Back to GetFilings.com
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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (I.R.S. Employer
or 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 / /
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES /X/ NO/ /.
AS OF OCTOBER 31, 2003, THERE WERE OUTSTANDING 10,735,745 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE OF THE REGISTRANT.
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 September 30, 2003................... 3
Unaudited Condensed Consolidated Statements of Income
for the three and nine month periods ended September 30,
2002 and 2003.............................................. 4
Unaudited Condensed Consolidated Statements of
Comprehensive Income for the three and nine month periods
ended September 30, 2002 and 2003.......................... 4
Unaudited Condensed Consolidated Statements of Cash
Flows for the nine month periods ended September 30,
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.............. 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................ 18
Item 4. Controls and Procedures.................................... 19
PART II-- OTHER INFORMATION
Items 1-6, Exhibits and Reports on Form 8-K........................ 20
SIGNATURES........................................................... 21
2
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
December 31, September 30,
2002 2003
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents............................................. $49,135 $63,935
Marketable securities available for sale, at fair value............... 18,121 26,033
Income taxes receivable............................................... -- 2,210
Tuition receivable, net of allowances for doubtful accounts........... 25,759 36,772
Student loans receivable, net of allowances for losses - held for
sale................................................................ -- 9,672
Other current assets.................................................. 773 1,338
----------------- ----------------
Total current assets.............................................. 93,788 139,960
Student loans receivable, net of allowances for losses................... 9,453 --
Property and equipment, net.............................................. 36,571 34,307
Restricted cash.......................................................... -- 500
Other assets............................................................. 312 369
----------------- ----------------
Total assets...................................................... $140,124 $175,136
================= ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 3,534 $ 4,392
Accrued expenses...................................................... 1,181 1,582
Income taxes payable.................................................. 1,812 --
Dividends payable..................................................... 1,507 1,512
Unearned tuition...................................................... 29,853 42,939
----------------- ----------------
Total current liabilities........................................ 37,887 50,425
Deferred income taxes.................................................... 70 158
Long-term liabilities.................................................... 1,985 2,194
----------------- ----------------
Total liabilities................................................ 39,942 52,777
----------------- ----------------
Commitments and contingencies
Mandatorily redeemable convertible Series A preferred stock,
par value $.01; 6,000,000 shares authorized; 3,758,456 and
3,863,644 shares issued and outstanding at December 31, 2002
and September 30, 2003, respectively............................... 93,807 95,207
Stockholders' equity:
Common stock, par value $.01; 20,000,000 shares
authorized; 10,652,412 and 10,735,745 shares issued and outstanding
at December 31, 2002 and September 30, 2003, respectively......... 107 107
Additional paid-in capital............................................ 58,868 63,059
Retained earnings (accumulated deficit)............................... (52,674) (36,034)
Accumulated other comprehensive income................................ 74 20
----------------- ----------------
Total stockholders' equity...................................... 6,375 27,152
----------------- ----------------
Total liabilities and stockholders' equity...................... $140,124 $175,136
================= ================
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 For the nine months
ended September 30, ended September 30,
--------------------------- ----------------------------
2002 2003 2002 2003
------------- ------------- ------------- -------------
Revenues $23,026 $29,993 $82,547 $103,652
------------- ------------- ------------- -------------
Costs and expenses:
Instruction and educational support............. 9,770 12,236 29,768 38,324
Selling and promotion........................... 5,044 7,104 12,537 16,940
General and administration...................... 4,254 5,085 12,757 14,687
------------- ------------- ------------- -------------
19,068 24,425 55,062 69,951
Gain on sale of assets.......................... -- 1,772 -- 1,772
------------- ------------- ------------- -------------
Income from operations................... 3,958 7,340 27,485 35,473
Investment and other income......................... 484 688 1,242 1,850
------------- ------------- ------------- -------------
Income before income taxes............... 4,442 8,028 28,727 37,323
Provision for income taxes........................... 1,732 3,174 11,203 14,753
------------- ------------- ------------- -------------
Net income................................ 2,710 4,854 17,524 22,570
Preferred stock dividends and accretion.............. 2,035 1,287 6,076 3,843
------------- ------------- ------------- -------------
Net income available to common
stockholders.............................. $ 675 $3,567 $11,448 $18,727
============= ============= ============= =============
Basic net income per share........................... $ 0.08 $0.33 $ 1.37 $ 1.75
============= ============= ============= =============
Diluted net income per share......................... $ 0.19 $0.32 $ 1.21 $ 1.53
============= ============= ============= =============
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
For the three months For the nine months
ended September 30, ended September 30,
------------------------------- ---------------------------------
2002 2003 2002 2003
-------------- ------------- --------------- --------------
Net income............................................. $ 2,710 $ 4,854 $ 17,524 $ 22,570
Other comprehensive income:
Change in unrealized gain (loss) on investments,
net of taxes................................. 73 (222) 45 (54)
------------- ------------- -------------- ----------------
Comprehensive income................................... $ 2,783 $ 4,632 $ 17,569 $ 22,516
============= ============= ============== ================
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 nine months ended September 30,
----------------------------------------------
2002 2003
--------------------- -------------------
Cash flow from operating activities:
Net income................................................. $ 17,524 $ 22,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of marketable securities................. -- (135)
Gain on sale of property and equipment................ -- (1,772)
Amortization of deferred rent......................... (165) 198
Depreciation and amortization......................... 2,652 3,235
Provision for student loan losses..................... 163 141
Deferred income taxes................................. 76 1
Changes in assets and liabilities:
Tuition receivable, net............................... (8,623) (11,013)
Other current assets.................................. (956) (444)
Restricted cash....................................... -- (500)
Other assets.......................................... (74) (57)
Accounts payable...................................... 1,891 858
Accrued expenses...................................... 357 401
Income taxes payable.................................. (3,741) (2,638)
Unearned tuition...................................... 11,324 13,086
Student loans originated................................... (6,433) (6,460)
Collections on student loans receivable.................... 5,411 6,100
--------------------- -------------------
Net cash provided by operating activities......... 19,406 23,571
--------------------- -------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment.............. -- 5,150
Proceeds from sale of marketable securities............... -- 26,135
Purchases of property and equipment....................... (16,082) (4,349)
Purchases of marketable securities........................ (12,000) (34,000)
--------------------- -------------------
Net cash used in investing activities............. (28,082) (7,064)
--------------------- -------------------
Cash flows from financing activities:
Deferred lease incentives................................. 1,313 11
Common dividends paid..................................... (1,628) (2,080)
Preferred dividends paid.................................. (3,937) (2,445)
Proceeds from exercise of stock options................... -- 2,807
Issuance cost of preferred stock.......................... (29) --
--------------------- -------------------
Net cash used in financing activities............. (4,281) (1,707)
--------------------- -------------------
Net increase (decrease) in cash and cash equivalen (12,957) 14,800
Cash and cash equivalents - beginning of period.............. 58,705 49,135
--------------------- -------------------
Cash and cash equivalents - end of period.................... $ 45,748 $ 63,935
===================== ===================
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 SEPTEMBER 30, 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 and nine months ended September 30,
2003 are not necessarily indicative of the results to be expected for the full
fiscal year. All information as of September 30, 2003, and for the three and
nine months ended September 30, 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-five campuses in Maryland, North Carolina, Pennsylvania,
Tennessee, Virginia and Washington, D.C. and worldwide via the Internet through
Strayer University Online. ELP provides student loans for the University's
students.
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 For the nine months
ended September 30, ended September 30,
---------------------------------- --------------------------------
(in thousands) (in thousands)
2002 2003 2002 2003
---------------- ----------------- ----------------- --------------
Weighted average shares outstanding
used to compute basic net income per share... 8,352 10,727 8,352 10,682
Incremental shares issuable upon the
assumed conversion of preferred stock........ 6,004 3,864 5,951 3,828
Incremental shares issuable upon the
assumed exercise of stock options............ 200 378 182 286
---------------- ----------------- ----------------- --------------
Shares used to compute diluted net income
per share.................................... 14,556 14,969 14,485 14,796
================ ================= ================= ==============
Set forth below is a reconciliation of net income used to compute net income per
share:
For the three months For the nine months
ended September 30, ended September 30,
------------------------------- ---------------------------------
(in thousands) (in thousands)
2002 2003 2002 2003
---------------- ------------- ---------------- ---------------
Net income available to common stockholders used
to compute basic net income per share.... $ 675 $ 3,567 $ 11,448 $18,727
Plus: Impact of assumed preferred stock
conversion:
Preferred stock dividends and
accretion............................. 2,035 1,287 6,076 3,843
---------------- ------------- ---------------- ---------------
Net income used to compute diluted net income
per share..................................... $ 2,710 $ 4,854 $ 17,524 $22,570
================ ============= ================ ===============
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 September 30,
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 September 30, 2003, the Company had
10,652,412 and 10,735,745 shares of common stock issued and outstanding,
respectively. For the three months ended September 30, 2003, the Company
declared a quarterly cash dividend of $0.065 per common share. The dividend
was payable on October 21, 2003 to common stockholders of record on October
7, 2003.
Preferred Stock/Series A Convertible Redeemable Preferred Stock
A total of 8,000,000 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 September 30, 2003:
7
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
Dividends - accrue in-kind shares............... 927
Accretion of carrying value..................... (461)
------------
Balance, June 30, 2003.......................... $ 94,733
Dividends - accrue in-kind shares............... 944
Accretion of carrying value..................... (470)
------------
Balance, September 30, 2003..................... $ 95,207
============
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. On July 1, 2003, the Company recorded 35,673 shares of Series
A Convertible Redeemable Preferred Stock as accrued in-kind dividends and
paid a quarterly cash divided 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% accruing 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 are 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 option
prices based at or above the fair market value of the shares at the date of
grant. Vesting provisions are at the
8
discretion of the Board of Directors. The maximum term of options granted
under the Plan is 10 years.
The table below sets forth the stock option activity for the nine months
ended September 30, 2003:
Weighted-Average
Number of shares Exercise Price
------------------- -------------------
Balance, December 31, 2002................................. 970,000 $37.09
Grants..................................................... 245,000 $54.19
Exercises.................................................. (83,333) $33.69
Forfeitures................................................ -- --
---------- ---------
Balance, September 30, 2003................................ 1,131,667 $41.05
========== =========
Of the 1,131,667 total stock options that have been issued and are
outstanding, 506,662 are exercisable as of September 30, 2003. A total of
334,405 shares remain authorized but unissued under the Plan. As of
September 30, 2003, the weighted average contractual life of outstanding
stock options is 4.7 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 For the nine months ended
September 30, September 30,
----------------------------- ----------------------------
2002 2003 2002 2003
---- ---- ---- ----
In thousands (except per share)
Net income........................................... $ 2,710 $ 4,854 $ 17,524 $ 22,570
Stock-based compensation expense, net of tax 623 849 1,842 2,983
---------- --------- --------- ---------
Pro forma net income................................. $ 2,087 $ 4,005 $ 15,682 $ 19,587
========== ========= ========= =========
Net income available to common stockholders $ 675 $ 3,567 $ 11,448 $ 18,727
Stock-based compensation expense, net of tax 623 849 1,842 2,983
---------- --------- --------- ---------
Pro forma net income available to common
stockholders......................................... $ 52 $ 2,718 $ 9,606 $ 15,744
========== ========= ========= =========
Net income per share:
As reported:
Basic...................................... $0.08 $0.33 $1.37 $1.75
Diluted.................................... $0.19 $0.32 $1.21 $1.53
Pro forma:
Basic...................................... $0.01 $0.25 $1.15 $1.47
Diluted.................................... $0.14 $0.27 $1.08 $1.32
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:
9
2002 2003
---- ----
Dividend yield........................................ 0.5% 0.5%
Risk-free interest rates.............................. 4.8% 3.0%
Volatility............................................ 43% 40%
Expected option term (years).......................... 5.9 5.2
Weighted average fair value of options granted during
the year ............................................. $23.65 $21.88
6. INVESTMENTS IN MARKETABLE SECURITIES
In the third quarter of 2003, as part of its cash management activities, the
Company liquidated its $26.1 million investment in a diversified, no load,
short-term, investment grade corporate bond fund. This transaction resulted in a
$0.1 million gain before tax on the sale of these marketable securities. Most of
the proceeds from the sale were re-invested in a diversified, short-term,
investment grade tax exempt 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
December 31, 2002 did not have a material impact on the consolidated financial
statements.
10
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting For Certain Financial Instruments with Characteristics of Both
Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 established standards for
how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003 and must be applied
prospectively by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
The adoption of SFAS No. 150 did not have a material impact on the consolidated
financial statements.
8. SALE OF THE WASHINGTON, D.C. CAMPUS BUILDING
During the third quarter of 2003, the Company sold its Washington, D.C. campus
building for $5,150,000, realizing a gain on the sale of $1,772,000 before tax.
The company will be relocating its Washington, D.C. campus to a nearby leased
facility described in Note No. 9 below.
9. LEASE AGREEMENTS
During the third quarter of 2003, the Company executed a lease agreement for the
relocation and consolidation of its Washington, D.C. campus to the existing
Library/Annex location nearby. The table below sets forth additional information
regarding the lease:
Lease Commencement Average Annual
Campus Square Feet Date Term Payment
- --------------------------------- ------------- ------------------ ------------ ----------------
Washington, D.C. 37,000 12/01/03 138 months $896,000
10. LONG-TERM LIABILITY
In conjunction with the opening of new campuses 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 $1,313,000. There was $11,000 in
reimbursements during the three and nine months ended September 30, 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.
11. SALE OF STUDENT LOAN PORTFOLIO
In the fourth quarter 2003, the Company sold its student loan portfolio to a
national student loan marketing organization. Strayer will continue to originate
student loans but will periodically divest these at various prices based on
market conditions. The student loans receivable, net of allowances for losses,
are classified as held for sale at September 30, 2003.
11
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 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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Enrollment. Enrollment at Strayer University for the 2003 summer term,
which began June 30, 2003 and ended September 15, 2003, increased 25% to 13,928
students compared to 11,171 for the same term in 2002. Across the Strayer
University campus network, new student enrollments increased 31% and continuing
student enrollments increased 24%. Students taking 100% of their classes at
Strayer University Online increased 68% to 6,082 students from 3,612. The total
number of students taking any courses online (including students at brick and
mortar campuses taking at least one online course) in the summer 2003 quarter
was 7,503.
12
STUDENT ENROLLMENT
------------------
Summer Summer %
2002 2003 Change
------------ ------------ ------------------
New Campuses (9 in operation 3 or less years)
Campus Based Students 406 1,106 172%
Online Based Students 354 1,137 221%
------------ ------------
Total New Campus Students 760 2,243 195%
------------ ------------
Mature Campuses (14 in operation 4 or more years)
Campus Based Students 7,153 6,740 -6%
Online Based Students 2,591 3,834 48%
------------ ------------
Total Mature Campus Students 9,744 10,574 9%
------------ ------------
Out-of-Area Online Students 667 1,111 67%
------------ ------------
Total University Enrollment 11,171 13,928 25%
============ ============
Total Students Taking 100% Courses Online 3,612 6,082 68%
Total Students Taking At Least 1 Course Online 4,527 7,503 66%
Revenues. Revenue increased 30% from $23.0 million in the third quarter of
2002 to $30.0 million in the third quarter of 2003, principally due to a 25%
increase in student enrollments and a 5% tuition increase effective for 2003.
Instruction and educational support expenses. Instruction and educational
support expenses increased $2.5 million, or 25%, from $9.8 million in the third
quarter of 2002 to $12.2 million in the third quarter of 2003. This increase was
principally due to the direct costs necessary to support the increase in student
enrollments including faculty compensation, related academic staff salaries,
campus facility costs and financial aid processing costs. These costs as a
percentage of revenues decreased to 40.8% in the third quarter of 2003 from
42.4% in the third quarter of 2002 as strong revenue growth more than offset the
cost increases described above.
Selling and promotion expenses. Selling and promotion expenses increased
$2.1 million, or 41%, from $5.0 million in the third quarter of 2002 to $7.1
million in the third quarter of 2003. This increase was principally due to
marketing expenses associated with opening three new campuses, two in
Pennsylvania for fall term 2003 and one in North Carolina for summer term 2003,
as well as ongoing marketing expenses for the two new campuses opened in
Tennessee for the spring term 2003. The addition of admissions representatives
at these new campuses and at Strayer University Online also contributed to the
increase. These expenses
13
as a percentage of revenues increased to 23.7% in the third quarter of 2003 from
21.9% in the third quarter of 2002 as a result of the aforementioned factors.
General and administration expenses. General and administration expenses
increased $0.8 million, or 20%, from $4.3 million in the third quarter of 2002
to $5.1 million in the third quarter of 2003. This increase was principally due
to increased employee compensation and related expenses as well as the addition
of five new campuses, two in Tennessee for the spring term 2003, one in North
Carolina for the summer term 2003 and two in Pennsylvania for the fall term
2003. Higher bad debt expense also contributed to this increase. General and
administrative expenses as a percentage of revenues decreased to 17.0% in the
third quarter of 2003 from 18.5% in the third quarter of 2002 primarily due to
greater revenues being spread over the fixed costs of various centralized
functions.
Gain on sale of assets. In the third quarter of 2003, the Company sold its
Washington, D.C. campus building for $5.2 million and signed a lease for space
in a nearby building. This transaction resulted in a gain of $1.8 million before
tax.
Income from operations. Operating income increased $3.3 million, or 85%,
from $4.0 million in the third quarter 2002 to $7.3 million in the third quarter
of 2003. The increase was due to the aforementioned factors. Excluding the gain
from the sale of the Washington, D.C. campus building, operating income
increased $1.6 million, or 41%, to $5.6 million.
Investment and other income. Investment and other income increased $0.2
million, or 42%, from $0.5 million in the third quarter of 2002 to $0.7 million
in the third quarter of 2003. The increase was principally due to a higher level
of investments in marketable securities and a $0.1 million gain before tax
realized on the sale of marketable securities. The Company also had, on average,
a higher cash balance.
Net income. Net income was $4.9 million in the third quarter of 2003
compared to $2.7 million for the same period in 2002, an increase of $2.1
million, or 79%, because of factors discussed above. In addition to the above,
management believes it is important to provide investors with the Company's net
income excluding the $1.1 million gain (based on the statutory tax rate) on the
sale of the Washington, D.C. campus building since this transaction is a
non-recurring item. Excluding the $1.1 million gain, net income was $3.8 million
in the third quarter of 2003, an increase of 40% compared to the same period in
2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
Revenues. Revenue increased 26% from $82.5 million in the nine months ended
September 30, 2002 to $103.7 million in the nine months ended September 30,
2003, principally due to an average 20% increase in student enrollments and a 5%
tuition increase effective for 2003.
Instruction and educational support expenses. Instruction and educational
support expenses increased $8.6 million, or 29%, from $29.8 million in the nine
months ended September 30, 2002 to $38.3 million in the nine months ended
September 30, 2003. This increase was principally due to the direct costs
necessary to support the increase in student enrollments including faculty
compensation, related academic staff salaries, campus facility costs and
financial aid processing costs. These costs as a percentage of revenues
increased to 37.0% in the nine months ended September 30, 2003 from 36.1% in the
nine months ended
14
September 30, 2002 primarily due to the earlier timing of two new campus
openings in 2003 as compared to 2002, as well as the increase of the total
number of new campus openings to five in 2003 compared to three in 2002.
Selling and promotion expenses. Selling and promotion expenses increased
$4.4 million, or 35%, from $12.5 million in the nine months ended September 30,
2002 to $16.9 million in the nine months ended September 30, 2003. This increase
was principally due to marketing expenses associated with opening five new
campuses - two in Tennessee for spring term 2003, one in North Carolina for
summer term 2003, and two in Pennsylvania for fall term 2003. 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 16.3% in the nine months ended September 30, 2003 from
15.2% in the nine months ended September 30, 2002 as a result of the
aforementioned factors.
General and administration expenses. General and administration expenses
increased $1.9 million, or 15%, from $12.8 million in the nine months ended
September 30, 2002 to $14.7 million in the nine months ended September 30, 2003.
This increase was principally due to increased employee compensation and related
expenses as well as the addition of five new campuses in 2003 and the ongoing
general and administration expenses related to the three new campuses opened for
summer term 2002. General and administrative expenses as a percentage of
revenues decreased to 14.2% for the nine months ended September 30, 2003 from
15.5% in the nine months ended September 30, 2002 primarily due to greater
revenues being spread over the fixed costs of various centralized functions.
Gain on sale of assets. In the third quarter of 2003, the Company sold its
Washington, D.C. campus building for $5.2 million and signed a lease for space
in a nearby building. This transaction resulted in a gain of $1.8 million before
tax.
Income from operations. Operating income increased $8.0 million, or 29%,
from $27.5 million in the third quarter 2002 to $35.5 million in the third
quarter of 2003. The increase was due to the aforementioned factors. Excluding
the gain from the sale of the Washington, D.C. campus building, operating income
increased $6.2 million, or 23%, to $33.7 million.
Investment and other income. Investment and other income increased $0.6
million, or 49%, from $1.2 million in the nine months ended September 30, 2002
to $1.8 million in the nine months ended September 30, 2003. The increase was
principally due to a higher level of investments in marketable securities and a
$0.1 million gain before tax on the sale of marketable securities. The Company
also had, on average, a higher cash balance.
Net income. Net income was $22.6 million in the nine months ended September
30, 2003 compared to $17.5 million for the same period in 2002, an increase of
$5.1 million, or 29%, because of factors discussed above. In addition to the
above, management believes it is important to provide investors with the
Company's net income excluding the $1.1 million gain (based on the statutory tax
rate) on the sale of the Washington, D.C. campus building since this transaction
is a non-recurring item. Excluding the $1.1 million gain from the sale of the
Washington, D.C. campus building, net income was $21.5 million in the nine
months ended September 30, 2003, an increase of $4.0 million or 23% compared to
the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had cash, cash equivalents and marketable securities
of $90.0 million compared to $67.3 million at December 31, 2002 and $56.8
million at September 30,
15
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. In the third quarter of 2003, this $26.1
million investment was liquidated generating a gain from sale of marketable
securities of $0.1 million before tax. Most of the proceeds were re-invested in
a diversified, short-term, investment grade tax-exempt bond fund to further
reduce the Company's interest rate risk and to benefit from the tax efficiency
of the fund's underlying securities. As of September 30, 2003, we had a total of
$26.0 million invested in this fund. At September 30, 2003, the 452 issues in
this fund had an average credit rating of AA+, an average maturity of 438 days
and an average duration of 1.1 years, as well as an average yield to maturity of
1.5%. We had no debt as of December 31, 2002 or September 30, 2003.
For the nine months ended September 30, 2003, we generated $23.6 million net
cash from operating activities compared to $19.4 million for the same period in
2002. Capital expenditures were $4.3 million for the nine months ended September
30, 2003 compared to $16.1 million for the same period in 2002, $12.0 million of
which was for the purchase of three existing campus facilities. In the third
quarter of 2003, proceeds of $5.2 million were received for the sale of our
Washington, D.C. campus. For the nine months ended September 30, 2003, we paid
$4.5 million in cash dividends - $2.4 million to our preferred stockholders and
$2.1 million to our common stockholders.
For the third quarter 2003, bad debt expense as a percentage of revenue was 1.7%
compared to 1.3% 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 third quarter 2002 and 2003.
Currently, the Company invests its cash in bank overnight deposits, money market
funds and a short-term tax-exempt 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 September 30, 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 $6,285 $12,400 $9,629 $26,926
Preferred Stock Cash Dividends 3,257 6,456 6,742 9,697
---------- --------- ----------- -----------
Total $9,542 $18,856 $16,371 $36,623
========== ========= =========== ===========
NEW CAMPUS/NEW STATE OPENINGS
Philadelphia, Pennsylvania
Strayer University successfully opened its two campuses in the Philadelphia area
for the fall 2003 term, completing its goal of opening five new campuses in
2003.
16
Georgia
Strayer University has obtained approval from Georgia's Nonpublic Postsecondary
Education Commission to open two campuses in the Atlanta area in 2004.
PBS JOINT VENTURE
Strayer University has entered into an agreement with the Public Broadcasting
Service (PBS) to offer certain PBS courses in the form of continuing education
units (CEUs), not for college credit, through Strayer University Online. Strayer
University Online will be marketed by PBS through its various media and on its
web site. Strayer University will offer the PBS courses starting in January
2004.
FISCAL YEAR 2001 COHORT DEFAULT RATE
During the third quarter of 2003, the Company was notified by the U.S.
Department of Education that its Cohort Default Rate for fiscal year 2001 (the
most recent annual period for which data is available) declined to 4.3% from
4.7% for the fiscal year 2000.
SHARE REPURCHASE PLAN
The Company's Board of Directors has authorized the Company to repurchase up to
an aggregate of $15 million in value of the Common Stock over the next 14 months
in open market purchases from time to time at the discretion of the Company's
management, depending on market conditions and other corporate considerations.
The Company intends to effect such purchases, if any, in compliance with Rule
10b-18 under the Securities Exchange Act of 1934, as amended. This share
Repurchase Plan may be modified, suspended or terminated at any time by the
Company without notice.
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:
17
Shares
------------------
(in thousands)
Current
-------
Weighted average common shares outstanding for the three months
ended 9/30/03 ........................................................... 10,727
Series A Convertible Redeemable Preferred Stock, convertible on a
1:1 basis (outstanding or recorded) at 9/30/03........................... 3,864
Issued stock options using Treasury Stock Method............................. 378
-------------
Total current.......................................................... 14,969
-------------
Potential
---------
Accrual of required PIK dividends on Series A Convertible
Redeemable Preferred Stock through May 2006.............................. 458 (a)
Total issued stock options, less options accounted for using
the Treasury Stock Method above.......................................... 763
Authorized but unissued options 334
-------------
Total potential........................................................ 1,555
-------------
Total current and potential common shares.............................. 16,524
=============
-------------------------
(a) This number may be smaller as it does not reflect that the Company has
the right to cause 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.
Of the 458,000 shares, 130,000 would potentially accrue through May 15,
2004.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is subject to the impact of interest rate changes and may be subject
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
tax-exempt 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 tax-exempt bond funds may be adversely affected in the future
should interest rates decline. The Company's future investment income may fall
short of expectations due to changes in interest rates or the Company may suffer
losses in principal if forced to sell securities that have declined in market
value due to changes in interest rates. As of September 30, 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.
18
ITEM 4: CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Registrant's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the
Registrant's disclosure controls and procedures as of September 30, 2003.
Based upon such evaluation, 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 Over Financial Reporting. There have not been any changes
in the Company's internal controls over financial reporting during the
quarter ended September 30, 2003 that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls
over financial reporting.
19
>
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 31.01
Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 31.02
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.01
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b) Reports on Form 8-K:
On August 1, 2003, the Registrant filed a Current Report on Form
8-K announcing its Second Quarter 2003 financial results.
On September 4, 2003, the Registrant filed a Current Report on
Form 8-K announcing that it had declared its regular quarterly
common stock dividend for the third quarter in the amount of
$0.065 per share payable on October 21, 2003 to all holders of
record on October 7, 2003.
20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is being signed by a duly authorized officer of the Registrant and in such
officer's 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: November 3, 2003
21
EXHIBIT INDEX
Exhibit Description
- ------- -----------
31.01 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.02 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.01 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
22