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 100 campuses 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., and worldwide via the Internet.

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,
                                          2010          2011           2012
Average enrollment                         56,002        53,901         49,323
% Change from prior year                       19 %          (4 %)          (8 %)
Full-time tuition (per course)          $   1,515     $   1,590      $   1,650
% Change from prior year                        5 %           5 %            4 %
Revenues (in thousands)                 $ 636,732     $ 627,434      $ 561,979
% Change from prior year                       24 %          (1 %)         (10 %)
Income from operations (in thousands)   $ 215,771     $ 179,143      $ 113,587
% Change from prior year                       25 %         (17 %)         (37 %)
Net income (in thousands)               $ 131,260     $ 106,044      $  65,930
% Change from prior year                       25 %         (19 %)         (38 %)
Diluted net income per share            $    9.70     $    8.88      $    5.76
% Change from prior year                       28 %          (8 %)         (35 %)

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 months past due is charged against the allowance. Our bad debt expense as a percentage of revenues for the years ended December 31, 2010, 2011, and 2012 was 3.8%, 4.0% and 4.2%, 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 expenses generally 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.

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, 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. Tuition revenue is recognized as income, net of any refunds or withdrawals, in the respective quarter of instruction. Advance registrations for future quarters are recorded as unearned tuition at the start of each academic term. Any cash received prior to the start of an academic term is recorded as unearned tuition. We record estimates for our allowance for doubtful accounts for tuition receivable from students. If the financial condition of our students were to deteriorate, resulting in impairment of their ability to make required payments for tuition payable to us, additional allowances may be required. We 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, we generated $562.0 million in revenue, a 10% decrease compared to 2011, primarily as a result of a decline in average enrollment of 8%. Income from operations was $113.6 million in 2012, a decrease of 37% compared to 2011. Net income in 2012 was $65.9 million, a decrease of 38% compared to 2011. Earnings per diluted share was $5.76 in 2012 compared to $8.88 in 2011, a decrease of 35%.

Key enrollment trends by quarter were as follows:

                                                        % Change
                                             %           in new
Academic Term     2011         2012        Change       students
Winter            57,608       50,432        -12 %          -8 %
Spring            55,974       50,896         -9 %          12 %
Summer            47,790       44,236         -7 %           9 %
Fall              54,233       51,727         -5 %           4 %
Average           53,901       49,323         -8 %           4 %

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 are contributing factors. The 19% decline in our new students in 2011 had an adverse impact on 2012 enrollment since there were fewer students from 2011 continuing their education in 2012. 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 what we think our business model 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 to 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 operating 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 EPS in the $5.40-$5.60 range. Each 1% increase (or decrease) in revenue from 2012 levels in 2013 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.

The following table sets forth certain income statement data as a percentage of revenues for the periods indicated:

                                           Year Ended December 31,
                                        2010        2011        2012
Revenues                                100.0 %     100.0 %     100.0 %
Costs and expenses:
Instruction and educational support      42.3        46.6        53.4
Marketing                                11.0        11.8        12.8
Admissions advisory                       4.0         4.2         4.7
General and administration                8.8         8.8         8.9
Income from operations                   33.9        28.6        20.2
Investment income                         0.2           -           -
Interest expense                            -         0.6         0.8
Income before income taxes               34.1        28.0        19.4
Provision for income taxes               13.5        11.1         7.7
Net income                               20.6 %      16.9 %      11.7 %
Effective tax rate                       39.5 %      39.6 %      39.5 %

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. 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, and lowest in the third quarter, or summer term.
In 2012, enrollment by term was as follows:

                            2012 Enrollment by Term

Term       Enrollment
Winter          50,432
Spring          50,896
Summer          44,236
Fall            51,727
Average         49,323

The following table sets forth our revenues on a quarterly basis for the years ended December 31, 2010, 2011 and 2012:

                               Quarterly Revenues
                             (dollars in thousands)

                               2010                          2011                          2012
Three Months Ended    Amount        Percent         Amount         Percent        Amount        Percent
March 31             $ 157,901           25 %     $ 171,956             27 %     $ 149,532           27 %
June 30                159,283           25         163,789             26         146,254           26
September 30           147,597           23         135,865             22         124,260           22
December 31            171,951           27         155,824             25         141,933           25
Total for Year       $ 636,732          100 %     $ 627,434            100 %     $ 561,979          100 %

Costs generally are not affected by the seasonal factors as much as enrollment and revenue, and do not vary significantly on a quarterly basis.

Liquidity and Capital Resources

At December 31, 2012, we had cash and cash equivalents of $47.5 million compared to $57.1 million at December 31, 2011. At December 31, 2012, most of our cash was invested in bank overnight deposits.

On November 8, 2012, we entered into a second amended and restated revolving credit and term loan agreement which is secured by our assets and provides for a $100.0 million revolving credit facility and $125.0 million term loan facility with a maturity date of December 31, 2016. Proceeds from the new term loan were used to pay off $77.5 million outstanding under the original term loan facility. We had no outstanding balance under the prior revolving credit facility on the day of closing. At December 31, 2012, we had $125.0 million outstanding under the new term loan and no balance outstanding under the revolving credit facility. In 2013, we are obligated to repay $3.1 million of the term loan.

For the year ended December 31, 2012, we generated $82.1 million net cash from operating activities compared to $154.4 million for the same period in 2011. Capital expenditures were $24.7 million for the year ended December 31, 2012 compared to $30.0 million for the same period in 2011. Capital expenditures for the year ending December 31, 2013 are expected to be in the range of $15-20 million as we are not currently planning to open additional campuses in 2013.

For the year ended December 31, 2012, we paid $47.3 million in regular cash dividends and invested $25.0 million to repurchase common shares in the open market. In 2013, we do not intend to pay a regular quarterly dividend.

In 2012, bad debt expense as a percentage of revenue was 4.2% compared to 4.0% for the same period in 2011. Days sales outstanding was 15 days at the end of the fourth quarter of both 2012 and 2011.

Currently, we maintain our cash in mostly FDIC-insured bank accounts and invest our excess cash in money market funds. We have available $100 million under our revolving credit facility. We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash borrowed under the credit facility, will be sufficient to meet our requirements for at least the next 12 months.

The table below sets forth our cash and cash equivalents and marketable securities as of December 31, 2010, 2011 and 2012:

                         Cash and Marketable Securities
                                 (in millions)

                                                     At December 31,
                                                2010       2011       2012
Cash and cash equivalents                      $ 64.1     $ 57.1     $ 47.5
Marketable securities (short-term bond fund)     12.4          -          -
Total                                          $ 76.5     $ 57.1     $ 47.5

Year Ended December 31, 2010 2011 2012 Investment income $ 1.2 $ 0.1 $ 0.0

Contractual Obligations

The table below sets forth our contractual commitments associated with operating
leases and the repayment of debt as of December 31, 2012:

                                   Payments Due By Period (in thousands)
                                  Within                                      More than
                     Total        1 Year       1-3 Years      3-5 Years        5 Years
Operating leases   $ 242,429     $ 39,992     $    77,128     $   59,393     $    65,916
Term loan            125,000        3,125           9,375        112,500               -
                   $ 367,429     $ 43,117     $    86,503     $  171,893     $    65,916

Impact of Inflation

Inflation has not had a significant impact on our historical operations.

Off-Balance Sheet Arrangements

As of December 31, 2012, we do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of the Securities Exchange Commission Regulation S-K.