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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, 1999 Commission file number: 0-21039
STRAYER EDUCATION, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C>
MARYLAND 52-1975978
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>
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:
<TABLE>
<S> <C>
NONE NONE
(Title of class:) (Name of each exchange on
which registered:)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of
Registrant is $404,620,107 (based upon the last sale price of the Common Stock
as reported on the Nasdaq National Market System on February 29, 2000). The
total number of shares of Common Stock outstanding as of February 29, 2000 was
15,304,490.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement for its
2000 Annual Meeting of Stockholders (which is expected to be filed with the
Commission within 120 days after the end of the Registrant's 1999 fiscal year)
are incorporated by reference into Part III of this Report.
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PART I
ITEM 1. 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 11,500 students at thirteen campuses
in Washington, D.C., Maryland and Virginia. The University is accredited by the
Commission on Higher Education of the Middle States Association of Colleges and
Schools ("Middle States"), one of the six regional collegiate accrediting
agencies recognized by the U.S. Department of Education ("Department of
Education" or "Department"). The majority of Strayer students are working adults
pursuing their first college degree to improve their job skills and advance
their careers. Of students enrolled in Strayer programs at the beginning of the
1999 Fall quarter, approximately 61% were age 30 or over and approximately 72%
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 1999 Fall
quarter, Strayer students completed an average of 8.9 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 from more than 16 private and federal
sector employers in Maryland, Virginia, and the District of Columbia. The
Curriculum Advisory Board also studies the career progress of University alumni.
The University uses these studies to make decisions about curriculum
development, resource allocation and faculty appointments.
The University offers programs in the following areas:
<TABLE>
<S> <C> <C>
BACHELOR OF SCIENCE (B.S.) MASTER OF SCIENCE (M.S.) ASSOCIATE IN ARTS (A.A.)
DEGREE DEGREE DEGREE
Accounting Business Administration Accounting
Business Administration Information Systems Business Administration
Computer Information Systems Professional Accounting Computer Information Systems
Computer Networking Economics
Economics DIPLOMA (CAREER DIVISION) General Studies
International Business Computer Information Systems Marketing
</TABLE>
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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 1999 Fall quarter:
UNIVERSITY ENROLLMENT BY MAJOR, PROGRAM
AND LOCATION -- 1999 FALL QUARTER
<TABLE>
<CAPTION>
WASHINGTON TAKOMA PRINCE ANNE WHITE
MAJOR PROGRAM D.C. PARK GEORGE MONTGOMERY ARUNDEL MARSH ARLINGTON ALEXANDRIA
----- ------- ---------- ------ ------ ---------- ------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accounting................ AA 34 18 19 0 0 5 14 10
BS 104 56 34 6 0 6 41 80
MS 19 12 6 2 0 0 18 11
Business Administration... AA 113 28 64 6 0 7 36 22
BS 258 144 112 18 36 11 159 181
MS 74 55 24 14 4 9 81 86
International Business.... BS 19 8 4 6 2 1 12 18
Computer Information
Systems................. * 99 126 177 21 0 5 56 102
AA 146 90 65 4 0 9 28 18
BS 303 219 125 56 23 18 259 267
Computer Networking....... BS 139 102 155 59 58 9 121 273
Information Systems....... MS 92 50 30 29 9 4 128 111
Economics................. AA 1 0 1 0 0 0 0 0
BS 10 5 1 0 0 0 5 2
General Studies........... AA 9 11 3 0 0 2 5 6
Marketing................. AA 9 3 1 1 0 1 3 4
Non-Degree/Non-Program**.. -- 157 141 128 39 20 20 187 106
----- ----- --- --- --- --- ----- -----
Total Enrollment.......... 1,586 1,068 949 261 152 107 1,153 1,297
===== ===== === === === === ===== =====
</TABLE>
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* Diploma program.
** Includes undeclared majors.
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UNIVERSITY ENROLLMENT BY MAJOR, PROGRAM
AND LOCATION -- 1999 FALL QUARTER
<TABLE>
<CAPTION>
DISTANCE TOTAL
MAJOR PROGRAM WOODBRIDGE LOUDOUN MANASSAS FREDERICKSBURG HENRICO LEARNING ENROLLMENT
----- ------- ---------- ------- -------- -------------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accounting......................... AA 8 4 7 3 1 2 125
BS 73 54 70 51 19 18 612
MS 11 3 10 3 1 6 102
Business Administration............ AA 23 22 23 15 2 6 367
BS 251 164 177 162 56 45 1,774
MS 88 58 86 72 31 23 705
International Business............. BS 7 11 12 4 0 2 106
Computer Information Systems....... * 94 90 79 51 10 5 915
AA 33 28 20 37 3 20 501
BS 314 241 263 214 52 63 2,417
Computer Networking................ BS 273 189 165 173 88 25 1,829
Information Systems................ MS 86 69 84 55 17 24 788
Economics.......................... AA 0 0 0 0 0 0 2
BS 1 3 6 0 0 0 32
General Studies.................... AA 2 2 4 3 0 4 51
Marketing.......................... AA 3 1 6 0 0 0 33
Non-Degree/Non-Program**........... -- 39 105 95 33 31 44 1,145
----- ----- ----- --- --- --- ------
Total Enrollment................... 1,306 1,044 1,107 876 311 287 11,504
===== ===== ===== === === === ======
</TABLE>
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* Diploma program.
** Includes undeclared majors.
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In 1999, the Company opened two campuses in the state of Maryland and
received approval to open the Chesterfield Campus in Richmond, Virginia. The
Anne Arundel Campus opened and began recruiting students in the spring 1999
quarter. The White Marsh Campus opened and began recruiting students in the
summer 1999 quarter. The Company also opened a campus in Montgomery County,
Maryland in November 1998 and began recruiting students in the winter quarter of
1999.
The University allows students to apply credits earned in one program
toward attainment of a more advanced degree. For example, a student originally
pursuing a Diploma in Computer Information Systems can extend his or her
original objective by taking additional courses leading to an A.A. degree in
Computer Information Systems, a B.S. degree in Computer Information Systems, and
ultimately an M.S. degree in Information Systems. The curriculum design provides
students a level of competency and a measure of attainment in the event they
interrupt their education or choose to work in their field of concentration
prior to obtaining their final degree.
FACULTY
The University seeks to appoint faculty who hold appropriate academic
credentials, are dedicated, active professionals in their field, and are
committed to teaching working adults. In accordance with its educational
mission, the University focuses the efforts of its faculty on teaching. The
normal course load for a full-time faculty member is four courses per quarter
for each of three quarters, or 12 courses per academic year. With the approval
of the Campus Deans, faculty members may teach a fifth course per quarter and
extra courses during the summer quarter for additional compensation. The
University requires full-time faculty members to hold counseling hours at least
two hours per week for each course they teach.
Strayer provides financial support for faculty members seeking to update
their skills and knowledge. The University maintains a tuition plan that
reimburses instructors enrolled in advanced degree programs for one-half of
their tuition charges. Strayer conducts annual in-house faculty workshops in
each discipline. The University also fully reimburses its faculty for their
costs in receiving computer-related instruction and training to keep current in
information technology developments.
REGULATORY ENVIRONMENT
The Higher Education Act of 1965 ("HEA"), as amended, and the regulations
promulgated thereunder subject the University and all other higher education
institutions that participate in the various federal student financial aid
programs under Title IV of the HEA ("Title IV Programs") to significant
regulatory scrutiny. The HEA mandates specific regulatory responsibility for
each of the following components of the higher education regulatory triad: (i)
the federal government through the Department of Education; (ii) the accrediting
agencies recognized by the Department of Education; and (iii) state higher
education regulatory bodies. The regulations, standards, and policies of these
regulatory agencies frequently change. In October 1998, Congress reauthorized
the HEA and amended numerous provisions of the HEA.
ACCREDITATION AND APPROVALS
The University has been accredited by Middle States, an accrediting agency
recognized by the Department of Education, since 1981. Accreditation is a system
for recognizing educational institutions and their programs for performance,
integrity and quality that entitles them to the confidence of the educational
community and the public. In the United States, this recognition comes primarily
through private voluntary associations of institutions and programs of higher
education. These associations establish criteria for accreditation, evaluate
institutions and professional programs for accreditation, and publicly designate
those institutions that meet their criteria. Accredited schools are subject to
periodic review by accrediting bodies to ensure that the schools maintain the
performance, integrity and quality required for accreditation.
Middle States reaffirmed the University's accreditation in 1995. The
University submitted an interim status report to Middle States on March 26,
1997, which Middle States accepted. Middle States also conducted a site visit to
the Prince George's County, Maryland campus and the Distance Learning Center in
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Lorton, Virginia, in November 1997, and included them within the College's
accreditation. The next scheduled evaluation visit by Middle States is currently
set for the year 2000.
Middle States is the same accrediting agency that grants institutional
accreditation to other degree-granting public and private colleges and
universities in its region. Accreditation by Middle States is an important
attribute of the University. Colleges and universities depend on accreditation
in evaluating transfers of credit and applications to graduate schools.
Employers rely on the accredited status of institutions when evaluating a
candidate's credentials, and parents and high school counselors look to
accreditation for assurance that an institution has quality educational
standards. Moreover, scholarship commissions often restrict their awards to
students attending accredited institutions, and institutional accreditation is
necessary to qualify for eligibility for federal student financial assistance.
The University is authorized to offer its programs by the D.C. Education
Licensure Commission, the Virginia State Council of Higher Education and the
Maryland Higher Education Commission.
The Company is currently reviewing the University's need to obtain approval
to offer its courses through Strayer Online in other states. Because online
education is a recent development, its status under current educational
regulations is unsettled.
The University is authorized by the Immigration and Naturalization Service
(the "INS") of the U.S. Department of Justice to admit foreign students. The
University also employs foreign faculty members and administrators in accordance
with U.S. immigration laws. In addition, Strayer is approved for the education
of veterans and members of the selective reserve and their dependents, as well
as for the rehabilitation of handicapped students. Approximately 8.5% of the
University's students are veterans or reservists.
STUDENT CHARACTERISTICS
The University's students primarily are working adults. At the beginning of
the 1999 Fall quarter, approximately 72% of the enrollment consisted of
part-time students, approximately 70% attended classes at night, 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.................................................. 5%
</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, 1999, the University employed 87 admissions
representatives.
The University has entered into articulation agreements with Montgomery
Community College and Stratford 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.
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STUDENT ADMISSIONS
The University seeks to ensure that incoming students have the necessary
academic background to succeed in their course of study at Strayer. Students
attending the University's undergraduate programs must possess a high school
diploma or a General Educational Development Certificate. All students also must
pass placement exams or submit acceptable standardized test scores. For
admission to the University's programs, students must possess a certain level of
proficiency in English and mathematics. Students attending the University's
graduate programs must have a bachelor's degree from an accredited institution.
If a student's undergraduate major varies widely from the student's proposed
graduate course of study, certain undergraduate foundation courses may be
necessary for admission to some of the highly technical courses offered at the
graduate level.
International students applying for admission must meet the same admission
requirements as other students. Those students whose native language is not
English must provide evidence that they are able to use the English language
with sufficient facility to do college-level work in an English-speaking
institution.
TUITION AND FEES
Strayer charges tuition by the credit hour. All courses offered are 4.5
credit hours. As of January 1, 2000, undergraduate, full-time students are
charged at the rate of $200 per credit hour. Undergraduate, part-time students
are charged at the rate of $210 per credit hour. Courses in graduate programs
are charged at the rate of $270 per credit hour. Accordingly, a full-time
student seeking to obtain a bachelor's degree in four years currently would pay
approximately $9,000 per year in tuition. The University implemented a tuition
increase of $10.00 per credit hour for 2000.
SEL PROGRAM
In 1995, Strayer began the SEL Program of loans for eligible students as an
alternative to government-sponsored student loans. The SEL Program enables the
University to reduce the significant administrative costs it incurs in
processing loans under Title IV Programs and lessens the University's dependence
on Federal student financial aid programs. The University believes that the SEL
Program also helps it to attract and retain qualified students.
The Company designed the SEL Program for working adult students. The loans
generally have maturities ranging from one to four years after graduation and
bear interest at a fixed rate that is competitive with rates under Title IV
Programs. Monthly loan payments begin the first month after the loan date and
generally vary between $200 and $300, including loan principal as well as
interest. Borrowers make payments while still enrolled, thereby reducing the
debt they otherwise would assume upon completion of their studies. At December
31, 1999, there were a total of 2,153 loans outstanding with an aggregate loan
balance of approximately $6.8 million and an average individual loan balance of
approximately $3,179.
Loans under the SEL Program are unsecured. Strayer's underwriting involves
a credit evaluation of each applicant. Student defaults on loans extended under
the SEL Program have not been material.
CAREER DEVELOPMENT SERVICES
The University actively assists its students and alumni with job placement
and other career-related matters through career development offices located at
each campus. Strayer's career development personnel conduct workshops on
employment-related topics (including resume preparation, interviewing techniques
and job search strategies), maintain job listings, arrange campus interviews by
employers and provide other placement assistance. The University sponsors career
fairs in the fall and spring quarters for students and alumni to discuss career
opportunities with companies and governmental agencies in Maryland, Virginia,
and the District of Columbia.
The University conducts annual alumni surveys to monitor the career
progression of its graduates and to comply with 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 1998 alumni
survey, which had
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an approximately 27.5% overall response rate, indicated that 92.3% of those
responding were employed. In addition, approximately 89.5% of undergraduate
alumni and 91.6% of the graduate alumni who responded credit Strayer for the
achievement of their professional goals. According to the survey, Strayer's
greatest assets, in order of importance, are schedule variety, campus locations,
instructor knowledge, personal class sizes and course selection.
Strayer students and graduates are employed in a wide range of regional and
local companies, many of which are in the information technology industry.
Federal governmental agencies also provide a significant source of employment.
COMPETITION
The post-secondary education market in Strayer's market area is highly
competitive. The University competes with traditional public and private
two-year and four-year colleges, other for-profit schools and alternatives to
higher education, such as employment and military service. Public colleges may
offer programs similar to those of the University at a lower tuition level, due
to government subsidies, government and foundation grants, tax-deductible
contributions and other financial aid sources not available to proprietary
institutions. Tuition at private institutions generally is higher, and in some
cases significantly higher, than the tuition at the University.
The University competes with other educational institutions primarily based
on the quality of its business-oriented curriculum and instruction, its flexible
schedules and convenient classroom locations, and its responsiveness to changing
educational requirements of the workplace. Few of the University's competitors
have modified their programs to meet the special needs of working adult
students, although management believes that more may do so in the future.
EMPLOYEES
During 1999, the University employed 718 faculty members, of whom 94 were
full-time and 624 part-time, and 382 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, 267 were employed full-time and 115 part-time.
LICENSING AND FINANCIAL AID REGULATION
STATE LICENSURE
The University is dependent on the authorization of each state within which
the University offers educational programs to allow it to operate and to grant
degrees or diplomas to students. The University is subject to extensive
regulation in each of the three jurisdictions (the District of Columbia,
Virginia and Maryland) in which it currently operates. State laws and
regulations affect the University's operations and may limit the ability of the
University to introduce educational programs or establish new campuses. State
authorization also is required in order for an institution to become and remain
eligible to participate in Title IV Programs.
FINANCING STUDENT EDUCATION
In the 1999 Fall quarter, approximately 43% of the University's students
participated in one or more of the federally supported student financial aid
programs. A substantial portion (approximately 47% in 1999) of the University's
revenues are derived from tuition financed under Title IV Programs.
The University's financial aid programs are designed to assist eligible
students whose financial resources are inadequate to meet the cost of education.
Aid is awarded on the basis of financial need, generally defined under the HEA
as the difference between the cost of attending a program of study and the
amount a student reasonably can be expected to contribute to those expenses. All
recipients of financial aid must maintain a satisfactory grade point average and
progress in a timely manner toward completion of a program of study.
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Generally, tuition must be paid (or arrangements made therefore) prior to
the beginning of a quarter. The HEA requires that an institution have a "fair
and equitable" refund policy, limiting the amount that an institution may charge
a student who withdraws from the institution. A student is obligated only for a
pro rata portion of the tuition and other fees charged by the institution if the
student withdraws during the first 60% of the student's first period of
enrollment at that institution. A student who withdraws after the first period
of enrollment is also entitled to a refund, but a pro rata refund calculation is
not required. If a student who is owed a refund received Title IV Program funds,
the institution must allocate the refund to the appropriate lenders or Title IV
Programs, in a specified order which excludes the Federal Work-Study Program.
The 1998 HEA amendments address an institution's refund policy with regard
to Title IV Programs only. Under the new provision, the institution must first
determine the amount of Title IV Program funds that the student "earned." If the
student withdraws during the first 60% of any period of enrollment, the amount
of Title IV Program funds that the student earned is equal to a pro rata portion
of the funds for which the student would otherwise be eligible. If the student
withdraws after the 60% point, then the student earned 100% of the Title IV
Program funds. The institution must return to appropriate lenders or Title IV
Programs, in a specified order and excluding the Federal Work-Study Program, the
lesser of the unearned Title IV Program funds or the institutional charges
incurred by the student for the period multiplied by the percentage of unearned
Title IV Program funds. This HEA amendment takes effect October 7, 2000, but an
institution may choose to implement the provision earlier. The Company believes
that the University's refund policy is consistent with the current HEA and has
been updated to conform to the 1998 amendments.
Students finance their Strayer education in a variety of ways. A
significant number of students utilize Federal financial aid programs. In
addition, many of Strayer's working adult students finance their own education
or receive full or partial tuition reimbursement from their employers. Congress
recently extended the Internal Revenue Code's educational assistance programs
provision under which an employee may exclude from wages up to $5,250 of tuition
reimbursement per year. In addition, Congress recently created several tax
credits for students pursuing higher education and added a deduction for
interest on student loans. Strayer offers grants, loans (including loans under
the SEL Program), scholarships and work-study programs as financing options for
its students.
TITLE IV PROGRAMS
The University maintains eligibility for its students to participate in the
following Title IV Programs:
Federal Family Education Loans. Pursuant to the Federal Family Education
Loan Program (the "FFEL Program"), which includes the Federal Stafford Loan
("Stafford") program and the Federal PLUS (the "Parent Loan for Undergraduate
Students") program, students and their parents can obtain from lending
institutions subsidized and unsubsidized student loans, which are guaranteed by
the federal government. The obligation to begin repaying Stafford loans is
deferred until six months after the student graduates, withdraws or ceases to be
enrolled on at least a half-time basis. Students who demonstrate financial need
may qualify for a subsidized Stafford loan, and the Federal government will pay
the interest on the loan while the student is in school and for six months after
the student's graduation or withdrawal. Unsubsidized Stafford loans are
available to students who do not qualify for a subsidized Stafford loan or in
some cases in addition to a subsidized Stafford loan. The unsubsidized Stafford
loan program now incorporates the former Federal Supplemental Loans for Students
program.
Pell Grants. Grants under the Federal Pell Grant ("Pell") program are
available to eligible students based on financial need and other factors.
Campus-Based Programs. The "campus-based" Title IV Programs include the
Federal Supplemental Educational Opportunity Grant program, the Federal
Work-Study program, and the Federal Perkins Loan ("Perkins") program.
Direct Student Loans. In 1993, Congress enacted the William D. Ford
Federal Direct Loan Program (the "Direct Loan Program"), under which the
Department of Education makes loans directly to students,
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rather than guaranteeing loans made by lending institutions. The Direct Loan
Program was phased in beginning in 1994-95. The University was approved to
participate in this program beginning July 1, 1996.
OTHER FINANCIAL AID PROGRAMS
In addition to the University's own student loan and scholarship programs,
eligible students at the University may participate in educational assistance
programs administered by the U.S. Department of Veterans Affairs, the U.S.
Department of Defense, the District of Columbia and private organizations.
FINANCIAL AID REGULATION
To be eligible to participate in Title IV Programs, the University must
comply with specific standards and procedures set forth in the HEA and the
regulations issued thereunder by the Department of Education. An institution
must, among other things, be authorized by each state within which it operates
to offer its educational programs and be accredited by a recognized accrediting
agency. The institution also must be certified by the Department of Education to
participate in Title IV Programs, based on a determination that, among other
things, the institution meets certain standards of administrative capability and
financial responsibility. For purposes of the Title IV Programs, the University
and all of its campuses are considered to be a single "institution of higher
education" so that Department of Education requirements applicable to an
"institution of higher education" are applied to all of the University's
campuses in the aggregate rather than on an individual basis. The University
currently is certified to participate in Title IV Programs.
In October 1998, Congress reauthorized and amended the HEA. While the 1998
HEA amendments made numerous changes to Title IV Program requirements, the
Company believes that these changes will not have a material adverse effect on
the University. Most of the provisions of the 1998 HEA amendments were effective
October 1, 1998. However, the Department of Education is required to engage in
negotiated rulemaking with representatives of the higher education community
before issuing regulations to implement the 1998 HEA amendments to the Title IV
Programs. The Company believes that the University is in compliance with the new
law.
Congress reauthorizes the HEA every five to six years. In addition Congress
reviews and determines appropriations for Title IV Programs on an annual basis.
An elimination of certain Title IV Programs, a reduction in Federal funding
levels of such programs, material changes in the requirements for participation
in such programs, or the substitution of materially different programs could
reduce the ability of certain students to finance their education, which in turn
could lead to lower enrollments at the University or require the University to
increase its reliance upon alternative sources of student financial aid. Given
the significant percentage of the University's revenues that are derived
indirectly from the Title IV Programs, the loss of or a significant reduction in
Title IV Program funds available to the University's students could have a
material adverse effect on the Company. In addition, the regulatory scheme
applicable to the University has been subject to frequent revisions, many of
which have increased the level of scrutiny to which higher education
institutions are subjected and have raised the applicable standards. Congress
and the Department of Education recently have focused in particular upon the
operations of proprietary institutions, such as the University. The University's
compliance with such regulations may affect the operations of the University and
its ability to participate in Title IV Programs. Certain elements of the
regulatory scheme applicable to the University are described below.
INCREASED REGULATORY SCRUTINY
The 1992 amendments to the HEA formalized, modified and strengthened the
regulatory structure known as the "Program Integrity Triad," which consists of
the Department of Education, recognized accrediting agencies, and state higher
education regulatory bodies. Congress intended this initiative to increase the
regulatory scrutiny of post-secondary educational institutions. The 1998 HEA
amendments preserve the "Program Integrity Triad" with some refinements. In
addition to the Program Integrity Triad, other participants in Title IV
Programs, notably student loan guarantee agencies, also have enforcement
authority.
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ADMINISTRATIVE CAPABILITY
Department of Education regulations specify extensive criteria by which an
institution must establish that it has the requisite "administrative capability"
to participate in Title IV Programs. To meet the administrative capability
standards, an institution, among other things, must not have cohort default
rates above specified levels, must have various procedures in place for
safeguarding federal funds, must not be, and not have any principal or affiliate
who is, debarred or suspended from Federal contracting or engaging in activity
that is cause for debarment or suspension, and must not otherwise appear to lack
administrative capability.
In certain circumstances, the Department of Education may certify the
institution's continuing eligibility to participate in Title IV Programs on a
provisional basis for no more than three years. During the period of provisional
certification, the institution must comply with any additional conditions
included in its program participation agreement. If the Department of Education
determines that a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may revoke the
institution's certification to participate in Title IV Programs.
Department of Education regulations permit an institution to enter into a
written contract with a third-party servicer for the administration of any
aspect of the institution's participation in Title IV Programs. The third-party
servicer must, among other obligations, comply with Title IV requirements and be
jointly and severally liable with the institution for any violation by the
servicer of any Title IV provision. The University has written contracts with
two third party loan servicers, Financial Aid Management for Education, Inc. and
Weber and Associates, Inc. The servicers certify FFEL Program loan applications,
prepare reports from the University to the Department of Education, issue checks
for the Pell and campus-based programs, and issue and collect Perkins loans.
FINANCIAL RESPONSIBILITY
The HEA and Department of Education regulations establish extensive
standards of financial responsibility that institutions such as the University
must satisfy to participate in Title IV Programs. These standards generally
require that an institution provide the services described in its official
publications and statements; provide the administrative resources necessary to
comply with Title IV requirements; and meet all of its financial obligations,
including required refunds and any repayments to the Department of Education for
debts and liabilities incurred in programs administered by the Department. Under
standards that were effective prior to July 1, 1998, and may be applied to
demonstrate financial responsibility for an institution's fiscal year beginning
on or after July 1, 1996 and on or before June 30, 1998, for-profit institutions
such as the University must also: (i) demonstrate an "acid test" ratio (defined
as the ratio of cash, cash equivalents and current accounts receivable to
current liabilities) of at least 1-to-1 at the end of its latest fiscal year;
(ii) not have had operating losses in either or both of its two latest fiscal
years that in sum result in a decrease in tangible net worth in excess of 10% of
the institution's tangible net worth at the beginning of that two-year period;
and (iii) have had a positive tangible net worth for its latest fiscal year. For
the fiscal year ended December 31, 1999, the University's "acid test" ratio was
1.68.
New Department of Education financial responsibility standards, which took
effect July 1, 1998, replace the three numeric tests described above with a more
complex formula. The new standards focus on three financial ratios: (i) equity
ratio (which measures the institution's capital resources, ability to borrow and
financial viability); (ii) primary reserve ratio (which measures the
institution's financial viability and liquidity); and (iii) net income ratio
(which measures the institution's ability to operate at a profit or within its
means). An institution must have a composite score of at least 1.5 to be deemed
financially responsible without the need for further Federal oversight. The
Company has applied the new financial responsibility standards to its audited
financial statements as of and for the year ended December 31, 1999 and
calculated a composite score of 3.0. The Company therefore believes that the
University meets the Department's new financial responsibility standards.
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<PAGE> 12
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 a FFEL Program, Direct Loan Program or weighted average cohort
default rate that is equal to or greater than 25% for each of the three most
recent federal fiscal years. The Department of Education may initiate a
proceeding to limit, suspend or terminate an institution's participation in all
Title IV Programs if it has a FFEL Program, Direct Loan Program or weighted
average cohort default rate that exceeds 40% for any federal fiscal year.
If an institution's FFEL cohort default rate equals or exceeds 25% in any
of the three most recent federal fiscal years, the institution may be placed on
provisional certification status. Provisional certification does not limit an
institution's access to Title IV Program funds; however, an institution with
provisional status is under closer review by the Department of Education and may
be subject to summary adverse action if it commits violations of Title IV
Program requirements. The University's cohort default rates on FFEL Program
loans for the 1994, 1995, 1996 and 1997 federal fiscal years, the most recent
years for which this information is available, were 16.0%, 15.2%, 14.5%, and
14.6%, respectively. The average default rates for proprietary institutions
nationally were 21.1%, 19.9%, 18.2%, and 15.4% in fiscal years 1994, 1995, 1996
and 1997, respectively.
THE "85/15 RULE"
Under what is commonly referred to as the "85/15 Rule," the HEA until
recently provided that proprietary institutions, such as the University, were
eligible to participate in Title IV Programs only if they derive no more than
85% of their revenues from Title IV Programs, as determined in accordance with a
formula in the regulations. The 1998 HEA amendments increased the percentage of
revenues that a for-profit institution can derive from Title IV Programs from
85% to 90%. The Department of Education has not yet issued regulations
implementing this change, but the amendment was effective October 1, 1998. A
proprietary institution that violates the "85/15 Rule" loses its eligibility to
participate in Title IV Programs for at least one year. During 1999, the
University derived 47% of its revenues from tuition financed under Title IV
Programs.
INCENTIVE COMPENSATION
As a part of an institution's program participation agreement with the
Department of Education, the institution must certify that it will neither
provide, nor contract with any entity that provides, any commission, bonus or
other incentive payment based directly or indirectly on success in securing
enrollments or financial aid to any person or entity engaged in any student
recruitment, admission or financial aid awarding activity. Although there can be
no assurance that the Department of Education will not find deficiencies in the
University's present or former compensation plans, the University believes that
its compensation plan complies with the HEA.
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<PAGE> 13
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.
During 1999, the Department of Education conducted a program review of
Strayer University. The Department of Education has issued a final program
review determination letter indicating that Strayer University satisfactorily
responded to the findings in the program review report. Based on the responses
and representations submitted by the University, the Department of Education now
considers the findings closed with no additional action required. In addition,
no payments or refunds are required to be made to the Department of Education or
other lending institutions.
RESTRICTIONS ON ADDING LOCATIONS AND EDUCATIONAL PROGRAMS
State requirements and accrediting agency standards may in certain
instances limit the ability of the University to establish additional locations
and programs. District of Columbia regulations require institutions to submit an
application for an amended license in order to add a new program or location.
The Virginia State Council of Higher Education requires institutions to obtain
approval prior to offering new educational programs at existing sites or
instruction for degree credit at a new site located more than 25 miles or 30
minutes' travel time from an existing location. Maryland law and regulations
require institutions to obtain the approval of the Maryland Higher Education
Commission in order to offer an instructional program not specified in its
certificate of approval or to offer more than one-third of the credit-bearing
coursework leading toward a certificate or degree at a location not specified in
its certificate of approval. Middle States requires institutions that it
accredits to notify it in advance of implementing new programs or locations, and
upon notification may undertake a review of the institution's accreditation.
Based on its current understanding of how these standards will be applied, the
University does not believe that these standards will have a material adverse
effect on the University or its expansion plans.
The HEA requires proprietary institutions of higher education to be in full
operation for two years before qualifying to participate in Title IV Programs.
However, the applicable regulations permit an institution that is already
qualified to participate in Title IV Programs to establish an additional
location that may immediately qualify, unless the location was acquired from
another institution that has ceased offering educational programs at that
location and has unpaid Title IV liabilities. The new location must satisfy all
other applicable requirements for institutional eligibility, including approval
of the additional location by the relevant state
13
<PAGE> 14
authorizing agency and the institution's accrediting agency. In addition, a
location that qualifies as a "branch campus" must meet extensive regulatory
requirements, including the standards of administrative capability and financial
responsibility discussed above. The University's expansion plans assume its
continued ability to establish new campuses as additional locations of the
University without incurring the two-year delay in participation in Title IV
Programs. The loss of state authorization or accreditation by the University or
an existing campus, or the failure of the University or a new campus to obtain
state authorization or accreditation, would render the University ineligible to
participate in Title IV Programs in that state or at that location.
The Department of Education requires an institution to provide notice of an
additional location that offers at least 50%, but less than 100%, of an
educational program. The Department of Education may, in its discretion, require
the institution to apply for approval before it awards or disburses Title IV
Program funds to students enrolled at such location. The Department of Education
regulations provide that that determination is based on the percentage of an
educational program that is offered at the new location and on the financial and
administrative capability of the institution. An institution must apply to the
Department of Education for approval before it awards or disburses Title IV
Program funds to students enrolled at a new branch campus or a new location at
which it offers 100% of an educational program.
Generally, if an institution eligible to participate in Title IV Programs
adds an educational program after it has been designated as an eligible
institution, the institution must apply to the Department of Education to have
the additional program designated as eligible. However, an institution is not
obligated to obtain Department of Education approval of an additional program
that leads to an associate, baccalaureate, professional or graduate degree or
which prepares students for gainful employment in the same or related recognized
occupation as an educational program that has previously been designated as an
eligible program at that institution and meets certain minimum length
requirements. In the event that an institution erroneously determines that an
educational program is eligible for Title IV funds without the Department of
Education's express approval, the institution may be liable for repayment of
Title IV aid provided to students in that program. The Company does not believe
that the Department of Education's regulations will create significant obstacles
to the University's plans to add new programs.
DISTANCE LEARNING
In 1997, the University received regulatory approval from the D.C.
Education Licensure Commission, Virginia State Council of Higher Education,
Maryland Higher Education Commission, and Middle States to offer all of its
existing degree and diploma programs through Strayer Online via Internet-based
telecommunications instruction. Instruction for this program is delivered from
the Company's Distance Learning Center in Lorton, Virginia. During the Fall 1999
quarter, the University had 1,222 students participating in the distance
learning program, of whom 287 students took classes solely through Strayer
Online.
In addition to the regulation of distance education by state education
licensure agencies and Middle States, the HEA imposes a limit on the amount of
correspondence study an institution participating in Title IV Programs may
offer. As amended in 1998, the HEA states that a student enrolled in a course of
instruction that is offered in whole or in part through telecommunications and
which leads to a recognized certificate for a program of study of one year or
longer, or a recognized associate, bachelor or graduate degree conferred by such
institution, is not considered to be enrolled in a correspondence course, unless
the total number of telecommunications and correspondence courses offered by the
institution equals or exceeds fifty percent of the total number of courses
offered by the institution. The HEA also excludes from Title IV Program
participation institutions at which more than one half of the enrolled students
are enrolled in correspondence courses, except that the Secretary of Education
is authorized to waive this limitation at his/her discretion in the case of
colleges offering two- or four-year programs leading to an associate or bachelor
degree. Department of Education regulations grant an automatic waiver for
degree-granting institutions where students enrolling in correspondence courses
receive five percent or less of the total Title IV Program funds received by all
students enrolled at the institution. The University does not anticipate that
the number of students enrolled in Strayer Online courses will equal or exceed
one half of the University's total enrollment, or that the number of courses
offered through Strayer Online will equal or exceed the total number of courses
offered on its campuses. The
14
<PAGE> 15
University will monitor enrollment in and the offering of courses through
Strayer Online to ensure that the prescribed limits are not exceeded.
CHANGE IN OWNERSHIP RESULTING IN A CHANGE OF CONTROL
Many states and accrediting agencies require institutions of higher
education to report or obtain approval of certain changes in ownership or other
aspects of institutional status, but the types of and triggers for such
reporting or approval vary among states and accrediting agencies. The D.C.
Education Licensure Commission may require an institution licensed by it to
apply to amend its license prior to a change in ownership. The applicable laws
and regulations of Virginia and Maryland do not specifically address reporting
of changes in ownership. The University's accrediting agency, Middle States,
requires institutions that it accredits to inform it in advance of any
substantive change, including a change that significantly alters the ownership
or control of the institution. Examples of substantive changes requiring advance
notice to Middle States include changes in the legal status, ownership or form
of control of the institution, such as the sale of a proprietary institution.
Middle States must approve a substantive change in advance in order to include
the change in the institution's accreditation status.
The HEA provides that an institution which undergoes a change in ownership
resulting in a change of control loses its eligibility to participate in the
Title IV Programs and must apply to the Department of Education in order to
reestablish such eligibility. An institution is ineligible to receive Title IV
Program funds during the period prior to recertification. The 1998 HEA
amendments provide that the Department of Education may provisionally certify an
institution seeking approval of a change of ownership based on preliminary
review by the Department of a materially complete application received by the
Department within ten business days of the transaction. The Department may
continue such provisional certification on a month-to-month basis until it has
rendered a decision on the institution's recertification application. The HEA
defines one of the events that would trigger a change in ownership resulting in
a change of control as the transfer of the controlling interest of the stock of
the institution or its parent corporation. For a publicly-traded corporation,
the securities of which are required to be registered under the Exchange Act,
such as the Company, the Department of Education regulations implementing the
HEA define a change in ownership resulting in a change of control as occurring
when a change of control of the corporation takes place that gives rise to the
obligation on the part of the corporation to file a Form 8-K with the SEC
notifying that agency of the change of control.
As of December 31, 1999, Ron K. Bailey owned approximately 52.7% 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.
Under INS regulations, if a school that is approved to admit foreign
students changes ownership, approval will be automatically withdrawn 60 days
after the change of ownership unless the school files a new petition for school
approval within 60 days of that change of ownership. If, after conducting a
review, the INS district director finds that the school's approval should not be
continued, the district director must institute proceedings to withdraw the
school's approval. The University currently has INS approval to admit foreign
students.
If the University underwent a change of control that required re-approval
by any state authority, Middle States or any Federal agency, and any required
regulatory approval were significantly delayed, limited or denied, there could
be a material adverse effect on the University's ability to offer certain
educational
15
<PAGE> 16
programs, award certain degrees or diplomas, operate one or more of its
locations, admit certain students or participate in Title IV Programs, which in
turn would materially and adversely affect the University's operations. A change
that required approval by a state regulatory authority, Middle States or a
Federal agency could also delay the University's ability to establish new
campuses or educational programs and may have other adverse regulatory effects.
Furthermore, the suspension from Title IV Programs and the necessity of
obtaining regulatory approvals in connection with a change of control may
materially limit the University's flexibility in future financing or acquisition
transactions.
VETERANS BENEFITS
Pursuant to Federal law providing benefits for veterans and reservists, the
University is approved for education of veterans and members of the selective
reserve and their dependents by the state approving agency in the District of
Columbia, Maryland, and Virginia.
TAX REFORM ACT OF 1997
In August 1997, Congress passed the Tax Reform Act of 1997 ("Act") which
extended benefits associated with employer-provided educational assistance and
added several new tax credits and incentives for students. The Act continues the
exclusion from wages of up to $5,250 of tuition reimbursement per year under the
educational assistance programs provision. This provision does not apply to
graduate level programs beginning after June 30, 1996, and it expires with
respect to programs beginning after May 31, 2000. The Hope Scholarship Credit
provides a tax credit of up to $1,500 per year per eligible student for tuition
and related expenses in the first two years of post-secondary education in a
degree or certificate program. The Lifetime Learning Credit provides a tax
credit of up to $1,000 per year per taxpayer for tuition and related expenses
for all post-secondary education, including graduate studies. Both of these
credits are phased out for taxpayers with high modified adjusted gross income.
The Act also provides that individuals can deduct interest paid on their student
loans in the first five years of repayment, beginning with the 1998 Federal
income tax return. The deduction is phased out for taxpayers with high modified
adjusted gross income.
ITEM 2. PROPERTIES.
The University leases ten of its thirteen campuses, four 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 2010,
with three five-year renewal terms. See "Certain Transactions -- Lease of Campus
Facilities" and Note 7 to the Company's consolidated financial statements. The
table below sets forth certain information regarding each of the University's
properties at December 31, 1999:
<TABLE>
<CAPTION>
AREA IN LEASE EXPIRES
LOCATION SQUARE FEET YEAR
-------- ----------- -----------------
<S> <C> <C>
Washington, D.C......................................... 33,000 2006
Alexandria, Virginia.................................... 22,000 Facility is owned
Arlington, Virginia..................................... 26,000 2002
Woodbridge, Virginia.................................... 20,800 2006
Manassas, Virginia...................................... 20,800 2006
Loudoun Campus (Ashburn, Virginia)...................... 33,000 Facility is owned
Fredericksburg, Virginia................................ 17,500 2006
Takoma Park (Washington, D.C.).......................... 21,800 Facility is owned
Prince George's County, Maryland........................ 12,000 2003
Distance Learning (Lorton, Virginia).................... 16,200 2004
Henrico County (Glen Allen, Virginia)................... 19,000 2003
Montgomery County (Germantown, MD)...................... 17,000 2005
Anne Arundel County, Maryland........................... 17,000 2004
White Marsh (Baltimore, MD)............................. 20,000 2010
</TABLE>
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<PAGE> 17
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 1999.
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.
<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
1998:
First Quarter............................................. $34.75 $30.00
Second Quarter............................................ $38.50 $33.00
Third Quarter............................................. $35.00 $25.88
Fourth Quarter............................................ $39.75 $25.63
1999:
First Quarter............................................. $39.63 $31.13
Second Quarter............................................ $37.50 $26.25
Third Quarter............................................. $32.81 $19.88
Fourth Quarter............................................ $23.00 $12.87
</TABLE>
The last sales price of the Common Stock on February 29, 2000, as reported
on the Nasdaq National Market, was $26.438 per share. As of February 29, 1999,
there were approximately 49 holders of record and 3,518 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 $0.06 per share ($0.24 annually) on the Company's Common Stock.
The amount of dividends payable in the future will be reviewed periodically by
the Company's Board of Directors in light of the Company's earnings, financial
condition, capital needs and regulatory considerations. There is no requirement
or assurance that dividends will be paid.
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<PAGE> 18
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,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues............................... $38,196 $45,005 $53,131 $62,872 $69,776
------- ------- ------- ------- -------
Costs and expenses
Instruction and educational support....... 16,168 17,808 19,738 22,355 25,082
Selling and promotion..................... 4,281 4,457 5,476 5,923 7,765
General and administration(1)............. 11,571 6,749 7,232 8,387 9,405
------- ------- ------- ------- -------
32,020 29,014 32,446 36,665 42,252
------- ------- ------- ------- -------
Income from operations....................... 6,176 15,991 20,685 26,207 27,524
Investment and other income.................. 875 1,061 2,764 3,180 4,302
------- ------- ------- ------- -------
Income before income taxes................... 7,051 17,052 23,449 29,387 31,826
Provision for income taxes(2)................ -- 2,740 9,012 11,440 12,500
------- ------- ------- ------- -------
Net income................................... $ 7,051 $14,312 $14,437 $17,947 $19,326
======= ======= ======= ======= =======
Cash dividends per common share.............. $ 0.04 $ 0.17 $ 0.23 $ 0.24
======= ======= ======= =======
PRO FORMA DATA:(3)
Income before income taxes................... $17,052
Income taxes................................. 6,649
-------
Net income................................... $10,403
=======
NET INCOME PER SHARE (PRO FORMA FOR 1996)
Basic........................................ $ 0.84 $ 0.96 $ 1.15 $ 1.25
======= ======= ======= =======
Diluted...................................... $ 0.83 $ 0.93 $ 1.12 $ 1.23
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING(4)
Basic........................................ 12,425 15,037 15,626 15,505
======= ======= ======= =======
Diluted...................................... 12,593 15,590 16,063 15,711
======= ======= ======= =======
OPERATING DATA:
Enrollment(5)................................ 7,400 8,200 9,400 10,400 11,500
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $8,992 $11,777 $15,934 $18,614 $12,213
Working capital............................... 8,327 15,574 20,600 23,363 18,170
Total assets.................................. 25,878 47,822 78,248 97,146 98,096
Long-term liabilities......................... -- 189 137 330 141
Total liabilities............................. 10,539 12,411 13,125 15,501 17,035
Total stockholders' equity.................... 15,339 35,411 65,123 81,645 81,061
</TABLE>
- ---------------
(1) Includes bonus payments to the former stockholder of the University (the "S
Corporation Stockholder") of $6.2 million in 1995 for the payment of income
taxes by the S Corporation Stockholder on
18
<PAGE> 19
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 1995 does 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%.
(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 statements that are forward looking. They
are based on the Company's current expectations and are subject to a number of
uncertainties and risks. The Company's actual results may differ materially. The
uncertainties and risks include the pace of growth of student enrollment, our
continued compliance with Title IV of the Higher Education Act, and the economic
environment. Further information about these and other relevant risks and
uncertainties may be found in the Company's other filings with the Securities
and Exchange Commission, all of which are available from the Commission and from
the Company's worldwide web site at http://www.strayeredu.com, as well as from
other sources.
BACKGROUND AND OVERVIEW
The University is a regional proprietary institution of higher education
offering undergraduate and graduate degree programs at thirteen campuses in
Maryland, Virginia, and the District of Columbia. 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 net income have increased in each of the
last three years. From 1996 through 1999, revenues increased approximately
55.0%, operating income increased approximately 72.1%, and net income (pro
forma) increased 85.8%. Over the three-year period, tuition revenue accounted
for approximately 98.3% of total revenue. The number of students increased
approximately 40.8% from 8,172 at the beginning of the 1996 Fall quarter to
11,504 at the beginning of the 1999 Fall quarter, and tuition rates increased
approximately 11.7% over the last three years.
19
<PAGE> 20
The University's principal source of revenue is tuition collected from its
students. The academic year of the University is divided into four quarters,
which approximately coincide with the four quarters of the calendar year.
Students generally must pay the entire tuition for each course prior to the
beginning of the quarter. If a student withdraws from a course prior to
completion, the University refunds a portion of the tuition. When students
register for courses, tuition is recorded as unearned tuition, which is
recognized as courses are taught through the academic quarter. Revenues also
consist in part of fees and other revenues derived principally from application
fees, "no show" fees, and bookstore sales. When a student registers for a course
but does not attend any classes, the University may have no place in the course
for another student and therefore imposes a "no show" fee on the registered
student. Beginning in 1998, the Company contracted out its bookstore operations
to a third party. Unless otherwise indicated, student enrollment information
presented herein reflects enrollment as of the beginning of the Fall academic
quarter for the applicable year, which is the beginning of the academic year and
the industry practice for measuring enrollments at educational institutions.
The University records tuition receivable when students register for the
academic quarter, generally prior to the end of the previous academic quarter.
Because the University's academic quarters coincide with the calendar quarters,
tuition receivable at the end of any calendar quarter largely represents student
tuition due for the following academic quarter. Based upon past experience and
judgment, the University establishes an allowance for doubtful accounts with
respect to accounts receivable not included in unearned tuition. Any uncollected
account more than six months past due is charged against the allowance. The
University's historical bad debt expense related to tuition receivable as a
percentage of revenue for the years ended December 31, 1997, 1998, and 1999 was
2.6%, 2.9%, and 2.4%, respectively.
The University's expenses consist of instruction and educational support
expenses, selling and promotional expenses, and general and administration
expenses. Instruction and educational support expenses generally contain items
of expense directly attributable to the educational activity of the University.
This expense category includes salaries and benefits of faculty, academic
administrators, and student support personnel. Instruction and educational
support expenses also include costs of educational supplies and facilities,
including rent on campus leases, certain costs of establishing and maintaining
computer laboratories, and all other physical plant and occupancy costs, with
the exception of costs attributable to the Jessup, Maryland and Newington,
Virginia facilities.
Selling and promotional expenses include salaries and benefits of personnel
engaged in recruitment, admissions, promotion and development, as well as costs
of advertising and production of marketing materials.
General and administration expenses include salaries and benefits of
personnel engaged in accounting, personnel, compliance and other business
functions, and plant and occupancy costs attributable to such functions.
Investment and other income consist primarily of earnings on investments.
20
<PAGE> 21
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,
---------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net revenues:............................................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Instruction and educational support....................... 37.1 35.6 35.9
Selling and promotional................................... 10.3 9.4 11.1
General and administration................................ 13.6 13.3 13.5
----- ----- -----
Income from operations...................................... 39.0 41.6 39.5
Investment and other income................................. 5.2 5.1 6.2
----- ----- -----
Income before taxes......................................... 44.2 46.7 45.7
Provision for income taxes.................................. 17.0 18.2 18.0
----- ----- -----
Net income.................................................. 27.2% 28.5% 27.7%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues increased 11.0% from $62.9 million in 1998 to $69.8
million in 1999 due to a 10.1% increase in the number of students and a 5%
tuition increase in 1999.
Instruction and educational support expenses. Instruction and educational
support expenses increased 12.2% from $22.4 million in 1998 to $25.1 million in
1999 due to an increase in the number of personnel to support increased
enrollment, salary increases and the addition of the three new campuses.
Selling and promotional expenses. Selling and promotional expenses
increased 31.1% from $5.9 million in 1998 to $7.8 million in 1999 due
principally to increased advertising costs, and the addition of admissions
personnel.
General and administration expenses. General and administration expenses
increased 12.1% from $8.4 million in 1998 to $9.4 million in 1999 due
principally to the addition of administrative personnel in order to support
increased enrollments and the addition of three new campuses.
Income from operations. Income from operations increased 5.0% from $26.2
million in 1998 to $27.5 million in 1999. This increase was primarily due to the
increase in student enrollment and tuition in 1999.
Provision for income taxes. Income tax expense increased 9.3% from $11.4
million in 1998 to $12.5 million in 1999. This increase was primarily due to the
increase in income before taxes attributable to the factors discussed above.
Net income. Net income increased 7.7% from $17.9 million in 1998 to $19.3
million in 1999 because of the factors discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased 18.3% from $53.1 million in 1997 to $62.9
million in 1998 due to a 10.9% increase in the number of students in 1998 and a
6.0% tuition increase for 1998.
Instruction and educational support expenses. Instruction and educational
support expenses increased 13.3% from $19.7 million in 1997 to $22.4 million in
1998 due to an increase in the number of personnel to support increased
enrollment, salary increases and the addition of the Henrico County, Virginia
and Montgomery County, Maryland campuses.
21
<PAGE> 22
Selling and promotional expenses. Selling and promotional expenses
increased 8.2% from $5.5 million in 1997 to $5.9 million in 1998 due principally
to increased advertising costs, and the addition of admissions personnel.
General and administration expenses. General and administration expenses
increased 16.0% from $7.2 million in 1997 to $8.4 million in 1998 due
principally to the addition of administrative personnel in order to support
increased enrollments and the addition of the Henrico County, Virginia and
Montgomery County, Maryland campuses.
Income from operations. Income from operations increased 26.6% from $20.7
million in 1997 to $26.2 million in 1998. This increase was primarily due to the
increase in student enrollment and tuition in 1998.
Provision for income taxes. Income tax expense increased 26.9% from $9.0
million in 1997 to $11.4 million in 1998. This increase was primarily due to the
increase in income before taxes attributable to the factors discussed above.
Net income. Net income increased 24.3% from $14.4 million in 1997 to $17.9
million in 1998 because of the factors discussed above.
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 1999, enrollments at the beginning of the Winter, Spring, Summer and
Fall academic quarters were 10,179, 9,778, 7,214 and 11,504, 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 1997, 1998, and 1999.
QUARTERLY REVENUE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ----------------- -----------------
THREE MONTHS ENDED AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31.................................. $13,773 26% $16,849 27% $18,914 27%
June 30................................... 13,639 25 16,375 26 17,643 25
September 30.............................. 10,030 19 11,783 18 12,866 19
December 31............................... 15,689 30 17,865 29 20,353 29
------- --- ------- --- ------- ---
Total for Year....................... $53,131 100% $62,872 100% $69,776 100%
======= === ======= === ======= ===
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Company generated cash of $18.3 million from operating
activities. Investing activities used cash of $5.1 million, principally for the
purchase of property and equipment, including the Takoma Park campus. Cash used
by financing activities was $19.6 million for dividend payments of $3.3 million
and repurchase of $17.7 million of common stock, offset by proceeds for the
exercise of stock options, including tax benefits, of $1.4 million.
At December 31, 1999, the Company had cash and cash equivalents and
marketable securities of $57.5 million compared to $64.0 million at December 31,
1998. In addition, the Company has available a $10.0 million credit facility
from a bank. The Company believes that existing cash and cash equivalents,
marketable securities, cash generated from operating activities and, if
necessary, cash borrowed under the
22
<PAGE> 23
credit facility, will be sufficient to meet the Company's requirements for at
least the next 24 months. If the University decides to purchase additional
campus facilities, it may finance such acquisitions with indebtedness.
IMPACT OF THE YEAR 2000
The Year 2000 issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs that have been written using six digits (e.g.,
12/31/99), rather than eight (e.g., 12/31/1999), to define the applicable year
of business. This date definition limitation could, unless corrected, cause some
computer programs, hardware and non-information technology systems to be unable
to process information containing dates after December 31, 1999.
As a result of the successful implementation and employment of the
Company's Year 2000 readiness plan, the Company has experienced no disruption as
a result of the year 2000 changeover. The Company is committed to continuous
monitoring of all systems, applications and operating systems. Updates for
applications and operating systems will be obtained as required.
The Company's costs to date for its Year 2000 compliance project, excluding
the salaries of its employees, have not been material. In fact, the Company's IT
systems have been modified by the suppliers of those systems and such
modifications were included as part of normal upgrades of those systems. The
Company does not currently believe that there are any outstanding year 2000
issues related to its IT systems, the IT systems of any vendor, or the IT
systems of the Department of Education. There can be no guarantee, however, that
internal systems, external systems, non-IT systems, and the systems of the
Company's major suppliers will operate without failure as a result of residual
year 2000 issues. The Company cannot assure that undetected internal and
external Year 2000 issues will not materially impact its business, financial
condition, results of operations and cash flows.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes and changes
in the market values of its investments. The Company invests its excess cash in
marketable securities and certificates of deposit. At December 31, 1999 the
Company's investments include certificates of deposit, money market funds, U.S.
Government obligations (primarily fixed income securities) and high-quality
equity securities. The Company employs established policies and procedures to
manage its exposure to changes in the market risk of its marketable securities,
which are classified as available-for-sale as of December 31, 1999. The Company
has not used derivative financial instruments in its investment portfolio.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. These securities may have their fair market value adversely
impacted due to a rise in interest rates. Investments in certificates of deposit
and money market funds may adversely impact future earnings due to a decrease in
interest rates. Due in part to these factors, the Company's future investment
income may fall short of expectations due to changes in interest rates or the
Company may suffer losses in principal if forced to sell securities which have
declined in market value due to changes in interest rates. As of December 31,
1999, a 10% increase or decline in interest rates will not have a material
impact on the Company's future earnings, fair values, or cash flows related to
investments in certificates of deposit or interest earning marketable
securities. In addition, as of December 31, 1999, a 10% decrease in market
values would not have a material impact on the Company's future earning, fair
values, financial position or cash flows related to investments in marketable
equity securities.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Strayer Education, Inc.
Report of Independent Accountants......................... 25
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... 26
Consolidated Statements of Income for each of the three
years in the period ended
December 31, 1999...................................... 27
Consolidated Statements of Comprehensive Income for each
of the three years in the period ended December 31,
1999................................................... 28
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31,
1999................................................... 29
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1999...... 30
Notes to Consolidated Financial Statements................ 31
Schedule II -- Valuation and Qualifying Accounts.......... 38
</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.
24
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Strayer Education, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Strayer Education, Inc. and its subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Washington, D.C.
February 3, 2000
25
<PAGE> 26
STRAYER EDUCATION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $18,614 $12,213
Marketable securities available for sale, at fair value... 6,420 5,901
Short-term investments -- restricted...................... 922 959
Tuition receivable, net of allowances for doubtful
accounts of $295 and $605, respectively................ 11,812 14,997
Income taxes receivable................................... 275 201
Other current assets...................................... 491 793
------- -------
Total current assets.............................. $38,534 $35,064
Student loans receivable, net of allowances for losses...... 5,524 6,436
Property and equipment, net................................. 13,880 16,837
Marketable securities available for sale, at fair value..... 38,986 39,440
Other assets................................................ 222 319
------- -------
Total assets...................................... $97,146 $98,096
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 166 $ 183
Accrued expenses.......................................... 943 423
Dividends payable......................................... 789 917
Unearned tuition.......................................... 13,273 15,371
------- -------
Total current liabilities......................... 15,171 16,894
Deferred income taxes....................................... 330 141
------- -------
Total liabilities................................. 15,501 17,035
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized, no shares issued or outstanding............ -- --
Common stock, par value $.01; 50,000,000 shares
authorized; 15,277,251 and 15,774,477 shares issued and
outstanding in 1998 and 1999, respectively............. 158 153
Additional paid-in capital.................................. 50,470 34,175
Retained earnings........................................... 30,274 46,194
Accumulated other comprehensive income...................... 743 539
------- -------
Total stockholders' equity........................ 81,645 81,061
------- -------
Total liabilities and stockholders' equity........ $97,146 $98,096
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Revenues.................................................... $ 53,131 $ 62,872 $69,776
-------- -------- -------
Costs and expenses:
Instruction and educational support....................... 19,738 22,355 25,082
Selling and promotion..................................... 5,476 5,923 7,765
General and administration................................ 7,232 8,387 9,405
-------- -------- -------
32,446 36,665 42,252
-------- -------- -------
Income from operations.................................... 20,685 26,207 27,524
Investment and other income................................. 2,764 3,180 4,302
-------- -------- -------
Income before income taxes................................ 23,449 29,387 31,826
Provision for income taxes.................................. 9,012 11,440 12,500
-------- -------- -------
Net income................................................ $ 14,437 $ 17,947 $19,326
======== ======== =======
NET INCOME PER SHARE:
Basic..................................................... $ 0.96 $ 1.15 $ 1.25
Diluted................................................... $ 0.93 $ 1.12 $ 1.23
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net income.................................................. $14,437 $17,947 $19,326
Other comprehensive income (loss):
Unrealized gains (losses) on investments, net of taxes.... 52 460 (204)
------- ------- -------
Comprehensive income........................................ $14,489 $18,407 $19,122
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 29
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
---------- ------ ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Tax benefit from exercise of stock
options.......................... -- -- 1,207 -- -- 1,207
Dividends ($0.17 per share)........ -- -- -- (2,490) -- (2,490)
Net unrealized gains on marketable
securities....................... -- -- -- -- 52 52
Net income......................... -- -- -- 14,437 -- 14,437
---------- ---- -------- ------- ----- --------
Balance, December 31, 1997........... 15,542,105 156 48,762 15,922 283 65,123
Exercise of stock options.......... 303,872 3 2,096 -- -- 2,099
Repurchase of common stock......... (71,500) (1) (2,388) -- -- (2,389)
Dividends ($0.23 per share)........ -- -- -- (3,595) -- (3,595)
Tax benefit from exercise of stock
options.......................... -- -- 2,000 -- -- 2,000
Net unrealized gains on marketable
securities....................... -- -- -- -- 460 460
Net income......................... -- -- -- 17,947 -- 17,947
---------- ---- -------- ------- ----- --------
Balance, December 31, 1998........... 15,774,477 158 50,470 30,274 743 81,645
Exercise of stock options.......... 133,203 1 903 -- -- 904
Repurchase of common stock......... (630,429) (6) (17,723) -- -- (17,729)
Dividends ($0.24 per share)........ -- -- -- (3,406) -- (3,406)
Tax benefit from exercise of stock
options.......................... -- -- 525 -- -- 525
Net unrealized losses on marketable
securities....................... -- -- -- -- (204) (204)
Net income......................... -- -- -- 19,326 -- 19,326
---------- ---- -------- ------- ----- --------
Balance, December 31, 1999........... 15,277,251 $153 $ 34,175 $46,194 $ 539 $ 81,061
========== ==== ======== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 30
STRAYER EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 14,437 $ 17,947 $ 19,326
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,236 1,625 1,894
Provision for student loan losses...................... 325 353 216
Deferred income taxes.................................. (174) (147) (248)
Other non-cash charges................................. -- 75 --
Changes in assets and liabilities:
Short-term investments -- restricted................... (72) (43) (37)
Tuition receivable, net................................ (1,140) (1,749) (3,185)
Inventories............................................ (95) 1,018 --
Income taxes receivable................................ -- (275) 74
Other current assets................................... (279) 238 (114)
Other assets........................................... (138) 10 (97)
Trade accounts payable................................. 48 (214) 17
Accrued expenses....................................... 89 114 (520)
Unearned tuition....................................... 629 1,494 2,098
Student loans originated or acquired...................... (4,078) (4,293) (5,124)
Collections on student loans receivable................... 2,114 2,854 3,996
-------- -------- --------
Net cash provided by operating activities......... 12,902 19,007 18,296
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,286) (7,392) (4,851)
Purchases of marketable securities........................ (34,380) (19,739) (9,298)
Maturities of marketable securities....................... 12,698 11,975 9,030
-------- -------- --------
Net cash used in investing activities............. (23,968) (15,156) (5,119)
-------- -------- --------
Cash flows from financing activities:
Dividends paid............................................ (2,490) (2,806) (3,278)
Proceeds from sale of common stock........................ 15,033 -- --
Proceeds from exercise of stock options, including tax
benefits............................................... 2,596 4,024 1,429
Repurchase of common stock................................ -- (2,389) (17,729)
Other..................................................... 84 -- --
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 15,223 (1,171) (19,578)
-------- -------- --------
Net increase (decrease) in cash and cash
requirements.................................... 4,157 2,680 (6,401)
Cash and cash equivalents -- beginning of year.............. 11,777 15,934 18,614
-------- -------- --------
Cash and cash equivalents -- end of year.................... $ 15,934 $ 18,614 $ 12,213
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Strayer Education, Inc. (the Company), a Maryland corporation, conducts its
operations though its subsidiaries, Strayer University, Inc. (the University)
and Education Loan Processing, Inc. (ELP). The University is a proprietary
accredited institution of higher education that provides undergraduate and
graduate degrees in various fields of study through its thirteen campuses in the
District of Columbia, Maryland and Virginia. ELP provides student loans for the
University's students. For purposes of the consolidated balance sheets, all of
ELP's assets and liabilities have been classified as current assets and
liabilities with the exception of student loans receivable, which have been
classified as non-current consistent with industry practice.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Strayer
Education, Inc. and its subsidiaries, the University, ELP, and Professional
Education, Inc. All inter-company accounts and transactions have been eliminated
in the consolidated financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of operating cash and cash invested in
U.S. government obligations. The Company places its cash and temporary cash
investments with high quality credit institutions. The Company considers all
highly liquid instruments purchased with a maturity of three months or less at
the date of purchase to be cash equivalents.
INVESTMENTS
The Company's investments in marketable securities are considered
"available-for-sale," and, as such, are stated at fair value. The net unrealized
gains and losses are reported as a component of accumulated comprehensive income
in stockholders' equity. Realized gains or losses from the sale of marketable
securities are based on the specific identification method.
TUITION REVENUES
Tuition income is deferred at the time of registration and is recognized as
income, net of any refunds or withdrawals, throughout each respective quarter
session. Advance registrations for the next quarter are shown as unearned
tuition.
STUDENT LOANS RECEIVABLE
Student loans receivable are stated at the amount of unpaid principal,
reduced by an allowance for loan losses. Interest income from student loans is
recognized using the interest method.
Provisions for estimated losses on student loans are charged to income in
amounts sufficient to maintain the allowance at a level considered adequate to
cover the losses of principal and interest in the existing loan portfolio, based
upon historical trends, economic conditions and other information. ELP's
charge-off policy is based on a loan-by-loan review; however, any loan with
payments more than 120 days past due is written off against the allowance.
CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash investments with high credit
quality institutions. At times cash and cash equivalent balances may be in
excess of the FDIC insurance limit. The Company has not experienced any losses
on its cash and cash equivalents.
31
<PAGE> 32
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND NATURE OF OPERATIONS -- (CONTINUED)
Tuition receivables are not collateralized; however, credit risk is
minimized as a result of the diverse nature of the University's student base in
Maryland, Virginia, and the District of Columbia. The University establishes an
allowance for doubtful tuition accounts based upon historical trends and other
information.
Student loans are receivable from the University's students. The Company
performs credit evaluations and requires cosigners in some instances to minimize
credit risk.
INVENTORIES
Beginning in 1998, the Company contracted out its bookstore operations to
an Internet service provider, MBS Direct. The Company no longer maintains
bookstore inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives ranging from 3 to 40 years. Depreciation and amortization amounted to
$1,236,000, $1,625,000, and $1,894,000 for the years ended December 31, 1997,
1998 and 1999, respectively.
INCOME TAXES
The Company provides for deferred income taxes based on temporary
differences between financial statement and tax bases of assets and liabilities
using enacted tax rates in effect in the year in which the differences are
expected to reverse.
NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding. Diluted earnings per share
is computed by dividing net income by the weighted average common and
potentially dilutive common equivalent shares outstanding, determined as
follows.
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding used to
compute basic earnings per share............... 15,037,002 15,626,274 15,505,343
Incremental shares issuable upon the assumed
exercise of stock options...................... 552,774 436,982 205,180
---------- ---------- ----------
Shares used to compute diluted earnings per
share.......................................... 15,589,776 16,063,256 15,710,523
========== ========== ==========
</TABLE>
Incremental shares issuable upon the assumed exercise of outstanding stock
options is computed using the average market price during the related periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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.
32
<PAGE> 33
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND NATURE OF OPERATIONS -- (CONTINUED)
COMMON STOCK SPLIT
During 1997, the Company's Board of Directors approved a 3-for-2 stock
split. The stock dividend was paid on November 18, 1997 to shareholders of
record on November 4, 1997. All prior share and per share information in the
financial statements have been changed to give effect to this stock split.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains on
investments in marketable securities, net of income taxes.
2. INVESTMENTS
SHORT-TERM INVESTMENTS -- RESTRICTED
The U.S. Department of Education requires Title IV Program loan funds
collected in excess of amounts due for tuition to be kept in a cash or cash
equivalent account until such amounts are required to be remitted to students.
These funds are invested in short-term U.S. Treasury Notes.
MARKETABLE SECURITIES
The cost and market value for each class of investments as of December 31,
1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998
-------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Certificates of deposit and money market
funds....................................... $10,617 $ 14 $ -- $10,631
Fixed income investments...................... 22,989 348 -- 23,337
Equity securities............................. 10,584 854 -- 11,438
------- ------ ---- -------
Total............................... $44,190 $1,216 $ -- $45,406
======= ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Certificates of deposit and money market
funds....................................... $ 8,852 $ -- $ -- $ 8,852
Fixed income investments...................... 23,835 23 435 23,423
Equity securities............................. 11,771 1,295 -- 13,066
------- ------ ---- -------
Total............................... $44,458 $1,318 $435 $45,341
======= ====== ==== =======
</TABLE>
33
<PAGE> 34
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1998 and 1999
is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Land........................................................ $ 2,000 $ 4,014
Buildings................................................... 4,639 5,414
Furniture and equipment..................................... 9,326 11,155
Leasehold improvements...................................... 3,735 3,967
Vehicles.................................................... 22 22
------- -------
19,722 24,572
Less accumulated depreciation and amortization............ (5,842) (7,735)
------- -------
$13,880 $16,837
======= =======
</TABLE>
4. STUDENT LOANS RECEIVABLE
Student loans receivable under the Strayer Education Loan Program as of
December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Student loans receivable outstanding, including accrued
interest.................................................. $5,877 $6,847
Allowance for loan losses................................... (353) (411)
------ ------
Student loans receivable, net.......................... $5,524 $6,436
====== ======
</TABLE>
The interest rate on these student loans is generally 7.5%. The Company
believes the carrying value of the student loans approximates their fair value.
The loans require a minimum monthly payment of the greater of $50 or 3% of the
outstanding loan balance, plus interest while the student is in attendance. Upon
the student's graduation or withdrawal, the loans become due in equal monthly
installments of principal plus interest over 33.3 months.
5. STOCK OPTION PLAN
In July 1996, the Company set aside 1,500,000 shares of common stock for
shares to be issued under the Company's 1996 Stock Option Plan (the Plan) that
provided for the grant of options intended to qualify as incentive stock
options, and also provided for the grant of non-qualifying options to directors
and employees of the Company. Options may be granted to eligible employees of
the Company at the discretion of the Board of Directors, at option prices based
on the fair market value of the shares at the date of grant. Vesting provisions
are at the discretion of the Board of Directors. Stock option activity for the
years ended December 31, 1997, 1998, and 1999 is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
Balance, December 31, 1996.................................. 985,875
Grants.................................................... --
Exercises................................................. (208,355)
Forfeitures............................................... (50,462)
--------
</TABLE>
34
<PAGE> 35
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCK OPTION PLAN -- (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
Balance, December 31, 1997.................................. 727,058
Grants.................................................... 11,324
Exercises................................................. (303,872)
Forfeitures............................................... --
--------
Balance, December 31, 1998.................................. 434,510
--------
Grants.................................................... 2,759
Exercises................................................. (133,203)
Forfeitures............................................... --
--------
Balance, December 31, 1999.................................. 304,066
========
</TABLE>
At December 31, 1999, the 304,066 stock options outstanding are
exercisable. All of the options have an exercise price of $6.67 per share and
expire on July 25, 2001.
The Company accounts for the fair value of its stock options granted to
employees and directors in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
expense has been recognized for the Plan, since the exercise price of the
options was equal to the fair value of the underlying common stock on the date
of grant. Had compensation expense been determined based on the fair value of
the options at the grant dates consistent with that method of accounting under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," the Company's pro forma net income and net income per share for
the years ended December 31, 1997, 1998, and 1999 would have been decreased as
indicated below (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported............................................ $14,437 $17,947 $19,326
Pro forma.............................................. $14,005 $17,054 $19,283
Net income per common share:
Basic:
As reported............................................ $ 0.96 $ 1.15 $ 1.25
Pro forma.............................................. $ 0.93 $ 1.09 $ 1.24
Diluted:
As reported............................................ $ 0.93 $ 1.12 $ 1.23
Pro forma.............................................. $ 0.90 $ 1.06 $ 1.23
</TABLE>
The fair value of each option granted in 1999 was estimated on the date of
grant using the Black-Scholes option-pricing model using the following
assumptions: dividend yield of 1.0%; expected volatility of 47%; risk-free
interest rate of 5.25%; expected term of 2.1 years. The fair value at date of
grant was $25.55 per share. The fair value of each option granted in 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model
using the following assumptions: dividend yield of 1.0%; expected volatility of
35%; risk-free interest rate of 4.17%; expected term of 2 years. The fair value
at date of grant was $20.08 per share. The remaining contractual life of the
options as of December 31, 1999 was 1.58 years.
6. OTHER EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing trust covering all eligible
employees of the Company. Participants may defer a percentage of their salaries
or make contributions up to 10% of their total compensation. Employee
contributions are voluntary. Discretionary contributions are made by the Company
35
<PAGE> 36
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER EMPLOYEE BENEFIT PLANS -- (CONTINUED)
in the fourth quarter of each year, and were $144,000, $185,000 and $186,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
In May 1998, the Company adopted the Strayer Education Employee Stock
Purchase Plan (ESPP). Under the ESPP, eligible employees may purchase shares of
the Company's common stock, subject to certain limitations, at 90 percent of its
market value at the date of purchase. Purchases are limited to 10 percent of an
employee's eligible compensation. The aggregate number of shares of Common Stock
that may be made available for purchase by participating employees under the
ESPP is 2,500,000 shares. During 1998 and 1999, 4,116 and 11,962 shares,
respectively, were purchased in the open market for employees, at average prices
of $31.81 and $26.13 per share, respectively.
7. COMMITMENTS AND CONTINGENCIES
The University participates in various federal student financial assistance
programs which are subject to audit. Management believes that the potential
effects of audit adjustments, if any, for the periods currently under audit will
not have a material adverse effect on the Company's financial position, results
of operations or cash flows.
The Company has long-term operating leases for ten of its thirteen campuses
and other administrative locations. Rent expense was $3,294,000, $3,658,000 and
$4,227,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
The University has the option to buy certain of these campus properties at their
fair market value as determined by independent appraisal. The Washington D.C.
campus and three of the Virginia campuses are leased from companies owned by the
President and Chief Executive Officer and a majority stockholder of the Company.
Rent paid to these companies was $2,126,000, $2,199,363 and $2,040,167 for the
years ended December 31, 1997, 1998 and 1999, respectively. During 1999, the
Company acquired its Takoma Park Campus from its majority stockholder for
$1,024,000.
The rents on these leases are subject to an annual increase based on a
stipulated price index. The minimum rental commitments for the Company as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL AMOUNT PAYABLE
TOTAL TO RELATED PARTIES
------- --------------------
<S> <C> <C>
2000..................................................... $ 4,501 $ 1,849
2001..................................................... 4,382 1,849
2002..................................................... 3,930 1,849
2003..................................................... 3,486 1,849
2004..................................................... 3,010 1,849
Thereafter............................................... 4,824 2,619
------- -------
$24,133 $11,864
======= =======
</TABLE>
In addition, the Company has a credit facility from a bank in the amount of
$10.0 million. Interest on any borrowings under the facility will accrue at an
annual rate not to exceed 0.75% above the London Interbank Offered Rate. The
Company does not pay a fee for this facility, but in the event of any
borrowings, an origination fee of 1% will be due on the amounts borrowed from
time to time thereunder. There have been no borrowings by the Company under the
credit facility.
On October 2, 1998, the Board of Directors authorized the Company to
repurchase up to five percent of shares of its outstanding common stock at
market prices, not to exceed a total cost of $24 million. The timing of stock
purchases are made at the discretion of management. The Company repurchased
71,500 shares and 630,429 shares during the years ended December 31, 1998 and
1999, respectively.
36
<PAGE> 37
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
During the year 2000, the Board has authorized a stock repurchase program
in an amount of up to 25% of net income.
8. INCOME TAXES
The income tax provision for the years ended December 31, 1997, 1998 and
1999 is summarized below (in thousands).
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $7,422 $ 9,620 $10,453
State................................................... 1,764 1,967 2,295
------ ------- -------
9,186 11,587 12,748
------ ------- -------
Deferred:
Federal................................................. (145) (129) (203)
State................................................... (29) (18) (45)
------ ------- -------
(174) (147) (248)
------ ------- -------
$9,012 $11,440 $12,500
====== ======= =======
</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>
1998 1999
---- ----
<S> <C> <C>
Tuition receivable and student loans........................ $253 $396
Property and equipment...................................... 143 203
Accrued vacation pay........................................ -- 45
Unrealized gains on marketable securities................... (473) (344)
---- ----
Net deferred tax asset (liability).......................... $(77) $300
==== ====
</TABLE>
A reconciliation between the Company's statutory tax rate and the effective
tax rate for the years ended December 31, 1997, 1998, and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate...................................... 35% 35% 35%
State income taxes, net of federal benefits................. 5% 5% 5%
Effect of prior year accruals............................... (2%) (1%) (1%)
-- -- --
Effective tax rate.......................................... 38% 39% 39%
== == ==
</TABLE>
Cash payments for income taxes were $8,147,000 in 1997, $9,552,000 in 1998
and $12,674,000 in 1999.
37
<PAGE> 38
STRAYER EDUCATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for 1998 and 1999 is as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
1998 FIRST SECOND THIRD FOURTH
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.................................. $16,849 $16,375 $11,783 $17,865
Income from operations.......................... 8,109 7,310 2,278 8,510
Net income...................................... 5,376 4,924 1,890 5,757
Net income per share:
Basic......................................... $ 0.35 $ 0.32 $ 0.12 $ 0.36
Diluted....................................... $ 0.34 $ 0.31 $ 0.12 $ 0.35
</TABLE>
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
1999 FIRST SECOND THIRD FOURTH
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.................................. $18,914 $17,643 $12,866 $20,353
Income from operations.......................... 9,275 7,692 1,379 9,178
Net income...................................... 6,158 5,511 1,509 6,147
Net income per share:
Basic......................................... $ 0.39 $ 0.35 $ 0.10 $ 0.41
Diluted....................................... $ 0.39 $ 0.35 $ 0.10 $ 0.40
</TABLE>
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, 1999............ $295 $1,695 $(1,385) $605
Year ended December 31, 1998............ 230 1,302 (1,237) 295
Year ended December 31, 1997............ 164 1,379 (1,313) 230
Allowance for loan losses:
Year ended December 31, 1999............ 353 216 (158) 411
Year ended December 31, 1998............ 283 213 (143) 353
Year ended December 31, 1997............ 147 325 (189) 283
</TABLE>
38
<PAGE> 39
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......................... 59 Chief Executive Officer, President,Director
Harry T. Wilkins...................... 43 Chief Financial Officer
Stanley G. Elmore..................... 58 Chairman of the Board of Directors
Todd A. Milano........................ 47 Director, Treasurer
Jennie D. Seaton...................... 70 Director
Roland Carey.......................... 60 Director
Donald T. Benson...................... 56 Director
G. Thomas Waite, III.................. 48 Director
Charlotte Beason...................... 52 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. He has been the President and a director of ELP since its
formation in 1994. From 1980 to 1989, Mr. Bailey held a variety of
administrative positions with the University, including the position of Vice
President of the University. Before assuming his first full-time position with
the University in 1980, Mr. Bailey was a part-time faculty member of the
University and served as Director of Data Processing of the National Association
of Home Builders.
Harry T. Wilkins is the Chief Financial Officer of the Company and has been
the Director of Financial Affairs of the University since 1992. Prior to joining
the University, Mr. Wilkins was a Director with the accounting firm of Wooden &
Benson, Chartered from 1984 to 1992 and a member of the consulting practice of
the accounting firm of Deloitte Touche (then Deloitte, Haskins and Sells) from
1979 to 1984. Mr. Wilkins is a Certified Public Accountant.
Stanley G. Elmore has been a director of the Company since July 1996. Mr.
Elmore has served as the Chairman of the Board of Trustees of the University
from 1989 to 1987. Mr. Elmore retired in 1998 from his position as Vice
President, Citibank Mid-Atlantic, a position he had held since 1989.
Todd A. Milano is the Treasurer of the Company and has been a director of
the Company since July 1996. Mr. Milano also served as the Vice Chairman of the
Board of Trustees of the University from 1992 to 1999. Mr. Milano has been the
President and Chief Executive Officer of Central Pennsylvania College since
1989.
Dr. Jennie D. Seaton has been a director of the Company since July 1996.
Dr. Seaton has been a member of the Board of Trustees of the University since
1990 and was elected to Vice Chairman of the Board of Trustees of the University
in 1999. Dr. Seaton is retired and was an Assistant Dean of Virginia
Commonwealth University from 1975 to 1994.
Roland Carey has been a director of the Company since July 1996. Mr. Carey
has been a member of the Board of Trustees of the University since 1990. Since
August 1999, Mr. Carey has been an Instructor with the Louisa County Public
School System of Virginia and Chairman of the Middle School Building Leadership
39
<PAGE> 40
Team. Prior to his current position, Mr. Carey was the Program Coordinator, Carl
Sandburg School for more than twelve years.
Donald T. Benson has been a director of the Company since July 1996. Mr.
Benson has been a member of the Board of Trustees of the University since 1992.
Mr. Benson serves as Senior Vice President, Human Resources and Real Estate
Investment of Methodist Health Care System in Houston, Texas. From 1997 to 1998,
Mr. Benson was Vice President, Human Resources and Administration of Coventry
Corporation. Mr. Benson was Vice President, Human Resources of Aetna Inc. from
1992 to 1997.
G. Thomas Waite, III has been a director of the Company since July 1996.
Mr. Waite has been a member of the Board of Trustees of the University since
1994. Mr. Waite has served as Treasurer and Chief Financial Officer, Humane
Society of the United States since 1993.
Dr. Charlotte Beason has been a director of the Company since July 1996.
Dr. Beason has been a member of the Board of Trustees of the University since
1995. Dr. Beason is a Nurse at the U.S. Department of Veterans Affairs, a
position she has held for more than five years.
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, 63, 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., 62, is the Academic Dean of the University, a
position he has held since 1986.
J. Chris Toe, Ph.D., 45, 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, 44, is the University's Director of Public Relations, a
position she has held since 1995. Ms. Boulter joined the University in 1990 as
an accountant and was the University's Director of Marketing from 1991 to 1995.
Robert E. Farmer, 61, 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).
Doug Lemon, 46, is the University's Director of Information Technology, a
position he has held since August 1999. From 1996 to 1999, Mr. Lemon was the
Director of Information Technology for the University of Maryland, University
College.
Christopher Symanoskie, 28, is the Manager of Investor Relations, a
position he has held since May 1998. Prior to his employment at Strayer, Mr.
Symanoskie was the Manager of Financial Information at Callahan & Associates, a
Washington D.C. based consulting firm, from 1996 to 1998.
40
<PAGE> 41
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 Stanley Elmore,
Ron Bailey and Jennie Seaton. This committee exercises such authority as is
delegated to it.
Compensation Committee. The Compensation Committee consists of Donald
Benson and Todd Milano. The Compensation Committee determines the compensation
of the Company's executive officers, subject to the provisions of any employment
agreements, and administers the Company's Stock Option Plan.
COMPENSATION OF THE BOARD OF DIRECTORS
Directors are reimbursed for expenses incurred in connection with their
attendance at Board and Committee meetings and currently receive compensation of
$1,700 per meeting.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by reference
from the information to be contained under the caption "Compensation" in the
Company's 1999 Proxy Statement which will be filed no later than 120 days
following December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the ownership
of Common Stock as of December 31, 1999, 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. Except as noted below, the address for all 5% beneficial owners is:
1025 Fifteenth Street, N.W., Washington, D.C. 20005.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------
NAMES OF BENEFICIAL OWNERS(1) NUMBER PERCENT OF CLASS
----------------------------- --------- ----------------
<S> <C> <C>
Ron K. Bailey and Beverly W. Bailey(2)...................... 8,175,000 52.7%
Kayne Anderson Investment Management, LLC.(3)
1800 Avenue of the Stars
Los Angeles, CA 90067.................................. 1,602,137 10.4%
T. Rowe Price Associates, Inc.(4)
100 East Pratt Street
Baltimore, MD 21202.................................... 1,485,700 9.5%
Harry T. Wilkins............................................ 182,000 *
Stanley G. Elmore........................................... 11,850 *
Todd A. Milano.............................................. 12,320 *
Jennie D. Seaton............................................ 7,950 *
Roland Carey................................................ 10,500 *
Donald T. Benson............................................ 9,075 *
G. Thomas Waite, III........................................ 3,128 *
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------
NAMES OF BENEFICIAL OWNERS(1) NUMBER PERCENT OF CLASS
----------------------------- --------- ----------------
<S> <C> <C>
Charlotte Beason............................................ 3,000 *
--------- ----
All directors and executive officers as a group (9
persons)(5)............................................... 8,414,823 54.3%
========= ====
</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
February 1, 2000. These securities are owned by various individual and
institutional investors, which Kayne Anderson Investment Management, LLC.
serves as investment adviser with power to direct investments and/or sole
power to vote the securities. For purposes of the reporting requirements of
the Securities and Exchange Act of 1934, Kayne Anderson Investment
Management is deemed to be a beneficial owner of such securities; however,
Kayne Anderson Investment Management expressly disclaims that it is, in
fact, the beneficial owner of such securities.
(4) Based on a Schedule 13G filed with the Securities and Exchange Commission on
February 14, 2000. These securities are owned by various individual and
institutional investors, which T. Rowe Price Associates, Inc. ("Price
Associates") serves as investment adviser with power to direct investments
and/or sole power to vote the securities. For purposes of the reporting
requirements of the Securities and Exchange Act of 1934, Price Associates is
deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, the beneficial owner of
such securities.
(5) Includes currently exercisable options to purchase the following shares for
each listed individual: Wilkins (150,000); Elmore (10,500); Milano (2,500);
Seaton (1,600); Carey (10,500); Benson (7,500); Waite (0) and Beason
(3,000).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
LEASE OF CAMPUS FACILITIES
The Company has long-term non-cancelable operating leases for ten of its
various campus locations. The rents on these leases are subject to an annual
increase based on a stipulated price index. Of the ten leased campus locations,
four of the campuses, including the Washington, D.C. campus and three of the
Virginia campuses, were leased from corporations which are owned by Mr. Bailey,
the Company's President, CEO and majority stockholder. Rent paid to Mr. Bailey
under these operating leases and the Takoma Park lease prior to its purchase for
the years ended December 31, 1997, 1998 and 1999 was $2,126,000, $2,199,363, and
$2,040,167, respectively. During 1999, the Company acquired its Takoma Park
Campus from its majority
42
<PAGE> 43
stockholder for $1,024,000. Future minimum rental commitments for all of the
Company's ten leases and the four campuses leased from Mr. Bailey as of December
31, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL AMOUNT PAYABLE
TOTAL TO RELATED PARTIES
------- --------------------
<S> <C> <C>
2000..................................................... 4,501 1,849
2001..................................................... 4,382 1,849
2002..................................................... 3,930 1,849
2003..................................................... 3,486 1,849
2004..................................................... 3,010 1,849
Thereafter............................................... 4,824 2,619
------- -------
$24,133 $11,864
======= =======
</TABLE>
Each of the four 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
All required financial statements of the registrant are set forth under
Item 8 of this report on Form 10-K.
(a)(2) Financial Statement Schedules
All required financial statement schedules of the registrant are set forth
under Item 8 of this report on Form 10-K.
43
<PAGE> 44
(a)(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.01* -- Articles of Incorporation of the Company.
3.02* -- Amended and Restated Bylaws of the Company.
4.01* -- Specimen Stock Certificate.
10.01* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Fredericksburg Investments, Inc.
10.02* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Beacon Investments, Inc.
10.03* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Battleview Investments, Inc.
10.04* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Central Investments, Inc.
10.05* -- Lease Agreement, dated as of June 1, 1996, between Strayer
University, Inc. and Potomac Investments, Inc.
10.06* -- Lease Agreement, dated as of October 1, 1991, between
Strayer University, Inc. and GLM-Highland Building Limited
Partnership.
10.07* -- Lease Agreement, dated as of June 15, 1993, between Strayer
University, Inc. and Alexandria Tech Center I.
10.08* -- Employment Agreement, dated as of June 1, 1996, between
Strayer Education, Inc. and Ron K. Bailey.
10.09* -- Employment Agreement, dated as of June 1, 1996, between
Strayer University, Inc. and Harry T. Wilkins.
10.10* -- 1996 Stock Option Plan
10.11* -- Form of Tax Indemnification Agreement
10.12* -- First Amendment to Agreement of Lease for Office Condominium
Space, dated July 25, 1994, between Strayer University, Inc.
and Cross Creek Associates Limited Partnership.
10.13** -- Lease Agreement, dated as of February 29, 1996, between
Confederation Life Insurance Company (U.S.) in
Rehabilitation and Strayer University, Inc.
10.14** -- Office Building Lease, dated as of July 26, 1996, between
Nikowski Limited Partnership and Strayer University, Inc.
10.15** -- Office Lease Agreement, dated as of June 17, 1996, between
1133 Fifteenth Street Limited Partnership and Strayer
University, Inc.
23.01 -- Consent of PricewaterhouseCoopers LLP
24.01 -- Power of Attorney (contained in signature page).
27+ -- Financial Data Schedule.
</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
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STRAYER EDUCATION, INC.
By: RON K. BAILEY
------------------------------------
(RON K. BAILEY, CHIEF EXECUTIVE
OFFICER AND DIRECTOR)
Date: March 10, 2000
45
<PAGE> 46
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 (Nos. 333-3043 and
333-13597) of our report dated February 3, 2000, on our audits of the
consolidated financial statements of Strayer Education, Inc. and subsidiaries as
of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, which report is included in this Form 10-K.
PricewaterhouseCoopers LLP
Washington, D.C.
March 24, 2000
46
<PAGE> 47
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ron K. Bailey and Harry T. Wilkins, and each of
them individually, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and his name, place and
stead in any and all capacities, to sign the report and any and all amendments
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RON K. BAILEY Chief Executive Officer and Director March 10, 2000
- ----------------------------------------------------- (Principal Executive Officer)
(RON K. BAILEY)
/s/ HARRY T. WILKINS Chief Financial Officer (Principal March 10, 2000
- ----------------------------------------------------- Financial and Accounting Officer)
(HARRY T. WILKINS)
/s/ STANLEY G. ELMORE Director March 10, 2000
- -----------------------------------------------------
(STANLEY G. ELMORE)
/s/ TODD A. MILANO Director March 10, 2000
- -----------------------------------------------------
(TODD A. MILANO)
/s/ JENNIE D. SEATON Director March 10, 2000
- -----------------------------------------------------
(JENNIE D. SEATON)
/s/ ROLAND CAREY Director March 10, 2000
- -----------------------------------------------------
(ROLAND CAREY)
/s/ DONALD T. BENSON Director March 10, 2000
- -----------------------------------------------------
(DONALD T. BENSON)
/s/ G. THOMAS WAITE Director March 10, 2000
- -----------------------------------------------------
(G. THOMAS WAITE)
/s/ CHARLOTTE BEASON Director March 10, 2000
- -----------------------------------------------------
(CHARLOTTE BEASON)
</TABLE>
47
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001013934
<NAME> STRAYER EDUCATION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,213
<SECURITIES> 45,341
<RECEIVABLES> 22,449
<ALLOWANCES> 1,016
<INVENTORY> 0
<CURRENT-ASSETS> 35,604
<PP&E> 24,572
<DEPRECIATION> 7,735
<TOTAL-ASSETS> 98,096
<CURRENT-LIABILITIES> 16,894
<BONDS> 0
0
0
<COMMON> 153
<OTHER-SE> 80,908
<TOTAL-LIABILITY-AND-EQUITY> 98,096
<SALES> 0
<TOTAL-REVENUES> 69,776
<CGS> 0
<TOTAL-COSTS> 42,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,911
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,826
<INCOME-TAX> 12,500
<INCOME-CONTINUING> 19,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,326
<EPS-BASIC> 1.25
<EPS-DILUTED> 1.23
</TABLE>
