| 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, and you could suffer a complete loss of your investment |
| ’’ 24 _________________________________________________________________ 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 of 1965, as amended (the ‘‘Higher Education Act’’), and related regulations subject Strayer University and all other higher education institutions that participate in the various federal student financial aid programs under Title IV of the Higher Education Act (‘‘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 US Department of Education (the ‘‘Department of Education’’); (2) the accrediting agencies recognized by the US Secretary of Education and (3) state education regulatory bodies |
| The regulations, standards and policies of these regulatory agencies frequently change, and changes in, or new interpretations of, applicable laws, regulations or standards 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 |
| If we are found to be in noncompliance with any of these regulations, standards or policies, we could lose our access to Title IV program funds |
| Approximately 57prca of our students participate in one or more Title IV programs, the loss of 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 |
| If we fail to maintain our institutional accreditation, we would lose our ability to participate in Title IV programs |
| Strayer University is institutionally accredited by the Middle States Commission on Higher Education (‘‘Middle States’’), one of the six regional accrediting agencies recognized by the US Secretary of Education as a reliable indicator of educational quality |
| Accreditation by an accrediting agency recognized by the Secretary of Education is required in order for an institution to become and remain eligible to participate in Title IV programs |
| The loss of accreditation would, among other things, render Strayer University ineligible to participate in Title IV programs and would have a material adverse effect on our business |
| 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 |
| Strayer University is authorized to operate and to grant degrees or diplomas by the applicable education agency of each state where it maintains a campus |
| Such state authorization is required in order for students at the campus to be eligible to participate in Title IV programs |
| The loss of authorization in a state would, among other things, render Strayer University ineligible to participate in Title IV programs at least at those state campus locations and could have a material adverse effect on our business |
| 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, 25prca or more of its students who were required to begin repaying their student loans in the relevant fiscal year default on their payment by the end of the next federal fiscal year |
| 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 25 _________________________________________________________________ were greater than 40prca |
| 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 Universityapstas default rates calculated by the Department of Education on Federal Family Education Loan Program loans for the 2001, 2002 and 2003 federal fiscal years, the three most recent years for which this information is available, were 4dtta3prca, 3dtta7prca and 2dtta7prca, respectively |
| The average cohort default rates for proprietary institutions nationally, as calculated by the Department of Education, were 9dtta0prca, 8dtta7prca and 7dtta3prca in fiscal years 2001, 2002 and 2003, respectively |
| A failure to demonstrate ‘‘administrative capability’’ or ‘‘financial responsibility’’ may result in the loss of eligibility to participate in Title IV programs |
| 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 |
| Furthermore, if we fail to demonstrate ‘‘financial responsibility’’ under the Department of Educationapstas 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 |
| We are subject to sanctions if we fail to calculate 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 sanctioned or subject to other adverse actions by the Department of Education, which could have a material adverse effect on our business |
| We are dependent on the renewal and maintenance of Title IV programs |
| Congress reauthorizes the Higher Education Act, which is the law governing Title IV programs, approximately every five to six years |
| 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 |
| Our school would lose its eligibility to participate in federal student financial aid programs if the percentage of our revenues derived from those programs were too high |
| A proprietary institution loses its eligibility to participate in the federal student financial aid programs if it derives more than 90prca of its revenues, on a cash basis, from these programs in any fiscal year |
| Using the Department of Education’s formula, we derived approximately 72prca of our cash-basis revenues from these programs in 2004 |
| Our school or an otherwise eligible program offered by our school would lose its eligibility for federal student financial aid programs if we failed to comply with the legal requirements regarding telecommunications courses that we may offer |
| If (i) under current law, we offer more than 50prca of our courses by telecommunications (meeting certain regulatory conditions) or 50prca or more of our students are enrolled in such courses, or (ii) under law expected to become effective commencing July 1, 2006, Strayer University fails to meet Middle States’ standards with respect to distance education; then, in any such case, our school could or our otherwise eligible distance education program could lose eligibility for federal student financial aid programs |
| 26 _________________________________________________________________ Our failure to comply with the Department of Educationapstas incentive compensation rules could result in sanctions |
| If we pay a bonus, commission or other incentive payment in violation of applicable requirements, we could be subject to sanctions, which could have a material adverse effect on our business |
| Risks Related to Our Business We may not be able to sustain our recent growth rate, and we may not be able to manage future growth effectively |
| We have experienced a period of significant growth since the beginning of 2001, particularly in our Strayer University Online business |
| Over this period, we have opened 23 new campuses and our revenue has increased 23prca between 2000 and 2005 on a compound annual basis |
| Our ability to sustain our current rate of growth depends on a number of factors, including our ability to obtain regulatory approvals, our ability to recruit and retain high quality academic and administrative personnel at new campuses and competitive factors |
| In addition, growth and expansion of our operations may place a significant strain on our resources and increased demands on our management information and reporting systems, financial management controls and personnel |
| Although we have made a substantial investment in augmenting our financial and management information systems and other resources to support future growth, we cannot assure you that we will be able to manage further expansion effectively |
| Failure to do so could adversely affect our business |
| Our success depends in part on our ability to update and expand the content of existing 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 programs, develop new programs in a cost-effective manner and meet students &apos 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 accepted 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 or as quickly as our competitors introduce competing new programs |
| Our strategy of opening new schools and adding new services is dependent on regulatory approvals and requires significant resources |
| Establishing new schools and locations and adding new services require us to make investments in management and capital expenditures, incur marketing expenses and reallocate other resources |
| To open a new school or location, we are required to obtain appropriate state and accrediting agency approvals, which may be conditioned or delayed in a manner which could significantly affect our growth plans |
| In addition, to be eligible for federal student financial aid programs, the new school or location would have to be certified by the Department of Education |
| We cannot assure you that we will be able to open successfully new schools and locations or add new services in the future |
| Our failure to manage effectively the operations of newly established schools and locations could adversely affect our business |
| Our financial performance depends in part on our ability to continue to develop awareness of the programs we offer among working adult students |
| The continued development of awareness of the 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: 27 _________________________________________________________________ • 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 |
| 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 |
| This strong competition could adversely affect our business |
| Strayer University Online and Strayer University do not rely 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 Universityapstas 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 Strayerapstas courseware materials for classes taught via the Internet or via other distance learning means and business know-how and internal processes and procedures developed to respond to the requirements of its operating and various education regulatory agencies |
| Our future success depends in part upon our ability to recruit and retain key personnel |
| In connection with our May 2001 recapitalization, we hired a new management team, including Robert S Silberman, our Chairman and Chief Executive Officer, to implement our new growth strategy |
| 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 |
| 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 preparing for our peak enrollment in the fourth quarter (October through December), including investing in online 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, because of the recent increase in the use of personal computers and access to the Internet, the online education market is a rapidly evolving market, and we may not be able to accurately forecast 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 by the Department of Education for purposes of participation in federal student 28 _________________________________________________________________ financial aid programs, a review of our accreditation by Middle States and reauthorization 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 or diplomas, 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 |
| We may not be able to successfully complete or integrate future acquisitions |
| As part of our growth strategy, we expect to consider selective acquisitions |
| We cannot assure you that we will be able to complete successfully any acquisitions on favorable terms, or that if we do, we will be able to successfully integrate the personnel, operations and technologies of any such acquisitions |
| Our failure to successfully complete or integrate 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 and most applicable state agencies and accrediting agencies 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 |
| Risks Related to Strayer University Onlineapstas Business Strayer University Onlineapstas current success and future growth depends on the continued growth of the Internet |
| Strayer University Onlineapstas business relies on the Internet for its success |
| If Internet use does not continue to grow, our Strayer University Online business may not grow as planned |
| A number of factors could inhibit the growth and acceptance of the Internet and adversely affect our online business, including: • inadequate Internet infrastructure; • security and privacy concerns; • the lack of compelling content; and • the unavailability of cost-effective, high-speed service and other technological factors |
| Capacity constraints or system disruptions to Strayer University Onlineapstas 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 Onlineapstas program infrastructure 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 Onlineapstas computer networks |
| We cannot assure you that Strayer University Online will be able to expand its program infrastructure on a timely basis sufficient to meet demand for its programs |
| Strayer University Onlineapstas 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 Onlineapstas computer systems or operations could have a material adverse effect on our ability to attract and retain students |
| Strayer University Onlineapstas computer networks may be vulnerable to security risks that could disrupt operations and require it to expend significant resources |
| Strayer University Onlineapstas 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 Online may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches |
| 29 _________________________________________________________________ Strayer University Online operates in a highly competitive market with rapid technological changes and it may not have the resources needed to 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 Online may not have the resources necessary to compete with the rapidly changing technologies being developed by its competitors, and its success will depend on its ability to adapt to these changing technologies |
| Government regulations relating to the Internet could increase Strayer University Onlineapstas cost of doing business, affect its ability to grow or otherwise have a material adverse effect on our business |
| The increasing popularity and use of the Internet and other online services for the delivery of education has led and may lead to the adoption of new laws and regulatory practices in the United States or foreign countries or to the interpretation of the application of existing laws and regulations to such services |
| These new laws and interpretations may relate to issues such as online privacy, copyright, trademark and service mark, sales taxes, fair business practices and the requirement that online education institutions qualify to do business as a foreign corporation or be licensed as a school in one or more jurisdictions where they have no physical location |
| New laws, regulations or interpretations related to doing business over the Internet could increase Strayer University Onlineapstas cost of doing business, affect its ability to increase enrollments and revenues or otherwise have a material adverse effect on our business |
| In addition, if we fail to comply with the requirements of the Higher Education Act and the Department of Education, which (i) under current law, limit the percentage of an institutionapstas online offerings or online students (as calculated pursuant to the Department of Education regulations relating to the so-called 50prca rules), or (ii) under law expected to become effective commencing July 1, 2006, Strayer University fails to meet Middle States’ standards, we could or our otherwise eligible distance education programs could lose eligibility for the Title IV programs |