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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number: 0-21039
STRAYER EDUCATION, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1975978
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1100 WILSON BLVD., SUITE 2500, ARLINGTON, VA 22209
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (703) 247-2500
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). [X] Yes [ ] No
The aggregate market value of the voting and non-voting common stock held
by non-affiliates (computed by reference to the price at which the common stock
was last sold) as of the last business day of the Registrant's most recently
completed second fiscal quarter was $528.7 million. (As of March 24, 2003,
following a 2.3 million share secondary offering of common stock which closed in
November 2002, the market value of the voting and non-voting common stock held
by non-affiliates (computed by reference to the price at which the common stock
was last sold) was $600.8 million.)
The total number of shares of Common Stock outstanding as of March 24,
2003 was 10,652,412.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for its
2003 Annual Meeting of Stockholders (which is expected to be filed with the
Commission within 120 days after the end of the Registrant's 2002 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 ......................................................................................... 21
Item 3 Legal Proceedings .................................................................................. 21
Item 4 Submission of Matters to a Vote of Security Holders ................................................ 21
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .............................. 22
Item 6 Selected Consolidated Financial Data ............................................................... 23
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 25
Item 7a Quantitative and Qualitative Disclosures about Market Risk ......................................... 31
Item 8 Financial Statements and Supplementary Data ........................................................ 32
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............... 53
PART III
Item 10 Directors and Executive Officers of the Registrant ................................................. 54
Item 11 Executive Compensation ............................................................................. 59
Item 12 Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters ..... 59
Item 13 Certain Relationships and Related Party Transactions ............................................... 59
Item 14 Controls and Procedures ............................................................................ 59
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................... 61
SIGNATURES ................................................................................................... 63
CERTIFICATIONS ............................................................................................... 66
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS:
This document and the documents incorporated by reference herein include
"forward-looking statements," within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, in
particular, the statements about our plans, strategies and prospects under the
headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." We have typically used the words "may,"
"will," "expect," "believe," "estimate," "plan," "intend" and similar
expressions in this document and the documents incorporated by reference herein
to identify forward-looking statements. We have based these forward-looking
statements on our current views with respect to future events and financial
performance. Actual results could differ materially from those projected in the
forward-looking statements. These forward-looking statements are subject to many
risks, uncertainties and assumptions, including, among other things:
o the pace of growth of student enrollment;
o our continued compliance with Title IV of the Higher Education Act and
the regulations thereunder, as well as state and regional regulatory
requirements;
o competitive factors;
o risks associated with the opening of new campuses;
o risks associated with the offering of new educational programs and
adapting to other changes;
o risks associated with the acquisition of existing educational
institutions;
o risks related to the timing of regulatory approvals;
o our ability to continue to implement our online growth strategy; and
o general economic and market conditions.
You should not put undue reliance on any forward-looking statements. You
should understand that many important factors, including those discussed under
the headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," could cause our results to differ
materially from those expressed or suggested in any forward-looking statements.
Further information about these and other relevant risks and uncertainties may
be found elsewhere in this annual report on Form 10-K and in our other filings
with the Securities and Exchange Commission. We undertake no obligation to
update or revise forward looking statements.
ITEM 1. BUSINESS.
OVERVIEW
Our company is a for-profit post-secondary education services company.
Our mission is to make high quality, post-secondary education achievable and
convenient for working adults in today's economy. We work to fulfill this
mission by offering a variety of academic programs through Strayer University,
both in traditional classroom courses and through Strayer University Online.
Strayer University prides itself on making post-secondary education accessible
to working adults who missed or were previously unable to take advantage of
higher education opportunities.
Founded in 1892, Strayer University is an institution of higher learning
that offers undergraduate and graduate degree programs in business
administration, accounting and information technology at 23 physical campuses in
Maryland, Virginia, North Carolina, Tennessee and Washington, D.C. (including
one campus in Raleigh, North Carolina, which will commence offering classes this
summer). As of the fall 2002 quarter, we had more than 16,500 students enrolled
in our programs. Strayer University is accredited by the Middle States
Commission on Higher Education, one of the six regional collegiate accrediting
agencies recognized by the U.S. Secretary of Education. Strayer University is
committed to providing an
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education that prepares working adult students for advancement in their careers
and professional lives. It attracts students from around the country and
throughout the world. As part of its program offering, the University also
offers classes via the internet through Strayer University Online, providing its
working adult students a more flexible and convenient program offering and
allowing students worldwide to take advantage of Strayer University's programs.
We have experienced significant internal growth through new campus
openings and geographic expansion over the last several years. Since our initial
public offering in 1996, we have grown from eight campuses in one state and
Washington, D.C. to twenty-three (23) campuses in four states and Washington,
D.C. Our goal is to open at least three new campuses per year by filling out the
Washington, D.C., Maryland, Virginia, North and South Carolina, Tennessee and
Pennsylvania areas and by expanding into contiguous states that exhibit strong
enrollment potential. We received earlier than anticipated approval from the
Pennsylvania State Department of Education to open two campuses in Philadelphia
and accordingly have determined to accelerate our rate of new campus openings in
2003 to five and plan to open two new campuses in Pennsylvania by fall 2003,
subject to receiving all necessary regulatory approvals. We have opened nine of
our campuses since the beginning of 2001. At the same time, we have developed a
robust and rapidly growing online education program. Since receiving regulatory
approval to offer our degree programs through Strayer University Online in 1997,
we have experienced rapid growth, with 6,822 students enrolled in at least one
class through Strayer University Online during the 2002 fall term.
In connection with our recapitalization in May 2001, we hired a new
senior management team, made significant investments in information technology
infrastructure to support planned growth in our online programs, and embarked on
an accelerated program to open new campuses. As a result of these efforts, our
total revenues grew 19% from $78.2 million in 2000 to $92.9 million in 2001,
with fall term enrollment growing from 12,100 students in 2000 to over 14,000
students in 2001. This strong growth has continued in 2002, with our total
revenues growing 26% from $92.9 million in 2001 to $116.7 million in 2002 with
fall term 2002 enrollment growing to over 16,500 students. During this period of
significant revenue growth, net income grew 5% from $21.7 million in 2000 to
$22.8 million in 2001, having been impacted by our investment in these new
growth initiatives. Net income grew 13% from $22.8 million in 2001 to $25.8
million in 2002.
INDUSTRY BACKGROUND AND OUTLOOK
The market for post-secondary education is large, growing and highly
fragmented. The U.S. Bureau of Labor Statistics reports that over 60 million
working adults in the United States do not have higher than a high school
education. We believe that the demand for career-oriented, post-secondary
education will increase during the next several years as a result of several
demographic, economic and social trends, including:
o an increase in demand by employers for professional and skilled workers;
o a projected 10% growth in the annual number of high school graduates from
2.8 million in 2000 to 3.1 million in 2010;
o our expectation that the number of adults (persons 25 years old and
older) enrolling in post-secondary education will increase significantly;
o the significant and measurable income premium attributable to
post-secondary education; and
o budgetary constraints at traditional colleges and universities.
The adult education market is a significant and growing component of the
post-secondary education market. We believe that the market for post-secondary
adult education should continue to increase as working adults seek additional
education and training to update and improve their skills in order to enhance
their earnings potential and to keep pace with the increasing demands of a
knowledge-based economy. In addition, we believe that many working adults will
seek accredited degree programs that provide flexibility to accommodate the
fixed schedules and time commitments associated with their professional, family
and personal obligations. There are currently seven public companies (of which
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Strayer is the smallest) operating in the post-secondary market. There are also
numerous smaller private companies operating in the post-secondary market.
However competition in the market has not impacted our ability to grow in this
large and fragmented market.
COMPANY STRENGTHS
We have a 110-year operating history and a proven track record of
providing education programs for working adults. We believe the following
strengths distinguish us from our competitors and position us to capitalize on
the growing demand for post-secondary education among working adults:
o CONSISTENT OPERATING HISTORY. We have been in continuous operation since
1892 and have demonstrated an ability to grow consistently and
profitably. Our enrollments and revenues have grown each year since our
initial public offering in 1996.
o PRACTICAL AND DIVERSIFIED CURRICULA. We offer core curricula in stable,
high demand areas of education. In order to keep pace with a changing
knowledge-based economy, we constantly strive to meet the evolving needs
of our students and their employers by regularly refining and updating
our existing educational programs. Additionally, we replicate programs
that are successful in a given school at additional locations throughout
our network of campuses. Strayer University currently offers 58 different
degree, diploma and certificate programs inclusive of emphases and
concentrations, to its students. We believe that our diversified program
offerings provide us with greater stability of enrollments versus
competitors that are more focused in one particular field of study.
o FOCUS ON WORKING ADULTS PURSUING DEGREE PROGRAMS. We focus on helping
working adults pursue college degrees in order to advance their career
and employment opportunities. We believe this is an attractive market
within the post-secondary education sector due to (1) the growing number
of adult students enrolling in post-secondary education programs, and (2)
the highly motivated nature of adult students given the personal
sacrifices and time commitments required to attend class while balancing
their busy schedules. We consider adult students to be our primary
customers, with the various business and government organizations that
provide tuition assistance to their employees as our secondary customers.
With this focus on the customer, regardless of whether they choose to
take classes at a physical campus or online, we have only one reporting
segment. In addition, we believe that our focus on associate, bachelor
and graduate-level degree programs results in extended periods of student
enrollment and positively impacts the visibility and predictability of
our future revenues. Approximately 95% of our students were enrolled in
degree programs as of the fall 2002 quarter.
o FLEXIBLE PROGRAM OFFERINGS. We maintain flexible quarterly programs that
allow working adult students to attend classes and complete coursework on
a convenient evening and weekend schedule throughout the calendar year.
During the fall 2002 quarter, over 85% of the courses we offered were
night or weekend courses. Additionally, we developed Strayer University
Online to enable students to pursue a degree entirely online, thereby
increasing the convenience, accessibility and flexibility of our high
quality educational content. Approximately 41% of our students enrolled
as of the fall 2002 quarter were taking or have taken at least one course
through Strayer University Online. We believe that these convenient and
flexible offerings distinguish us from many traditional universities that
currently do not effectively address the unique requirements of working
adults.
o ATTRACTIVE AND CONVENIENT CAMPUS LOCATIONS. Our campuses are located in
growing metropolitan areas in the mid-Atlantic and Southern regions where
there are large populations of working adults. These geographic areas
offer large populations of working adults with demographic
characteristics similar to those of our typical students. Strayer
University's campuses are attractive and modern, offering conducive
learning environments in convenient locations.
o ESTABLISHED BRAND NAME AND ALUMNI SUPPORT. With a 110-year operating
history, Strayer University is an established brand name in
post-secondary adult learning, and our students and graduates work
throughout corporate America. Our extensive alumni network (currently
over
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19,700 alumni worldwide) and support system fosters additional
recruitment opportunities and assists students with job placement and
career advancement. Strayer University was ranked first in the
Washington Business Journal's 2002 Book of Lists for having the
largest enrollment in graduate business and management programs in the
Washington, D.C. metropolitan area.
o STRONG OWNER-ORIENTED MANAGEMENT TEAM. In connection with our May 2001
recapitalization, we developed a new growth strategy and hired a new
senior management team in March of 2001 to implement this strategy. As
described below, under the leadership of Robert S. Silberman, our
Chairman and Chief Executive Officer, we have embarked on various
initiatives to increase enrollment and expand our campuses. In addition,
all of our senior officers have made investments in Strayer through
outright share purchases in addition to their option grants.
COMPANY STRATEGY
Our goal is to be a leading provider of high quality post-secondary
education programs for working adults primarily in the areas of business
administration, accounting and information technology. We have identified the
following factors as key to executing our growth strategy:
o MAINTAIN STABLE ENROLLMENT IN OUR MATURE MARKETS. At December 31, 2002,
we had 13 mature campuses (those in operation for more than three years).
Over the last five years, average enrollment at our mature campuses has
remained stable, while tuition has increased approximately 5% per year.
Our goal is to maintain stable campus enrollments in our mature markets,
while increasing revenues through a combination of complementary growth
in those mature markets through Strayer University Online and continuing
market-based tuition increases.
o ACCELERATE RATE OF NEW CAMPUS GROWTH. Our goal is to open at least three
new campuses per year by filling out the Washington, D.C., Maryland,
Virginia, North and South Carolina, Tennessee and Pennsylvania areas and
by expanding into contiguous states that exhibit strong enrollment
potential. We believe this strategy will leverage our existing investment
in curriculum, management and marketing infrastructure. Since our initial
public offering in 1996, we have grown from eight campuses to
twenty-three campuses (including three opening in the first and second
quarters of 2003) while expanding into several states. We opened three
new campuses in 2001, one in Baltimore, Maryland and two in Southern
Virginia. On July 1, 2002, we began offering classes at three new
campuses in North Carolina (one in Raleigh-Durham and two in Charlotte).
Our new campuses have typically turned profitable after five to six
quarters of operation.
In 2002, the Tennessee Higher Education Commission approved our offering
programs at two new campuses in the State of Tennessee. Accordingly, we
are opening two new campuses in Tennessee (one in Memphis and one in
Nashville) in the first quarter of 2003 with classes commencing in the
spring quarter 2003. Due to strong demand at our Raleigh-Durham campus,
we are also opening a second campus in the Raleigh-Durham area by summer
2003 and are evaluating additional expansion opportunities in North
Carolina. We received earlier than anticipated approval from the
Pennsylvania State Department of Education to open two campuses in
Philadelphia and accordingly have determined to accelerate our rate of
new campus openings in 2003 to five and plan to open two new campuses in
Pennsylvania by fall 2003, subject to receiving all necessary regulatory
approvals.
We have also received approval from the South Carolina Commission on
Higher Education to offer academic programs at up to three campuses in
South Carolina and are investigating possible expansion locations in that
state for 2004. We have also applied to operate in Delaware and expect to
pursue approval there and in other adjacent states and open campuses in
favorable demographic locations in adjacent regions as part of our
multi-year expansion plan.
o CONTINUE OUR GROWTH AT STRAYER UNIVERSITY ONLINE. We actively market
Strayer University Online to U.S. students throughout all 50 states and
to international students on a global basis. Strayer University Online
has demonstrated its success with both asynchronous (on demand) and
synchronous (real time) course offerings that are favored by working
adult students because of
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their quality and convenience. We believe that the added flexibility
of being able to offer both traditional and online courses allows us
to better serve our working adult students. Due to the convenience and
flexibility of online teaching, particularly in the asynchronous or
"on demand" format, this medium has rapidly grown in acceptance and is
expected to continue to enjoy rapid growth. Enrollment at Strayer
University Online has grown at a greater than 80% compounded annual
growth rate since its inception in 1997. Enrollment in markets outside
of commuting distance to a Strayer University physical campus has
grown at a greater than 50% compounded annual growth rate in this
period. There were 6,822 students taking at least one online course as
of the 2002 fall term and the Company intends to make additional
investments in Online in 2003 to support the continued strong growth
in this area.
o DEVELOP CORPORATE/INSTITUTIONAL ALLIANCES. We believe we are
well-positioned to pursue significant opportunities in the large
corporate/institutional market. Our convenient evening, weekend and
online courses provide an attractive solution for the education and
training needs of employers and their employees. We currently have
sponsorship and reimbursement arrangements of varying sorts with over 80
corporations and government institutions, including AT&T, Boeing,
Computer Sciences Corporation, EDS, General Motors, Northrup Grumman,
Pepco, UPS, Verizon, the U.S. Department of Defense, the General Services
Administration and the World Bank Group. We are actively working with
other institutions to increase the number of such arrangements.
o CONSIDER SELECTIVE ACQUISITIONS. We periodically evaluate opportunities
to acquire other providers of post-secondary education. When exploring
acquisition opportunities, we seek schools that we believe offer programs
with a good strategic fit to our current curricula and that have
demonstrated compliance with regulatory requirements and accreditation
standards. We also seek out operations that are located in geographic
locations that possess attractive demographic characteristics. In
addition, we also consider other factors such as 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 compare potential acquisitions to other
alternative uses of our capital (including but not limited to organic
growth alternatives, share repurchases and special or increased
dividends) in terms of return on capital and enhancing shareholder value.
We have no current commitments with regard to potential acquisitions.
STRAYER UNIVERSITY
CURRICULUM
Strayer University offers information technology and business-oriented
curricula that are designed to equip students with specialized and practical
knowledge and skills for careers in business, industry and government. Our
Academic Curriculum Committee periodically reviews and revises the University's
course offerings to improve the educational programs and respond to competitive
changes in job markets. In 1993, Strayer University formed a Curriculum Advisory
Board. The composition of the Curriculum Advisory Board varies over time, but
typically consists of Strayer University faculty and representatives from
private and government employers. The Curriculum Advisory Board supports the
program evaluation process. Strayer University uses advice from the Board to
make decisions about curriculum development, resource allocation and faculty
appointments.
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Strayer University offers programs in the following areas:
GRADUATE PROGRAMS UNDERGRADUATE PROGRAMS
----------------- ----------------------
o Master of Business Administration (M.B.A.) Degree o Bachelor of Science (B.S.) Degree
Accounting
o Master of Science (M.S.) Degree Business Administration
Computer Information Systems
Communications Technology Computer Networking
Information Systems Database Technology
Management Information Systems Economics
Professional Accounting International Business
Internetworking Technology
o Executive Graduate Certificate Programs
o Associate in Arts (A.A.) Degree
Business Administration
Computer Information Systems Accounting
Professional Accounting Acquisition and Contract Management
Business Administration
Computer Information Systems
Computer Networking
Database Technology
Economics
General Studies
Internetworking Technology
Marketing
o Undergraduate Diploma Programs
Accounting
Acquisition and Contract Management
Computer Information Systems
Internetworking Technology
Network Security
Web Development
o Undergraduate Certificate Programs
Accounting
Business Administration
Computer Information Systems
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 our degree, diploma and
certificate programs, we offer classes to non-degree and non-program students
wishing to take courses for personal or professional enrichment.
Although all of our programs are offered at each campus, the University
adapts its course offerings to the preferences of the student population at each
location. Strayer University students may enroll in courses at more than one
campus and take courses online.
Strayer 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
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information systems, a B.S. degree in computer information systems, and
ultimately an M.S. degree in information systems. This 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 UNIVERSITY ONLINE
In August 1997, we began the operation of Strayer University Online.
Through Strayer University Online, the University offers courses and degree
programs via the internet using both synchronous (real time) and asynchronous
(on demand) 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 all of their courses solely through
Strayer University Online or may take online courses as a supplement to
traditional, site-based courses. A student taking classes through Strayer
University Online has the same admission and financial aid requirements,
policies and procedures and receives the same student services as other Strayer
University students. Tuition for Strayer University Online courses is the same
as for campus courses. During the fall 2002 quarter, Strayer University had
6,822 students participating in its online programs, 5,401 of whom took classes
solely through Strayer University Online.
FACULTY
Strayer 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 our
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. Strayer
University requires full-time faculty members to hold student counseling hours
at least two hours per week for each course they teach.
We provide financial support for faculty members seeking to update their
skills and knowledge. Strayer University maintains a tuition plan that typically
reimburses instructors enrolled in advanced degree programs for 50% of the
tuition for one new course per term and conducts annual in-house faculty
workshops in each discipline. Strayer University also fully reimburses its
faculty for their costs in receiving approved computer-related instruction and
training to keep current in information technology developments. We believe that
our dedicated and capable faculty is one of the keys to our success and, despite
our rapid growth and expansion into new states, we have not experienced any
difficulties in hiring qualified full-time and adjunct faculty to meet our
growth objectives.
ORGANIZATION OF STRAYER UNIVERSITY
Strayer 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 of Trustees consists of Scott Steffey, Strayer's Executive
Vice President and Chief Operating Officer and former Vice Chancellor of the
State University of New York, as well as various non-management members. The
current Board of Trustees members are listed below:
BOARD OF TRUSTEES
MR. SCOTT W. STEFFEY Mr. Steffey is the Chairman of the Board of Trustees and
previously served for four years as Vice Chancellor of the State
University of New York. Mr. Steffey is the Executive Vice
President and Chief Operating Officer of Strayer Education, Inc.
DR. DONALD R. STODDARD Dr. Stoddard is a lifetime academician and the former President of
Strayer University.
DR. CHARLOTTE F. BEASON Dr. Beason is the Chair of the Commission on Collegiate Nursing
Education and Program Director, U.S. Department of Veterans
Affairs and is also a Director of Strayer.
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MR. ROLAND CAREY Mr. Carey is a former Director of Strayer and previously served as
an advisor to the Louisa County Public School System of Virginia
and a school Program Coordinator.
DR. ELIOT A. COHEN Dr. Cohen is Director of the Strategic Studies program at Johns
Hopkins University. Previously, Dr. Cohen was an Assistant
Professor of Government and Assistant Dean of Harvard College. Dr.
Cohen has also served as a member of the Strategy Department of
the United States Naval War College and as a member of the Policy
Planning Staff of the Office of the Secretary of Defense.
MR. TODD A. MILANO Mr. Milano is President and Chief Executive Officer of Central
Pennsylvania College and is also a Director of Strayer.
DR. PETER D. SALINS Dr. Salins is Provost and Vice Chancellor for Academic Affairs and
Chief Academic Officer at the State University of New York.
DR. JENNIE D. SEATON Dr. Seaton is a former Director of Strayer and previously served
as Assistant Dean of Virginia Commonwealth University.
MR. G. THOMAS WAITE, III Mr. Waite is the Chief Financial Officer and Treasurer of The
Humane Society of the United States and is also a Director of
Strayer.
Within the parameters of the academic and financial direction set by its
Board of Trustees, Strayer University is managed on a day-to-day basis by the
University President and Provost and Academic Dean as to academic matters, as
well as by three Regional Directors and the Director of Strayer University
Online who are responsible for implementing Board of Trustees policy and meeting
commercial and budgetary goals for their respective areas. In addition, there is
one Dean of Student Affairs who is responsible for ensuring the University is
meeting the non-academic needs of students in all regions and additional
Regional Academic Deans who oversee delivery of academic programs throughout the
University's network of campuses. Other key University administration officials
are the Director of Financial Aid and Title IV Compliance, Director of
Libraries, Director of Facilities, Director of Academic Records and Director of
Institutional Research and Assessment. In addition, to support the University's
continuing growth strategy, the University has two additional key Director
positions: Director of New Campus Openings and Director of Business Development.
Following Dr. Stoddard's retirement as University President in January 2003, the
University appointed Dr. J. Chris Toe, the Provost and Academic Dean, as
President. The University's current senior academic and commercial managers are
listed below:
UNIVERSITY SENIOR MANAGEMENT
DR. J. CHRIS TOE - Acting President, Provost and Academic Dean
JAMES F. MCCOY - Regional Director - Southern Virginia, North Carolina and
Tennessee
REGINALD RAINEY - Regional Director - Northern Virginia
MICHAEL O. WILLIAMS - Regional Director - Maryland and Washington, D.C.
PAMELA S. BELL - Director - Strayer University Online
BETTY G. SHUFORD- Dean of Student Affairs (all regions)
ROBERT L. GUSTAVUS - Regional Academic Dean
MARJORIE ARRINGTON - Director of Financial Aid and Title IV Compliance
GREGORY FERENBACH - Director of Business Development and Senior Counsel
DAVID A. MOULTON - Director of Libraries
RANDI S. REICH - Director of New Campus Openings
GEOFFREY D. ROTH - Director of Facilities
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MICHAEL K. SCHUCHERT - Director of Institutional Research and Assessment
CYNDI L. WASTLER - Director of Academic Records
Similarly, at the campus level, the day-to-day business operations are
managed by a campus manager and the academic functions are overseen by a campus
dean. Each campus is staffed 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.
CORPORATE SENIOR MANAGEMENT
For a description of Strayer Education Inc.'s senior management, see the
biographical information set forth on pages 64 - 70 below.
MARKETING
To generate interest among potential students, we engage 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 from
potential students and their employers. 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 human resource departments and
on-site information meetings. We implement a continuous marketing strategy to
record 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 University students are working adults pursuing
their first college degree to improve their job skills and advance their
careers. Of the students enrolled in Strayer University's programs at the
beginning of the 2002 fall quarter, approximately 59% were age 30 or older and
approximately 71% were engaged in a part-time (fewer than three courses each
quarter) course of study. In the 2002 fall quarter, our students registered for
an average of 8.8 course credits (about two classes per student).
Strayer University has a very diverse student body. In 2002, 51% of
students were minorities and 57% of students were women. Approximately 7% of the
University's students were international, including those taking courses through
Strayer University Online. Approximately 3% of the University's students are
active duty military personnel. Through Strayer University Online, the
University offered courses to students in all 50 states and 60 foreign countries
in 2002. Strayer University prides itself on making post-secondary education
accessible to working adults who missed or were previously unable to take
advantage of education opportunities.
The following is a breakdown of our students by program level as of the
2002 fall quarter:
NUMBER PERCENTAGE OF
DEGREE PROGRAMS OF STUDENTS DEGREE STUDENTS
--------------- ----------- ---------------
Bachelors ............................. 10,174 67%
Masters ............................... 3,034 20%
Associates ............................ 2,064 13%
------ ----
Total Degree Students ................. 15,272 100%
====== ====
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PERCENTAGE OF
NUMBER NON-DEGREE
NON-DEGREE PROGRAMS OF STUDENTS STUDENTS
------------------- ----------- --------
Diploma ............................... 510 40%
Undergraduate Certificate ............. 21 2%
Graduate Certificate .................. 31 3%
Undeclared ............................ 698 55%
----- ----
Total Non-Degree Students ............. 1,260 100%
===== ====
Our business is seasonal and as a result, our quarterly results of
operations tend to vary within a year due to student enrollment patterns.
Enrollment generally is highest in the fourth quarter, or fall term, and lowest
in the third quarter, or summer term.
STUDENT ADMISSIONS
Strayer University seeks to ensure that incoming students have the
necessary academic background to succeed in their course of study. Students
attending Strayer University's undergraduate programs must possess a high school
diploma or a General Educational Development Certificate. Students attending
Strayer 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 perform 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, 2003, undergraduate full-time students are
charged at the rate of $232 per credit hour. Undergraduate part-time students
are charged at the rate of $243 per credit hour. Courses in graduate programs
are charged at the rate of $309 per credit hour. Accordingly, a full-time
student seeking to obtain a bachelor's degree in four years currently would pay
approximately $10,440 per year in tuition. Strayer University implemented a
tuition increase of 5% per credit hour effective January 1, 2003. Under a
variety of different programs, Strayer 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, we introduced the Strayer Education Loan Program (the "SEL
Program") for eligible students as an alternative to government sponsored
student loans. Education Loan Processing, Inc., a wholly-owned subsidiary,
administers the SEL Program for Strayer University. In addition to serving as an
alternative to the federal loan programs, the SEL Program can service loans at a
competitive cost.
We 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 University, the
minimum monthly payment on the loan is a percentage of the balance each month.
Upon completion of their schooling, students are 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.
Loans under the SEL Program are unsecured. Before making loans, we
conduct a credit evaluation and verify the employment of each applicant. Student
defaults on loans extended under the SEL Program have historically approximated
2-2.5% of total dollars loaned.
STRAYER FOUNDATION SCHOLARSHIPS
The Strayer University Education Foundation (the "Foundation") was
established by a former majority stockholder of Strayer as an independent entity
to provide scholarships and grant assistance for
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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 Mr. Steffey), and oversees a variety of scholarship and grant
programs for students based on eligibility criteria established by the
Foundation's Board of Trustees.
CAREER DEVELOPMENT SERVICES
Although most of Strayer University'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 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. Strayer University sponsors career fairs in the fall and spring
quarters for students and alumni to discuss career opportunities with companies
and governmental agencies.
We regularly conduct alumni surveys to monitor the career progression of
our 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 University's greatest assets, in order of
importance, are campus location, schedule variety, instructor knowledge, course
selection, online courses and small class sizes.
Strayer University students and graduates are employed by a wide range of
companies and many governmental agencies.
EMPLOYEES
As of December 31, 2002, Strayer University employed 721 faculty members,
of whom 144 were full-time and 577 were part-time, and 548 non-faculty staff in
information systems, financial aid, recruitment and admissions, student
administration, marketing and human resources, corporate accounting and other
administrative functions. Of the University's non-faculty staff, 435 were
employed full-time and 113 were employed part-time.
INTELLECTUAL PROPERTY
In the ordinary course of its business, Strayer develops many kinds of
intellectual property that are or will be the subject of copyright, trademark,
service mark, patent, trade secret or other protections. Such intellectual
property includes Strayer's courseware materials for classes taught via the
internet or other distance-learning means and business know-how and internal
processes and procedures developed to respond to the requirements of its
operations and various education regulatory agencies. Strayer also claims a
common law right to the mark "STRAYER" for educational services and has obtained
federal registration of the mark.
REGULATION
REGULATORY ENVIRONMENT
The Higher Education Act and the regulations promulgated thereunder
require all higher education institutions that participate in the various Title
IV programs, including Strayer University, both to comply with detailed
substantive and reporting requirements and to undergo periodic regulatory
scrutiny. The Higher Education Act mandates specific regulatory responsibility
for each of the following components of the higher education regulatory triad:
(1) the federal government through the U.S. Department of Education; (2) the
institutional accrediting agencies recognized by the U.S. Secretary of
Education; and (3) state higher education regulatory bodies. The regulations,
standards and policies of these regulatory agencies are subject to change.
ACCREDITATION
Strayer University has been institutionally accredited since 1981 by the
Middle States Commission on Higher Education ("Middle States"), a regional
accrediting agency recognized by the U.S. Secretary of
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Education. Accreditation is a system for recognizing educational institutions
and their programs for performance, integrity, educational quality, faculty,
physical resources, administrative capability and financial stability 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, conduct peer-review
evaluations of 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 such
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 the U.S. Virgin Islands).
Accreditation by Middle States is an important attribute of Strayer University.
Colleges and universities depend on accreditation when 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 quality educational
standards. Moreover, institutional accreditation is necessary to qualify for
eligibility for federal student financial assistance. Middle States reaffirmed
our 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
accreditor's region. Although the home region is solely responsible for final
accreditation actions, as we open campuses in regions outside the Middle States
region, the host regional accreditors also will participate in the accreditation
process of such expansion operations.
STATE LICENSURE
We are authorized to offer our programs, including those offered through
Strayer University Online, by the applicable educational regulatory agencies in
all states where our campuses and Strayer University Online facilities are
located. We are dependent upon the authorization of each state where we are
physically located to allow us to operate and to grant degrees or diplomas to
students in those states. We are subject to extensive regulation in each of the
five jurisdictions (the District of Columbia, Virginia, Maryland, North Carolina
and Tennessee) in which we currently maintain campuses, and we will be subject
to similar extensive regulation in those additional states in which we may
expand our operations in the future. State laws and regulations affect our
operations and may limit our ability to introduce educational programs or
establish new campuses. We are required by the Higher Education Act to maintain
state licensure in each state where we maintain a campus that participates in
Title IV programs.
OTHER APPROVALS
We are 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 veterans. In addition, we are authorized by the
Immigration and Naturalization Service (the "INS") of the U.S. Department of
Justice to admit international students for study in the United States subject
to applicable guidelines. The INS, working with the Department of State, is in
the process of instituting a mandatory electronic reporting system for schools
that enroll international students.
FINANCING STUDENT EDUCATION
Students finance their Strayer University education in a variety of ways.
A significant number of students utilize federal financial aid. In addition,
many of our 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 and has provided for
a tax deduction for interest
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on student loans and exclusions from income of certain tuition reimbursement
amounts. We also offer a variety of grants, loans (including loans under the SEL
Program), scholarships and work-study programs as financing options for our
students.
In 2001, approximately 44% of Strayer University's students participated
in one or more Title IV programs. A substantial portion (approximately 55% in
2001) of our revenues was derived from tuition financed under Title IV programs.
Our participation in financial aid programs is designed to assist
eligible students whose financial resources are inadequate to meet the cost of
education. Federal student aid is awarded on the basis of financial need,
generally defined under the Higher Education Act 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.
The Higher Education Act addresses an institution's return-of-funds
policy with regard to Title IV programs. Under the Act, 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. An institution must return
required funds no later than 30 days after the date the institution determines a
student withdrew. If such payments are not timely made, an institution is
subject to adverse action, including the submission of a letter of credit equal
to 25% of the refunds the institution should have made in its most recent fiscal
year. Strayer believes that Strayer University's return-of-funds policy and
practice is consistent with the current Higher Education Act.
TITLE IV PROGRAMS
Strayer University maintains eligibility for its students to participate
in the following Title IV programs:
o Federal Pell Grants. Grants under the Federal Pell Grant ("Pell") program
are available to eligible students based on financial need and other
factors.
o 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.
o 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
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 student'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.
o 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. Strayer University has not originated any loans
under this program, but utilizes other Title IV loan programs.
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OTHER FINANCIAL AID PROGRAMS
In addition to Strayer University's own student loan and scholarship
programs, eligible students at Strayer 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, Strayer University
must comply with specific standards and procedures set forth in the Higher
Education Act and the regulations issued thereunder by the Department of
Education. An institution must, among other things, be authorized by each state
within which it is physically located to offer its educational programs and
maintain institutional accreditation 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, Strayer 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 Strayer University's
campuses in the aggregate rather than on an individual basis. Strayer University
and each of its campuses are currently certified to participate in Title IV
programs.
Congress reauthorizes the Higher Education Act approximately every five
years with the next Congressional review scheduled to take place in 2003. 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. This, in turn, could lead to lower enrollments at Strayer University
or require Strayer University to increase its reliance upon alternative sources
of student financial aid. Given the significant percentage of Strayer
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
Strayer University's students could have a material adverse effect on Strayer.
In addition, the regulations applicable to Strayer University have been subject
to frequent revisions. If Strayer University were not to continue to comply with
such regulations, such non-compliance may affect the operations of the
University and its ability to participate in Title IV programs. Certain elements
of the regulations applicable to Strayer University are described below.
INCREASED REGULATORY SCRUTINY
The 1992 amendments to the Higher Education Act 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 amendments to the Higher Education Act 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.
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 comply with all
applicable Title IV program regulations, 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, must submit in a timely manner all reports
and financial statements required by the regulations and must not otherwise
appear to lack administrative capability.
14
PROVISIONAL CERTIFICATION
In certain circumstances, including a change in ownership resulting in a
change of control, the Department of Education may certify an 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 seek to
revoke the institution's certification to participate in Title IV programs with
the institution having fewer due process protections than if it were fully
certified.
THIRD PARTY SERVICERS
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. Strayer 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 Strayer University's
participation in Title IV programs, such as certifying FFEL Program loan
applications, preparing reports from Strayer University to the Department of
Education, issuing payments for the Pell and campus-based programs and issuing
and collecting Perkins loans.
FINANCIAL RESPONSIBILITY
The Higher Education Act and Department of Education regulations
establish extensive standards of financial responsibility that institutions such
as Strayer University must satisfy in order 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.
Department of Education standards utilize a complex formula to assess
financial responsibility. The standards focus on three financial ratios: (1)
equity ratio (which measures the institution's capital resources, ability to
borrow and financial viability); (2) primary reserve ratio (which measures the
institution's financial viability and liquidity); and (3) 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. Strayer 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. Strayer therefore believes that Strayer University
meets the Department of Education's financial responsibility standards.
STUDENT LOAN DEFAULTS
Under the Higher Education Act, 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. For each federal fiscal year, a rate of student defaults (known
as a "cohort default rate") is calculated for each institution by determining
the rate at which borrowers who become subject to their repayment obligation in
that federal fiscal year default by the end of the following federal fiscal
year. The Department calculates a single cohort default rate for each federal
fiscal year that includes all current or former student borrowers at the
institution who commenced repayment on any FFEL Program or Direct Loan Program
loan during that year.
Under the Department's regulations regarding cohort default rates, if the
Department notifies an institution that its three most recent cohort default
rates are each 25 percent or greater, the institution's
15
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, as well as 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 subject to closer review by the Department of Education
and may be subject to summary adverse action if it violates Title IV program
requirements. Strayer University's cohort default rates on FFEL Program loans
for the 1998, 1999, 2000 federal fiscal years, the three most recent years for
which this information is available, were 12.1%, 5.6% and 4.7% respectively. The
average cohort default rates for for-profit institutions nationally were 11.4%,
9.3% and 9.4% in fiscal years 1998, 1999 and 2000, respectively.
THE "90/10 RULE"
Under what is commonly referred to as the "90/10 Rule," the Higher
Education Act provides that for-profit institutions, such as Strayer 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 described in the regulations. A for-profit institution that
violates the "90/10 Rule" loses its eligibility to participate in Title IV
programs for at least one year. During 2001, Strayer 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 Higher Education Act, the
institution, subject to certain exceptions, may not 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, admissions or financial
aid awarding activity. The Department of Education recently published revised
regulations, to clarify the incentive payment rule and provide a number of "safe
harbors". 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 Strayer University's present or former employee
compensation and third-party contractual arrangements, Strayer University
believes that its employee compensation and third-party contractual arrangements
comply with the incentive compensation provisions of the Higher Education Act.
DISTANCE LEARNING AND THE "50% RULES"
Strayer University offers essentially all of its existing degree and
diploma programs through Strayer University Online, delivering instruction via
internet-based telecommunications from Strayer's Distance Learning Center in
Lorton, Virginia. Strayer University Online has been approved by the applicable
regulatory agencies in all states where our campuses and Strayer University
Online facilities are located. During the fall 2002 quarter, Strayer University
had 6,822 students taking courses online, 5,401 of whom took classes solely
through Strayer University Online.
The Higher Education Act excludes from Title IV program participation
institutions at which more than 50% of the institution's courses are offered by
correspondence or 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
16
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 addition, a student is not eligible for Title IV program funds
for a correspondence course unless such course is at least one academic year in
length or part of a program leading to an associate, bachelor or graduate
degree. The Higher Education Act states that a student enrolled in a course of
instruction at an institution like Strayer University, where at least half of
the programs lead to a degree 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
traditional 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% rules, 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. Strayer University's policy is to ensure that it
remains in compliance with the 50% rules by monitoring its course offerings and
ensuring that the number of courses offered through Strayer University Online
will not equal or exceed one-half of the total number of courses offered by
Strayer University, calculated as set forth above. Strayer University does not
offer traditional correspondence courses.
COMPLIANCE REVIEWS
Strayer University is subject to announced and unannounced compliance
reviews and audits by various external agencies, including the Department of
Education, its Office of Inspector General, state licensing agencies, guaranty
agencies and accrediting agencies. The Higher Education Act and Department of
Education regulations also require an institution to submit annually a
compliance audit of its administration of the Title IV Programs conducted by an
independent certified public accountant in accordance with Government Auditing
Standards and the Office of Inspector General audit guide.
POTENTIAL EFFECT OF REGULATORY VIOLATIONS
If Strayer University fails to comply with the regulatory standards
governing Title IV programs, the Department of Education could impose one or
more sanctions, including transferring Strayer University to the reimbursement
or cash monitoring system of payment, seeking to require repayment of certain
Title IV funds, requiring the University to post a letter of credit in favor of
the Department of Education as a condition for continued Title IV certification,
taking emergency action against the University, referring the matter for
criminal prosecution or initiating proceedings to impose a fine or to limit,
condition, suspend or terminate the participation of the University in Title IV
programs. In addition, Strayer University's guaranty agencies could initiate
proceedings to limit, suspend or terminate Strayer 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 Strayer University
does not believe any such sanctions or proceedings are presently contemplated,
if such sanctions or proceedings were imposed against Strayer University and
resulted in a substantial curtailment of the University's participation in Title
IV programs, Strayer University would be materially and adversely affected.
If Strayer 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 Strayer 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. Strayer 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 Strayer
17
University to participate in Title IV programs would be expected to have a
material adverse effect on Strayer University even if it could arrange or
provide alternative sources of revenue or student financial aid.
RESTRICTIONS ON ADDING LOCATIONS AND EDUCATIONAL PROGRAMS
State requirements and accrediting agency standards may in certain
instances limit the ability of Strayer 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. In North Carolina, new locations and programs must
be approved by both the University of North Carolina Board of Governors and (for
non-degree programs) the North Carolina Community College System. 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 Strayer University or its expansion
plans.
The Higher Education Act requires for-profit 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
additional locations that are exempt from the two-year rule. Such additional
locations may immediately qualify for participation in the Title IV programs,
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. Strayer University's expansion plans
assume its continued ability to establish new campuses as additional locations
of Strayer 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 Strayer University or an existing
campus, or the failure of Strayer University or a new campus to obtain state
authorization or accreditation, would render Strayer University ineligible to
participate in Title IV programs in that state or at that location.
The Department of Education regulations require institutions to report to
the Department of Education 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 of
Education, 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 without
having obtained any necessary Department of Education approval may be subject to
administrative repayments and other sanctions. Strayer does not believe that the
Department of Education's regulations will create significant obstacles to
Strayer University's plans to add new campuses.
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, a degree-granting
institution
18
such as Strayer is not obligated to obtain Department of Education approval of
additional programs that lead to an associate, bachelor, professional or
graduate degree at a level already awarded. Similarly, an institution is not
required to obtain advance approval for new programs that prepare 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. Strayer does not believe
that the Department of Education's regulations will create significant obstacles
to Strayer University's plans to add new programs.
CHANGE IN OWNERSHIP RESULTING IN CHANGE OF CONTROL
Many states 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. Strayer 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 Higher Education Act 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 Higher Education Act provides that the Department of Education may
temporarily, provisionally certify an institution seeking approval of a change
of ownership and control based on preliminary review by the Department of
Education of a materially complete application received by the Department of
Education within ten business days after the transaction. The Department of
Education may continue such temporary, provisional certification on a
month-to-month basis until it has rendered a final decision on the institution's
application. If the Department of Education determines to approve the
application after a change in ownership and control, it issues a provisional
certification, which extends for a period expiring not later than the end of the
third complete award year following the date of provisional certification. The
Higher Education Act 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 Strayer, the Department of Education
regulations implementing the Higher Education Act define a change in ownership
resulting in a change of control as occurring when a person acquires ownership
and control of a corporation such that the corporation is required to file a
Form 8-K with the Securities and Exchange Commission ("SEC") notifying that
agency of the change of control. The regulations also provide that a change in
ownership and control of a publicly traded corporation occurs if a person who is
a controlling stockholder of the corporation ceases to be a controlling
stockholder. A controlling stockholder is a stockholder who holds or controls
through agreement both 25% or more of the total outstanding voting stock of the
corporation and more shares of voting stock than any other stockholder.
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. Strayer University currently has INS approval to admit
foreign students for U.S. study, subject to applicable regulations.
Pursuant to federal law providing benefits for veterans and reservists,
Strayer University is approved for education of veterans and members of the
selective reserve and their dependents by the state
19
approving agency in the District of Columbia, Maryland, North Carolina 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 Strayer's
self-tender offer to repurchase common shares and the sale of its Series A
Preferred Stock to New Mountain Partners, L.P. (a private equity fund managed by
New Mountain Capital, LLC) and MidOcean Partners, L.P. (formerly DB Capital
Investors, L.P.) in March 2001, Strayer 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 May 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.
If Strayer 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 Strayer 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 Strayer
University's operations. A change that required approval by a state regulatory
authority, Middle States or a federal agency could also delay Strayer
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 Strayer University's flexibility in
future financing or acquisition transactions.
ADDITIONAL INFORMATION
We maintain a website at http://www.strayereducation.com. The information
on our website is not incorporated by reference in this Annual Report on Form
10-K and our web address is included as an inactive textual reference only. We
make available, free of charge through our website, our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
20
ITEM 2. PROPERTIES.
As of December 31, 2002, we have 23 campuses and six other properties,
seven of which are owned and 22 of which are leased. The table below sets forth
certain information regarding each of the Company's properties at December 31,
2002 (except as otherwise noted):
CAMPUSES (23)
- -------------
APPROXIMATE AREA INITIAL LEASE TERM
LOCATION IN SQUARE FEET YEAR EXPIRES (1)
- -------- -------------- ----------------
Alexandria, VA ...................................... 22,000 Facility is owned
Anne Arundel, MD .................................... 17,000 2004
Arlington, VA ....................................... 25,000 2022
Chesapeake, VA ...................................... 21,000 2011
Charlotte (North), NC ............................... 12,500 2007
Charlotte (South), NC ............................... 12,500 2007
Chesterfield, VA .................................... 20,000 2011
Fredericksburg, VA .................................. 17,500 2006
Henrico County (Glen Allen, VA) ..................... 20,800 Facility is owned
Loudoun (Ashburn, VA) .............................. 30,000 Facility is owned
Manassas, VA ........................................ 20,800 Facility is owned (2)
Memphis, TN ......................................... 13,000 2008
Montgomery County (Germantown, MD) .................. 18,000 2005
Nashville, TN ....................................... 13,000 2008
Newport News, VA .................................... 21,000 2011
Owings Mills, MD .................................... 15,000 2005
Prince George's County (Suitland, MD) ............... 21,400 2003
Cary, NC ............................................ 12,500 2007
Takoma Park (Washington, D.C.) ...................... 21,800 Facility is owned
Washington, D.C. .................................... 33,000 Facility is owned (2)(3)
White Marsh (Baltimore, MD) ......................... 20,000 2010
Woodbridge, VA ...................................... 20,800 Facility is owned (2)
Raleigh, NC ......................................... 12,000 2010
OTHER PROPERTIES (6)
- --------------------
APPROXIMATE AREA CURRENT LEASE TERM YEAR
LOCATION IN SQUARE FEET EXPIRES (1)
- -------- -------------- -----------
Corporate Headquarters (Arlington, VA) .............. 7,000 2012
Corporate Headquarters (Rosslyn, VA) ................ 8,000 2022
Jessup, MD .......................................... 5,100 2006
Newington, VA ....................................... 5,000 2004
Strayer University Online (Lorton, VA) .............. 16,200 2005
Washington, D.C. Library/Annex ...................... 12,200 2006
- ------------
(1) Facility leases typically have renewal options.
(2) Leased in 2001 and acquired in January 2002.
(3) The Company has made arrangements to sell this building which would
result in leasing additional space at the existing Library Annex building
for this campus.
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
2002.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our 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
---- --- -----
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
2002:
First Quarter ............. $ 52.31 $ 42.30 $ 49.10
Second Quarter ............ $ 66.45 $ 48.03 $ 63.60
Third Quarter ............. $ 63.62 $ 47.10 $ 59.49
Fourth Quarter ............ $ 62.93 $ 47.34 $ 57.50
The last sales price of our Common Stock on March 24, 2003, as reported
on the Nasdaq National Market, was $56.62 per share. As of March 24, 2003, there
were 10,652,412 shares of Common Stock outstanding, and 78 holders of record. In
addition, there exist a number (approximately 4,500 as of March 24, 2003) of
institutional and other holders of Common Stock whose shares are held in nominee
accounts by brokers. On March 24, 2003, we also had 3,792,913 shares of Series A
Convertible Redeemable Preferred Stock, which were convertible (as of that date)
into the same number of shares of Common Stock. We also had outstanding options
to purchase 1,205,000 shares of Common Stock as of March 24, 2003.
We have established a policy of declaring quarterly cash dividends at the
rate of $0.065 per share ($0.26 annually) on our Common Stock. Consistent with
this policy, we have paid Common Stock dividends in such amount on a quarterly
basis for more than the past two years. Whether to declare dividends and the
amount of dividends payable in the future will be reviewed periodically by our
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.
In 2001, we issued our Series A Convertible Redeemable Preferred Stock,
the terms of which are described in detail in Note 6 to the Consolidated
Financial Statements below. From May 15, 2001 until May 15, 2006, dividends on
these preferred shares accrue at an annual rate of 7%, with 3.5% payable in cash
when the dividend is declared and the rest accrued in the form of additional
shares and compounding quarterly until the Series A Convertible 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 are
paid in cash when the dividend is declared. Commencing after May 15, 2004, the
Company may effectively cause conversion into common stock of our Series A
Convertible Redeemable Preferred Stock if our common stock trades at or above
$52.00 per share for 20 consecutive days. In November 2002, 2.3 million shares
of Series A Convertible Redeemable Preferred Stock were converted into shares of
common stock on a one for one basis and sold in a secondary public offering at
$52.00 per share. The Company received no proceeds from the offering.
Set forth in the table below is information pertaining to securities
authorized for issuance under our equity compensation plans. There are options
but no warrants or other rights existing under these plans.
22
EQUITY COMPENSATION PLAN INFORMATION
(AS OF DECEMBER 31, 2002)
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding remaining available
Plan Category warrants and rights options, warrants and rights for future issuance
------------- ------------------- ---------------------------- -------------------
1. Equity compensation plans
previously approved by
security holders
A. 1996 Stock Option Plan as
amended at the May 2001
Annual Shareholders' 970,000 $37.09 579,405
Meeting
2. Equity compensation plans not
previously approved by
security holders - - -
Total 970,000 $37.09 579,405
In February 2003, an additional 235,000 options were granted to key
executives under the 1996 Stock Option Plan (as amended) increasing the total
number of common shares to be issued upon exercise of options from 970,000 to
1,205,000. The weighted average exercise price of these additional options is
$53.61.
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 and operating data. The financial
information has been derived from our consolidated financial statements.
The information set forth below is qualified by reference to and should
be read in conjunction with our consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other information included elsewhere or incorporated
by reference in this annual report.
23
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in thousands, except per share, percentage, enrollment and campus data)
INCOME STATEMENT DATA:
Total Revenues $ 62,872 $ 69,776 $ 78,214 $ 92,876 $116,710
Costs and expenses:
Instruction and educational support 22,355 25,082 28,187 33,699 41,601
Selling and promotion 5,923 7,765 8,480 12,576 16,773
General and administration 8,387 9,405 10,620 13,094 17,107
------ ------ ------ ------ ------
36,665 42,252 47,287 59,369 75,481
------ ------ ------ ------ ------
Income from operations 26,207 27,524 30,927 33,507 41,229
Income before income taxes 29,387 31,826 35,683 37,298 42,514
Net income 17,947 19,326 21,709 22,809 25,784
Preferred stock dividends and accretion -- -- -- 5,010 7,344
------ ------ ------ ------ ------
Net income available to common stockholders $ 17,947 $ 19,326 $ 21,709 $ 17,799 $ 18,440
======== ======== ======== ======== ========
NET INCOME PER SHARE:
Basic $1.15 $1.25 $1.42 $1.62 $2.14
===== ===== ===== ===== =====
Diluted $1.12 $1.23 $1.41 $1.55 $1.78
===== ===== ===== ===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 15,626 15,506 15,324 10,970 8,617
====== ====== ====== ====== =====
Diluted (a) 16,063 15,711 15,451 14,737 14,516
====== ====== ====== ====== ======
OTHER DATA:
EBITDA (b) $ 27,832 $ 29,418 $ 32,990 $ 36,150 $ 44,871
EBITDA as % of revenue 44.3% 42.2% 42.2% 38.9% 38.4%
Depreciation and amortization $ 1,625 $ 1,894 $ 2,063 $ 2,643 $ 3,642
Capital expenditures $ 7,392 $ 4,851 $ 4,388 $ 6,274 $17,113(c)
Cash dividends per common share $ 0.23 $ 0.24 $ 0.25 $ 0.26 $ 0.26
Enrollment (d) 10,449 11,504 12,096 14,009 16,532
Campuses (e) 11 13 14 17 20
AT DECEMBER 31,
---------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $19,536 $13,172 $26,198 $ 58,705 $ 49,135
Working capital (f) 23,363 18,170 26,742 49,846 55,901
Total assets 97,146 98,096 119,139 110,488 140,124
Long-term liabilities 330 141 -- 763 2,055
Total liabilities 15,501 17,035 21,395 29,513 39,942
Series A Convertible Redeemable
Preferred Stock -- -- -- 148,347 93,807
Total stockholders' equity (deficit) 81,645 81,061 97,744 (67,372) 6,375
24
- ------------
(a) Diluted weighted average shares outstanding reflect the issuance of the
Series A Convertible Redeemable Preferred Stock in May 2001, accrued
in-kind dividends on and assumed conversion of the Series A Convertible
Redeemable Preferred Stock and outstanding options (using the Treasury
Stock Method), and the 2.3 million Series A Convertible Redeemable
Preferred shares converted into common shares in November 2002.
(b) EBITDA is calculated by adding back depreciation and amortization to
income from operations. We believe that EBITDA serves as a financial
analysis tool for measuring and comparing financial information such as
core profitability, interest coverage and leverage. EBITDA should not be
considered by the reader as an alternative to net income or other cash
flow measures determined under generally accepted accounting principles
as an indicator of our performance or liquidity. EBITDA as disclosed in
this table may not be comparable to similarly titled amounts disclosed by
other companies.
(c) Reflects the purchase for $12 million of three previously leased campus
facilities in January 2002.
(d) Reflects student enrollment as of the beginning of the fall academic term
for each year indicated.
(e) Reflects number of campuses in operation at the end of each period
indicated.
(f) Working capital is calculated by subtracting current liabilities from
current assets.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH "SELECTED
HISTORICAL FINANCIAL AND OTHER INFORMATION," OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO THE "CAUTIONARY NOTICE REGARDING FORWARD
LOOKING STATEMENTS" AND THE OTHER INFORMATION APPEARING ELSEWHERE, OR
INCORPORATED BY REFERENCE, IN THIS ANNUAL REPORT.
BACKGROUND AND OVERVIEW
We are an education services holding company that owns Strayer University
and Education Loan Processing, Inc. ("ELP"). The University is an institution of
higher education which as of December 31, 2002, offered undergraduate and
graduate degree programs at 20 campuses in Maryland, Virginia, North Carolina
and Washington, D.C. and worldwide through Strayer University Online. ELP
administers Strayer's education loan programs.
In May 2001, we issued $150 million of Series A Convertible Redeemable
Preferred Stock. We used the $150 million, together with approximately $36.4
million of cash and marketable securities, to repurchase 7,175,000 shares of our
outstanding common stock through a tender offer open to all shareholders. As our
common stock subsequently traded above $25.00 per share, only our then chief
executive officer and majority stockholder tendered at $25.00 per share (which
he had agreed to do by contract).
As set forth below, enrollment (measured by fall term to fall term),
full-time tuition rates, revenues, operating income and net income have all
increased in each of the last three years.
25
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
---- ---- ----
(in thousands, except percentage, enrollment, tuition per credit hour and earnings per share data)
Fall term enrollment ..................................................... 12,096 14,009 16,532
% Change from prior year ................................................. 5.1% 15.8% 18.0%
Full-time tuition (per credit hour) ...................................... $ 210.00 $ 220.50 $ 231.50
% Change from prior year ................................................. 5.0% 5.0% 5.0%
Revenues ................................................................. $ 78,214 $ 92,876 $116,710
% Change from prior year ................................................. 12.1% 18.7% 25.7%
Operating Income ......................................................... $ 30,927 $ 33,507 $ 41,229
% Change from prior year ................................................. 12.4% 8.3% 23.0%
Net Income ............................................................... $ 21,709 $ 22,809 $ 25,784
% Change from prior year ................................................. 12.3% 5.1% 13.0%
Diluted earnings per share ............................................... $ 1.41 $ 1.55 $ 1.78
% Change from prior year ................................................. 14.6% 9.9% 14.8%
Strayer 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, placement examination fees and "no-show" fees related to
students who fail to attend a course and do not officially withdraw. Beginning
in 1998, the University contracted out its bookstore operations to a third
party.
Strayer 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. Our bad debt expense as a percentage of revenue for the
years ended December 31, 2000, 2001 and 2002 was 2.7%, 1.7% and 1.5%,
respectively.
Strayer University's expenses consist of instruction and educational
support expenses, selling and promotion 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 and academic
administrators. 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 corporate offices.
Selling and promotion 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 consists primarily of earnings and realized
gains on investments.
26
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" discusses our 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,
valuation of deferred tax assets, 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 are
its more significant judgments and estimates used in the preparation of its
consolidated financial statements. 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 recorded as unearned tuition. We record estimates for our allowance
for uncollectible accounts for tuition receivable from students and for loan
loss reserves from student loans granted. If the financial condition of our
students were to deteriorate, resulting in impairment of their ability to make
required payments for tuition or loans payable to us, additional allowances and
loan reserves may be required. We record estimates for our accrued expenses and
income tax liabilities. Should actual results differ from our estimates,
revisions to our 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,
---------------------------------
2000 2001 2002
---- ---- ----
Revenues ................................... 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Instruction and educational support ...... 36.0 36.3 35.6
Selling and promotion .................... 10.9 13.5 14.4
General and administration ............... 13.6 14.1 14.7
---- ---- ----
Income from operations ..................... 39.5 36.1 35.3
Investment and other income ................ 6.1 4.1 1.5
Secondary Offering expenses ................ -- -- 0.4
---- ---- ----
Income before income taxes ................. 45.6 40.2 36.4
Provision for income taxes ................. 17.8 15.6 14.3
---- ---- ----
Net income ................................. 27.8% 24.6% 22.1%
===== ===== =====
Tax rate ................................... 39.2% 38.8% 39.4%
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues increased 26% from $92.9 million in 2001 to $116.7
million in 2002 due to an increase in the number of students and a 5% tuition
increase in 2002.
Instruction and educational support expenses. Instruction and educational
support expenses increased 23% from $33.7 million in 2001 to $41.6 million in
2002 due to an increase in faculty to support increased enrollment, salary
increases and the addition of three new campuses in North Carolina.
27
Selling and promotion expenses. Selling and promotion expenses increased
33% from $12.6 million in 2001 to $16.8 million in 2002 principally due to
increased advertising costs and the addition of admissions personnel.
General and administration expenses. General and administration expenses
increased 31% from $13.1 million in 2001 to $17.1 million in 2002 principally
due to the addition of administrative personnel in order to support increased
enrollments and the addition of three new campuses in North Carolina.
Income from operations. Income from operations increased 23% from $33.5
million in 2001 to $41.2 million in 2002 due to the aforementioned factors.
Investment and other income. Investment and other income decreased 53%
from $3.8 million in 2001 to $1.8 million in 2002 due to lower interest rates in
2002 as well as a gain of $0.9 million generated in 2001 when marketable
securities were liquidated to help fund the Company's share repurchase.
Provision for income taxes. Income tax expense increased 15% from $14.5
million in 2001 to $16.7 million in 2002 primarily due to the increase in income
before taxes attributable to the factors discussed above. In addition, our
effective tax rate increased in 2002 primarily due to secondary offering costs
which were, for the most part, not deductible for tax purposes.
Net income. Net income increased 13% from $22.8 million in 2001 to $25.8
million in 2002 because of the factors discussed above.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Revenues increased 19% 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 20% from $28.2 million in 2000 to $33.7 million in
2001. A salary increase, the addition of new faculty due to enrollment growth
and the addition of three new campuses contributed to the increase.
Selling and promotion expenses. Selling and promotion expenses increased
48% from $8.5 million in 2000 to $12.6 million in 2001 principally due to an
increase in advertising costs, specifically television advertising, increased
advertising for the new campus openings and our Strayer University Online
activities, increases in the 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% from $10.6 million in 2000 to $13.1 million in 2001 principally
due 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 marketing director.
Income from operations. Income from operations increased 8% from $30.9
million in 2000 to $33.5 million in 2001 due to the aforementioned factors.
Investment and other income. Investment and other income decreased 20%
from $4.8 million in 2000 to $3.8 million in 2001. We liquidated a majority of
our marketable securities in the first quarter of 2001 to help fund our
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 4% 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
offset by a slightly lower tax rate.
Net income. Net income increased 5% from $21.7 million in 2000 to $22.8
million in 2001 because of the factors discussed above.
SEASONALITY
Our quarterly results of operations tend to vary significantly within a
year because of student enrollment patterns. Enrollment generally is highest in
the fourth quarter, or fall term, and lowest in the
28
third quarter, or summer term. In 2002, enrollments at the beginning of
the winter, spring, summer and fall academic terms were 14,067, 14,335, 11,171
and 16,532, respectively.
Costs generally are not affected by the seasonal factors and do not vary
significantly on a quarterly basis.
The following table sets forth our revenues on a quarterly basis for the
years ended December 31, 2000, 2001 and 2002.
QUARTERLY REVENUES
(DOLLARS IN THOUSANDS)
2000 2001 2002
---------------------------- --------------------------- ---------------------------
THREE MONTHS ENDED AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------------ ------ ------- ------ ------- ------ -------
March 31 ........................ $ 21,128 27% $ 23,644 25% $ 29,698 25%
June 30 ......................... 20,325 26 23,826 26 29,823 26
September 30 .................... 14,691 19 18,222 20 23,026 20
December 31 ..................... 22,070 28 27,184 29 34,163 29
-------- ---- --------- ---- --------- ---
Total for Year .................. $ 78,214 100% $ 92,876 100% $ 116,710 100%
======== ==== ======== ==== ========= ====
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had cash, cash equivalents and marketable
securities of $67.3 million compared to $58.7 million at December 31, 2001.
Beginning in the second quarter of 2002, we began investing in a diversified no
load, short-term, investment grade corporate bond fund in an effort to generate
a somewhat higher yield on our short-term, liquid assets than our holdings in
overnight and money market funds, but take only limited credit and interest rate
risk. As of December 31, 2002, we had invested a total of $18 million in this
fund. At December 31, 2002, the 433 issues in this fund had an average credit
rating of Aa3, an average maturity of 2.5 years and an average duration of 2.1
years, as well as an average yield of 3.75%. We had no debt as of December 31,
2002 or December 31, 2001. In 2002, we generated $31.7 million from operating
activities. Capital expenditures for 2002 were $17.1 million, of which $12
million was in the first quarter for the purchase of three campus facilities.
In 2002, we also paid $7.4 million in dividends, $5.2 million to our
preferred stockholders and $2.2 million to our common stockholders.
In 2002, bad debt expense decreased from 1.7% of revenue in 2001 to 1.5%
in 2002. Days sales outstanding, adjusted to exclude tuition receivable related
to future quarters, was seven days in 2002, unchanged compared to the same
period in 2001.
In May 2001, the Company issued the Series A Convertible 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.
Currently, we invest our cash in bank overnight deposits, money market
funds and the short-term corporate bond fund described above. In addition, we
have available two $10 million credit facilities from banks under which there is
no outstanding balance drawn. We believe that existing cash and cash
equivalents, the short-term corporate bond fund, cash generated from operating
activities, and if necessary, cash borrowed under the credit facilities, will be
sufficient to meet our cash requirements for at least the next 12 months.
29
CASH AND MARKETABLE SECURITIES
(DOLLARS IN MILLIONS)
AT DECEMBER 31,
-------------------------------------
2000 2001 2002
---- ---- ----
Cash and cash equivalents ............ $ 26.2 $ 58.7 $ 49.2
Marketable securities ................ 49.9 -- 18.1
---- ---- ----
Total ................................ $ 76.1 $ 58.7 $ 67.3
====== ====== ======
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
---- ---- ----
Investment and other income .......... $ 4.8 $ 3.8 $ 1.8
====== ====== ======
The table below sets forth our contractual commitments associated with
operating leases and preferred stock cash dividends as of December 31, 2002.
Although they have historically been paid by the Company, common stock dividend
payments are not a contractual commitment and therefore have been excluded from
the table.
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
------------------------------------------------------
WITHIN AFTER 5
1 YEAR 2-3 YEARS 4-5 YEARS YEARS
------ --------- --------- -----
Operating Leases ........... $ 5,464 $ 8,803 $ 6,431 $ 15,534
Preferred Stock Cash
Dividends ............... 3,257 6,514 5,756 13,068
----- ----- ----- ------
Total ...................... $ 8,721 $ 15,317 $ 12,187 $ 28,602
======= ======== ======== ========
TOTAL POTENTIAL SHARE ISSUANCE
Shares used to compute diluted earnings per share include common shares
issued and outstanding, the assumed conversion of shares of Series A Convertible
Redeemable Preferred Stock outstanding or accrued and the assumed exercise of
issued stock options using the treasury stock method. As of December 31, 2002,
our total current and potential shares outstanding are as follows:
CURRENT
- ---------------
Common shares outstanding at December 31, 2002 ....................................................... 10,652,412
Series A Convertible Redeemable Preferred Stock, convertible on a 1:1 basis,
outstanding or accrued at December 31, 2002......................................................... 3,758,456
Authorized, issued and outstanding options using Treasury Stock Method ............................... 198,111
-----------
Subtotal ............................................................................................. 14,608,979
POTENTIAL
- ---------------
Accrual of in-kind dividends on Series A Convertible Redeemable Preferred Stock through May 2006 ..... 563,501(a)
Total issued stock options, less options accounted for using the Treasury Stock Method above ......... 771,889
Authorized but unissued options....................................................................... 579,405
----------
Subtotal.............................................................................................. 1,914,795
---------
Total current and potential........................................................................... 16,523,774
- ------------
(a) The actual number of preferred stock dividends may be smaller as we
have the right to redeem, and thereby cause redemption or conversion of,
our Series A Convertible Redeemable Preferred Stock into common stock if
our common stock price trades above $52.00 per share for 20 consecutive
trading days after May 15, 2004.
In February 2003, the Company granted 235,000 stock options to key
executives. These stock option grants do not change the total current and
potential shares of 16,523,774 in the table above.
30
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 bank overnight deposits, money market funds and a
short-term corporate bond fund. The Company has not used derivative financial
instruments in its investment portfolio.
Earnings from investments in bank overnight deposits, money market mutual
funds, and short-term corporate bond funds may be adversely affected in the
future should interest rates decline. The Company's future investment income may
fall short of expectations due to changes in interest rates or the Company may
suffer losses in principal if forced to sell securities that have declined in
market value due to changes in interest rates. As of December 31, 2002, 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.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Strayer Education, Inc.
Report of Independent Accountants............................................................................................ 33
Consolidated Balance Sheets as of December 31, 2001 and 2002................................................................. 34
Consolidated Statements of Income for each of the three years in the period ended December 31, 2002.......................... 35
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2002............ 35
Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended December 31, 2002.. 36
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2002...................... 37
Notes to Consolidated Financial Statements................................................................................... 38
Schedule II--Valuation and Qualifying Accounts............................................................................... 53
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
32
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, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, 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
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
February 13, 2003
33
STRAYER EDUCATION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------------
ASSETS 2001 2002
---- ----
Current assets:
Cash and cash equivalents ........................................................ $ 58,705 $ 49,135
Marketable securities available for sale, at fair value ......................... -- 18,121
Tuition receivable, net of allowances for doubtful accounts of $457 and $635 in
2001 and 2002, respectively ................................................... 19,012 25,759
Other current assets ............................................................ 879 773
-------- ---------
Total current assets ...................................................... 78,596 93,788
Student loans receivable, net of allowances for losses ............................. 8,392 9,453
Property and equipment, net ........................................................ 23,100 36,571
Other assets ....................................................................... 400 312
-------- ---------
Total assets .............................................................. $110,488 $ 140,124
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................................ $ 1,882 $ 3,534
Accrued expenses ................................................................ 562 1,181
Income taxes payable ............................................................ 1,247 1,812
Dividends payable ............................................................... 1,855 1,507
Unearned tuition ................................................................ 23,204 29,853
---------- ---------
Total current liabilities ................................................. 28,750 37,887
Deferred income taxes .............................................................. -- 70
Long-term liabilities .............................................................. 763 1,985
---------- ---------
Total liabilities ......................................................... 29,513 39,942
---------- ---------
Commitments and contingencies
Mandatorily redeemable convertible Series A preferred stock, par value $.01;
6,000,000 shares authorized; 5,845,676 and 3,758,456 shares issued and
outstanding in 2001 and 2002, respectively ....................................... 148,347 93,807
Stockholders' equity (deficit):
Common stock, par value $.01; 20,000,000 shares authorized; 8,352,412 and
10,652,412 shares issued and outstanding in 2001 and 2002, respectively ........ 83 107
Additional paid-in capital ....................................................... 1,759 58,868
Retained earnings (accumulated deficit) .......................................... (69,214) (52,674)
Accumulated other comprehensive income ........................................... -- 74
---------- ---------
Total stockholders' equity (deficit) ...................................... (67,372) 6,375
Total liabilities and stockholders' equity (deficit) ...................... $ 110,488 $ 140,124
========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
34
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------------
2000 2001 2002
-------- -------- --------
Revenues ............................................ $ 78,214 $ 92,876 $116,710
-------- -------- --------
Costs and expenses:
Instruction and educational support ............. 28,187 33,699 41,601
Selling and promotion ........................... 8,480 12,576 16,773
General and administration ...................... 10,620 13,094 17,107
-------- -------- --------
47,287 59,369 75,481
-------- -------- --------
Income from operations .......................... 30,927 33,507 41,229
Investment and other income ......................... 4,756 3,791 1,775
Secondary offering expenses ......................... -- -- (490)
-------- -------- --------
Income before income taxes ...................... 35,683 37,298 42,514
Provision for income taxes .......................... 13,974 14,489 16,730
-------- -------- --------
Net income ...................................... $ 21,709 $ 22,809 $ 25,784
Preferred stock dividends and accretion ............. -- 5,010 7,344
-------- -------- --------
Net income available to common stockholders ..... $ 21,709 $ 17,799 $ 18,440
======== ======== ========
Net income per share:
Basic ........................................... $ 1.42 $ 1.62 $ 2.14
Diluted ......................................... $ 1.41 $ 1.55 $ 1.78
Weighted average shares outstanding
Basic ........................................... 15,324 10,970 8,617
Diluted ......................................... 15,451 14,737 14,516
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------------
2000 2001 2002
-------- -------- --------
Net income ......................................................... $ 21,709 $ 22,809 $ 25,784
Other comprehensive income (loss):
Unrealized gains (losses) on investments, net of taxes .......... (136) -- 74
Reclassification adjustment for realized gains included in
net income, net of taxes ...................................... -- (403) --
-------- -------- --------
Comprehensive income .............................................. $ 21,573 $ 22,406 $ 25,858
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
35
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, 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)
Transaction costs for repurchase of common stock . (29) -- (29)
Issuance of common stock for redemption of
preferred stock ................................ 2,300,000 24 57,109 -- -- 57,133
Preferred stock dividends and accretion .......... -- -- -- (7,344) -- (7,344)
Common stock dividends ($0.26 annually per share) -- -- -- (2,321) -- (2,321)
Tax benefit from transaction costs for repurchase
of common stock ................................ -- -- -- 450 -- 450
Net unrealized gains on marketable securities, net
of income tax .................................. -- -- -- -- 74 74
Net income ....................................... -- -- -- 25,784 -- 25,784
---------- ------ -------- ----------- ------ ---------
Balance, December 31, 2002 ......................... 10,652,412 $ 107 $ 58,868 $ (52,674) $ 74 $ 6,375
========== ====== ======== =========== ====== =========
The accompanying notes are an integral part of these consolidated
financial statements.
36
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
2000 2001 2002
---- ---- ----
Cash flows from operating activities:
Net income ............................................................. $ 21,709 $ 22,809 $ 25,784
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred rent ........................................ -- -- (91)
Depreciation and amortization ........................................ 2,063 2,643 3,642
Provision for student loan losses .................................... 172 196 243
Deferred income taxes ................................................ (147) 144 333
Gain on sale of marketable securities ................................ -- (887) --
Changes in assets and liabilities:
Tuition receivable, net .............................................. (267) (3,748) (6,747)
Income taxes payable ................................................. 906 2,600 1,018
Other current assets ................................................. 42 (145) (67)
Other assets ......................................................... 56 -- (50)
Accounts payable ..................................................... 279 23 1,652
Accrued expenses ..................................................... 902 327 619
Unearned tuition ..................................................... 2,612 5,221 6,649
Student loans originated or acquired ................................... (5,499) (7,313) (8,475)
Collections on student loans receivable ................................ 4,475 6,013 7,171
-------- -------- ---------
Net cash provided by operating activities .......................... 27,303 27,883 31,681
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment .................................... (4,388) (6,274) (17,113)
Purchases of marketable securities ..................................... (14,157) -- (18,000)
Maturities of marketable securities .................................... 9,462 50,126 --
-------- -------- ---------
Net cash provided by (used in) investing activities ................ (9,083) 43,852 (35,113)
-------- -------- ---------
Cash flows from financing activities:
Common dividends paid .................................................. (3,756) (3,088) (2,172)
Preferred dividends paid ............................................... -- (1,976) (5,250)
Deferred lease incentives .............................................. -- 763 1,313
Proceeds from exercise of stock options ................................ 591 1,495 --
Repurchase of common stock ............................................. (2,029) (183,046) --
Issuance of Series A Convertible Redeemable Preferred Stock, net ....... -- 146,624 (29)
-------- -------- ---------
Net cash used in financing activities .............................. (5,194) (39,228) (6,138)
Net increase (decrease) in cash and cash equivalents ............... 13,026 32,507 (9,570)
Cash and cash equivalents - beginning of year ............................. 13,172 26,198 58,705
-------- -------- ---------
Cash and cash equivalents - end of year ................................... $ 26,198 $ 58,705 $ 49,135
======== ======== =========
The accompanying notes are an integral part of these consolidated
financial statements.
37
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES.
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, as of December 31, 2002,
twenty campuses in the District of Columbia, Maryland, North Carolina and
Virginia and worldwide via the Internet through Strayer University Online. The
Company has also been approved to offer its programs in Tennessee and
Pennsylvania and plans to open two campuses in each state as well as a second
campus in Raleigh, North Carolina in 2003. With the Company's focus on the
customer, regardless of whether he or she chooses to take classes at a physical
campus or online, we have only one reporting segment.
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 Convertible
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 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 in a tender offer at
$25.00 per share open to all shareholders; as the Company's shares had traded
above $25.00 per share, only the Company's then CEO and majority stockholder
tendered shares. In November 2002, 2.3 million shares of the Series A
Convertible Redeemable Preferred Stock were converted into common stock on a 1
for 1 basis and, pursuant to the Investors' registration rights agreement with
the Company, were sold in a secondary offering of common stock at $52.00 per
share. The Company did not receive any proceeds from the offering.
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 overnight deposits. 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.
MARKETABLE SECURITIES
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 other 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 effective interest method.
38
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 overnight deposits 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. The Company has also been placing its excess cash in a
diversified, short-term, no load corporate bond fund that is classified under
"Marketable Securities."
Tuition receivables are not collateralized; however, credit risk is
minimized as a result of the diverse nature of the University's student base, as
of December 31, 2002, in the District of Columbia, Maryland, Virginia and North
Carolina. 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 less accumulated depreciation.
In accordance with Statement of Financial Accounting Standard No. 144,
"Accounting for the impairment or disposal of long-lived assets", the carrying
values of the Company's assets are re-evaluated when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an impairment loss has occurred based on
expected future cash flows, then a loss is recognized using a fair-value based
model. Through 2002, no such impairment loss had occurred. 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 $2,063,000, $2,643,000 and $3,642,000 for the years ended December
31, 2000, 2001, and 2002, 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.
STOCK OPTIONS
The Company uses the intrinsic-value-based method of accounting for its
stock option plan. Under the intrinsic-value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at grant date over
the amount an employee must pay to acquire the stock. The Company generally
grants stock options with an exercise price equal to or above the market value
of the common stock on the date of grant.
The Black-Scholes option pricing model was used to estimate fair value as
of the date of grant using the following assumptions (there were no new options
granted in 2000.):
39
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2001 2002
---- ----
Dividend Yield 0.7% 0.5%
Risk-Free interest rates 4.75% 4.81%
Volatility 47% 43%
Expected option term (years) 5.3 5.9
Weighted average fair value of options granted $16.68 $23.65
during the year
Had the compensation cost for our stock option plans been determined
based on the fair value at the grant date rather than the intrinsic-value
method, our pro forma amounts would be as follows:
In thousands (except per share) 2000 2001 2002
---- ---- ----
Net income .............................................. $21,709 $22,809 $25,784
Stock-based compensation expense, net of tax ............ 179 1,540 2,722
------- ------- -------
Pro forma net income .................................... $21,530 $21,269 $23,062
======= ======= =======
Net income available to common stockholders ............. $21,709 $17,799 $18,440
Stock-based compensation expense, net of tax ............ 179 1,540 2,722
------- ------- -------
Pro forma net income available to common stockholders ... $21,530 $16,259 $15,718
======= ======= =======
Earnings per share
As reported:
Basic ................................................ $ 1.42 $ 1.62 $ 2.14
Diluted .............................................. 1.41 1.55 1.78
Pro forma:
Basic ................................................ $1.40 $1.48 $1.82
Diluted .............................................. 1.39 1.44 1.59
Pro forma disclosures for stock options accounting may not be
representative of the effects on reported net income in future years.
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):
2000 2001 2002
---- ---- ----
Weighted average shares outstanding used to compute basic earnings per share ....... 15,324 10,970 8,617
Incremental shares issuable upon the assumed conversion of Series A Convertible
Redeemable Preferred Stock ....................................................... -- 3,661 5,713
Incremental shares issuable upon the assumed exercise of stock options ............. 127 106 186
------ ------ ------
Shares used to compute diluted earnings per share .................................. 15,451 14,737 14,516
====== ====== ======
Incremental shares issuable upon the assumed exercise of outstanding
stock options are computed using the Treasury Stock Method.
40
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of expenses during the period reported. 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, 2001 have been
reclassified on the balance sheet to conform to the December 31, 2002
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141"). SFAS 141 supersedes Accounting Principles Board Opinion No. 16
Business Combinations. SFAS 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 FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 142 supersedes
Accounting Principles Board Opinion No. 17, Intangible Assets. SFAS 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. SFAS 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 SFAS 141
and SFAS 142 did not have any affect on the consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), Accounting for Asset Retirement Obligations.
SFAS 143 addressees financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and related asset
retirement costs. SFAS 143 is effective for financial statements with fiscal
year's beginning after June 15, 2002, and is not expected to have a material
impact on our financial statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No 144 ("SFAS 144"), Accounting for the Impairment or Disposal of
Long-Lived Assets, that is applicable to financial statements issued for fiscal
years beginning after December 15, 2001. The FASB's new rules on asset
impairment supersede SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and portions of Accounting
Principles Bulletin Opinion 30, Reporting the Results of Operations. This
Standard provides a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to be met to classify
an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires
41
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The provisions of this Standard did not
have a material effect on the Company's financial position or operating results.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity Including Certain Costs
Incurred in a Restructuring. Under EITF 94-3, a liability for an exit activity
was recognized at the date of an entity's commitment to an exit plan. SFAS 146
required that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS 146 is effective for
exit or disposal activities that are initiated after December 31, 2002 and is
not expected to have a material impact on our financial statements.
In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45")
Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing
disclosure requirement for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. FIN 45
is effective on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. We have adopted the disclosure provisions of this interpretation as of
December 31, 2002 and it did not have a material impact on our consolidated
financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, it requires prominent disclosure about the effects on reported net
income of any entity's accounting policy decisions with respect to stock-based
employee compensation. SFAS 148 is effective for fiscal years ending after
December 15, 2002. The Company adopted the disclosure provisions of SFAS 148 for
the fiscal year ended December 31, 2002, and it did not have a material impact
on our financial statements. We continue to use the intrinsic-value-based method
of accounting for stock-based employee compensation as prescribed by APB Opinion
No. 25.
2. INVESTMENTS - MARKETABLE SECURITIES.
The cost and fair value for investments in marketable securities as of
December 31, 2002 is as follows (in thousands):
2002
GROSS UNREALIZED
COST GAINS FAIR VALUE
---- ----- ----------
Short-term bond fund ... $ 18,000 $ 121 $ 18,121
======== ===== ========
The Company has invested some of its excess cash in a diversified, no
load, short-term, investment grade, corporate bond fund. At December 31, 2002
the 433 issues in this fund had an average credit rating of Aa3, an average
maturity of 2.5 years, an average duration of 2.1 years and an average yield of
3.75%.
The Company held no investments in marketable securities as of December
31, 2001.
42
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT.
The composition of property and equipment as of December 31, 2001 and
2002 is as follows (in thousands):
ESTIMATED USEFUL
2001 2002 LIFE (YEARS)
---- ---- -----------
Land ........................................... $ 2,772 $ 7,334
Buildings and improvements ..................... 9,988 19,970 5-40
Furniture and equipment ........................ 14,229 17,245 5-7
Leasehold improvements ......................... 5,479 5,050 3-10
Vehicles ....................................... 22 22 5
Construction in progress ....................... 14 37 --
-------- --------
32,504 49,658
Accumulated depreciation and amortization ...... (9,404) (13,087)
-------- --------
$ 23,100 $ 36,571
======== ========
During 2001, fully depreciated assets of approximately $3 million were
written off. In addition, $763,000 and $1,313,000 in leasehold improvements,
paid by lessors as lease incentives, were capitalized during 2001 and 2002,
respectively.
4. STUDENT LOANS RECEIVABLE.
The loans receivable under the Strayer Education Loan Program as of
December 31, 2001 and 2002 are as follows (in thousands):
2001 2002
---- ----
Student loans receivable outstanding, including accrued interest ... $ 8,928 $10,056
Allowance for loan losses .......................................... (536) (603)
------- -------
Student loans receivable, net ...................................... $ 8,392 $ 9,453
======= =======
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.
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 employees and directors of
the Company. Options may be granted to eligible employees of the Company at the
discretion of the Board of Directors (or the Compensation Committee of the
Board), at option prices equal to or greater than the fair market value of the
shares at the date of grant. Vesting provisions are at the discretion of the
Board of Directors (or the Compensation Committee of the Board). The maximum
term of the options under the Plan is ten years. Stock option activity for the
years ended December 31, 2000, 2001 and 2002 are as follows:
43
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
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
Grants .......................... 50,000 51.83
Exercises ....................... -- --
Forfeitures ..................... (10,000) 49.33
-------- ------
Balance, December 31, 2002 ......... 970,000 $37.09
======== ======
The number of shares exercisable as of December 31, 2000, 2001 and 2002
are as follows:
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
Exercisable, December 31, 2000 224,703 $ 6.67
Exercisable, December 31, 2001 -- $ --
Exercisable, December 31, 2002 293,330 $35.87
During 2001 and 2002, 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, 2002
was $37.09. The options vest over three to four years with exercise prices
ranging from $33.69 to $61.81. All options granted in 2001 and 2002 expire seven
years from date of grant and have a weighted-average contractual life of 5.4
years as of December 31, 2002.
In February 2003, an additional 235,000 options were granted to key
executives. These options have a weighted average exercise price of $53.61, vest
over three to four years and expire six to eight years from the date of grant.
6. TERMS OF THE SERIES A CONVERTIBLE MANDATORILY REDEEMABLE 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 the Series
A Convertible 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 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. 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.
In November 2002, 2.3 million shares of the Series A Convertible
Redeemable Preferred Stock were converted into common stock on a 1 for 1 basis
and, pursuant to the Investors' registration rights agreement with the Company,
were sold in a secondary offering of common stock at $52.00 per share. The
Company did not receive any proceeds from the offering.
44
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Series A Convertible Redeemable Preferred Stock has the following
material terms:
Authorized
A total of 8 million shares of Preferred Stock, par value $.01, have
been authorized. Of these preferred shares, 6 million shares have been
designated as Series A Convertible Redeemable Preferred Stock including shares
to be reserved for the payment of dividends on the outstanding shares of Series
A Convertible Redeemable Preferred Stock. The original issuance of Series A
Convertible Redeemable Preferred Stock and all quarterly preferred stock
dividends thereon through December 31, 2002 are reflected in the following
table, as reduced to reflect the 2.3 million shares of Series A Convertible
Redeemable Preferred Stock converted into common stock in November 2002:
SERIES A
CONVERTIBLE
REDEEMABLE
PREFERRED STOCK
---------------
AMOUNT
(IN THOUSANDS)
Balance, December 31, 2000 --
Issuance of shares $ 150,000
Issuance costs (3,375)
Dividend-accrue in-kind shares 3,335
Accretion of carrying value (1,613)
---------
Balance, December 31, 2001 $ 148,347
Dividend-accrue in-kind shares 5,080
Shares converted into common shares (57,132)
Accretion of carrying value (2,488)
---------
Balance, December 31, 2002 $ 93,807
==========
In May 2001, 5,769,231 shares of Series A Convertible Redeemable
Preferred Stock were issued. During 2001, the Company recorded 76,445 shares as
accrued in-kind dividends. During 2002, the Company recorded 212,780 shares as
accrued in-kind dividends. In November 2002, 2.3 million shares of the Series A
Convertible Redeemable Preferred Stock were converted on a 1 for 1 basis into
common stock. The number of Series A Convertible Redeemable Preferred Stock
outstanding is 3,758,456 as of December 31, 2002.
Series A Convertible Redeemable Preferred Stock dividends and accretion
are recorded based on an effective yield of 5.43% applied to the carrying value
of the Series A Convertible Redeemable Preferred Stock.
Ranking
The shares of Series A Convertible Redeemable 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 Convertible Redeemable 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 Convertible Redeemable
Preferred Stock are payable as follows:
o From the original issuance date of the Series A Convertible Redeemable
Preferred Stock until May 15, 2006, dividends accrue at an annual rate
of 7.0% of the sum of the liquidation amount,
45
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 accrued in
additional shares and compounding quarterly until the Series A
Convertible Redeemable 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 Convertible Redeemable Preferred Stock are not
entitled to participate in the common stock dividend. However, the
Series A Convertible Redeemable 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 Convertible Redeemable Preferred Stock are
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 Convertible Redeemable 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 Convertible Redeemable 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
Convertible Redeemable Preferred Stock plus 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 five 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 Convertible
Redeemable 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
Convertible Redeemable 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
Convertible Redeemable Preferred Stock.
Voting Rights
Each holder of Series A Convertible Redeemable 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 Convertible Redeemable 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
Convertible Redeemable 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 Convertible Redeemable Preferred Stock outstanding, the approval of the
holders of at least a majority of the Series A Convertible Redeemable Preferred
Stock shall be required to take certain actions including:
o Any reclassification of the Series A Convertible Redeemable 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
Convertible Redeemable Preferred Stock;
46
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
o The authorization, creation, or issuance of additional equity
securities ranking senior to or on a par with the Series A Convertible
Redeemable 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 Convertible Redeemable 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 Convertible Redeemable 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 Convertible Redeemable Preferred Stock in whole or in
part at its discretion. In either case, the redemption price of each share of
Series A Convertible Redeemable 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.
Redemption at the Option of the Holder
The holders of the Series A Convertible Redeemable 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
Convertible Redeemable Preferred Stock may require the Company to redeem all or
a part of that holder's shares of Series A Convertible Redeemable 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.
47
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Convertible Redeemable Preferred Stock, the common stock and other
securities, if any, issuable on conversion of the Series A Convertible
Redeemable 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.
Piggyback Registration
Piggyback 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
piggyback registration rights.
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 Convertible Redeemable Preferred Stock or the common stock into which the
Series A Convertible Redeemable 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 Convertible Redeemable Preferred
Stock, the holders of the Series A Convertible Redeemable 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
48
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A Convertible Redeemable Preferred Stock may elect decreases as the number of
shares of Series A Convertible Redeemable Preferred Stock outstanding decreases
in the following manner:
% OF SERIES A CONVERTIBLE REDEEMABLE
PREFERRED STOCK ORIGINALLY ISSUED AND STILL
OUTSTANDING % OR NUMBER OF 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 Convertible Redeemable Preferred Stock in connection with
a proper redemption request in an amount at least equal to $30 million, the
holders of the Series A Convertible Redeemable 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.
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 Convertible Redeemable 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 the Company's 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 Convertible Redeemable 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,
Virginia, and Newport News, Virginia, during 2001 and in Charlotte, North
Carolina (two campuses), Cary, North Carolina, and corporate offices in
Arlington, Virginia, during 2002, the Company was reimbursed by the lessors for
improvements made to the leased properties in the amount of $763,000 and
$1,313,000 in 2001 and 2002, respectively. 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 five to ten years.
49
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. OTHER EMPLOYEE BENEFIT PLANS.
The Company has a 401(k) plan 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 matching contributions of up to 2% of base compensation
were made by the Company each year, and were $195,000, $205,000 and $304,000 for
the years ended December 31, 2000, 2001 and 2002, 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 2000, 2001 and 2002,
10,297, 6,540 and 7,443 shares, respectively, were purchased in the open market
for employees, at average prices of $23.93, $42.44 and $53.08 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.
As of December 31, 2002, the Company had long-term operating leases for
sixteen of its campuses and other administrative locations. Rent expense was
$4,770,000, $5,533,000 and $5,165,000 for the years ended December 31, 2000,
2001 and 2002, 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 $1,836,600, $1,946,000 and $502,000
for the years ended December 31, 2000, 2001 and 2002, respectively. In February
2002, the Company acquired the Washington D.C., Manassas, Virginia, and
Woodbridge, Virginia, 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 $337,000 in 2002
and expires in 2006.
The rents on the Company's leases are subject to annual increases. The
minimum rental commitments for the Company as of December 31, 2002, are as
follows (in thousands):
TOTAL AMOUNT PAYABLE TO
TOTAL RELATED PARTIES
2003 .................... $ 5,464 $ 348
2004 .................... 4,607 358
2005 .................... 4,196 369
2006 .................... 3,568 156
2007 .................... 2,863 --
Thereafter .............. 15,534 --
------- ------
$36,232 $1,231
======= ======
In addition, the Company has available two $10.0 million credit
facilities from two banks. 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.
50
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES.
The income tax provision for the years ended December 31, 2000, 2001
and 2002 is summarized below (in thousands).
2000 2001 2002
---- ---- ----
Current:
Federal ............. $11,637 $12,123 $13,403
State ............... 2,484 2,222 2,994
------- ------- -------
14,121 14,345 16,397
======= ======= =======
Deferred:
Federal ............. (132) 129 299
State ............... (15) 15 34
------- ------- -------
(147) 144 333
------- ------- -------
$13,974 $14,489 $16,730
======= ======= =======
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, 2001 and 2002 (in thousands):
2001 2002
---- ----
Tuition receivable and student loans ............ $ 387 $ 495
Property and equipment .......................... 140 (373)
Accrued vacation payable ........................ 34 44
Deferred leasing costs .......................... -- 62
Unrealized gains on marketable securities ....... -- (47)
----- -----
Net deferred tax asset .......................... $ 561 $ 181
===== =====
A reconciliation between the Company's statutory tax rate and the
effective tax rate for the years ended December 31, 2000, 2001 and 2002 is as
follows:
2000 2001 2002
---- ---- ----
Statutory federal rate ........................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefits ...... 4.5% 3.9% 4.6%
Other ............................................ (0.3%) (0.1%) (0.2%)
----- ----- ----
Effective tax rate ............................... 39.2% 38.8% 39.4%
===== ===== =====
Cash payments for income taxes were $13,628,000 in 2000, $11,649,000 in
2001 and $15,502,000 in 2002.
51
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED).
Quarterly financial information for 2001 and 2002 is as follows (in
thousands except per share data):
QUARTER
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
2001
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
QUARTER
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
2002
Total revenues ................................. $ 29,698 $ 29,823 $ 23,026 $ 34,163
Income from operations ......................... 11,818 11,710 3,958 13,744
Net income ..................................... 7,430 7,384 2,710 8,260
Net income available to common stockholders .... 5,414 5,359 675 6,992
Net income per share:
Basic ...................................... $ 0.65 $ 0.64 $ 0.08 $ 0.74
Diluted .................................... $ 0.52 $ 0.51 $ 0.19 $ 0.57
52
STRAYER EDUCATION, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE ADDITIONS BALANCE BAD DEBT
BEGINNING CHARGED END EXPENSE
OF TO OF AS A % OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS PERIOD REVENUE
- ----------- ------ ------- ---------- ------ --------
Deduction from asset account:
Allowance for doubtful accounts:
Year ended December 31, 2002 ....... $457 $1,794 $(1,616) $635 1.5%
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%
Allowance for loan losses:
Year ended December 31, 2002 ....... 536 243 (176) 603
Year ended December 31, 2001 ....... 465 196 (125) 536
Year ended December 31, 2000 ....... 411 172 (118) 465
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth certain information with respect to the
Company's directors and executive officers.
NAME AGE POSITION
- ---- --- --------
DIRECTORS:
ROBERT S. SILBERMAN ...... 45 Chairman of the Board and Chief Executive Officer
DR. CHARLOTTE F. BEASON .. 55 Director
WILLIAM E. BROCK ......... 72 Director
DAVID A. COULTER ......... 55 Director
GARY GENSLER ............. 45 Director
ROBERT R. GRUSKY ......... 45 Director
ROBERT L. JOHNSON ........ 56 Director
STEVEN B. KLINSKY ........ 46 Director
TODD A. MILANO ........... 50 Director
G. THOMAS WAITE, III ..... 51 Director
J. DAVID WARGO ........... 49 Director
EXECUTIVE OFFICERS:
SCOTT W. STEFFEY ......... 41 Executive Vice President and Chief Operating Officer
MARK C. BROWN ............ 44 Senior Vice President and Chief Financial Officer
STEVEN A. MCARTHUR ....... 45 Senior Vice President and General Counsel
ROBERT E. FARMER ......... 64 Vice President, Human Resources, Administration and Training
LYSA A. HLAVINKA ......... 36 Vice President, Marketing
KEVIN P. O'REAGAN ........ 43 Vice President and Chief Technology Officer
SONYA G. UDLER ........... 35 Vice President, Corporate Communications
MICHAEL J. FORTUNATO ..... 39 Controller
DIRECTORS
MR. ROBERT S. SILBERMAN has been Chairman of the Board since February
2003 and Chief Executive Officer since March 2001. Mr. Silberman was an
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 Strayer
since March 2001 and is Chairman of the Board's Executive Committee. He also
serves on the Board of Directors of Surgis, Inc.
DR. CHARLOTTE F. BEASON is Chair of the Commission on Collegiate
Nursing Education (an autonomous agency accrediting baccalaureate and graduate
programs in nursing) and Program Director, Office of Nursing Services, at the
U.S. Department of Veterans Affairs since 1996. Dr. Beason is a member of the
Nominating Committee of the Board and also a member of the Strayer University
Board of Trustees.
54
MR. WILLIAM E. BROCK is the Founder and has been Chairman of BRIDGES
Learning Systems, Inc., an education services company, since 1996. From 1988 to
1995, Mr. Brock was the founder and Chairman of the Brock Group, a firm
specializing in international trade, investment and human resources. From 1985
to 1987, Mr. Brock served as the U.S. Secretary of Labor. From 1981 to 1985, Mr.
Brock served as the U.S. Trade Representative. From 1977 to 1981, Mr. Brock
served as Chairman of the Republican National Committee. Mr. Brock served as a
U.S. Senator from the State of Tennessee from 1971 to 1977. Mr. Brock is also a
Director of On Assignment, Inc., HealthExtras, Inc. and Federal Medical, Inc.
Mr. Brock is Chairman of the Nominating Committee of the Board.
MR. DAVID A. COULTER has been Vice Chairman, J.P. Morgan Chase & Co.
from December 2000 to the present. Mr. Coulter was Vice Chairman of The Chase
Manhattan Corporation from July 2000 to December 2000. Prior to joining Chase,
Mr. Coulter led the west coast operations of the Beacon Group, a private
investment and strategic advisory firm, and prior to that Mr. Coulter served as
the Chairman and Chief Executive Officer of the BankAmerica Corporation. Mr.
Coulter currently serves on the Board of Directors of PG&E Corporation, and he
is a Trustee of Carnegie Mellon University. Mr. Coulter is a member of the
Compensation Committee of the Board.
MR. GARY GENSLER served as Under Secretary of the U.S. Department of
the Treasury from 1999 to 2001, and before that as Assistant Secretary of the
Treasury from 1997 to 1999. From 1988 to 1997, Mr. Gensler was a partner of The
Goldman Sachs Group, L.P., where he served in various capacities including
co-head of finance, responsible for controllers and treasury worldwide. Mr.
Gensler is co-author of "The Great Mutual Fund Trap." He serves as a Trustee of
the Baltimore Museum of Art, the Bryn Mawr School, The Enterprise Foundation and
is a member of the Board of Visitors of the University of Maryland Baltimore
County and is a member of the Board of the Johns Hopkins Center for Talented
Youth. Mr. Gensler also serves on the Management Advisory Board of New Mountain
Capital, LLC. Mr. Gensler is Chairman of the Audit Committee of the Board.
MR. ROBERT R. GRUSKY has been a Member of New Mountain Capital, LLC
since January 2000. Since 2000, Mr. Grusky has also been the managing member of
the limited liability company that is the general partner of Hope Capital
Partners, L.P., an investment partnership that invests primarily in public
equities. From 1998 to 2000, Mr. Grusky served as President of RSL Investments
Corporation. From 1985 to 1997, with the exception of 1990-1991 when he was on a
leave of absence to serve as a White House Fellow and Assistant for Special
Projects to the Secretary of Defense, Mr. Grusky served in a variety of
capacities, including Vice President, at Goldman, Sachs & Co., first in its
Mergers & Acquisitions Department and then in its Principal Investment Area. He
is also on the Board of Directors of Surgis, Inc. and a member of the
Board of Trustees of Hackley School and the Multiple Myeloma Research
Foundation. Mr. Grusky is a member of the Audit Committee of the Board and is
also a member of the Executive Committee of the Board.
MR. ROBERT L. JOHNSON is the founder and Chief Executive Officer of
Black Entertainment Television (BET), a subsidiary of Viacom and the leading
African American-operated media and entertainment company in the United States.
Mr. Johnson previously held positions at the Washington Urban League and the
Corporation for Public Broadcasting. Mr. Johnson serves on the following boards:
US Airways; Hilton Hotels Corporation; General Mills; United Negro College Fund;
National Cable Television Association; and the American Film Institute. Mr.
Johnson is also a member of the Board of Governors for the Rock and Roll Hall of
Fame in Cleveland, Ohio; and the Brookings Institute. Mr. Johnson is a member of
the Nominating Committee of the Board.
MR. STEVEN B. KLINSKY is the Founder and has been the Managing Member
and Chief Executive Officer of New Mountain Capital, LLC since January 2000.
From 1987 to June 1999, Mr. Klinsky was a general partner of Forstmann Little &
Co., a private equity firm. Mr. Klinsky was non-executive Chairman of the Board
from March 2001 until February 2003, is the Board's lead outside director, is a
member of the Executive Committee and is Chairman of the Compensation Committee.
He also serves on the Board of Directors of Surgis, Inc.
MR. TODD A. MILANO has been President and Chief Executive Officer of
Central Pennsylvania College since 1989. Mr. Milano is a member of the
Compensation Committee of the Board and is also a member of the Strayer
University Board of Trustees.
55
MR. G. THOMAS WAITE, III has been Treasurer and Chief Financial Officer
of the Humane Society of the United States since 1993. In 1992, Mr. Waite was
the Director of Commercial Management of The National Housing Partnership. Mr.
Waite is a member of the Audit Committee of the Board and is also a member of
the Strayer University Board of Trustees.
MR. J. DAVID WARGO has been a Member of New Mountain Capital, LLC since
January 2000. Since 1993, Mr. Wargo has also been the President of Wargo and
Company, Inc., an investment management company. From 1989 to 1992, Mr. Wargo
was a Managing Director and Senior Analyst of The Putnam Companies, a
Boston-based investment management company. From 1985 to 1989, Mr. Wargo was a
partner and held other positions at Marble Arch Partners. Mr. Wargo is also a
Director of On Command Corporation and OPENTV Corporation. Mr. Wargo is a member
of the Nominating Committee of the Board.
EXECUTIVE OFFICERS
MR. SCOTT W. STEFFEY joined Strayer in March 2001 as its Executive Vice
President and Chief Operating Officer 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.
MR. MARK C. BROWN joined Strayer in September 2001 as its Senior Vice
President and Chief Financial Officer. Mr. Brown 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 LLP.
MR. STEVEN A. MCARTHUR joined Strayer in May 2001 as its Senior Vice
President and General Counsel. Mr. McArthur is responsible for oversight of all
legal matters for Strayer 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 18 years experience advising various public companies in
the areas of regulatory compliance, mergers and acquisitions, financings and
related legal matters.
MR. ROBERT E. FARMER 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 University's Director of
Operations (in 2000) and Director of Human Resources for the University, a
position he held since 1995. Mr. Farmer was the Campus Coordinator of the
University's Arlington campus from 1992 until 1995, and he was the Director of
Admissions at that campus from 1990 to 1992.
MS. LYSA A. HLAVINKA has been working in the for-profit education field
for the past 11 years and joined Strayer in May 2001 as Vice President,
Marketing. Ms. Hlavinka 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.
MR. KEVIN P. O'REAGAN has been active in the technology field for the
past 18 years and joined Strayer in July 2001 as its Vice President and Chief
Technology Officer. Mr. O'Reagan 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.
56
MS. SONYA G. UDLER joined Strayer as its Vice President, Corporate
Communications in July 2002, bringing over 14 years of public relations and
marketing communications experience to Strayer. For the two years prior to
joining Strayer, she served as a public relations and media strategies
consultant. She previously served as Senior Vice President at Young & Associates
Inc., a public relations agency, where she developed communications strategies
and media programs for Bell Atlantic, Siemens, Verizon and other leading
technology companies.
MR. MICHAEL J. FORTUNATO joined Strayer as its Controller in September
2002, bringing 17 years of accounting experience from a variety of industries,
including healthcare, real estate, international investing and most recently
software development. Mr. Fortunato is a CPA who started his career with the
accounting firm of KPMG Peat Marwick.
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. J. CHRIS TOE ........... 48 Acting University President, University Provost and Academic Dean
JAMES F. MCCOY ............. 43 Regional Director -- Southern Virginia, North Carolina and Tennessee
REGINALD RAINEY ............ 35 Regional Director -- Northern Virginia
MICHAEL O. WILLIAMS ........ 49 Regional Director -- Maryland and Washington, D.C.
PAMELA S. BELL ............. 43 Director, Strayer University Online
BETTY G. SHUFORD ........... 60 Dean of Student Affairs
ROBERT L. GUSTAVUS ......... 60 Regional Academic Dean
MARJORIE ARRINGTON ......... 41 Director of Financial Aid and Title IV Compliance
GREGORY FERENBACH .......... 43 Director of Business Development and Senior Counsel
DAVID A. MOULTON ........... 50 Director of Libraries
RANDI S. REICH ............. 29 Director of New Campus Openings
GEOFFREY D. ROTH ........... 37 Director of Facilities
MICHAEL K. SCHUCHERT ....... 32 Director of Institutional Research and Assessment
CYNDI L. WASTLER ........... 37 Director of Academic Records
DR. J. CHRIS TOE, 48, is the University's Acting President, as well as
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.
MR. JAMES F. MCCOY, 43, is the University's Regional Director-Southern
Virginia, North Carolina and Tennessee 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.
MR. REGINALD RAINEY, 35, is the University's Regional Director-Northern
Virginia, with oversight responsibilities for all administrative functions of
that Region's campuses. Mr. Rainey has been with
57
Strayer University sixteen years, with experience in Campus Manager and other
positions including student enrollment, retention, collection of revenue and
budget.
MR. MICHAEL O. WILLIAMS, 49, is the University's Regional
Director-Maryland 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.
MS. PAMELA S. BELL, 43, is the University's Director of Strayer
University Online. In this capacity, Ms. Bell oversees all functions including,
academics, admissions, international outreach and business operations for
Strayer University Online. She manages the delivery and ensures the quality of
teaching in online courses; coordinates online assessment of faculty for
technology-mediated teaching; and is responsible for faculty training. Prior to
her appointment as Director in February 2002, Ms. Bell served for almost three
years as Assistant Vice President and Division Manager at SAIC managing various
online related programs and applications. Prior to this, Ms. Bell served with
Strayer University Online in various assignments, including Academic Dean,
Distance Learning Coordinator and Admissions Counselor.
MS. BETTY G. SHUFORD, 60, is the University's Dean of Student Affairs
with the responsibility for ensuring the non-academic needs of students are
being met in all regions. Ms. Shuford has been with Strayer University for
nineteen years. She previously served in a number of positions, including
Regional Director and Administrative Dean, and Campus Manager at four different
campuses.
MR. ROBERT L. GUSTAVUS, 60, is a Regional Academic Dean, Northern
Virginia Region. Mr. Gustavus has spent over thirty-five years in government,
the commercial sector, and higher education. He has extensive teaching 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. He
served as Director of Strayer University Online from 2001 to February 2002.
Prior to becoming the Director of Strayer University Online, he was a Campus
Dean and Regional 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.
MS. MARJORIE ARRINGTON, 41, 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.
MR. GREGORY FERENBACH, 43, is the University's Director of Business
Development and Senior Counsel. Mr. Ferenbach is responsible for outreach to
corporations, government, military and other organizations. In this role, he
develops sponsorship and other arrangements between Strayer and these
organizations that allows them to provide Strayer University offerings to their
employees. Mr. Ferenbach also assists with regulatory matters, including new
state openings. Prior to joining Strayer, Mr. Ferenbach was General Counsel to
PBS and prior to that was an attorney in private practice.
MR. DAVID A. MOULTON, 50, is the University's Director of Libraries.
Mr. Moulton manages library services and collections for all campus locations as
well as for online users. Mr. Moulton oversees the operations of the
University's main library, the Wilkes Library in D.C. and the Learning Resource
Centers at each campus. Mr. Moulton has been employed by Strayer for 26 years in
a variety of Librarian positions. Mr. Moulton has a Masters Degree in Library
Science and 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.
MS. RANDI S. REICH, 29, is the University's Director of New Campus
Openings. Ms. Reich is responsible for managing all aspects of the University's
expansion into new states and new campus openings. Ms. Reich previously held the
position of Director of Corporate and Institutional Alliances and also served as
a campus manager at Strayer. Prior to joining Strayer, Ms. Reich co-founded and
managed
58
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.
MR. GEOFFREY D. ROTH, 37, is the University's Director of Facilities
with responsibility for leasing, managing and maintaining all campus locations
and other University real estate. Mr. Roth is responsible for all aspects of
site selection, transaction management, construction, furniture & equipment
delivery and relocation. Mr. Roth also works with each campus to insure that
from a fiscal and physical perspective, each location is maintained to Strayer
standards. Mr. Roth has 15 years of corporate real estate experience, including
serving as a Director of Corporate Services at Cushman & Wakefield, Inc. where
he helped Fortune 500 clients manage their real estate portfolios.
MR. MICHAEL K. SCHUCHERT, 32, is the University's Director of
Institutional Research and Assessment. Prior to joining Strayer University in
2001, Mr. Schuchert served as the Director of Institutional Research at the
Montgomery County Community College. Mr. Schuchert has several years experience
serving as a research associate at the American Sociological Association, the
Association of American Medical College, and a senior associate at the American
Association of Health Plans. Mr. Schuchert also teaches undergraduate sociology
and statistics courses at Strayer University.
MS. CYNDI L. WASTLER, 37, 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 the captions "Directors' Compensation" and
"Board Committees" in the Company's Proxy Statement which will be filed no later
than 120 days following December 31, 2002.
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 Proxy Statement which will be filed no later than 120 days
following December 31, 2002.
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, 2002.
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, 2002.
ITEM 14. CONTROLS AND PROCEDURES.
a) Disclosure Controls and Procedures. The Registrant's Chief Executive
Officer and Chief Financial Officer have evaluated the Registrant's disclosure
controls and procedures within the 90 days
59
prior to the date of filing of this Annual Report on Form 10-K. Based upon such
review, the Chief Executive Officer and Chief Financial Officer have concluded
that the Registrant has in place, as of December 31, 2002, appropriate controls
and procedures designed to ensure that information required to be disclosed by
the Registrant (including consolidated subsidiaries) in the reports it files or
submits under the Securities Exchange Act of 1934, as amended, and the rules
thereunder, is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in reports it
files or submits under the Securities Exchange Act is accumulated and
communicated to the Registrant's management, including its principal executive
officer or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
b) Internal controls. Since the date of the evaluation described above,
there have not been any significant changes in our internal accounting controls
or in other factors that could significantly affect those controls.
60
PART IV
ITEM 15. 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 (incorporated by reference to Exhibit 3.01 of the Company's
Annual Report on Form 10-K filed with the Commission on March 28,
2002).
3.02 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.02 of the Company's Registration Statement
on Form S-1 (File No. 333-3967) filed with the Commission on May
17, 1996).
4.01 Specimen Stock Certificate (incorporated by reference to Exhibit
4.01 of Amendment No. 3 to the Company's Registration Statement on
Form S-1 (File No. 333-3967) filed with the Commission on July 16,
1996).
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. (incorporated by reference to Exhibit
4.02 of the Company's Annual Report on Form 10-K filed with the
Commission on March 28, 2002).
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. (incorporated by reference to Annex
A of the Company's Preliminary Proxy Statement filed with the
Commission on January 3, 2001).
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.
(incorporated by reference to Annex E of the Company's Preliminary
Proxy Statement filed with the Commission on January 3, 2001).
10.03 Employment Agreement, dated as of April 6, 2001, between Strayer
Education, Inc. and Robert S. Silberman (incorporated by reference
to Exhibit 10.03 of the Company's Annual Report on Form 10-K filed
with the Commission on March 28, 2002).
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. (incorporated by reference to Exhibit 10.04 of
the Company's Annual Report on Form 10-K filed with the Commission
on March 28, 2002).
10.05 1996 Amended Stock Option Plan (incorporated by reference to
Exhibit B of the Company's Proxy Statement filed with the
Commission on April 27, 2001).
61
21.01 Subsidiaries of Registrant (incorporated by reference to Exhibit
21.01 of the Company's Annual Report on Form 10-K filed with the
Commission on March 28, 2002).
23.01* Consent of PricewaterhouseCoopers LLP.
24.01* Power of Attorney (included in signature page hereto).
99.01* Certifications Pursuant to Section 9.06 of the Sarbanes-Oxley Act
of 2002.
- -------------
* Filed herewith.
(B) REPORTS ON FORM 8-K
On October 8, 2002, the Registrant filed a Current Report on Form 8-K
announcing that it had filed a registration statement on Form S-3 for a proposed
secondary offering of 2.0 million share of common stock.
On November 1, 2002, the Registrant filed a Current Report on Form 8-K
announcing record third quarter 2002 enrollment, revenues and earnings.
On November 15, 2002, the Registrant filed a Current Report on Form 8-K
announcing the pricing of a 2.0 million common share secondary offering.
On November 20, 2002, the Registrant filed a Current Report on Form 8-K
announcing the closing of a 2.3 million common share secondary offering.
On November 26, 2002, the Registrant filed a Current Report on Form 8-K
announcing that it had declared its regular quarterly common stock cash dividend
for the fourth quarter in the amount of $0.065 per share payable on January 22,
2003 to all holders of record on January 8, 2003.
62
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
Chairman of the Board and
Chief Executive Officer
Date: March 31, 2003
63
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 Chairman of the Board and March 31, 2003
- ---------------------------------------- Chief Executive Officer
(Robert S. Silberman) (Principal Executive Officer)
/s/ Mark C. Brown Chief Financial Officer (Principal March 31, 2003
- ---------------------------------------- Financial and Accounting Officer)
(Mark C. Brown)
/s/ Charlotte F. Beason Director March 31, 2003
- ----------------------------------------
(Charlotte F. Beason)
/s/ David A. Coulter Director March 31, 2003
- ----------------------------------------
(David A. Coulter)
/s/ William E. Brock Director March 31, 2003
- ----------------------------------------
(William E. Brock)
/s/ Gary Gensler Director March 31, 2003
- ----------------------------------------
(Gary Gensler)
/s/ Robert R. Grusky Director March 31, 2003
- ----------------------------------------
(Robert R. Grusky)
/s/ Robert L. Johnson Director March 31, 2003
- ----------------------------------------
(Robert L. Johnson)
/s/ Steven B. Klinsky Director March 31, 2003
- ----------------------------------------
(Steven B. Klinsky)
64
/s/ Todd A. Milano Director March 31, 2003
- ----------------------------------------
(Todd A. Milano)
/s/ G. Thomas Waite, III Director March 31, 2003
- ----------------------------------------
(G. Thomas Waite, III)
/s/ J. David Wargo Director March 31, 2003
- ----------------------------------------
(J. David Wargo)
65
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
------------------------------------------------------------------------
CERTIFICATIONS
- --------------
I, Robert S. Silberman, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Strayer Education, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
By: /s/ Robert S. Silberman
------------------------
Robert S. Silberman
Chief Executive Officer
66
I, Mark C. Brown, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Strayer Education, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Mark C. Brown
-------------------------
Mark C. Brown
Senior Vice President and
Chief Financial Officer
67