
Fredericksburg, Virginia.............. 17,500 2006
Takoma Park (Washington, D.C.)........ 21,800 2006
Prince George's County, Maryland...... 12,000 2000
Distance Learning (Lorton, Virginia).. 16,200 1999
Henrico County (Glen Allen,
Virginia)........................... 19,000 2003
Montgomery County (Germantown, MD).... 17,000 2005
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of 1998.
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
The last sales price of the Common Stock on February 26, 1999, as reported
on the Nasdaq National Market, was $ 34.125 per share. As of February 26, 1999,
there were approximately 37 holders of record and 2,375 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 $0.05 per share ($0.20 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.
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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,
-----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Total Revenues........................ $34,257 $38,196 $45,005 $53,131 $62,872
------- ------- ------- ------- -------
Costs and expenses
Instruction and educational support. 14,740 16,168 17,808 19,738 22,355
Selling and promotion............... 3,667 4,281 4,457 5,476 5,923
General and administration(1)....... 10,648 11,571 6,749 7,232 8,387
------ ------ ------- ------- -------
29,055 32,020 29,014 32,446 36,665
------ ------ ------- ------- -------
Income from operations................. 5,202 6,176 15,991 20,685 26,207
Investment and other income............ 350 875 1,061 2,764 3,180
------- ------- ------- ------- -------
Income before income taxes............. 5,552 7,051 17,052 23,449 29,387
Provision for income taxes(2).......... -- -- 2,740 9,012 11,440
------- ------- ------- ------- -------
Net income............................. $ 5,552 $ 7,051 $14,312 $14,437 $17,947
======= ======= ======= ======= =======
Cash dividends per common share $0.04 $0.17 $0.23
===== ===== =====
PRO FORMA DATA:(3)
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
======= ======= ======
Diluted................................ $ 0.83 $ 0.93 $ 1.12
======= ======= ======
WEIGHTED AVERAGE SHARES OUTSTANDING(4)
Basic.................................. 12,425 15,037 15,626
====== ====== ======
Diluted................................ 12,593 15,590 16,063
====== ====== ======
OPERATING DATA:
Enrollment(5) ......................... 6,800 7,400 8,200 9,400 10,400
AT DECEMBER 31,
---------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- -------
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 5,564 $ 8,992 $ 11,777 $ 15,934 $ 18,614
Working capital........................ 5,934 8,327 15,574 20,600 23,363
Total assets........................... 19,824 25,878 47,822 78,248 97,146
Long-term liabilities.................. -- -- 189 137 330
Total liabilities...................... 10,487 10,539 12,411 13,125 15,501
Total stockholders' equity............. 9,337 15,339 35,411 65,123 81,645
- ----------
(1) Includes bonus payments to the former stockholder of the University (the "S
Corporation Stockholder") of $5.5 million in 1994, and $6.2 million in 1995
for the payment of income taxes by the S Corporation Stockholder on
undistributed S Corporation income. In connection with the Company's initial
public offering, effective July 25, 1996, the Company acquired the
University and ELP, as a result of which the University and ELP changed
their tax status from S Corporations to C Corporations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Background and Overview."
(2) Historical data for 1994 through 1995 do not reflect any provision for
income taxes. The University and ELP were S Corporations during such periods
and therefore were not subject to income tax.
(3) 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%.
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(4) 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.
(5) 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 forward-looking statements, which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause a difference include, but are not limited to, those discussed elsewhere in
the Company's Form 10-K dated December 31, 1998 as filed with the Securities and
Exchange Commission.
BACKGROUND AND OVERVIEW
The University is a regional proprietary institution of higher education
offering undergraduate and graduate degree programs at eleven campuses in the
greater Washington, D.C. area. The Company was incorporated in May 1996 to
acquire all of the outstanding capital stock of the University and ELP from Mr.
and Mrs. Ron K. Bailey, the previous sole stockholders of the University. Upon
completion of the Company's initial public offering in July 1996, the University
and ELP, which administers the SEL Program, became direct subsidiaries of the
Company.
Revenues, operating income, and pro forma net income have increased in each
of the last three years. From 1995 through 1998, revenues increased
approximately 64.6%, operating income increased approximately 324.3%, and net
income increased 154.5%. Over the three-year period, tuition revenue accounted
for approximately 97.4% of total revenue. The number of students increased
approximately 41.0% from 7,419 at the beginning of the 1995 Fall quarter to
10,449 at the beginning of the 1998 Fall quarter, and tuition rates increased
approximately 14.8% 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, 1996, 1997, and 1998 was
1.8%, 2.6%, and 2.9%, respectively.
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 one floor of the Arlington campus used
for administrative purposes.
17
18
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.
Further, as discussed below, general and administration expenses prior to 1996
reflect payments made to the S Corporation Stockholder for taxes payable by that
stockholder with respect to the University's income.
As of July 25, 1996, the Company terminated the University's S Corporation
status and became subject to corporate income taxation on a consolidated basis.
Since the Company was an S Corporation prior to July 25, 1996, there was no
corporate income tax provision.
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,
1996 1997 1998
-------- --------- -------
Net Revenues: 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Instruction and educational support... 39.6 37.1 35.6
Selling and promotional............... 9.9 10.3 9.4
General and administration............ 15.0 13.6 13.3
------ ------ ------
Income from operations.................. 35.5 39.0 41.6
Investment and other income............. 2.4 5.2 5.1
------ ------ ------
Income before taxes..................... 37.9 44.2 46.7
Provision for income taxes.............. 6.1 17.0 18.2
------ ------ ------
Net income.............................. 31.8% 27.2% 28.5%
====== ====== ======
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased 18.3% from $53.1 million in 1997 to $62.9
million in 1998 due to a 10.9% increase in the number of students in 1998 and a
6.0% tuition increase for 1998.
Instruction and educational support expenses. Instruction and educational
support expenses increased 13.3% from $19.7 million in 1997 to $22.4 million in
1998 due to an increase in the number of personnel to support increased
enrollment, salary increases and the addition of the Henrico County, Virginia
and Montgomery County, Maryland campuses.
Selling and promotional expenses. Selling and promotional expenses increased
8.2% from $5.5 million in 1997 to $5.9 million in 1998 due principally to
increased advertising costs, and the addition of admissions personnel.
General and administration expenses. General and administration expenses
increased 16.0% from $7.2 million in 1997 to $8.4 million in 1998 due
principally to the addition of administrative personnel in order to support
increased enrollments and the addition of the Henrico County, Virginia and
Montgomery County, Maryland campuses.
Income from operations. Income from operations increased 26.6% from $20.7
million in 1997 to $26.2 million in 1998. This increase was primarily due to the
increase in student enrollment and tuition in 1998.
Provision for income taxes. Income tax expense increased 26.9% from $9.0
million in 1997 to $11.4 million in 1998. This increase was primarily due to the
increase in income before taxes attributable to the factors discussed above.
Net income. Net income increased 24.3% from $14.4 million in 1997 to $17.9
million in 1998 because of the factors discussed above.
18
19
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased 18.1% from $45.0 million in 1996 to $53.1
million in 1997 due to a 15.3% increase in the number of students in 1997 and a
6.3% tuition increase for 1997.
Instruction and educational support expenses. Instruction and educational
support expenses increased 10.8% from $17.8 million in 1996 to $19.7 million in
1997 due to an increase in the number of personnel to support increased
enrollment, salary increases and the upgrade of campus computer laboratories.
Selling and promotional expenses. Selling and promotional expenses increased
22.9% from $4.5 million in 1996 to $5.5 million in 1997 due principally to
increased advertising costs, and the addition of admissions personnel at the new
Distance Learning Center and the Prince George's County Campus.
General and administration expenses. General and administration expenses
increased 7.2% from $6.7 million in 1996 to $7.2 million in 1997 due principally
to the addition of administrative personnel in order to support increased
enrollments.
Income from operations. Income from operations increased 29.4% from $16.0
million in 1996 to $20.7 million in 1997. This increase was primarily due to the
increase in student enrollment and tuition in 1997.
Provision for income taxes. Income tax expense increased 333% from $2.7
million in 1996 to $9.0 million in 1997. This increase was due to the
termination of the Company's S-corporation status in July 1996.
Net income. Net income increased 38.8% from $10.4 million on a pro forma
basis in 1996 to $14.4 million in 1997 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 1998, enrollments at the beginning of the Winter, Spring, Summer and
Fall academic quarters were 9,412, 9,317, 6,686 and 10,449, 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 1996, 1997, and 1998.
QUARTERLY REVENUE
(DOLLARS IN THOUSANDS)
1996 1997 1998
------------------ ------------------- --------------------
THREE MONTHS ENDED AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------------------- -------- --------- -------- --------- --------- ---------
March 31............ $ 12,415 28% $ 13,773 26% $ 16,849 27%
June 30............. 11,614 26 13,639 25 16,375 26
September 30........ 8,305 18 10,030 19 11,783 18
December 31......... 12,671 28 15,689 30 17,865 29
-------- --- -------- --- -------- ---
Total for Year...... $ 45,005 100% $ 53,131 100% $ 62,872 100%
======== === ======== === ======== ===
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company generated cash of $19.0 million from operating
activities. Investing activities used cash of $15.2 million, principally for the
purchase of property and equipment, including the Alexandria, Virginia campus,
and marketable securities. Cash used by financing activities was $1.2 million
for dividend payments of $2.8 million and repurchase of $2.4 million of common
stock, offset by proceeds for the exercise of stock options, including tax
benefits, of $4.0 million.
At December 31, 1998, the Company had cash and cash equivalents and
marketable securities of $64.0 million compared to $52.8 million at December 31,
1997. In addition, the Company has available a $10.0 million credit facility
from a bank. 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.
19
20
YEAR 2000
The Year 2000 issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs that have been written using six digits (e.g.,
12/31/99), rather than eight (e.g., 12/31/1999), to define the applicable year
of business. This date definition limitation could, unless corrected, cause some
computer programs, hardware and non-information technology systems to be unable
to process information containing dates after December 31, 1999.
The Company has completed the identification and assessment of most of
its IT systems, and those systems have been modified by the suppliers of those
systems to address Year 2000 issues. In no case is a system replaced solely
because of Year 2000 issues, although in some cases, the timing of system
replacement is being accelerated. In addition to its internal systems, the
Company has begun to assess the level of Year 2000 issues with its suppliers.
The Company has also started its identification and assessment of its non-IT
systems, which include its telephone systems, heating and air-conditioning,
elevators and other business equipment. This non-IT systems assessment should be
completed by June 30, 1999.
The Company's costs to date for its Year 2000 compliance project,
excluding the salaries of its employees, have not been material. In fact, the
Company's IT systems have been modified by the suppliers of those systems and
such modifications were included as part of normal upgrades of those systems.
Although the Company has not completed its assessment, it does not currently
believe that the future costs associated with its remaining IT systems or its
non-IT systems will be material.
The Company has begun to assess the Year 2000 readiness of its banking
and governmental agencies to determine the extent to which the Company may be
vulnerable in the event that those parties fail to properly remediate their own
Year 2000 issues. The Company derives a significant portion of its revenues from
the student funding provided by Title IV Programs. The Department of Education
processes the applications for this funding. The Department of Education has
stated that its systems will be Year 2000 compliant by March 31, 1999 and that
schools will be able to test the remediated systems during the first half of
1999. In January 1999, the Department reported that 12 of its 14
mission-critical systems were Year 2000 compliant and that the remaining two
systems would be Year 2000 compliant by March 31, 1999. The Department's Office
of the Inspector General has supported the Department's conclusion that all of
its mission-critical systems related to student financial aid delivery will be
Year 2000 compliant by March 31, 1999. In the most recent report card of Year
2000 progress for federal agencies, the House Subcommittee on Government
Management, Information, and Technology gave the Department of Education a grade
of "A-."
The Company cannot determine currently its most likely worst case
scenario, as it has not identified and assessed all of its systems, particularly
its non-IT systems. As the Company completes its identification and assessment
of internal and third party systems, it expects to develop contingency plans for
various worst-case scenarios. A failure to address Year 2000 issues successfully
could have a material adverse effect on the Company's business, financial
condition and/or results of operations.
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, 1998 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, 1998. 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,
1998, 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, 1998, 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.
20
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Strayer Education, Inc.
Independent Accountant's Report...................................................... 22
Consolidated Balance Sheets as of December 31, 1997 and 1998......................... 23
Consolidated Statements of Income for each of the three years in the period ended
December 31, 1998................................................................. 24
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 1998.................................................... 25
Consolidated Statements of Comprehensive Income for each of the three years in the
period ended December 31, 1998.................................................... 26
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1998........................................................... 27
Notes to Consolidated Financial Statements........................................... 28
Schedule II -- Valuation and Qualifying Accounts...................................... 34
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
21
22
INDEPENDENT ACCOUNTANTS REPORT
Strayer Education, Inc. Board of Directors and Stockholders
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") at December 31,
1997 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Washington, D.C.
January 29, 1999
22
23
STRAYER EDUCATION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------
1997 1998
--------- -------
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 15,934 $ 18,614
Marketable securities available for sale, at market..................... 5,018 6,420
Short-term investments -- restricted.................................... 879 922
Tuition receivable, net of allowances for doubtful accounts of $230 and
$295, respectively................................................... 10,063 11,812
Inventories............................................................. 1,018 --
Income taxes receivable................................................. -- 275
Other current assets.................................................... 676 491
-------- --------
Total current assets............................................ 33,588 38,534
Student loans receivable, net of allowances for losses.................... 4,438 5,524
Property and equipment, net............................................... 8,113 13,880
Marketable securities available for sale, at market....................... 31,877 38,986
Other assets.............................................................. 232 222
-------- --------
Total assets.................................................... $ 78,248 $ 97,146
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 380 $ 166
Accrued expenses........................................................ 829 943
Dividends payable....................................................... -- 789
Unearned tuition........................................................ 11,779 13,273
--------- ---------
Total current liabilities....................................... 12,988 15,171
Deferred income taxes..................................................... 137 330
-------- --------
Total liabilities............................................... 13,125 15,501
-------- --------
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; 15,542,105
and 15,774,477 shares issued and outstanding in 1997 and 1998,
respectively.............................................................. 156 158
Additional paid-in capital.............................................. 48,762 50,470
Retained earnings....................................................... 15,922 30,274
Accumulated other comprehensive income.................................. 283 743
-------- --------
Total stockholders' equity...................................... 65,123 81,645
-------- --------
Total liabilities and stockholders' equity...................... $ 78,248 $ 97,146
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
23
24
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
1996 1997 1998
----------- ----------- ---------
Revenues..................................... $45,005 $53,131 $ 62,872
------- ------- --------
Costs and expenses:
Instruction and educational support........ 17,808 19,738 22,355
Selling and promotion...................... 4,457 5,476 5,923
General and administration................. 6,749 7,232 8,387
------- ------- ----------
29,014 32,446 36,665
------- ------- ----------
Income from operations..................... 15,991 20,685 26,207
Investment and other income.................. 1,061 2,764 3,180
------- ------- ----------
Income before income taxes................. 17,052 23,449 29,387
Provision for income taxes................... 2,740 9,012 11,440
------- ------- ----------
Net income................................. $14,312 $14,437 $ 17,947
======= ======= ==========
PRO FORMA INFORMATION:
Income before income taxes................. $17,052
Income taxes............................... 6,649
-------
Net income................................. $10,403
=======
NET INCOME PER SHARE (PRO FORMA IN 1996):
Basic...................................... $0.84 $0.96 $ 1.15
Diluted.................................... $0.83 $0.93 $ 1.12
The accompanying notes are an integral part of these
consolidated financial statements.
24
25
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN
SHARES AMOUNT CAPITAL
------ ------ -----------
Balance, December 31, 1995................... 563 $6 $2,100
Formation of Strayer
Education, Inc.......................... 1,500 -- 1
Exchange of Strayer Education, Inc.
common stock for Strayer
University, Inc. common stock........... 8,997,937 84 (84)
Proceeds from sale of common
stock, net of offering expenses of
$3,187.................................. 5,175,000 52 31,261
Payment to stockholder for
acquisition of ELP...................... -- -- (943)
Distributions to stockholders.............. -- -- (1,188)
Dividends ($0.04 per share)................ -- -- --
Net unrealized gains on
marketable securities................... -- -- --
Net income................................. -- -- --
---------- --------- -----------
Balance, December 31, 1996................... 14,175,000 142 31,147
Proceeds from sale of
common stock, net of
offering expenses of $1,189............. 1,158,750 12 15,021
Exercise of stock options................. 208,355 2 1,387
Reimbursement of prior year
distribution to stockholders............ -- -- --
Dividends ($0.17 per share)............... -- -- --
Tax benefit from exercise of
stock options.......................... -- -- 1,207
Net unrealized gains on
marketable securities.................. -- -- --
Net income................................ -- -- --
---------- --------- -----------
Balance, December 31, 1997................... 15,542,105 156 48,762
Exercise of stock options................. 303,872 3 2,096
Repurchase of common stock................ (71,500) (1) (2,388)
Dividends ($0.23 per share)............... -- -- --
Tax benefit from exercise of
stock options.......................... -- -- 2,000
Net unrealized gains on
marketable securities................... -- -- --
Net income................................ -- -- --
---------- --------- -----------
Balance, December 31, 1998................... 15,774,477 $158 $50,470
========== ========= ===========
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
-------- ------------- ------
Balance, December 31, 1995................... $13,075 $158 $15,339
Formation of Strayer
Education, Inc.......................... -- -- 1
Exchange of Strayer Education, Inc.
common stock for Strayer
University, Inc. common stock........... -- -- --
Proceeds from sale of common
stock, net of offering expenses of
$3,187.................................. -- -- 31,313
Payment to stockholder for
acquisition of ELP...................... (117) -- (1,060)
Distributions to stockholders.............. (22,788) -- (23,976)
Dividends ($0.04 per share)................ (591) -- (591)
Net unrealized gains on
marketable securities................... -- 73 73
Net income................................. 14,312 -- 14,312
------ ----------- ------
Balance, December 31, 1996................... 3,891 231 35,411
Proceeds from sale of
common stock, net of
offering expenses of $1,189............. -- -- 15,033
Exercise of stock options................. -- -- 1,389
Reimbursement of prior year
distribution to stockholders............ 84 -- 84
Dividends ($0.17 per share)............... (2,490) -- (2,490)
Tax benefit from exercise of
stock options.......................... -- -- 1,207
Net unrealized gains on
marketable securities.................. -- 52 52
Net income................................ 14,437 -- 14,437
------ ----------- ------
Balance, December 31, 1997................... 15,922 283 65,123
Exercise of stock options................. -- -- 2,099
Repurchase of common stock................ -- -- (2,389)
Dividends ($0.23 per share)............... (3,595) -- (3,595)
Tax benefit from exercise of
stock options.......................... -- -- 2,000
Net unrealized gains on
marketable securities................... -- 460 460
Net income................................ 17,947 -- 17,947
------ ----------- ------
Balance, December 31, 1998................... $30,274 $743 $81,645
======= =========== =======
The accompanying notes are an integral part of these
consolidated financial statements.
25
26
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
----------- ----------- ---------
Net income........................................... $14,312 $14,437 $17,947
Other comprehensive income:
Unrealized gains on investments, net of taxes.... 73 52 460
------ ------ --------
Comprehensive income................................. $14,385 $14,489 $ 18,407
========= ========= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
26
27
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ----------- ----------
Cash flows from operating activities:
Net income................................................. $ 14,312 $ 14,437 $ 17,947
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 1,021 1,236 1,625
Provision for student loan losses....................... 205 325 353
Deferred income taxes................................... (75) (174) (147)
Other non-cash charges.................................. -- -- 75
Changes in assets and liabilities:
Short-term investments -- restricted.................... (87) (72) (43)
Tuition receivable, net................................. (1,050) (1,140) (1,749)
Inventories............................................. (198) (95) 1,018
Income taxes receivable................................. -- -- (275)
Other current assets.................................... (161) (279) 238
Other assets............................................ -- (138) 10
Trade accounts payable.................................. (28) 48 (214)
Accrued expenses........................................ 64 89 114
Unearned tuition........................................ 1,646 629 1,494
Student loans originated or acquired....................... (3,314) (4,078) (4,293)
Collections on student loans receivable.................... 1,030 2,114 2,854
Proceeds from sale of loans................................ 212 -- --
-------- -------- --------
Net cash provided by operating activities.......... 13,577 12,902 19,007
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment........................ (5,208) (2,286) (7,392)
Purchases of marketable securities......................... (16,640) (34,380) (19,739)
Maturities of marketable securities........................ 5,370 12,698 11,975
-------- -------- --------
Net cash used in investing activities.............. (16,478) (23,968) (15,156)
-------- -------- --------
Cash flows from financing activities:
Distributions to stockholders.............................. (23,976) 84 --
Dividends paid............................................. (591) (2,490) (2,806)
Proceeds from sale of common stock and additional capital
contributions by ELP stockholder........................ 31,313 15,033 --
Proceeds from exercise of stock options, including tax
Benefits................................................ -- 2,596 4,024
Repurchase of common stock................................. -- -- (2,389)
Acquisition of ELP......................................... (1,060) -- --
-------- -------- --------
Net cash provided by (used in) financing activities 5,686 15,223 (1,171)
-------- -------- --------
Net increase in cash and cash requirements......... 2,785 4,157 2,680
Cash and cash equivalents -- beginning of year............... 8,992 11,777 15,934
-------- -------- --------
Cash and cash equivalents -- end of year..................... $ 11,777 $ 15,934 $ 18,614
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
27
28
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Strayer Education, Inc. (the Company) was formed on May 10, 1996, as a
Maryland corporation, and commenced operations on July 25, 1996. On July 30,
1996, the Company completed an initial public offering of its common stock. The
Company sold 5,175,000 shares in the offering at a price of $6.67 per share. Net
proceeds to the Company were $31,313,000. Prior to the closing of the offering,
the Company exchanged 8,998,500 shares of its common stock for 100% of the
outstanding common stock of Strayer University, Inc. (the University).
Approximately $19,838,000 of the net proceeds of the offering were paid to the
stockholders of the University as a distribution of earnings on which the
stockholders had previously paid income taxes during the period the University
was an S Corporation.
The University is a proprietary accredited institution of higher education
that provides undergraduate and graduate degrees in various fields of study
through its eleven campuses in the District of Columbia, Maryland and Virginia.
Through its subsidiary Education Loan Processing, Inc. (ELP), the Company
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.
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 market 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.
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.
28
29
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Tuition receivables are not collateralized; however, credit risk is
minimized as a result of the diverse nature of the University's student base in
the greater Washington, D.C. area. 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.
Inventories
Beginning in 1998, the Company contracted out its bookstore operations to a
third party, "MBS Direct". The Company no longer maintains any bookstore
inventory. Prior to 1998, inventories, which consisted of books and supplies
held in campus bookstores, were valued at the lower of cost or market. Cost was
determined using the first-in, first-out (FIFO) method.
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 amounted to $1,021,000,
$1,236,000 and $1,625,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Income Taxes
Prior to July 30, 1996, the financial statements of the Company did not
include a provision for income taxes because the taxable income of the
University and ELP was included in the income tax returns of the stockholders
under S Corporation elections. A provision for corporate income taxes is
presented for all periods subsequent to July 30, 1996.
In connection with the formation of Strayer Education, Inc., the initial
public offering of the Company's common stock, and the acquisition of the
University and ELP by Strayer Education, Inc., effective July 25, 1996, the
University and ELP were no longer treated as S Corporations for tax purposes.
The Compant now provides for deferred income taxes based on temporary
differences between financial statement and 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. 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.
1996 1997 1998
---- ---- ----
(Pro forma)
Weighted average shares outstanding
used to compute basic earnings per
share................................ 12,424,812 15,037,002 15,626,274
Incremental shares issuable upon the
assumed exercise of stock options.... 167,844 552,774 436,982
---------- ---------- ----------
Shares used to compute diluted earnings
per share............................ 12,592,656 15,589,776 16,063,256
========== ========== ==========
Incremental shares issuable upon the assumed exercise of outstanding stock
options is computed using the average market price during the related periods.
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. Diluted income per share was not significantly different from the
basic amount. Historical net income per share is presented in Note 9.
29
30
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of expenses during the
period reported. Actual results could differ from those estimates.
Common Stock Split
During 1997, the Company's Board of Directors approved a 3-for-2 stock
split. The stock dividend was paid on November 18, 1997 to shareholders of
record on November 4, 1997. All prior share and per share information in the
financial statements have been changed to give effect to this stock split.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130) effective January 1, 1998, which
requires additional reporting with respect to certain changes in assets and
liabilities that previously were reported in stockholders' equity. Accordingly,
the Company has included Consolidated Statements of Comprehensive Income for the
years ended December 31, 1996, 1997, and 1998, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
presentation. These changes had no impact on previously reported results of
operations.
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 market value for each class of investments at December 31, 1997 and
1998 are as follows (in thousands):
1997
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- --------- ------ -----
Certificates of deposit and money
market funds ................................. $ 3,923 $ 8 $ -- $ 3,931
Fixed income investments ...................... 23,144 201 -- 23,345
Equity securities ............................. 9,359 260 -- 9,619
------- ------- --------- -------
Total ............................... $36,426 $ 469 $ -- $36,895
======= ======= ========= =======
1998
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
Certificates of deposit and money
market funds ................... $10,617 $ 14 $ -- 10,631
Fixed income investments ........ 22,989 348 -- 23,337
Equity securities ............... 10,584 854 -- 11,438
------- ------- ---------- -------
Total ................. $44,190 $ 1,216 $ -- $45,406
======= ======= ========== =======
30
31
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1997 and 1998
is as follows (in thousands):
1997 1998
---- ----
Land .................. $ 800 $ 2,000
Buildings ............. 2,319 4,639
Furniture and equipment 7,179 9,326
Leasehold improvements 2,010 3,735
Vehicles .............. 22 22
------- -------
12,330 19,722
Less accumulated
depreciation .. 4,217 5,842
------- -------
$ 8,113 $13,880
======= =======
4. STUDENT LOANS RECEIVABLE
Student loans receivable under the Strayer Education Loan Program as of December
31, 1997 and 1998 are as follows (in thousands):
1997 1998
Student loans receivable outstanding,
including accrued Interest ......... $ 4,721 $ 5,877
Allowance for loan losses ........... (283) (353)
------- -------
Student loans receivable, net .. $ 4,438 $ 5,524
======= =======
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 majority of loans are lines of credit that convert to term loans upon the
student's withdrawal or graduation from the University. The breakdown of the
balances of these loans is as follows as of December 31,1997 and 1998:
1997 1998
---- ----
Line of credit loans $4,643 $5,816
Term loans 78 61
------ ------
Total $4,721 $5,877
====== ======
The line of credit loans require a minimum monthly payment of the greater of
$50 or 3% of the outstanding loan balance, plus interest. Term loans are 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 through December 31, 1998 is as follows:
NUMBER OF SHARES
----------------
Balance, July 24, 1996 ... -
Grants ................. 994,704
Exercises .............. -
Forfeitures ............ (8,829)
--------
Balance, December 31, 1996 985,785
Grants ................. -
Exercises .............. (208,355)
Forfeitures ............ (50,462)
--------
Balance, December 31, 1997 727,058
Grants ................. 11,324
Exercises .............. (303,872)
Forfeitures ............ -
--------
Balance, December 31, 1998 434,510
--------
At December 31, 1998, the 434,510 stock options outstanding are exercisable.
All of the options have an exercise price of $6.67 per share and expire on July
25, 2001.
31
32
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1996, 1997, and 1998 would have been decreased as
indicated below (in thousands):
1996 1997 1998
---- ---- ----
Net income:
As reported ....... $ 10,403 $ 14,437 $ 17,947
Pro forma ......... $ 10,204 $ 14,005 $ 17,054
Net income per common
share:
Basic:
As reported ....... $ 0.84 $ 0.96 $ 1.15
Pro forma ......... $ 0.82 $ 0.93 $ 1.09
Diluted:
As reported ....... $ 0.83 $ 0.93 $ 1.12
Pro forma ......... $ 0.81 $ 0.90 $ 1.06
The fair value of each option granted in 1996 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 35%; risk-free
interest rate of 6.52%; expected term of 4 years. The fair value at date of
grant was $2.27 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 of 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 at December 31, 1998 was 2.58 years.
6. OTHER EMPLOYEE BENEFIT PLANS
The University 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
University in the fourth quarter of each year, and were $119,000, $144,000 and
$185,000 for the years ended December 31, 1996, 1997 and 1998, 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 During 1998, 4,116 shares were purchased in the open market
for employees, at an average price of $31.81 per share.
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 nine of its eleven campuses
and other administrative locations. Rent expense was $3,371,000, $3,294,000 and
$3,658,000 for the years ended December 31, 1996, 1997 and 1998, 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.
campuses and three of the Virginia campuses are leased from companies owned by
the President and a majority stockholder of the Company. Rent paid to these
companies was $2,279,000, $2,126,000 and $2,199,363 for the years ended December
31, 1996, 1997 and 1998, respectively.
32
33
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1998 are as follows (in thousands):
TOTAL AMOUNT
PAYABLE TO
TOTAL RELATED PARTIES
----- ---------------
1999 ..... $ 4,090 $ 2,198
2000 ..... 4,016 2,198
2001 ..... 3,921 2,198
2002 ..... 3,563 2,198
2003 ..... 3,183 2,198
Thereafter 6,897 5,496
------- -------
$25,670 $16,486
======= =======
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 will 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 were no borrowings by the Company in 1998.
On October 2, 1998, the Board of Directors authorized the Company to
repurchase up to five percent of shares of its outstanding common stock at
market prices, not to exceed $24 million.. The timing of stock purchases are
made at the discretion of management. At December 31, 1998, the Company has
repurchased 94,600 shares.
8. INCOME TAXES
The income tax provision for the years ended December 31, 1996, 1997 and
1998 is summarized below (in thousands).
Current: 1996 1997 1998
-------- -------- --------
Federal ............... $ 2,088 $ 7,422 $ 9,620
State ................. 727 1,764 1,967
-------- -------- --------
2,815 9,186 11,587
-------- -------- --------
Deferred:
Federal ............... (61) (145) (129)
State ................. (14) (29) (18)
-------- -------- --------
(75) (174) (147)
-------- -------- --------
$ 2,740 $ 9,012 $ 11,440
======== ======== ========
The tax effects of the principal temporary differences that give rise to the
Companies' deferred tax asset (liability) are as follows for the years ended
December 31, (in thousands):
1997 1998
------ -----
Tuition receivable and student loans .... $ 200 $ 253
Property and equipment .................. 49 143
Unrealized gains on marketable securities (186) (473)
----- -----
Net deferred tax asset (liability) ...... $ 63 $(77)
===== =====
A reconciliation between the Company's statutory tax rate and the effective
tax rate for the years ended December 31, 1996, 1997, and 1998 is as follows:
1996 1997 1998
---- ---- ----
Statutory federal rate .................................. 35% 35% 35%
State income taxes, net of federal benefits ............. 5% 5% 5%
Effect of prior year accruals ........................... -- (2%) (1%)
Income attributable to period during which the University
and ELP were S Corporations ............................. (24%) -- --
--- --- ---
Effective tax rate ...................................... 16% 38% 39%
=== === ===
Cash payments for income taxes were $2,809,000 in 1996, $8,147,000 in 1997
and $9,552,000 in 1998.
Pro forma income taxes reflect the application of statutory corporate income
tax rates to the net income of the University and ELP as if the termination of
the S Corporation status of the Company had occurred on January 1, 1996.
33
34
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The components of the pro forma income tax provision as of December 31,
1996, are as follows (in thousands):
Current 1996
------
Federal ............ $ 5,526
State .............. 1,198
-------
6,724
Deferred ............. (75)
-------
$ 6,649
=======
9. HISTORICAL NET INCOME PER SHARE
Historical net income per share for the year ended December 31, 1996, after
giving effect to the merger of the University and the Company and the 3-for-2
stock split, is as follows:
1996
----
Historical net income (000) ... $ 14,312
Net income per share:
Basic ...................... $ 1.28
Diluted .................... $ 1.26
Weighted average shares
outstanding
Basic ...................... 11,197,602
Diluted .................... 11,365,446
10. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for 1997 and 1998 is as follows (in
thousands except per share data):
1997 QUARTER
- ----------------------- -------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- -------
Total revenues......... $13,773 $13,639 $10,030 $15,689
Income from operations. 6,406 6,140 1,440 6,699
Net income............. 4,182 4,166 1,653 4,436
Net income per share:
Basic............... 0.29 0.27 0.11 0.29
Diluted............. 0.28 0.27 0.10 0.28
1998 QUARTER
----------------------- --------------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- -------
Total revenues ........ $16,849 $16,375 $11,783 $17,865
Income from operations 8,109 7,310 2,278 8,510
Net income ............ 5,376 4,924 1,890 5,757
Net income per share:
Basic ......... $ 0.35 $ 0.32 $ 0.12 $ 0.36
Diluted ....... $ 0.34 $ 0.31 $ 0.12 $ 0.35
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, 1998 .... $230 1,302 $(1,237) $295
Year ended December 31, 1997 .... 164 1,379 $(1,313) 230
Year ended December 31, 1996 .... 155 788 (779) 164
Allowance for loan losses:
Year ended December 31, 1998 .... 283 213 (143) 353
Year ended December 31, 1997 .... 147 325 (189) 283
Year ended December 31, 1996 .... 49 205 (107) 147
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
34
35
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....... 58 CEO, President, Director
Harry T. Wilkins.... 42 Chief Financial Officer
Stanley G. Elmore... 57 Chairman of the Board of
Directors
Todd A. Milano...... 46 Director, Treasurer
Jennie D. Seaton.... 69 Director
Roland Carey........ 59 Director
Donald T. Benson.... 55 Director
G. Thomas Waite, III 47 Director
Charlotte Beason.... 51 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. Mr. Bailey 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 has been the Chairman of the Board of Trustees of the University since
1989. Mr. Elmore has served as Projects and Programs Manager, Citibank
Mid-Atlantic, a position he has held for more than five years.
Todd A. Milano is the Treasurer of the Company and has been a director of
the Company since July 1996. Mr. Milano has been the Vice Chairman of the Board
of Trustees of the University since 1992. Mr. Milano has served as President and
Chief Executive Officer of Central Pennsylvania Business School since 1989.
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.
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. Mr.
Carey is an Instructor with the Carl Sandburg School, a position he has held for
more than five years.
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 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 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 for the Humane Society of the United States
since 1993.
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/Health Care
Reform Office, a position she has held for more than five years.
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.
35
36
CERTAIN SIGNIFICANT EMPLOYEES OF THE UNIVERSITY
The following information is supplied with respect to certain other
significant employees of the University:
Dr. Donald Stoddard, 62, 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.
Younes P. Benab, Ph.D., 61, is the Academic Dean of the University, a
position he has held since 1986.
J. Chris Toe, Ph.D., 44, has been the Administrative Dean of the University
since 1997. From 1994 to 1997, Dr. Toe was the Director, Graduate Programs of
the University. Dr. Toe joined the University in 1993 as an adjunct professor,
becoming a full-time professor in 1994. Prior to joining the University, Dr. Toe
was an independent consultant.
Marla Boulter, 43, 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.
Robert E. Farmer, 60, is the Director of Human Resources of the University,
a position he has 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).
Piroj Piboolnuruk, 44, is the University's Director of Information
Management, a position he has held since 1992. Mr. Piboolnuruk was the
University's coordinator of Administrative Services from 1986 to 1992.
John Tucker, 58, is the University's Director of Distance Learning, a
position he has held since 1995. Mr. Tucker has been on the faculty of the
University as an Adjunct Professor since 1974 and was a director of systems
engineering with the Internal Revenue Service from 1988 to 1995. He is a
certified computer professional and has an extensive background as an educator
in distance learning.
Christopher Symanoskie, 27, is the Manager of Investor Relations, a position
he has held since May 1998. Prior to his employment at Strayer, Mr. Symanoskie
was the Manager of Financial Information at Callahan & Associates, a Washington
DC based consulting firm, from 1996 to 1998.
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 and Charlotte Beason. 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 Stan 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
$1,600 per meeting.
36
37
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 1998 Proxy Statement which will be filed no later than 120 days
following December 31, 1998.
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 December 31, 1998, by each person known by the Corporation
to be the beneficial owner of more than five percent (5%) of the outstanding
shares of Common Stock, each director of the Corporation, 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
Corporation.
SHARES BENEFICIALLY
OWNED
-----------------------
PERCENT
NAMES OF BENEFICIAL OWNERS (1) NUMBER OF CLASS
- -------------------------------------------------- ----------- ---------
Ron K. Bailey and Beverly W. Bailey (2) .......... 8,175,000 51.8%
T. Rowe Price Associates, Inc. (3)
100 East Pratt Street
Baltimore, MD 21202 ........................... 1,292,800 8.2
Harry T. Wilkins ................................. 80,000 *
Stanley G. Elmore ................................ 3,550 *
Todd A. Milano ................................... 9,718 *
Jennie D. Seaton ................................. 4,550 *
Roland Carey ..................................... 3,500 *
Donald T. Benson ................................. 1,575 *
G. Thomas Waite, III ............................. 3,339 *
Charlotte Beason ................................. 1,450 *
--------- ----
All directors and executive officers as a group (9
persons) ......................................... 8,282,682 52.5%
========= ====
- ----------
* 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 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 11, 1999. 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.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
LEASE OF CAMPUS FACILITIES
The Company has long-term non-cancelable operating leases for nine of its
various campus locations. The rents on these leases are subject to an annual
increase based on a stipulated price index. Of the nine leased campus locations,
five of the campuses, including the Washington, D.C. campuses 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 five operating leases for the years ended December 31, 1996, 1997
and 1998 was $2,279,000, $2,126,000, and $2,199.363, respectively. Future
minimum rental commitments for all of the Company's nine leases and the five
campuses leased from Mr. Bailey as of December 31, 1998 was as follows (in
thousands):
AMOUNTP AYABLE TO AN
TOTAL LEASE AFFILIATE OF MR. BAILEY
COMMITMENTS INCLUDED IN TOTAL
----------- -----------------------
1999 ........... $ 4,090 $ 2,198
2000 ........... 4,016 2,198
2001 ........... 3,921 2,198
2002 ........... 3,563 2,198
2003 ........... 3,183 2,198
Thereafter ..... 6,897 5,496
------- -------
$26,670 $16,486
======= =======
Each of the five leases with Mr. Bailey has a 10-year term expiring in May
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.
REORGANIZATION TRANSACTIONS
On July 30, 1996, the Company completed an initial public offering of its
common stock. The Company sold 5,175,000 shares in the offering at a price of
$6.67 per share. Net proceeds to the Company were $31,313,000. Prior to the
closing of the offering, the Company exchanged 8,998,500 shares of its common
stock for 100% of the outstanding common stock of the University, which was held
jointly by Mr. and Mrs. Ron K. Bailey, in their capacity as the S Corporation
Stockholder. Approximately $19,838,000 of the net proceeds of the offering were
paid to the Baileys as a distribution of earnings on which they had previously
paid income taxes during the period the University was an S Corporation.
Contemporaneously with the closing of the initial public offering, the
Company acquired ELP at a purchase price of $1,060,000, ELP's net book value.
ELP was wholly owned by Mr. Ron K. Bailey, the Company's President and a
director of the Company.
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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 of 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 Beacon Investments, Inc.
10.03* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Battleview Investments, Inc.
10.04* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Central Investments, Inc.
10.05* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Potomac Investments, Inc.
10.06* -- Lease Agreement, dated as of October 1, 1991, between
Strayer University, Inc. and GLM- Highland Building Limited
Partnership.
10.07* -- Lease Agreement, dated as of June 15, 1993, between Strayer
University, Inc. and Alexandria Tech Center I.
10.08* -- Employment Agreement, dated as of June 1, 1996, between
Strayer Education, Inc. and Ron K. Bailey.
10.09* -- Employment Agreement, dated as of June 1, 1996, between
Strayer University, Inc. and Harry T. Wilkins.
10.10* -- 1996 Stock Option Plan
10.11* -- Form of Tax Indemnification Agreement
10.12* -- First Amendment to Agreement of Lease for Office
Condominium Space, dated July 25, 1994, between
Strayer University, Inc. and Cross Creek Associates
Limited Partnership.
10.13** -- Lease Agreement, dated as of February 29, 1996, between
Confederation Life Insurance Company (U.S.) in
Rehabilitation and Strayer University, Inc.
10.14** -- Office Building Lease, dated as of July 26, 1996, between
Nikowski Limited Partnership and Strayer University,
Inc.
10.15** -- Office Lease Agreement, dated as of June 17, 1996, between
1133 Fifteenth Street Limited Partnership and Strayer
University, Inc.
23.01 -- Consent of PricewaterhouseCoopers LLP
24.01 -- Power of Attorney (contained in signature page).
27+ -- Financial Data Schedule.
- ----------
* 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
None
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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 19, 1999 By: /s/ RON K. BAILEY
---------------------
Ron K. Bailey
Chief Executive Officer and
Director
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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 attorney's-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 attorney's-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 19, 1999
- ----------------------------- Director (Principal
Ron K. Bailey Executive Officer)
/s/ HARRY T. WILKINS Chief Financial Officer MARCH 19, 1999
- ----------------------------- (Principal Financial and
Harry T. Wilkins Accounting Officer)
/s/ STANLEY G. ELMORE Director MARCH 19, 1999
- -----------------------------
Stanley G. Elmore
/s/ TODD A. MILANO Director MARCH 19, 1999
- -----------------------------
Todd A. Milano
/s/ JENNIE D. SEATON Director MARCH 19, 1999
- -----------------------------
Jennie D. Seaton
/s/ ROLAND CAREY Director MARCH 19, 1999
- -----------------------------
Roland Carey
/s/ DONALD T. BENSON Director MARCH 19, 1999
- -----------------------------
Donald T. Benson
/s/ G. THOMAS WAITE Director MARCH 19, 1999
- -----------------------------
G. Thomas Waite
/s/ CHARLOTTE BEASON Director MARCH 19, 1999
- -----------------------------
Charlotte Beason
41