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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER: 0-21039
STRAYER EDUCATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 52-1975978
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1025 FIFTEENTH STREET, N.W., WASHINGTON, D.C. 20005
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (202) 408-2424
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE NONE
(TITLE OF CLASS:) (NAME OF EACH EXCHANGE ON
WHICH REGISTERED:)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of
Registrant is $235,311,936 (based upon the last sale price of the Common Stock
as reported on the Nasdaq National Market System on March 16, 1998). The total
number of shares of Common Stock outstanding as of March 16, 1998 was
15,557,905.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for its 1998
Annual Meeting of Stockholders (which is expected to be filed with the
Commission within 120 days after the end of the Registrant's 1997 fiscal year)
are incorporated by reference into Part III of this Report.
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PART I
ITEM I. BUSINESS.
OVERVIEW
Strayer Education, Inc. (the "Company"), through its wholly-owned
subsidiary, Strayer University, Inc. ("Strayer" or the "University") is a
regional proprietary institution of higher education that offers undergraduate
and graduate degree programs to more than 9,400 students at nine campuses in
Washington, D.C., Maryland and Northern Virginia. The University is accredited
by the Commission on Higher Education of the Middle States Association of
Colleges and Schools ("Middle States"), one of the six regional collegiate
accrediting agencies recognized by the U.S. Department of Education. The
majority of Strayer students are working adults pursuing their first college
degree to improve their job skills and advance their careers. Of students
enrolled in Strayer programs at the beginning of the 1997 Fall quarter,
approximately 61% were age 30 or over and approximately 65% were engaged in a
part-time course of study. The University considers a full-time undergraduate
and graduate student to be one who completes 13.5 and 9.0 course credits in an
academic quarter, respectively. In the 1997 Fall quarter, Strayer students
completed an average of 9.0 course credits.
The Company has two additional wholly-owned subsidiaries, Education Loan
Processing, Inc. ("ELP") and Professional Education, Inc. (ProEd). ELP is a
finance company that purchases and services student loans, principally for the
University, and administers the Strayer Education Loan Program (the "SEL
Program"). ProEd was formed for the purpose of acquiring an information
technology training company. No such acquisitions have been made as of the date
of this report.
CAMPUS ORGANIZATION
The University organizes its academic programs and administrative operations
on a decentralized campus basis to increase its responsiveness to student needs.
A Campus Dean and a Campus Coordinator oversee the academic and administrative
functions, respectively, at each campus. Each campus is staffed with personnel
performing admissions, academic advising, financial aid and career development
functions.
A learning resources center at each campus supports the University's
instructional programs. Each learning resources center contains a library and
computer laboratories and is operated by a full-time manager and support staff.
CURRICULUM
The University offers a business-oriented curriculum to equip students with
specialized knowledge and skills for careers in business, industry and
government. The Academic Curriculum Committee reviews and revises the
University's course offerings periodically to improve the educational programs
and respond to changing and competitive job markets. The University formed a
Curriculum Advisory Board in 1993 to support the program evaluation process. The
Curriculum Advisory Board consists of University faculty, current and former
Strayer students, and representatives of more than 20 private and federal sector
employers in the greater Washington, D.C. area. The Curriculum Advisory Board
also studies the career progress of University alumni. The University uses these
studies to make decisions about curriculum development, resource allocation and
faculty appointments.
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The University offers programs in the following areas:
<TABLE>
<S> <C>
BACHELOR OF SCIENCE (B.S.) DEGREE MASTER OF SCIENCE (M.S.) DEGREE
Accounting Business Administration
Business Administration Information Systems
Computer Information Systems Professional Accounting
Economics
ASSOCIATE IN ARTS (A.A.) DEGREE DIPLOMA (CAREER DIVISION)
Accounting Computer Information Systems
Business Administration
Computer Information Systems
Economics
General Studies
Marketing
</TABLE>
Each undergraduate degree program emphasizes oral and written communication
skills as well as mathematics and various disciplines in the humanities and
social sciences. In addition to its degree and diploma programs, the University
offers classes to non-degree, non-program students wishing to take courses for
personal or professional enrichment.
Although all of the University's programs and courses are offered at each
campus, the University adapts its offerings to the preferences of the student
population at each location. In addition, Strayer students may enroll in courses
at more than one campus. The following table shows Strayer's enrollment by
major, program and campus location at the beginning of the 1997 Fall quarter:
UNIVERSITY ENROLLMENT BY MAJOR, PROGRAM
AND LOCATION -- 1997 FALL QUARTER
<TABLE>
<CAPTION>
WASHINGTON, TACOMA
MAJOR PROGRAM D.C. PARK ARLINGTON ALEXANDRIA WOODBRIDGE LOUDOUN
- -------------------- ------- ------- ---- --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Accounting.......... AA 46 24 12 16 15 7
BS 136 51 57 61 79 50
MS 17 9 23 19 11 5
Business
Administration.... AA 95 50 27 31 26 37
BS 270 128 202 192 220 194
MS 75 49 116 63 75 48
Computer Information
Systems........... * 103 144 55 59 54 68
AA 202 108 34 40 51 51
BS 359 260 305 464 466 306
Information Systems..... MS 48 41 89 86 78 53
Economics........... AA 1 4 0 0 0 1
BS 13 6 5 5 2 0
General Studies..... AA 19 7 10 7 7 1
Marketing........... AA 11 5 1 2 4 3
Non-Degree/
Non-Program**..... -- 166 118 114 100 29 162
--- --- --- --- -- ---
Total
Enrollment.... 1,561 1,004 1,050 1,145 1,117 986
===== ===== ===== ===== ===== ===
</TABLE>
* Diploma program.
** Includes undeclared majors.
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UNIVERSITY ENROLLMENT BY MAJOR, PROGRAM
AND LOCATION -- 1997 FALL QUARTER
<TABLE>
<CAPTION>
FRED- PRINCE DISTANCE CORPORATE SOUTHERN TOTAL
MAJOR PROGRAM MANASSAS ERICKSBURG GEORGE LEARNING OUTREACH MARYLAND ENROLLMENTS
- -------------------- ------- -------- ---------- ------ -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accounting.......... AA 12 10 5 1 7 0 155
BS 87 61 12 6 2 3 605
MS 9 4 1 0 1 0 99
Business
Administration.... AA 20 28 14 2 51 1 382
BS 216 175 29 11 74 7 1,718
MS 56 66 9 8 22 5 592
Computer Information
Systems........... * 45 56 31 2 1 0 618
AA 31 56 23 2 4 0 602
BS 377 279 72 21 17 3 2,929
Information Systems.... MS 67 37 6 11 4 19 539
Economics........... AA 0 0 0 0 0 0 6
BS 2 0 0 0 0 0 33
General Studies..... AA 6 3 5 1 4 0 70
Marketing........... AA 5 0 2 0 0 0 33
Non-Degree/
Non-Program**..... -- 90 39 79 23 104 14 1,038
-- -- -- -- --- -- -----
Total
Enrollment.... 1,023 814 288 88 291 52 9,419
===== === === == === == =====
</TABLE>
* Diploma program.
** Includes undeclared majors.
The University allows students to apply credits earned in one program toward
attainment of a more advanced degree. For example, a student originally pursuing
a Diploma in Computer Information Systems can extend his/her original objective
by taking additional courses leading to an A.A. degree in Computer Information
Systems, a B.S. degree in Computer Information Systems, and ultimately an M.S.
degree in Information Systems. The curriculum design provides students a level
of competency and a measure of attainment in the event they interrupt their
education or choose to work in their field of concentration prior to obtaining
their final degree.
FACULTY
The University seeks to appoint faculty who hold appropriate academic
credentials, are dedicated, active professionals in their field, and are
committed to teaching working adults. In accordance with its educational
mission, the University focuses the efforts of its faculty on teaching. The
normal load for a full-time faculty member is four courses per quarter for each
of three quarters, or 12 courses per academic year. With the approval of the
Campus Deans, faculty members may teach a fifth course per quarter and extra
courses during the summer quarter for additional compensation. The University
requires full-time faculty members to hold counseling hours at least two hours
per week for each course they teach.
Strayer provides financial support for faculty members seeking to update
their skills and knowledge. The University maintains a tuition plan that
reimburses instructors enrolled in advanced degree programs for one-half of
their tuition charges. Strayer conducts annual in-house faculty workshops in
each discipline. The University also fully reimburses its faculty for their
costs in receiving computer-related instruction and training to keep current in
information technology developments.
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ACCREDITATION AND APPROVALS
The University has been accredited by Middle States, an accrediting agency
recognized by the Department of Education, since 1981. Accreditation is a system
for recognizing educational institutions and their programs for a performance,
integrity and quality that entitles them to the confidence of the educational
community and the public. In the United States, this recognition comes primarily
through private voluntary associations of institutions and programs of higher
education. These associations establish criteria for accreditation, evaluate
institutions and professional programs for accreditation, and publicly designate
those, which meet their criteria. Accredited schools are subject to periodic
review by accrediting bodies to ensure that the schools maintain the
performance, integrity and quality required for accreditation.
Middle States reaffirmed the University's accreditation in 1995, and the
next scheduled evaluation visit by Middle States is currently set for the
academic year 1999-2000.
Middle States is the same accrediting agency that grants institutional
accreditation to other degree-granting public and private colleges and
universities in its region. Accreditation by Middle States is an important
attribute of the University. Colleges and universities depend on accreditation
in evaluating transfers of credit and applications to graduate schools.
Employers rely on the accredited status of institutions when evaluating a
candidate's credentials, and parents and high school counselors look to
accreditation for assurance that an institution has quality educational
standards. Moreover, scholarship commissions often restrict their awards to
students attending accredited institutions, and institutional accreditation is
necessary to qualify for eligibility for federal student financial assistance.
The University is authorized to offer its programs by the D.C. Education
Licensure Commission, the Virginia State Council of Higher Education and the
Maryland Higher Education Commission.
The University is authorized by the Immigration and Naturalization Service
of the U.S. Department of Justice to admit foreign students. The University also
employs certain foreign faculty members and administrators in accordance with
U.S. immigration laws. In addition, Strayer is approved for the education of
veterans and members of the selective reserve and their dependents, as well as
for the rehabilitation of handicapped students. Approximately 7% of the
University's students are veterans or reservists.
STUDENT CHARACTERISTICS
The University's students primarily are working adults. At the beginning of
the 1997 Fall quarter, approximately 65% of the enrollment consisted of
part-time students, approximately 79% attended classes at night or on weekends,
and approximately 55% were women. The approximate age distribution of the
students was as follows:
<TABLE>
<CAPTION>
PERCENTAGE
AGE OF STUDENTS
------------- -----------
<S> <C>
21 or under.. 8%
22 to 29..... 31%
30 to 39..... 36%
40 to 49..... 20%
50 or over... 4%
Age unknown.. 1%
</TABLE>
STUDENT RECRUITMENT
The University focuses its recruitment efforts on attracting students with
the motivation and ability to complete its business-oriented educational
programs. To generate interest among potential students, Strayer's marketing
staff primarily employs direct mailings and television, radio and newspaper
advertising. The University monitors the effectiveness of its various marketing
efforts in producing student enrollment. Referrals constitute the most important
source of inquiries from potential students.
The marketing department tracks and forwards to the University's admissions
representatives responses to its direct mail and advertising campaigns.
Admissions representatives at each campus pursue expressions of interest in
Strayer by arranging interviews for prospective students. The representatives
also conduct campus tours and otherwise assist prospective students in the
application process. At December 31, 1997, the University employed 52 admissions
representatives.
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The University has entered into articulation agreements with Germanna
Community College, Northern Virginia Community College, Montgomery Community
College, Anne Arundel Community College and Prince George's Community College to
facilitate enrollment of students seeking to transfer course credits earned at
these institutions. The University sponsors recruitment events at the campuses
of each of these community colleges.
STUDENT ADMISSIONS
The University seeks to ensure that incoming students have the necessary
academic background to succeed in their course of study at Strayer. Students
attending the University's undergraduate programs must possess a high school
diploma or a General Educational Development Certificate. All students also must
pass placement exams or submit acceptable standardized test scores. For
admission to the University's programs, students must attain a certain level of
proficiency in English and mathematics. Students attending the University's
graduate programs must have a bachelor's degree from an accredited institution.
If a student's undergraduate major varies widely from the student's proposed
graduate course of study, certain undergraduate foundation courses may be
necessary for admission to some of the highly technical courses offered at the
graduate level.
International students applying for admission must meet the same admission
requirements as other students. Those students whose native language is not
English must provide evidence that they are able to use the English language
with sufficient facility to do college-level work in an English-speaking
institution.
TUITION AND FEES
Strayer charges tuition by the credit hour. All courses offered are 4.5
credit hours. As of January 1, 1998, undergraduate, full-time students are
charged at the rate of $180 per credit hour. Undergraduate, part-time students
are charged at the rate of $190 per credit hour. Courses in graduate programs
are charged at the rate of $250 per credit hour. Accordingly, a full-time
student seeking to obtain a bachelor's degree in four years currently would pay
approximately $8,100 per year in tuition. The University implemented a tuition
increase of 6.3% in 1997.
Generally, tuition must be paid (or arrangements made therefor) prior to the
beginning of a quarter. If a student withdraws from a course before completion,
federal regulations permit the University to retain a specified percentage of
the tuition, which varies with the percentage of the course completed.
Students finance their Strayer education in a variety of ways. A significant
number of students utilize federal financial aid programs. In addition, many of
Strayer's working adult students finance their own education or receive full or
partial tuition reimbursement from their employers. Strayer offers grants, loans
(including loans under the SEL Program), scholarships and work-study programs as
financing options for its students.
SEL PROGRAM
In 1995, Strayer began the SEL Program of loans for eligible students as an
alternative to government-sponsored student loans. The SEL Program enables the
University to reduce the significant administrative costs incurred by it in
processing loans under Title IV Programs and lessens the University's dependence
on federal student financial aid programs. The University believes that the SEL
Program also helps it to attract and retain qualified students.
The Company designed the SEL Program for working adult students. The loans
generally have maturities ranging from one to four years after graduation and
bear interest at a fixed rate that is competitive with rates under Title IV
Programs. Monthly loan payments begin the first month after the loan date and
generally vary between $200 and $300, including loan principal as well as
interest. Borrowers make principal payments while still enrolled, thereby
reducing the debt they otherwise would assume upon completion of their studies.
At December 31, 1997, there were a total of 1,497 loans outstanding with an
aggregate loan balance of approximately $4.7 million and an average individual
loan balance of approximately $3,154.
Loans under the SEL Program are unsecured. Strayer's underwriting involves a
credit evaluation of each applicant.
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CAREER DEVELOPMENT SERVICES
The University actively assists its students and alumni with job placement
and other career-related matters through career development offices located at
eight of its campuses. Strayer's career development personnel conduct workshops
on employment-related topics (including resume preparation, interviewing
techniques and job search strategies), maintain job listings, arrange campus
interviews by employers and provide other placement assistance. The University
sponsors career fairs in the Fall and Spring quarters for students and alumni to
discuss career opportunities with companies and governmental agencies in the
greater Washington, D.C. area.
The University conducts annual alumni surveys to monitor the career
progression of its graduates and to comply with the Middle States and state
requirements to perform outcome assessments. The reliability of the survey data
largely depends on the information reported to the University. The 1997 alumni
survey, which had an approximately 16% overall response rate, indicated that 94%
of those responding were employed. In addition, approximately 89% of
undergraduate alumni and 86% of the graduate alumni responding credit Strayer
for the achievement of their professional goals. According to the survey,
Strayer's greatest assets, in order of importance, are schedule variety, campus
locations, instructor knowledge, personal class sizes and course selection.
Strayer students and graduates are employed in a wide range of regional and
local companies, many of whom are in the information technology industry.
Federal governmental agencies also provide a significant source of employment.
COMPETITION
The postsecondary education market in Strayer's market area is highly
competitive. The University competes with traditional public and private
two-year and four-year colleges, other for-profit schools and alternatives to
higher education, such as employment and military service. Public colleges may
offer programs similar to those of the University at a lower tuition level, due
to government subsidies, government and foundation grants, tax-deductible
contributions and other financial sources not available to proprietary
institutions. Tuition at private institutions generally is higher, and in some
cases significantly higher, than the tuition at the University.
The University competes with other educational institutions primarily based
on the quality of its business-oriented curriculum and instruction, its
flexible schedules and convenient classroom locations, and its responsiveness
to changing educational requirements of the workplace. Few of the University's
competitors have modified their programs to meet the special needs of working
adult students, although management believes that more may do so in the future.
EMPLOYEES
During 1997, the University employed 554 faculty members, of whom 86 were
full-time and 468 part-time, and 345 non-faculty staff in information systems,
financial aid, recruitment and admissions, payroll and human resources,
corporate accounting, and other administrative functions. Of the University's
non-faculty staff, 248 were employed full-time and 97 part-time.
LICENSING AND FINANCIAL AID REGULATION
STATE LICENSURE
The University is dependent on the authorization of each state within which
the University offers educational programs to allow it to operate and to grant
degrees or diplomas to students. The University is subject to extensive
regulation in each of the three jurisdictions (the District of Columbia,
Virginia and Maryland) in which it currently operates. State laws and
regulations affect the University's operations and may limit the ability of the
University to introduce educational programs or establish new campuses. State
authorization also is required in order for an institution to become and remain
eligible to participate in Title IV Programs.
FINANCING STUDENT EDUCATION
In the 1998 Winter quarter, approximately 42.6% of the University's students
participated in one or more of the federally supported student financial aid
programs. A substantial portion (approximately 50% in 1997) of the University's
revenues are derived from tuition financed under Title IV Programs.
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The University's financial aid programs are designed to assist eligible
students whose financial resources are inadequate to meet the cost of education.
Aid is awarded on the basis of financial need, generally defined under the
Higher Education Act ("HEA") as the difference between the cost of attending a
program of study and the amount a student reasonably can be expected to
contribute to those expenses. All recipients of financial aid must maintain a
satisfactory grade point average and progress in a timely manner toward
completion of a program of study.
Title IV Programs
The University maintains eligibility for its students to participate in the
following Title IV Programs:
Federal Family Education Loans. Pursuant to the Federal Family Education
Loan Program (the "FFEL Program"), which includes the Federal Stafford Loan
("Stafford") program and the Federal PLUS program, students and their parents
can obtain from lending institutions subsidized and unsubsidized student loans,
which are guaranteed by the federal government. The obligation to begin repaying
Stafford loans is deferred until six months after the student graduates,
withdraws or ceases to be enrolled on at least a half-time basis. Students who
demonstrate financial need may qualify for a subsidized Stafford loan, and the
federal government will pay the interest on the loan while the student is in
school and for six months after the student's graduation or withdrawal.
Unsubsidized Stafford loans are available to students without demonstrated
financial need or in some cases in addition to a subsidized Stafford loan. The
unsubsidized Stafford loan program now incorporates the former Federal
Supplemental Loans for Students program.
Pell Grants. Grants under the Federal Pell Grant ("Pell") program are
available to eligible students based on financial need and other factors.
Campus-Based Programs. The "campus-based" Title IV Programs include the
Federal Supplemental Educational Opportunity Grant program, the Federal
Work-Study program, and the Federal Perkins Loan ("Perkins") program.
Direct Student Loans. In 1993, Congress enacted the William D. Ford Federal
Direct Loan Program (the "Direct Loan Program"), under which the Department of
Education makes loans directly to students, rather than guaranteeing loans made
by lending institutions. The Direct Loan Program has been phased in beginning in
1994-95. The University was approved to participate in this program beginning
July 1, 1996.
Other Financial Aid Programs
In addition to the University's own student loan and scholarship programs,
eligible students at the University may participate in educational assistance
programs administered by the U.S. Department of Veterans Affairs, the U.S.
Department of Defense, the District of Columbia and private organizations.
FINANCIAL AID REGULATION
To be eligible to participate in Title IV Programs, the University must
comply with specific standards and procedures set forth in the HEA and the
regulations issued thereunder by the Department of Education. An institution
must, among other things, be authorized by each state within which it operates
to offer its educational programs and be accredited by a recognized accrediting
agency. The institution also must be certified by the Department of Education to
participate in Title IV Programs, which requires, among other things, that the
institution meet certain standards of administrative capability and financial
responsibility. For purposes of the Title IV Programs, the University and all of
its campuses are considered to be a single "institution" so that Department of
Education requirements applicable to an "institution" are applied to all of the
University's campuses in the aggregate rather than on an individual basis. The
University currently is certified to participate in Title IV Programs.
The regulatory scheme applicable to the University has been subject to
frequent revisions, many of which have increased the level of scrutiny to which
higher education institutions are subjected and raised the applicable standards.
The University's compliance with those such regulations may affect the
operations of the University and its ability to participate in Title IV
Programs.
The new standards are consistent with the increased scrutiny and regulation
to which providers of postsecondary education have been subjected as a result of
increased concern over fraud and abuse in Title IV Programs. Congress and the
Department of Education recently have focused in particular upon the operations
of proprietary institutions, such as the University. Certain elements of the
regulatory scheme applicable to the University are described below.
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Increased Regulatory Scrutiny
The 1992 amendments to the HEA formalized, modified and strengthened the
regulatory structure known as the "Program Integrity Triad," which consists of
the Department of Education, recognized accrediting agencies, and state higher
education regulatory bodies. Congress intended this initiative to increase the
regulatory scrutiny of postsecondary educational institutions. In addition to
the Program Integrity Triad, other participants in Title IV Programs, notably
student loan guarantee agencies, also have enforcement authority.
An elimination of certain Title IV Programs, a reduction in federal funding
levels of such programs, material changes in the requirements for participation
in such programs, or the substitution of materially different programs could
reduce the ability of certain students to finance their education, which in turn
could lead to lower enrollments at the University or require the University to
increase its reliance upon alternative sources of student financial aid. Given
the significant percentage of the Company's revenues that are derived indirectly
from the Title IV Programs, the loss of or a significant reduction in Title IV
Program funds available to the University's students could have a material
adverse effect on the Company.
Administrative Capability
Department of Education regulations specify extensive criteria by which an
institution must establish that it has the requisite "administrative capability"
to participate in Title IV Programs. To meet the administrative capability
standards, an institution, among other things, must not have cohort default
rates above specified levels, must have various procedures in place for
safeguarding federal funds, must not be, and not have any principal or affiliate
who is, debarred or suspended from federal contracting or engaging in activity
that is cause for debarment or suspension, and must not otherwise appear to lack
administrative capability.
If the Department of Education determines that an institution is not capable
administratively, solely because it fails to comply with the cohort default rate
standards of administrative capability, the Department will certify the
institution's continuing eligibility to participate in Title IV Programs on a
provisional basis for no more than three years. See "Licensing, Accreditation
and Financial Aid Regulation -- Financial Aid Regulation -- Student Loan
Defaults." During the period of provisional certification, the institution must
comply with any additional conditions included in its program participation
agreement. If the Department of Education determines that a provisionally
certified institution is unable to meet its responsibilities under its program
participation agreement, it may revoke the institution's certification to
participate in Title IV Programs.
Based on an inspection conducted by the Office of Inspector General of the
Department of Education in mid-1992, the Department of Education concluded that
there were serious deficiencies at that time in the University's administration
of federal student financial aid programs. The Department of Education cited
late and unpaid refunds, lack of refund notification, unpaid credit balances, a
high student withdrawal rate, lack of exit counseling documentation, incorrect
loan certifications and missing financial aid transcripts. Because of these
deficiencies, the Department of Education transferred the University from the
"advance" system of payment of Title IV Program funds, under which an
institution requests and receives funding from the Department of Education in
advance based on anticipated needs, to the "reimbursement" system of payment,
under which the institution must disburse funds to eligible students and
document their eligibility for Title IV Program funds before receiving such
funds from the Department of Education. The University disputed various of the
Department of Education's findings but took steps to correct certain
institutional weaknesses identified by the Department of Education, including
creating new administrative positions dealing with Title IV Programs, hiring
additional financial aid officers, increasing training for financial aid
officers and other University officials, preparing a financial aid manual, and
developing new computer systems. Further, following an internal audit, the
University in 1993 and 1994 repaid to the government certain Title IV funds for
which the University determined its documentation was inadequate. Following
these remedial actions, the Department of Education returned the University to
the advance system of payment, effective December 7, 1995.
Department of Education regulations permit an institution to enter into a
written contract with a third-party servicer for the administration of any
aspect of the institution's participation in Title IV Programs. The third-party
servicer must, among other obligations, comply with Title IV requirements and be
jointly and severally liable with the institution for any violation by the
servicer of any Title IV provision. The University has written contracts with a
third-party servicer. Financial Aid Management for Education, Inc., which has
served the University since 1983. The servicer certifies FFEL Program loan
applications, prepares reports from the University to the Department of
Education, issues checks for the Pell and campus-based programs, and issues and
collects Perkins loans.
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Financial Responsibility
The HEA and Department of Education regulations prescribe extensive
standards of financial responsibility that institutions such as the University
must satisfy to participate in Title IV Programs. Among these standards are
general standards requiring the institution to provide the services described in
its official publications and statements; to provide the administrative
resources necessary to comply with Title IV requirements; and to 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. A for-profit institution such as the University
must also: (i) demonstrate an "acid test" ratio (defined as the ratio of cash,
cash equivalents and current accounts receivable to current liabilities) of at
least 1-to-1 at the end of its latest fiscal year; (ii) not have had operating
losses in either or both of its two latest fiscal years that in sum result in a
decrease in tangible net worth in excess of 10% of the institution's tangible
net worth at the beginning of the two-year period; and (iii) have had a positive
tangible net worth for its latest fiscal year. Based on its audited financial
statements for 1996 and 1997, as submitted to the Department of Education, the
University believes it satisfies each of the applicable financial responsibility
standards.
Student Loan Defaults
Under the HEA, an educational institution may lose its eligibility to
participate in some or all of the Title IV Programs if defaults on the repayment
of federally guaranteed student loans by its students exceed certain rates. A
rate of student defaults (known as a "cohort default rate") is calculated for
each institution annually by determining the rate at which borrowers who become
subject to their repayment obligation in one federal fiscal year default by the
end of the following federal fiscal year. For certain purposes described below,
the Department of Education calculates a weighted average cohort default rate
for the institution's students who enter repayment and default on a FFEL Program
or Direct Loan Program loan.
If the Department of Education notifies an institution that its cohort
default rate for FFEL Program loans equals or exceeds 25% for each of the three
most recent federal fiscal years, the institution's participation in the FFEL
Program ends 30 days after the notification, unless the institution timely
appeals that determination on specified grounds and according to specified
procedures. An institution's participation in the Direct Loan Program ends 30
days after notification that any combination of its FFEL Program cohort default
rate, its Direct Loan Program cohort default rate, or its weighted average
cohort default rate equals or exceeds 25% for each of the three most recent
federal fiscal years, unless the institution timely appeals. An institution
whose participation terminates under these provisions may not participate in the
relevant program for a period of up to three federal fiscal years. The
Department of Education also may initiate a proceeding to limit, suspend or
terminate an institution's participation in the FFEL Program if it has any
combination of an FFEL Program, Direct Loan Program or weighted average cohort
default rate that is equal to or greater than 25% for each of the three most
recent federal fiscal years. The Department of Education may initiate a
proceeding to limit, suspend or terminate an institution's participation in all
Title IV Programs if it has an FFEL Program, Direct Loan Program or weighted
average cohort default rate that exceeds 40% for any federal fiscal year.
If an institution's FFEL cohort default rate equals or exceeds 25% in any of
the three most recent federal fiscal years, the institution may be placed on
provisional certification status. Provisional certification does not limit an
institution's access to Title IV Program funds; however, an institution with
provisional status is under closer review by the Department of Education and may
be subject to summary adverse action if it commits violations of Title IV
Program requirements. The University's cohort default rates on FFEL Program
loans for the 1993, 1994 and 1995 federal fiscal years, the most recent years
for which this information is available, were 16.6%, 16.0% and 15.2%,
respectively. The average default rates for proprietary institutions nationally
were 23.9% 21.1% and 19.9% in fiscal years 1993, 1994 and 1995, respectively.
The "85/15 Rule"
Under what is commonly referred to as the "85/15 Rule," the HEA provides
that proprietary institutions, such as the University, are eligible to
participate in Title IV Programs only if they derive no more than 85% of their
revenues from Title IV Programs, as determined in accordance with a formula in
the regulations. A proprietary institution that violates the "85/15 Rule" loses
its eligibility to participate in Title IV Programs for at least one year.
During 1997, the University derived 50% of its revenues from tuition financed
under Title IV Programs.
10
<PAGE> 11
Incentive Compensation
As a part of an institution's program participation agreement with the
Department of Education, the institution must certify that it will neither
provide, nor contract with any entity that provides, any commission, bonus or
other incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity. Although there can be
no assurance that the Department of Education will not find deficiencies in the
University's present or former compensation plans, the University believes that
its compensation plan complies with the HEA.
Potential Effect of Regulatory Violations
If the University fails to comply with the regulatory standards governing
Title IV Programs, the Department of Education could impose one or more
sanctions, including transferring the University to the reimbursement system of
payment, requiring repayment of certain Title IV funds, certifying the
University's eligibility on a provisional basis, taking emergency action,
referring the matter for criminal prosecution, or initiating proceedings to
impose a fine or to limit, suspend or terminate the participation of the
University in Title IV Programs. In addition, the University's guarantee
agencies could limit, suspend or terminate its eligibility to provide guaranteed
student loans in the event of certain regulatory violations. Although there are
no such sanctions currently in force, and the University does not believe any
such sanctions are contemplated, if such sanctions were imposed against the
University and resulted in a substantial curtailment of the University's
participation in Title IV Programs, the University would be materially and
adversely affected.
If the University lost its eligibility to participate in Title IV Programs,
or if the amount of available federal student financial aid were reduced, the
University would seek to arrange or provide alternative sources of revenue or
financial aid for students. The SEL Program would provide one such alternative,
but there can be no assurance that the SEL Program could provide loans
sufficient to make up for the loss of Title IV Program funds. Although the
University believes that one or more private organizations would be willing to
provide financial assistance to students attending the University, there is no
assurance that this would be the case, and the interest rate and other terms of
such student financial aid might not be as favorable as those for Title IV
Program funds. The University may be required to guarantee all or part of such
alternative assistance or might incur other additional costs in connection with
securing alternative sources of financial aid. Accordingly, the loss of
eligibility of the University to participate in Title IV Programs would be
expected to have a material adverse effect on the University even if it could
arrange or provide alternative sources of revenue or student financial aid.
RESTRICTIONS ON ADDING LOCATIONS AND EDUCATIONAL PROGRAMS
State requirements and accrediting agency standards may in certain instances
limit the ability of the University to establish additional locations and
programs. District of Columbia regulations require institutions to submit an
application for an amended license in order to add a new program or location.
The Virginia State Council of Higher Education requires institutions to obtain
approval prior to offering new educational programs at existing sites or
instruction for degree credit at a new site located more than 25 miles or 30
minutes' travel time from a central location. Maryland law and regulations
require institutions to obtain the approval of the Maryland Higher Education
Commission ("MHEC") in order to offer an instructional program not specified in
its certificate of approval or to offer more than one-third of the
credit-bearing coursework leading toward a certificate or degree at a location
not specified in its certificate of approval. Middle States requires
institutions that it accredits to notify it in advance of implementing new
programs or locations, and upon notification may undertake a review of the
institution's accreditation. Based on its current understanding of how these
standards will be applied, the University does not believe that these standards
will have a material adverse effect on the University or its expansion plans.
The HEA requires proprietary institutions of higher education to be in full
operation for two years before qualifying to participate in Title IV Programs.
However, the applicable regulations permit an institution that is already
qualified to participate in Title IV Programs to establish an additional
location that may immediately qualify, unless the location was acquired from
another institution that has ceased offering educational programs at that
location and has unpaid Title IV liabilities. The new location must satisfy all
other applicable requirements for institutional eligibility, including approval
of the additional location by the relevant state authorizing agency and the
institution's accrediting agency. In addition, a location that qualifies as a
"branch campus" must meet extensive regulatory requirements, including the
standards of administrative capability and financial responsibility discussed
above. The University's expansion plans assume its continued ability to
establish new campuses as additional locations of the University's main campus
without incurring the two-year delay in participation in Title IV Programs. The
loss of state authorization or accreditation by the University or an existing
campus, or the failure of the University or a new campus to obtain state
authorization or accreditation, would render the University ineligible to
participate in Title IV Programs in that state or at that location.
11
<PAGE> 12
The Department of Education requires an institution to provide notice of an
additional location that offers at least 50%, but less than 100%, of an
educational program. The Department of Education may, in its discretion, require
the institution to apply for approval before it awards or disburses Title IV
Program funds to students enrolled at such location. The Department of Education
regulations provide that that determination is based on the percentage of an
educational program that is offered at the new location and on the financial and
administrative capability of the institution. An institution must apply to the
Department of Education for approval before it awards or disburses Title IV
Program funds to students enrolled at a new branch campus or a new location at
which it offers 100% of an educational program.
Generally, if an institution eligible to participate in Title IV Programs
adds an educational program after it has been designated as an eligible
institution, the institution must apply to the Department of Education to have
the additional program designated as eligible. However, an institution is not
obligated to obtain Department of Education approval of an additional program
that leads to an associate, baccalaureate, professional or graduate degree or
which prepares students for gainful employment in the same or related recognized
occupation as an educational program that has previously been designated as an
eligible program at that institution and meets certain minimum length
requirements. In the event that an institution erroneously determines that an
educational program is eligible for Title IV funds without the Department of
Education's express approval, the institution may be liable for repayment of
Title IV aid provided to students in that program. The University does not
believe that the Department of Education's regulations will create significant
obstacles to its plans to add new programs.
DISTANCE LEARNING
In August 1997, the University received regulatory approval from the D.C.
Education Licensure Commission, Virginia State Council of Higher Education,
Maryland Higher Education Commission, and Middle States to offer all of its
existing degree and diploma programs through Strayer Online via Internet-based
telecommunications instruction. Instruction for this program is delivered from
the Company's Distance Learning Center in Lorton, Virginia. During the Fall 1997
Quarter, the University had 331 students participating in the distance learning
program, of which 88 students solely took classes through Strayer Online.
CHANGE IN OWNERSHIP RESULTING IN A CHANGE OF CONTROL
Many states and accrediting agencies require institutions of higher
education to report or obtain approval of certain changes in ownership or other
aspects of institutional status, but the types of and triggers for such
reporting or approval vary among states and accrediting agencies. The D.C.
Commission may require an institution licensed by it to apply to amend its
license prior to a change in ownership. The applicable laws and regulations of
Virginia and Maryland do not specifically address reporting of changes in
ownership. The University's accrediting agency, Middle States, requires
institutions that it accredits to inform it in advance of any substantive
change, including a change that significantly alters the ownership or control of
the institution. Examples of substantive changes requiring advance notice to
Middle States include changes in the legal status, ownership or form of control
of the institution, such as the sale of a proprietary institution. Middle States
must approve a substantive change in advance in order to include the change in
the institution's accreditation status.
The HEA provides that an institution which undergoes a change in ownership
resulting in a change of control loses its eligibility to participate in the
Title IV Programs and must apply to the Department of Education in order to
reestablish such eligibility. An institution is ineligible to receive Title IV
Program funds during the period prior to recertification. The HEA further
defines one of the events that would trigger a change in ownership resulting in
a change of control as the transfer of the controlling interest of the stock of
the institution or its parent corporation. For a publicly-traded corporation,
the securities of which are required to be registered under the Exchange Act,
such as the Company, the Department of Education regulations implementing the
HEA define a change in ownership resulting in a change of control as occurring
when a change of control of the corporation takes place that gives rise to the
obligation on the part of the corporation to file a Form 8-K with the SEC
notifying that agency of the change of control.
Ron K. Bailey currently owns approximately 52.4% of the Company's
outstanding stock jointly with his wife. If Mr. or Mrs. Bailey were to die, the
surviving spouse would become the sole owner of those shares. The HEA and
Department of Education implementing regulations allow a change in ownership
upon the retirement or death of an owner to be treated as not resulting in a
change of control if it involves the sale or transfer of the owner's ownership
interest to a family member or to a person with an ownership interest who has
been involved in the management of the institution for at least two years.
However, the Department of Education requires schools to report such events to
the Department of Education for review. District of Columbia, Virginia and
Maryland law and Middle States policies do not specifically address changes in
ownership resulting from the retirement or death of an owner. However, it is
possible that one or more of these regulatory bodies would consider such a
change in ownership to be a substantive change that must be reported by the
institution and would require review or reauthorization of the institution.
12
<PAGE> 13
Under INS regulations, if a school that is approved to admit foreign
students changes ownership, approval will be automatically withdrawn 60 days
after the change of ownership unless the school files a new petition for school
approval within 60 days of that change of ownership. If, after conducting a
review, the INS district director finds that the school's approval should not be
continued, the district director must institute proceedings to withdraw the
school's approval. The Company currently has INS approval to admit foreign
students.
If the University underwent a change of control that required reapproval by
any state authority, Middle States or any federal agency, and any required
regulatory approval were significantly delayed, limited or denied, there could
be a material adverse effect on the University's ability to offer certain
educational programs, award certain degrees or diplomas, operate one or more of
its locations, admit certain students or participate in Title IV Programs,
which in turn would materially and adversely affect the University's
operations. A change that required approval by a state regulatory authority,
Middle States or a federal agency could also delay the University's ability to
establish new campuses or educational programs and may have other adverse
regulatory effects. Furthermore, the suspension from Title IV Programs and the
necessity of obtaining regulatory approvals in connection with a change of
control may materially limit the University's flexibility in future financings
or acquisition transactions.
VETERANS BENEFITS
Pursuant to federal law providing benefits for veterans and reservists, the
University is approved for education of veterans and members of the selective
reserve and their dependents by the state approving agency in the District of
Columbia and Virginia. The University expects to seek approval to offer
educational programs to veterans and other eligible persons in Maryland at an
appropriate time.
ITEM 2. PROPERTIES.
The University leases eight of its nine campuses, five of which are owned
by corporations controlled by the Company's President and CEO, Ron K. Bailey.
The leases with these corporations all have ten-year terms expiring in 2006,
with three five-year renewal terms. Of the remaining leases, one has a term
that expires in 2002 with two five-year renewal options, one has a term that
expires in 1998, with a three-year renewal option and the third lease has a
term that expires in 2000, with three one-year renewal options. With the
exception of the Arlington and Prince George's County leases, the leases
contain purchase options. See "Certain Transactions -- Lease of Campus
Facilities" and Note 9 to the Company's consolidated financial statements. The
table below sets forth certain information regarding each of the University's
properties at December 31, 1997:
<TABLE>
<CAPTION>
AREA IN
LOCATION SQUARE FEET
--------------------------------- ------------
<S> <C>
Washington, D.C.................. 33,000
Alexandria, Virginia............. 22,000
Arlington, Virginia.............. 26,000
Woodbridge, Virginia............. 20,800
Manassas, Virginia............... 20,800
Loudoun Campus (Ashburn),
Virginia....................... 33,000
Fredericksburg, Virginia......... 17,500
Takoma Park (Washington, D.C.)... 21,800
Prince George's County, Maryland. 6,000
Distance Learning (Lorton,
Virginia)...................... 16,200
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation and other legal
proceedings arising out of the ordinary course of its business. There are no
pending material legal proceedings to which the Company is subject or to which
the Company's property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of 1997.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the Nasdaq National Market under the symbol
"STRA." The following table sets forth, for the periods indicated, the high and
low sale prices of the Company's Common Stock, as reported on the Nasdaq
National Market. All sale price information has been restated to reflect the
Company's November 18, 1997, 3-for-2 stock split effected by way of a 50
percent stock dividend.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996:
Third Quarter (July 25 through September 30)...... $17.88 $10.25
Fourth Quarter.................................... $23.00 $16.38
1997:
First Quarter..................................... $17.92 $13.08
Second Quarter.................................... $26.33 $13.08
Third Quarter..................................... $30.33 $23.08
Fourth Quarter.................................... $36.00 $28.00
</TABLE>
The last sales price of the Common Stock on March 16, 1998, as reported on
the Nasdaq National Market, was $32.00 per share. As of February 13, 1998,
there were approximately 22 holders of record and 1,147 non-objecting
beneficial shareholders. The Company believes that there are a number of
holders of Common Stock whose shares are held in nominee accounts by brokers.
The Company has established a policy of declaring quarterly cash dividends
at the rate of $0.0433 per share ($0.1733 annually) on the Company's Common
Stock. The amount of dividends payable in the future will be reviewed
periodically by the Company's Board of Directors in light of the Company's
earnings, financial condition, capital needs and regulatory considerations.
There is no requirement or assurance that dividends will be paid.
14
<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
AND OPERATING DATA AMOUNTS).
The following table sets forth, for the periods and at the dates indicated,
selected consolidated financial data for the Company. The financial information
has been derived from the Company's consolidated financial statements. The
information set forth below is qualified by reference to and should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this annual report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenues...................... $29,368 $34,257 $38,196 $45,005 $53,131
------- ------- ------- ------- -------
Costs and expenses
Instruction and educational support. 14,185 14,740 16,168 17,808 19,738
Selling and promotion............... 3,092 3,667 4,281 4,457 5,476
General and administration(1)....... 7,847 10,648 11,571 6,749 7,232
------- ------- ------- ------- -------
25,124 29,055 32,020 29,014 32,446
------- ------- ------- ------- -------
Income from operations................. 4,244 5,202 6,176 15,991 20,685
Investment and other income............ 180 350 875 1,061 2,764
------- ------- ------- ------- -------
Income before income taxes............. 4,424 5,552 7,051 17,052 23,449
Provision for income taxes(2).......... -- -- -- 2,740 9,012
------- ------- ------- ------- -------
Net income............................. $ 4,424 $ 5,552 $ 7,051 $14,312 $14,437
======= ======= ======= ======= =======
Quarterly Cash dividends per common share $0.0417 $0.0433
======= =======
PRO FORMA DATA:(3)
Income before income taxes............. $17,052
Income taxes........................... 6,649
-----
Net income............................. $10,403
=======
NET INCOME PER SHARE (PRO FORMA FOR 1996)
Basic.................................. $ 0.84 $ 0.96
======= =======
Diluted................................ $ 0.83 $ 0.93
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING(4)
Basic.................................. 12,425 15,037
======= =======
Diluted................................ 12,593 15,590
======= =======
OPERATING DATA:
Enrollment(5) ......................... 6,200 6,800 7,400 8,200 9,400
<CAPTION>
AT DECEMBER 31,
---------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 2,191 $ 5,564 $ 8,992 $ 11,777 $ 15,934
Working capital........................ 5,195 5,934 8,327 15,574 20,649
Total assets........................... 16,279 19,824 25,878 47,822 78,297
Long-term liabilities.................. -- -- -- 189 186
Total liabilities...................... 9,651 10,487 10,539 12,411 13,174
Total stockholders' equity............. 6,628 9,337 15,339 35,411 65,123
</TABLE>
- ----------
(1) Includes bonus payments to the former stockholder of the University (the "S
Corporation Stockholder") of 3.5 million in 1993, $5.5 million in 1994, and
$6.2 million in 1995 for the payment of income taxes by the S Corporation
Stockholder on undistributed S Corporation income. In connection with the
Company's initial public offering, effective July 25, 1996, the Company
acquired the University and ELP, as a result of which the University and
ELP changed their tax status from S Corporations to C Corporations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Background and Overview."
(2) Historical data for 1993 through 1995 do not reflect any provision for
income taxes. The University and ELP were S Corporations during such
periods and therefore were not subject to income tax.
(3) Reflects the formation of the Company and the acquisition of the University
by the Company as if those events had taken place on January 1, 1996.
Following the termination of their status as S Corporations prior to
completion of the Company's initial public offering, the University and ELP
became subject to federal and state income tax. The pro forma data reflects
the application of statutory corporate income tax rates to income before
income taxes as if the termination of the S Corporation status of the
University and ELP had occurred on January 1, 1996. The effective pro forma
income tax rate for the year ended December 31, 1996 was 39%.
15
<PAGE> 16
(4) Pro forma weighted average shares outstanding reflect the acquisition of
the University by the Company in exchange for 8,998,500 shares of common
stock, as if it had occurred on January 1, 1996. Subsequent to the closing
of the initial public offering, the Company made a distribution to the
stockholders of the University in respect of earnings previously subject to
income tax during the University's period as an S Corporation (the "S Corp.
Distribution"). As a result, pro forma weighted average shares outstanding
also give effect to the increase in the number of shares which, when
multiplied by the net per share proceeds of the offering, would have been
necessary to fund distributions to the stockholders, including the S Corp.
Distribution, during the twelve months ended July 1996, to the extent that
such distributions exceeded net income during the same period.
(5) Reflects student enrollment as of the beginning of the Fall academic
quarter for each year indicated. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Seasonality."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion contains forward-looking statements, which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause a difference include, but are not limited to, those discussed
elsewhere in the Company's Form 10-k dated December 31, 1997 as filed with the
Securities and Exchange Commission.
BACKGROUND AND OVERVIEW
The University is a regional proprietary institution of higher education
offering undergraduate and graduate degree programs at nine campuses in the
greater Washington, D.C. area. The Company was incorporated in May 1996 to
acquire all of the outstanding capital stock of the University and ELP from Mr.
and Mrs. Ron K. Bailey, the previous sole stockholders of the University. Upon
completion of the Company's initial public offering in July 1996, the
University and ELP, which administers the SEL Program, became direct
subsidiaries of the Company.
Revenues, operating income, and pro forma net income have increased in each
of the last three years. From 1995 through 1997, revenues increased
approximately 39.1%, operating income increased approximately 234.9%, and net
income increased 104.8%. Over the three-year period, tuition revenue accounted
for approximately 95.8% of total revenue. The number of students increased
approximately 27.0% from 7,419 at the beginning of the 1995 Fall quarter to
9,419 at the beginning of the 1997 Fall quarter, and tuition rates increased
approximately 13.3% over the last three years.
The University's principal source of revenue is tuition collected from its
students. The academic year of the University is divided into four quarters,
which approximately coincide with the four quarters of the calendar year.
Students generally must pay the entire tuition for each course prior to the
beginning of the quarter. If a student withdraws from a course prior to
completion, the University refunds a portion of the tuition. When students
register for courses, tuition is recorded as unearned tuition, which is
recognized as courses are taught through the academic quarter. Revenues also
consist in part of fees and other revenues derived principally from application
fees, "no show" fees, and bookstore sales. When a student registers for a
course but does not attend any classes, which can have the effect of denying a
place in the course to another student, the University imposes a "no show" fee.
Unless otherwise indicated, student enrollment information presented herein
reflects enrollment as of the beginning of the Fall academic quarter for the
applicable year, which is the beginning of the academic year and the industry
practice for measuring enrollments at educational institutions.
The University records tuition receivable when students register for the
academic quarter, generally prior to the end of the previous academic quarter.
Because the University's academic quarters coincide with the calendar quarters,
tuition receivable at the end of any calendar quarter largely represents
student tuition due for the following academic quarter. Based upon past
experience and judgment, the University establishes an allowance for doubtful
accounts with respect to accounts receivable not included in unearned tuition.
Any uncollected account more than six months past due is charged against the
allowance. The University's historical bad debt expense as a percentage of
revenue for the years ended December 31, 1995, 1996, and 1997 was 1.7%, 1.8%,
and 2.6%, respectively.
The University's expenses consist of instruction and educational support
expenses, selling and promotional expenses, and general and administration
expenses. Instruction and educational support expenses generally contain items
of expense directly attributable to the educational activity of the University.
This expense category includes salaries and benefits of faculty, academic
administrators, and student support personnel. Instruction and educational
support expenses also include costs of educational supplies and facilities,
including rent on campus leases, certain costs of establishing and maintaining
computer laboratories, and all other physical plant and
16
<PAGE> 17
occupancy costs, with the exception of costs attributable to one floor of the
Arlington campus used for administrative purposes.
Selling and promotional expenses include salaries and benefits of personnel
engaged in recruitment, admissions, promotion and development, as well as costs
of advertising and production of marketing materials.
General and administration expenses include salaries and benefits of
personnel engaged in accounting, personnel, compliance and other business
functions, and plant and occupancy costs attributable to such functions.
Further, as discussed below, general and administration expenses prior to 1996
reflect payments made to the S Corporation Stockholder for taxes payable by
that stockholder with respect to the University's income.
Prior to 1996, the University each year paid the S Corporation Stockholder
amounts sufficient to pay the income tax liabilities for income earned by the
University under Subchapter S of the Internal Revenue Code of 1986. These
amounts were paid as bonuses (subject to payroll taxes and benefits) and were
reflected in general and administration expenses. These bonus payments totaled
$6.2 million for the 1995 fiscal year. Amounts paid to the stockholder from
January 1, 1996 through July 25, 1996 (the date of completion of the Company's
initial public offering of Common Stock) with respect to the University's
income were paid as distributions to the stockholder and not to the stockholder
as a bonus. Unlike bonuses, these distributions are not reflected as general
and administration expenses. As of July 25, 1996, the Company terminated the
University's S Corporation status and became subject to corporate income
taxation on a consolidated basis. Since the Company was an S Corporation prior
to July 25, 1996, there was no corporate income tax provision.
Investment and other income consist primarily of earnings on investments.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net Revenues: 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Instruction and educational
support...................... 42.3 39.6 37.1
Selling and promotional....... 11.2 9.9 10.3
General and administration.... 30.3 15.0 13.6
------ ------ ------
Income from operations.......... 16.2 35.5 39.0
Investment and other income..... 2.3 2.4 5.2
------ ------ ------
Income before taxes............. 18.5 37.9 44.2
Provision for income taxes...... -- 6.1 17.0
------ ------ ------
Net income...................... 18.5% 31.8% 27.2%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased 18.1% from $45.0 million in 1996 to $53.1
million in 1997 due to a 15.3% increase in the number of students in 1997 and a
6.3% tuition increase for 1997.
Instruction and educational support expenses. Instruction and educational
support expenses increased 10.8% from $17.8 million in 1996 to $19.7 million in
1997 due to an increase in the number of personnel to support increased
enrollment, salary increases and the upgrade of campus computer laboratories.
Selling and promotional expenses. Selling and promotional expenses
increased 22.9% from $4.5 million in 1996 to $5.5 million in 1997 due
principally to increased advertising costs, and the addition of admissions
personnel at the new Distance Learning Center and the Prince George's County
Campus.
General and administration expenses. General and administration expenses
increased 7.2% from $6.7 million in 1996 to $7.2 million in 1997 due
principally to the addition of administrative personnel in order to support
increased enrollments.
Income from operations. Income from operations increased 29.4% from $16.0
million in 1996 to $20.7 million in 1997. This increase was primarily due to
the increase in student enrollment and tuition in 1997.
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<PAGE> 18
Provision for income taxes. Income tax expense increased 333% from $2.7
million in 1996 to $9.0 million in 1997. This increase was due to the
termination of the Company's S-corporation status in July 1996.
Net income. Net income increased 38.8% from $10.4 million on a pro forma
basis in 1996 to $14.4 million in 1997 because of the factors discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased 17.8% from $38.2 million in 1995 to $45.0
million in 1996 due to a 9.6% increase in the number of students, a 6.7%
tuition increase and increased activity in ELP, all in 1996.
Instruction and educational support expenses. Instruction and educational
support expenses increased 10.1% from $16.2 million in 1995 to $17.8 million in
1996 due to an increase in the number of personnel to support increased
enrollment, salary increases and the upgrade of campus computer laboratories.
Selling and promotional expenses. Selling and promotional expenses
increased 4.1% from $4.3 million in 1995 to $4.5 million in 1996 due
principally to increased advertising costs.
General and administration expenses. General and administration expenses
decreased 41.7% from $11.6 million in 1995 to $6.7 million in 1996. The primary
reason for the decrease was the fact that the Company did not pay a bonus to
its stockholder in respect of income taxes in 1996. Excluding the $6.2 million
bonus in 1995, general and administration expenses would have increased
approximately 25% due to increases in expenses associated with being a public
company and increases in the number of administrative personnel to support
increased enrollment.
Income from operations. Income from operations increased 158.9% from $6.2
million in 1995 to $16.0 million in 1996. This increase was due to the increase
in student enrollment in 1996 and due to the fact that the University did not
pay bonuses to its stockholder, as discussed above.
Net income. Net income increased 103% from $7.1 million in 1995 to $14.3
million in 1996 because of the factors discussed above.
SEASONALITY
The Company's quarterly results of operations tend to vary significantly
within a year because of student enrollment patterns. Enrollment generally is
highest in the fourth, or Fall, quarter, and lowest in the third, or Summer,
quarter. In 1997, enrollments at the beginning of the Winter, Spring, Summer
and Fall academic quarters were 8,039, 8,091, 5,932 and 9,419, respectively.
Costs generally are not affected by the seasonal factors and do not vary
significantly on a quarterly basis. To some extent, however, instructional and
educational support expenses are lower in the third quarter because fewer
part-time faculty are needed.
The following table sets forth the Company's revenues on a quarterly basis
for the years ended December 1995, 1996, and 1997.
QUARTERLY REVENUE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ----------------- -----------------
THREE MONTHS ENDED AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------------ ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
March 31............ $ 10,635 28% $ 12,415 28% $ 13,773 26%
June 30............. 9,702 25 11,614 26 13,639 25
September 30........ 7,221 19 8,305 18 10,030 19
December 31......... 10,638 28 12,671 28 15,689 30
-------- ------ -------- --- -------- ---
Total for Year...... $ 38,196 100% $ 45,005 100% $ 53,131 100%
======== ===== ======== === ======== ===
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company's Board of Directors approved a 3-for-2 stock
split effective by way of a 50 percent stock dividend. In April 1997, the
Company received approximately $15.0 million in net proceeds from a public
offering of 1,158,750 shares of common stock. The proceeds from this offering
were used to fund the Company's SEL Program, the acquisition of the
University's Alexandria
18
<PAGE> 19
Campus facility, and for expansion of the University's Distance Learning Program
and Maryland campus openings.
During 1997, the Company generated cash from operating activities of $12.9
million. This cash and the remaining proceeds from the Company's April 1997
public offering resulted in an increase in cash and cash equivalents and
marketable securities from $26.9 million at December 31, 1996 to $52.8 million
at December 31, 1997. In addition, on March 31, 1997, the Company obtained a
credit facility from a bank in the amount of $10.0 million. Interest on any
borrowings under the facility will accrue at an annual rate not to exceed 0.75%
above the London Interbank Offered Rate. The Company will not pay a fee for
this facility, but in the event of any borrowings, an origination fee of 1%
will be due on the amounts borrowed from time to time thereunder. There were
no borrowings by the Company in 1997.
The Company believes that existing cash and cash equivalents, marketable
securities, cash generated from operating activities and, if necessary, cash
borrowed under the credit facility will be sufficient to meet the Company's
requirements for at least the next 24 months. If the University decides to
purchase additional campus facilities, it may finance such acquisitions with
indebtedness.
Strayer Education, Inc. is in the process of assessing and repairing its
computer applications to ensure their functionality with respect to the "year
2000" millennium change. At present, Strayer Education does not anticipate
that material incremental costs will be incurred in any single future year.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Strayer Education, Inc.
Report of Independent Accountants............................................................. 20
Consolidated Balance Sheets as of December 31, 1996 and 1997.................................. 21
Consolidated Statements of Income for each of the three years in the period ended
December 31, 1997.......................................................................... 22
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 1997............................................................. 23
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997.................................................................... 24
Notes to Consolidated Financial Statements.................................................... 25
</TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Schedule II-- Valuation and Qualifying Accounts................................................. 32
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
19
<PAGE> 20
INDEPENDENT ACCOUNTANTS REPORT
Board of Directors and Stockholders, Strayer Education, Inc.
We have audited the accompanying consolidated balance sheets of Strayer
Education, Inc. and subsidiaries (the "Company") as of December 31, 1996 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. We have also audited the financial statement schedule listed in the index
on page 19 of this Form 10-K. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Strayer
Education, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
Washington, D.C. Coopers & Lybrand L.L.P.
January 30, 1998
20
<PAGE> 21
STRAYER EDUCATION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 11,777 $ 15,934
Marketable securities available for sale, at market................................ 5,057 5,018
Short-term investments -- restricted............................................... 807 879
Tuition receivable, net of allowances for doubtful accounts of $164 and
$230, respectively.............................................................. 8,923 10,063
Inventories........................................................................ 923 1,018
Other current assets............................................................... 309 725
-------- --------
Total current assets....................................................... 27,796 33,637
Student loans receivable, net of allowances for losses............................... 2,799 4,438
Property and equipment, net.......................................................... 7,063 8,113
Investments in marketable securities available for sale, at market................... 10,070 31,877
Other assets......................................................................... 94 232
-------- --------
Total assets............................................................... $ 47,822 $ 78,297
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 332 $ 380
Accrued expenses................................................................... 740 829
Unearned tuition................................................................... 11,150 11,779
--------- ---------
Total current liabilities.................................................. 12,222 12,988
Deferred income taxes................................................................ 189 186
-------- --------
Total liabilities.......................................................... 12,411 13,174
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01; 5,000,000 shares authorized, no shares issued
or outstanding.................................................................. -- --
Common stock, par value $.01; 50,000,000 shares authorized; 14,175,000 and
15,542,105 shares issued and outstanding in 1996 and 1997, respectively......... 142 156
Additional paid-in capital......................................................... 31,147 48,762
Retained earnings.................................................................. 3,891 15,922
Net unrealized gains on investments, net of deferred income taxes of
$152 and $186 in 1996 and 1997, respectively.................................... 231 283
-------- --------
Total stockholders' equity................................................. 35,411 65,123
-------- --------
Total liabilities and stockholders' equity................................. $ 47,822 $ 78,297
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 22
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
----------- ----------- --------
<S> <C> <C> <C>
Total Revenues........................ $38,196 $45,005 $53,131
------- ------- -------
Costs and expenses:
Instruction and educational support .. 16,168 17,808 19,738
Selling and promotion................. 4,281 4,457 5,476
General and administration............ 11,571 6,749 7,232
------- ------- -------
32,020 29,014 32,446
------- ------- -------
Income from operations................ 6,176 15,991 20,685
Investment and other income............. 875 1,061 2,764
------- ------- -------
Income before income taxes............ 7,051 17,052 23,449
Provision for income taxes.............. -- 2,740 9,012
------- ------- -------
Net income............................ $ 7,051 $14,312 $14,437
======= ======= =======
PRO FORMA INFORMATION:
Income before income taxes............ $17,052
Income taxes.......................... 6,649
-------
Net income............................ $10,403
=======
NET INCOME PER SHARE (PRO FORMA IN 1996):
Basic................................. $ 0.84 $ 0.96
Diluted............................... $ 0.83 $ 0.93
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 23
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAINS
-------------------- PAID-IN RETAINED (LOSSES) ON
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS TOTAL
------ ------ ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994............. 563 $6 $ -- $9,374 $(43) $9,337
Distributions to
stockholders...................... -- -- -- (3,350) -- (3,350)
Capital contributions by
stockholder in
connection with
formation of ELP.................. -- -- 2,100 -- -- 2,100
Net unrealized gains on
investments....................... -- -- -- -- 201 201
Net income........................... -- -- -- 7,051 -- 7,051
------------ -------- --------- ---------- -------- ----------
Balance, December 31, 1995............. 563 6 2,100 13,075 158 15,339
Formation of Strayer
Education, Inc.................... 1,500 -- 1 -- -- 1
Exchange of Strayer
Education, Inc. common
stock for Strayer
University, Inc. common
stock............................. 8,997,937 84 (84) -- -- --
Proceeds from sale of
common stock, net of
offering expenses of $3,187....... 5,175,000 52 31,261 -- -- 31,313
Payment to stockholder for
acquisition of ELP................ -- -- (943) (117) -- (1,060)
Distributions to
stockholders...................... -- -- (1,188) (22,788) -- (23,976)
Cash dividends ($0.04 per
share)............................ -- -- -- (591) -- (591)
Net unrealized gains on
investments....................... -- -- -- -- 73 73
Net income........................... -- -- -- 14,312 -- 14,312
------------ -------- --------- ---------- -------- ----------
Balance, December 31, 1996............. 14,175,000 142 31,147 3,891 231 35,411
Proceeds from sale of
common stock, net of
offering expenses of $1,189........ 1,158,750 12 15,021 -- -- 15,033
Exercise of stock options............ 208,355 2 1,387 -- -- 1,389
Reimbursement of prior year
distribution to stockholders....... -- -- -- 84 -- 84
Cash dividends ($0.17 per share)..... -- -- -- (2,490) -- (2,490)
Tax benefit from exercise of
stock options..................... -- -- 1,207 -- -- 1,207
Net unrealized gains on
investments....................... -- -- -- -- 52 52
Net income............................. -- -- -- 14,437 -- 14,437
------------ -------- --------- ---------- -------- ----------
Balance, December 31, 1997............. 15,542,105 $156 $48,762 $15,922 $283 $65,123
============ ======== ========= ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 24
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 7,051 $ 14,312 $ 14,437
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization................................ 688 1,021 1,236
Provision for student loan losses............................ 49 205 325
Deferred income taxes........................................ -- (75) (174)
Changes in assets and liabilities:
Short-term investments -- restricted......................... (317) (87) (72)
Tuition receivable, net...................................... 940 (1,050) (1,140)
Inventories.................................................. (179) (198) (95)
Other current assets......................................... 167 (161) (279)
Other assets................................................. -- -- (138)
Trade accounts payable....................................... (220) (28) 48
Accrued expenses............................................. 158 64 89
Unearned tuition............................................. 113 1,646 629
Student loans originated or acquired............................ (1,481) (3,314) (4,078)
Collections on student loans receivable......................... 500 1,030 2,114
Proceeds from sale of loans..................................... -- 212 --
------- -------- --------
Net cash provided by operating activities............... 7,469 13,577 12,902
------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............................. (1,162) (5,208) (2,286)
Purchases of marketable securities.............................. (7,993) (16,640) (34,380)
Maturities of marketable securities............................. 6,386 5,370 12,698
Other........................................................... (22) -- --
------- -------- --------
Net cash used in investing activities................... (2,791) (16,478) (23,968)
------- -------- --------
Cash flows from financing activities:
Distributions to stockholders................................... (3,350) (23,976) 84
Dividends paid.................................................. -- (591) (2,490)
Proceeds from sale of common stock and
additional capital contributions by ELP stockholder.......... 2,100 31,313 15,033)
Proceeds from exercise of stock options, including tax
benefit...................................................... -- -- 2,596
Acquisition of ELP.............................................. -- (1,060) --
------- -------- --------
Net cash provided by (used in)financing
activities............................................ (1,250) 5,686 15,223
------- -------- --------
Net increase in cash and cash requirements.............. 3,428 2,785 4,157
Cash and cash equivalents -- beginning of year.................... 5,564 8,992 11,777
------- -------- --------
Cash and cash equivalents -- end of year.......................... $ 8,992 $ 11,777 $ 15,934
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 25
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Strayer Education, Inc. (the Company) was formed on May 10, 1996, as a
Maryland corporation, and commenced operations on July 25, 1996.
On July 30, 1996, the Company completed an initial public offering of its
common stock. The Company sold 5,175,000 shares in the offering at a price of
$6.67 per share. Net proceeds to the Company were $31,313,000. Prior to the
closing of the offering, the Company exchanged 8,998,500 shares of its common
stock for 100% of the outstanding common stock of Strayer University, Inc.
(the University). Approximately $19,838,000 of the net proceeds of the offering
were paid to the stockholders of the University as a distribution of earnings
on which the stockholders had previously paid income taxes during the period
the University was an S Corporation.
Contemporaneously with the closing of the initial public offering, the
Company acquired Education Loan Processing, Inc. (ELP) at a purchase price of
$1,060,000, ELP's net book value. ELP was incorporated in December 1994 and
began operations in January 1995. ELP was wholly owned by a stockholder of the
Company.
Under generally accepted accounting principles, the University's and ELP's
bases in their assets and liabilities were carried over to the Company and the
operations of the University, ELP and the Company were retroactively combined
in a manner similar to a pooling of interest, because these acquisitions were
combinations of entities under common control. All significant intercompany
accounts and transactions have been eliminated.
On April 22, 1997, the Company completed a public offering of 1,158,750
shares at $14.00 per share. Net proceeds to the Company were $15.0 million.
In May 1997, the Company formed a wholly-owned subsidiary, Professional
Education, Inc. (ProEd), for the purpose of acquiring an information technology
training company. No such acquisitions have been made as of the date of this
report.
During 1997, the Company's Board of Directors approved a 3-for-2 stock
split effective by way of a 50 percent stock dividend. The stock dividend was
paid on November 18, 1997 to shareholders of record on November 4, 1997. All
share and per share information in this report has been changed to give effect
to this stock split.
Consistent with the financial statements included in the Company's
prospectus and the reorganization of the Company in connection with the
completion of the initial public offering, the 1995 financial statements are
presented on a combined basis and the 1996 and 1997 financial statements are
presented on a consolidated basis. The accompanying 1996 and 1997 financial
statements include the accounts of the Company, the University, ELP and ProEd,
collectively referred to herein as the "Company" or "Companies."
2. NATURE OF OPERATIONS
The University is a proprietary accredited institution of higher education
that provides undergraduate and graduate degrees in various fields of study
through its nine campuses in the District of Columbia, Maryland and Virginia.
In January 1998, the College was granted University status by the Education
Licensure Committee of The District of Columbia. Subsequently, Strayer College
changed its name to Strayer University.
ELP is a finance company that purchases and services student loans,
principally for the University. For purposes of the consolidated balance
sheets, all of ELP's assets and liabilities have been classified as current
assets and liabilities with the exception of student loans receivable, which
have been classified as noncurrent consistent with industry practice.
25
<PAGE> 26
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of operating cash and cash invested in
short-term certificates of deposit, commercial paper, and U.S. government
obligations. The Companies place their cash and temporary cash investments with
high quality credit institutions. The Companies consider all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Investments
The Companies' investments are considered "available-for-sale," and, as
such, are stated at market value. The net unrealized gains and losses are
reported as a component of stockholders' equity. Realized gains or losses from
the sale of marketable securities are based on the specific identification
method.
Tuition Revenues
Tuition income is deferred at the time of registration and is recognized as
income, net of any refunds or withdrawals, ratably throughout each respective
quarter session. Advance registrations for the next quarter are shown as
unearned tuition.
Student Loans Receivable
Student loans receivable are stated at the amount of unpaid principal,
reduced by an allowance for loan losses. Interest income from student loans is
recognized using the interest method.
Provisions for estimated losses on student loans are charged to income in
amounts sufficient to maintain the allowance at a level considered adequate to
cover the losses of principal and interest in the existing loan portfolio,
based upon historical trends, economic conditions and other information. ELP's
charge-off policy is based on a loan-by-loan review; however, any loan with
payments more than 120 days past due is written off against the allowance.
Concentration of Credit Risk
The Companies place their cash and temporary cash investments with high
credit quality institutions. At times cash and cash equivalent balances may be
in excess of the FDIC insurance limit. The Companies have not experienced any
losses on their cash and cash equivalents.
Tuition receivables are not collateralized; however, credit risk is
minimized as a result of the diverse nature of the University's student base in
the greater Washington, D.C. area. The University establishes an allowance for
doubtful tuition accounts based upon factors surrounding historical trends and
other information.
Student loans are receivable from the University's students. The Companies
perform credit evaluations and require cosigners in some instances to minimize
credit risk.
Inventories
Inventories, which consist of books and supplies held in campus bookstores,
are valued at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated
useful lives ranging from 3 to 40 years. Depreciation amounted to $688,000,
$1,021,000 and $1,236,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
26
<PAGE> 27
Income Taxes
Prior to July 30, 1996, the financial statements of the Companies do not
include a provision for income taxes because the taxable income of the
University and ELP was included in the income tax returns of the stockholders
under S Corporation elections. A provision for corporate income taxes is
presented for all periods subsequent to July 30, 1996.
In connection with the formation of Strayer Education, Inc., the initial
public offering of the Company's common stock, and the acquisition of the
University and ELP by Strayer Education, Inc., effective July 25, 1996, the
University and ELP are no longer treated as S Corporations for tax purposes.
The Companies now provide for deferred income taxes based on temporary
differences between financial statement and tax bases of assets and liabilities
using enacted tax rates in effect in the year in which the differences are
expected to reverse.
Net Income Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128) effective December 31, 1997. All prior period
net income per share amounts have been restated to comply with the provisions
of FAS 128. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
common and potentially dilutive common equivalent shares outstanding,
determined as follows.
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Weighted average shares outstanding
used to compute basic earnings per
share............................... 12,424,812 15,037,002
Incremental shares issuable upon the
assumed exercise of stock
options............................. 167,844 552,774
---------- ----------
Shares used to compute diluted
earnings per share.................. 12,592,656 15,589,776
========== ==========
</TABLE>
Incremental shares issuable upon the assumed exercise of outstanding stock
options is computed using the average market price during the related periods.
Pro forma weighted average shares outstanding reflect the acquisition of
the University by the Company in exchange for 8,998,500 shares of common stock,
as if it had occurred on January 1, 1996. Subsequent to the closing of the
initial public offering, the Company made a distribution to the stockholders of
the University in respect of earnings previously subject to income tax during
the University's period as an S Corporation (the "S Corp. Distribution"). As a
result, pro forma weighted average shares outstanding also give effect to the
increase in the number of shares which, when multiplied by the net per share
proceeds of the offering, would have been necessary to fund distributions to
the stockholders, including the S Corp. Distribution, during the twelve months
ended July 1996, to the extent that such distributions exceeded net income
during the same period. Fully diluted income per share was not significantly
different from the primary amount. Historical net income per share is presented
in Note 11.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of expenses during
the period reported. Actual results could differ from those estimates.
4. INVESTMENTS
Short-Term Investments -- Restricted
The U.S. Department of Education requires Title IV Program loan funds
collected in excess of amounts due for tuition to be kept in a separate cash or
cash equivalent account until such amounts can be remitted to students. These
funds are invested in short-term U.S. Treasury Notes with maturities of three
months or less.
27
<PAGE> 28
Marketable Securities
The cost and market value for each class of investments at December 31, 1996
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996
-----------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Certificates of deposit and money market
funds....................................... $ 632 $ -- $ -- $ 632
Fixed income investments...................... 10,416 137 -- 10,553
Equity securities............................. 3,695 247 -- 3,942
-------- ----- ---- --------
Total............................... $ 14,743 $ 384 $ -- $ 15,127
======== ===== ==== ========
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Certificates of deposit and money
market funds............................. $ 3,923 $ 8 $ -- $ 3,931
Fixed income investments................... 23,144 201 -- 23,345
Equity securities.......................... 9,359 260 -- 9,619
------- ----- ---- --------
Total............................ $36,426 $ 469 $ -- $ 36,895
======= ===== ==== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1996 and 1997
is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Land.......................... $ 800 $ 800
Buildings..................... 2,319 2,319
Furniture and equipment....... 5,321 7,179
Leasehold improvements........ 1,576 2,010
Vehicles...................... 52 22
------- --------
10,068 12,330
Less accumulated
depreciation........... 3,005 4,217
------- --------
$ 7,063 $ 8,113
======= ========
</TABLE>
6. STUDENT LOANS RECEIVABLE
Student loans receivable under the Strayer Education Loan Program as of
December 31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Student loans receivable outstanding, including accrued
interest............................................... $2,946 $4,721
Allowance for loan losses................................ (147) (283)
------ ------
Student loans receivable, net....................... $2,799 $4,438
====== ======
</TABLE>
The interest rate on these student loans is generally 7.5%. The Companies
believe the carrying value of the student loans approximates their fair value.
The majority of loans are revolving lines of credit that convert to term loans
upon the student's withdrawal or graduation from the University. The breakdown
of the balances of these loans is as follows as of December 31, 1997:
<TABLE>
<S> <C>
Line of credit loans............. $4,643
Term loans....................... 78
------
Total............................ $4,721
======
</TABLE>
The lines of credit require a minimum monthly payment of the greater of $50
or 3% of the outstanding loan balance, plus interest. Term loans are due in
equal monthly installments of principal plus interest over 33.3 months.
28
<PAGE> 29
7. STOCK OPTION PLAN
In July 1996, the Company set aside 1,500,000 shares of common stock for
shares to be issued under the Company's 1996 Stock Option Plan (the Plan) that
provided for the grant of options intended to qualify as incentive stock
options, and also provided for the grant of non-qualifying options to directors
and employees of the Company. Options may be granted to eligible employees of
the Companies at the discretion of the Board of Directors, at option prices
based on the fair market value of the shares at the date of grant. Vesting
provisions are at the discretion of the Board of Directors.
On July 24, 1996, the Board of Directors granted options to acquire 994,704
shares of stock at the initial offering price of $6.67 per share to all
full-time employees with at least one year of service, and to all members of
the Board of Directors. The options vest in three equal annual installments
beginning on July 25, 1997. During 1996, options for 8,829 shares were
forfeited. During 1997, options for 208,355 and 50,462 shares with a weighted
average exercise price of $6.67 were exercised and forfeited, respectively. At
December 31, 1997, the total number of stock options outstanding was 727,058,
of which 111,541 were exercisable. All of these options have a weighted
average exercise price of $6.67 per share and expire on July 25, 2001.
The Company accounts for the fair value of its stock options granted to
employees and directors in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense has been recognized for the Plan, since the exercise price
of the options was equal to the fair value of the underlying common stock on
the date of grant. Had compensation expense been determined based on the fair
value of the options at the grant dates consistent with that method of
accounting under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," the Company's pro forma net income
and net income per share for the years ended December 31, 1996 and 1997 would
have been decreased as indicated below (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Net income:
As reported............... $10,403 $14,437
Pro forma................. $10,204 $14,005
Net income per common share:
Basic:
As reported............... $ 0.84 $ 0.96
Pro forma................. $ 0.82 $ 0.93
Diluted:
As reported............... $ 0.83 $ 0.93
Pro forma................. $ 0.81 $ 0.90
</TABLE>
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model using the following assumptions: fair value
at date of grant of $2.27 per share; dividend yield of 1.0%; expected
volatility of 35%; risk-free interest rate of 6.52%; expected term of 4 years.
the remaining contractual life of the options at December 31, 1997 was 3.58
years.
8. PROFIT SHARING PLAN
The University has a 401(k) profit sharing trust covering all eligible
employees of the Company. Participants may defer a percentage of their salaries
or make contributions up to 10% of their total compensation. Employee
contributions are voluntary. Discretionary contributions are made by the
University in the fourth quarter of each year, and were $94,000, $119,000 and
$144,000 for the years ended December 31, 1995, 1996 and 1997, 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 Companies' financial position,
results of operations or cash flows.
The University has long-term operating leases for eight of its nine
campuses and other administrative locations. ELP has a two-year noncancelable
operating lease for office space. Rent expense was $3,227,000, $3,371,000 and
$3,294,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
The University has the option to buy certain of these campus properties at
their fair market value as determined by independent appraisal. The Washington
D.C. campuses and three of the Virginia campuses are leased from companies
owned by the President and a majority stockholder of the Company. Rent paid to
these companies was $1,896,000, $2,279,000 and $2,126,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
29
<PAGE> 30
The rents on these leases are subject to an annual increase based on a
stipulated price index. The minimum rental commitments for the Companies as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL AMOUNT
PAYABLE TO
TOTAL RELATED PARTIES
----- ---------------
<S> <C> <C>
1998...................... 3,427 2,126
1999...................... 3,190 2,126
2000...................... 3,061 2,126
2001...................... 2,959 2,126
2002...................... 2,598 2,126
Thereafter................ 8,165 7,264
-------- --------
$ 23,400 $ 17,894
======== ========
</TABLE>
In addition, on March 31, 1997, the Company obtained a credit facility from
a bank in the amount of $10.0 million. Interest on any borrowings under the
facility will accrue at an annual rate not to exceed 0.75% above the London
Interbank Offered Rate. The Company will not pay a fee for this facility, but
in the event of any borrowings, an origination fee of 1% will be due on the
amounts borrowed from time to time thereunder. There were no borrowings by the
Company in 1997.
10. INCOME TAXES
The income tax provision for the years ended December 31, 1996 and 1997 is
summarized below (in thousands). There was no income tax provision in 1995 due
to the S Corporation status of the University and ELP during that year.
<TABLE>
<S> <C> <C>
Current: 1996 1997
---- ----
Federal.............................. $ 2,088 $ 7,422
State................................ 727 1,764
------- -------
2,815 9,186
------- -------
Deferred:
Federal.............................. (61) (145)
State................................ (14) (29)
------- -------
(75) (174)
------- -------
$ 2,740 $ 9,012
======= =======
</TABLE>
The tax effects of the principal temporary differences that give rise to
the Companies' deferred tax asset (liability) are as follows for the years
ended December 31, (in thousands):
<TABLE>
<CAPTION>
1996 1997
----- ----
<S> <C> <C>
Tuition receivable and student loans ..... $ 112 $ 200
Property and equipment (37) 49
Unrealized gains on marketable securities. (152) (186)
------- -------
Net deferred tax asset (liability) ....... $ (77) $ 63
======= =======
</TABLE>
A reconciliation between the Companies' statutory tax rate and the
effective tax rate for the years ended December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Statutory federal rate .................................. 35% 35%
State income taxes, net of federal benefits ............. 5% 5%
Effect of 1996 over accrual ............................. -- (2%)
Income attributable to period during which the University
and ELP were S Corporations ........................... (24%) --
--- ---
Effective tax rate ...................................... 16% 38%
=== ===
</TABLE>
Cash payments for income taxes were $2,809,000 and $8,147,000 in 1996 and
1997, respectively.
Pro forma income taxes reflect the application of statutory corporate
income tax rates to the net income of the University and ELP as if the
termination of the S Corporation status of the Companies had occurred on
January 1, 1996.
30
<PAGE> 31
The components of the pro forma income tax provision as of December 31,
1996, are as follows (in thousands):
<TABLE>
<S> <C>
Current 1996
-------
Federal..................................................... $ 5,526
State....................................................... 1,198
-------
6,724
Deferred.................................................... (75)
-------
$ 6,649
=======
</TABLE>
The effective pro forma income tax rate differs from the 35% statutory
federal rate principally as a result of state income taxes.
11. HISTORICAL NET INCOME PER SHARE
Historical net income per share, computed under the provisions of FAS 128
(see note 3), after giving effect to the merger of the University and the
Company and the 3-for-2 stock split, are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Historical net income (000).. $ 7,051 $ 14,312 $ 14,437
Net income per share:
Basic .................... $ 0.78 $ 1.28 $ 0.96
Diluted .................. $ 0.78 $ 1.26 $ 0.93
Weighted average shares
outstanding
Basic .................... 9,000,000 11,197,602 15,037,002
Diluted .................. 9,000,000 11,365,446 15,589,776
</TABLE>
12. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for 1996 and 1997 is as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
1996 QUARTER
----------------------- -------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Total revenues......... $12,415 $11,614 $ 8,305 $12,671
Income from operations. 4,628 4,434 982 5,947
Net income............. 4,736 4,703 1,314 3,559
Pro forma information:
Income taxes...... 1,852 1,839 491 2,467
Net income........ 2,884 2,864 823 3,832
Net income per
share:
Basic.......... 0.26 0.26 0.06 0.26
Diluted........ 0.26 0.26 0.06 0.26
</TABLE>
<TABLE>
<CAPTION>
1997 QUARTER
----------------------- --------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Total revenues......... $13,773 $13,639 $10,030 $15,689
Income from operations. 6,406 6,140 1,440 6,699
Net income............. 4,182 4,166 1,653 4,436
Net income per share:
Basic............... 0.29 0.27 0.11 0.29
Diluted............. 0.28 0.27 0.10 0.28
</TABLE>
31
<PAGE> 32
STRAYER EDUCATION, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
BEGINNING OF CHARGED TO END OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS PERIOD
- --------------------------------------------- ------------ ---------- --------- -------
<S> <C> <C> <C> <C>
Deduction from asset account:
Allowance for doubtful accounts:
Year ended December 31, 1997.......... $ 164 $1,379 $(1,313) $ 230
Year ended December 31, 1996.......... 155 788 (779) 164
Year ended December 31, 1995.......... 135 655 (635) 155
Allowance for loan losses:
Year ended December 31, 1997.......... 147 325 (189) 283
Year ended December 31, 1996.......... 49 205 (107) 147
Year ended December 31, 1995.......... -- 49 -- 49
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- ------------------------------------------------
<S> <C> <C>
Ron K. Bailey........... 57 CEO, President, Director
Harry T. Wilkins........ 41 Chief Financial Officer Chairman of the Board of
Stanley G. Elmore....... 56 Directors
Todd A. Milano.......... 45 Director, Treasurer
Jennie D. Seaton........ 68 Director
Roland Carey............ 58 Director
Donald T. Benson........ 54 Director
G. Thomas Waite, III.... 46 Director
Charlotte Beason........ 50 Director
</TABLE>
Ron K. Bailey is the Chief Executive Officer and President and has been a
director of the Company since its formation. Mr. Bailey is currently the
Chairman of the University and was the President and a trustee of the University
from 1989 to 1997. Mr. Bailey has been the President and a director of ELP since
its formation in 1994. From 1980 to 1989, Mr. Bailey held a variety of
administrative positions with the University, including the position of Vice
President of the University. Before assuming his first full-time position with
the University in 1980, Mr. Bailey was a part-time faculty member of the
University and served as Director of Data Processing of the National Association
of Home Builders.
Harry T. Wilkins is the Chief Financial Officer of the Company and has been
the Director of Financial Affairs of the University since 1992. Prior to joining
the University, Mr. Wilkins was a Director with the accounting firm of Wooden &
Benson, Chartered from 1984 to 1992 and a member of the consulting practice of
the accounting firm of Deloitte Touche (then Deloitte, Haskins and Sells) from
1979 to 1984. Mr. Wilkins is a Certified Public Accountant.
Stanley G. Elmore has been a director of the Company since July 1996. Mr.
Elmore has been the Chairman of the Board of Trustees of the University since
1989. Mr. Elmore has served as Projects and Programs Manager, Citibank
Mid-Atlantic, a position he has held for more than five years.
32
<PAGE> 33
Todd A. Milano is the Treasurer of the Company and has been a director of
the Company since July 1996. Mr. Milano has been the Vice Chairman of the Board
of Trustees of the University since 1992. Mr. Milano has served as President and
Chief Executive Officer of Central Pennsylvania Business School since 1989.
Dr. Jennie D. Seaton has been a director of the Company since July 1996. Dr.
Seaton has been a member of the Board of Trustees of the University since 1990.
Dr. Seaton is retired and was an Assistant Dean of Virginia Commonwealth
University from 1975 to 1994.
Roland Carey has been a director of the Company since July 1996. Mr. Carey
has been a member of the Board of Trustees of the University since 1990. Mr.
Carey is an Instructor with the Carl Sandburg School, a position he has held for
more than five years.
Donald T. Benson has been a director of the Company since July 1996. Mr.
Benson has been a member of the Board of Trustees of the University since 1992.
Mr. Benson has served as Vice President, Human Resources and Administration of
Coventry Corporation since 1997. Mr. Benson was Vice President, Human Resources,
of Aetna Life Insurance Company from 1992 to 1997. From 1976 to 1992, Mr. Benson
was Senior Vice President, Human Resources, of Connecticut General Insurance
Corp. (CIGNA).
G. Thomas Waite, III has been a director of the Company since July 1996. Mr.
Waite has been a member of the Board of Trustees of the University since 1994.
Mr. Waite has served as Treasurer for the Humane Society of the United States
since 1993. In 1992, Mr. Waite was the Director of Commercial Management of The
National Housing Partnership; from 1986 to 1991, he held the position of Senior
Vice President of Hurst Property Company. As a result of the insolvency of a
real estate partnership in which Mr. Waite served as a general partner, Mr.
Waite filed for protection from creditors under Chapter 11 of the Federal
Bankruptcy Code in 1993, which subsequently was converted to a Chapter 7 filing
in 1993.
Dr. Charlotte Beason has been a director of the Company since July 1996. Dr.
Beason has been a member of the Board of Trustees of the University since 1995.
Dr. Beason is a Nurse at the U.S. Department of Veterans Affairs/Health Care
Reform Office, a position she has held for more than five years.
Directors of the Company are elected at the annual meeting of stockholders
and serve until their successors are duly elected and qualified or until their
earlier resignation or removal. Executive officers serve at the discretion of
the Board of Directors.
CERTAIN SIGNIFICANT EMPLOYEES OF THE UNIVERSITY
The following information is supplied with respect to certain other
significant employees of the University:
Dr. Donald Stoddard, 61, is the President of Strayer University. He was a
director of the Company from July 1996 to July 1997. Dr. Stoddard has been a
member of the Board of Trustees of the University since 1995. Dr. Stoddard was a
Professor, Department of English, Anne Arundel Community College, from 1990 to
1997. From 1979 to 1990, Dr. Stoddard was the Coordinator, Collegiate
Institutional Approval, of the Maryland Higher Education Commission.
Younes P. Benab, Ph.D., 60, is the Academic Dean of the University, a
position he has held since 1986.
J. Chris Toe, Ph.D., 43, has been the Administrative Dean of the University
since 1997. From 1994 to 1997, Dr. Toe was the Director, Graduate Programs of
the University. Dr. Toe joined the University in 1993 as an adjunct professor,
becoming a full-time professor in 1994. Prior to joining the University, Dr. Toe
was an independent consultant.
Marla Boulter, 42, is the University's Director of Public Relations, a
position she has held since 1995. Ms. Boulter joined the University in 1990 as
an accountant and was the University's Director of Marketing from 1991 to 1995.
Don R. Anderson, 55, is the Director of Facilities of the University, a
position he has held since 1988.
Robert E. Farmer, 59, is the Director of Human Resources of the University,
a position he has held since 1995. Mr. Farmer was the Campus Coordinator of the
Arlington campus from 1992 until 1995, and was the Director of Admissions at
that campus from 1990 to 1992. Mr. Farmer is a certified Professional in Human
Resources (PHR).
Piroj Piboolnuruk, 43, is the University's Director of Information
Management, a position he has held since 1992. Mr. Piboolnuruk was the
University's coordinator of Administrative Services from 1986 to 1992.
33
<PAGE> 34
John Tucker, 57, is the University's Director of Distance Learning, a
position he has held since 1995. Mr. Tucker has been on the faculty of the
University as an Adjunct Professor since 1974 and was a director of systems
engineering with the Internal Revenue Service from 1988 to 1995. He is a
certified computer professional and has an extensive background as an educator
in distance learning.
David J. Spille, 31, is the Manager of Investor Relations, a position he has
held since February 1997. Prior to his employment at Strayer, Mr. Spille was an
Analyst at The Nasdaq Stock Market, Inc. from 1994 to 1997, and a Business
Analyst at E-Systems Incorporated from 1990 to 1994.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee, an Executive
Committee and a Compensation Committee.
Audit Committee. The Audit Committee consists of G. Thomas Waite, Roland
Carey and Charlotte Beason. This committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants and reviews
the adequacy of the Company's internal accounting controls.
Executive Committee. The Executive Committee consists of Stan Elmore, Ron
Bailey and Jennie Seaton. This committee exercises such authority as is
delegated to it.
Compensation Committee. The Compensation Committee consists of Donald Benson
and Todd Milano. The Compensation Committee determines the compensation of the
Company's executive officers, subject to the provisions of any employment
agreements, and administers the Company's Stock Option Plan.
COMPENSATION OF THE BOARD OF DIRECTORS
Directors are reimbursed for expenses incurred in connection with their
attendance at Board and Committee meetings, but currently receive no
compensation for serving as directors.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by reference
from the information to be contained under the caption "Compensation" in the
Company's 1998 Proxy Statement.
34
<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the ownership
of Common Stock as of March 16, 1998, by each person known by the Corporation to
be the beneficial owner of more than five percent (5%) of the outstanding shares
of Common Stock, each director of the Corporation, and all executive officers
and directors as a group. The information presented in the table is based upon
the most recent filings with the Securities and Exchange Commission by such
persons or upon information otherwise provided by such persons to the
Corporation.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
----------------------
PERCENT
NAMES OF BENEFICIAL OWNERS (1) NUMBER OF CLASS
------------------------------------------------------------- --------- ----------
<S> <C> <C>
Ron K. Bailey and Beverly W. Bailey (2)...................... 8,175,000 52.6%
Putnam Investments, Inc. (3)
One Post Office Square
Boston, Massachusetts 02109............................. 1,761,969 11.3
T. Rowe Price Associates, Inc. (4)
100 East Pratt Street
Baltimore, MD 21202..................................... 864,150 5.6
Harry T. Wilkins............................................. 40,000 *
Stanley G. Elmore............................................ 3,550 *
Todd A. Milano............................................... 9,310 *
Jennie D. Seaton............................................. 3,950 *
Roland Carey................................................. 3,500 *
Donald T. Benson............................................. 4,075 *
G. Thomas Waite, III......................................... 2,572 *
Charlotte Beason............................................. 1,450 *
---------- ------
All directors and executive officers as a group (9 persons).. 8,243,407 53.0%
========== ======
</TABLE>
- ----------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options or warrants currently exercisable or exercisable within 60 days
are deemed outstanding for purposes of computing the percentage ownership of
the person holding such option or warrant but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Except
where indicated otherwise, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Includes 292,500 shares held by the Bailey Family Foundation.
(3) Based on a Schedule 13G filed with the Securities and Exchange Commission on
January 27, 1998. These securities are owned by various institutional
investors that are clients of investment adviser subsidiaries of Putnam
Investments, Inc. ("PI"), a wholly-owned subsidiary of Marsh & McClennan
Companies, Inc. ("M&MC"). For purposes of reporting requirements of the
Securities Exchange Act of 1934, PI and M&MC are each deemed to be
beneficial owners of these securities; however, each of PI and M&MC
expressly disclaims that beneficial ownership.
(4) Based on a Schedule 13G filed with the Securities and Exchange Commission on
February 17, 1998. These securities are owned by various individual and
institutional investors, which T. Rowe Price Associates, Inc. ("Price
Associates") serves as investment adviser with power to direct investments
and/or sole power to vote the securities. For purposes of the reporting
requirements of the Securities and Exchange Act of 1934, Price Associates is
deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, the beneficial owner of
such securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
LEASE OF CAMPUS FACILITIES
The Company has long-term noncancelable operating leases for eight of its
various campus locations. The rents on these leases are subject to an annual
increase based on a stipulated price index. Of the eight campus locations, five
of the campuses, including the
35
<PAGE> 36
Washington, D.C. campuses and three of the Virginia campuses, were leased from
corporations which are owned by Mr. Bailey, the Company's President, CEO and
majority stockholder. Rent paid to Mr. Bailey under these five operating leases
for the years ended December 31, 1995, 1996 and 1997 was $1,896,000, $2,279,000
and $2,126,000, respectively. Future minimum rental commitments for all of the
Company's eight leases and the five campuses leased from Mr. Bailey as of
December 31, 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT PAYABLE TO AN
AFFILIATE OF MR.
TOTAL LEASE BAILEY
COMMITMENTS INCLUDED IN TOTAL
------------- -------------------
<S> <C> <C>
1998....... 3,427 2,126
1999....... 3,190 2,126
2000....... 3,061 2,126
2001....... 2,959 2,126
2002....... 2,598 2,126
Thereafter. 8,165 7,264
------- -------
$23,400 $17,894
======= =======
</TABLE>
Each of the five leases with Mr. Bailey has a 10-year term expiring in May
2006. The Company has the option under each such lease to purchase at any time
during the term of the lease the related campus facility at its discretion at
the fair market value of such facility as determined by independent appraisers.
The Company may lease additional campus facilities from entities owned or
controlled by Mr. Bailey. Any such leases will have market terms as determined
by an independent appraiser and be subject to the approval by a majority of
independent directors.
REORGANIZATION TRANSACTIONS
On July 30, 1996, the Company completed an initial public offering of its
common stock. The Company sold 5,175,000 shares in the offering at a price of
$6.67 per share. Net proceeds to the Company were $31,313,000. Prior to the
closing of the offering, the Company exchanged 8,998,500 shares of its common
stock for 100% of the outstanding common stock of the University, which was held
jointly by Mr. and Mrs. Ron K. Bailey, in their capacity as the S Corporation
Stockholder. Approximately $19,838,000 of the net proceeds of the offering were
paid to the Baileys as a distribution of earnings on which they had previously
paid income taxes during the period the University was an S Corporation.
Contemporaneously with the closing of the initial public offering, the
Company acquired ELP at a purchase price of $1,060,000, ELP's net book value.
ELP was wholly owned by Mr. Ron K. Bailey, the Company's President and a
director of the Company.
36
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
All required financial statements of the registrant are set forth under
Item 8 of this report of Form 10-K.
(a)(2) Financial Statement Schedules
All required financial statement schedules of the registrant are set forth
under Item 8 of this report on Form 10-K.
(a)(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------
<S> <C>
3.01* -- Articles of Incorporation of the Company.
3.02* -- Amended and Restated Bylaws of the Company.
4.01* -- Specimen Stock Certificate.
10.01* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Fredericksburg Investments, Inc.
10.02* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Beacon Investments, Inc.
10.03* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Battleview Investments, Inc.
10.04* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Central Investments, Inc.
10.05* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Potomac Investments, Inc.
10.06* -- Lease Agreement, dated as of October 1, 1991, between Strayer
University, Inc. and GLM- Highland Building Limited Partnership.
10.07* -- Lease Agreement, dated as of June 15, 1993, between Strayer
University, Inc. and Alexandria Tech Center I.
10.08* -- Employment Agreement, dated as of June 1, 1996, between Strayer
Education, Inc. and Ron K. Bailey.
10.09* -- Employment Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Harry T. Wilkins.
10.10* -- 1996 Stock Option Plan
10.11* -- Form of Tax Indemnification Agreement
10.12* -- First Amendment to Agreement of Lease for Office Condominium
Space, dated July 25, 1994, between Strayer University, Inc. and
Cross Creek Associates Limited Partnership.
10.13** -- Lease Agreement, dated as of February 29, 1996, between
Confederation Life Insurance Company (U.S.) in Rehabilitation and
Strayer University, Inc.
10.14** -- Office Building Lease, dated as of July 26, 1996, between
Nikowski Limited Partnership and Strayer University, Inc.
10.15** -- Office Lease Agreement, dated as of June 17, 1996, between 1133
Fifteenth Street Limited Partnership and Strayer University, Inc.
23.01 -- Consent of Coopers & Lybrand L.L.P. (contained in signature page).
24.01 -- Power of Attorney (contained in signature page).
27+ -- Financial Data Schedule.
</TABLE>
- ----------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-3967).
** Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-23601).
+ Included in electronic filing via EDGAR.
(b) Report on Form 8-K
None
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STRAYER EDUCATION, INC.
Date: March 16, 1998 By: /s/ RON K. BAILEY
---------------------
Ron K. Bailey
Chief Executive Officer and
Director
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Strayer Education, Inc. and subsidiaries on Form S-8 (FILE Nos. 333-3043 and
333-13597) of our report dated January 30, 1998, on our audits of the
consolidated financial statements and financial statement schedule of Strayer
Education, Inc. and subsidiaries as of December 31, 1997 and 1996, and for the
three fiscal years in the period ended December 31, 1997, which report is
included on Page 20 in this Form 10-K.
Washington, D.C. Coopers & Lybrand, L.L.P.
March 17, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ron K. Bailey and Harry T. Wilkins, and each of
them individually, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and his name, place and
stead in any and all capacities, to sign the report and any and all amendments
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney's-in-fact and agents, full power and authority to
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
thereof.
38
<PAGE> 39
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------------------------- --------------------------- --------------
<S> <C> <C>
/s/ RON K. BAILEY Chief Executive Officer and MARCH 16, 1998
---------------------------- Director (Principal
Ron K. Bailey Executive Officer)
/s/ HARRY T. WILKINS Chief Financial Officer MARCH 16, 1998
---------------------------- (Principal Financial and
Harry T. Wilkins Accounting Officer)
/s/ STANLEY G. ELMORE MARCH 16, 1998
----------------------------- Director
Stanley G. Elmore
/s/ TODD A. MILANO Director MARCH 16, 1998
---------------------------
Todd A. Milano
/s/ JENNIE D. SEATON Director MARCH 16, 1998
----------------------------
Jennie D. Seaton
/s/ ROLAND CAREY Director MARCH 16, 1998
----------------------------
Roland Carey
/s/ DONALD T. BENSON Director MARCH 16, 1998
----------------------------
Donald T. Benson
/s/ G. THOMAS WAITE Director MARCH 16, 1998
----------------------------
G. Thomas Waite
/s/ CHARLOTTE BEASON Director MARCH 16, 1998
----------------------------
Charlotte Beason
</TABLE>
39
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,934
<SECURITIES> 37,774
<RECEIVABLES> 14,784
<ALLOWANCES> 513
<INVENTORY> 1,018
<CURRENT-ASSETS> 33,637
<PP&E> 12,330
<DEPRECIATION> 4,217
<TOTAL-ASSETS> 78,297
<CURRENT-LIABILITIES> 12,988
<BONDS> 0
0
0
<COMMON> 156
<OTHER-SE> 64,967
<TOTAL-LIABILITY-AND-EQUITY> 78,297
<SALES> 53,131
<TOTAL-REVENUES> 53,131
<CGS> 32,446
<TOTAL-COSTS> 32,446
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,704
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,449
<INCOME-TAX> 9,012
<INCOME-CONTINUING> 14,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,437
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.93
</TABLE>
