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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2003
COMMISSION FILE NO. 0-21039
STRAYER EDUCATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN THIS CHARTER)
Maryland 52-1975978
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1100 Wilson Blvd., Suite 2500
Arlington, VA 22209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 247-2500
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / / THE REGISTRANT BECAME SUBJECT
TO SUCH FILING REQUIREMENTS ON JULY 25, 1996.
AS OF MARCH 31, 2003, THERE WERE OUTSTANDING 10,652,412 SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE OF THE REGISTRANT.
1
STRAYER EDUCATION, INC.
INDEX
FORM 10-Q
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets at
December 31, 2002 and March 31, 2003.............................. 3
Unaudited Condensed Consolidated Statements of Income
for the three months ended March 31, 2002 and 2003................ 4
Unaudited Condensed Consolidated Statements of Comprehensive
Income for the three months ended March 31, 2002 and 2003......... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2002 and 2003................ 5
Notes to Unaudited Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 11
Item 3. Quantitative and Qualitative
Disclosures About Market Risk..................................... 15
Item 4. Controls and Procedures........................................... 16
PART II-- OTHER INFORMATION
Items 1-6, Exhibits and Reports on Form 8-K............................... 17
SIGNATURES.................................................................. 18
CERTIFICATIONS.............................................................. 19
2
STRAYER EDUCATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
December 31,
2002 March 31, 2003
----------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents ....................................................... $ 49,135 $ 54,330
Marketable securities available for sale, at fair value ......................... 18,121 24,181
Tuition receivable, net of allowances for doubtful accounts ..................... 25,759 29,838
Other current assets ............................................................ 773 1,355
--------- ---------
Total current assets ........................................................ 93,788 109,704
Student loans receivable, net of allowances for losses ............................. 9,453 9,792
Property and equipment, net ........................................................ 36,571 36,251
Other assets ....................................................................... 312 313
--------- ---------
Total assets ................................................................ $ 140,124 $ 156,060
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 3,534 $ 4,088
Accrued expenses ................................................................ 1,181 510
Income taxes payable ............................................................ 1,812 5,607
Dividends payable ............................................................... 1,507 1,507
Unearned tuition ................................................................ 29,853 34,626
--------- ---------
Total current liabilities .................................................. 37,887 46,338
Deferred income taxes .............................................................. 70 92
Long-term liabilities .............................................................. 1,985 2,048
--------- ---------
Total liabilities .......................................................... 39,942 48,478
--------- ---------
Commitments and contingencies
Mandatorily redeemable convertible Series A preferred stock,
par value $.01; 6,000,000 shares authorized; 3,758,456 and
3,792,913 shares issued and outstanding at December 31, 2002
and March 31, 2003, respectively ............................................. 93,807 94,267
Stockholders' equity:
Common Stock, par value $.01; 20,000,000 shares
authorized; 10,652,412 shares issued and outstanding
at December 31, 2002 and March 31, 2003 ...................................... 107 107
Additional paid-in capital ...................................................... 58,868 58,868
Retained earnings (accumulated deficit) ......................................... (52,674) (45,769)
Accumulated other comprehensive income .......................................... 74 109
--------- ---------
Total stockholders' equity ................................................ 6,375 13,315
--------- ---------
Total liabilities and stockholders' equity ................................ $ 140,124 $ 156,060
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the three months
ended March 31,
--------------------
2002 2003
------- -------
Revenues ............................... $29,698 $36,694
------- -------
Costs and expenses:
Instruction and educational support 9,641 12,831
Selling and promotion ............. 3,733 4,889
General and administration ........ 4,506 4,877
------- -------
17,880 22,597
------- -------
Income from operations ..... 11,818 14,097
Investment and other income ........... 363 574
------- -------
Income before income taxes . 12,181 14,671
Provision for income taxes ............. 4,751 5,799
------- -------
Net income .................. 7,430 8,872
Preferred stock dividends and accretion 2,016 1,275
------- -------
Net income available to
common stockholders ......... $ 5,414 $ 7,597
======= =======
Basic net income per share ............. $ 0.65 $ 0.71
======= =======
Diluted net income per share ........... $ 0.52 $ 0.61
======= =======
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
For the three months
ended March 31,
--------------------
2002 2003
------- -------
Net income.............................. $7,430 $8,872
Other comprehensive income:
Unrealized gain on investment,
net of taxes...................... -- 109
------- -------
Comprehensive income.................... $7,430 $8,981
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(AMOUNTS IN THOUSANDS)
For the three months
ended March 31,
--------------------
2002 2003
-------- --------
Cash flow from operating activities:
Net income .................................................. $ 7,430 $ 8,872
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred rent .......................... -- 63
Depreciation and amortization .......................... 790 1,012
Provision for student loan losses ...................... 50 46
Deferred income taxes .................................. 14 (36)
Changes in assets and liabilities:
Tuition receivable, net ................................ (2,203) (4,079)
Other current assets ................................... (560) (548)
Other assets ........................................... (12) (1)
Accounts payable ....................................... (472) 554
Accrued expenses ....................................... 692 (671)
Income taxes payable ................................... 3,310 3,794
Unearned tuition ....................................... 2,953 4,773
Student loans originated .................................... (2,290) (2,459)
Collections on student loans receivable ..................... 1,714 2,074
-------- --------
Net cash provided by operating activities .......... 11,416 13,394
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................ (12,785) (692)
Purchases of marketable securities ......................... -- (6,000)
-------- --------
Net cash used in investing activities .............. (12,785) (6,692)
-------- --------
Cash flows from financing activities:
Common dividends paid ...................................... (543) (692)
Preferred dividends paid ................................... (1,312) (815)
Issuance cost of preferred stock ........................... (28) --
-------- --------
Net cash used in financing activities .............. (1,883) (1,507)
-------- --------
Net increase (decrease) in cash and cash equivalents (3,252) 5,195
Cash and cash equivalents - beginning of period ............... 58,705 49,135
-------- --------
Cash and cash equivalents - end of period ..................... $ 55,453 $ 54,330
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
STRAYER EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF MARCH 31, 2002 AND 2003 IS UNAUDITED.
1. BASIS OF PRESENTATION
The financial statements are presented on a consolidated basis. The accompanying
financial statements include the accounts of Strayer Education, Inc. (the
Company), Strayer University, Inc. (the University) and Education Loan
Processing, Inc. (ELP), collectively referred to herein as the "Company" or
"Companies."
The results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full fiscal year.
All information as of March 31, 2003, and for the three months ended March 31,
2002 and 2003 is unaudited but, in the opinion of management, contains all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the condensed consolidated financial position, results of
operations and cash flows of the Companies.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
2. NATURE OF OPERATIONS
The Company, a Maryland corporation, conducts its operations through its
subsidiaries. The University is an accredited institution of higher education
that provides undergraduate and graduate degrees in various fields of study
through its twenty-two campuses in the District of Columbia, Maryland, Virginia,
North Carolina and Tennessee. ELP provides student loans for the University's
students. For purposes of the consolidated balance sheets, all of ELP's assets
and liabilities have been classified as current assets and liabilities with the
exception of student loans receivable, which have been classified as non-current
consistent with industry practice.
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed by dividing net income by
the weighted average common and potentially dilutive common equivalent shares
outstanding, determined as follows:
6
For the three months
ended March 31,
--------------------
(in thousands)
2002 2003
-------- --------
Weighted average shares outstanding
used to compute basic net income per share................... 8,352 10,652
Incremental shares issuable upon the
assumed conversion of preferred stock........................ 5,897 3,793
Incremental shares issuable upon the
assumed exercise of stock options............................ 132 194
-------- --------
Shares used to compute diluted net income per share............... 14,381 14,639
======== ========
For additional information regarding total potential share issuance, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Set forth below is a reconciliation of net income used to compute net income per
share:
For the three months
ended March 31,
--------------------
(in thousands)
2002 2003
-------- --------
Net income available to common stockholders
used to compute basic earnings per
share................................... $ 5,414 $ 7,597
Plus: Impact of assumed preferred stock conversion:
Preferred stock dividends and accretion.................. 2,016 1,275
-------- --------
Net income used to compute diluted net income per share........... $ 7,430 $ 8,872
======== ========
4. CREDIT FACILITIES
The Company maintains two credit facilities from two banks in the amount of
$10.0 million each. Interest on any borrowings under the facilities will accrue
at an annual rate of 0.75% above the London Interbank Offered Rate. There is no
outstanding balance and no fees payable on either facility as of March 31, 2003.
5. STOCKHOLDERS' EQUITY
Common Stock
A total of 20,000,000 shares of common stock, par value $0.01, have been
authorized. As of December 31, 2002 and March 31, 2003, the Company had
10,652,412 shares of common stock issued and outstanding. For the three
months ended March 31, 2003, the Company declared a quarterly cash dividend
of $0.065 per common share. The dividend was payable on April 22, 2003 to
common stockholders of record on April 8, 2003.
7
Preferred Stock / Series A Convertible Redeemable Preferred Stock
A total of 8 million shares of Preferred Stock, par value $0.01, have been
authorized. Of these preferred shares, 6,000,000 have been designated as
Series A Convertible Redeemable Preferred Stock, including shares reserved
for accrue in-kind dividends on the Series A Convertible Redeemable
Preferred Stock. The following table reflects all Preferred Stock activity
from December 31, 2002 to March 31, 2003:
Series A Convertible
Redeemable Preferred
Stock
--------------------
(in thousands)
Balance, December 31, 2002..................... $ 93,807
Dividends - accrue in-kind shares.............. 911
Accretion of carrying value.................... (451)
---------
Balance, March 31, 2003........................ $ 94,267
=========
On January 1, 2003 the Company recorded 34,456 shares of Series A
Convertible Redeemable Preferred Stock as accrued in-kind dividends and
paid a quarterly cash dividend of $0.8 million. On April 1, 2003 the
Company recorded 35,059 shares of Series A Convertible Redeemable Preferred
Stock as accrued in-kind dividends and paid a quarterly cash dividend of
$0.8 million.
From the original issuance date until May 15, 2006, dividends accrue on the
Series A Convertible Redeemable Preferred Stock at an annual rate of 7%,
with 3.5% payable in cash and the remaining 3.5% accrues in additional
shares of Series A Convertible Redeemable Preferred Stock. After May 15,
2006, dividends accrue at an annual rate of 3.0%, all of which is payable
in cash. The Series A Convertible Redeemable Preferred Stock dividends and
accretion are recorded based on an effective yield of 5.43% applied to the
carrying value of the Series A Convertible Redeemable Preferred Stock. This
stock is currently convertible into common shares at a price of $26.00 per
share on a one-for-one basis. To the extent the Company's common stock
trades above $52.00 per share for 20 consecutive trading days at any time
after May 15, 2004, the Company may cause conversion of the Series A
Convertible Redeemable Preferred Stock. For a more detailed description of
the terms of the Series A Convertible Redeemable Preferred Stock, see Note
6 of the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
Stock Options
In July 1996, the Company's stockholders approved 1,500,000 shares of
common stock for grants under the Company's 1996 Stock Option Plan. This
Plan was amended by the stockholders at the May 2001 Annual Stockholder's
Meeting to increase the shares authorized for issuance thereunder by
1,000,000 (as amended, the "Plan") to 2,500,000. The Plan provides for the
grant of options intended to qualify as incentive stock options, and also
provides for the grant of non-qualifying options to employees and directors
of the Company. Options may be granted to eligible employees or directors
of the Company at the discretion of the Board of Directors, at
8
option prices based at or above the fair market value of the shares at the
date of grant. Vesting provisions are at the discretion of the Board of
Directors. The maximum term of the options was 5 years before the amendment
and 7 years after the amendment.
The table below sets forth the stock option activity for the three months
ended March 31, 2003:
Weighted-Average
Number of shares Exercise Price
----------------- ----------------
Balance, December 31, 2002........... 970,000 $ 36.43
Grants............................... 235,000 $ 53.61
Exercises............................ -- --
Forfeitures.......................... -- --
----------- -----------
Balance, March 31, 2003.............. 1,205,000 $ 40.31
=========== ===========
Of the 1,205,000 total stock options that have been issued and are
outstanding, 293,330 are exercisable as of March 31, 2003. A total of
344,405 shares remain authorized but unissued under the Plan. As of March
31, 2003, the weighted average contractual life of outstanding stock options
is 5.1 years.
The Company uses the intrinsic-value-based method of accounting for its
stock options plan. Under this method, compensation expense is the excess,
if any, of the quoted market price of the stock at grant date over the
amount an employee must pay to acquire the stock. Had compensation expense
been determined based on the fair value of the options at grant dates
computed by the Black-Scholes methodology, the pro forma amounts would be as
follows:
For the three months ended
March 31,
--------------------------
2002 2003
------ ------
In thousands (except per share)
Net income .......................................... $7,430 $8,872
Stock-based compensation expense, net of tax ........ 553 1,009
------ ------
Pro forma net income ................................ $6,877 $7,863
====== ======
Net income available to common stockholders ......... $5,414 $7,597
Stock-based compensation expense, net of tax ........ 553 1,009
------ ------
Pro forma net income available to common stockholders $4,861 $6,588
====== ======
Net income per share:
As reported:
Basic ..................................... $ 0.65 $ 0.71
Diluted ................................... $ 0.52 $ 0.61
Pro forma:
Basic ..................................... $ 0.58 $ 0.62
Diluted ................................... $ 0.48 $ 0.54
9
The table below sets forth the assumptions used to estimate fair value as of the
date of grant using the Black-Scholes option pricing model:
2001 2002 2003
---- ---- ----
Dividend yield................................................... 0.7% 0.5% 0.5%
Risk-free interest rates......................................... 4.8% 4.8% 3.0%
Volatility....................................................... 47% 43% 43%
Expected option term (years)..................................... 5.3 5.9 5.2
Weighted average fair value of options granted during the year... $16.68 $23.65 $21.77
6. INVESTMENTS IN MARKETABLE SECURITIES
In the second quarter of 2002, as part of its cash management activities, the
Company began investing in a diversified, no load, short-term, investment grade
corporate bond fund. These marketable securities are considered "available for
sale," and as such, are stated at fair value. The net unrealized gains and
losses (net of taxes) are reported as a component of accumulated comprehensive
income (loss) in stockholders' equity.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of intangible long-lived assets and related asset retirement costs.
The adoption of SFAS 143 on January 1, 2003 did not have a material impact on
the consolidated financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("SFAS 146"), Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity Including Certain Costs
Incurred in a Restructuring. Under EITF 94-3, a liability for an exit activity
was recognized at the date of an entity's commitment to an exit plan. SFAS 146
required that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The adoption of SFAS 146
on January 1, 2003 did not have a material impact on the consolidated financial
statements.
In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45")
Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing
disclosure requirement for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. FIN 45
is effective on a prospective basis to guarantees issued or modified after
December 31, 2002. FIN 45 is effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of FIN 45 as of
10
December 31, 2002 did not have a material impact on the consolidated financial
statements.
8. LEASE AGREEMENTS
During the first quarter of 2003, the Company did not execute any new lease
agreements.
9. LONG-TERM LIABILITY
In conjunction with the opening of new campuses in Chesapeake, Virginia, and
Newport News, Virginia during 2001 and in Charlotte, North Carolina (two
campuses), Cary, North Carolina, and corporate offices in Arlington, Virginia
during 2002, the Company was reimbursed by the lessors for improvements made to
the leased properties in the amount of $763,000 and $1,313,000 in 2001 and 2002,
respectively. There were no such reimbursements during three months ended March
31, 2003. In accordance with Financial Accounting Standards Board Technical
Bulletin No. 88-1, these reimbursements were capitalized as leasehold
improvements and a long-term liability established. The leasehold improvements
and the long-term liability will be amortized on a straight-line basis over the
corresponding lease terms, which range from five to ten years.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements included in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as elsewhere in this
report on Form 10-Q are forward-looking statements made pursuant to the Private
Securities Litigation Reform Act of 1995 ("Reform Act"). These statements are
based on the Company's current expectations and are subject to a number of
assumptions, risks and uncertainties. In accordance with the Safe Harbor
provisions of the Reform Act, the Company has identified important factors that
could cause the actual results to differ materially from those expressed in or
implied by such statements. The assumptions, uncertainties and risks include the
pace of growth of student enrollment, our continued compliance with Title IV of
the Higher Education Act, and the regulations thereunder, as well as state and
regional regulatory requirements, competitive factors, risks associated with the
opening of new campuses, risks associated with the offering of new educational
programs and adapting to other changes, risks associated with the acquisition of
existing educational institutions, risks relating to the timing of regulatory
approvals, our ability to continue to implement our growth strategy, and general
economic and market conditions. Further information about these and other
relevant risks and uncertainties may be found in the Company's annual report on
Form 10-K and its other filings with the Securities and Exchange Commission. The
Company undertakes no obligation to update or revise forward looking statements.
ADDITIONAL INFORMATION
We maintain a website at http://www.strayereducation.com. The information on our
website is not incorporated by reference in this Quarterly Report on Form 10-Q
and our web address is included as an inactive textual reference only. We make
available, free of
11
charge through 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.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Enrollment. Enrollment at Strayer University for the 2003 winter term,
which began January 6, 2003 and ended March 24, 2003, increased 18% to 16,558
students compared to 14,067 for the same term in 2002. Across the Strayer
University campus network, new student enrollments increased 14% and continuing
student enrollments increased 19%. Strayer University Online enrollments
increased 80% to 5,810 students from 3,222. The total number of students taking
courses online (including students at brick and mortar campuses taking at least
one online course) in the winter 2003 quarter was 7,356.
STUDENT ENROLLMENT
Winter Winter %
2002 2003 Change
------ ------ ------
New Campuses (7 in operation 3 or less years)
Campus Based Students ...................... 605 1,272 110%
Online Based Students ...................... 375 1,167 211%
------ ------
Total New Campus Students ............. 980 2,439 149%
------ ------
Mature Campuses (13 in operation 4 or more years)
Campus Based Students ...................... 10,240 9,476 - 7
Online Based Students ...................... 2,178 3,552 63%
------ ------
Total Mature Campus Students .......... 12,418 13,028 5%
------ ------
Out-of-Area Online Students ..................... 669 1,091 63%
------ ------
Total University Enrollment ..................... 14,067 16,558 18%
====== ======
Total Students Taking 100% Courses Online ....... 3,222 5,810 80%
Total Students Taking At Least 1 Course Online .. 4,260 7,356 73%
Revenues. Revenue increased 24% from $29.7 million in the first quarter of
2002 to $36.7 million in the first quarter of 2003, principally due to an 18%
increase in student enrollments and a 5% tuition increase effective for 2003.
Instruction and educational support expenses. Instruction and educational
support expenses increased $3.2 million, or 33%, from $9.6 million in the first
quarter of 2002 to $12.8 million in the first quarter of 2003. This increase was
principally due to the direct costs necessary to support the increase in student
enrollments including faculty
12
compensation, related academic staff salaries, campus facility costs and
financial aid processing costs. These costs as a percentage of revenues
increased to 35.0% in the first quarter of 2003 from 32.5% in the first quarter
of 2002 primarily due to the addition of three new campuses which generally
operate at a loss or at lower profitability in the first year of operation.
Selling and promotion expenses. Selling and promotion expenses increased
$1.2 million, or 31%, from $3.7 million in the first quarter of 2002 to $4.9
million in the first quarter of 2003. This increase was principally due to
marketing expenses associated with opening two new campuses in Tennessee for
spring term 2003 as well as ongoing marketing expenses for the three new
campuses opened in North Carolina for the summer term in 2002. The addition of
admissions representatives at these new campuses and at Strayer University
Online also contributed to the increase. These expenses as a percentage of
revenues increased to 13.3% in the first quarter of 2003 from 12.6% as a result
of the aforementioned factors.
General and administration expenses. General and administration expenses
increased $0.4 million, or 8%, from $4.5 million in the first quarter of 2002 to
$4.9 million in the first quarter of 2003. This increase was principally due to
increased employee compensation and related expenses as well as the addition of
three new campuses in North Carolina. General and administrative expenses as a
percentage of revenues decreased to 13.3% in the first quarter of 2003 from
15.2% in the first quarter of 2002 primarily due to greater revenues being
spread over the fixed costs of various centralized functions.
Income from operations. Operating income increased $2.3 million, or 19%,
from $11.8 million in the first quarter of 2002 to $14.1 million in the first
quarter of 2003. The increase was due to the aforementioned factors.
Investment and other income. Investment and other income increased $0.2
million, or 58%, from $0.4 million in the first quarter of 2002 to $0.6 million
in the first quarter of 2003. The increase was principally due to investments in
marketable securities beginning in the second quarter of 2002 which had a higher
yield than money market funds and bank overnight deposits. The Company also had,
on average, a higher cash balance.
Net income. Net income was $8.9 million in the first quarter of 2003
compared to $7.4 million for the same period in 2002, an increase of $1.5
million, or 19%, because of factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had cash, cash equivalents and marketable securities of
$78.5 million compared to $67.3 million at December 31, 2002 and $55.4 million
at March 31, 2002. Beginning in the second quarter of 2002, we began investing
in a diversified no load, short-term, investment grade corporate bond fund in an
effort to generate a somewhat higher yield on our short-term, liquid assets than
our holdings in bank overnight deposits and money market funds, but taking only
limited credit and interest rate risk. As of March 31, 2003, we had invested a
total of $24.2 million in this fund. At March 31, 2003, the 475 issues in this
fund had an average credit rating of Aa3, an average maturity of 2.5 years and
an average duration of 2.0 years, as well as an average yield of 3.73%. We had
no debt as of March 31, 2003 or December 31, 2002. For the
13
three months ended March 31, 2003, we generated $13.4 million from operating
activities compared to $11.4 million for the same period in 2002. Capital
expenditures were $0.7 million for the three months ended March 31, 2003
compared to $12.8 million for the same period in 2002, $12.0 million of which
was for the purchase of three existing campus facilities.
In the first quarter 2003, we also paid $1.5 million in dividends, $0.8 million
to our preferred stockholders and $0.7 million to our common stockholders.
For the first quarter 2003, bad debt expense as a percentage of revenue was 1.6%
compared to 1.5% for the same period in 2002. Days sales outstanding, adjusted
to exclude tuition receivable related to future quarters, was seven days at the
end of the first quarter 2003, compared to six days for the same period in 2002.
Currently, the Company invests its cash in bank overnight deposits, money market
funds and a short-term corporate bond fund. In addition, the Company has
available two $10 million credit facilities from two banks. The Company believes
that existing cash, cash equivalents, and marketable securities, cash generated
from operating activities, and if necessary, cash borrowed under the credit
facilities, will be sufficient to meet the Company's requirements for at least
the next 12 months.
The table below sets forth our contractual commitments associated with operating
leases and preferred stock cash dividends as of March 31, 2003. Although they
have historically been paid by the Company, common stock dividend payments are
not a contractual commitment and, therefore, have been excluded from this table.
Payments Due By Period (In Thousands)
-------------------------------------------------------------------
Within 1 Year 2-3 Years 4-5 Years After 5 Years
------------- --------- --------- -------------
Operating Leases $5,231 $8,626 $5,966 $ 13,815
Preferred Stock Cash Dividends 3,257 6,514 6,627 11,382
---------- --------- --------- ----------
Total $8,488 $15,140 $12,593 $ 25,197
========== ========= ========= ==========
CAMPUSES
Due to earlier than expected favorable action by the Tennessee Higher Education
Commission, the Company announced its intention to accelerate the opening of
campuses in both the Memphis and Nashville markets to the spring 2003 term.
These campus facilities are now up and running. The Company also intends to open
a second campus in the Raleigh-Durham, North Carolina area for the summer term
2003. In addition, the Company received approval from the Pennsylvania State
Department of Education to open two campuses in the city of Philadelphia. Due to
this earlier than expected action, the Company intends to accelerate its opening
of two campuses in the city of Philadelphia to fall term 2003 from summer term
2004.
PROGRAMS
The Company applied for approval from the Middle States Commission on Higher
Education to offer three new master's degree programs: Master of Education,
Master of Public Administration and Master of Health Services Administration.
The Master of Education degree is designed for both teachers and administrators.
Strayer's Master of
14
Public Administration program would apply competencies gained from the
University's business programs to the public sector. The Master of Health
Services Administration degree would prepare graduates with the business
knowledge and skills necessary to assume managerial positions in health services
organizations. Pending receipt of specific state approvals, the Company intends
to offer all three programs by early 2004.
TOTAL POTENTIAL SHARE ISSUANCE
Shares used to compute diluted earnings per share include common shares issued
and outstanding, the assumed conversion of Series A Convertible Redeemable
Preferred Stock outstanding, and the assumed exercise of issued stock options
using the Treasury Stock Method. Our total current and potential common shares
outstanding are as follows:
Current
Common shares issued and outstanding at 3/31/03..................... 10,652,412
Series A Convertible Redeemable Preferred Stock, convertible on a
1:1 basis (outstanding or recorded) at 3/31/03.................. 3,792,913
Issued stock options using Treasury Stock Method.................... 193,243
-----------
Total current................................................. 14,638,568
-----------
Potential
Accrual of required PIK dividends on Series A Convertible
Redeemable Preferred Stock through May 2006..................... 529,044 (a)
Total issued stock options, less options accounted for using
the Treasury Stock Method above................................. 1,011,757
Authorized but unissued options 344,405
-----------
Total potential............................................... 1,885,206
-----------
Total current and potential common shares..................... 16,523,774
===========
------------------------
(a) This number may be smaller as it does not reflect that the Company
has the right to force conversion of all remaining Series A preferred
shares into common shares after May 15, 2004 if the Company's common
stock price trades above $52.00 per share for twenty consecutive
trading days.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and may be exposed
to changes in the market values of its future investments. The Company invests
its excess cash in bank overnight deposits, money market funds and a short-term
corporate bond fund. The Company has not used derivative financial instruments
in its investment portfolio.
Earnings from investments in bank overnight deposits, money market mutual funds,
and short-term corporate bond funds may be adversely affected in the future
should interest rates decline. The Company's future investment income may fall
short of expectations
15
due to changes in interest rates or the Company may suffer losses in principal
if forced to sell securities that have declined in market value due to changes
in interest rates. As of March 31, 2003, a 10% increase or decline in interest
rates will not have a material impact on the Company's future earnings, fair
values, or cash flows related to investments in cash equivalents or interest
earning marketable securities.
ITEM 4: CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Registrant's Chief Executive
Officer and Chief Financial Officer have evaluated the Registrant's
disclosure controls and procedures within the 90 days prior to the date of
filing of this Quarterly Report on Form 10-Q. Based upon such review, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Registrant has in place appropriate controls and procedures designed to
ensure that information required to be disclosed by the Registrant in the
reports it files or submits under the Securities Exchange Act of 1934, as
amended, and the rules thereunder, is recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in reports it files or submits under the Securities
Exchanges Act is accumulated and communicated to the Registrant's
management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
(b) Internal controls. Since the date of the evaluation described above, there
have not been any significant change in our internal accounting controls or
in other factors that could significantly affect those controls.
16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
Exhibit 99.01:
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K:
On January 6, 2003, the Registrant filed a Current Report on Form 8-K
announcing its approval to offer academic programs in Tennessee.
On March 14, 2003, the Registrant filed a Current Report on Form 8-K
announcing that it had declared its regular quarterly common stock
dividend for the first quarter in the amount of $0.065 per share payable
on April 22, 2003 to all holders of record on April 8, 2003.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
statement is being signed by a duly authorized officer of the Registrant and in
the capacity as the principal financial officer.
STRAYER EDUCATION, INC.
By: /s/ Mark C. Brown
-----------------------
Mark C. Brown
Senior Vice President and Chief Financial Officer
Date: May 12, 2003
18
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
CERTIFICATIONS
I, Robert S. Silberman, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Strayer Education,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process,
19
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 12, 2003
/s/ Robert S. Silberman
-----------------------------
Robert S. Silberman
President and Chief Executive
Officer
20
I, Mark C. Brown, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Strayer Education,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
21
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 12, 2003
/s/ Mark C. Brown
-----------------------------
Mark C. Brown
Senior Vice President and
Chief Financial Officer
22
- -------------------------------------------------------------------------------
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ----------- ------------------------
99.01 Certifications Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- -------------------------------------------------------------------------------
23
Exhibit 99.01
CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002
CERTIFICATIONS
The undersigned Chief Executive Officer of Strayer Education, Inc. (the
"Registrant") hereby certify that this periodic report on Form 10-Q fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such periodic report fairly
presents, in all material respects, the financial condition and results of
operations of the Registrant.
/s/ Robert S. Silberman
-----------------------------
Robert S. Silberman
President and Chief Executive
Officer
Date: May 12, 2003
The undersigned Chief Financial Officer of Strayer Education, Inc. (the
"Registrant") hereby certify that this periodic report on Form 10-Q fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such periodic report fairly
presents, in all material respects, the financial condition and results of
operations of the Registrant.
/s/ Mark C. Brown
-----------------------------
Mark C. Brown
Senior Vice President and
Chief Financial Officer
Date: May 12, 2003
24