Second, the cohort default rate ceiling will increase from 25% to 30%. This change has several consequences:
If an institution’s cohort default rate is 30% or more in a given fiscal year, the institution will be required to assemble a “default prevention task force” and submit to the Department of Education a default improvement plan.
If an institution’s cohort default rate exceeds 30% for two consecutive years, the institution will be required to review, revise and resubmit its default improvement plan. The Department of Education may direct that the plan be amended to include actions, with measurable objectives, that it determines will promote loan repayment.
If an institution’s cohort default rate exceeds 30% for two out of three consecutive years, the Department of Education may subject the institution to provisional certification. The institution may file a timely appeal on specified grounds according to specified procedures, and if the Secretary of Education determines that the institution demonstrated a basis for relief, the Secretary may not subject the institution to provisional certification based solely on the institution’s cohort default rate.
If an institution’s cohort default rate is equal to or greater than 30% for each of the three most recent federal fiscal years for which data are available, the institution will be ineligible to participate in the Direct Loan Program and Federal Pell Grant Program. | · | If an institution’s cohort default rate is 30% or more in a given fiscal year, the institution will be required to assemble a “default prevention task force” and submit to the Department of Education a default improvement plan. |
| · | If an institution’s cohort default rate exceeds 30% for two consecutive years, the institution will be required to review, revise and resubmit its default improvement plan. The Department of Education may direct that the plan be amended to include actions, with measurable objectives, that it determines will promote loan repayment. |
| · | If an institution’s cohort default rate exceeds 30% for two out of three consecutive years, the Department of Education may subject the institution to provisional certification. The institution may file a timely appeal on specified grounds according to specified procedures, and if the Secretary of Education determines that the institution demonstrated a basis for relief, the Secretary may not subject the institution to provisional certification based solely on the institution’s cohort default rate. |
| · | If an institution’s cohort default rate is equal to or greater than 30% for each of the three most recent federal fiscal years for which data are available, the institution will be ineligible to participate in the Direct Loan Program and Federal Pell Grant Program. |
The revisions to the cohort default rate rule did not change the existing provision that an institution generally loses eligibility to participate in Title IV loan programs if its most recent cohort default rate is greater than 40%., or the existing provision that institutions with a cohort default rate equal to or greater than 15% are subject to a 30-day delayed disbursement period for first-year, first-time borrowers.
Effective July 1, 2010, the Department of Education issuesissued two cohort default rates – a two-year cohort default rate and a three-year cohort default rate – for fiscal years 2009 through 2011. The Department of Education will relyrelied on the two-year cohort default rate and related thresholds to determine institutional eligibility until 2014, when the Department of Education issueswill issue official three-year cohort default rates for the fiscal year 2011 cohort.
The Department of Education issued the first two official three-year cohort default rate, for fiscal year 2009, in September 2012. Strayer’s official fiscal year 2009 three-year cohort default rate was 13.9%. The average official three-year cohort default rate for proprietary institutions nationally was 22.7% for fiscal year 2009. Strayer University’s unofficial three-year cohort default rates, for fiscal years 20072009 and 2008, which2010, in September 2012 and September 2013, respectively. Strayer’s official fiscal year 2009 and 2010 three-year cohort default rates were released for informational purposes only, were 13.0%13.9% and 12.7%15.2%, respectively. The average unofficial informationalofficial three-year cohort default rates for proprietary institutions nationally were 21.2%22.7% and 25.0%21.8% for federal fiscal years 20072009 and 2008,2010, respectively.
As part of its compliance program related to the cohort default rate, Strayer University provides entrance and exit counseling to its students and engages the services of a third party to counsel students once they are in repayment status regarding their repayment obligations.
The 90/10 Rule
A requirement of the Higher Education Act, commonly referred to as the 90/10 Rule, applies only to proprietary institutions of higher education, which includes Strayer University. Under this rule, a proprietary institution is prohibited from deriving from Title IV funds, on a cash accounting basis (except for certain institutional loans) for any fiscal year, more than 90% of its revenues (as revenues are computed under the Department of Education’s methodology).
The 90/10 Rule is a compliance obligation that is part of an institution’s program participation agreement with the Department of Education. A proprietary institution of higher education that violates the 90/10 Rule for any fiscal year will be placed on provisional status for two fiscal years. Proprietary institutions of higher education that violate the 90/10 Rule for two consecutive fiscal years will become ineligible to participate in Title IV programs for at least two fiscal years and will be required to demonstrate compliance with Title IV eligibility and certification requirements for at least two fiscal years prior to resuming Title IV program participation. In addition, the Department of Education discloses on its website any proprietary institution of higher education that fails to meet the 90/10 requirement, and reports annually to Congress the relevant ratios for each proprietary institution of higher education.
HEOA changes in 2008 generally codified the regulatory formula for 90/10 rule calculations, but also expanded on the Department of Education’s formula in certain respects, including by broadening the categories of funds that may be counted as non-Title IV revenue for 90/10 Rule purposes. The HEOA provisions were effective on August 14, 2008, and the Department of Education issued final regulations implementing the 90/10 Rule and certain other HEOA provisions that were effective July 1, 2010, but institutions could have, at their discretion, implemented the 90/10 Rule regulations on or after November 1, 2009. These regulations clarify the treatment of certain types of revenue, and require institutions to report in their annual financial statement audits not only the percentage of revenues derived from Title IV funds during the fiscal year, but also the dollar amounts of the numerator and denominator of the 90/10 calculation and specified categories of revenue. The regulations also shorten from 90 to 45 days the time period within which institutions must notify the Secretary after the end of a fiscal year in which the institution failed to meet the 90/10 Rule requirement.
Using the HEOA formula, Strayer University derived approximately 78% and 76% of its cash-basis revenues from Title IV program funds in 20102011 and 2011, respectively.74% in 2012. Our computation for 20122013 has not yet been finalized and audited.
The key components of non-Title IV revenue for Strayer University are individual student payments, employer tuition reimbursement payments, veterans benefits, vocational rehabilitation funds, private loans, state grants, and scholarships. Certain members of Congress have proposed to revise the 90/10 Rule to count DOD tuition assistance and veterans education benefits along with Title IV revenue toward the 90% limit and to reduce the limit to 85% of total revenue.
Incentive Compensation
As a part of an institution’s program participation agreement with the Department of Education and in accordance with the Higher Education Act, the institution may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment, admissions or financial aid awarding activity. Failure to comply with the incentive payment rule could result in loss of certification to participate in federal student financial aid programs, limitations on participation in the federal student financial aid programs, or financial penalties.
Effective July 1, 2011, the Department of Education eliminated 12 “safe harbors” that had been established in 2002 to define circumstances under which an institution would not run afoul of the incentive payment prohibition. The final rules prohibit payments made “in any part,” directly or indirectly, upon the success of securing enrollments or financial aid, apply to all employees at an institution who are engaged in or responsible for any student recruitment or admission activity, limit “profit-sharing payments,” and set rules for third-party contracts. The Department of Education has published a subsequent Dear Colleague Letter interpreting this regulation.
Gainful Employment
On June 13, 2011,Under the Higher Education Act, a proprietary institution offering programs of study other than a baccalaureate degree in liberal arts (for which there is a limited statutory exception) must prepare students for gainful employment in a recognized occupation. The Department of Education previously attempted to define “an eligible program of training to prepare students for gainful employment in a recognized occupation.” After a federal court invalidated the Department’s regulation (except for disclosure requirements), the Department established a negotiated rulemaking committee to again consider the issue of gainful employment, and appointed Strayer University’s General Counsel to serve on the committee. The Committee did not achieve the required consensus. The Department has indicated that it expects to issue a Notice of Proposed Rulemaking for public comment in early 2014.
Although it is not yet known what metrics the Department will ultimately propose in its Notice expected in 2014, the last proposal put before the negotiated rulemaking committee by the Department of Education published final regulations oncontained measurements of program cohort default rates, annual debt-to-earnings and discretionary debt-to-earnings. Under this proposal, a program would pass:
| · | If the program’s cohort default rate is less than 30% in two of three consecutive years; and |
| | |
| · | If the program’s graduates have an annual debt-to-earnings ratio that does not exceed 8%; or a discretionary debt-to-earnings ratio that does not exceed 20%. |
In addition, a program that does not pass either of the debt-to-earnings metrics, to determine whetherand that has an academic program preparesannual debt-to-earnings ratio between 8% and 12%, or a student for gainful employment. Pursuant to the final regulations, which were set to become effective on July 1, 2012, an academic program isdiscretionary debt-to-earnings ratio between 20% and 30%, would be considered to lead to gainful employmentbe in a warning zone. Under the annual and discretionary debt-to-earnings metrics, a program would become Title IV ineligible for three years if it meetsfails to pass both metrics for two out of three consecutive years, or fails to pass at least one metric for four consecutive years. Under the program cohort default rate metric, a program would become Title IV ineligible for three years if the three-year program cohort default rate of three consecutive cohorts of students is greater than or equal to 30%. If a program could become ineligible at the end of the following three metrics:
If at least 35% of students are in a satisfactory repayment status with respect to their federal student loans three to four years after entering repayment;
If the annual loan payment of a typical graduate of the program for all debt incurred by the graduate for the program does not exceed 30% of the average or median discretionary income in the third or fourth year, after graduation; or
If the annual loan payment of a typical graduate of the program for all debt incurred by the graduate for the program does not exceed 12% of the average or median annual earnings in the third or fourth year after graduation.
A particular program offered by an institution would have become ineligible for Title IV funding if it could not pass one of the three above metrics in three out of four consecutive years, beginning with fiscal year 2012. After one failure, the institution would be required to disclosepost a letter of credit or agree to set aside a portion of Title IV funds to provide borrower relief to enrolled students the amount by which the particular program missed the metric and what the institution plans to do to improve performance. After two failures consecutively or within a three-year period, the institution would have to inform each current and prospective student that their debts may be unaffordable, thatin case the program may lose eligibility, and what transfer options exists. After three failures consecutively or within four years,were to become ineligible. However, the proposal contains a four-year transition period, during which time a program would not lose eligibility for Title IV funds and could not re-establish eligibility for at least three years. As adopted,if an institution chooses to provide grants to students to reduce debt instead of posting a letter of credit or creating an excess fund.
Under the first year thatproposal, an institution would be required to give debt warnings to students if a program could have lost eligibility underbecome ineligible at the regulationend of the year. For programs failing the annual or discretionary debt-to-earnings metrics, Title IV enrollment would have been 2015, with eligibility losses in that yearbe limited to the lowest 5% of all programs across institutions. The regulations provide means by which an institution may challengeprevious year’s level. Any program that could become ineligible at the Department of Education’s calculation of anyend of the three debt metrics.
On June 30, 2012,year under the U.S. District Court for the District of Columbia, considering a challengeprogrammatic cohort default rate would also be limited to the regulations brought by the Association of Private Sector Colleges and Universities, vacated the debt measures as well as the rules requiring institutions to report to the Department of Education information about students who complete gainful employment programs. On July 30, 2012, the Department of Education filed a motion to alter or amend the Court’s June 30 judgment, urging the court to reinstate the reporting requirements. The court requested additional briefing on the issue, and a decision on the motion to alter or amend the judgment remains pending.
If the debt measures or reporting requirements were to be reinstituted on appeal or by a future Department of Education rulemaking that passes judicial scrutiny, the gainful employment regulations will substantially increase our administrative burdens and could affect our student enrollment, persistence and retention. Further, although the regulations provide opportunities for an institution to correct any potential deficiencies in a program prior to the lossprevious year’s level of Title IV eligibility,enrollment.
Given the uncertainty as to what the Department will propose in any Notice of Proposed Rulemaking, the Company is unable to determine what impact, if theany, a final rule is reinstated, the continuing eligibilitywill have on its financial condition or results of our academic programs could be affected by factors beyond management’s control such as changes in our graduates’ income levels, changes in student borrowing levels, increases in interest rates, changes in the percentage of former students who are current in the repayment of their student loans, and various other factors. Even if we were able to correct any deficiency in the gainful employment metrics in a timely manner, the disclosure requirements associated with a program’s failure to meet at least one metric could adversely affect student enrollments in that program and could adversely affect the reputation of our institution.
operations.
Return of Federal Funds
Under the Higher Education Act’s return-of-funds provision, an institution must return Title IV funds to a Title IV program in a timely manner if a student received funds from that program but did not earn them due to the student’s withdrawal from the institution. In order to determine if funds should be returned, the institution must first determine the amount of Title IV program funds that the student earned. If the student attends the institution, but withdraws during the first 60% of any period of enrollment or payment period, the amount of Title IV program funds that the student earned is equal to a pro rata portion of the funds for which the student would otherwise be eligible. Strayer University uses the student’s last day of attendance as the withdrawal date for purposes of return to Title IV. Effective July 1, 2011, institutions that use the last day of attendance are required to measure the last day of attendance based on official attendance records, and “attendance” for online classes must include participation in an academically related activity. Strayer University’s current systems allow for measurement on this basis. If the student withdraws after the 60% point, then the student has earned 100% of the Title IV program funds. The institution must return to the appropriate Title IV programs, in a specified order, the lesser of the unearned Title IV program funds or the institutional charges incurred by the student for the period multiplied by the percentage of unearned Title IV program funds. An institution must return the funds no later than 45 days after the date that the institution determines that a student withdrew.
If the funds are not returned in a timely manner, an institution may be subject to adverse action, including being required to submit a letter of credit equal to 25% of the refunds the institution should have made in its most recently completed fiscal year. Under Department of Education regulations, if late returns of Title IV program funds constitute 5% or more of students sampled in the institution’s annual compliance audit for either of its two most recently completed fiscal years, an institution generally must submit an irrevocable letter of credit payable to the Secretary of Education.
Third-Party Servicers
Department of Education regulations permit an institution to enter into a written contract with a third-party servicer for the administration of any aspect of the institution’s participation in Title IV programs. The third-party servicer must, among other obligations, comply with Title IV requirements and be jointly and severally liable with the institution to the Secretary of Education for any violation by the servicer of any Title IV provision. An institution must report to the Department of Education new contracts or any significant modifications to contracts with third-party servicers as well as other matters related to third-party servicers. Strayer University has written contracts with third-party servicers to perform activities related to Strayer University’s participation in Title IV programs. Strayer University also has a contract with Higher One Business Solutions, formerly Sallie Mae Business Solutions, for processing stipends due to students and with General Revenue Corporation for loan default prevention. Prior to September 30, 2011, Strayer University utilized Global Financial Aid Services, Inc., for services including certifying Title IV loan applications, preparing reports from Strayer University to the Department of Education, and issuing federal grant program payments. The University’s agreement with Global Financial Aid Services expired on September 30, 2011, at which point Strayer University in-sourced its financial aid processing.
Lender Relationships
As part of an institution’s program participation agreement with the Department of Education, the institution must adopt a code of conduct pertaining to student loans. Strayer University has a code of conduct that it believes complies with the provisions of HEOA in all material respects. In addition to the code of conduct requirements that apply to institutions, HEOA contains provisions that apply to lenders, prohibiting lenders from engaging in certain activities as they interact with institutions.
Prior to the termination of the FFEL Program on June 30, 2010, Strayer University was subject to rules applicable to institutions that make available a list of recommended or suggested federal loan lenders for use by potential borrowers. Strayer University remains subject to those rules with respect to private education loans.
Restrictions on Adding Locations and Educational Programs
State requirements and accrediting agency standards limit the ability of Strayer University to establish additional locations and programs. Most states require approval before institutions can add new programs, campuses or teaching locations. Middle States requires institutions that it accredits to notify it in advance of implementing new programs or locations, which may require additional approval. At its discretion, Middle States may also conduct site visits to additional locations to ensure that accredited institutions that experience rapid growth in the number of additional locations maintain educational quality. All new Strayer University campus locations require Middle States approval before students are enrolled, and the Higher Education Act requires Middle States to monitor institutions with significant enrollment growth. In addition, under Strayer University’s provisional certification, the Department of Education must approve any new campus location, level of academic offering and non-degree program.
The Higher Education Act 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 in many circumstances permit an institution that is already qualified to participate in Title IV programs to establish additional locations that are exempt from the two-year rule. These additional locations generally may qualify immediately for participation in the Title IV programs, unless the location was acquired from another institution that has ceased offering educational programs at that location and has Title IV liabilities that it is not repaying in accordance with an agreement to do so, and the acquiring institution does not agree, among other matters, to be responsible for certain liabilities of the acquired institution. The new location must satisfy all other applicable requirements for institutional eligibility, including approval of the additional location by the relevant state authorizing agency and the institution’s accrediting agency. Strayer University’s expansion plans assume its continued ability to establish new campuses as additional locations of Strayer University under such applicable regulations and thereby to avoid incurring the two-year delay in participation in Title IV programs. The loss of state authorization or accreditation of Strayer University or an existing campus, or the failure of Strayer University or a new campus to obtain state authorization or accreditation, would render Strayer University ineligible to participate in Title IV programs at least in that state or at that location. Department of Education regulations require institutions to report to the Department of Education a new additional location at which at least 50% of an eligible program will be offered, if the institution wants to disburse Title IV program funds to students enrolled at that location. Under its provisional Program Participation Agreement with the Department of Education, Strayer University must obtain Department of Education approval for the addition of any new location. Institutions are responsible for knowing whether they need approval, and institutions that add locations and disburse Title IV program funds without having obtained any necessary approval may be subject to administrative repayments and other sanctions.
Effective July 1, 2011,The Department of Education regulations that became effective July 1, 2011, required a proprietary institution to notify the Department of Education of new programs if the program had a Classification of Instructional Programs (“CIP”) code under the taxonomy of instructional program classifications and descriptions developed by the National Center for Education Statistics (“NCES”) that was different from any other program offered by the institution, the program had the same CIP code as another program offered by the institution but lead to a different degree or certificate, or the institution’s accrediting agency had determined the program to be an additional program. NotificationThis regulation was required at least 90 days before the first day of class, and the institution could then proceed to offer the program, unless the Department of Education advised the institution that the additional educational program had to be approved. On June 30, 2012,struck down by the U.S. District Court for the District of Columbia in addition to striking down the Gainful Employment debt measures and reporting requirements, also vacated the program approval rules. Pending a final ruling in this case, the Department of Education has advised schools to follow the rules on additional programs that immediately preceded the gainful employment rules.June 2012. The version once againregulation now in effect provides that approval of new programs is not required if the additional program prepares students for gainful employment in the same or related occupation as an educational program that has previously been designated as eligible and is at least eight semester hours,hours; or twelve quarter hours,hours. As part of the gainful employment regulation proposed to a negotiated rulemaking committee by the Department of Education, an institution would need to get new program approval only if the program had previously been deemed ineligible, was a failing or 600 clock hours.zone program that was voluntarily discontinued by the institution, or is in the same “family of CIP” codes as a current or recent failing program.
Other Regulations Governing Title IV Programs
The Department of Education has enacted a comprehensive set of regulations governing an institution’s participation in the Title IV programs. If Strayer University were not to continue to comply with these regulations, such non-compliance might affect the operations of the University and its ability to participate in Title IV programs.
Compliance Reviews
Strayer University is subject to announced and unannounced compliance reviews and audits by various external agencies, including the Department of Education, its Office of Inspector General, state licensing agencies, guaranty agencies, and accrediting agencies. The Higher Education Act and Department of Education regulations also require an institution to submit annually to the Secretary of Education a compliance audit of its administration of the Title IV programs conducted by an independent certified public accountant in accordance with Government Auditing Standards and applicable audit guides of the Department of Education’s Office of Inspector General. In addition, to enable the Secretary of Education to make a determination of financial responsibility, an institution must submit annually to the Secretary of Education audited financial statements prepared in accordance with Department of Education regulations.
In an August 2010 letter to members of the Senate Health, Education, Labor and Pensions (HELP) Committee, the Secretary of Education announced plans to increase the number of program reviews by 50%, from 200 conducted in 2010 to 300 in 2011. The Department of Education is conductingconducted a program review of Strayer University’s administration of Title IV programs. Ifprograms beginning in the program review finds that we failed to comply with Title IV and its implementing regulations, the Departmentthird quarter of Education could impose sanctions or conditions that could have a material adverse effect on our operations and financial condition. On March 25, 2011, the Department of Education issued a preliminary program review report indicating its position that Strayer University’s Associate in Arts in General Studies program was not an eligible program under Title IV of the Higher Education Act. The Company has communicated its disagreement with this finding, has enrolled affected students in other programs, and is working with the Department of Education to resolve the matter. Strayer University continues to communicate with the Department of Education, and has provided requested data, but has not received a Final Program Review Determination Letter.2010. On December 22, 2011, the Department of Education notified Strayer University that its Program Participation Agreement was approved on a provisional basis because “the institution did not disburse Title IV funds timely to students in each payment period.” On July 18, 2013, the University received its Final Program Review Determination from the Department, with no material adverse findings and no additional actions required.
Potential Effect of Regulatory Violations
If Strayer University fails to comply with the regulatory standards governing Title IV programs, the Department of Education could impose one or more sanctions, including transferring Strayer University from the advance payment method to the reimbursement or cash monitoring system of payment, seeking to require repayment of certain Title IV funds, requiring the University to post a letter of credit in favor of the Department of Education as a condition for continued Title IV certification, taking emergency action against the University, referring the matter for criminal prosecution or initiating proceedings to impose a fine or to limit, condition, suspend or terminate Strayer University’s participation in Title IV programs. Although there are no such sanctions currently in force, if such sanctions or proceedings were imposed against Strayer University and resulted in a substantial curtailment, or termination, of the University’s participation in Title IV programs or resulted in substantial fines or monetary liabilities, Strayer University would be materially and adversely affected.
If Strayer University lost its eligibility to participate in Title IV programs, or if Congress reduced the amount of available federal student financial aid, the University would seek to arrange or provide alternative sources of revenue or financial aid for students. Although the University believes that one or more private organizations would be willing to provide financial assistance to students attending Strayer University, there is no assurance that this would be the case, and the interest rate and other terms of such student financial aid are unlikely to be as favorable as those for Title IV program funds. Strayer University might be required to guarantee all or part of such alternative assistance in a manner that complies with rules governing schools’ relationships with lenders or might incur other additional costs in connection with securing alternative sources of financial aid. Accordingly, the loss of eligibility of Strayer University to participate in Title IV programs, or a reduction in the amount of available federal student financial aid, would be expected to have a material adverse effect on Strayer University even if it could arrange or provide alternative sources of revenue or student financial aid.
In addition to the actions that may be brought against us as a result of our participation in Title IV programs, we also may be subject, from time to time, to complaints and lawsuits relating to regulatory compliance brought not only by our regulatory agencies, but also by other government agencies and third parties.
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. In addition, Strayer University’s accrediting agency, Middle States, requires institutions that it accredits to inform it in advance of any substantive change, including a change that significantly alters the ownership or control of the institution. Examples of substantive changes requiring advance notice to and approval of 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. Middle States will undertake a site visit to an institution that has undergone a change in ownership or control no later than six months after the change.
The Higher Education Act provides that an institution that undergoes a change in ownership resulting in a change of control loses its eligibility to participate in the Title IV programs and must apply to the Department of Education in order to reestablish such eligibility. An institution is ineligible to receive Title IV program funds during the period prior to recertification. The Higher Education Act provides that the Department of Education may temporarily, provisionally certify an institution seeking approval of a change of ownership and control based on preliminary review by the Department of Education of a materially complete application received by the Department of Education within 10 business days after the transaction. The Department of Education may continue such temporary, provisional certification on a month-to-month basis until it has rendered a final decision on the institution’s application. If the Department of Education determines to approve the application after a change in ownership and control, it issues a provisional certification, which extends for a period expiring not later than the end of the third complete award year following the date of provisional certification. The Higher Education Act defines one of the events that would trigger a change in ownership resulting in a change of control as the transfer of the controlling interest of the stock of the institution or its parent corporation. For a publicly traded corporation, the securities of which are required to be registered under the Exchange Act, such as Strayer, the Department of Education regulations implementing the Higher Education Act define a change in ownership resulting in a change of control as occurring when a person acquires ownership and control of a corporation such that the corporation is required to file a Form 8-K with the Securities and Exchange Commission (SEC) notifying that agency of the change of control. The regulations also provide that a change in ownership and control of a publicly traded corporation occurs if a person who is a controlling stockholder of the corporation ceases to be a controlling stockholder. A controlling stockholder is a stockholder who holds or controls through agreement both 25% or more of the total outstanding voting stock of the corporation and more shares of voting stock than any other stockholder.
The U.S. Department of Homeland Security, working with the U.S. Department of State, has implemented a mandatory electronic reporting system for schools that enroll foreign students and exchange visitors. Strayer University currently is authorized by the U.S. Department of Homeland Security to admit foreign students for study in the United States subject to applicable requirements. In certain circumstances, the Department of Homeland Security may require an institution to obtain approval for a change in ownership and control.
Pursuant to federal law providing benefits for veterans and reservists, some of the programs offered by Strayer University are approved for the enrollment of persons eligible to receive U.S. Department of Veterans Affairs educational benefits by the state approving agenciesagencies. In 2013, we had such approval in Alabama, Arkansas, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, D.C., West Virginia, and Washington, D.C.Wisconsin. In certain circumstances, state approving agencies may require an institution to obtain approval for a change in ownership and control.
If Strayer University underwent a change of control that required approval by any state authority, Middle States or any federal agency, and any required regulatory approval were significantly delayed, limited or denied, there could be a material adverse effect on Strayer University’s ability to offer certain educational programs, award certain degrees, diplomas or certificates, operate one or more of its locations, admit certain students or participate in Title IV programs, which in turn would materially and adversely affect Strayer University’s operations. A change that required approval by a state regulatory authority, Middle States or a federal agency could also delay Strayer University’s ability to establish new campuses or educational programs and may have other adverse regulatory effects. Furthermore, the suspension from Title IV programs and the necessity of obtaining regulatory approvals in connection with a change of control may materially limit Strayer University’s flexibility in future financing or acquisition transactions.
Recent or Pending Legislative and Regulatory Activity
Congress is considering legislation that would make further changes in the Higher Education Act and other education-related federal laws. Congressional activity may adversely affect enrollment in for-profit educational institutions. We cannot predict the impact, if any, of these recent or pending legislative changes on our long-term business model, although the uncertainty associated with Congressional activity has had a negative impact on the industry as a whole.
On June 13, 2011, the Department of Education published final regulations on the metrics to determine whether an academic program prepares a student for gainful employment. Pursuant to the final regulation, which was to become effective on July 1, 2012, an academic program is considered to lead to gainful employment if it meets one of the three metrics. As discussed more fully above, on June 30, 2012,the Department of Education is currently engaged in a negotiated rulemaking regarding gainful employment after its previous regulation was invalidated, along with the accompanying reporting and additional program approval requirements, by the U.S. District Court for the District of Columbia invalidated these debt measuresColumbia. The Department of Education is expected to release a notice of proposed rulemaking at some point in early 2014. The most recent proposal before the negotiated rulemaking committee, as welldiscussed above, contained three metrics: annual debt-to-earnings metric, discretionary debt-to-earnings metric, and a program level cohort default rate metric. A program failing the program level cohort default rate or both the debt-to-earnings metrics would be deemed ineligible to receive Title IV funds for a period of three years, and programs previously deemed ineligible, voluntarily discontinued by an institution for failing or being in the warning zone, or within the same “family of CIP” codes as the accompanying reporting and additionala currently or previously failing program would be required to receive prior approval requirements. Pending a final ruling in this case,by the Department of Education has advised schools to followEducation. It is not yet known, however, the rules on additional programsfinal form that immediately precededany proposal contained in the gainful employment rules.Department of Education’s Notice of Proposed Rulemaking will take.
Congress
Congress historically has reauthorized the Higher Education Act (“HEA”),which is the law governing Title IV programs, approximately every five to six years, but undertook the most recent reauthorization through multiple pieces of legislation. On July 31, 2008, Congress reauthorized the HEA through September 30, 2013, by passing the HEOA, which then President Bush signed into law on August 14, 2008. HEOA provisions became effective upon enactment, unless otherwise specified in the law. HEOA includes numerous new and revised requirements for higher education institutions. In October 2009, the Department of Education published final regulations to implement HEOA changes to Title IV of the Higher Education Act. Those regulations were effective July 1, 2010. Congress began Higher Education Act reauthorization hearings in 2013, and there is currently an automatic one year extension that continues the current authorization through September 30, 2014.
In addition to HEOA, three other laws to amend and reauthorize aspects of the Higher Education Act have been enacted over the last few years. In February 2006, then President Bush signed the Deficit Reduction Act of 2005, which included the Higher Education Reconciliation Act of 2005, or HERA. Among other measures, HERA reauthorized the Higher Education Act with respect to the federal guaranteed student loan programs. In September 2007, then President Bush signed the College Cost Reduction and Access Act, which increased benefits to students under the Title IV programs and reduced payments to and raised costs for lenders that participate in the federal student loan programs. In May 2008, then President Bush signed the Ensuring Continued Access to Student Loans Act of 2008, or ECASLA, which was designed to facilitate student loan availability and to increase student access to federal financial aid in light of then-current market conditions. Congress extended ECASLA for an additional year, to June 30, 2010. In March 2010, Congress passed the Student Aid and Fiscal Responsibility Act of 2009, which eliminated the FFEL Program and required all institutions participating in Title IV programs to convert exclusively to the Direct Loan Program by July 1, 2010.
The Consumer Financial Protection Bureau submitted two reports to Congress in 2012 with specific recommendations for restructuring the student borrowing experience, including requiring institutions to certify that a student is not eligible for any further federal funds before a private loan may be issued to such student. On January 23, 2013, Senator Durbin introduced the Know Before You Owe Private Student Loan Act of 2013, which would require institutions to certify to a private loan lender a student’s cost of attendance and estimated federal financial assistance before a loan may be issued to such student. The Act would also require institutions to counsel students about their loan options, including discussion of differences between federal loans and private loans. Private loan lenders would be required to provide students with quarterly account updates on the balance and interest accrued. On January 23, 2013, Senator Durbin also introduced the Fairness for Struggling Students Act of 2013, which would allow private student loans to be dischargeable in bankruptcy. Both proposals are still pending before Senate committees. We do not know what steps Congress may take in response to these actions and whether such actions (if any) will have an adverse effect on our business or results of operations.
On August 9, 2013, the Bipartisan Student Loan Certainty Act became law. Under the Act, all Stafford loans to undergraduates are pegged to the 10 year T-bill plus 2.05% with a cap at 8.25%. Stafford loans to post-graduate students will be at the T-bill rate plus 3.6% with the cap at 9.5%. Direct PLUS loans are set at the T-bill rate plus 4.6% with a cap at 10.5%. Direct consolidation loan rates will be a weighted average of the interest rates of the consolidated loans rounded to the nearest 1/8th of 1%. Interest rates would be reset every July 1 and effective for loans taken out from July 1st to June 30th of the next year. Those interest rates would be effective for the life of the loan.
Appropriations
Congress reviews and determines appropriations for Title IV programs on an annual basis. An elimination of certain Title IV programs, a reduction in federal funding levels of such programs, material changes in the requirements for participation in such programs, or the substitution of materially different programs could reduce the ability of certain students to finance their education. This, in turn, could lead to lower enrollments at Strayer University or require Strayer University to increase its reliance upon alternative sources of student financial aid. Given the significant percentage of Strayer University’s revenues that are derived indirectly from the Title IV programs, the loss of or a significant reduction in Title IV program funds available to Strayer University’s students could have a material adverse effect on Strayer.
Appropriations for certain Title IV programs could be affected by sequestration, a process of automatic spending reductions. The Budget Control Act of 2011 and the Statutory Pay-As-You-Go Act of 2010 each provide for the possibility of sequestration as a budgetary enforcement tool. On January 2, 2013, Congress enacted the American Taxpayer Relief Act of 2012, which delayed potential sequestration under the Budget Control Act of 2011 until March 1, 2013. If sequestration is triggered by either the Budget Control Act of 2011 or the Statutory Pay-As-You-Go Act of 2010, funding for Title IV programs would be affected. Pell Grants would be exempt from cuts through FY2013, but could be subject to sequestration in FY2014 and beyond. Most other federal student aid programs would be subject to across-the-board cuts to discretionary programs at a rate of approximately 8.2%. Origination fees for Stafford loans and PLUS loans would increase approximately 7.6%, to approximately 1.076% and 4.304% of the total loan, respectively. Cuts to the Department of Education’s Federal Student Aid Administration budget could lead to delays in student eligibility determinations and delays in processing and origination of federal student loans.
Senate Health, Education, Labor and Pensions (HELP) Committee
In 2010, the U.S. Congress increased its focus on proprietary education institutions, including regarding participation in Title IV programs and DOD oversight of tuition assistance for military service members. Since June 2010, the Senate HELP Committee has held hearings to examine the proprietary education sector. Other Committeescommittees of the U.S. Congress have also held hearings into, among other things, the standards and procedures of accrediting agencies, credit hours and program length, the portion of federal student financial aid going to proprietary institutions, and the receipt of veterans and military education benefits by students enrolled at proprietary institutions. Strayer University has cooperated with these inquiries. A number of legislators have variously requested the Government Accountability Office (GAO) to review and make recommendations regarding, among other things, recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud and abuse in Title IV programs, and the percentage of proprietary institutions’ revenue coming from Title IV and other federal funding sources. The GAO released four reports on for-profit post-secondary education: first, a report in August 2010 (subsequently revised in November 2010) that concluded, based on a three-month undercover investigation, that employees at a non-random sample of 15 proprietary institutions (not including Strayer University) made deceptive statements to students about accreditation, graduation rates, job placement, program costs, and financial aid; second, a report in October 2010 critical of the Department of Education’s efforts to enforce the ban on incentive payments; third, a report in October 2011 critical of the student experience and instructor performance at some for-profit online institutions; and fourth, a report in December 2011 comparing various student outcomes across proprietary, non-profit, and public institutions.
On July 30, 2012, the Senate HELP Committee released its final report on the for-profit sector of higher education entitled “For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success.” While acknowledging that for-profit institutions have a role to play in higher education, the report criticized the proprietary institution industry on many fronts,fronts. However, the report also concluded that Strayer University’s “performance, measured by student withdrawal and default rates, is one of the best of any company examined, and it appears that students are faring well at this degree based for-profit college.” S. Rept. 112-37. The report ultimately recommended several measures for reform which could change the participation of proprietary institutions in Title IV funding, including the following:
Tie access to federal financial aid to minimum student outcome thresholds.
Prohibit institutions from funding marketing, advertising and recruiting activities with federal financial aid dollars.
Expand the reporting period for cohort default rates beyond 3 years.
Require that for-profits receive 15% of revenues from non-federal sources.
Extend the ban on incentive compensation to include all employees of institutions of higher education, and clarify that this ban extends to numeric threshold or quota-based termination policies.
| · | Tie access to federal financial aid to minimum student outcome thresholds. |
| | |
| · | Prohibit institutions from funding marketing, advertising and recruiting activities with federal financial aid dollars. |
| | |
| · | Expand the reporting period for cohort default rates beyond three years. |
| | |
| · | Require that for-profits receive 15% of revenues from non-federal sources. |
| | |
| · | Extend the ban on incentive compensation to include all employees of institutions of higher education, and clarify that this ban extends to numeric threshold or quota-based termination policies. |
The report was not adopted by the full Committee, and the minority Members released their own report criticizing the majority’s investigation in many aspects, including that it did not include a review of all institutions of higher education.
On September 21, 2012, a group of senators wrote a letter to the Federal Trade Commission urging it to evaluate the marketing practices utilized by many proprietary institutions through the use of third-party lead generators. In addition, legislation was introduced in the Senate in April 2012, which remains pending in Committee, which would prevent institutions from using Title IV funds for marketing activities.
This increased congressional activity is expected to continue and may result in legislation, further rulemaking affecting participation in Title IV programs, and other governmental actions.
U.S. Department of Education
Title IV regulations applicable to Strayer University have been subject to frequent revisions, many of which have increased the level of scrutiny to which higher education institutions are subjected and have raised applicable standards. In October 2009, the Department of Education published final regulations to implement the HEOA’s numerous new and revised requirements for higher education institutions. These regulations were effective July 1, 2010. On October 29, 2010, the Department of Education published final regulations regarding program integrity at higher education institutions (Program Integrity Regulations), most of which became effective July 1, 2011. On May 5, 2011, the Department of Education initiated a new negotiated rulemaking process on teacher preparation programs and federal student loans. The negotiations ended in April of 2012. The Department of Education has yet to issue a Notice of Proposed Rulemaking for public comment on these issues, which it must do prior to promulgating a final regulation.
In May of 2012, the Department of Education announced its intent to establish a negotiated rulemaking committee to prepare proposed regulations designed to prevent fraud and otherwise ensure proper use of Title IV, HEA program funds, especially in the context of current technologies. In particular, the Department of Education intends to propose regulations to address the use of debit cards and other banking mechanisms for disbursing Federal Student Aid funds, and to improve and streamline the campus-based Federal Student Aid programs. Public hearings were held in May 2012,2012. On April 16, 2013, the Department of Education announced that it would add gainful employment, program integrity, Title IV cash management, and negotiations are anticipatedstate authorization of distance education among others to beginthis previously initiated negotiated rulemaking. In June of 2013, the Department announced that it would break out gainful employment, and establish a separate negotiated rulemaking committee for this purpose. The negotiated rulemaking committee dealing with gainful employment held several meetings in the near future.
third and fourth quarters of 2013, and the Department of Education is expected to issue a Notice of Proposed Rulemaking related to gainful employment in early 2014. A separate negotiated rulemaking involves implementation of the amendments to the campus safety and security reporting requirements in the HEA resulting from the enactment of the Violence Against Women Reauthorization Act of 2013.
State Licensure
Under the Program Integrity Regulations regarding state licensure, a proprietary institution is considered legally authorized by a state if the state has a process to review and appropriately act on complaints concerning the institution, including enforcing applicable state laws, and the institution complies with any applicable state approval or licensure requirements consistent with the Program Integrity Regulations. These requirements became effective July 1, 2011, and institutions were permitted to request a one-year extension of the effective date to July 1, 2012, and if necessary, an additional one-year extension to July 1, 2013. To receive an extension, an institution must obtain from the state an explanation of how a one-year extension will permit the state to modify its procedures to comply with the new requirements.
The revised rules specify that an institution is legally authorized in a state for Title IV purposes if it is established or licensed as an educational institution by name. If an institution offers post-secondary education through distance or correspondence education to students in a state in which it is not physically located or in which it is otherwise subject to state jurisdiction as determined by the state, the institution must meet any state requirements for it to be legally offering post-secondary distance or correspondence education in that state. On June 5, 2012, the Court of Appeals upheld a lower court’s ruling vacating the state authorization of online programs requirement. On July 27, 2012, the Department of Education issued a Dear Colleague Letter cautioning education institutions to remain in compliance with all applicable state laws and regulations related to distance education. The Department of Education has not announced its next steps, but it may engage in the future in a negotiated rulemaking to addressApril 2013 that distance education and state authorization.authorization will be considered as part of the current negotiated rulemaking, but thus far no action has been taken.
The final rule also amended the general provisions regarding student consumer information. Under this revision, the institution must make available for review to any enrolled or prospective student upon request, a copy of the documents describing the institution’s accreditation and its state, federal, or tribal approval or licensing. The institution must also provide its students or prospective students with contact information for filing complaints with its accreditor and with its state approval or licensing entity and any other relevant state official or agency that would appropriately handle a student’s complaint.
We are authorized to offer our programs by the applicable educational regulatory agencies in all states where our physical campuses and online delivery facilities are located, and these states have the applicable processes in place as required by the regulations.
Incentive Compensation
Institutions participating in the Title IV programs may not pay any commission, bonus, or other incentive payment based directly or indirectly on securing enrollments or financial aid to personnel engaged in recruitment or admissions or making decisions about awarding Title IV aid. Previously, there were 12 “safe harbors” relating to payment and compensation plans that institutions may practice without fear of violating the prohibition. The Program Integrity Regulations removed the safe harbors when they became effective on July 1, 2011.
The new regulations prohibit incentive compensation to employees engaged in any student recruitment or admission activity or in making decisions regarding the award of Title IV funds that is based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid. Merit-based adjustments to employee compensation may be made if they are not based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid. Profit-sharing payments may be made as long as they are not provided to any person who is engaged in student recruitment or admission activity or in making decisions regarding the award of Title IV funds. The regulations also obligate a third-party servicer to refer to the Office of Inspector General of the Department of Education any information indicating payment of any commission, bonus, or other incentive payment based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid to any person or entity engaged in any student recruitment or admission activity or in making decisions regarding the award of Title IV funds.
Misrepresentation
Under the Higher Education Act, the Department of Education may fine, suspend or terminate the participation in Title IV programs by an institution that engages in substantial misrepresentation of the nature of its educational program, its financial charges, or the employability of its graduates. The Program Integrity Regulations set forth the types of activities that constitute misrepresentation and describe the adverse actions that the Department of Education may take if it finds that an institution or a third party that provides educational programs, marketing, advertising, recruiting or admissions services to the institution engaged in substantial misrepresentation. The new rule specifies the types of statements that can subject the institution to liability for misrepresentation, the nature and form of misleading statements, and provides that an institution may not describe the eligible institution’s participation in Title IV programs in a manner that suggests approval or endorsement by the U.S. Department of Education of the quality of its educational programs. On June 5, 2012, the U.S. Court of Appeals for the District of Columbia Circuit held that the Department of Education’s expansion of the definition of misrepresentation to include “any statement that has the likelihood or tendency to deceive or confuse” was unsupported by law, and thus vacated that portion of the regulation.
Gainful Employment Reporting and Disclosure
Under the Higher Education Act, a proprietary institution offering programs of study other than a baccalaureate degree in liberal arts (for which there is a limited statutory exception) must prepare students for gainful employment in a recognized occupation. The Program Integrity Regulations established new annual reporting requirements that are applicable to these programs, and the first reports were due to the Department of Education on October 1, 2011, for the 2006-2007, 2007-2008, 2008-2009 and 2009-2010 federal financial aid award years. For each such program, Strayer University reported specific information regarding the program, the students enrolled in the program, and students who completed the program, including the amount the student received from private educational loans and institutional financing plans. In addition, the Program Integrity Regulations require institutions with gainful employment programs to disclose to prospective students certain information relating to those programs, including the occupations that the program prepares students to enter; the on-time graduation rate; tuition, fees, and costs; job placement rates, if applicable; and median loan debt of students who completed the program. Strayer University makes such disclosures on its website and in promotional materials. The June 30, 2012, U.S. District Court for the District of Columbia decision related to Gainful Employment vacated the reporting requirements, but the disclosure requirements remain in effect. A motion to reconsider the Court’s invalidation of the reporting requirements remains pending. The Department of Education required institutions to make the first disclosures by July 1, 2011, and to update suchthe disclosures for the 2011-2012 award year by January 31, 2013.2013, and to update the disclosures for the 2012-2013 award year, using a newly developed template released by the Department of Education in November 2013 by January 31, 2014. We made our first disclosures in 2011, and completed a timely updateupdates of the disclosures for the 2011-2012 year.and 2012-2013 years.
New Programs
The Program Integrity Regulations established requirements intended to remain in place until the Department of Education implements performance-based standards for approving additional programs using gainful employment measures. These regulations required an institution to notify the Department of Education of new programs (defined in the regulations) that are subject to gainful employment requirements. Notification was to be made at least 90 days before the first day of class. The institution could proceed to offer the program, unless the Department of Education advised the institution that the additional educational program must be approved. This new program approval process was vacated by the U.S. District Court for the District of Columbia in its June 30, 2012 decision invalidating the gainful employment regulation. Pending a final ruling in this case, the Department of Education has advised schools to followAs such, institutions are following the rules on additional programs that immediately preceded the vacated gainful employment rules.regulations.
Administration of Financial Aid
Several of the Program Integrity Regulations relate to the administration of financial aid, including the areas of the definition of online attendance, definition of credit hours, measuring satisfactory academic progress, return of federal funds when a student withdraws, verification and disbursement.
College Affordability and Transparency Lists
The Department of Education publishes on its website lists of the top 5% of institutions, in each of nine categories, with (1) the highest tuition and fees for the most recent academic year, (2) the highest “net price” for the most recent academic year, (3) the largest percentage increase in tuition and fees for the most recent three academic years, and (4) the largest percentage increase in net price for the most recent three academic years. An institution that is placed on a list for high percentage increases in either tuition and fees or in net price must submit a report to the Department of Education explaining the increases and the steps that it intends to take to reduce costs. The Department of Education will report annually to Congress on these institutions and will publish their reports on its web site. The Department of Education also posts lists of the top 10% of institutions in each of the nine categories with lowest tuition and fees or the lowest net price for the most recent academic year. Under HEOA, net price means average yearly price actually charged to first-time, full-time undergraduate students who receive student aid at a higher education institution after such aid is deducted.
Executive Order on Military and Veterans Benefits Programs
In April 2012, President Obama issued an Executive Order directing the Departments of Defense and Veterans Affairs, along with other Executive Branch agencies, to implement actions to establish “Principles of Excellence” to apply to educational institutions receiving funding from Federal military and veterans educational benefits programs, including benefits programs provided by the Post-9/11 GI Bill and the Tuition Assistance program. The Principles of Excellence relate broadly to information regarding tuition and fees, academic quality, marketing, and state authorization requirements.
Credit Hours
In 2009, the Department of Education’s Office of Inspector General criticized three accreditors, including Middle States, for deficiency in their oversight of institutions’ credit hour allocations. In June 2010, the House Education and Labor Committee held a hearing concerning accrediting agencies’ standards for assessing institutions’ credit hour policies. The Program Integrity Regulations define the term “credit hour” for the first time and require accrediting agencies to review the reliability and accuracy of an institution’s credit hour assignments. If an accreditor does not comply with this requirement, its recognition by the Department of Education could be jeopardized. If an accreditor identifies systematic or significant noncompliance in one or more of an institution’s programs, the accreditor must notify the Secretary of Education. If the Department of Education determines that an institution is out of compliance with the credit hour definition, the Department could impose liabilities or other sanctions.
Additional Information
We maintain a website at www.strayereducation.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K and our web address is included as an inactive textual reference only. We make available on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
The Form 10-K and other reports filed with the SEC can be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC; the website address is www.sec.gov.
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this Annual Report on Form 10-K or in the documents incorporated by reference herein before deciding to purchase our common stock. The occurrence of any of the following risks could materially harm our business, adversely affect the market price of our common stock and could cause you to suffer a partial or complete loss of your investment. See “Cautionary Notice Regarding Forward-Looking Statements.”
Risks Related to Extensive Regulation of Our Business
If we fail to comply with the extensive regulatory requirements for our business, we could face significant monetary liabilities, fines and penalties, including loss of access to federal student loans and grants for our students.
As a provider of higher education, we are subject to extensive regulation on both the federal and state levels. In particular, the Higher Education Act and related regulations subject Strayer University and all other higher education institutions that participate in the various Title IV programs to significant regulatory scrutiny.
The Higher Education Act mandates specific regulatory responsibilities for each of the following components of the higher education regulatory triad: (1) the federal government through the Department of Education; (2) the accrediting agencies recognized by the U.S. Secretary of Education (Secretary of Education) and (3) state education regulatory bodies. In addition, other federal agencies, such as the Consumer Financial Protection Bureau and Federal Trade Commission, and various state agencies and state Attorneys General enforce consumer protection laws applicable to post-secondary educational institutions.
The regulations, standards and policies of these regulatory agencies frequently change, and changes in, or new interpretations of, applicable laws, regulations, standards or policies could have a material adverse effect on our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs or costs of doing business.
Title IV requirements are enforced by the Department of Education and in some instances by private plaintiffs. If we are found to be in noncompliance with these laws, regulations, standards or policies, we could lose our access to Title IV program funds, which would have a material adverse effect on our business. Findings of noncompliance also could result in our being required to pay monetary damages, or being subjected to fines, penalties, injunctions, restrictions on our access to Title IV program funds or other censure that could have a material adverse effect on our business.
Regulatory changes by the Department of Education may have a material adverse effect on our business.
The Department of Education issued on October 28, 2010, final rules that address program integrity issues for post-secondary education institutions participating in Title IV programs, most of which took effect on July 1, 2011. On June 13, 2011, the Department of Education published final regulations on the metrics to determine whether an academic program prepares a student for gainful employment. PursuantSubsequent to the final regulation, which was set to become effective on July 1, 2012, an academic program is considered to lead to gainful employment ifmetrics being invalidated by a federal court, the Department of Education established a negotiated rulemaking committee to consider the issue of gainful employment. The Committee did not achieve the required consensus. Although the Department of Education has not yet published a notice of proposed rulemaking, the Department has indicated that it meets oneexpects to do so in early 2014. Although it is not yet known what will be included in the Department’s Notice of Proposed Rulemaking, the most recent proposal by the Department put before the Committee included three metrics, as discussed more fully above. As adopted, the first year that a program could become ineligible is 2015, and a program will not lose eligibility unless it fails all three metrics in three of four years. However, failuredescribed herein. Failure of a program in any given year to meet the metrics would lead to heightened disclosure requirements.requirements and, if continuing, potential loss of eligibility to participate in Title IV programs. Although there is still uncertainty about the substance and timing of any final regulations related to debt metrics, were vacated by the U.S. District Court for the District of Columbia, if they were to be reinstated on appeal or otherwise properly promulgated by the Department of Education in the future, compliance with the rules could affect how we conduct our business, and insufficient time or lack of sufficient guidance for compliance could have a material adverse effect on our business. Uncertainty surrounding the rules and interpretive regulations or guidance by the Department of Education may continue for some period of time and may adversely affect our business.
Congressional examination of for-profit post-secondary education could lead to legislation or other governmental action that may negatively affect the industry.
In 2010, the U.S. Congress increased its focus on for-profit education institutions, including regarding participation in Title IV programs and DOD oversight of tuition assistance for military service members attending for-profit colleges. Since June 2010, the Senate HELP Committee has held hearings to examine the proprietary education sector, and the final report of the majority Members of the Committee was critical of the industry as a whole. Further, the report recommended various reforms which would affect proprietary institutions’ participation in Title IV programs. Other Committees of the U.S. Congress have also held hearings into, among other things, the standards and procedures of accrediting agencies, credit hours and program length, the portion of federal student financial aid going to proprietary institutions, and the receipt of veterans and military education benefits by students enrolled at proprietary institutions. Strayer University has cooperated with these inquiries. A number of legislators have variously requested the GAO to review and make recommendations regarding, among other things, recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud and abuse in Title IV programs, and the percentage of proprietary institutions’ revenue coming from Title IV and other federal funding sources. GAO released four reports on for-profit post-secondary education: first, a report in August 2010 (subsequently revised in November 2010) that concluded, based on a three-month undercover investigation, that employees at a non-random sample of 15 proprietary institutions (not including Strayer University) made deceptive statements to students about accreditation, graduation rates, job placement, program costs, and financial aid; second, a report in October 2010 critical of the Department of Education’s efforts to enforce the ban on incentive payments; third, a report in October 2011 critical of the student experience and instructor performance at some for-profit online institutions; and fourth, a report in December 2011 comparing various student outcomes across proprietary, non-profit, and public institutions.
On July 30, 2012, the Senate HELP Committee released a report entitled “For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success.” While acknowledging that for-profit institutions have a role to play in higher education, the report criticized the proprietary institution industry on many fronts,fronts. However, the report also concluded that Strayer University's “performance, measured by student withdrawal rates, is one of the best of any company examined, and it appears that students are faring well at this degree based for-profit college.” S. Rept. 112-37. The report ultimately recommended several measures for reform which could change the participation of proprietary institutions in Title IV funding, including the following:
| · | Tie access to federal financial aid to minimum student outcome thresholds. |
| · | Prohibit institutions from funding marketing, advertising and recruiting activities with federal financial aid dollars. |
| · | Expand the reporting period for cohort default rates beyond three years. |
| · | Require that for-profits receive 15% of revenues from non-federal sources. |
| · | Extend the ban on incentive compensation to include all employees of institutions of higher education, and clarify that this ban extends to numeric threshold or quota-based termination policies. |
The report was not adopted by the full Committee, and the minority Members released their own report criticizing the majority’s investigation in many aspects, including that it did not include a review of all institutions of higher education.
On September 21, 2012, a group of senators wrote a letter to the Federal Trade Commission urging it to evaluate the marketing practices utilized by many proprietary institutions through the use of third-party lead generators. In addition, legislation was introduced in the Senate in April 2012, which remains pending in Committee, which would prevent institutions from using Title IV funds for marketing activities.
This increased activity is expected to continue and may result in legislation, further rulemaking affecting participation in Title IV programs, and other governmental actions. In addition, concerns generated by Congressional activity may adversely affect enrollment in and revenues of for-profit educational institutions. Limitations on the amount of federal student financial aid for which our students are eligible under Title IV could materially and adversely affect our business.
We are dependent on the renewal and maintenance of Title IV programs.
Congress historically has reauthorized theThe Higher Education Act (“HEA”), which is the law governing Title IV programs, approximately every fiveis subject to six years, with the next authorization expected in 2013.periodic reauthorization. Congress completed the most recent reauthorization through multiple pieces of legislation and may reauthorize the Higher Education ActHEA in a piecemeal manner in the future. Additionally, Congress determines the funding level for each Title IV program on an annual basis. Any action by Congress that significantly reduces funding for Title IV programs or the ability of our school or students to participate in these programs could materially harm our business. A reduction in government funding levels could lead to lower enrollments at our school and require us to arrange for alternative sources of financial aid for our students. Lower student enrollments or our inability to arrange such alternative sources of funding could adversely affect our business. The HEA is currently operative through an automatic one-year extension, which continues the current authorization through September 30, 2014.
We are subject to compliance reviews, which, if they resulted in a material finding of non-compliance, could affect our ability to participate in Title IV programs.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of non-compliance and related lawsuits by government agencies, accrediting agencies and third parties, including claims brought by third parties on behalf of the federal government. For example, the Department of Education regularly conducts program reviews of educational institutions that are participating in Title IV programs and the Office of Inspector General of the Department of Education regularly conducts audits and investigations of such institutions. In August 2010, the Secretary of Education announced plans to increase the number of program reviews by 50% to 300 in 2011, and the2011. The Department of Education is conductingcould limit, suspend, or terminate our participation in Title IV programs upon a material finding of non-compliance. The Department of Education last began such a program review of Strayer University’s administration of Title IV programs. On March 25, 2011,programs in the Departmentthird quarter of Education issued a preliminary program review report indicating its position that Strayer University’s Associate in Arts in General Studies (“AAGS”) program was not an eligible program under Title IV. The Company has communicated its disagreement with this finding, has enrolled affected students in other programs, and is working with the Department of Education to resolve the matter. Strayer continues to communicate with the Department of Education, and has provided requested data, but has not received a Final Program Review Determination Letter. If such a final determination finds that we failed to comply with Title IV and its implementing regulations, the Department of Education could impose sanctions or conditions that could have a material adverse effect on our operations and financial condition.2010. On December 22, 2011, the Department of Education notified Strayer University that its Program Participation Agreement was approved on a provisional basis because “the institution did not disburse Title IV funds timely to students in each payment period.” On July 18, 2013, the University received its Final Program Review Determination from the Department, with no material adverse findings and no additional actions required.
If we fail to maintain our institutional accreditation or if our institutional accrediting body loses recognition by the Department of Education, we would lose our ability to participate in Title IV programs.
The loss of Strayer University’s accreditation by Middle States or Middle States’ loss of recognition by the Department of Education would render Strayer University ineligible to participate in Title IV programs and would have a material adverse effect on our business. In addition, an adverse action by Middle States other than loss of accreditation, such as issuance of a warning, could have a material adverse effect on our business. Increased scrutiny of accreditors by the Secretary of Education in connection with the Department of Education’s recognition process may result in increased scrutiny of institutions by accreditors or have other consequences.
If we fail to maintain any of our state authorizations, we would lose our ability to operate in that state and to participate in Title IV programs there.
Each Strayer University campus is authorized to operate and to grant degrees, diplomas or certificates by the applicable education agency of the state where the campus is located. Such state authorization is required for students at the campus to participate in Title IV programs. The loss of state authorization would, among other things, render Strayer University ineligible to participate in Title IV programs at least at those state campus locations, limit Strayer University’s ability to operate in that state and could have a material adverse effect on our business.
Effective July 1, 2011, Department of Education regulations provide that a proprietary institution is considered legally authorized by a state if the state has a process to review and appropriately act on complaints concerning the institution, including enforcing applicable state laws, and the institution complies with any applicable state approval or licensure requirements consistent with the new rules. However, if a state in which Strayer has a physical campus fails to comply in the future with the provisions of the new rule or fails to provide the University with legal authorization, it could limit Strayer University’s ability to operate in that state and have a material adverse effect on our operations.
If we fail to obtain recertification by the Department of Education when required, we would lose our ability to participate in Title IV programs.
An institution generally must seek recertification from the Department of Education at least every six years and possibly more frequently depending on various factors, such as whether it is provisionally certified. The Department of Education may also review an institution’s continued eligibility and certification to participate in Title IV programs, or scope of eligibility and certification, in the event the institution undergoes a change in ownership resulting in a change of control or expands its activities in certain ways, such as the addition of certain types of new programs, or, in certain cases, changes to the academic credentials that it offers. In certain circumstances, the Department of Education must provisionally certify an institution. The Department of Education may withdraw our certification if it determines that we are not fulfilling material requirements for continued participation in Title IV programs. If the Department of Education does not renew, or withdraws our certification to participate in Title IV programs, our students would no longer be able to receive Title IV program funds, which would have a material adverse effect on our business.
Each institution participating in Title IV programs must enter into a Program Participation Agreement with the Department of Education. Under the agreement, the institution agrees to follow the Department of Education’s rules and regulations governing Title IV programs. On January 20, 2012, Strayer University executed a provisional Program Participation Agreement with the Department of Education allowing it to participate in Title IV programs until September 30, 2014. Under the provisional agreement, Strayerthe only material additional condition that the University must obtaincomply with is obtaining Department of Education approval for substantial changes, including the addition of any new location, level of academic offering, or non-degree program.
A failure to demonstrate financial responsibility or administrative capability may result in the loss of eligibility to participate in Title IV programs.
If we fail to demonstrate financial responsibility under the Department of Education’s regulations, we could lose our eligibility to participate in Title IV programs or have that eligibility adversely conditioned, which would have a material adverse effect on our business. If we fail to maintain administrative capability as defined by the Department of Education, we could lose our eligibility to participate in Title IV programs or have that eligibility adversely conditioned, which would have a material adverse effect on our business. On December 22, 2011, the Department of Education notified Strayer University that its Program Participation Agreement was approved on a provisional basis because “the institution did not disburse Title IV funds timely to students in each payment period.”
Student loan defaults could result in the loss of eligibility to participate in Title IV programs.
In general, under the Higher Education Act, an educational institution may lose its eligibility to participate in some or all Title IV programs if, for three consecutive federal fiscal years, 25% or more of its students who were required to begin repaying their student loans in the relevant federal fiscal year default on their payment by the end of the next federal fiscal year. Institutions with a cohort default rate equal to or greater than 15%, but less than 25%, must delay for 30 days disbursements to first-year, first-time subsidized and unsubsidized Direct Loan borrowers. In addition, an institution may lose its eligibility to participate in some or all Title IV programs if its default rate for a federal fiscal year was greater than 40%.
Beginning with cohort default rate calculations for federal fiscal year 2009, the cohort default rate will beis calculated by determining the rate at which borrowers who become subject to their repayment obligation in the relevant federal fiscal year, default by the end of the second (rather than next) federal fiscal year that follows that fiscal year. The currenttwo-year method of calculating rates will remainremains in effect and will beis used to determine institutional eligibility until three consecutive years of official cohort default rates calculated under the new formula are available. In addition, the cohort default rate threshold of 25% will be increased to 30% for purposes of certain sanctions and requirements related to cohort default rates. If we lose eligibility to participate in Title IV programs because of high student loan default rates, it would have a material adverse effect on our business. Strayer University’s two-year cohort default rates for the 2008, 2009, 2010, and 20102011 federal fiscal years, the three most recent years for which this information is available, were 6.7%10.0%, 10.0%8.6%, and 8.6%10.5%, respectively. The average two-year cohort default rates for proprietary institutions nationally were 11.6%15.0%, 15.0%12.9%, and 12.9%13.6% for federal fiscal years 2008,2009, 2010, and 2011, respectively. Strayer University’s three-year cohort default rates for federal fiscal years 2009 and 2010, the only two years for which this information is currently available, were 13.9% and 15.2%, respectively.
The average official three-year cohort default rates for proprietary institutions nationally were 22.7% and 21.8% for fiscal years 2009 and 2010, respectively.
Our school could lose its eligibility to participate in federal student financial aid programs or be provisionally certified with respect to such participation if the percentage of our revenues derived from those programs were too high.
A proprietary institution may lose its eligibility to participate in the federal student financial aid programs if it derives more than 90% of its revenues, on a cash basis, from these programs for two consecutive fiscal years. A proprietary institution of higher education that violates the 90/10 Rule for any fiscal year will be placed on provisional status for two fiscal years. Using the formula specified in the Higher Education Opportunity Act, we derived approximately 76%74% of our cash-basis revenues from these programs in 2011.2012. Certain members of Congress have proposed to revise the 90/10 Rule to count DOD tuition assistance and veterans education benefits, along with Title IV revenue, toward the 90% limit and to reduce the limit to 85% of total revenue. If we were to violate the 90/10 Rule, the loss of eligibility to participate in the federal student financial aid programs would have a material adverse effect on our business.
Our failure to comply with the Department of Education’s new gainful employment regulations could result in heightened disclosure requirements and loss of Title IV eligibility.
To be eligible for Title IV funding, academic programs offered by proprietary institutions of higher education must prepare students for gainful employment in a recognized occupation. AsAfter the previously adopted the gainful employment regulations were invalidated by a federal court, the Department of Education convened a negotiated rulemaking to take effect on July 1, 2012,propose new regulations related to gainful employment – which negotiations did not yield the required consensus. The Department is expected to issue a Notice of Proposed Rulemaking for public comment in early 2014. Although it is not yet known what metrics the Department will ultimately propose in its Notice expected in 2014, the last proposal put before the negotiated rulemaking committee by the Department of Education contained measurements of program cohort default rates, annual debt-to-earnings, and provideddiscretionary debt-to-earnings. Under this proposal a program would pass:
| · | If the program’s cohort default rate is less than 30%; and |
| | |
| · | If the program’s graduates have an annual debt-to-earnings ratio that does not exceed 8%; or a discretionary debt-to-earnings ratio that does not exceed 20%. |
In addition, a program that does not pass either of the debt-to-earnings metrics, and that has an academic program isannual debt-to-earnings ratio between 8% and 12%, or a discretionary debt-to-earnings ratio between 20% and 30%, would be considered to comply with this requirementbe in a warning zone. Under the annual and discretionary debt-to-earnings metrics, a program would become Title IV ineligible for three years if it satisfiesfails to pass both metrics for two out of three consecutive years, or fails to pass at least one of three metrics:
If at least 35% of students are in a satisfactory repayment status with respect to their federal student loans three tometric for four years after entering repayment;
If the annual loan payment of a typical graduate ofconsecutive years. Under the program for all debt incurred by the graduate for the program does not exceed 30% of the average or median discretionary income in the third or fourth year after graduation; or
If the annual loan payment ofcohort default rate metric, a typical graduate of the program for all debt incurred by the graduate for the program does not exceed 12% of the average or median annual earnings in the third or fourth year after graduation.
A program would become Title IV ineligible for Title IV fundingthree years if it failed onethe three-year default rate of these three metrics in three outconsecutive cohorts of four consecutive years, beginning with fiscal year 2012. After one failure, the institution must disclosestudents is greater than or equal to students the amount by which the particular program missed the metric and what the institution plans to do to improve performance. After two failures consecutively or within a three-year period, the institution must inform each current and prospective student that their debts may be unaffordable, that the program may lose eligibility, and what transfer options exists. After three failures consecutively or within four years, a program would lose eligibility for Title IV funds and could not re-establish eligibility for at least three years. The first year that a program could lose eligibility under the regulation as adopted was 2015, with eligibility losses in that year limited to the lowest 5% of all programs across institutions.30%. The regulations as adoptedwould provide a means by which an institution may challenge the Department of Education’s calculation of any of the three debt metrics prior to loss of Title IV eligibility.
As discussed more fully above, these metrics as well asAt this point, it is unknown what form any final regulation might take in relation to gainful employment and therefore the reporting requirements were invalidated byCompany does not have adequate guidance or data to determine definitively the U.S. District Courtfull financial or operational impact, if any, of potential new regulations going forward. Any gainful employment regulation may substantially increase our administrative burdens and could affect our student enrollment, persistence and retention. Further, although the regulations may provide opportunities for the District of Columbia on June 30, 2012. However, if the rules werean institution to be reinstituted on appeal orcorrect any potential deficiencies in a future Departmentprogram prior to the loss of Education rulemaking that passes judicial scrutiny,Title IV eligibility, the continuing eligibility of our academic programs willmay be affected by factors beyond management’s control such as changes in our graduates’ income levels, changes in student borrowing levels, increases in interest rates, changes in the percentage of former students who are current in the repayment of their student loans, and various other factors. Even if we were able to correct in a timely manner any deficiency in the gainful employment metrics in a timely manner, the disclosure requirements expected to be associated with a program’s failure to meet a metric in any yearthe metrics may adversely affect student enrollments in that program and may adversely affect the reputation of our institution.
The University must still comply with thecertain gainful employment disclosure requirements, which wereas originally promulgated and upheld by the District Court. Failure to comply with those requirements could result in sanctions or other liability, which could have a material adverse effect on our business.
Our failure to comply with the Department of Education’s incentive compensation rules could result in sanctions and other liability.
If we pay a bonus, commission or other incentive payment in violation of applicable Department of Education rules or if the Department or other third parties interpret our compensation practices as such, we could be subject to sanctions or other liability, which could have a material adverse effect on our business.
Our failure to comply with the Department of Education’s new misrepresentation rules could result in sanctions and other liability.
The Higher Education Act prohibits an institution that participates in Title IV programs from engaging in “substantial misrepresentation” of the nature of its educational program, its financial charges, or the employability of its graduates. The Department of Education’s Program Integrity Regulations, which took effect July 1, 2011, interpret this provision to prohibit any statement on those topics, made by the institution or a third party that provides educational programs, marketing, advertising, recruiting, or admissions services to the institution, that has the likelihood or tendency to confuse. Although the U.S. Court of Appeals for the District of Columbia held on June 5, 2012, that the term “substantial misrepresentation” could not include true, nondeceitful statements that are merely confusing, the new misrepresentation rules are expansive. In the event of substantial misrepresentation, the Department of Education may revoke an institution’s program participation agreement, limit the institution’s participation in Title IV programs, deny applications from the institution such as to add new programs or locations, initiate proceedings to fine the institution or limit, suspend, or terminate its eligibility to participate in Title IV programs. If the Department of Education or other third parties interpret statements made by us or on our behalf to be in violation of the new regulations, we could be subject to sanctions and other liability, which could have a material adverse effect on our business.
Our failure to comply with the Department of Education’s credit hour rule could result in sanctions and other liability.
In 2009, the Department of Education’s Office of Inspector General criticized three accreditors, including Middle States, for deficiency in their oversight of institutions’ credit hour allocations. In June 2010, the House Education and Labor Committee held a hearing concerning accrediting agencies’ standards for assessing institutions’ credit hour policies. The Program Integrity Regulations define the term “credit hour” for the first time and require accrediting agencies to review the reliability and accuracy of an institution’s credit hour assignments. If an accreditor does not comply with this requirement, its recognition by the Department of Education could be jeopardized. If an accreditor identifies systematic or significant noncompliance in one or more of an institution’s programs, the accreditor must notify the Secretary of Education. If the Department of Education determines that an institution is out of compliance with the credit hour definition, the Department could impose liabilities or other sanctions.sanctions, which could have a material adverse effect on our business.
We are subject to sanctions if we fail to calculate accurately and make timely payment of refunds of Title IV program funds for students who withdraw before completing their educational program.
The Higher Education Act and Department of Education regulations require us to calculate refunds of unearned Title IV program funds disbursed to students who withdraw from their educational program before completing it. If refunds are not properly calculated or timely paid, we may be required to post a letter of credit with the Department of Education or be subject to sanctions or other adverse actions by the Department of Education, which could have a material adverse effect on our business.
Investigations, legislative and regulatory developments and general credit market conditions related to the student loan industry may result in fewer lenders and loan products and increased regulatory burdens and costs.
The Higher Education Opportunity ActHEOA contains new requirements pertinent to relationships between lenders and institutions. In 2009, the Department of Education promulgated regulations that address these relationships, and state legislators have also passed or may be considering legislation related to relationships between lenders and institutions. In addition, new procedures introduced and recommendations made by the Consumer Financial Protection Bureau create uncertainty about whether Congress will impose new burdens on private student lenders. These developments, as well as legislative and regulatory changes such as those relating to gainful employment and repayment rates creating uncertainty in the industry and general credit market conditions, may cause some lenders to decide not to provide certain loan products and may impose increased administrative and regulatory costs. Such actions could reduce demand for and/or availability of private education loans, decrease Strayer University’s non-Title IV revenue and thereby increase Strayer University’s 90/10 ratio and have a material adverse effect on our business.
We rely on one or more third parties to administer our participation in Title IV programs and failure to comply with applicable regulations by a third-partythird party or by us could cause us to lose our eligibility to participate in Title IV programs.
Until September 30, 2011, Global Financial Aid Services, Inc. assisted us with the administration of our participation in Title IV programs, and other third parties continue to assist us with other aspects of our participation in the Title IV programs. Because Strayer University is jointly and severally liable to the Department of Education for the actions of third-party servicers, failure of such servicers to comply with applicable regulations could have a material adverse effect on Strayer University, including loss of eligibility to participate in Title IV programs. If any of the third partythird-party servicers discontinue providing such services to us, we may not be able to replace them in a timely, cost-efficient, or effective manner, or at all, and we could lose our ability to comply with the requirements of the Title IV programs, which could adversely affect our enrollment, revenues and results of operations. Since September 30, 2011, we have directly administered Strayer University’s participation in Title IV programs, rather than relying on a third-party.programs. If our financial aid personnel, processes, and quality assurance procedures fail to comply with applicable regulation, such failure could have a material adverse effect on Strayer University, including loss of eligibility to participate in Title IV programs.
Sequestration could reduce demand by reducing the availability of Title IV funds and increasing processing time.29
Congressional actions that reduce Title IV program funding (whether through across-the-board funding reductions, sequestration or otherwise) or materially affect the eligibility of Strayer University or its students to participate in Title IV programs would have a material adverse effect on our enrollment, financial condition, results of operations and cash flows. If either the Budget Control Act of 2011 or the Statutory Pay-As-You-Go Act of 2010 triggers sequestration, funding for Title IV programs would be affected. Most federal student aid programs would be subject to across-the-board cuts at a rate of approximately 8.2%, other than Pell Grants, which would be exempt from cuts through FY2013. In addition, origination fees for Stafford loans and PLUS loans would increase. A reduction in the maximum annual Pell Grant amount or changes in eligibility could increase student borrowing and make it more difficult for us to comply with other regulatory requirements, such as the cohort default rate regulations. In addition, the Department of Education’s Federal Student Aid administration budget would be reduced by sequestration, which could delay student eligibility determinations and processing of federal student loans. These events could make it more difficult for students to obtain funding for a Strayer University education, either in a timely manner or at all.
Our business could be harmed if we experience a disruption in our ability to process student loans under the Federal Direct Loan Program.
We collected the majority of our fiscal year 20122013 total consolidated net revenue from receipt of Title IV financial aid program funds, principally from federal student loans under the Federal Direct Loan Program (FDLP).Program. Any processing disruptions by the Department of Education may affect our students’ ability to obtain student loans on a timely basis. If we experience a disruption in our ability to process student loans through the FDLP,Federal Direct Loan Program, either because of administrative challenges on our part or the inability of the Department of Education to process the volume of direct loans on a timely basis, our business, financial condition, results of operations and cash flows could be adversely and materially affected.
Our business could be harmed if Congress makes changes to the availability of Title IV funds.
We collected the majority of our fiscal year 2013 total consolidated net revenue from receipt of Title IV financial aid program funds, principally from federal student loans under the Federal Direct Loan Program. Changes in the availability of these funds or a reduction in the amount of funds disbursed may have a material adverse effect on our enrollment, financial condition, results of operations and cash flows. Congress eliminated further federal direct subsidized loans for graduate and professional students as of July 1, 2012. On August 9, 2013, Congress passed legislation that ties interest rates on Title IV loans to the rate paid on U.S. Treasury bonds. Interest rates are set every July 1st for loans taken out from July 1st to June 30th of the following year. In April 2011, Congress eliminated year-round Pell Grant awards beginning with the 2011-2012 award year and in July 2012, Congress reduced eligibility for Pell Grants from 18 semesters to 12 semesters. To date these changes have not had a material impact on our business, but future changes in the availability of Title IV funds could impact students’ ability to fund their education and thus may have a material adverse effect on our enrollment, financial condition, results of operations and cash flows.
Risks Related to Our Business
Our growthenrollment rate is uncertain, and we may not be able to assess our future enrollments effectively.
Our growth depends on a number of factors, including increased unemployment and the resulting lower confidence in job prospects, and many of the regulatory risks discussed above. In 2011, we revised our business model to acknowledge lower growth or reductions in enrollments. Our enrollment in 2013 could2014 is likely to be lower than our historical performance and will be affected by legislative uncertainty, regulatory activity, and market conditions. Increased unemployment and the resulting lower confidence in job prospects may be factors contributing to lower enrollments. Until legislative, regulatory, and market uncertainty are resolved, it may be difficult to assess whether and to what extent there is an impact on our long termlong-term growth prospects. We planIn 2013, we closed physical locations to better align our resources with our current student enrollments. Although we may continue to invest in new campuses and to pursue our strategic goals. However,goals in the future, there can be no assurance as to what our growth rate will be or as to the steps we may need to take if regulatory and legislative matters are not clarified or if market conditions do not stabilize.
Our strategy of openingOpening new campuses and adding new services isare dependent on our forecast of the demand for adult-focused post-secondary education and on regulatory approvals.
Establishing new locations and adding new services require us to expend significant resources, including making human capital and financial capital investments, incurring marketing expenses and reallocating other resources. Since significant growth in enrollment in new campuses is required for them to become profitable, our willingness to add new campuses depends on our ability to predict growth in enrollment. The recent activity by the Department of Education and the U.S. Congress has introduced uncertainties into our business model and has slowed our pace of opening of new campuses, and we do not currently have plans to open new campuses in 2013.2014. To open a new location, we are required to obtain appropriate federal, state, and accrediting agency approvals, which may be conditioned or delayed in a manner that could significantly affect our growth plans. We cannot assure investors that we will continue to open new campus locations or add new services in the future.
Our future success depends in part upon our ability to recruit and retain key personnel.
Our success to date has been, and our continuing success will be, substantially dependent upon our ability to attract and retain highly qualified executive officers, faculty and administrators and other key personnel. If we cease to employ any of these integral personnel or fail to manage a smooth transition to new personnel, our business could suffer.
Our success depends in part on our ability to update and expand the content of existing academic programs and develop new programs in a cost-effective manner and on a timely basis.
Our success depends in part on our ability to update and expand the content of our academic programs, develop new programs in a cost-effective manner and meet students’ needs in a timely manner. Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological and other skills. The update and expansion of our existing programs and the development of new programs may not be received favorably by students, prospective employers or the online education market. If we cannot respond to changes in industry requirements, our business may be adversely affected. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as students require due to regulatory constraints or as quickly as our competitors introduce competing new programs.
Our financial performance depends in part on our ability to continue to develop awareness of the academic programs we offer among working adult students.
The continued development of awareness of the academic programs we offer among working adult students is critical to the continued acceptance and growth of our programs. If we are unable to continue to develop awareness of the programs we offer, this could limit our enrollments and negatively impact our business. The following are some of the factors that could prevent us from successfully marketing our programs:
● | · | the emergence of more successful competitors; |
● | · | customer dissatisfaction with our services and programs; |
● | · | performance problems with our online systems; and |
● | · | our failure to maintain or expand our brand or other factors related to our marketing. |
Congressional and other governmental activities could damage the reputation of Strayer University and limit our ability to attract and retain students.
Since 2010, the U.S. Congress has increased its focus on proprietary educational institutions, including administration of Title IV programs, military assistance programs, and other federal programs. The Department of Education has indicated to Congress that it intends to increase its regulation of and attention to proprietary educational institutions. And the Government Accountability Office has released several reports of investigations into proprietary educational institutions. These and other governmental activities, including new regulations on program integrity and gainful employment, even if resulting in no adverse findings or actions against Strayer, singly or cumulatively could affect public perception of investor-funded higher education, damage the reputation of Strayer University, and limit our ability to attract and retain students.
We face strong competition in the post-secondary education market.
Post-secondary education in our market area is highly competitive. We compete 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 Strayer University at a lower tuition level as a result of government subsidies, government and foundation grants, tax-deductible contributions and other financial sources not available to proprietary institutions. Some of our competitors in both the public and private sectors have substantially greater financial and other resources than we do. Congress, the Department of Education, and other agencies require increasing disclosure of information to consumers. While we believe that Strayer University provides valuable education to its students, we cannot predict the bases on which individual students and potential students will choose among the range of educational and other options available to them. This strong competition could adversely affect our business.
Strayer University relies on exclusive proprietary rights and intellectual property, and competitors may attempt to duplicate Strayer programs and methods.
Third parties may attempt to develop competing programs or duplicate or copy aspects of Strayer University’s curriculum, online library, quality management and other proprietary content. Any such attempt, if successful, could adversely affect our business. In the ordinary course of its business, Strayer develops intellectual property of many kinds that is or will be the subject of copyright, trademark, service mark, patent, trade secret or other protections. Such intellectual property includes but is not limited to Strayer’s courseware materials for classes taught online and business know-how and internal processes and procedures developed to respond to the requirements of its various education regulatory agencies.
Seasonal and other fluctuations in our operating results could adversely affect the trading price of our common stock.
Our business is subject to seasonal fluctuations, which cause our operating results to fluctuate from quarter to quarter. This fluctuation may result in volatility or have an adverse effect on the market price of our common stock. We experience, and expect to continue to experience, seasonal fluctuations in our revenue. Historically, our quarterly revenues and income have been lowest in the third quarter (July through September) because fewer students are enrolled during the summer months. We also incur significant expenses in the third quarter in preparing for our peak enrollment in the fourth quarter (October through December), including investing in online and campus infrastructure necessary to support increased usage. These investments result in fluctuations in our operating results which could result in volatility or have an adverse effect on the market price of our common stock. In addition, the online education market is a rapidly evolving market, and we may not be able to forecast accurately future enrollment growth and revenues.
Regulatory requirements may make it more difficult to acquire us.
A change in ownership resulting in a change of control of Strayer would trigger a requirement for recertification of Strayer University by the Department of Education for purposes of participation in federal student financial aid programs, a review of Strayer University’s accreditation by Middle States and reauthorization of Strayer University by certain state licensing and other regulatory agencies. If we underwent a change of control that required approval by any state authority, Middle States or any federal agency, and any required regulatory approval were significantly delayed, limited or denied, there could be a material adverse effect on our ability to offer certain educational programs, award certain degrees, diplomas or certificates, operate one or more of our locations, admit certain students or participate in Title IV programs, which in turn could have a material adverse effect on our business. These factors may discourage takeover attempts.
Capacity constraints or system disruptions to Strayer University’s computer networks could damage the reputation of Strayer University and limit our ability to attract and retain students.
The performance and reliability of Strayer University’s computer networks, especially the online educational platform, is critical to our reputation and ability to attract and retain students. Any system error or failure, or a sudden and significant increase in traffic, could result in the unavailability of Strayer University’s computer networks. We cannot assure you that Strayer University, including its online educational platform, will be able to expand its program infrastructure on a timely basis sufficient to meet demand for its programs. Strayer University’s computer systems and operations could be vulnerable to interruption or malfunction due to events beyond its control, including natural disasters and telecommunications failures. Any interruption to Strayer University’s computer systems or operations could have a material adverse effect on our ability to attract and retain students.
Strayer University’s computer networks may be vulnerable to security risks that could disrupt operations and require it to expend significant resources.
Strayer University’s computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. As a result, Strayer University may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches.
The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation and operations.
Possession and use of personal information in our operations subjectssubject us to risks and costs that could harm our business. We collect, use and retain large amounts of personal information regarding our students and their families, including social security numbers, tax return information, personal and family financial data and credit card numbers. We also collect and maintain personal information of our employees in the ordinary course of our business. Some of this personal information is held and managed by certain of our vendors. Although we use security and business controls to limit access and use of personal information, a third party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy. In addition, errors in the storage, use or transmission of personal information could result in a breach of student or employee privacy. Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches and restrict our use of personal information. We cannot assure you that a breach, loss or theft of personal information will not occur. A breach, theft or loss of personal information regarding our students and their families or our employees that is held by us or our vendors could have a material adverse effect on our reputation and results of operations and result in liability under state and federal privacy statutes and legal actions by state authorities and private litigants, and any of which could have a material adverse effect on our business.
Strayer University, with its online programs, operates in a highly competitive market with rapid technological changes and it may not compete successfully.
Online education is a highly fragmented and competitive market that is subject to rapid technological change. Competitors vary in size and organization from traditional colleges and universities, many of which have some form of online education programs, to for-profit schools, corporate universities and software companies providing online education and training software. We expect the online education and training market to be subject to rapid changes in technologies. Strayer University’s success will depend on its ability to adapt to these changing technologies.
We may not be able to complete or integrate any future acquisitions successfully.
As part of our growth strategy, we expect to consider selective acquisitions. We cannot assure investors that we will be able to complete successfully any acquisitions on favorable terms, or that if we do, we will be able to integrate successfully the personnel, operations and technologies of any such acquisitions. Our failure to complete or integrate successfully future acquisitions could disrupt our business and materially and adversely affect our profitability and liquidity by distracting our management and employees and increasing our expenses. In addition, because an acquisition is considered a change in ownership and control of the acquired institution under applicable regulatory standards, we must seek approval from the Department of Education if the acquired institution participates in Title IV programs, and most applicable state agencies and accrediting agencies and possibly other regulatory bodies when we acquire an institution. If we were unable to obtain such approvals of an institution we acquired, depending on the size of that acquisition, that failure could have a material adverse effect on our business.
There are no SEC staff comments on our periodic SEC reports which are unresolved.
We lease our campus and administrative facilities exceptExcept for five campus facilities which we own.own, our campus and administrative facilities are leased. Our campusesfacilities are located predominantly in Alabama, Arkansas, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, and Washington, D.C.,the Eastern United States, and our corporate headquarters is located in Herndon, Virginia. Our leases generally range from five to 10 years with one to two renewal options for extended terms. As of December 31, 2012,2013, we leased 9899 campus and administrative facilities consisting of approximately 1.8 million square feet. The facilities that we own consist of approximately 110,000 square feet.
As announced in October 2013, we closed approximately 20 physical locations predominantly in the Midwest. These locations, representing approximately 325,000 square feet of our 1.8 million square feet under lease, have remaining lease obligations ranging from two to eight years. We are evaluating various options to address unused facility space including sublets, both short-term and long-term, and lease buyouts.
We evaluate current utilization of our facilities and anticipated enrollment to determine facility needs. We do not anticipate any significant addition of campus or administrative space in 2013.2014.
From time to time, the Company iswe are involved in litigation and other legal proceedings arising out of the ordinary course of itsour business. On October 15, 2010, a putative securities class action styled Kinnett v. Strayer Education, Inc., et al., was filed in the United States District Court for the Middle District of Florida. On March 20, 2012, the District Court granted the Company’s motion to dismiss the complaint for failure to state a claim, and the Eleventh Circuit Court of Appeals upheld that dismissal on December 13, 2012. On April 4, 2011, a shareholder derivative action alleging similar facts was filed in the Circuit Court of Fairfax County, Virginia, which action was voluntarily dismissed by nonsuit on June 12, 2012. There are no pending material legal proceedings to which we are subject or to which our property is subject.
Not applicable.
Our common stock is traded on the NASDAQ StockGlobal Select Market under the symbol “STRA.” The following table sets forth, for the periods indicated, the high, low, and closing sale prices of our common stock, as reported on the NASDAQ Stock Market.
| | High | | | Low | | | Close | | | Cash Dividends Declared | | | High | | Low | | Close | | | Cash Dividends Declared | |
2011 | | | | | | | | | | | | | |
First Quarter | | $ | 154.61 | | | $ | 113.25 | | | $ | 130.49 | | | $ | 1.00 | | |
Second Quarter | | $ | 152.99 | | | $ | 113.33 | | | $ | 126.39 | | | $ | 1.00 | | |
Third Quarter | | $ | 147.19 | | | $ | 74.48 | | | $ | 76.67 | | | $ | 1.00 | | |
Fourth Quarter | | $ | 100.04 | | | $ | 69.34 | | | $ | 97.19 | | | $ | 1.00 | | |
2012 | | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | $ | 120.00 | | | $ | 92.51 | | | $ | 94.28 | | | $ | 1.00 | | | $ | 120.00 | | $ | 92.51 | | $ | 94.28 | | $ | 1.00 | |
Second Quarter | | $ | 109.50 | | | $ | 82.46 | | | $ | 109.02 | | | $ | 1.00 | | | $ | 109.50 | | $ | 82.46 | | $ | 109.02 | | $ | 1.00 | |
Third Quarter | | $ | 113.28 | | | $ | 62.53 | | | $ | 64.35 | | | $ | 1.00 | | | $ | 113.28 | | $ | 62.53 | | $ | 64.35 | | $ | 1.00 | |
Fourth Quarter | | $ | 69.16 | | | $ | 42.98 | | | $ | 56.17 | | | $ | 1.00 | | | $ | 69.16 | | $ | 42.98 | | $ | 56.17 | | $ | 1.00 | |
2013 | | | | | | | | | | |
First Quarter | | | $ | 64.70 | | $ | 46.31 | | $ | 48.38 | | $ | | |
Second Quarter | | | $ | 58.55 | | $ | 44.50 | | $ | 48.83 | | $ | | |
Third Quarter | | | $ | 52.85 | | $ | 39.27 | | $ | 41.52 | | $ | | |
Fourth Quarter | | | $ | 49.99 | | $ | 33.64 | | $ | 34.47 | | $ | | |
As of February 1, 2013,January 31, 2014, there were 11,357,32410,797,237 shares of common stock outstanding, and 58approximately 114 holders of record. In addition, there are approximately 7,500 institutional and other holders of common stock whose shares are held in nominee accounts by brokers.
In 2012, we paid $47.3 million in dividends, or $1.00 per share each quarter. In November 2012, we announced that we doWe did not intend to pay a regular quarterly dividend in 2013. Whether to declare dividends and the amount of dividends to be paid in the future will be reviewed periodically by our Board of Directors in light of our earnings, cash flow, financial condition, capital needs, investment opportunities and regulatory considerations. There is no requirement or assurance that common dividends will be paid in the future.
Peer Group Performance Graph
The following performance graph compares the cumulative stockholder return on our common stock since December 31, 20072008 with The NASDAQ Stock Market (U.S.) Index and a self-determined peer group consisting of Apollo Group, Inc. (APOL), Career Education Corporation (CECO), Corinthian Colleges, Inc. (COCO), DeVry, Inc. (DV), and ITT Educational Services, Inc. (ESI). At present, there is no comparative index for the education industry. This graph is not deemed to be “soliciting material” or to be filed with the SEC or subject to the SEC’s proxy rules or to the liabilities of Section 18 of the Securities Exchange Act, and the graph shall not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act or the Securities Exchange Act.
Comparison of 60 Month Cumulative Total Return*
Among Strayer Education, Inc.
The NASDAQ Stock Market (U.S.) Index and a Peer Group
Name | | 12/31/07 | | | 12/31/08 | | | 12/31/09 | | | 12/31/10 | | | 12/31/11 | | | 12/31/12 | | | 12/31/08 | | 12/31/09 | | 12/31/10 | | 12/31/11 | | 12/31/12 | | 12/31/13 |
Strayer Education, Inc. | | | 100 | | | | 126 | | | | 125 | | | | 89 | | | | 57 | | | | 33 | | | 100 | | 99 | | 71 | | 45 | | 26 | | 16 |
NASDAQ Stock Market (U.S.) | | | 100 | | | | 59 | | | | 86 | | | | 100 | | | | 98 | | | | 114 | | | 100 | | 144 | | 168 | | 165 | | 191 | | 265 |
Peer Group | | | 100 | | | | 102 | | | | 98 | | | | 68 | | | | 53 | | | | 25 | | | 100 | | 99 | | 70 | | 51 | | 24 | | 35 |
* | The comparison assumes $100 was invested on December 31, 20072008 in our common stock, the NASDAQ Stock Market (U.S.) Index and the peer companies selected by us. |
There were no sales by us of unregistered securities during the year ended December 31, 2012.2013.
In November 2003, our Board of Directors authorized us to repurchase shares of common stock in open market purchases from time to time at the discretion of our management, depending on market conditions and other corporate considerations. Our Board of Directors amended the program on various dates, increasing the repurchase amount authorized and extending the expiration date. At December 31, 2012,2013, approximately $95.0$70.0 million of our share repurchase authorization was remaining for repurchases through the end of 2013.2014. All of our share repurchases were effected in compliance with Rule 10b-18 under the Exchange Act. Some repurchases have been made in accordance with a share repurchase plan adopted by us under Rule 10b5-1 under the Exchange Act. Our share repurchase program may be modified, suspended or terminated at any time by us without notice.
A summary of our share repurchases since the inception of the plan is as follows:
| | Total number of shares repurchased | | | Average dollar price paid per share | | | Cost of share repurchases (millions) | | | Total number of shares repurchased | | Average dollar price paid per share | | Cost of share repurchases (millions) | |
2003 | | | 32,350 | | | $ | 99.57 | | | $ | 3.2 | | | 32,350 | | $ | 99.57 | | $ | 3.2 | |
2004 | | | 346,444 | | | | 106.13 | | | | 36.8 | | | 346,444 | | 106.13 | | 36.8 | |
2005 | | | 410,071 | | | | 92.59 | | | | 38.0 | | | 410,071 | | 92.59 | | 38.0 | |
2006 | | | 349,066 | | | | 100.39 | | | | 35.0 | | | 349,066 | | 100.39 | | 35.0 | |
2007 | | | 260,818 | | | | 146.05 | | | | 38.1 | | | 260,818 | | 146.05 | | 38.1 | |
2008 | | | 603,382 | | | | 180.86 | | | | 109.1 | | | 603,382 | | 180.86 | | 109.1 | |
2009 | | | 451,613 | | | | 177.34 | | | | 80.1 | | | 451,613 | | 177.34 | | 80.1 | |
2010 | | | 687,340 | | | | 168.06 | | | | 115.5 | | | 687,340 | | 168.06 | | 115.5 | |
2011 | | | 1,581,444 | | | | 128.15 | | | | 202.7 | | | 1,581,444 | | 128.15 | | 202.7 | |
2012 | | | 484,841 | | | | 51.56 | | | | 25.0 | | | 484,841 | | 51.56 | | 25.0 | |
2013 | | | | 495,085 | | | 50.49 | | | 25.0 | |
Total | | | 5,207,369 | | | $ | 131.25 | | | $ | 683.5 | | | | 5,702,454 | | $ | 124.24 | | $ | 708.5 | |
A summary of ourWe did not make any share repurchases during the three months ended December 31, 2012 is as follows:2013.
| | Total number of shares repurchased(1) | | | Average dollar price paid per share | | | Remaining authorization under the plan (millions) | |
October | | | – | | | $ | – | | | $ | 120.0 | |
November | | | 235,161 | | | | 48.20 | | | | 108.7 | |
December | | | 249,680 | | | | 54.74 | | | | 95.0 | |
Total | | | 484,841 | | | $ | 51.56 | | | $ | 95.0 | |
(1) | All shares repurchased were part of a publicly announced plan. |
The following table sets forth, for the periods and at the dates indicated, selected consolidated financial and operating data. The financial information has been derived from our consolidated financial statements. Effective during the first quarter of 2011, we made changes in our presentation of operating expenses and reclassified prior periods to conform to the current presentation. We determined that these changes would provide more meaningful information and increased transparency of our operations. Also effective during the first quarter of 2011, we changed the presentation of tuition receivable and unearned tuition in our consolidated balance sheets to record tuition receivable and unearned tuition for our students upon the start of the academic term. These changes have been reported retrospectively for all periods presented and had no impact on income from operations, net income, earnings per share, working capital, retained earnings, stockholders’ equity or on net cash provided by operating activities. These changes did not affect our revenue recognition policies. All prior period amounts have been reclassified to conform to the current period presentation. The information set forth below is qualified by reference to and should be read in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information included elsewhere or incorporated by reference in this Annual Report on Form 10-K.
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | |
| | (Dollar and share amounts in thousands, except per share data) | | | (Dollar and share amounts in thousands, except per share data) | |
Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 396,275 | | | $ | 511,961 | | | $ | 636,732 | | | $ | 627,434 | | | $ | 561,979 | | | $ | 511,961 | | $ | 636,732 | | $ | 627,434 | | $ | 561,979 | | $ | 503,600 | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Instruction and educational support | | | 167,333 | | | | 218,551 | | | | 269,557 | | | | 292,003 | | | | 300,098 | | | 218,551 | | 269,557 | | 292,003 | | 300,098 | | 310,446 | |
Marketing | | | 43,701 | | | | 54,967 | | | | 70,270 | | | | 74,293 | | | | 71,864 | | | 54,967 | | 70,270 | | 74,293 | | 71,864 | | 75,426 | |
Admissions advisory | | | 19,606 | | | | 23,017 | | | | 25,277 | | | | 26,531 | | | | 26,374 | | | 23,017 | | 25,277 | | 26,531 | | 26,374 | | 20,390 | |
General and administration | | | 38,784 | | | | 43,072 | | | | 55,857 | | | | 55,464 | | | | 50,056 | | | | 43,072 | | | 55,857 | | | 55,464 | | | 50,056 | | | 64,637 | |
Total costs and expenses | | | | 339,607 | | | 420,961 | | | 448,291 | | | 448,392 | | | 470,899 | |
Income from operations | | | 126,851 | | | | 172,354 | | | | 215,771 | | | | 179,143 | | | | 113,587 | | | 172,354 | | 215,771 | | 179,143 | | 113,587 | | 32,701 | |
Investment and other income | | | 4,527 | | | | 1,408 | | | | 1,228 | | | | 152 | | | | 4 | | | 1,408 | | 1,228 | | 152 | | 4 | | 2 | |
Interest expense | | | – | | | | – | | | | – | | | | 3,773 | | | | 4,616 | | | | – | | | – | | | 3,773 | | | 4,616 | | | 5,419 | |
Income before income taxes | | | 131,378 | | | | 173,762 | | | | 216,999 | | | | 175,522 | | | | 108,975 | | | 173,762 | | 216,999 | | 175,522 | | 108,975 | | 27,284 | |
Provision for income taxes | | | 50,570 | | | | 68,684 | | | | 85,739 | | | | 69,478 | | | | 43,045 | | | | 68,684 | | | 85,739 | | | 69,478 | | | 43,045 | | | 10,859 | |
Net income | | $ | 80,808 | | | $ | 105,078 | | | $ | 131,260 | | | $ | 106,044 | | | $ | 65,930 | | | $ | 105,078 | | $ | 131,260 | | $ | 106,044 | | $ | 65,930 | | $ | 16,425 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 5.77 | | | $ | 7.67 | | | $ | 9.78 | | | $ | 8.91 | | | $ | 5.79 | | | $ | 7.67 | | $ | 9.78 | | $ | 8.91 | | $ | 5.79 | | $ | 1.55 | |
Diluted | | $ | 5.67 | | | $ | 7.60 | | | $ | 9.70 | | | $ | 8.88 | | | $ | 5.76 | | | $ | 7.60 | | $ | 9.70 | | $ | 8.88 | | $ | 5.76 | | $ | 1.55 | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 14,015 | | | | 13,703 | | | | 13,426 | | | | 11,906 | | | | 11,390 | | | 13,703 | | 13,426 | | 11,906 | | 11,390 | | 10,584 | |
Diluted(a) | | | 14,242 | | | | 13,825 | | | | 13,535 | | | | 11,943 | | | | 11,440 | | | 13,825 | | 13,535 | | 11,943 | | 11,440 | | 10,624 | |
Other Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 10,761 | | | $ | 13,937 | | | $ | 17,309 | | | $ | 21,525 | | | $ | 23,973 | | | $ | 13,937 | | $ | 17,309 | | $ | 21,525 | | $ | 23,973 | | $ | 35,563 | |
Stock-based compensation expense | | $ | 11,127 | | | $ | 10,954 | | | $ | 11,987 | | | $ | 13,234 | | | $ | 5,464 | | | $ | 10,954 | | $ | 11,987 | | $ | 13,234 | | $ | 5,464 | | $ | 9,291 | |
Capital expenditures | | $ | 20,657 | | | $ | 30,431 | | | $ | 46,015 | | | $ | 29,991 | | | $ | 24,733 | | | $ | 30,431 | | $ | 46,015 | | $ | 29,991 | | $ | 24,733 | | $ | 8,726 | |
Cash dividends per common share (paid): | | | | | | | | | | | | | | | | | | | | | |
Regular | | $ | 1.63 | | | $ | 2.25 | | | $ | 3.25 | | | $ | 4.00 | | | $ | 4.00 | | |
Special | | $ | 2.00 | | | | – | | | | – | | | | – | | | | – | | |
Cash dividends per common share (paid) | | | $ | 2.25 | | $ | 3.25 | | $ | 4.00 | | $ | 4.00 | | $ | | |
Average enrollment(b) | | | 38,449 | | | | 47,142 | | | | 56,002 | | | | 53,901 | | | | 49,323 | | | 47,142 | | 56,002 | | 53,901 | | 49,323 | | 43,969 | |
Campuses(c) | | | 60 | | | | 71 | | | | 84 | | | | 92 | | | | 97 | | | 71 | | 84 | | 92 | | 97 | | 100 | |
Full-time employees(d) | | | 1,488 | | | | 1,811 | | | | 2,099 | | | | 2,140 | | | | 2,019 | | | 1,811 | | 2,099 | | 2,140 | | 2,019 | | 1,485 | |
| | At December 31, | |
| | 2009 | | | 2010 | | | 2011 | | | 2012 | | 2013 | |
| | (In thousands) | |
Balance Sheet Data: | | | | | | | | | | | | | | |
Cash, cash equivalents and marketable securities | | $ | 116,516 | | | $ | 76,493 | | | $ | 57,137 | | | $ | 47,517 | | $ | 94,760 | |
Working capital(e) | | | 105,735 | | | | 62,205 | | | | 17,484 | | | | 46,631 | | | 82,182 | |
Total assets | | | 238,441 | | | | 235,178 | | | | 231,133 | | | | 227,792 | | | 254,266 | |
Long-term debt | | | – | | | | – | | | | 90,000 | | | | 121,875 | | | 118,750 | |
Other long-term liabilities | | | 11,745 | | | | 12,644 | | | | 21,656 | | | | 21,905 | | | 51,456 | |
Total liabilities | | | 48,621 | | | | 59,174 | | | | 188,840 | | | | 186,804 | | | 215,364 | |
Total stockholders’ equity | | | 189,820 | | | | 176,004 | | | | 42,293 | | | | 40,988 | | | 38,902 | |
| | At December 31, | |
| | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | |
| | (In thousands) | |
Balance Sheet Data: | | | | | | | | | | | | | | | |
Cash, cash equivalents and marketable securities | | $ | 107,331 | | | $ | 116,516 | | | $ | 76,493 | | | $ | 57,137 | | | $ | 47,517 | |
Working capital(e) | | | 112,679 | | | | 105,735 | | | | 62,205 | | | | 17,484 | | | | 46,631 | |
Total assets | | | 216,088 | | | | 238,441 | | | | 235,178 | | | | 231,133 | | | | 227,792 | |
Long-term debt | | | – | | | | – | | | | – | | | | 90,000 | | | | 121,875 | |
Other long-term liabilities | | | 11,663 | | | | 11,745 | | | | 12,644 | | | | 21,656 | | | | 21,905 | |
Total liabilities | | | 40,007 | | | | 48,621 | | | | 59,174 | | | | 188,840 | | | | 186,804 | |
Total stockholders’ equity | | | 176,081 | | | | 189,820 | | | | 176,004 | | | | 42,293 | | | | 40,988 | |
(a) | Diluted weighted average shares outstanding include common shares issued and outstanding, and the dilutive impact of restricted stock, restricted stock units, and outstanding stock options using the Treasury Stock Method. |
(b) | Reflects average student enrollment for the four academic terms for each year indicated. |
(c) | Reflects number of campuses offering classes during the fourth quarter of each year indicated. In October 2013, we announced that approximately 20 physical locations would be closed after classes were taught in the fall academic term. Following these closures, the University will have approximately 80 physical campuses. |
(d) | Reflects full-time employees including full-time faculty as of December 31 of each year. |
(e) | Working capital is calculated by subtracting current liabilities from current assets. |
You should read the following discussion in conjunction with “Selected Historical Financial and Other Information,” our consolidated financial statements and the notes thereto, the “Cautionary Notice Regarding Forward-Looking Statements,” Item 1A entitled “Risk Factors” and the other information appearing elsewhere, or incorporated by reference, in this Annual Report on Form 10-K.
Background and Overview
We are an education services holding company that owns Strayer University. Strayer University is an institution of higher education which offers undergraduate and graduate degree programs at 100physical campuses, predominantly located in Alabama, Arkansas, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin,the Eastern United States, and Washington, D.C., and worldwide via the Internet.online.
Set forth below are average enrollment, full-time tuition rates, revenues, income from operations, net income, and diluted net income per share for the last three years.
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2010 | | | 2011 | | | 2012 | | | 2011 | | 2012 | | 2013 | |
Average enrollment | | | 56,002 | | | | 53,901 | | | | 49,323 | | | 53,901 | | 49,323 | | 43,969 | |
% Change from prior year | | | 19 | % | | | (4 | %) | | | (8 | %) | | (4 | %) | | (8 | %) | | (11 | %) |
Full-time tuition (per course) | | $ | 1,515 | | | $ | 1,590 | | | $ | 1,650 | | | $ | 1,590 | | $ | 1,650 | | $ | 1,700 | |
% Change from prior year | | | 5 | % | | | 5 | % | | | 4 | % | | 5 | % | | 4 | % | | 3 | % |
Revenues (in thousands) | | $ | 636,732 | | | $ | 627,434 | | | $ | 561,979 | | | $ | 627,434 | | $ | 561,979 | | $ | 503,600 | |
% Change from prior year | | | 24 | % | | | (1 | %) | | | (10 | %) | | (1 | %) | | (10 | %) | | (10 | %) |
Income from operations (in thousands) | | $ | 215,771 | | | $ | 179,143 | | | $ | 113,587 | | | $ | 179,143 | | $ | 113,587 | | $ | 32,701 | |
% Change from prior year | | | 25 | % | | | (17 | %) | | | (37 | %) | | (17 | %) | | (37 | %) | | (71 | %) |
Net income (in thousands) | | $ | 131,260 | | | $ | 106,044 | | | $ | 65,930 | | | $ | 106,044 | | $ | 65,930 | | $ | 16,425 | |
% Change from prior year | | | 25 | % | | | (19 | %) | | | (38 | %) | | (19 | %) | | (38 | %) | | (75 | %) |
Diluted net income per share | | $ | 9.70 | | | $ | 8.88 | | | $ | 5.76 | | | $ | 8.88 | | $ | 5.76 | | $ | 1.55 | |
% Change from prior year | | | 28 | % | | | (8 | %) | | | (35 | %) | | (8 | %) | | (35 | %) | | (73 | %) |
Strayer University derives approximately 96% of its revenue from tuition collected from its students. The academic year of the University is divided into four quarters, which approximately coincide with the four quarters of the calendar year. Students make payment arrangements for the tuition for each course at the time of enrollment. Tuition revenue is recognized in the quarter of instruction. If a student withdraws from a course prior to completion, the University refunds a portion of the tuition depending on when the withdrawal occurs. Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, employee tuition discounts and scholarships. The University also derives revenue from other sources such as textbook-related income, application fees, technology fees, placement test fees, withdrawal fees, certificate revenue, and other income, which are all recognized when earned.
We record tuition receivable and unearned tuition for our students upon the start of the academic term. Because the University’s academic quarters coincide with the calendar quarters, at the end of the fiscal quarter (and academic term), tuition receivable represents amounts due from students for educational services already provided and unearned tuition represents advance payments from students for academic services to be provided in the future. Based upon past experience and judgment, the University establishes an allowance for doubtful accounts with respect to accounts receivable. Any uncollected account more than six monthsone year past due is charged against the allowance. Accounts less than one year past due are reserved according to the length of time the balance has been outstanding. We also consider the likelihood of recovering balances that have previously been written off, based on our historical experience of recovering portions of these balances. Our estimates are subject to adjustment if future results are materially different than what we have experienced historically. Our bad debt expense as a percentage of revenues for the years ended December 31, 2010, 2011, 2012, and 20122013, was 3.8%4.0%, 4.0%4.2% and 4.2%4.4%, respectively.
Effective during the first quarter of 2011, we made changes in our presentation of operating expenses and reclassified prior periods to conform to the current presentation. We determined that these changes would provide more meaningful information and increased transparency of our operations. There were no changes to the total operating expenses or operating income as a result of these reclassifications. Below is a description of the nature of the costs included in our operating expense categories:
| · | Instruction and educational support expensesgenerally contain items of expense directly attributable to educational activities of the University. This expense category includes salaries and benefits of faculty and academic administrators, as well as administrative personnel who support and serve student interests. Instruction and educational support expenses also include costs of educational supplies and facilities, including rent for campus facilities, certain costs of establishing and maintaining computer laboratories and all other physical plant and occupancy costs, with the exception of costs attributable to the corporate offices. Bad debt expense incurred on delinquent student account balances is also included in instruction and educational support expenses. |
| · | Marketing expenses include the costs of advertising and production of marketing materials and related personnel costs. Admissions advisory expenses include salaries, benefits and related costs of personnel engaged in admissions.
General and administration expenses include salaries and benefits of management and employees engaged in accounting, human resources, legal, regulatory compliance, and other corporate functions, along with the occupancy and other related costs attributable to such functions.
|
| | |
| · | Admissions advisory expenses include salaries, benefits and related costs of personnel engaged in admissions. |
| | |
| · | General and administration expensesinclude salaries and benefits of management and employees engaged in accounting, human resources, legal, regulatory compliance, and other corporate functions, along with the occupancy and other related costs attributable to such functions. |
Investment income consists primarily of earnings and realized gains or losses on investments, and interest expense consists of interest incurred on our outstanding borrowings, unused revolving credit facility fees, and amortization of deferred financing costs.
Critical Accounting Policies and Estimates
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments related to its allowance for doubtful accounts, income tax provisions, the useful lives of property and equipment, redemption rates for scholarship programs, fair value of future contractual operating lease obligations for facilities that have been closed, valuation of deferred tax assets, goodwill, and intangible assets, valuation of its interest rate swap arrangement, forfeiture rates and achievability of performance targets for stock-based compensation plans, and accrued expenses. Management bases its estimates and judgments on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments regarding the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly reviews its estimates and judgments for reasonableness and may modify them in the future. Actual results may differ from these estimates under different assumptions or conditions.
Management believes that the following critical accounting policies are its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue recognition – Our educational programs are offered on a quarterly basis, and such periods coincide with our quarterly financial reporting periods. Approximately 96% of our revenues during the year ended December 31, 2013, consisted of tuition revenue. Tuition revenue is recognized as income,in the quarter of instruction. Tuition revenue is shown net of any refunds, or withdrawals, in the respective quarter of instruction. Advance registrations for future quarters are recorded as unearnedcorporate discounts, scholarships and employee tuition atdiscounts. At the start of each academic term.term, a liability (unearned tuition) is recorded for academic services to be provided and a tuition receivable is recorded for the portion of the tuition not paid upfront in cash. Any cash received prior to the start of an academic term is recorded as unearned tuition.
Our Graduation Fund is a program whereby eligible students may earn tuition credits at the end of their course of study if they successfully remain in the program. For our Graduation Fund, we estimate on a quarterly basis the value of awards earned that will be redeemed in a future period and adjust this estimate as necessary. This estimate is a function of the continuation rates of students with similar characteristics, and is subject to adjustment if student continuation rates vary significantly from prior experience. Our continuation rates have not varied materially from our estimates to date. If student continuation rates increase, we may increase our liability as students would be earning a greater benefit than previously estimated.
Tuition receivable – We record estimates for our allowance for doubtful accounts for tuition receivable from students.students primarily based on our historical collection rates by age of receivable (net of recoveries) and consideration of other relevant factors. We periodically assess our methodologies for estimating bad debts in consideration of actual experience. If the financial condition of our students were to deteriorate, resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required. During 2012 and 2013, our bad debt expense was 4.2% and 4.4% of revenue, respectively.
Accrued lease and related costs – We estimate potential sublease income and vacancy periods for space that is not in use, adjusting our estimates when circumstances change. If we enter into subleases at rates that are substantially different that our current estimates, we will adjust our liability for lease and related costs.
Other estimates – We also record estimates for certain of our accrued expenses and income tax liabilities. We estimate the useful lives of our property and equipment. We periodically assess goodwill and intangible assets for impairment. We assess the value of our interest rate swap arrangement every quarter. We periodically review our assumed forfeiture rates and ability to achieve performance targets for stock-based awards and adjust them as necessary. Should actual results differ from our estimates, revisions to our accrued expenses, carrying amount of goodwill and intangible assets, stock-based compensation expense, and income tax liabilities may be required.
New Campuses
Our goal is to serve the demand for post-secondary adult education nationwide by opening new campuses. For the last twelve years, we have pursued this goal by opening new campuses. A new campus typically requires approximately $1 million in upfront capital costs for leasehold improvements, furniture and fixtures, and computer equipment. In the first year of operation, assuming a mid-year opening, we expect to incur operating losses of approximately $1.0-$1.2 million including depreciation related to the upfront capital costs. A new campus is typically expected to begin generating operating income on a quarterly basis after six quarters of operation, which is generally upon reaching an enrollment level of about 250-300 students. Our new campus notional model assumes an increase of average enrollment by 100-150 students per year until reaching a level of about 1,000 students. Given the potential internal rate of return achieved with each new campus, opening new campuses is an important part of our strategy. We believe opening new campuses and having the option to attend classes on campus is important to attracting, retaining and servicing students. We believe we have sufficient capital resources from cash, cash equivalents, cash generated from operating activities and availability on our credit facility (discussed below) to continue to open new campuses, although we currently are not planning to open any in 2013. We opened eight new campuses in 2011 and eight in 2012. See “New Campuses Opened” table in Item 1 for information regarding the locations of these new campuses.
Results of Operations
In 2012,2013, we generated $562.0$503.6 million in revenue, a 10% decrease compared to 2011,2012, primarily as a result of a decline in average enrollment of 8%11%. Income from operations was $113.6$32.7 million in 2013, a decrease of 71% compared to 2012. Income from operations in 2013 is net of $54.7 million in charges related to the Company’s previously announced restructuring. Net income in 2013 was $16.4 million compared to $65.9 million for the same period in 2012, a decrease of 37%75%. Net income for 2013 is net of approximately $33.0 million in after tax charges related to the restructuring. Diluted earnings per share was $1.55 compared to 2011. Net income$5.76 for the same period in 2012, was $65.9 million, a decrease of 38% compared73%. Diluted earnings per share for the year is net of $3.10 per share in after tax charges related to 2011. Earnings per diluted share was $5.76the restructuring.
In October 2013, the Company implemented various restructuring initiatives to better align the Company’s resources with its current student enrollments. These restructuring initiatives, which occurred primarily in 2012 compared to $8.88the fourth quarter of 2013, include the closing of approximately 20 physical locations and reductions in 2011, a decreasethe number of 35%.campus-based and corporate employees. The Company incurred the following charges associated with these activities in the fourth quarter of 2013, and recorded them in the following line items in the statement of operations below:
| | Year Ended December 31, 2013 | |
($ in thousands) | | Lease and Related Costs, Net | | | Severance and Other Employee Separation Costs | | | Total | |
Instruction & educational support | | $ | 30,612 | | | $ | 5,548 | | | $ | 36,160 | |
Marketing | | | — | | | | 120 | | | | 120 | |
Admissions advisory | | | — | | | | 248 | | | | 248 | |
General & administration | | | 17,180 | | | | 982 | | | | 18,162 | |
Total charges | | $ | 47,792 | | | $ | 6,898 | | | $ | 54,690 | |
The following details the changes in the Company’s restructuring liability by type of cost during the year ended December 31, 2013:
($ in thousands) | | Lease and Related Costs, Net | | | Severance and Other Employee Separation Costs | | | Total | |
Balance at December 31, 2012 | | $ | — | | | $ | — | | | $ | — | |
Restructuring and other charges (1) | | | 47,792 | | | | 6,898 | | | | 54,690 | |
Non-cash adjustments(2) | | | (5,139 | ) | | | 1,438 | | | | (3,701 | ) |
Payments | | | (103 | ) | | | (6,120 | ) | | | (6,223 | ) |
Balance at December 31, 2013(1) | | $ | 42,550 | | | $ | 2,216 | | | $ | 44,766 | |
(1) | The current portion of our restructuring liabilities was $10.4 million as of December 31, 2013, most of which are included in Accounts payable and accrued expenses, and the long-term portion is included in Other long-term liabilities in the Consolidated Balance Sheets. The gross obligation associated with restructuring liabilities as of December 31, 2013, is approximately $44.8 million, which principally represents non-cancelable leases that will be paid over the respective lease terms through 2022. |
| |
(2) | A total of $48.5 million of non-cash charges were incurred in connection with the restructuring. Non-cash adjustments for lease and related costs include $10.9 million of accelerated depreciation, partially offset by the release of certain deferred rent and leasehold incentive liabilities of approximately $5.7 million. Non-cash adjustments for severance and other employee separation costs represent share-based compensation. |
Key enrollment trends by quarter were as follows:
Academic Term | | 2011 | | | 2012 | | | % Change | | % Change in new students | | 2012 | | 2013 | | | % Change | | % Change in new students |
Winter | | | 57,608 | | | | 50,432 | | | | -12 | % | | | -8 | % | | 50,432 | | 47,926 | | -5 | % | | -5 | % |
Spring | | | 55,974 | | | | 50,896 | | | | -9 | % | | | 12 | % | | 50,896 | | 46,130 | | -9 | % | | -14 | % |
Summer | | | 47,790 | | | | 44,236 | | | | -7 | % | | | 9 | % | | 44,236 | | 38,627 | | -13 | % | | -17 | % |
Fall | | | 54,233 | | | | 51,727 | | | | -5 | % | | | 4 | % | | 51,727 | | 43,192 | | -17 | % | | -23 | % |
Average | | | 53,901 | | | | 49,323 | | | | -8 | % | | | 4 | % | | 49,323 | | 43,969 | | -11 | % | | -16 | % |
Although we do not know for sure why our recent enrollment trends and that of the proprietary higher education sector generally have been negative, we believe that sustained levels of high unemployment, and the resulting lower confidence in job prospects, competition, and the high cost of a college education are all contributing factors. The 19%16% decline in our new students in 2011 had2013 will have an adverse impact on 20122014 enrollment since there werewill be fewer students from 20112013 continuing their education in 2012.2014. We believe it will take several quarters of new student growth in order to achieve overall enrollment growth.
We cannot predict future enrollments or whether new student enrollment will decline further, stabilize or increase in response to the economy or other factors. We can describe whatHowever, we thinkhave introduced a number of initiatives in response to these declining enrollment trends. Recognizing that affordability is an important factor in a prospective student’s decision to seek a college degree, we reduced our business modelundergraduate tuition for new students by 20% beginning in our 2014 winter academic term. As an extra incentive to encourage our students to continue their studies through to graduation, we introduced our Graduation Fund in mid-2013. Under this program, qualifying students receive one free course for every three courses taken. The free courses earned are redeemable in one’s final academic year. In 2013, as described above, we undertook some restructuring initiatives, including the closing of approximately 20 physical locations. The revenue impact of these initiatives is not known since the University is making online classes available to these students. However, we estimate these actions will save us approximately $50 million in expenses per year beginning in 2014. This figure is based upon various assumptions about our ability to sublease or otherwise mitigate lease costs, which may look like financially under different enrollment scenarios. We implemented a 3% tuition increase in 2013 but we expect roughly flat revenue per student in 2013 due tobe greater or less than expected. A description of factors that may affect the University’s continued mix shift towards graduate and corporate sponsored students, as well as continued targeted use of scholarships. We also expect Strayer University’s expenses to grow 1% to 2% in 2013, reflecting the annualization of operatingcontract lease costs at the eight new campuses opened during 2012, but that no additional campuses are currently planned for 2013. We expect that at the 2012 revenue level, anticipated 2013 expenses would lead to a 19-20% operating margin in 2013, and EPSincluded in the $5.40-$5.60 range. Each 1% increase (or decrease)expected savings is set forth in revenue from 2012 levelsNote 3 of the Consolidated Financial Statements under the caption “Restructuring and Related Charges.” We believe these measures and others that are embedded in 2013our strategic priorities will have an approximate 50 basis points positive (or negative) impact on operating margin, and an approximate $0.20 positive (or negative) impact on earnings per share. Finally, this model assumes an effective tax rate of 39.5% and 11,500,000 diluted shares outstanding.allow us to continue to deliver high quality, affordable education which should result in continued growth for the University over the long-term.
The following table sets forth certain income statement data as a percentage of revenues for the periods indicated:
| | Year Ended December 31, | | Year Ended December 31, |
| | 2010 | | 2011 | | 2012 | | 2011 | | 2012 | | 2013 |
Revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Costs and expenses: | | | | | | | | | | | | | | | | | | | |
Instruction and educational support | | | 42.3 | | | | 46.6 | | | | 53.4 | | | 46.6 | | 53.4 | | 61.7 | |
Marketing | | | 11.0 | | | | 11.8 | | | | 12.8 | | | 11.8 | | 12.8 | | 15.0 | |
Admissions advisory | | | 4.0 | | | | 4.2 | | | | 4.7 | | | 4.2 | | 4.7 | | 4.0 | |
General and administration | | | 8.8 | | | | 8.8 | | | | 8.9 | | | | 8.8 | | | 8.9 | | | 12.8 | |
Total Costs and expenses | | | | 71.4 | | | 79.8 | | | 93.5 | |
Income from operations | | | 33.9 | | | | 28.6 | | | | 20.2 | | | 28.6 | | 20.2 | | 6.5 | |
Investment income | | | 0.2 | | | | – | | | | – | | | – | | – | | – | |
Interest expense | | | – | | | | 0.6 | | | | 0.8 | | | | 0.6 | | | 0.8 | | | 1.1 | |
Income before income taxes | | | 34.1 | | | | 28.0 | | | | 19.4 | | | 28.0 | | 19.4 | | 5.4 | |
Provision for income taxes | | | 13.5 | | | | 11.1 | | | | 7.7 | | | | 11.1 | | | 7.7 | | | 2.1 | |
Net income | | | 20.6 | % | | | 16.9 | % | | | 11.7 | % | | | 16.9 | % | | | 11.7 | % | | | 3.3 | % |
Effective tax rate | | | 39.5 | % | | | 39.6 | % | | | 39.5 | % | | 39.6 | % | | 39.5 | % | | 39.8 | % |
Year Ended December 31, 2013 Compared To Year Ended December 31, 2012
Enrollment. Average enrollment decreased 11% to 43,969 students for the year ended December 31, 2013 from 49,323 students for the same period in 2012.
Revenues. Revenues decreased 10% to $503.6 million in 2013 from $562.0 million in 2012 principally due to lower average enrollment. In late 2013, we introduced a new pricing structure for new undergraduate students which could significantly reduce their cost of tuition. A shift in enrollment toward students eligible for the lower tuition will result in lower revenue per student in the future.
Instruction and educational support expenses. Instruction and educational support expenses increased $10.3 million, or 3%, to $310.4 million in 2013 from $300.1 million in 2012. This increase is primarily attributable to lease abandonments, asset write-offs, and severance charges of $36.2 million associated with the restructuring, partially offset by lower overall personnel-related costs due to lower average enrollment. These expenses as a percentage of revenues increased to 61.7% in 2013 from 53.4% in 2012. We believe instruction and educational support expenses will decline in the aggregate in the future as a result of savings expected to be achieved as a result of the restructuring, which primarily will affect instruction and educational support expenses and general and administration expenses.
Marketing expenses. Marketing expenses increased $3.5 million, or 5%, to $75.4 million in 2013 from $71.9 million in 2012. This increase is primarily due to the full year impact in 2013 of new markets opened during 2012. These expenses as a percentage of revenues increased to 15.0% in 2013 from 12.8% in 2012, largely due to marketing expenses increasing while tuition revenues declined. Although we implemented restructuring initiatives in 2013, we expect to continue to invest in our marketing efforts such that marketing expense may increase as a percentage of revenue in 2014 as compared to 2013.
Admissions advisory expenses. Admissions advisory expenses decreased by $6.0 million, or 23%, to $20.4 million in 2013 from $26.4 million in 2012, primarily as a result of lower personnel costs from consolidating Global Online centers in the fourth quarter of 2012. Admissions advisory expenses as a percentage of revenues decreased to 4.0% in 2013 from 4.7% in 2012 due to these expenses declining at a higher rate than tuition revenues.
General and administration expenses. General and administration expenses increased $14.5 million, or 29%, to $64.6 million in 2013 from $50.1 million in 2012. The increase is primarily attributable to one-time lease abandonment, asset write-off, and severance charges of $18.2 million associated with the restructuring initiatives, partially offset by lower overall personnel-related costs. General and administration expenses as a percentage of revenues increased to 12.8% in 2013 compared to 8.9% in 2012 due to these expenses increasing while tuition revenues declined. We believe general and administration expenses will decline in the aggregate in the future as a result of savings expected to be achieved as a result of the restructuring, which primarily will affect instruction and educational support expenses and general and administration expenses.
Income from operations. Income from operations decreased $80.9 million, or 71%, to $32.7 million in 2013 from $113.6 million in 2012, primarily due to the $54.7 million incurred with the restructuring and due to the aforementioned factors.
Investment income. Investment income decreased from approximately $4,000 in 2012 to approximately $2,000 in 2013.
Interest expense. Interest expense increased $0.8 million, or 17%, to $5.4 million in 2013 compared to $4.6 million in 2012, primarily due to higher average debt outstanding in 2013.
Provision for income taxes. Income tax expense decreased $32.1 million, or 75%, to $10.9 million in 2013 from $43.0 million in 2012, primarily due to the decrease in income before taxes attributable to the factors discussed above. Our effective tax rate was 39.8% for 2013 as compared to 39.5% for 2012.
Net income. Net income decreased $49.5 million, or 75%, to $16.4 million in 2013 from $65.9 million in 2012 due to the factors discussed above.
Year Ended December 31, 2012 Compared To Year Ended December 31, 2011
Enrollment. Average enrollment decreased 8% to 49,323 students for the year ended December 31, 2012 from 53,901 students for the same period in 2011.
Revenues. Revenues decreased 10% to $562.0 million in 2012 from $627.4 million in 2011 principally due to lower average enrollment.
Instruction and educational support expenses.Instruction and educational support expenses increased $8.1 million, or 3%, to $300.1 million in 2012 from $292.0 million in 2011. This increase includes approximately $6.0 million of additional costs necessary to support our opening of eight new campuses during 2012, and approximately $2.4 million of one-time costs associated with the consolidation of certain non-campus functions. These expenses as a percentage of revenues increased to 53.4% in 2012 from 46.6% in 2011, largely due to instructional and academic staff costs growing while tuition revenues declined.
Marketing expenses. Marketing expenses decreased $2.4 million, or 3%, to $71.9 million in 2012 from $74.3 million in 2011. These expenses as a percentage of revenues increased to 12.8% in 2012 from 11.8% in 2011, largely due to marketing expenses decreasing at a lower rate than tuition revenue.
Admissions advisory expenses. Admissions advisory expenses decreased slightly by $0.1 million, or 1%, to $26.4 million in 2012 from $26.5 million in 2011. Admissions advisory expenses as a percentage of revenues increased to 4.7% in 2012 from 4.2% in 2011 as these expenses remained largely unchanged while tuition revenue declined.
General and administration expenses.General and administration expenses decreased $5.4 million, or 10%, to $50.1 million in 2012 from $55.5 million in 2011. The decrease is primarily attributable to lower stock-based compensation expense of $7.0 million related to certain awards with performance criteria that are unlikely to be met, partially offset by one-time charges including costs associated with the consolidation of certain administrative functions. General and administration expenses as a percentage of revenues remained largely unchanged at 8.9% in 2012 compared to 8.8% in 2011.
Income from operations. Income from operations decreased $65.5 million, or 37%, to $113.6 million in 2012 from $179.1 million in 2011, due to the aforementioned factors.
Investment income. Investment income decreased from $0.2 million to approximately $4,000 in 2012. This decrease was principally due to lower investment yields on existing cash balances.
Interest expense. Interest expense increased $0.8 million, or 22% to $4.6 million in 2012 compared to $3.8 million in 2011 primarily due to higher average borrowings in 2012.
Provision for income taxes. Income tax expense decreased $26.5 million, or 38%, to $43.0 million in 2012 from $69.5 million in 2011, primarily due to the decrease in income before taxes attributable to the factors discussed above. Our effective tax rate was 39.5% for 2012 as compared to 39.6% for 2011.
Net income.Income. Net income decreased $40.1 million, or 38%, to $65.9 million in 2012 from $106.0 million in 2011 due to the factors discussed above.
Year Ended December 31, 2011 Compared To Year Ended December 31, 2010
Enrollment. Average enrollment decreased 4% to 53,901 students for the year ended December 31, 2011 from 56,002 students for the same period in 2010.
Revenues. Revenues decreased 1% to $627.4 million in 2011 from $636.7 million in 2010 principally due to lower average enrollment, partly offset by a 5% tuition increase implemented at the beginning of 2011.
Instruction and educational support expenses. Instruction and educational support expenses increased $22.4 million, or 8%, to $292.0 million in 2011 from $269.6 million in 2010. This increase was principally due to direct costs necessary to support students at existing and new campuses, including faculty and related academic staff compensation ($14.6 million) and campus facility costs ($6.3 million). These expenses as a percentage of revenues increased to 46.6% in 2011 from 42.3% in 2010, largely due to instructional and academic staff costs growing at a higher rate than tuition revenues.
Marketing expenses. Marketing expenses increased $4.0 million, or 6%, to $74.3 million in 2011 from $70.3 million in 2010. This increase was principally due to the direct costs required to build the Strayer University brand, particularly in new markets, and to attract prospective students. These expenses as a percentage of revenues increased to 11.8% in 2011 from 11.0% in 2010 primarily due to incremental expenditures in new markets and lower tuition revenue.
Admissions advisory expenses. Admissions advisory expenses increased $1.2 million, or 5%, to $26.5 million in 2011 from $25.3 million in 2010. This increase was principally due to the addition of admissions personnel, particularly at new campuses. Admissions advisory expenses as a percentage of revenues increased slightly to 4.2% in 2011 from 4.0% in 2010.
General and administration expenses. General and administration expenses decreased $0.4 million, or 1%, to $55.5 million in 2011 from $55.9 million in 2010. General and administration expenses as a percentage of revenues were 8.8% in both 2011 and 2010.
Income from operations. Income from operations decreased $36.7 million, or 17%, to $179.1 million in 2011 from $215.8 million in 2010, due to the aforementioned factors.
Investment income. Investment income decreased $1.0 million to $0.2 million in 2011 from $1.2 million in 2010. This decrease was principally due to a lower average cash balance and lower investment yields.
Interest expense. Interest expense, which was $3.8 million in 2011, related to borrowings against the revolving credit facility and term loan facility, and unused revolving credit fees. There were no borrowings in 2010.
Provision for income taxes. Income tax expense decreased $16.2 million, or 19%, to $69.5 million in 2011 from $85.7 million in 2010, primarily due to the decrease in income before taxes attributable to the factors discussed above. Our effective tax rate increased slightly to 39.6% for 2011 as compared to 39.5% for 2010.
Net income. Net income decreased $25.3 million, or 19%, to $106.0 million in 2011 from $131.3 million in 2010 due to the factors discussed above.
Seasonality
Our quarterly results of operations tend to vary significantly within a year because of student enrollment patterns. Enrollment generally is highest in the fourth quarter, or fall term, andgenerally lowest in the third quarter, or summer term. In 2012,2013, enrollment by term was as follows:
20122013 Enrollment by Term
Term | | Enrollment | |
Winter | | | 50,43247,926 | |
Spring | | | 50,89646,130 | |
Summer | | | 44,23638,627 | |
Fall | | | 51,72743,192 | |
Average | | | 49,32343,969 | |
The following table sets forth our revenues on a quarterly basis for the years ended December 31, 2010, 2011, 2012 and 2012:2013:
Quarterly Revenues
(dollars in thousands)
| | 2010 | | 2011 | | 2012 | | 2011 | | 2012 | | 2013 |
Three Months Ended | | Amount | | | Percent | | Amount | | Percent | | Amount | | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
March 31 | | $ | 157,901 | | | | 25 | % | | $ | 171,956 | | | | 27 | % | | $ | 149,532 | | | | 27 | % | | $ | 171,956 | | 27 | % | | $ | 149,532 | | 27 | % | | $ | 137,506 | | 27 | % |
June 30 | | | 159,283 | | | | 25 | | | | 163,789 | | | | 26 | | | | 146,254 | | | | 26 | | | 163,789 | | 26 | | 146,254 | | 26 | | 131,980 | | 26 | |
September 30 | | | 147,597 | | | | 23 | | | | 135,865 | | | | 22 | | | | 124,260 | | | | 22 | | | 135,865 | | 22 | | 124,260 | | 22 | | 110,031 | | 22 | |
December 31 | | | 171,951 | | | | 27 | | | | 155,824 | | | | 25 | | | | 141,933 | | | | 25 | | | | 155,824 | | | 25 | | | 141,933 | | | 25 | | | 124,083 | | | 25 | |
Total for Year | | $ | 636,732 | | | | 100 | % | | $ | 627,434 | | | | 100 | % | | $ | 561,979 | | | | 100 | % | |
Total for year | | | $ | 627,434 | | | 100 | % | | $ | 561,979 | | | 100 | % | | $ | 503,600 | | | 100 | % |
Costs generally are not affected by the seasonal factors as much as enrollment and revenue, and excluding one-time items, do not vary significantly on a quarterly basis.