STRAYER EDUCATION INC - 10-Q Quarterly Report

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, 2004
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 Identification
organization) 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 22, 2004, THERE WERE OUTSTANDING 14,669,437 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, 2003 and September 30, 2004......................................... 3

Unaudited Condensed Consolidated Statements of Income
for the three and nine month periods ended September 30, 2003 and 2004........... 4

Unaudited Condensed Consolidated Statements of Comprehensive
Income for the three and nine month periods ended September 30,
2003 and 2004.................................................................... 4

Unaudited Condensed Statement of Stockholders' Equity for the nine
month period ended September 30, 2004............................................ 5

Unaudited Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 30, 2003 and 2004..................... 6

Notes to Unaudited Condensed Consolidated Financial Statements................... 7

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................... 13

Item 3. Quantitative and Qualitative
Disclosures About Market Risk.................................................... 20

Item 4. Controls and Procedures.......................................................... 20

PART II -- OTHER INFORMATION

Items 1-6 and Exhibits........................................................................ 21

SIGNATURES...................................................................................... 23

STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)

ASSETS December 31, September 30,
2003 2004
--------------- -----------------

Current assets:
Cash and cash equivalents ................................................... $ 82,089 $ 85,823
Marketable securities available for sale, at fair value ..................... 25,951 25,835
Income taxes receivable ..................................................... -- 1,259
Tuition receivable, net of allowances for doubtful accounts ................. 35,997 47,315
Student loans receivable, held for sale ..................................... 65 22
Other current assets ........................................................ 1,656 3,671
--------- ---------
Total current assets .................................................... 145,758 163,925
Property and equipment, net .................................................... 35,930 39,957
Restricted cash ................................................................ 500 500
Other assets ................................................................... 368 343
--------- ---------
Total assets ............................................................ $ 182,556 $ 204,725
========= =========

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 5,127 $ 6,402
Accrued expenses ............................................................ 2,329 1,985
Income taxes payable ........................................................ 2,898 --
Dividends payable ........................................................... 1,510 --
Unearned tuition ............................................................ 39,134 51,941
--------- ---------
Total current liabilities .............................................. 50,998 60,328
Deferred income taxes .......................................................... 228 959
Long-term liabilities .......................................................... 2,666 4,575
--------- ---------
Total liabilities ...................................................... 53,892 65,862
--------- ---------

Commitments and contingencies
Mandatorily redeemable convertible Series A preferred stock,
par value $.01; 6,000,000 shares authorized; 3,899,944
shares issued and outstanding at December 31, 2003 ....................... 95,686 --

Stockholders' equity:
Common Stock, par value $.01; 20,000,000 shares
authorized; 10,703,395 and 14,669,437 shares issued and outstanding
at December 31, 2003 and September 30, 2004, respectively ................ 107 147
Additional paid-in capital .................................................. 59,838 141,035
Retained earnings (accumulated deficit) ..................................... (26,918) (2,218)
Accumulated other comprehensive income (loss) ............................... (49) (101)
--------- ---------
Total stockholders' equity ............................................ 32,978 138,863
--------- ---------
Total liabilities and stockholders' equity ............................ $ 182,556 $204,725
========= =========

The accompanying notes are an integral part of these
consolidated financial statements.

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,
--------------------------- ---------------------------
2003 2004 2003 2004
------------ ----------- ------------ ------------

Revenues $ 29,993 $ 38,009 $ 103,652 $ 130,926
Costs and expenses:
Instruction and educational support..................... 12,236 14,889 38,324 46,613
Selling and promotion................................... 7,104 9,159 16,940 21,564
General and administrative.............................. 5,085 6,124 14,687 18,041
Gain on sale of asset........................................ 1,772 -- 1,772 --
------------ ----------- ------------ ------------
Income from operations........................... 7,340 7,837 35,473 44,708
Investment and other income................................. 688 376 1,850 1,058
------------ ----------- ------------ ------------
Income before income taxes....................... 8,028 8,213 37,323 45,766
Provision for income taxes................................... 3,174 3,123 14,753 17,808
------------ ----------- ------------ ------------
Net income........................................ 4,854 5,090 22,570 27,958
Preferred stock dividends and accretion...................... 1,287 -- 3,843 1,389
------------ ----------- ------------ ------------
Net income available to common
stockholders...................................... $ 3,567 $ 5,090 $ 18,727 $26,569
============ =========== ============ ============
Basic net income per share................................... $ 0.33 $ 0.35 $ 1.75 $ 1.99
============ =========== ============ ============
Diluted net income per share................................. $ 0.32 $ 0.34 $ 1.53 $ 1.85
============ =========== ============ ============

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,
------------------------------- -------------------------------
2003 2004 2003 2004
------------- ------------- --------------- --------------

Net income................................................. $4,854 $ 5,090 $ 22,570 $ 27,958
Other comprehensive income:
Unrealized gain (loss) on investments,
net of taxes......................................... (222) 49 (54) (52)
------------- ------------- ------------- --------------
Comprehensive income....................................... $4,632 $ 5,139 $ 22,516 $ 27,906
============= ============= ============= ==============

The accompanying notes are an integral part of these
consolidated financial statements.

STRAYER EDUCATION, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)

Common Stock Retained Accumulated
------------ Additional Earnings Other
Paid-in (Accumulated Comprehensive
Shares Amount Capital Deficit) Income Total
------ ------ ------- -------- ------ -----

Balance at 12/31/03.............................. 10,703,395 $ 107 59,838 $ (26,918) $ (49) $32,978
Exercise of stock options........................ 335,416 3 11,945 -- -- 11,948
Tax benefit from exercise of stock
options..................................... -- -- 9,855 -- -- 9,855
Issuance of common stock for
redemption of preferred stock............... 3,977,120 40 96,166 -- -- 96,206
Repurchase of common stock....................... (346,494) (3) (36,769) -- -- (36,772)
Preferred stock dividends and accretion.......... -- -- -- (1,389) -- (1,389)
Common stock dividends........................... -- -- -- (1,869) -- (1,869)
Change in net unrealized gains (losses)
on marketable securities, net of income tax -- -- -- -- (52) (52)
Net income....................................... -- -- -- 27,958 -- 27,958
---------- ------ --------- ----------- ------- --------
Balance at 9/30/04............................... 14,669,437 $ 147 $ 141,035 $ (2,218) $ (101) $ 138,863
========== ====== ========= ============ ======= =========

The accompanying notes are an integral part of these
consolidated financial statements.

STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands)

For the nine months ended September 30,
---------------------------------------
2003 2004
-------- --------

Cash flows from operating activities:
Net income.................................................................. $22,570 $27,958
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred rent.......................................... 198 442
Gain on sale of marketable securities.................................. (135) --
Gain on sale of property and equipment................................. (1,772) --
Depreciation and amortization.......................................... 3,235 3,971
Provision for student loan losses and indemnification.................. 141 (182)
Deferred income taxes.................................................. 1 (69)
Changes in assets and liabilities:
Tuition receivable, net................................................ (11,013) (11,318)
Other current assets................................................... (444) (762)
Restricted cash........................................................ (500) --
Other assets........................................................... (57) 25
Accounts payable....................................................... 858 1,275
Accrued expenses....................................................... 401 (344)
Income taxes payable................................................... (2,638) 6,271
Unearned tuition....................................................... 13,086 12,807
Student loans originated.................................................... (6,460) (1,088)
Collections on student loans receivable and held for sale................... 6,100 1,235
------- -------
Net cash provided by operating activities.......................... 23,571 40,221
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment............................... 5,150 --
Proceeds from sale of marketable equipment................................. 26,135 --
Purchases of property and equipment........................................ (4,349) (7,998)
Purchases of marketable securities......................................... (34,000) --
------- -------
Net cash used in investing activities.............................. (7,064) (7,998)
------- -------
Cash flows from financing activities:
Deferred lease incentives.................................................. 11 582
Common stock dividends paid................................................ (2,080) (2,564)
Preferred stock dividends paid............................................. (2,445) (1,684)
Repurchase of common stock ................................................ -- (36,772)
Proceeds from exercise of stock options.................................... 2,807 11,949
------- -------
Net cash used in financing activities.............................. (1,707) (28,489)
------- -------
Net increase in cash and cash equivalents.......................... 14,800 3,734
Cash and cash equivalents - beginning of period............................... 49,135 82,089
------- -------
Cash and cash equivalents - end of period..................................... $63,935 $85,823
======= =======

The accompanying notes are an integral part of these
consolidated financial statements.

STRAYER EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Information as of September 30, 2003 and 2004 and for the three-month and
nine-month periods ended September 30, 2003 and 2004 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, 2004
are not necessarily indicative of the results to be expected for the full fiscal
year. All information as of September 30, 2004, and for the three and nine
months ended September 30, 2003 and 2004 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 Company.

The Company's educational programs are offered on a quarterly basis.
Approximately 96% of the Company's revenues during the nine months ended
September 30, 2004 consisted of tuition revenue. Tuition revenue is deferred at
the time of registration and is recognized in the quarter of instruction.
Tuition revenue is shown net of any refunds, withdrawals or corporate discounts.
Beginning in the first quarter 2004, the Company began recording employee
tuition discounts and scholarships & awards as a reduction to revenue as well.
In the prior year, these items (totaling $541,000 and $1,604,000 for the three
and nine months ended September 30, 2003, respectively) were treated as an
operating expense.

Revenues also include application fees, commencement fees, placement test fees,
withdrawal fees, loan service and origination fees, and other income which are
recognized when incurred. Beginning in the first quarter 2004, the Company also
began recording textbook-related income as revenue. In the prior year, this
income ($145,000 and $383,000 for the three and nine months ended September 30,
2003, respectively) was included in Investment and other income. This change in
classification, as well as the one referenced above, had no impact on net income
and is immaterial in amount.

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, 2003.

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 thirty campuses in Pennsylvania, Maryland, Washington, D.C.,
Virginia, North Carolina, South Carolina, Tennessee, and

Georgia and worldwide via the Internet through Strayer University Online. ELP
originates student loans for the University's students, which loans are held for
sale.

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:

For the three months For the nine months
ended September 30, ended September 30,
---------------------------- --------------------------
(in thousands) (in thousands)
2003 2004 2003 2004
---------- ---------- --------------------------

Weighted average shares outstanding
used to compute basic net income per share... 10,727 14,743 10,682 13,340
Incremental shares issuable upon the
assumed conversion of preferred stock........ 3,864 -- 3,828 1,398
Incremental shares issuable upon the
assumed exercise of stock options............ 378 278 286 354
---------- ---------- ---------- ----------
Shares used to compute diluted net income
per share.................................... 14,969 15,021 14,796 15,092
========== ========== ========== ==========

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 For the nine months
ended September 30, ended September 30,
----------------------------- ---------------------------
(in thousands) (in thousands)
2003 2004 2003 2004
------------- ----------- ------------ -----------

Net income available to common stockholders used $ 3,567 $ 5,090 $ 18,727 $ 26,569
to compute basic earnings per share.............
Plus: Impact of assumed preferred stock
conversion:
Preferred stock dividends and accretion...... 1,287 -- 3,843 1,389
------------- ----------- ------------ -----------
Net income used to compute diluted net income
per share...................................... $ 4,854 $ 5,090 $ 22,570 $ 27,958
============= =========== ============ ===========

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,
2004.

5. STOCKHOLDERS' EQUITY

Secondary Offering

In the first quarter of 2004, the Company completed its previously announced
secondary offering of common stock. The Company received none of the proceeds
from the secondary offering except for proceeds related to the exercise of
options by management to fulfill the over-allotment obligation. The 3,450,000
shares sold in the offering were issued following the conversion of
convertible preferred stock (3,102,000 shares) and the partial exercise of an
option on existing shares of common stock (233,000 shares) held by New
Mountain Partners, L.P., New Mountain Strayer Trust and MidOcean Capital
Investors, L.P., as well as the exercise of options (115,000 shares) held by
certain of the Company's management.

Common Stock

A total of 20,000,000 shares of common stock, par value $0.01, have been
authorized. As of December 31, 2003 and September 30, 2004, the Company had
10,703,395 and 14,669,437 shares of common stock issued and outstanding,
respectively. Commencing in the third quarter of 2004, the Company increased
the annual common stock cash dividend to $0.50 per share or $0.125 per share
quarterly. However, with the rescheduling this year of the third quarter
dividend payment from October to December (in connection with a general
change in timing of such dividend to occur in March, June, September and
December of each year), the $0.50 per share annual dividend is being prorated
over a five month period instead of three, resulting in a dividend payment of
$0.21 per share instead of a quarterly payment of $0.125 per share.

Series A Convertible Redeemable Preferred Stock

A total of 6,000,000 shares of Series A Convertible Redeemable Preferred
Stock, par value $0.01, have been authorized. As of December 31, 2003,
3,899,944 shares of Series A Convertible Redeemable Preferred Stock were
issued and outstanding. During the nine months ended September 30, 2004, the
Company recorded 77,176 shares as accrued in-kind dividends. In March 2004,
3,102,000 shares of Series A Convertible Redeemable Preferred Stock were
converted into common stock on a 1 for 1 basis and, pursuant to the
registration rights agreement with the Company, were sold in a registered
secondary offering by the holders thereof. In June 2004, the Company
converted all of its remaining outstanding Series A Preferred Shares
(including all shares accrued thereon through June 28, 2004) on a 1 for 1
basis into common shares. The Series A Preferred Stockholders received an
aggregate of 875,120 common shares of the Company as a result of the
conversion. The following table reflects all Preferred Stock activity from
December 31, 2003 to September 30, 2004:

Series A Convertible
Redeemable Preferred
Stock
--------------------
(in thousands)

Balance, December 31, 2003..................................... $95,686
Dividends - accrued in-kind shares............................. 1,058
Shares converted into common shares............................ (96,206)
Accretion of carrying value.................................... (538)
-------
Balance, September 30, 2004.................................... $ --
=======

For a more detailed description of the terms of the Series A Convertible
Redeemable Preferred Stock, see Note 7 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2003.

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 discretion of the Board of Directors.
The maximum term of the options was five years before the amendment and ten
years after the amendment.

The table below sets forth the stock option activity for the nine months
ended September 30, 2004:

Weighted-Average
Number of shares Exercise Price
---------------- --------------

Balance, December 31, 2003........................ 1,131,667 $ 41.05
Grants............................................ 85,000 113.54
Exercises......................................... (335,416) 35.62
Forfeitures....................................... (16,667) 53.61
--------- -------
Balance, September 30, 2004....................... 864,584 $ 50.03
========= =======

Of the 864,584 total stock options that have been issued and remain
outstanding, 536,248 are exercisable as of September 30, 2004. A total of
266,072 shares remain authorized but unissued under the Plan. As of
September 30, 2004, the weighted average contractual life of outstanding
stock options is 4.0 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,
-------------------------- -------------------------
2003 2004 2003 2004
---- ---- ---- ----

In thousands (except per share data)

Net income........................................ $ 4,854 $ 5,090 $ 22,570 $ 27,958
Stock-based compensation expense, net of tax...... 849 472 2,983 1,746
-------- -------- -------- --------
Pro forma net income.............................. $ 4,005 $ 4,618 $ 19,587 $ 26,212
======== ======== ======== ========

Net income available to common stockholders....... $ 3,567 $ 5,090 $ 18,727 $ 26,569
Stock-based compensation expense, net of tax...... 849 472 2,983 1,746
-------- -------- -------- --------
Pro forma net income available to common
stockholders................................... $ 2,718 $ 4,618 $ 15,744 $ 24,823
======== ======== ======== ========

Net income per share:
As reported:
Basic................................... $ 0.33 $ 0.35 $ 1.75 $ 1.99
Diluted................................. $ 0.32 $ 0.34 $ 1.53 $ 1.85
Pro forma:
Basic................................... $ 0.25 $ 0.31 $ 1.47 $ 1.86
Diluted................................. $ 0.27 $ 0.31 $ 1.32 $ 1.74

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:

2003 2004
---- ----

Dividend yield ...................................................... 0.5% 0.24%
Risk-free interest rates ............................................ 3.0% 3.8%
Volatility .......................................................... 40% 34%
Expected option term (years) ........................................ 5.2 6.1
Weighted average fair value of options granted during the year ...... $21.88 $45.23

6. INVESTMENTS IN MARKETABLE SECURITIES

The Company's investments in marketable securities consist solely of publicly
traded securities and are recorded at fair value based on the quoted market
prices. The investments are considered "available-for-sale" as they are not held
for trading and will not be held to maturity, in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The Company records the net unrealized gains and
losses for changes in fair value as a component of accumulated other
comprehensive income in stockholders' equity (deficit). Realized gains and
losses from the sale of marketable securities are based on the specific
identification method.

7. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB issued FASB Interpretation No. 46 - An Interpretation
of ARB 51 (revised December 2003) ("FAS 46R"), Consolidation of Variable
Interest Entities. FIN 46R addresses consolidation by business enterprises of
variable interest entities. FIN 46R is effective for periods ending after March
15, 2004 and did not have a material impact on the Company's financial
statements.

8. LEASE AGREEMENTS

During 2004, the Company executed leases for new campuses as follows:

Lease Commencement Average Annual
Campus Square Feet Date Term Payment
------------------------------- ---------------- --------------------- ---------------- -----------------

Chamblee County, GA 17,000 05/15/04 128 months $339,000
Cobb County, GA 15,700 06/15/04 96 months $434,000
King of Prussia, PA 12,600 08/01/04 87 months $257,000
Tampa, FL (Tampa East) 13,900 01/01/05 87 months $231,000
Tampa, FL (Tampa West) 14,000 02/01/05 84 months $365,000

Other Properties
-------------------------------
Newington, VA 14,900 01/01/05 72 months $254,000

9. LONG-TERM LIABILITIES

Lease Incentives

In conjunction with the opening of new campuses, the Company was reimbursed by
the lessors for improvements made to the leased properties. In accordance with
Financial Accounting Standards Board Technical Bulletin No. 88-1, these
reimbursements were capitalized as leasehold improvements and a long-term
liability was established. The Company recorded $828,000 and $1,546,000 in lease
incentives for several of its campuses for the three and nine months ended
September 30, 2004. 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. As of December 31, 2003 and September 30, 2004,
the Company had deferred lease incentives of $1,513,000 and $2,744,000,
respectively.

Lease Obligations

In accordance with the FASB Technical Bulletin No. 85-3, "Accounting for
Operating Leases with Schedule Rent Increases", the Company records rent expense
on a straight-line basis over the initial term of a lease. The difference
between the rent payment and the straight-line rent expense is recorded as a
long-term liability. As of December 31, 2003 and September 30, 2004, the Company
had deferred lease obligations of $820,000 and $1,576,000, respectively.

Indemnification on the Sale of Student Loans

In 2003, the Company sold its student loan portfolio to a national student loan
marketing organization. Under the terms of the Indemnification Agreement, the
Company has provided an indemnification to the purchaser of the student loans
for claims that may arise due to loan documentation, regulatory compliance, and
loan servicing for the student loans that were sold. As of December 31, 2003 and
September 30, 2004, the Company had recorded a liability of $333,000 and
$255,000, respectively, for the indemnification.

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, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003

Enrollment at Strayer University for the 2004 summer term increased 22% to
17,028 students compared to 13,928 for the same term in 2003. Across the Strayer
University campus network, both new student enrollments and continuing student
enrollments increased 22%. Out-of-area online students increased 63%, while
students taking 100% of their classes online (including campus-based students)
increased 47%.

STUDENT ENROLLMENT

Summer Summer %
2003 2004 Change
------------- ------------ ------------

Campus Based Students:
New Campuses (13 in operation 3 or less years)
Classroom 681 1,412 107%
Online 723 1,778 146%
------------- ------------
Total New Campus Students 1,404 3,190 127%
------------- ------------

Mature Campuses (16 in operation 4 or more years)
Classroom 7,165 6,652 -7%
Online 4,248 5,370 26%
------------- ------------
Total Mature Campus Students 11,413 12,022 5%
------------- ------------

Total Campus Based Students 12,817 15,212 19%

Online Based Students (out-of-area) 1,111 1,816 63%
------------- ------------

Total Students 13,928 17,028 22%
============= ============

Total Students Taking 100% of Courses Online 6,082 8,964 47%

Total Students Taking at Least 1 Course Online 7,503 10,775 44%

Revenues. Revenues increased 27% from $30.0 million in the third quarter
of 2003 to $38.0 million in the third quarter of 2004, principally due to a 22%
increase in student enrollments and a 5% tuition increase effective for 2004.

Instruction and educational support expenses. Instruction and educational
support expenses increased $2.7 million, or 22%, from $12.2 million in the third
quarter of 2003 to $14.9 million in the third quarter of 2004. 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 39.2% in the third

quarter of 2004 from 40.8% in the third quarter of 2003 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 29%, from $7.1 million in the third quarter of 2003 to $9.2
million in the third quarter of 2004. This increase was principally due to
marketing expenses associated with opening one new campus for 2004 fall term in
Philadelphia, Pennsylvania, as well as ongoing marketing expenses for the four
other new campuses (one in Greenville, South Carolina, one in Memphis,
Tennessee, and two in Atlanta, Georgia) opened earlier in 2004. The addition of
admissions staff at these new campuses and at Strayer University Online also
contributed to the increase. These expenses as a percentage of revenues
increased to 24.1% in the third quarter of 2004 from 23.7% in the third quarter
of 2003.

General and administrative expenses. General and administrative expenses
increased $1.0 million, or 20%, from $5.1 million in the third quarter of 2003
to $6.1 million in the third quarter of 2004. This increase was principally due
to increased employee compensation and related expenses as well as the addition
of five new campuses since the third quarter of 2003. General and administrative
expenses as a percentage of revenue decreased to 16.1% in the third quarter of
2004 from 17.0% in the third quarter of 2003 as strong revenue growth more than
offset the cost increase described above.

Gain on sale of asset. 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 $0.5 million, or 7%,
from $7.3 million in the third quarter of 2003 to $7.8 million in the third
quarter of 2004. The increase was due to the aforementioned factors. Excluding
the gain from the sale of the Washington, D.C. campus building in the third
quarter of 2003, operating income for the third quarter of 2004 increased $2.3
million, or 41%. Management believes that excluding this asset sale provides a
useful indicator of the Company's underlying operating performance.

Investment and other income. Investment and other income decreased $0.3
million, or 45%, from $0.7 million in the third quarter of 2003 to $0.4 million
in the third quarter of 2004. The decrease was principally due to a shift of
underlying investments from a short-term corporate bond fund and money market
funds to a short-term tax-exempt bond fund and tax-exempt money market funds
which had lower yields, partly offset by a higher average cash balance.

Net income. Net income was $5.1 million in the third quarter of 2004
compared to $4.9 million for the same period in 2003, an increase of $0.2
million, or 5%, because of factors discussed above. The impact of the gain from
the sale of the Washington, D.C. campus building on net income was $1.1 million
in the third quarter of 2003. Excluding the gain from the third quarter of 2003,
net income for the third quarter of 2004 increased $1.3 million or 34%.
Management believes that excluding this asset sale provides a useful indicator
of the Company's underlying operating performance.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003

Revenues. Revenue increased 26% from $103.7 million in the nine months
ended September 30, 2003 to $130.9 million in the nine months ended September
30, 2004, principally due to an average 22% increase in student enrollments and
a 5% tuition increase effective for 2004.

Instruction and educational support expenses. Instruction and educational
support expenses increased $8.3 million, or 22%, from $38.3 million in the nine
months ended September 30, 2003 to $46.6 million in the nine months ended
September 30, 2004. 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 35.6% in the nine months ended September 30, 2004 from 37.0% in the
nine months ended September 30, 2003 as strong revenue growth more than offset
the cost increases described above.

Selling and promotion expenses. Selling and promotion expenses increased
$4.6 million, or 27%, from $17.0 million in the nine months ended September 30,
2003 to $21.6 million in the nine months ended September 30, 2004. This increase
was principally due to marketing expenses associated with opening five new
campuses, one in Tennessee and one in South Carolina for 2004 spring term, two
in Georgia for 2004 summer term, and one in Pennsylvania for 2004 fall term. 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 slightly to 16.5% in the nine months ended
September 30, 2004 from 16.3% in the nine months ended September 30, 2003.

General and administrative expenses. General and administrative expenses
increased $3.3 million, or 23%, from $14.7 million in the nine months ended
September 30, 2003 to $18.0 million in the nine months ended September 30, 2004.
This increase was principally due to increased employee compensation and related
expenses as well as the addition of five new campuses since September 30, 2003.
General and administrative expenses as a percentage of revenues decreased
slightly to 13.8% for the nine months ended September 30, 2004 from 14.2% for
the nine months ended September 30, 2003.

Income from operations. Operating income increased $9.2 million, or 26%,
from $35.5 million in the nine months ended September 30, 2003 to $44.7 million
in the nine months ended September 30, 2004. The increase was due to the
aforementioned factors. Excluding the gain from the sale of the Washington, D.C.
campus building from the nine months ended September 30, 2003, operating income
for the nine months ended September 30, 2004 increased $11.0 million, or 33%.
Management believes that excluding this asset sale provides a useful indicator
of the Company's underlying operating performance.

Investment and other income. Investment and other income decreased $0.8
million, or 43%, from $1.9 million in the nine months ended September 30, 2003
to $1.1 million in the nine months ended September 30, 2004. The decrease was
principally due to a shift of

underlying investments from a short-term corporate bond fund and money market
funds to a short-term tax-exempt bond fund and tax-exempt money market funds
which had lower yields, partly offset by a higher average cash balance.

Net income. Net income was $28.0 million in the nine months ended September
30, 2004 compared to $22.6 million for the same period in 2003, an increase of
$5.4 million, or 24%, because of factors discussed above. The impact of the gain
from the sale of the Washington, D.C. campus building on net income was $1.1
million in the third quarter of 2003. Excluding the gain on sale from the nine
months ended September 30, 2003, net income for the nine months ended September
30, 2004 increased $6.5 million or 30%. Management believes that excluding this
asset sale provides a useful indicator of the Company's underlying operating
performance.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2004, the Company had cash, cash equivalents and marketable
securities available for sale of $111.7 million compared to $108.0 million at
December 31, 2003 and $90.0 million at September 30, 2003. Beginning in the
third quarter of 2002, the Company began investing in a diversified no load,
short-term, investment grade corporate bond fund in an effort to generate a
somewhat higher yield on its short-term, liquid assets than its 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,
shorter 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, 2004, the Company had invested
a total of $25.8 million in this fund. At September 30, 2004, the 470 issues in
this fund had an average credit rating of Aa1, an average maturity of 1.1 years
and an average duration of 1.0 years, as well as an average yield to maturity of
1.5%.

For the nine months ended September 30, 2004, the Company generated $40.2
million in net cash from operating activities compared to $23.6 million for the
same period in 2003. The increase is largely attributable to the increase in net
income as well as lower income taxes payable resulting from tax deductions for
stock option exercises. Capital expenditures were $8.0 million for the nine
months ended September 30, 2004 compared to $4.3 million for the same period in
2003. Capital expenditures for the year ended December 31, 2004 are expected to
be in the range of $9.0 to $12.0 million.

In the nine months ended September 30, 2004, the Company also paid $4.2 million
in dividends, $1.5 million to its preferred stockholders and $2.7 million to its
common stockholders. During this period, the Company repurchased 346,494 shares
of common stock at an average price of $106.13 per share or an aggregate of
$36.8 million, utilizing its remaining share repurchase authorization. In
October 2004, the Company's Board of Directors authorized an additional $25
million for the repurchase of common stock under the existing share repurchase
program.

For the third quarter 2004, bad debt expense as a percentage of revenue was 2.5%
compared to 1.7% for the same period in 2003. Days sales outstanding, adjusted
to exclude tuition

receivable related to future quarters, was nine days at the end of the third
quarter 2004, compared to seven days for the same period in 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, under which no
amounts were outstanding as of September 30, 2004. 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.

CAMPUSES

The Company opened its third campus in the Philadelphia, Pennsylvania area for
the 2004 fall term. This new Pennsylvania campus, together with two new campuses
opened in Atlanta in the summer term and one campus opened in each of Memphis,
Tennessee and Greenville, South Carolina, completed the Company's goal of five
new campuses in 2004. Strayer University now has 30 campuses.

The Company has obtained approval from the State of Florida to open two new
campuses in the Tampa area in 2005.

COMMON STOCK CASH DIVIDEND

The Company announced in August 2004 that, commencing with the third quarter
dividend, it is increasing its annual common stock dividend to $0.50 per share
from $0.26 per share. This increase in annual dividend will result in a
quarterly dividend payment of $0.125 per share. The Company also reported that
it is changing the timing of its dividend announcements and subsequent payment
dates to correspond with its quarterly earnings releases. As a result, the 2004
third quarter dividend, which was declared on October 26, 2004, will now be paid
on December 10 instead of in October. The Company intends to make subsequent
dividend payments on a quarterly basis on March 10, June 10, September 10, and
December 10 of each year. The dividend record date will be announced in the
quarterly earnings release and will precede the dividend payment date by
approximately two weeks. With the rescheduling this year of the third quarter
dividend payment from October to December, the $0.50 annual dividend will be
prorated over a five month period instead of three, resulting in a dividend
payment of $0.21 per share on December 10, 2004 to shareholders of record as of
November 26, 2004.

TOTAL POTENTIAL SHARE ISSUANCE

The Company's total current and potential common shares outstanding are as
follows (in thousands):

Current
-------
Common shares issued and outstanding at 9/30/04 ..................... 14,669
Issued stock options using Treasury Stock Method .................... 278
-----------
Total current ................................................. 14,947
-----------

Potential
---------
Total issued stock options, less options accounted for using
the Treasury Stock Method above ................................. 587
Authorized but unissued options...................................... 266
-----------
Total potential ............................................... 853
-----------
Total current and potential common shares ..................... 15,800
===========

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 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 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, 2004, a 10% increase
or decline in interest rates would 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) 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, 2004. Based upon such review, the Chief
Executive Officer and Chief Financial Officer have concluded that the
Registrant has in place, as of September 30, 2004, effective controls and
procedures designed to ensure that information required to be disclosed by
the Registrant (including consolidated subsidiaries) 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 Exchange
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 Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting during the
quarter ended September 30, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the quarter, the Company used $15.6 million to
repurchase shares of common stock under its repurchase program
announced in November 2003. The original amount authorized for
this program was $15 million which was increased to $40 million in
May 2004 as was publicly announced. On October 26, 2004, the
Company's Board of Directors amended the Company's share
repurchase program to authorize the repurchase of an additional
$25 million in value of the Company's common stock. A summary of
the Company's share repurchases during the quarter is set forth
below:

Shares Average Price Authorization
Repurchased Per Share Remaining ($ mil)
----------------- ------------------ -------------------

Beginning Balance (at 6/30/04) $15.6

August 165,926 $94.06 (15.6)
----------------- ------------------ -------------------
Total (at 9/30/04) 165,926 $94.06 --
================= ================== ===================

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.

Exhibit 31.01
-------------

Certification of Chief Executive Officer pursuant to Rule 13a
-14(a) of the Securities Exchange Act.

Exhibit 31.02
-------------

Certification of Chief Financial Officer pursuant to Rule 13a -
14(a) of the Securities Exchange Act.

Exhibit 32.01
-------------

Certification pursuant to Rule 13b - 14(b) of the Securities
Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.

STRAYER EDUCATION, INC.

By: /s/ Mark C. Brown
--------------------------------------

Mark C. Brown
Senior Vice President and Chief Financial Officer

Date: October 29, 2004

EXHIBIT INDEX

Exhibit Description
- ------- -----------

31.01 Certification of Chief Executive Officer pursuant to Rule 13a
-14(a) of the Securities Exchange Act.

31.02 Certification of Chief Financial Officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act.

32.01 Certification pursuant to Rule 13b - 14(b) of the Securities
Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.