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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, 2001 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 Identification Number)
incorporation or organization)
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 the
Registrant is $413,430,000 (based upon the last sale price of the Common Stock
as reported on the Nasdaq National Market System on March 15, 2002). The total
number of shares of Common Stock outstanding as of March 15, 2002 was 8,352,412.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for its
2002 Annual Meeting of Stockholders (which is expected to be filed with the
Commission within 120 days after the end of the Registrant's 2001 fiscal year)
are incorporated by reference into Part III of this Report.
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STRAYER EDUCATION, INC.
FORM 10-K
INDEX
Page
PART I
Item 1 Business 1
Item 2 Properties 17
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 19
Item 6 Selected Consolidated Financial Data 19
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 21
Item 7a Quantitative and Qualitative Disclosures about Market Risk 26
Item 8 Financial Statements and Supplementary Data 27
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 47
PART III
Item 10 Directors and Executive Officers of the Registrant 48
Item 11 Executive Compensation 51
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 51
Item 13 Certain Relationships and Related Party Transactions 52
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 53
SIGNATURES 54
PART I
FORWARD-LOOKING STATEMENTS: This Annual Report on Form 10-K contains statements
that may be forward-looking statements within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995 ("Reform Act"). These statements are
based on the current expectations of the Company (as defined below) and are
subject to a number of risks and uncertainties. In connection with the Safe
Harbor provisions of the Reform Act, the Company has identified important
factors that could cause its actual results to differ materially from those
expressed in or implied by such statements. The uncertainties and risks include
the pace of growth of student enrollment, our continued compliance with Title IV
of the Higher Education Act, competitive factors, risks associated with the
opening of new campuses and the timing of related regulatory approvals and
general economic and market conditions. Further information about these and
other relevant risks and uncertainties may be found elsewhere in this annual
report on Form 10-K and in the Company's other filings with the Securities and
Exchange Commission, all of which are incorporated herein by reference and are
available from the Commission and from the Company's world wide web site at
http://www.strayeredu.com as well as from other sources. The Company undertakes
no obligation to update or revise forward looking statements.
ITEM 1. BUSINESS.
OVERVIEW
Strayer Education, Inc. ("Strayer" or the "Company") (Nasdaq: STRA)
(www.strayeredu.com) is an education services holding company which owns Strayer
University and certain other assets. Strayer's mission is to make higher
education achievable and convenient for working adults in today's economy.
Strayer University (the "University") (www.strayer.edu) is a proprietary
institution of higher learning which offers undergraduate and graduate degree
programs in business administration, accounting and information technology to
more than 14,000 working adults at 17 campuses in Maryland, Virginia,
Washington, DC and worldwide via the Internet through Strayer ONLINE. Strayer
University is committed to providing an education that prepares working adult
students for advancement in their careers and professional lives. By constantly
adapting to the latest techniques and technologies used in business, we provide
our graduates with practical skills and a competitive edge in the changing
marketplace.
Strayer University is accredited by the Middle States Commission on Higher
Education ("Middle States"), one of the six regional collegiate accrediting
agencies recognized by the U.S. Department of Education ("Department of
Education" or "Department"). Founded in 1892, Strayer attracts students from
around the country and throughout the world.
INDUSTRY BACKGROUND
The adult education market is a significant and growing component of the
large post-secondary education market. The Company believes the market for adult
education should continue to increase as working adults seek additional
education and training to update and improve their skills, to enhance their
earnings potential, and to keep pace with the rapidly expanding knowledge-based
economy.
Many working adults are seeking accredited degree programs that provide
flexibility to accommodate the fixed schedules and time commitments associated
with their professional and personal obligations. Our format enables working
adult students to attend classes and complete coursework on a more convenient
schedule. Many traditional universities currently do not effectively address the
unique requirements of working adult students who seek to pursue programs of
study in the evenings and on weekends during the full calendar year.
COMPANY STRATEGY
Our goal is to be a leading provider of high quality higher education
programs for working adults in the primary areas of Business Administration,
Accounting and Information Technology. We consider our
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adult students to be our primary customers and the employers that provide
tuition assistance to their employees through tuition reimbursement plans or
other sponsorship arrangements as our secondary customers. We have identified
the following factors as key to executing our growth strategy:
1. MAINTAIN STABLE ENROLLMENT AT OUR MATURE CAMPUSES (THOSE IN OPERATION
MORE THAN THREE YEARS)
At December 31, 2001, we had eleven mature campuses. Enrollment at
Strayer's mature campuses had been on the decline in 2000. In the
Spring, Summer and Fall quarters of 2001, enrollment at these campuses
grew 2%, 5% and 2%, respectively, compared to the same period in 2000.
2. ACCELERATE NEW CAMPUS GROWTH (THOSE IN OPERATION THREE YEARS OR LESS)
At December 31, 2001, we had six campuses in this category. Our goal
is to open two to three new campuses per year, by filling out
Washington, DC, Maryland and Virginia areas and by expanding into
contiguous states. Our three 2001 campus openings were in Baltimore,
MD, Chesapeake, VA and Newport News, VA. We plan to open three new
campuses in North Carolina in 2002, one in Raleigh-Durham and two in
Charlotte. In March 2002, we received approval from the University's
accrediting agency and from the University of North Carolina Board of
Governors, the applicable post-secondary authority in North Carolina
to open these campuses and offer our programs in the state in 2002.
Our new campuses typically become profitable after five to six
quarters of operation.
3. MAXIMIZE OUR ONLINE OPPORTUNITY TO SERVE WORKING ADULTS
Our goal is to actively market Strayer ONLINE to U.S. students
throughout all 50 states and to international students on a global
basis. Strayer ONLINE has demonstrated it is a successful online
program with both asynchronous (on demand) and synchronous (real time)
course offerings that are very much in demand by working adult
students because of their quality and convenience. Enrollment at
Strayer ONLINE has grown above a 50% compounded annual growth rate
("CAGR") since inception in 1997. There were 4,260 students taking
ONLINE courses in the Winter quarter 2002.
4. DEVELOP CORPORATE/INSTITUTIONAL ALLIANCES
The Company believes it is well-positioned to pursue significant
opportunities in the large corporate/institutional market. Currently,
the Company has in place sponsorship and reimbursement arrangements of
varying sorts with over 80 corporations and government institutions,
including AT&T, Verizon, General Motors, PEPCO, SallieMae, Northrop
Grumman Information Technology, EDS, UPS, Lockheed Martin, Raytheon,
the Defense Logistics Agency, The National Guard, The District of
Columbia, The General Services Administration, The United States Navy
Audit Agency and the U.S. Department of Energy.
5. CONSIDER SELECTIVE ACQUISITIONS
We periodically evaluate opportunities to acquire education businesses
and campus facilities. In evaluating such opportunities, management
considers, among other factors, location, demographics, price, the
availability of financing on acceptable terms, competitive factors, and
the opportunity to improve operating performance through the
implementation of our operating strategies. We have no current
commitments with regard to potential acquisitions.
STRAYER UNIVERSITY
CURRICULUM
The University offers information technology and business-oriented
curricula to equip students with specialized and practical knowledge and skills
for careers in business, industry and government. The Academic Curriculum
Committee reviews and revises the University's course offerings periodically to
improve the educational programs and respond to changing and competitive job
markets. The University formed a Curriculum Advisory Board in 1993 to support
the program evaluation process. The Curriculum Advisory Board consists of
University faculty, current and former Strayer students, and representatives
from more than a dozen private and government employers. The Curriculum Advisory
Board also studies
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the career progress of University alumni. The University uses these studies to
make decisions about curriculum development, resource allocation and faculty
appointments.
The University offers programs in the following areas:
MASTER OF BUSINESS BACHELOR OF SCIENCE (B.S.) UNDERGRADUATE CERTIFICATE
ADMINISTRATION (M.B.A.) DEGREE DEGREE PROGRAMS
Accounting Accounting
MASTER OF SCIENCE (M.S.) Business Administration Business Administration
DEGREE Computer Information Systems Computer Information Systems
Communications Technology Computer Networking
Information Systems Database Technology DIPLOMA (D.P.)
Management Information Systems Economics Accounting
Professional Accounting International Business Acquisition and Contract
Internetworking Technology Management
Computer Information Systems
EXECUTIVE GRADUATE ASSOCIATE IN ARTS (A.A.) Internetworking Technology
CERTIFICATE PROGRAMS DEGREE Network Security
Business Administration Accounting Web Development
Computer Information Systems Acquisition and Contract
Professional Accounting Management
Business Administration
Computer Information Systems
Computer Networking
Database Technology
Economics
General Studies
Internetworking Technology
Marketing
Each undergraduate degree program includes courses in oral and written
communication skills as well as mathematics and various disciplines in the
humanities and social sciences. In addition to its degree, diploma, and
certificate 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 are offered at each campus, the
University adapts its course offerings to the preferences of the student
population at each location. In addition, Strayer students may enroll in courses
at more than one campus and take courses online.
The University structures its curricula to allow students to advance
sequentially from one learning level to another by applying 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 educational 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.
STRAYER ONLINE
In August 1997, the Company began operation of Strayer ONLINE, a division
of the University. Through Strayer ONLINE, the University offers courses and
degree programs via the Internet using both synchronous (real-time interactive)
and asynchronous or on demand (time-independent) approaches to online learning.
The asynchronous format was first utilized by the University in the Summer 2001
quarter and has grown rapidly due to increasing demand. Students may take
courses solely through Strayer ONLINE or in addition to traditional, on-site
courses. A student taking classes through Strayer ONLINE has the same admission
and financial aid requirements, policies and procedures, and student services as
other University students. Tuition for Strayer ONLINE courses is the same as for
campus courses. During
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the Winter 2002 quarter, the University had 4,260 students participating in the
University's online programs, of whom 3,222 students took classes solely through
Strayer ONLINE.
FACULTY
The University seeks to appoint faculty who hold appropriate academic
credentials, are dedicated, active professionals in their field, and are
enthusiastic and committed to teaching working adults. In accordance with its
educational mission, the University faculty focuses its efforts 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 student 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 ordinarily 50%
of tuition for one new course per term. 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.
REGIONAL AND CAMPUS ORGANIZATION OF STRAYER UNIVERSITY
The University organizes its academic programs and administrative
operations on a regional and campus basis. The University's annual financial
budget and overall academic and business decisions are directed by its Board of
Trustees. The Board consists of Scott Steffey, the Company's Executive Vice
President and Chief Operating Officer and former Vice Chancellor of the State
University of New York and Dr. Donald Stoddard, the University's President, as
well as the following independent members:
Dr. Peter Salins Dr. Salins is Provost and Vice Chancellor for Academic
Affairs and Chief Academic Officer at the State
University of New York.
Roland Carey Mr. Carey is a former Director of the Company and
previously served as an Advisor to the Louisa County
Public School System of Virginia and a school Program
Coordinator.
Dr. Jennie Seaton Dr. Seaton is a former Director of the Company and
previously served as Assistant Dean of Virginia
Commonwealth University.
Todd Milano Mr. Milano is President and Chief Executive Officer of
Central Pennsylvania Business School and a Director of
the Company.
Dr. Charlotte Beason Dr. Beason is the Vice Chair, Commission on Collegiate
Nursing Education and Program Director, U.S. Department
of Veterans Affairs and a Director of the Company.
Thomas Waite, III Mr. Waite is the Chief Financial Officer and Treasurer of
The Humane Society of the United States and a Director of
the Company.
Within the parameters of the academic and financial direction set by the
University's Board of Trustees, the University is managed on a day to day basis
by the University President and Provost, as to academic matters, as well as by
four regional managers who are responsible for implementing Board policy and
meeting commercial and budgetary goals for their respective regions. They are:
James F. McCoy - Regional Director - Southern Virginia and North Carolina
Michael O. Williams - Regional Director - Northern Virginia and D.C.
Betty Shuford - Regional Director - Maryland
Robert L. Gustavus - Director - Strayer ONLINE.
Similarly, at the campus level, on a day-to-day basis, the campus
operations are managed by a Campus Manager while the academic functions are
overseen by a Campus Dean. Each campus is staffed
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with personnel performing instructional, admissions, academic advising,
financial aid, student services and career development functions. A learning
resource center at each campus supports the University's instructional programs.
Each learning resource center contains a library and computer laboratories and
is operated by a full-time manager and support staff, who assist students in the
use of research resources.
MARKETING
To generate interest among potential students, the University engages in a
broad range of activities to inform the working adult public and their employers
about the programs we offer. These activities include: direct mail; internet
marketing; marketing to our existing students; print and broadcast advertising,
student referrals and corporate and government outreach activities. Direct
response methods (direct mail and email advertising) are used to generate
inquiries. Strayer University maintains booths and information tables at
appropriate conferences and expos, as well as at transfer days at community
colleges. Through our business-to-business outreach efforts, we market our
programs to corporations with personal sales calls, distribution of information
through corporate intranets and HR departments, and on-site information
meetings. We implement a continuous marketing strategy to inquiries in our
database and track them through to application and registration. Additionally,
we market to students and alumni with information about new programs and new
locations to encourage them to return for further education.
STUDENT PROFILE
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 2001 Fall quarter,
approximately 60% were age 30 or over and approximately 74% were engaged in a
part-time (Undergraduates taking fewer than three courses each quarter) course
of study. In the 2001 Fall quarter, Strayer students registered for an average
of 8.8 course credits (about two classes per student). Strayer University's
student body is significantly diverse. In 2001, 52% of students constituted
minorities and 56% of students were women. Approximately 7% of the University's
students were international, including those taking courses through Strayer
ONLINE. Approximately 14.3% of the University's students were veterans or
reservists. Through Strayer ONLINE, the University offered courses to students
in all 50 states and 39 foreign countries in 2001. Strayer is proud of its
record of making higher learning attainable to those working adults who missed
or were previously unable to take advantage of education opportunities.
The following is a breakdown of our students by the level of program they are
seeking, at December 31, 2001:
Degree Programs Number of Students Percentage of Students
--------------- ------------------ ----------------------
Bachelors 8,686 70%
Masters 2,241 18%
Associates 1,541 12%
----
Total Degree Students 12,468 100%
Non-Degree Programs Number of Students Percentage of Students
------------------- ------------------ ----------------------
Diploma 700 45%
Undeclared 841 55%
---
Total Non-Degree Students 1,541 100%
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
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must possess a high school diploma or a General Educational Development
Certificate. Students attending the University's graduate programs must have a
bachelor's degree from an accredited 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, 2002, undergraduate, full-time students are
charged at the rate of $220.50 per credit hour. Undergraduate part-time students
are charged at the rate of $231.00 per credit hour. Courses in graduate programs
are charged at the rate of $294.00 per credit hour. Accordingly, a full-time
student seeking to obtain a bachelor's degree in four years currently would pay
approximately $9,900 per year in tuition. The University implemented a tuition
increase of 5% per credit hour effective January 1, 2002. Under a variety of
different programs, the University offers scholarships and tuition discounts to
active and reserve military students and in connection with various corporate
and government sponsorship and tuition reimbursement arrangements.
SEL PROGRAM
In 1995, the Company introduced the Strayer Education Loan Program (the
"SEL Program") for eligible students as an alternative to government sponsored
student loans. Education Loan Processing, Inc. ("ELP"), which is a wholly-owned
subsidiary of the Company, administers the SEL Program for the University. In
addition to serving as an alternative to the federal loan programs, the SEL
Program can service loans at a lower cost.
The Company designed the SEL Program for working adult students. Borrowers
make payments while enrolled, thereby reducing the debt they otherwise would
assume upon completion of their studies. While enrolled at Strayer, the minimum
monthly payment on the loan is a percentage of the balance each month. Upon
completion of their schooling, the student is placed on a fixed payment plan.
The loans generally have maturities ranging from one to four years after
graduation and bear interest at a rate that is competitive with rates under
federal student loan programs. At December 31, 2001, there were 2,798 loans
outstanding with an aggregate loan balance of approximately $8.9 million and an
average individual loan balance of approximately $3,200.
Loans under the SEL Program are unsecured. Before making loans, Strayer
conducts a credit evaluation and verifies employment of each applicant. Student
defaults on loans extended under the SEL Program have historically approximated
2% of total dollars loaned.
STRAYER FOUNDATION SCHOLARSHIPS
The Strayer University Education Foundation was established by the former
majority stockholder of the Company as an independent entity to provide
scholarships and grant assistance for needy students who wish to pursue a
program of study at Strayer University. The Foundation has a nine member Board
of Trustees including independent members (as well as Dr. Stoddard and Mr.
Steffey) and oversees a variety of scholarship and grant programs for students
based on eligibility criteria established by the Foundation Board. The
Foundation had $2.3 million in assets at December 31, 2001 and issued 93
scholarships and other awards totaling approximately $100,000 in 2001.
CAREER DEVELOPMENT SERVICES
Although most of Strayer's students are adults who are already employed,
the University actively assists its students and alumni with job placement and
other career-related matters through career
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development offices in each region where the University has campuses. Strayer's
career development personnel conduct workshops on employment-related topics
(including resume preparation, interviewing techniques and job search
strategies), maintain job listings, arrange campus interviews by employers and
provide other placement assistance. The University sponsors career fairs in the
Fall and Spring quarters for students and alumni to discuss career opportunities
with companies and governmental agencies.
The University regularly conducts alumni surveys to monitor the career
progression of its graduates and to comply with Middle States and state
requirements to perform outcome assessments. The 2000 alumni survey, which had
an approximately 24% overall response rate, indicated that 91% of those
responding were employed. According to the survey, Strayer's greatest assets, in
order of importance, are campus location, schedule variety, instructor
knowledge, course selection, online courses, and small class sizes.
Strayer students and graduates are employed in a wide range of companies
and many governmental agencies.
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, other online
providers 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 post-secondary
institutions generally is higher, and in some cases significantly higher, than
the tuition at the University.
We believe that the competitive factors in the higher education market
include the ability to provide the following:
o Convenient access to programs and classes;
o High-quality educational programs, classes and services;
o Qualified and experienced faculty;
o Competitive tuition cost;
o Career advancing and practical skills which are in demand in the
marketplace.
In terms of non-degree programs offered by the University, we compete with
a variety of business and information technology providers, primarily those in
the for-profit training sector. Many of these competitors have higher market
share and longer-term relationships with corporate and government sponsors.
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 structured their programs to meet the special needs of working adult
students, although management believes that more may do so in the future.
The Company also competes with other higher learning institutions in its
market area for marketing and printout broadcast media access as well as for
instructors, both for the classroom and online.
EMPLOYEES
As of December 2001, the University employed 486 faculty members, of whom
116 were full-time and 370 part-time, and 474 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, 365 were employed full-time and 109 part-time.
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ACCREDITATION, APPROVALS, LICENSING AND FINANCIAL AID REGULATION
REGULATORY ENVIRONMENT
The Higher Education Act of 1965, as amended ("HEA"), and the regulations
promulgated thereunder require all higher education institutions that
participate in the various federal student financial aid programs under Title IV
of the HEA ("Title IV Programs") including the University, to comply with
detailed substantive and reporting requirements as well as to undergo periodic
regulatory scrutiny. The HEA mandates specific regulatory responsibility for
each of the following components of the higher education regulatory triad: (i)
the federal government through the Department of Education; (ii) the accrediting
agencies recognized by the Department of Education; and (iii) state higher
education regulatory bodies. The regulations, standards, and policies of these
regulatory agencies are subject to change.
ACCREDITATION
The University has been accredited since 1981 by Middle States, a regional
accrediting agency recognized by the Department of Education. Accreditation is a
system for recognizing educational institutions and their programs for
performance, integrity and quality that entitles them to the confidence of the
educational community and the public. In the United States, this recognition
comes primarily through private voluntary associations of institutions and
programs of higher education. These associations establish criteria for
accreditation, evaluate institutions and professional programs for
accreditation, and publicly designate those institutions that meet their
criteria. Accredited schools are subject to periodic review by accrediting
bodies to ensure that the schools maintain the performance, integrity and
quality required for accreditation.
Middle States is the same accrediting agency that grants institutional
accreditation to other degree-granting public and private colleges and
universities in its region (namely, Delaware, District of Columbia, Maryland,
New Jersey, New York, Pennsylvania, Puerto Rico, and U.S. Virgin Islands).
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 students
and corporate and government sponsors under tuition reimbursement programs look
to accreditation for assurance that an institution maintains high quality
educational standards. Moreover, institutional accreditation is necessary to
qualify for eligibility for federal student financial assistance.
Middle States reaffirmed the University's accreditation in 2000 for a ten
year period.
The accrediting agencies that accredit higher education institutions in
various regions of the United States have recently adopted a "Policy on
Evaluation of Institutions Operating Interregionally." Under that policy both
the "home" regional accreditor and the "host" regional accreditor cooperate to
evaluate an institution that delivers education at a physical site in the host
regional accreditor's region. Although the home region is solely responsible for
final accreditation actions, as the University opens campuses in regions outside
the Middle States region, the host regional accreditors will also participate in
the accreditation process of such expansion operations.
STATE LICENSURE
The University is authorized to offer its programs, including those offered
through Strayer ONLINE, by the D.C. Education Licensure Commission, the Virginia
State Council of Higher Education, the Maryland Higher Education Commission and
the Board of Governors of the University of North Carolina (the state licensure
body for North Carolina). 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 and the
fourth jurisdiction (North Carolina) in which it plans to open campuses in 2002.
State laws and regulations
8
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.
OTHER APPROVALS
The University is authorized by the Immigration and Naturalization Service
(the "INS") of the U.S. Department of Justice to admit international students
for study in the U.S. subject to applicable guidelines. In addition, Strayer is
approved by appropriate authorities for the education of veterans and members of
the selective reserve and their dependents, as well as for the rehabilitation of
handicapped students.
FINANCING STUDENT EDUCATION
Students finance their Strayer education in a variety of ways. A
significant number of students utilize federal financial aid. In addition, many
of Strayer's working adult students finance their own education or receive full
or partial tuition reimbursement from their employers. Congress has enacted
several tax credits for students pursuing higher education as well as providing
a deduction for interest on student loans and exclusions from income of certain
tuition reimbursement amounts. Strayer also offers a variety of grants, loans
(including loans under the SEL Program), scholarships and work-study programs as
financing options for its students.
In 2001, approximately 44% of the University's students participated in one
or more Title IV Programs. A substantial portion (approximately 55% in 2001) of
the University's revenues are derived from tuition financed under Title IV
Programs.
The University's financial aid programs are designed to assist eligible
students whose financial resources are inadequate to meet the cost of education.
Aid is awarded on the basis of financial need, generally defined under the HEA
as the difference between the cost of attending a program of study and the
amount a student reasonably can be expected to contribute to those expenses. All
recipients of financial aid must maintain a satisfactory grade point average and
progress in a timely manner toward completion of a program of study.
1998 HEA amendments that took effect on October 7, 2000 address an
institution's refund policy with regard to Title IV Programs only. Under the new
provision, the institution must first determine the amount of Title IV Program
funds that the student "earned." If the student withdraws during the first 60%
of any period of enrollment or payment period, the amount of Title IV Program
funds that the student earned is equal to a pro rata portion of the funds for
which the student would otherwise be eligible. If the student withdraws after
the 60% point, then the student has earned 100% of the Title IV Program funds.
The institution must return to the appropriate Title IV Programs, in a specified
order and excluding the Federal Work-Study Program, the lesser of the unearned
Title IV Program funds or the institutional charges incurred by the student for
the period multiplied by the percentage of unearned Title IV Program funds. The
Company believes that the University's refund policy is consistent with the
current HEA.
TITLE IV PROGRAMS
The University maintains eligibility for its students to participate in the
following Title IV Programs:
Federal 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.
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 Parent Loan for Undergraduate Students
("PLUS") program, students and their parents can obtain from
9
lending institutions subsidized and unsubsidized student loans, which are
guaranteed by the federal government. Students who demonstrate financial need
may qualify for a subsidized Stafford loan, and the federal government will pay
the interest on the loan while the student is in school and until the borrower's
obligation to repay the loan begins. Unsubsidized Stafford loans are available
to students who do not qualify for a subsidized Stafford loan or in some cases
in addition to a subsidized Stafford loan.
Federal Direct Student Loans. Under the William D. Ford Federal Direct Loan
Program (the "Direct Loan Program"), the Department of Education makes loans
directly to students rather than guaranteeing loans made by lending
institutions. The University has not originated any loans under this program,
but utilizes other Title IV loan programs.
OTHER FINANCIAL AID PROGRAMS
In addition to the University's own student loan and scholarship programs,
eligible students at the University may participate in educational assistance
programs administered by the U.S. Department of Veterans Affairs, the U.S.
Department of Defense, the District of Columbia and private organizations.
FINANCIAL AID REGULATION
To be eligible to participate in Title IV Programs, the University must
comply with specific standards and procedures set forth in the HEA and the
regulations issued thereunder by the Department of Education. An institution
must, among other things, be authorized by each state within which it operates
to offer its educational programs and be accredited by a recognized accrediting
agency. The institution also must be certified by the Department of Education to
participate in Title IV Programs, based on a determination that, among other
things, the institution meets certain standards of administrative capability and
financial responsibility. For purposes of the Title IV Programs, the University
and all of its campuses are considered to be a single "institution of higher
education" so that Department of Education requirements applicable to an
"institution of higher education" are applied to all of the University's
campuses in the aggregate rather than on an individual basis. The University
currently is certified to participate in Title IV Programs.
In October 1998, Congress reauthorized and amended the HEA. While the 1998
HEA amendments made numerous changes to Title IV Program requirements, the
Company believes that these changes have not and will not have a material
adverse effect on the University. The Company believes that the University is in
material compliance with the HEA.
Congress reauthorizes the HEA every five to six years. In addition Congress
reviews and determines appropriations for Title IV Programs on an annual basis.
An elimination of certain Title IV Programs, a reduction in federal funding
levels of such programs, material changes in the requirements for participation
in such programs, or the substitution of materially different programs could
reduce the ability of certain students to finance their education, which in turn
could lead to lower enrollments at the University or require the University to
increase its reliance upon alternative sources of student financial aid. Given
the significant percentage of the University's revenues that are derived
indirectly from the Title IV Programs, the loss of or a significant reduction in
Title IV Program funds available to the University's students could have a
material adverse effect on the Company. In addition, the regulations applicable
to the University have been subject to frequent revisions. The University's
continued compliance with such regulations may affect the operations of the
University and its ability to participate in Title IV Programs. Certain elements
of the regulations 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 guaranty agencies, also have enforcement
authority.
10
ADMINISTRATIVE CAPABILITY
Department of Education regulations specify extensive criteria by which an
institution must establish that it has the requisite "administrative capability"
to participate in Title IV Programs. To meet the administrative capability
standards, an institution, among other things, must not have cohort default
rates above specified levels, must have various procedures in place for
safeguarding federal funds, must not be, and not have any principal or affiliate
who is, debarred or suspended from federal contracting or engaging in activity
that is cause for debarment or suspension, and must not otherwise appear to lack
administrative capability.
In certain circumstances, including a change in ownership resulting in a
change of control, the Department of Education may certify the institution's
continuing eligibility to participate in Title IV Programs on a provisional
basis for no more than three years. During the period of provisional
certification, the institution must comply with any additional conditions
included in its program participation agreement. If the Department of Education
determines that a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may revoke the
institution's certification to participate in Title IV Programs.
Department of Education regulations permit an institution to enter into a
written contract with a third-party servicer for the administration of any
aspect of the institution's participation in Title IV Programs. The third-party
servicer must, among other obligations, comply with Title IV requirements and be
jointly and severally liable with the institution for any violation by the
servicer of any Title IV provision. The University has written contracts with
three third-party servicers: Financial Aid Management for Education, Inc.,
Post-secondary Education Assistance Corporation, and Weber and Associates, Inc.
The servicers each perform activities related to the University's participation
in Title IV Programs, such as certifying FFEL Program loan applications,
preparing reports from the University to the Department of Education, issuing
payments for the Pell and campus-based programs, and issuing and collecting
Perkins loans.
FINANCIAL RESPONSIBILITY
The HEA and Department of Education regulations establish extensive
standards of financial responsibility that institutions such as the University
must satisfy to participate in Title IV Programs. These standards generally
require that an institution provide the services described in its official
publications and statements; provide the administrative resources necessary to
comply with Title IV requirements; and meet all of its financial obligations,
including required refunds and any repayments to the Department of Education for
debts and liabilities incurred in programs administered by the Department.
In addition, Department of Education standards, which took effect July 1,
1998, utilize a complex formula to assess financial responsibility. The
standards focus on three financial ratios: (i) equity ratio (which measures the
institution's capital resources, ability to borrow and financial viability);
(ii) primary reserve ratio (which measures the institution's financial viability
and liquidity); and (iii) net income ratio (which measures the institution's
ability to operate at a profit or within its means). An institution's financial
ratios must yield a composite score of at least 1.5 for the institution to be
deemed financially responsible without the need for further federal oversight.
The University has applied the financial responsibility standards to its audited
financial statements as of and for the year ended December 31, 2001 and
calculated a composite score of 3.0, the highest score available. The Company
therefore believes that the University meets the Department's financial
responsibility standards.
STUDENT LOAN DEFAULTS
Under the HEA, an educational institution may lose its eligibility to
participate in some or all of the Title IV Programs if defaults on the repayment
of federally guaranteed student loans by its students exceed certain levels. 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. The Department
11
calculates a single cohort default rate for an institution that includes all
borrowers who commenced repayment on any FFEL Program or Direct Loan Program
loan.
The Department issued new regulations effective July 1, 2001 regarding
cohort default rates. Under these regulations, if the Department notifies an
institution that its three most recent cohort default rates are each 25 percent
or greater, the institution's participation in the FFEL Program, Direct Loan
Program, and Federal Pell Grant 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
FFEL Program and Direct Loan Program ends 30 days after notification that its
most recent cohort default rate is greater than 40 percent, unless the
institution timely appeals that determination on specified grounds and according
to specified procedures. An institution whose participation ends under these
provisions may not participate in the relevant programs for the remainder of the
fiscal year in which the institution receives the notification and for the next
two fiscal years. The new regulations also address cohort default rates for
institutions that have undergone a change in status, such as acquisition or
merger of institutions and acquisition of another institution's branches or
locations.
If an institution's cohort default rate equals or exceeds 25% in any of the
three most recent federal fiscal years, the institution may be placed on
provisional certification status. Provisional certification does not limit an
institution's access to Title IV Program funds; however, an institution with
provisional status is under closer review by the Department of Education and may
be subject to summary adverse action if it violates Title IV Program
requirements. The University's cohort default rates on FFEL Program loans for
the 1997, 1998 and 1999 federal fiscal years, the three most recent years for
which this information is available, were 14.5%, 12.1% and 5.6%, respectively.
The average default rates for proprietary institutions nationally were 15.4%,
11.4% and 9.3% in fiscal years 1997, 1998 and 1999, respectively.
THE "90/10 RULE"
Under what is commonly referred to as the "90/10 Rule," the HEA provides
that proprietary institutions, such as the University, are eligible to
participate in Title IV Programs only if they derive no more than 90% of their
revenues from Title IV Programs, as determined in accordance with a formula in
the regulations. A proprietary institution that violates the "90/10 Rule" loses
its eligibility to participate in Title IV Programs for at least one year.
During 2001, the University derived 55% 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 and in accordance with the HEA, 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. Congress is considering legislation, and the Department of Education
is engaged in negotiated rulemaking, to clarify the incentive payment rule.
Failure to comply with the incentive payment rule could result in loss of
ability to participate in Federal Student Financial Aid programs or financial
penalties. Although there can be no assurance that the Department of Education
would not find deficiencies in the University's present or former employee
compensation and third-party contractual arrangements, the University believes
that its employee compensation and third-party contractual arrangements comply
with the incentive compensation provisions of the HEA.
DISTANCE LEARNING AND THE "50% RULE"
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 Winter
2002 quarter, the University had 4,260 students taking courses online, of whom
3,222 students took classes solely through Strayer ONLINE.
12
In addition to the regulation of distance education by state education
licensure agencies and Middle States, the HEA imposes a limit on the amount of
correspondence study an institution participating in Title IV Programs may
offer. The HEA also excludes from Title IV Program participation institutions at
which 50% or more of the institution's students are enrolled in correspondence
courses, except that the Secretary of Education is authorized to waive this
limitation at his/her discretion in the case of institutions offering two- or
four-year programs leading to an associate or bachelor degree. Department of
Education regulations grant an automatic waiver for these degree-granting
institutions if students enrolled in correspondence courses receive five percent
or less of the total Title IV Program funds received by all students enrolled at
the institution. In accordance with HEA regulations, the Department of Education
considers a telecommunications course to be a correspondence course if the sum
of telecommunications courses and other correspondence courses the institution
provided during an award year equaled or exceeded 50% of the total number of
courses it provided during that year. In addition, a student is not eligible for
Title IV Program funds for a correspondence course unless such course is part of
a program leading to an associate, bachelor or graduate degree. The HEA states
that a student enrolled in a course of instruction that is offered in whole or
in part through telecommunications and leads to a recognized certificate for a
program of study of one year or longer, or a recognized associate, bachelor or
graduate degree conferred by such institution, is not considered to be enrolled
in a correspondence course, unless the total number of telecommunications and
correspondence courses offered by the institution equals or exceeds 50% of the
total number of courses offered by the institution. For purposes of the 50%
rule, a course must be considered as being offered once during an award year
regardless of the number of times it is offered during that year, and a course
that is offered both on campus and online must be considered two courses for the
purpose of determining the total number of courses the institution provided
during an award year. The University's policy is to ensure that it remains in
compliance with the 50% rule by offering courses in a manner such that the
number of courses offered through Strayer ONLINE will not equal or exceed one
half of the total number of courses offered by the University, calculated as set
forth above. The University monitors enrollment in and the offering of courses
through Strayer ONLINE to ensure that the prescribed limits are not exceeded.
POTENTIAL EFFECT OF REGULATORY VIOLATIONS
If the University fails to comply with the regulatory standards governing
Title IV Programs, the Department of Education could impose one or more
sanctions, including transferring the University to the reimbursement or cash
monitoring system of payment, requiring repayment of certain Title IV funds,
certifying the University's eligibility on a provisional basis, taking emergency
action, referring the matter for criminal prosecution, or initiating proceedings
to impose a fine or to limit, suspend or terminate the participation of the
University in Title IV Programs. In addition, the University's guaranty
agencies could limit, suspend or terminate the University's eligibility to
provide guaranteed student loans in the event of certain regulatory violations.
Although there are no such sanctions currently in force, and the University does
not believe any such sanctions are contemplated, if such sanctions were imposed
against the University and resulted in a substantial curtailment of the
University's participation in Title IV Programs, the University would be
materially and adversely affected.
If the University lost its eligibility to participate in Title IV Programs,
or if the amount of available federal student financial aid were reduced, the
University would seek to arrange or provide alternative sources of revenue or
financial aid for students. The SEL Program would provide one such alternative,
but there can be no assurance that the SEL Program could provide loans
sufficient to make up for the loss of Title IV Program funds. Although the
University believes that one or more private organizations would be willing to
provide financial assistance to students attending the University, there is no
assurance that this would be the case, and the 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.
13
During 1999, the Department of Education conducted a program review of the
University. The Department of Education issued a final program review
determination letter indicating that the University satisfactorily responded to
the findings in the program review report. In addition, no payments or refunds
were required to be made to the Department of Education or lending institutions
as a result of this program review.
RESTRICTIONS ON ADDING LOCATIONS AND EDUCATIONAL PROGRAMS
State requirements and accrediting agency standards may in certain
instances limit the ability of the University to establish additional locations
and programs. District of Columbia regulations require institutions to submit an
application for an amended license in order to add a new program or location.
The Virginia State Council of Higher Education requires institutions to obtain
approval prior to offering new educational programs at existing sites or
instruction for degree credit at a new site located more than 25 miles or 30
minutes travel time from an existing location. Maryland law and regulations
require institutions to obtain the approval of the Maryland Higher Education
Commission in order to offer an instructional program not specified in its
certificate of approval or to offer more than one-third of the credit-bearing
coursework leading toward a certificate or degree at a location not specified in
its certificate of approval. Middle States requires institutions that it
accredits to notify it in advance of implementing new programs or locations, and
upon notification may undertake a review of the institution's accreditation.
Based on its current understanding of how these standards will be applied, the
University does not believe that these standards will have a material adverse
effect on the University or its expansion plans.
The HEA requires proprietary institutions of higher education to be in full
operation for two years before qualifying to participate in Title IV Programs.
However, the applicable regulations permit an institution that is already
qualified to participate in Title IV Programs to establish an additional
location that may immediately qualify, unless the location was acquired from
another institution that has ceased offering educational programs at that
location and has unpaid Title IV liabilities, and the acquiring institution does
not agree to be responsible for certain liabilities of the acquired institution.
The new location must satisfy all other applicable requirements for
institutional eligibility, including approval of the additional location by the
relevant state authorizing agency and the institution's accrediting agency. In
addition, a location that qualifies as a "branch campus" must meet extensive
regulatory requirements, including the standards of administrative capability
and financial responsibility discussed above. The University's expansion plans
assume its continued ability to establish new campuses as additional locations
of the University under such applicable regulations and thereby avoid 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 issued new regulations effective July 1, 2001
concerning adding new locations. Under the new regulations, institutions must
report to the Department a new additional location at which at least 50% of an
eligible program will be offered, if the institution wants to disburse Title IV
Program funds to students enrolled at that location. If the institution
participates in Title IV programs under provisional certification, as the
University currently does as a result of its 2001 recapitalization and change of
ownership (see Change in Ownership Resulting in a Change of Control), and in
certain other circumstances, the institution must obtain Department of Education
approval for the new location before providing Title IV assistance to students
at that location. Otherwise, once it reports the location to the Department, the
institution may disburse Title IV Program funds to eligible students at that
location if the location is licensed and accredited. Institutions are
responsible for knowing whether they need approval, and institutions that add
locations and disburse Title IV Program funds when they knew or should have
known that they were required to obtain Department of Education approval may be
subject to administrative repayments and other sanctions. The Company does not
believe that the Department of Education's regulations will create significant
obstacles to the University's plans to add new campuses.
14
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
prepares students for gainful employment in the same or related recognized
occupation as an educational program that has previously been designated as an
eligible program at that institution and meets certain minimum length
requirements. In the event that an institution erroneously determines that an
educational program is eligible for Title IV funds without the Department of
Education's express approval, the institution may be liable for repayment of
Title IV aid received by the institution in connection with that program. The
Company does not believe that the Department of Education's regulations will
create significant obstacles to the University's plans to add new programs.
CHANGE IN OWNERSHIP RESULTING IN A CHANGE OF CONTROL
Many states and accrediting agencies require institutions of higher
education to report or obtain approval of certain changes in ownership or other
aspects of institutional status, but the types of and triggers for such
reporting or approval vary among states and accrediting agencies. The D.C.
Education Licensure Commission may require an institution licensed by it to
apply to amend its license prior to a change in ownership. The applicable laws
and regulations of Virginia and Maryland do not specifically address reporting
of changes in ownership. The University's accrediting agency, Middle States,
requires institutions that it accredits to inform it in advance of any
substantive change, including a change that significantly alters the ownership
or control of the institution. Examples of substantive changes requiring advance
notice to Middle States include changes in the legal status, ownership or form
of control of the institution, such as the sale of a proprietary institution.
Middle States must approve a substantive change in advance in order to include
the change in the institution's accreditation status.
The HEA provides that an institution that undergoes a change in ownership
resulting in a change of control loses its eligibility to participate in the
Title IV Programs and must apply to the Department of Education in order to
reestablish such eligibility. An institution is ineligible to receive Title IV
Program funds during the period prior to recertification. The HEA provides that
the Department of Education may provisionally certify an institution seeking
approval of a change of ownership and control based on preliminary review by the
Department of a materially complete application received by the Department
within ten business days after the transaction. The Department may continue such
provisional certification on a month-to-month basis until it has rendered a
decision on the institution's recertification application. The Department may
provisionally certify an institution that has undergone a change in ownership
resulting in a change of control for a period expiring not later than the end of
the third complete award year following the date of provisional certification.
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. A change in
ownership and control of a publicly traded corporation also occurs if a person
who is a controlling shareholder of the corporation ceases to be a controlling
shareholder. A controlling shareholder is a shareholder who holds or controls
through agreement both 25 percent or more of the total outstanding voting stock
of the corporation and more shares of voting stock than any other shareholder.
Under INS regulations, if a school that is approved to admit foreign
students changes ownership, approval will be automatically withdrawn 60 days
after the change of ownership unless the school files a new petition for school
approval within 60 days after that change of ownership. If, after conducting a
review, the INS district director finds that the school's approval should not be
continued, the district director must institute proceedings to withdraw the
school's approval. The University currently has INS approval to admit foreign
students for U.S. study, subject to applicable regulations.
15
Pursuant to federal law providing benefits for veterans and reservists, the
University is approved for education of veterans and members of the selective
reserve and their dependents by the state approving agency in the District of
Columbia, Maryland, and Virginia. In certain circumstances, state approving
agencies may require an institution to obtain approval for a change in ownership
and control.
In order to complete the change of ownership associated with the Company's
self-tender offer to repurchase common shares and its issuance of its Series A
Convertible Preferred Stock to New Mountain Partners, L.P. (a private equity
fund managed by New Mountain Capital, LLC) and DB Capital Investors, L.P. (an
investment fund led by DB Capital Partners, Inc., the merchant banking arm of
Deutsche Bank) in March 2001, the University was required to make a number of
submissions to educational regulatory bodies, including, among others, (1)
filing a "substantive change" report with Middle States; (2) filing an
application for approval to participate in federal student financial aid
programs with the Department of Education; (3) filings with the D.C. Education
Licensure Commission, the Maryland Higher Education Commission, and the Virginia
State Council of Higher Education; and (4) filings with the INS and approving
agencies for veterans benefits in the District of Columbia, Maryland, and
Virginia. All of the applicable agencies approved the transaction, which closed
in 2001. As is customary for institutions undergoing a change of ownership
resulting in a change of control, the Department of Education recertified the
University on a provisional basis through June 30, 2004. Under the terms of the
provisional certification the University must obtain approval of the Department
of Education before awarding Title IV funds in certain circumstances, including
establishment of an additional location, change in ownership, increase in level
of academic offering, addition of certain non-degree or short-term training
programs, change in form of educational measurement, change in state authorizing
agency or primary accrediting agency, or waiver or recognition of regulatory
exception.
If the University underwent a change of control that required 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.
ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 (the "Act")
made permanent the exclusion of up to $5,200 from income provided for qualifying
employer-provided educational assistance (with respect to courses beginning
after December 31, 2001) and extended the exclusion to graduate level programs.
In addition, the Act allows taxpayers to claim a HOPE Scholarship Credit or a
Lifetime Learning Credit for a taxable year and to exclude from gross income
amounts distributed from a Coverdell education savings account on behalf of the
same student as long as the distribution is not used for the same education
expenses for which a credit was claimed. The Act also increases the annual limit
on contributions to Coverdell education savings accounts from $500 to $2,000 for
taxable years after 2001, with the phase-out range for married taxpayers filing
a joint return extended to between $190,000 and $220,000 of modified adjusted
gross income.
The Act also expands the definition of "qualified tuition program" to
include certain prepaid tuition programs established and maintained by one or
more eligible educational institutions that satisfy the requirements under
section 529 of the Internal Revenue Code. In the case of a qualified tuition
program maintained by one or more private eligible educational institutions, the
Act allows taxpayers to purchase tuition credits or certificates on behalf of a
designated beneficiary but not to make contributions to a savings account plan.
The Act allows taxpayers to claim a HOPE Scholarship Credit or Lifetime Learning
16
Credit for a taxable year and exclude from gross income amounts distributed
(both the principal and earnings portions) from a qualified tuition program on
behalf of the same student as long as the distribution is not used for the same
expenses for which a credit was claimed.
For taxable years beginning after December 31, 2001, the Act permits
taxpayers an above-the-line deduction for qualified higher education expenses.
For 2002 and 2003, taxpayers with adjusted gross income that does not exceed
$65,000 ($130,000 in the case of married couples filing joint returns) are
entitled to a maximum deduction of $3,000 per year. The Act also increased the
phase-out ranges for eligibility for the student loan interest deduction (for
interest paid on qualified education loans after December 31, 2001) to between
$50,000 and $65,000 for single taxpayers and to between $100,000 and $130,000
for married taxpayers filing joint returns, with the ranges adjusted annually
for inflation after 2002. In addition, the Act repealed both the limit on the
number of months during which interest paid on a qualified education loan is
deductible and the restriction that voluntary payments of interest are not
deductible (for interest paid on qualified education loans after December 31,
2001).
ITEM 2. PROPERTIES.
As of December 31, 2001, the Company leased fourteen of its various
campuses and administrative locations. In February 2002, the Company purchased
its Washington D.C., Manassas, VA and Woodbridge, VA facilities from entities
affiliated with its former majority stockholder, President and CEO, Ron K.
Bailey for an aggregate purchase price of $12 million. These three campuses
comprise 74,600 square feet and had an aggregate annual rent of $1,626,000. As a
result of this purchase, only one of its campuses, Fredericksburg, is now owned
by entities affiliated with Mr. Bailey. See "Certain Transactions -- Campus
Facilities" and Note 9 to the Company's consolidated financial statements. The
table below sets forth certain information regarding each of the Company's
properties at December 31, 2001 (except as otherwise noted):
APPROXIMATE
AREA IN INITIAL LEASE TERM
LOCATION SQUARE FEET YEAR EXPIRES (1) (2)
-------- ----------- --------------------
Alexandria, VA........................ 22,000 Facility is owned
Anne Arundel County, MD............... 17,000 2004
Arlington, VA......................... 26,000 2003
Chesapeake, VA........................ 21,000 2011
Chesterfield, VA...................... 11,000 2004
Corporate Headquarters (Arlington, VA) 7,000 2012
Fredericksburg, VA.................... 17,500 2006
Henrico County (Glen Allen, VA)....... 20,800 Facility is owned
Jessup, MD............................ 5,100 2003
Loudoun Campus (Ashburn, VA).......... 33,000 Facility is owned
Manassas, VA.......................... 20,800 Facility is owned (3)
Montgomery County (Germantown, MD).... 18,000 2005
Newport News, VA...................... 21,000 2011
Owings Mills, MD...................... 15,000 2005
Prince George's County, MD............ 21,400 2003
Strayer ONLINE (Lorton, VA)........... 16,200 2005
Takoma Park (Washington, D.C.)........ 21,800 Facility is owned
Washington, D.C. Campus............... 33,000 Facility is owned (3)
Washington, D.C. Library/Annex........ 12,200 2006
White Marsh (Baltimore, MD)........... 20,000 2010
Woodbridge, VA........................ 20,800 Facility is owned (3)
- ----------
(1) A number of these facility leases have renewal options.
(2) The Company also has leases for approximately 44,000 square feet at three
locations expiring in 2002 from which it has already or plans to relocate
into other space reflected in the table above.
(3) Leased in 2001 and acquired in February 2002.
17
In March 2002, the Company also entered into leasing arrangements for the
three North Carolina campuses it plans to open in 2002, one in Raleigh-Durham
and two in Charlotte (each with approximately 12,500 square feet and with
initial terms expiring in 2007).
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation and other legal
proceedings arising out of the ordinary course of its business. There are no
pending material legal proceedings to which the Company is subject or to which
the Company's property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon by stockholders during the fourth quarter of
2001.
18
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,
low, and closing sale prices of the Company's Common Stock, as reported on the
Nasdaq National Market.
HIGH LOW CLOSE
-------- -------- --------
2000:
First Quarter........................... $ 31.63 $ 18.56 $ 26.00
Second Quarter.......................... $ 27.13 $ 20.05 $ 24.00
Third Quarter........................... $ 26.00 $ 20.63 $ 21.88
Fourth Quarter.......................... $ 27.00 $ 17.50 $ 25.56
2001:
First Quarter........................... $ 35.38 $ 23.75 $ 35.00
Second Quarter.......................... $ 50.00 $ 32.06 $ 48.75
Third Quarter........................... $ 54.70 $ 37.20 $ 44.60
Fourth Quarter.......................... $ 51.95 $ 41.39 $ 48.72
The last sales price of the Common Stock on March 15, 2002, as reported on
the Nasdaq National Market, was $49.73 per share. As of March 15, 2002, there
were approximately 8,352,412 shares of Common Stock outstanding, 100 holders of
record. In addition, there exist a number (approximately 4,500 as of March 22,
2002) of institutional and other holders of Common Stock whose shares are held
in nominee accounts by brokers. On March 15, 2002, the Company also had
5,897,495 shares of Series A Convertible Redeemable Preferred Stock, which are
convertible (as of that date) into the same number of shares of Common Stock.
The Company also had outstanding options to purchase 930,000 shares of Common
Stock as of March 15, 2002.
The Company has established a policy of declaring quarterly cash dividends
at the rate of $0.065 per share ($0.26 annually) on the Company's Common Stock.
Whether to declare dividends and 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, cash flow, financial condition, capital needs,
investment opportunities and regulatory considerations. There is no requirement
or assurance that common dividends will continue to be paid.
The Company in 2001 issued its Series A Convertible Mandatorily Redeemable
Preferred Stock, the terms of which are described in Note 6 to the Consolidated
Financial Statements below. From May 15, 2001 until May 15, 2006, dividends
accrue at an annual rate of 7%, with 3.5% payable in cash when the dividend is
declared and the rest issued in additional shares and compounding quarterly
until the Series A Convertible Mandatorily Redeemable Preferred Stock either
converts, is redeemed, or a liquidation event occurs. Beginning on May 16, 2006,
dividends accrue at a rate of 3%, all of which is paid in cash when the dividend
is declared.
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.
19
YEAR ENDED DECEMBER 31,
------------------------------------------------------ 4 YEAR
1997 1998 1999 2000 2001 CAGR
-------- --------- --------- --------- --------- ------
INCOME STATEMENT DATA:
Total revenues................................ $ 53,131 $ 62,872 $ 69,776 $ 78,214 $ 92,876 15%
-------- -------- -------- -------- --------
Costs and expenses
Instruction and educational support........ 19,738 22,355 25,082 28,187 33,699
Selling and promotion...................... 5,476 5,923 7,765 8,480 12,576
General and administration................. 7,232 8,387 9,405 10,620 13,094
-------- -------- -------- -------- --------
32,446 36,665 42,252 47,287 59,369
-------- -------- -------- -------- --------
Income from operations........................ 20,685 26,207 27,524 30,927 33,507 13%
Investment and other income................... 2,764 3,180 4,302 4,756 3,791
-------- -------- -------- -------- --------
Income before income taxes.................... 23,449 29,387 31,826 35,683 37,298
Provision for income taxes.................... 9,012 11,440 12,500 13,974 14,489
-------- -------- -------- -------- --------
Net income.................................... $ 14,437 $ 17,947 $ 19,326 $ 21,709 $ 22,809 12%
======== ======== ======== ======== ========
NET INCOME PER SHARE
Basic......................................... $ 0.96 $ 1.15 $ 1.25 $ 1.42 $ 1.62
======== ======== ======== ======== ========
Diluted....................................... $ 0.93 $ 1.12 $ 1.23 $ 1.41 $ 1.55 14%
======== ======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic......................................... 15,037 15,626 15,506 15,324 10,970
======== ======== ======== ======== ========
Diluted (a)................................... 15,590 16,063 15,711 15,451 14,737
======== ======== ======== ======== ========
OTHER DATA:
EBITDA (b)...................................... 21,921 27,832 29,418 32,990 36,150
EBITDA as % of revenue ......................... 41.3% 44.3% 42.2% 42.2% 38.9%
Depreciation ................................... 1,236 1,625 1,894 2,063 2,643
Capital expenditures ........................... 2,286 7,392 4,851 4,388 6,274
% Return on average equity (c).................. 28.7% 24.5% 23.8% 24.3% 25.5%
Cash dividends per common share................. $ 0.17 $ 0.23 $ 0.24 $ 0.25 $ 0.26
Enrollment (d).................................. 9,419 10,449 11,504 12,096 14,009 10%
Campuses (e).................................... 10 11 13 14 17 14%
AT DECEMBER 31,
-----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 15,934 $ 18,614 $ 12,213 $ 25,190 $ 57,659
Working capital................................ 20,600 23,363 18,170 26,742 49,846
Total assets................................... 78,248 97,146 98,096 119,139 110,488
Long-term liabilities.......................... 137 330 141 -- 763
Total liabilities.............................. 13,125 15,501 17,035 21,395 29,513
Mandatorily redeemable convertible
preferred stock.............................. -- -- -- -- 148,347
Total stockholders' equity (deficit) .......... 65,123 81,645 81,061 97,744 (67,372)
- ----------
(a) Diluted weighted average shares outstanding reflect the issuance in May
2001 and assumed conversion of the Series A Convertible Mandatorily
Redeemable Preferred Stock and outstanding options (See Notes 5 and 6 to
Consolidated Financial Statements).
(b) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization.
20
(c) % Return on average equity is calculated by dividing net income by average
stockholders' equity, including Preferred Stock. Average stockholders'
equity is calculated by dividing beginning and ending stockholders' equity
by two.
(d) 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."
(e) Reflects number of campuses in operation at December 31.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain of the statements included in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as elsewhere
in this report on Form 10-K are forward-looking statements made pursuant to the
Private Securities Litigation Reform Act of 1995 ("Reform Act"). These
statements are based on the Company's current expectations and are subject to a
number of risks and uncertainties. In connection with the Safe Harbor provisions
of the Reform Act, the Company has identified important factors that could cause
the actual results to differ materially from those expressed in or implied by
such statements. The uncertainties and risks include the pace of growth of
student enrollment, our continued compliance with Title IV of the Higher
Education Act, competitive factors, risks associated with the opening of new
campuses and the timing of related regulatory approvals and general economic and
market conditions. Further information about these and other relevant risks and
uncertainties may be found elsewhere in this annual report on Form 10-K and in
the Company's other filings with the Securities and Exchange Commission, all of
which are incorporated herein by reference and are available from the Commission
and from the Company's world wide web site at www.strayeredu.com as well as from
other sources. The Company undertakes no obligation to update or revise forward
looking statements.
BACKGROUND AND OVERVIEW
Strayer Education, Inc. ("Strayer" or the "Company") is an education
services holding company which owns Strayer University, Inc. (the "University")
and Education Loan Processing, Inc. ("ELP"). The University is an institution of
higher education offering undergraduate and graduate degree programs at
seventeen campuses in Maryland, Virginia, and the District of Columbia and
worldwide through Strayer ONLINE. The University has also received approval from
its accrediting agency and the University of North Carolina Board of Governors
to offer post-secondary education in North Carolina at three campuses to be
opened in 2002. ELP administers Strayer's education loan programs.
In May 2001, the Company issued $150 million of convertible mandatorily
redeemable Series A Preferred Stock. The Company used the $150 million together
with approximately $36 million of cash to repurchase 7,175,000 shares of
outstanding common stock of the Company from the Company's majority stockholder
at $25.00 per share.
As set forth below, enrollment (measured by Fall quarter to Fall quarter),
full-time tuition rates, revenues, operating income, and net income have all
increased in each of the last three years.
21
1999 2000 2001
------ ------ ------
Fall enrollment................................ 11,504 12,096 14,009
% Change from prior year....................... 10.1% 5.1% 15.8%
Full-time tuition (per credit hour)............ 200.00 210.00 220.50
% Change from prior year....................... 5.3% 5.0% 5.0%
Revenues....................................... 69,776 78,214 92,876
% Change from prior year....................... 11.0% 12.1% 18.7%
Operating income............................... 27,524 30,927 33,507
% Change from prior year ...................... 5.0% 12.4% 8.3%
Net income..................................... 19,326 21,709 22,809
% Change from prior year ...................... 7.7% 12.3% 5.1%
Diluted earnings per share..................... 1.23 1.41 1.55
% Change from prior year (a).................. 10.1% 14.2% 10.2%
- -------
(a) % change based on unrounded actual numbers
The University derives over 98% of its revenue from 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 make payment arrangements for the tuition for each course prior to the
beginning of the quarter. When students register for courses, tuition is
recorded as unearned tuition, which is recognized as courses are taught through
the academic quarter. If a student withdraws from a course prior to completion,
the University refunds a portion of the tuition depending on when the withdrawal
occurs. The University also derives revenue from various fees such as
application fees, examination fees, and "no-show" fees. Beginning in 1998, the
University contracted out its bookstore operations to a third party.
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
Company's bad debt expense as a percentage of revenue for the years ended
December 31, 1999, 2000, and 2001 was 2.4%, 2.7% and 1.7%, respectively. See
Schedule II - Valuation and Qualifying Accounts after Note 11 to the Company's
Consolidated Financial Statements below.
The University's expenses consist of instruction and educational support
expenses, selling and promotional expenses, and general and administration
expenses. Instruction and educational support expenses generally contain items
of expense directly attributable to the educational activity of the University.
This expense category includes salaries and benefits of faculty, academic
administrators, and student support personnel. Instruction and educational
support expenses also include costs of educational supplies and facilities,
including rent on campus leases, certain costs of establishing and maintaining
computer laboratories, and all other physical plant and occupancy costs, with
the exception of costs attributable to the Jessup, Maryland and Newington,
Virginia facilities, both of which are under leases which are expiring in 2002.
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
employees engaged in management, student services, accounting, human resources,
compliance and other business functions, along with the occupancy costs
attributable to such functions.
Investment and other income consist primarily of earnings and realized
gains on investments.
22
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with the generally accepted accounting principles of
the United States. The preparation of these consolidated financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and the related
disclosures of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates and judgments related to its allowance for
uncollectible accounts, reserves for student loan losses, income tax provisions
and accrued expenses. Management bases its estimates and judgments on historical
experience and various other factors and assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments regarding the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management believes that the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements. The Company records estimates for its
allowance for uncollectible accounts for tuition receivable from students and
for loan loss reserves from student loans granted. If the financial condition of
the Company's students were to deteriorate, resulting in impairment of their
ability to make required payments for tuition or loans payable to the Company,
additional allowances and loan reserves may be required. The Company records
estimates for its accrued expenses and income tax liabilities. Should actual
results differ from the Company's estimates, revisions to its accrued expenses
and income tax liabilities may be required.
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,
------------------------------
1999 2000 2001
------- ------- -------
Revenues:.......................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Instruction and educational
support....................... 35.9 36.0 36.3
Selling and promotional.......... 11.1 10.8 13.5
General and administration....... 13.5 13.6 14.1
----- ----- -----
Income from operations............. 39.5 39.5 36.1
Investment and other income........ 6.2 6.1 4.1
----- ----- -----
Income before taxes................ 45.7 45.6 40.2
Provision for income taxes......... 18.0 17.9 15.6
----- ----- -----
Net income......................... 27.7% 27.8% 24.6%
===== ===== =====
Tax Rate........................... 39.3% 39.2% 38.8%
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Revenues increased 18.7% from $78.2 million in 2000 to $92.9
million in 2001 due to an increase in the number of students and a 5% tuition
increase in 2001.
Instruction and educational support expenses. Instruction and educational
support expenses increased 19.6% from $28.2 million in 2000 to $33.7 million in
2001. A salary increase of 4% effective in October 2000, the addition of new
faculty due to enrollment growth and the addition of three new campuses
contributed to the increase.
Selling and promotional expenses. Selling and promotional expenses
increased 48.3% from $8.5 million in 2000 to $12.6 million in 2001 due
principally to an increase in advertising costs, specifically television
advertising, increased advertising for the new campus openings and the Company's
Strayer
23
ONLINE activities, increases in number of admission representatives at existing
campuses and ONLINE, and the addition of admissions personnel at three new
campuses.
General and administration expenses. General and administration expenses
increased 23.3% from $10.6 million in 2000 to $13.1 million in 2001 due
principally to the addition of three new campuses, an increase in administrative
personnel and the addition of a new chief executive officer, chief operating
officer, corporate counsel, chief technology officer and a new marketing
director.
Income from operations. Income from operations increased 8.3% from $30.9
million in 2000 to $33.5 million in 2001. This increase was due to the
aforementioned factors.
Investment and other income. Investment and other income decreased 20.3%
from $4.8 million in 2000 to $3.8 million in 2001. The Company liquidated a
majority of its marketable securities in the first quarter of 2001 to help fund
the Company's self-tender offer. This decline in marketable securities along
with a lower interest rate environment resulted in lower investment income which
was partially offset by a $0.9 million gain from the liquidation of the
marketable securities.
Provision for income taxes. Income tax expense increased 3.7% from $14.0
million in 2000 to $14.5 million in 2001. This increase was primarily due to the
increase in income before taxes attributable to the factors discussed above, and
a slightly lower tax rate.
Net income. Net income increased 5.1% from $21.7 million in 2000 to $22.8
million in 2001 because of the factors discussed above.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues increased 12.1% from $69.8 million in 1999 to $78.2
million in 2000 due to an increase in the number of students and a 5% tuition
increase in 2000.
Instruction and educational support expenses. Instruction and educational
support expenses increased 12.4% from $25.1 million in 1999 to $28.2 million in
2000 due to an increase in the number of personnel to support increased
enrollment, salary increases and the addition of a new campus in Chesterfield,
Virginia.
Selling and promotional expenses. Selling and promotional expenses
increased 9.2% from $7.8 million in 1999 to $8.5 million in 2000 due principally
to increased advertising costs, and the addition of admissions personnel.
General and administration expenses. General and administration expenses
increased 12.9% from $9.4 million in 1999 to $10.6 million in 2000 due
principally to the addition of administrative personnel in order to support
increased enrollments and the addition of a new campus in Chesterfield,
Virginia.
Income from operations. Income from operations increased 12.4% from $27.5
million in 1999 to $30.9 million in 2000. This increase was primarily due to the
increases in student enrollment and tuition in 2000.
Investment and other income. Investment and other income increased 10.6%
from $4.3 million in 1999 to $4.8 million in 2000 due to an increase in realized
investment gains and interest on higher levels of invested cash and cash
equivalents.
Provision for income taxes. Income tax expense increased 11.8% from $12.5
million in 1999 to $14.0 million in 2000. This increase was primarily due to the
increase in income before taxes attributable to the factors discussed above and
no material change in the Company's tax rate.
Net income. Net income increased 12.3% from $19.3 million in 1999 to $21.7
million in 2000 because of the factors discussed above.
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
24
the third, or Summer quarter. In 2001, enrollments at the beginning of the
Winter, Spring, Summer and Fall academic quarters were 12,005, 12,044, 9,379 and
14,009, 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 1999, 2000 and 2001.
QUARTERLY REVENUE
(DOLLARS IN THOUSANDS)
1999 2000 2001
----------------- ----------------- ------------------
THREE MONTHS ENDED AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- --------------------- -------- ------- ------- -------- --------- --------
March 31............ $ 18,914 27% $ 21,128 27% $23,644 25%
June 30............. 17,643 25 20,325 26 23,826 26
September 30........ 12,866 19 14,691 19 18,222 20
December 31......... 20,353 29 22,070 28 27,184 29
-------- --- -------- --- ------- ---
Total for Year. $ 69,776 100% $ 78,214 100% $92,876 100%
======== === ======== === ======= ===
LIQUIDITY AND CAPITAL RESOURCES
As set forth below, during 2001, the Company generated significant cash
from operations. Furthermore, the Company has no debt. In May 2001, the Company
issued the Series A Convertible Mandatorily Redeemable Preferred Stock raising
$150 million ($146.6 million, net of expenses) and sold marketable securities of
$50.1 million to help fund the Company's $183 million self-tender offer of
common stock. Capital expenditures for 2001 were $6.2 million and the Company
paid $5.1 million in dividends to the common and preferred stockholders.
ABBREVIATED CASH FLOWS
(DOLLARS IN MILLIONS)
FOR THE YEAR ENDED
DECEMBER 31,
1999 2000 2001
----- ----- -----
Net income $19.3 $21.7 $22.8
Non-cash items 2.1 2.2 2.8
Gain on sale of marketable securities -- -- (0.9)
Student loans (1.1) (1.0) (1.3)
Change in assets and liabilities (1.5) 4.4 4.4
----- ----- -----
Cash from operating activities 18.8 27.3 27.8
Capital expenditures (4.8) (4.4) (6.2)
Common stock dividends - cash (3.3) (3.8) (3.1)
Preferred stock dividends - cash -- -- (2.0)
Sale (purchase) of marketable securities (0.3) (4.7) 50.1
Issuance of preferred stock, net -- -- 146.6
Repurchase of common stock (17.7) (2.0) (183.0)
Proceeds from the exercise of stock options 0.9 0.6 1.5
Lease incentives -- -- 0.8
----- ----- -----
Net increase (decrease) in cash ($6.4) $13.0 $32.5
===== ===== =====
As set forth below, at December 31, 2001, the Company had cash and cash
equivalents and marketable securities of $57.7 million compared to $75.1 million
at December 31, 2000. Currently, the Company invests its cash in bank overnight
deposits and money market funds. In addition, the Company
25
has available a $10 million credit facility from a bank. The Company believes
that existing cash and cash equivalents, 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.
CASH AND MARKETABLE SECURITIES
(DOLLARS IN MILLIONS)
AT DECEMBER 31,
1999 2000 2001
------- ------- -------
Cash and cash equivalents $ 12.2 $ 25.2 $ 57.7
Marketable securities 45.3 49.9 --
------- ------- -------
Total $ 57.5 $ 75.1 $ 57.7
======= ======= =======
Investment and other income $ 4.3 $ 4.8 $ 3.8
======= ======= =======
The Company has the following contractual commitments associated with
operating leases and preferred stock cash dividends:
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
--------------------------------------------------------------------
WITHIN 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
--------------------------------------------------------------------
Operating Leases $ 4,780 $ 7,663 $ 5,241 $ 9,849
Preferred Stock Cash Dividends* 5,250 10,500 10,452 25,140
--------------------------------------------------------------------
Total $10,030 $ 18,163 $15,693 $ 34,989
====================================================================
* Common stock dividend payments, while not contractual commitments, have
historically been paid by the Company.
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 may be
exposed to changes in the market values of its future investments. The Company
invests its excess cash in cash equivalents and marketable securities. At
December 31, 2001, the Company's investments were in cash and cash equivalents
including money market mutual funds and bank CD's. The Company has not used
derivative financial instruments in its investment portfolio.
Investments in money market mutual funds may adversely affect future
earnings should interest rates decline. The Company's future investment income
may fall short of expectations due to changes in interest rates or, with future
investments, 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, 2001, 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 cash equivalents or interest earning marketable
securities.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Strayer Education, Inc.
Report of Independent Accountants................................... 28
Consolidated Balance Sheets as of December 31, 2000
and 2001............................................................ 29
Consolidated Statements of Income for each of the three
years in the period ended December 31, 2001......................... 30
Consolidated Statements of Comprehensive Income for each
of the three years in the period ended December 31, 2001............ 30
Consolidated Statements of Stockholders' Equity (Deficit) for each
of the three years in the period ended December 31, 2001............ 31
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2001................... 32
Notes to Consolidated Financial Statements............................ 33
Schedule II-- Valuation and Qualifying Accounts....................... 47
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
27
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Strayer Education, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Strayer Education, Inc. and its subsidiaries (the "Company") as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Washington, D.C.
February 1, 2002
28
STRAYER EDUCATION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
2000 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 25,190 $ 57,659
Marketable securities available for sale, at fair value ............. 5,918 --
Short-term investments-- restricted ................................. 1,008 1,046
Tuition receivable, net of allowances for doubtful
accounts of $489 and $457 in 2000 and 2001, respectively ......... 15,264 19,012
Other current assets ................................................ 757 879
--------- ---------
Total current assets ........................................ 48,137 78,596
Student loans receivable, net of allowances for losses ................ 7,288 8,392
Property and equipment, net ........................................... 19,469 23,100
Marketable securities available for sale, at fair value ............... 43,982 --
Other assets .......................................................... 263 400
--------- ---------
Total assets ................................................ $ 119,139 $ 110,488
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .................................................... $ 769 $ 792
Accrued expenses .................................................... 1,325 1,652
Income taxes payable ................................................ 323 1,247
Dividends payable ................................................... 995 1,855
Unearned tuition .................................................... 17,983 23,204
--------- ---------
Total current liabilities ................................... 21,395 28,750
Long-term liabilities ................................................. -- 763
--------- ---------
Total liabilities ........................................... 21,395 29,513
--------- ---------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, par
value $.01; liquidation preference $151,988 (excluding
accrued dividends); 8,000,000 shares authorized;
5,845,676 Series A shares issued and outstanding in 2001 ........... -- 148,347
Stockholders' equity (deficit):
Common stock, par value $.01; 20,000,000 shares
authorized; 15,303,166 and 8,352,412 shares issued
and outstanding in 2000 and 2001, respectively ................... 153 83
Additional paid-in capital .......................................... 33,119 1,759
Retained earnings (accumulated deficit) ............................. 64,069 (69,214)
Accumulated other comprehensive income .............................. 403 --
--------- ---------
Total stockholders' equity (deficit) ........................ 97,744 (67,372)
--------- ---------
Total liabilities and stockholders' equity (deficit)......... $ 119,139 $ 110,488
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
29
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1999 2000 2001
------- ------- -------
Revenues ................................ $69,776 $78,214 $92,876
------- ------- -------
Costs and expenses:
Instruction and educational support ... 25,082 28,187 33,699
Selling and promotion ................. 7,765 8,480 12,576
General and administration ............ 9,405 10,620 13,094
------- ------- -------
42,252 47,287 59,369
------- ------- -------
Income from operations ................ 27,524 30,927 33,507
Investment and other income ............. 4,302 4,756 3,791
------- ------- -------
Income before income taxes ............ 31,826 35,683 37,298
Provision for income taxes .............. 12,500 13,974 14,489
------- ------- -------
Net income ............................ $19,326 $21,709 $22,809
Preferred stock dividends and accretion.. -- -- 5,010
------- ------- -------
Net income available to common
stockholders ........................ $19,326 $21,709 $17,799
======= ======= =======
Net income per share:
Basic ................................. $ 1.25 $ 1.42 $ 1.62
Diluted ............................... $ 1.23 $ 1.41 $ 1.55
Weighted average shares outstanding
Basic ................................. 15,506 15,324 10,970
Diluted ............................... 15,711 15,451 14,737
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1999 2000 2001
------ ------- -------
Net income ......................... $19,326 $21,709 $22,809
Other comprehensive income (loss):
Unrealized gains (losses) on
investments, net of taxes....... (204) (136) --
Reclassification adjustment for
realized gains included in net
income, net of taxes............ -- -- (403)
------- ------- -------
Comprehensive income ............... $19,122 $21,573 $22,406
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
30
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER
-------------------------- PAID-IN (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) INCOME TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 ................. 15,774,477 $ 158 $ 50,470 $ 30,274 $ 743 $ 81,645
Exercise of stock options ................ 133,203 1 903 -- -- 904
Repurchase of common stock ............... (630,429) (6) (17,723) -- -- (17,729)
Dividends ($0.24 per share) .............. -- -- -- (3,406) -- (3,406)
Tax benefit from exercise of stock
options ................................ -- -- 525 -- -- 525
Net unrealized losses on marketable
securities ............................. -- -- -- -- (204) (204)
Net income ............................... -- -- -- 19,326 -- 19,326
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 ................. 15,277,251 153 34,175 46,194 539 81,061
Exercise of stock options ................ 88,615 1 590 -- -- 591
Repurchase of common stock ............... (62,700) (1) (2,028) -- -- (2,029)
Dividends ($0.25 per share) .............. -- -- -- (3,834) -- (3,834)
Tax benefit from exercise of stock
options ................................ -- -- 382 -- -- 382
Net unrealized losses on marketable
securities ............................. -- -- -- -- (136) (136)
Net income ............................... -- -- -- 21,709 -- 21,709
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 ................. 15,303,166 153 33,119 64,069 403 97,744
Exercise of stock options ................ 224,246 2 1,493 -- -- 1,495
Repurchase of common stock including
transaction costs of $3,671 ........... (7,175,000) (72) (34,528) (148,446) -- (183,046)
Preferred stock dividends and accretion .. -- -- -- (5,010) -- (5,010)
Common stock dividends ($0.26 annually
per share) ............................. -- -- -- (2,636) -- (2,636)
Tax benefit from exercise of stock
options ................................ -- -- 1,675 -- -- 1,675
Reclassification adjustment for realized
gains included in net income............ -- -- -- -- (403) (403)
Net income ............................... -- -- -- 22,809 -- 22,809
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 ................. 8,352,412 $ 83 $ 1,759 $ (69,214) $ -- $ (67,372)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
31
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1999 2000 2001
--------- --------- ---------
Cash flows from operating activities:
Net income ......................................................... $ 19,326 $ 21,709 $ 22,809
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................... 1,894 2,063 2,643
Provision for student loan losses ............................... 216 172 196
Deferred income taxes ........................................... (248) (147) 144
Gain on sale of marketable securities ........................... -- -- (887)
Changes in assets and liabilities:
Short-term investments-- restricted ............................. (37) (49) (38)
Tuition receivable, net ......................................... (3,185) (267) (3,748)
Income taxes .................................................... 599 906 2,600
Other current assets ............................................ (114) 42 (145)
Other assets .................................................... (97) 56 --
Accounts payable ................................................ 17 279 23
Accrued expenses ................................................ (520) 902 327
Unearned tuition ................................................ 2,098 2,612 5,221
Student loans originated or acquired ............................... (5,124) (5,499) (7,313)
Collections on student loans receivable ............................ 3,996 4,475 6,013
--------- --------- ---------
Net cash provided by operating activities .................. 18,821 27,254 27,845
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment ................................ (4,851) (4,388) (6,274)
Purchases of marketable securities ................................. (9,298) (14,157) --
Maturities of marketable securities ................................ 9,030 9,462 50,126
--------- --------- ---------
Net cash provided by (used in) investing activities......... (5,119) (9,083) 43,852
--------- --------- ---------
Cash flows from financing activities:
Common dividends paid .............................................. (3,278) (3,756) (3,088)
Preferred dividends paid ........................................... -- -- (1,976)
Lease incentives ................................................... -- -- 763
Proceeds from exercise of stock options ............................ 904 591 1,495
Repurchase of common stock ......................................... (17,729) (2,029) (183,046)
Issuance of preferred stock, net ................................... -- -- 146,624
--------- --------- ---------
Net cash used in financing activities ...................... (20,103) (5,194) (39,228)
Net increase (decrease) in cash and cash --------- --------- ---------
requirements ............................................. (6,401) 12,977 32,469
Cash and cash equivalents-- beginning of year ........................ 18,614 12,213 25,190
--------- --------- ---------
Cash and cash equivalents-- end of year .............................. $ 12,213 $ 25,190 $ 57,659
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
32
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Strayer Education, Inc. (the "Company"), a Maryland corporation, conducts
its operations through its subsidiaries, Strayer University, Inc. (the
"University") and Education Loan Processing, Inc. ("ELP"). The University is an
accredited institution of higher education that provides undergraduate and
graduate degrees in various fields of study through its seventeen campuses in
the District of Columbia, Maryland and Virginia. The Company has also been
approved to offer its programs in North Carolina and plans to open three
campuses in that state in 2002.
In May 2001, the Company underwent a $150 million recapitalization and
change of control transaction in which it issued 5,769,231 shares of its Series
A Convertible Mandatorily Redeemable Preferred Stock of the Company to an
investor group consisting of New Mountain Partners L.P. and DB Capital
Investors, L.P. (collectively, the "Investors"). The Series A Convertible
Mandatorily Redeemable Preferred Stock has an effective dividend yield of 5.43%
and is convertible into common stock at a price of $26.00 per share, subject to
adjustment under certain circumstances. (See Note 6 below.) The Company used the
$150 million, together with approximately $36.4 million of its cash and
marketable securities, to repurchase 7,175,000 shares of outstanding common
stock of the Company from the Company's then CEO and majority stockholder at
$25.00 per share.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, the University, ELP, and Professional Education, Inc.
(which is currently an inactive subsidiary). 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
money market mutual funds and bank CD's. The Company places its cash and
temporary cash investments with high quality credit institutions. The Company
considers all highly liquid instruments purchased with a maturity of three
months or less at the date of purchase to be cash equivalents.
INVESTMENTS
The Company's investments in marketable securities are considered
"available-for-sale" and, as such are stated at fair value. The net unrealized
gains and losses are reported as a component of accumulated comprehensive income
in stockholders' equity (deficit). 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.
33
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ELP's student loans receivable have been classified as non-current assets,
consistent with industry practice. All of ELP's other assets and liabilities
have been classified as current assets and current liabilities for consolidation
purposes.
CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash investments in money market
mutual funds and bank CD's with high credit quality institutions. At times cash
and cash equivalent balances may be in excess of the FDIC insurance limit. The
Company has not experienced any losses on its cash and cash equivalents.
Tuition receivables are not collateralized; however, credit risk is
minimized as a result of the diverse nature of the University's student base in
the District of Columbia, Maryland, and Virginia. The University establishes an
allowance for doubtful tuition accounts based upon historical trends and other
information.
Student loans are receivable from the University's students. The Company
performs credit evaluations and requires cosigners in some instances to minimize
credit risk.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives ranging from 3 to 40 years. Depreciation and amortization amounted to
$1,894,000, $2,063,000 and $2,643,000 for the years ended December 31, 1999,
2000, and 2001, respectively.
INCOME TAXES
The Company provides for deferred income taxes based on temporary
differences between financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of shares of common stock
outstanding during the periods. Diluted earnings per share is computed by
dividing net income by the weighted average common and potentially dilutive
common equivalent shares outstanding, determined as follows (in thousands):
1999 2000 2001
------ ------ -----
Weighted average shares outstanding used to compute
basic earnings per share......................... 15,506 15,324 10,970
Incremental shares issuable upon the assumed
conversion of preferred stock.................... -- -- 3,661
Incremental shares issuable upon the assumed
exercise of stock options........................ 205 127 106
------ ------ ------
Shares used to compute diluted earnings per share.. 15,711 15,451 14,737
====== ====== ======
Incremental shares issuable upon the assumed exercise of outstanding stock
options is computed using the average market price during the related periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
34
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the period reported. The
most significant management estimates included allowances for uncollectible
accounts and student loans receivable, accrued expenses, and the provision for
income taxes. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains (losses) on
investments in marketable securities, net of income taxes.
RECLASSIFICATION
Certain amounts for the year ended December 31, 1999 have been reclassified
to operating activities on the consolidated statements of cash flows to conform
with the December 31, 2000 and 2001 presentations.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("FAS 141"). FAS 141 supersedes Accounting
Principles Board Opinion No. 16 Business Combinations. FAS 141 requires the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, establishes specific criteria for the recognition of
intangible assets separately from goodwill, and requires unallocated negative
goodwill to be written off immediately as an extraordinary gain (instead of
being deferred and amortized).
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142").
FAS 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible
Assets". FAS 142 addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. Goodwill and indefinite lived intangible assets
can no longer be amortized, must be tested for impairment at least annually at
the reporting unit level, and the amortization period of intangible assets with
finite lives will no longer be limited to forty years. FAS 142 is effective for
fiscal years beginning after December 15, 2001.
The Company has not made any acquisitions after June 30, 2001 and the
Company does not have goodwill or intangible assets. The adoption of FAS 141 and
FAS 142 will not have any affect on the consolidated financial statements.
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 Company liquidated all of its investments in marketable securities and
holds no investments as of December 31, 2001. The cost and fair value for each
class of investments as of December 31, 2000 are as follows (in thousands):
35
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000
-----------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ----- ----- --------
Certificates of deposit and money
market funds...................... $20,580 $ -- $ -- $ 20,580
Fixed income investments............ 20,591 183 124 20,650
Equity securities................... 8,068 651 49 8,670
------- ----- ----- --------
Total..................... $49,239 $ 834 $ 173 $ 49,900
======= ===== ===== ========
3. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 2000 and 2001
is as follows (in thousands):
ESTIMATED USEFUL
2000 2001 LIFE (YEARS)
-------- -------- ------------------
Land ................................................ $ 2,772 $ 2,772 --
Buildings ........................................... 5,414 9,988 40
Furniture and equipment ............................. 13,921 14,229 5-7
Leasehold improvements .............................. 5,702 5,479 3-10
Vehicles ............................................ 22 22 5
Construction in progress ............................ 1,436 14 --
-------- --------
29,267 32,504
Accumulated depreciation and amortization ......... (9,798) (9,404)
-------- --------
$ 19,469 $ 23,100
======== ========
During 2001, fully depreciated assets of approximately $3 million were
written off. In addition, $763,000 in leasehold improvements, paid by lessors as
lease incentives, were capitalized during 2001.
4. STUDENT LOANS RECEIVABLE
The loans receivable under the Strayer Education Loan Program as of
December 31, 2000 and 2001 are as follows (in thousands):
2000 2001
------- -------
Student loans receivable outstanding, including
accrued interest.............................. $ 7,753 $ 8,928
Allowance for loan losses....................... (465) (536)
------- -------
Student loans receivable, net.............. $ 7,288 $ 8,392
======= =======
The interest rate on these student loans is generally 7.5%. The Company
believes the carrying value of the student loans approximates their fair value.
The loans require a minimum monthly payment based on a percentage of the
outstanding monthly balance, plus interest, while the student is in attendance.
Upon the student's graduation or withdrawal, the loans become due in equal
monthly installments based on a fixed payment plan.
36
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. STOCK OPTION PLAN
In July 1996, the Company set aside 1,500,000 shares of common stock for
grants under the Company's 1996 Stock Option Plan, which was amended at the
May 2001 Annual Shareholders' Meeting to increase the shares authorized for
issuance thereunder by 1,000,000 (as amended, "the Plan"). The Plan provides for
the grant of options intended to qualify as incentive stock options, and also
provides for the grant of non-qualifying options to directors and employees and
directors 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. The maximum term of the options was
5 years before the amendment and 7 years after the amendment. Stock option
activity for the years ended December 31, 1999, 2000 and 2001 are as follows:
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
Balance, December 31, 1998........ 443,762 $ 6.67
Grants.......................... 2,759 6.67
Exercises....................... (133,203) 6.67
Forfeitures..................... -- --
------- -------
Balance, December 31, 1999........ 313,318 6.67
Grants.......................... -- --
Exercises....................... (88,615) 6.67
Forfeitures..................... -- --
------- -------
Balance, December 31, 2000........ 224,703 6.67
Grants.......................... 930,000 36.43
Exercises....................... (224,246) 6.67
Forfeitures..................... (457) 6.67
------- -------
Balance, December 31, 2001........ 930,000 $ 36.43
======= =======
The number of shares exercisable as of December 31, 1999, 2000 and 2001 are
as follows:
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
------------------ -------------------
Exercisable, December 31, 1999 313,318 $ 6.67
Exercisable, December 31, 2000 224,703 $ 6.67
Exercisable, December 31, 2001 -- $ --
During 2001, new options were granted to thirteen key executives and
directors in conjunction with the recapitalization that took place in May 2001
and the retention of a new senior management team. The weighted average exercise
price per share of all options as of December 31, 2001 was $36.43. The options
vest over 3 to 4 years with exercise prices ranging from $33.69 to $47.44. All
options granted in 2001 expire in 2008 and have a weighted-average contractual
life of 6.3 years as of December 31, 2001.
The Company accounts for the fair value of its stock options granted to
employees and directors in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
expense has been recognized for the Plan, since the exercise price of the
options was equal to the fair value of the underlying common stock on the date
of grant. Had compensation expense been determined based on the fair value of
the options at the grant dates
37
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consistent with that method of accounting under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation," the
Company's net income and net income per share for the years ended December 31,
1999, 2000, and 2001 would have been decreased as indicated in the pro forma
section below (in thousands):
1999 2000 2001
---------- ---------- ----------
As reported:
Net income $ 19,326 $ 21,709 $ 22,809
Net income available to common
stockholders ........................... $ 19,326 $ 21,709 $ 17,799
Net income per common share - Basic ...... $ 1.25 $ 1.42 $ 1.62
Net income per common share - Diluted..... $ 1.23 $ 1.41 $ 1.55
Pro forma:
Net income $ 19,283 $ 21,530 $ 21,269
Net income available to common
stockholders ........................... $ 19,283 $ 21,530 $ 16,259
Net income per common share - Basic ...... $ 1.24 $ 1.40 $ 1.48
Net income per common share - Diluted..... $ 1.23 $ 1.39 $ 1.44
The fair value of each option granted in 1999 was estimated on the date of
grant using the Black-Scholes option-pricing model using the following
assumptions: dividend yield of 1.0%; expected volatility of 47%; risk-free
interest rate of 5.25%; expected term of 2.1 years. The weighted average fair
value at date of grant was $25.55 per share. There were no new options granted
in 2000. The fair value of each option granted in 2001 was estimated on the date
of grant using the Black-Scholes option-pricing model using the following
assumptions: dividend yield of .7%; expected volatility of 47%; risk-free
interest rate of 4.75% and an expected term of 5.31 years. The weighted average
fair value at the date of grant was $16.68.
6. TERMS OF THE SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May 2001, the Company underwent a $150 million recapitalization and
change of control transaction in which it issued 5,769,231 shares of its Series
A Convertible Mandatorily Redeemable Preferred Stock (the "Series A Preferred
Stock") of the Company to an investor group consisting of New Mountain Partners
L.P. and DB Capital Investors, L.P. (collectively, the "Investors"). The Series
A Preferred Stock has an effective dividend yield of 5.43% and is convertible
into common stock at a price of $26.00 per share, subject to adjustment under
certain circumstances. The Company used the $150 million, together with
approximately $36.4 million of its cash and marketable securities, to repurchase
7,175,000 shares of outstanding common stock of the Company from the Company's
then CEO and majority stockholder at $25.00 per share. The Series A Preferred
Stock has the following material terms:
Authorized
A total of 8 million shares of Series A Preferred Stock, par value $.01,
have been authorized, including shares to be reserved for the payment of
dividends on the outstanding shares of Series A Preferred Stock. The original
issuance of Series A Preferred Stock and all quarterly preferred stock dividends
thereon through December 31, 2001 are reflected in the following table:
38
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------------------
SHARES AMOUNT
(in thousands)
-------------------------------------------------------------------
Balance, December 31, 2000 - -
Issuance of shares 5,769,231 $150,000
Issuance costs (3,375)
Dividends-paid in kind shares 76,445 1,988
Accretion of carrying value (266)
-------------------------------------------------------------------
Balance, December 31, 2001 5,845,676 $148,347
===================================================================
Series A Preferred Stock dividends and accretion are recorded based on an
effective yield of 5.43% applied to the carrying value of the Series A Preferred
Stock.
Ranking
The shares of Series A Preferred Stock rank, as to dividends and rights
upon liquidation, dissolution, or winding up, senior to the common Stock and on
a parity with each other.
Dividends
The holders of shares of Series A Preferred Stock are entitled to receive
dividends prior to any amounts being paid on the common stock when, as, and if
declared by the Board of Directors out of funds legally available therefore.
Dividends on the Series A Preferred Stock are payable as follows:
o From the original issuance date of the Series A Preferred Stock until
May 15, 2006, dividends accrue at an annual rate of 7.0% of the sum of
the liquidation amount, which is $26.00 per share, as adjusted, plus
any accumulated and unpaid dividends, with 3.5% of the original
investment amount payable in cash when the dividend is declared and the
rest issued in additional shares and compounding quarterly until the
Series A Preferred Stock either converts, is redeemed, or a liquidation
event occurs.
o Beginning on May 16, 2006, dividends accrue at an annual rate of 3.0%
of the sum of the Liquidation Amount plus any accumulated and unpaid
dividends, all of which are payable in cash when the dividend is
declared.
In addition, when and if the Board of Directors declares regular quarterly
dividends on the common stock up to $0.065 per share, holders of Series A
Preferred Stock are not entitled to participate in the common stock dividend.
However, the Series A Preferred Stock will participate on an as-converted basis
in any dividends on the common stock in excess of the regular quarterly
dividends of $0.065 per share.
Conversion at the Option of the Holder
The shares of Series A Preferred Stock are initially convertible, in whole
or in part, at the option of the holder thereof, into shares of common stock at
a conversion rate of one share of common stock for each share of Series A
Preferred Stock, subject to adjustment for certain events, including stock
splits, stock dividends, and dilutive issuances of capital stock.
Liquidation Rights
Upon any liquidation, dissolution, or winding up of the Company, the
holders of Series A Preferred Stock are entitled to a liquidation preference,
prior to any amounts being paid on the common stock, in an amount equal to the
greater of (1) the sum of $26.00 per share of Series A Preferred Stock plus
39
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compounded, accumulated but unpaid dividends (in each case, as adjusted for
stock dividends, stock combinations, or similar events) and (2) the product of
(a) the price of the common stock calculated as the average of the daily closing
prices for 5 consecutive trading days selected by the Board of Directors out of
the 20 trading days preceding the date of the liquidation, dissolution, or
winding up and (b) the number of shares of common stock to which the holders of
Series A Preferred Stock would have been entitled if they had converted their
shares.
Change of Control
Upon any change of control of the Company, the holders of Series A
Preferred Stock are entitled in each holder's sole discretion to elect to
receive the liquidation amount per share plus accumulated and unpaid dividends.
If no election is made, the holders retain their Series A Preferred Stock.
Voting Rights
Each holder of Series A Preferred Stock is entitled to the number of votes
equal to the number of whole shares of common stock into which all of the
holder's Series A Preferred Stock is convertible, with respect to all matters
submitted for Stockholder approval. Except as provided by law or by the express
terms of the Series A Preferred Stock, holders vote together with holders of the
common stock as a single class. For so long as there are any shares of Series A
Preferred Stock outstanding, the approval of the holders of at least a majority
of the Series A Preferred Stock shall be required to take certain actions
including:
o Any reclassification of the Series A Preferred Stock or any amendment,
alteration, or repeal of any provision of our charter or bylaws that
adversely affects the holders of the Series A Preferred Stock;
o The authorization, creation, or issuance of additional equity
securities ranking senior to or on a par with the Series A Preferred
Stock on liquidation or distributions or any security convertible into,
or which provides a right to acquire, a senior or pari passu security;
o Any issuance of shares of common stock at a per share price less than
$26.00, subject to certain adjustments, including securities
convertible into common stock at a per share conversion price less than
$26.00; and
o The declaration, payment, or making of any dividend or distribution on
the common stock other than our regular quarterly dividend of $0.065
per share of common stock.
Redemption at the Company's Option
The Series A Preferred Stock may not be redeemed at the option of the
Company prior to May 15, 2004. From and after the third year until the fifth
year that the Series A Preferred Stock is outstanding, so long as the common
stock is listed on the New York Stock Exchange or the NASDAQ National Market,
the Company may redeem it, in whole or in part, within 45 days of any period in
which the closing price of the common stock for at least 20 consecutive trading
days equals or exceeds 200% of the conversion price, which is initially $26.00
per share; provided that the 20 day period may not begin before May 15, 2004.
After May 15, 2006, the Company may redeem the Series A Preferred Stock in whole
or in part at its discretion. In either case, the redemption price of each share
of Series A Preferred Stock is equal to the liquidation amount, plus accumulated
and unpaid dividends. The decision of whether to redeem is to be made in the
discretion of the directors not elected by the Investors.
40
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Redemption at the Option of the Holder
The holders of the Series A Preferred Stock may request that it be redeemed
only:
o After the tenth anniversary of its issuance (May 15, 2011);
o Upon a change of control of the Company; or
o In the event the Company sells all or substantially all of its assets.
Upon the occurrence of any of these events, a holder of Series A Preferred
Stock may require the Company to redeem all or a part of that holder's shares of
Series A Preferred Stock, at a purchase price equal to the liquidation amount,
as adjusted, plus accumulated and unpaid dividends.
Registration Rights
Demand Registration
The Company has agreed that if it is not eligible to use the short-form
registration statement, Form S-3, it will register the resale of the securities
held by the Investors upon their request, as follows:
o The Company will not register the resale of securities more than two
times;
o The Company will not register the resale of securities more than once
during any six month period; and
o The aggregate offering price of the resale of securities must be at
least $10 million.
However, if the Company is eligible to use the short-form registration
statement, Form S-3, the Investors shall also have the right to request
registration on that form two times during any one year for a "shelf"
registration permitted by Rule 415 under the Securities Act. A majority of the
holders of the securities originally issued to the Investors is required to
request the "shelf" registration.
If the Company's Board of Directors determines that a requested
registration statement would result in a disclosure of information that would
materially and adversely affect any proposed or pending material transaction,
the Company may delay the registration. No postponement may exceed 90 days and
all postponements shall not exceed 120 days in the aggregate in any 12-month
period.
The Company may register securities for its own account or for the account
of other stockholders in a registration requested by the Investors, so long as
the inclusion of additional securities does not reduce the amount of securities
that may be sold by the Investors.
Securities registrable under the Registration Rights Agreement include the
Series A Preferred Stock, the common stock and other securities, if any,
issuable on conversion of the Series A Preferred Stock, the common stock, if
any, purchased by the Investors in accordance with the options granted them by
our former CEO and majority stockholder, and any securities issued to the
Investors in accordance with their preemptive rights.
Piggy-back Registration
Piggy-back registration means the rights of the holders of the registration
rights to include their shares in a registration filed by the Company for its
own account or in a registration the Company has filed upon the request of other
stockholders. The Company has granted the Investors unlimited piggy-back
registration rights.
41
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expenses
The Company will bear all the expenses of the registration, other than any
fees and disbursements of the underwriters that are customarily borne by selling
Stockholders and all underwriting discounts, commissions, and transfer taxes
relating to the securities sold by the Investors.
Indemnification
The Company has agreed to indemnify the Investors against any losses,
including fees and expenses, which may arise out of an untrue statement or an
omission of a material fact in any registration statement, other than untrue
statements that were provided in writing by the Investors or omissions of
material facts from statements provided in writing by the Investors for
inclusion in the registration statement. Each Investor, severally and not
jointly, has agreed to indemnify the Company and any underwriters participating
in the registration statement against any losses that may arise out of any
untrue statement that was provided in writing by that Investor or omissions of
material facts from statements provided in writing by that Investor for
inclusion in the registration statement. The amounts owed by the Investors under
this indemnification obligation shall not exceed the proceeds the Investors
received from the sale of securities under the registration statement.
Transferability of Registration Rights
The Investors may freely transfer the registration rights to any of their
affiliates. The Investors may also transfer the registration rights to any other
person to whom the Investors or their affiliates transfer shares of Series A
Preferred Stock or the common stock into which the Series A Preferred Stock
converts having any aggregate purchase price or liquidation amount of at least
$10 million.
OTHER TERMS OF SERIES A PREFERRED STOCK
Corporate Governance
Pursuant to the terms of the Series A Preferred Stock, the holders of the
Series A Preferred Stock are initially entitled to elect one-half of the
Company's Board of Directors. The percentage of the Company's Board of Directors
that the holders of the Series A Preferred Stock may elect decreases as the
number of shares of Series A Preferred Stock outstanding decreases in the
following manner:
% OF SERIES A PREFERRED STOCK
ORIGINALLY ISSUED STILL % OR NUMBER OF
OUTSTANDING DIRECTORS
----------- ---------
90% and Above 50%
50% to 89.9% 40%
25% to 49.9% 25%
10% to 24.9% At Least 1 member
0% to 9.9% none
In addition, in the event that the Company fails to pay the redemption
price for the Series A Preferred Stock in connection with a proper redemption
request in an amount at least equal to $30 million, the holders of the Series A
Preferred Stock will be able to elect a majority of the Company's Board of
Directors until the redemption price is paid.
Any significant changes in the Company's ownership and control could
require U.S. Department of Education or other regulatory agency approval.
42
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to any other Board of Directors or stockholder action that may
be required, the approval of a majority of the directors elected by the holders
of the Series A Preferred Stock will be required in order for the Company to
take certain actions, including:
o Any authorization or issuance, reclassification, repurchase,
redemption, or other acquisition of any of our equity securities or any
other securities exercisable for or convertible into any equity
securities;
o Any issuance or incurrence of indebtedness that would result in the
Company having in excess of an aggregate of $25 million of indebtedness
outstanding;
o Any liquidation, dissolution, winding up, or reorganization of the
Company;
o Any transaction or series of related transactions involving a change of
control or the sale of all or substantially all of the Company's equity
or assets, or any acquisition, disposition, or other business
combination involving consideration in excess of $20 million;
o Any amendment to the Company's charter or bylaws; and
o The removal or replacement of, or the establishment of the level or
form of compensation payable to, the Company's chief executive
officer, chief operating officer or chief financial officer.
Preemptive Rights
The holders of the Series A Preferred Stock have the right to purchase
their pro rata portion of new equity securities the Company issues, other than
certain exempt issuances.
7. LONG-TERM LIABILITY
In conjunction with the opening of new campuses in Chesapeake, VA and
Newport News, VA during 2001, the Company was reimbursed by the lessors for
improvements made to the leased properties in the amount of $763,000. In
accordance with Financial Accounting Standards Board Technical Bulletin No.
88-1, these reimbursements were capitalized as leasehold improvements and a
long-term liability established. The leasehold improvements and the long-term
liability will be amortized on a straight-line basis over the corresponding
lease terms, which range from 5 to 10 years.
8. OTHER EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing trust covering all eligible
employees of the Company. Participants may defer a percentage of their salaries
or make contributions up to 10% of their base compensation. Employee
contributions are voluntary. Discretionary contributions were made by the
Company in the fourth quarter of each year, and were $186,000, $195,000 and
$205,000 for the years ended December 31, 1999, 2000 and 2001, respectively.
In May 1998, the Company adopted the Strayer Education, Inc. Employee Stock
Purchase Plan (ESPP). Under the ESPP, eligible employees may purchase shares of
the Company's common stock, subject to certain limitations, at 90 percent of its
market value at the date of purchase. Purchases are limited to 10 percent of an
employee's eligible compensation. The aggregate number of shares of common stock
that may be made available for purchase by participating employees under the
ESPP is 2,500,000 shares. During 1999, 2000 and 2001, 11,962, 10,297 and 6,540
shares, respectively, were purchased in the open market for employees, at
average prices of $26.13, $23.93 and $42.44 per share, respectively.
9. 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.
43
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2001 the Company had long-term operating leases for
fourteen of its campuses and other administrative locations. Rent expense was
$4,227,000, $4,770,000 and $5,533,000 for the years ended December 31, 1999,
2000 and 2001, respectively. Prior to the purchase of three of these campuses in
February 2002, the Washington D.C. campus and three of the Virginia campuses
were leased from entities affiliated with the Company's former CEO and majority
stockholder. Rent paid to these entities was $2,040,000, $1,836,600 and
$1,946,000 for the years ended December 31, 1999, 2000 and 2001, respectively.
During 1999, the Company acquired its Takoma Park Campus for $1,024,000 and in
February 2002, the Company acquired the Washington D.C., Manassas, VA and
Woodbridge, VA campuses for an aggregate of $12,000,000 from entities affiliated
with the Company's former CEO and majority stockholder. Accordingly, only one
lease remains outstanding with affiliates of the Company's former CEO and
majority stockholder. This lease involved total payments of $320,000 in 2001 and
expires in 2006.
The rents on the Company's leases are subject to annual increases based on
a stipulated price index. The minimum rental commitments for the Company as of
December 31, 2001, excluding commitments related to the three campuses purchased
from the Company's former CEO and majority stockholder in February 2002, are as
follows (in thousands):
TOTAL AMOUNT PAYABLE
TOTAL TO RELATED PARTIES
------- ---------------------
2002...... $ 4,780 $338
2003...... 4,339 348
2004...... 3,324 358
2005...... 3,000 369
2006...... 2,241 156
Thereafter 9,849 --
-------- ------
$ 27,533 $1,569
======== ======
In addition, the Company has a credit facility from a bank in the amount of
$10.0 million. Interest on any borrowings under the facility will accrue at an
annual rate not to exceed 0.75% above the London Interbank Offered Rate. The
Company does not pay a fee for this facility. There have been no borrowings by
the Company under the credit facility.
On October 2, 1998, the Board of Directors authorized the Company to
repurchase up to five percent of its outstanding common stock at market prices,
not to exceed a total cost of $24 million. The timing of stock purchases are
made at the discretion of management. The Company repurchased 630,429 shares and
62,700 shares during the years ended December 31, 1999 and 2000, respectively.
During the year 2000, the Board authorized an additional stock repurchase
program in an amount of up to $40,000,000. The Company suspended the repurchase
plan from February to September of the year 2000 and again in December of 2000.
No shares were repurchased during 2001. No share repurchase plan is currently
authorized by the Board of Directors.
44
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
The income tax provision for the years ended December 31, 1999, 2000 and
2001 is summarized below (in thousands).
1999 2000 2001
--------- --------- -------
Current:
Federal $ 10,453 $ 11,637 $ 12,123
State.. 2,295 2,484 2,222
-------- -------- --------
12,748 14,121 14,345
-------- -------- --------
Deferred:
Federal (203) (132) 129
State.. (45) (15) 15
-------- -------- --------
(248) (147) 144
-------- -------- --------
$ 12,500 $ 13,974 $ 14,489
======== ======== ========
The tax effects of the principal temporary differences that give rise to
the Company's deferred tax assets (liabilities) are as follows as of December
31, 2000 and 2001 (in thousands):
2000 2001
------ ------
Tuition receivable and student loans... $ 372 $ 387
Property and equipment................. 283 140
Accrued vacation payable............... 50 34
Unrealized gains on marketable
securities........................... (258) --
------ ------
Net deferred tax asset................. $ 447 $ 561
====== ======
A reconciliation between the Company's statutory tax rate and the effective
tax rate for the years ended December 31, 1999, 2000, and 2001 is as follows:
1999 2000 2001
------ ------ ------
Statutory federal rate............... 35% 35% 35%
State income taxes, net of federal 5% 5% 4%
benefits.............................
Effect of prior year accruals........ (1%) (1%) 0%
------ ------ ------
Effective tax rate................... 39% 39% 39%
====== ====== ======
Cash payments for income taxes were $12,674,000 in 1999, $13,628,000 in
2000 and $11,649,000 in 2001.
45
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for 2000 and 2001 is as follows (in
thousands except per share data):
QUARTER
-------------------------------------
2000 FIRST SECOND THIRD FOURTH
------------------------------------------------ ------- ------- ------- -------
Total revenues ................................. $21,128 $20,325 $14,691 $22,070
Income from operations ......................... 10,423 8,432 2,192 9,880
Net income ..................................... 6,810 5,878 2,126 6,895
Net income per share:
Basic ........................................ $ 0.45 $ 0.38 $ 0.14 $ 0.45
Diluted ...................................... $ 0.44 $ 0.38 $ 0.14 $ 0.45
QUARTER
-------------------------------------
2001 FIRST SECOND THIRD FOURTH
------------------------------------------------ ------- ------- ------- -------
Total revenues ................................. $23,644 $23,826 $18,222 $27,184
Income from operations ......................... 11,459 9,262 2,744 10,042
Net income ..................................... 8,137 6,248 2,008 6,416
Net income available to
common stockholders ........................... 8,137 5,293 11 4,358
Net income per share:
Basic ........................................ $ 0.53 $ 0.45 $ 0.00 $ 0.52
Diluted ...................................... $ 0.53 $ 0.42 $ 0.14 $ 0.45
46
STRAYER EDUCATION, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE BAD DEBT
BEGINNING ADDITIONS BALANCE EXPENSE
OF CHARGED TO END OF AS A % OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS PERIOD REVENUE
----------- ------ ------- ---------- ------ -------
Deduction from asset account:
Allowance for doubtful accounts:
Year ended December 31, 2001 $ 489 $ 1,578 $(1,610) $ 457 1.7%
Year ended December 31, 2000 605 2,147 (2,263) 489 2.7%
Year ended December 31, 1999 295 1,695 (1,385) 605 2.4%
Allowance for loan losses:
Year ended December 31, 2001 465 196 (125) 536
Year ended December 31, 2000 411 172 (118) 465
Year ended December 31, 1999 353 216 (158) 411
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
47
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
---- --- --------
DIRECTORS
Steven B. Klinsky................. 45 Chairman of the Board
Robert S. Silberman............... 44 Chief Executive Officer, President, Director
Charles Ayres..................... 42 Director
Dr. Charlotte F. Beason........... 54 Director
William E. Brock.................. 71 Director
David A. Coulter.................. 54 Director
Gary Gensler...................... 44 Director
Robert R. Grusky.................. 44 Director
Todd A. Milano.................... 49 Director
G. Thomas Waite, III.............. 50 Director
J. David Wargo.................... 48 Director
EXECUTIVE OFFICERS
Scott W. Steffey.................. 40 Executive Vice President and Chief Operating Officer
Mark C. Brown..................... 43 Senior Vice President and Chief Financial Officer
Steven A. McArthur................ 44 Senior Vice President and General Counsel
Kevin P. O'Reagan................. 42 Vice President and Chief Technology Officer
Lysa Hlavinka..................... 35 Vice President, Marketing
Robert E. Farmer.................. 63 Vice President, Human Resources, Administration and Training
Dina B. West ..................... 35 Controller
DIRECTORS
- ---------
The biographical information regarding the Company's Directors required by
this Item is hereby incorporated by reference from the information to be
continued under the captions "Nominees for Common Stock Directors" and
"Information Concerning Preferred Stock Directors" contained in the Company's
Proxy Statement which will be filed no later than 120 days following December
31, 2001.
EXECUTIVE OFFICERS
- ------------------
Robert S. Silberman, 44, has been President and Chief Executive Officer of
Strayer Education, Inc. since March 2001. Mr. Silberman was Executive in
Residence at New Mountain Capital, LLC from August 2000 to March 2001. From 1995
to 2000, Mr. Silberman served as President and Chief Operating Officer (and in
certain other capacities) of CalEnergy Company, Inc. From 1993 to 1995, Mr.
Silberman was Assistant to the Chairman and Chief Executive Officer of
International Paper Company. From 1989 to 1993, Mr. Silberman served in several
senior positions in the U.S. Department of Defense, including as Assistant
Secretary of the Army. Mr. Silberman has been a Director of the Company since
March 2001 and is a Member of the Board's Executive Committee.
48
Scott W. Steffey, 40, joined the Company in March 2001 after serving as
an Executive in Residence at New Mountain Capital, LLC from March 2000 to
March 2001. Prior to that, Mr. Steffey served for four years as Vice Chancellor
of the State University of New York, the largest public post-secondary higher
education system in the world. He is also the founder of the Charter Schools
Institute, an organization that establishes competitive K-12 schools in New York
state dedicated to providing improved educational opportunities for economically
disadvantaged students. Previously, Mr. Steffey held senior management positions
at NYNEX Corporation and American Express Company.
Mark C. Brown, 43, joined the Company in August 2001 as its Senior Vice
President and Chief Financial Officer. He was most recently the Chief Financial
Officer of The Kantar Group, the information and consultancy division of WPP
Group, the multi-national communications services company. Prior to that, for
nearly 12 years, Mr. Brown held a variety of management positions at PepsiCo
Inc. including Director of Corporate Planning for Pepsi Bottling Group and
Business Unit Chief Financial Officer for Pepsi-Cola International. Mr. Brown is
a CPA who started his career with PricewaterhouseCoopers.
Steven A. McArthur, 44, joined Strayer in May 2001 as its Senior Vice
President and General Counsel. Mr. McArthur is responsible for oversight of all
legal matters for the Company and coordinating with other responsible officers
on various regulatory, administrative, employee benefit, real estate, leasing
and insurance matters. Mr. McArthur previously served as Senior Vice President
and General Counsel to MidAmerican Energy Holdings Company, a Fortune 500
diversified holding company and a number of its public company subsidiaries. Mr.
McArthur has over 17 years of experience advising various public companies in
the areas of regulatory compliance, mergers and acquisitions, financings and
related legal matters.
Kevin P. O'Reagan, 42, has been active in the technology field for the past
18 years, and joined the Company in May 2001. He started his career with
Andersen Consulting and later joined Prudential Mortgage as the Director of
Technology. He most recently was the Chief Technology Officer of the RIA Group
of the Thompson Corporation. Mr. O'Reagan has also developed and taught courses
at the post-graduate level as an adjunct faculty member at The Johns Hopkins
University in its Information Technology Program.
Lysa Hlavinka, 35, has been working in the for-profit education field for
the past 11 years, and joined the Company in May 2001. She started her career as
an account executive at an advertising agency and joined the University of
Phoenix in 1990. As that company grew, Ms. Hlavinka held positions as Marketing
Manager, Director of Administrative Services, and, most recently, National
Director of Advertising. While at the University of Phoenix, she taught
marketing and public relations courses as an adjunct faculty member.
Robert E. Farmer, 63, is Vice President of Human Resources, Administration
and Training of the University, a position to which he was appointed in 2001.
Previously, Mr. Farmer was the Director of Operations (in 2000) and previously
Director of Human Resources, a position he held since 1995. Mr. Farmer was the
Campus Coordinator of the Arlington campus from 1992 until 1995, and was the
Director of Admissions at that campus from 1990 to 1992. Mr. Farmer is a
certified Professional in Human Resources (PHR).
Dina B. West, 35, joined the Company in January 2002 as the Company's
Controller. Ms. West is responsible for the daily operations of the Company's
accounting department under the supervision of Mark Brown, Chief Financial
Officer. Ms. West previously served as Senior Manager for internal reporting
within Nextel International, Inc. and as Assistant Controller for Manugistics,
Inc. Ms. West is a CPA and MBA who began her career with Ernst & Young.
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.
49
CERTAIN SIGNIFICANT EMPLOYEES OF THE UNIVERSITY
The following information is supplied with respect to certain other
significant employees of the University:
NAME AGE POSITION
- ---- --- --------
Dr. Donald R. Stoddard............ 65 University President
Dr. J. Chris Toe.................. 47 University Provost and Academic Dean
James F. McCoy.................... 42 Regional Director - Southern Virginia and North Carolina
Michael O. Williams............... 48 Regional Director - Northern Virginia and Washington, D.C.
Betty G. Shuford.................. 60 Regional Director - Maryland
Robert L. Gustavus................ 59 Director, Strayer ONLINE
Marjorie Arrington ............... 40 Director of Financial Aid and Compliance
David A. Moulton ................. 49 Director of Libraries
Randi S. Reich ................... 28 Director of Corporate and Institutional Alliances
Cyndi L. Wastler ................. 36 Director of Academic Records
Dr. Donald R. Stoddard, Ph.D., 65, 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.
Dr. J. Chris Toe, 47, is the University's Provost and Academic Dean. Dr.
Toe has spent 25 years in government, international business, and higher
education. Eight of his 14 years in higher education have been at Strayer, which
he joined in 1993. He began his career as an economist in the West African
republic of Liberia and served on the economics faculty at Texas Tech University
in Lubbock, Texas for many years. Prior to becoming Provost, Dr. Toe managed
enrollment and student services, and graduate programs at the University. He has
been a Professor and Campus Dean, and he still teaches a graduate research
class.
James F. McCoy, 42, is the University's Regional Director-Southern Virginia
and North Carolina with oversight responsibilities for all administrative
functions of that Region's campuses, including student enrollment, retention,
collection of revenue and budget. Mr. McCoy has been active in proprietary
education for the past 19 years, and joined Strayer in 1994. He has worked with
several school systems including Phillips and Branell in management capacities
at both the campus and corporate levels. Mr. McCoy has extensive experience in
new campus start-ups., P&L management, and accreditation and compliance
regulations. In addition, he has management experience in both the
administrative and academic operations of a campus.
Michael O. Williams, 48, is the University's Regional Director-Northern
Virginia and Washington D.C. with oversight responsibilities for all
administrative functions of that Region's campuses, including student
enrollment, retention, collection of revenue and budget. Mr. Williams has been
employed at the University since 1992. Mr. Williams, an alumnus of the graduate
program at Strayer University, was a former Campus Coordinator of the Washington
Campus, 1995-2000, and previously an admissions representative.
Betty G. Shuford, 60, is the University's Regional Director-Maryland, with
oversight responsibilities for all administrative functions of that Region's
campuses, including student enrollment, retention, collection of revenue and
budget. Ms. Shuford has been with Strayer University for nineteen years. She
previously served in a number of positions, including Administrative Dean and
Campus Manager at four different campuses.
Robert Gustavus, 59, is the University's Director of Strayer ONLINE. Mr.
Gustavus has spent over thirty-five years in government, the commercial sector,
and higher education. He has extensive teaching
50
and administrative experience in higher education. Mr. Gustavus was an adjunct
faculty member for a local community college and the University of Virginia
prior to joining Strayer University as a full-time faculty member in 1995. Prior
to becoming the Director of ONLINE, he was a Campus Dean and Academic Dean
responsible for seven campuses. He has taught classes online for over two years
and is completing his doctoral degree with an emphasis in Instructional
Technology.
Marjorie Arrington, 40, is the University's Director of Financial Aid and
Title IV Compliance. Ms. Arrington is responsible for administering the
University's Title IV programs and insuring that all University practices in
this area comply with the applicable administrative and regulatory standards
required by the HEA. Ms. Arrington has been actively involved with the state,
regional and national associations of student financial aid administrators and
the U.S. Department of Education. Ms. Arrington has over 17 years of experience
in the administration of Title IV funds.
David A. Moulton, 49, is the University's Director of Libraries. Mr.
Moulton is responsible for library services and collections at all campus
locations and for supporting online library services for remote users. Mr.
Moulton oversees the operations of the Wilkes Library at the main campus in
Washington, D.C. and works with the Learning Resource Center officers at each
campus. Mr. Moulton has been employed by Strayer University for 26 years serving
as Evening Librarian and Assistant Librarian before assuming his present duties
in 1989. Mr. Moulton has held membership in the American Library Association for
over 25 years and has been a member of the Virginia Library Association for 15
years.
Randi S. Reich, 28, is the University's Director of Corporate and
Institutional Alliances. Ms. Reich is responsible for outreach to corporations,
government, military and organizations. In her role, she develops sponsorship
arrangements between Strayer and these organizations that allows them to provide
e-learning, corporate education and training offerings to their employees in the
developing Corporate University market place. Prior to joining Strayer, Ms.
Reich co-founded and managed business and strategic development for Mascot
Network, an application service provider serving the higher education market
with an "enterprise portal". Ms. Reich also served several years in city
government with the City of New York as the Assistant Director in the Mayor's
Office of Transportation and also worked at Boston Consulting Group.
Cyndi L. Wastler, 36, is the University's Director of Academic Records.
Mrs. Wastler is responsible for the oversight of the University's Transcript
Evaluation Center, the Records Office, Veterans Services, and the warehouse. In
addition, she also works with other University administrators on regulatory and
compliance matters that affect the University. Mrs. Wastler has been with the
University for eleven years working within in the Academic Records Office.
Previously, Mrs. Wastler was in retail sales management.
COMPENSATION OF THE BOARD OF DIRECTORS
The information required by this Item relating to Compensation and
Committees of the Board of Directors is hereby incorporated by reference from
the information contained under those respective captions in the Company's Proxy
Statement which will be filed no later than 120 days following December 31,
2001.
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 2001 Proxy Statement which will be filed no later than 120 days
following December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this Item relating to Section 16(a) Beneficial
Ownership Reporting Compliance and Security Ownership of Certain Beneficial
Owners and Management is hereby incorporated by reference from the information
contained under the caption "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement which will be filed no later than 120 days following
December 31, 2001.
51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
The information required by this Item relating to Certain Relationships and
Related Party Transactions is hereby incorporated by reference from the
information contained under the caption "Certain Transactions with Former
Management" in the Company's Proxy Statement which will be filed no later than
120 days following December 31, 2001.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
All required financial statements of the registrant are set forth under
Item 8 of this report on Form 10-K.
(a)(2) Financial Statement Schedules
All required financial statement schedules of the registrant are set forth
under Item 8 of this report on Form 10-K.
(a)(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
-------- -------------------------------------------------------
3.01+ -- Amended Articles of Incorporation and Articles
Supplementary of the Company.
3.02* -- Amended and Restated Bylaws of the Company.
4.01* -- Specimen Stock Certificate.
4.02+ -- Registration Rights Agreement, dated as of May 15, 2001,
by and among New Mountain Partners, L.P. and DB Capital
Investors, L.P. and Strayer Education, Inc.
10.01** -- Preferred Stock Purchase Agreement, dated as of November
28, 2000, by and among Strayer Education, Inc., New
Mountain Partners, L.P. and DB Capital Investors, L.P.
10.02** -- Support and Option Agreement, dated as of November 28,
2000, by and among Strayer Education, Inc., Ron K.
Bailey, Beverly W. Bailey, and New Mountain Partners,
L.P. and DB Capital Investors, L.P.
10.03+ -- Employment Agreement, dated as of April 6, 2001, between
Strayer Education, Inc. and Robert S. Silberman.
10.04+ -- Real Estate Purchase Agreement, dated as of January 31,
2002, by and among KKB, L.L.C., and Central
Investments, Inc., and Strayer University, Inc.
10.05 *** -- 1996 Amended Stock Option Plan.
21.01+ -- Subsidiaries of Registrant.
23.01 -- Consent of PricewaterhouseCoopers LLP.
24.01 -- Power of Attorney (contained in signature page).
- ----------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 833-3967).
** Filed as an exhibit to the Registrant's Proxy Statement for the Special
Meeting of Stockholders filed with the Securities and Exchange Commission on
February 14, 2001.
*** Filed as an exhibit to the Registrant's Proxy Statement for the 2001 Annual
Meeting filed with the Securities and Exchange Commission on April 27, 2001.
+ Filed herewith.
53
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.
By: /s/ Robert S. Silberman
--------------------------------------
ROBERT S. SILBERMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 27, 2002
54
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert S. Silberman and Steven A. McArthur and
Mark C. Brown, and each of them individually, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and his name, place and stead in any and all capacities,
to sign the report and any and all amendments to this report, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
date indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ ROBERT S. SILBERMAN Chief Executive Officer March 27, 2002
- --------------------------- and Director (Principal
(ROBERT S. SILBERMAN) Executive Officer)
/s/ MARK C. BROWN Chief Financial Officer March 27, 2002
- --------------------------- (Principal Financial and
(MARK C. BROWN) Accounting Officer)
/s/ CHARLES AYRES Director March 27, 2002
- ---------------------------
(CHARLES AYRES)
/s/ CHARLOTTE BEASON Director March 27, 2002
- ---------------------------
(CHARLOTTE BEASON)
Director
- ---------------------------
(DAVID B. COULTER)
/s/ WILLIAM E. BROCK Director March 27, 2002
- ---------------------------
(WILLIAM E. BROCK)
/s/ GARY GENSLER Director March 27, 2002
- ---------------------------
(GARY GENSLER)
/s/ ROBERT R. GRUSKY Director March 27, 2002
- ---------------------------
(ROBERT R. GRUSKY)
/s/ STEVEN B. KLINSKY Director March 27, 2002
- ---------------------------
(STEVEN B. KLINSKY)
/s/ TODD A. MILANO Director March 27, 2002
- ---------------------------
(TODD A. MILANO)
/s/ G. THOMAS WAITE, III Director March 27, 2002
- ---------------------------
(G. THOMAS WAITE, III)
/s/ J. DAVID WARGO March 27, 2002
- --------------------------- Director
(J. DAVID WARGO)
55